Law and regulation of consequential damages clauses in the energy sector in France

The notions of consequential, special, incidental or punitive damages traditionally do not belong to the French civil and/or commercial law. Their use in contracts subject to French law often raises difficulties and uncertainties, if they are not very precisely defined by the parties. 

French civil law does not give a specific meaning to consequential damage and consequential loss. However, these terms are currently not completely unknown under French law.

French civil law traditionally distinguishes between (i) direct and indirect damage and (ii) tangible and intangible damage. 

The distinction between direct and indirect damage

According to Article 1231-4 of the Civil Code, the indemnification of a contractual breach shall be limited to damages which are the immediate and direct consequence of the breach. Therefore, the indirect costs are only indemnified if, and insofar as this results from an agreement between the offender and the victim.

Under French contract law, the question of whether the prejudice is direct or indirect is a matter of causal link. Therefore, a prejudice directly caused to a party should be qualified as “direct” under the meaning of Article 1231-4 of the Civil Code. Conversely, indirect damages are the damages which are too far from the chain of the circumstances to be linked to the breach, as well as indirect victims which are damaged by rebound.

Even though the principle is rather simple, no objective definition allows to determine in advance, with absolute certainty, which prejudice shall be considered as direct or indirect by the courts: it depends on the context of the contract, on the parties, and on the breach itself.

The distinction between tangible and intangible damage

Pursuant to Article 1231-3 of the Civil Code, the indemnification resulting from a contractual breach is limited to breaches that were expected or could have been expected at the execution date (this is obviously different in tort). However, it is not limited to tangible damage: loss of profit, which is intangible, is for instance included. That said, it is always possible to agree on the exclusion of intangible damage, especially when formally signing a contract before the damage occurs.

This difference between tangible and intangible damage is not defined by law. Historically, a distinction was set between tangible damage (préjudice matériel) and psychological damage (préjudice moral). The concept of intangible damage is relatively new and comes from insurance practice, rather than from laws or regulations. It is now more widely used in contractual practice, also due to the use of templates drafted under English Law, even though no harmonised definition exists. The contracts therefore usually list examples.

In view of case law resulting from practice and legal doctrine, it seems that tangible damage under this meaning is typically defined as damage to property – meaning the costs to make good this damage. Conversely, any damage which does not fall within this definition should normally be considered to be intangible damage.

Not every kind of loss can be recovered under French law and compensation is limited by virtue of articles 1231-3 seq. of the Civil Code, as interpreted by the French courts and as set out below:

• the loss must be certain – the loss suffered and the lost profit must be certain and not hypothetical – this does not exclude future losses that are certain nor missed opportunities, provided it can be demonstrated that there was a real opportunity; 
• the loss must be foreseeable – article 1231-3 of the Civil Code limits the recoverable damages to losses which have been foreseen or foreseeable by the parties when entering the contract (save in case of fraud); and
• the loss to be recovered can be limited by the parties – compensation must be limited to the amount provided for in the contractual limitation of liability clause unless it is manifestly excessive or derisory. 

Under construction law, the terms “dommages consécutifs” are sometimes used by the doctrine, in order to designate the damage to equipment resulting from a defect affecting the solidity of the construction works and which are covered as accessory damage under the legal decennial guarantee. In this respect, both tangible and intangible damage may be indemnified, as damage accessory to the decennial guarantee, subject however to the demonstration of a direct link of causality between the disorder affecting the works and the damage. The damage resulting in disturbance of possession may also be included in this respect.

There is therefore no general theory of consequential loss or consequential damage under French law, neither from civil law which does not conceptualise these terms, nor from specific laws. The latter, even though they use these terms, do not define them – or they do so by reference or with different meanings, sometimes as a synonym for indirect damage, otherwise in order to designate a damage which, even though direct, is an accessory damage. 

The energy sector uses the notions of consequential loss or consequential damage in contractual practice. This comes from common law practitioners and templates, by habit more than as a result of a true analysis under French law, as seen above. Nonetheless, the practice is there and, when a contract is already executed with a reference to consequential loss, the will of the parties must be analysed in order to determine its meaning under French law in the context of this contract, according to the methods set out by the Civil Code for the interpretation of contracts, based upon the common intention of the parties, rather than on the wording of the clause (Article 1188 of the Civil Code).

Apart from these uses that do not help define the term other than by reference to indirect damage, consequential damage is most often used in the insurance sector, which is logically standardised and internationalised. This sector will therefore make use of these terms and the concept attached to them, by mimicry. However, this must be carefully dealt with, because insurance is a very specific sector, and insurance policies usually multiply the examples attached to the concept: in practice, the insurers, the insured and the courts will refer to the specific events listed by the policy rather than trying to define a concept of indirect damage or indirect loss.

Examples of contracts in French law using the words consequential loss or indirect loss include: 

Example 1: Clause 1.15 of the Red Book of the 2017 FIDIC Suite 

Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than under […]

Example 2 – production sharing contract

The Company and the Partner reciprocally waive any recourse against each other for property damage and any indirect loss or non-material damage resulting therefrom. It is further agreed that the Company and the Partner will obtain from their respective insurers the waiver of the exercise of their right of subrogation against the other Party; the Company and the Partner will indemnify each other for the consequences of any failure of an insurer to comply with this obligation.

Example 3 – production sharing contract

The Contractor will take all the necessary action to achieve the objectives of the Contract and give reasonable compensation to Third Parties for any direct damage which it, its employees, contractors or subcontractors and their employees, while carrying out their activities under the Petroleum Operations, may cause, by its or their negligence, to their person, to their property or to their rights. The Contractor will be civilly liable for all losses or damages suffered by Third Parties due to its or their errors, fault or negligence and shall bear the cost of all compensation and damages payable.

Example 4 – production sharing contract

It is understood that the Parties will meet as soon as possible after the notification, by one of the Parties, of the occurrence of force majeure and will make reasonable efforts to provide, by mutual agreement, solutions to address the non-performance of the obligations affected by the force majeure and to limit the damages suffered by all the Parties and thirds due to the occurrence of the force majeure. In any case, no Party may be held liable for indirect damages.

Example 5 – service contract 

The Company cannot be held responsible, for any reason whatsoever, for direct or indirect damages suffered by the Client resulting from the performance of the contract.
The responsibility of the Company cannot be sought, in particular, for loss of profit or operating loss. In any case, the compensation by the Company for the loss suffered by the customer may not exceed the amount of the remuneration referred to in article 5 hereof.

The doctrine has tried to propose definitions of consequential damage in order to conceptualise and clarify its various uses under French law. Two main meanings have been identified.

First, a purely legal definition of consequential damage refers to “second degree” damage, i.e. which is directly even though not immediately connected to the causal event, as opposed to indirect (or “remote”) damage. Pursuant to this definition, consequential damage would designate a damage which is directly the consequence of an event, and more specifically the necessary consequence of the first, immediate, damage, and which results from this first damage.

Second, under a more economic approach, the concept of consequential loss refers to economic losses. Legally, this economic definition means that a consequential loss is a specific kind of intangible damage (including for instance the lucrum cessans under Article 1231-2 of the Civil Code), notwithstanding the causality of the damage – direct or indirect. This is usually the meaning of the “consequential loss” in industrial contracts, 1 This is not a legal category. Just a practical notion, with specific risks and allocation of risks.  which are extensively used in the energy sector.

Under a similar approach, consequential damage can also refer to the indemnification of benefits and advantages that the victim lost, as a consequence of his contractor’s breach. That is to say that the indemnification of consequential damage aims at reinstating the victim to a situation equivalent to the contractual situation, had this breach not occurred.

FIDIC contracts, often used to build and operate the main energy installations, make use of this term in their limitation of liability clauses. See above.  

The FIDIC contract wording literally translates this reference to “indirect or consequential loss or damage”, as “la perte ou le dommage indirect ou conséquent”, which does not really help with an understanding of the term ‘consequential loss’ under French law, since this wording amalgamates “indirect” and “consequential” damages.

The context is nevertheless important, since this clause refers to two types of damage: intangible damage, such as “loss of any Works, loss of profit, loss of any contract”, and “indirect […] loss or damage”. Under French law, these concepts are, on the one hand, intangible economic damage, and, on the other hand, indirect damage. 

Generally, the approach that prevails in industrial contracts, including in the energy sector, is the exclusion of both intangible and indirect damage, and the use of the term “consequential loss” must be understood in this context of exclusion. A case-by-case analysis is nevertheless necessary, in view of the drafting of the clause as a whole and subject to the interpretation that may be given based upon the common intention, that may often result from the minutes of the negotiations (especially when successive versions have been exchanged by email between the parties).

In any case, it makes sense to seek to avoid non-French law terms such as “consequential loss” in French law contracts. Instead, reference should be made to French legal terms, or at least to a list of examples, or ideally a comprehensive list of damages, rather than just importing common law concepts that might become confusing, or even ambiguous, since the parties may have different interpretations without having shared them before the execution of the contract.

Usually, the clauses excluding or limiting the liability of a party exclude both indirect damage/loss and intangible damage/loss.

In contracts where the indemnification of consequential loss is excluded, the indemnification of indirect damage is usually also excluded in the contract, even though this is already the principle under French civil law. The same exclusion is often provided for intangible damage and, in particular, for economic losses such as loss of profit or loss of the use of the works subject to the contract. 

As to the approach to interpreting a contractual exclusion clause excluding “consequential loss” and other heads of damage/loss, as always under French law, a case-by-case analysis is necessary. What matters for the interpretation that shall be given by the courts is the common intention, which may often result from the minutes of the negotiations (especially when successive versions have been exchanged by email between the parties).

We are not aware of any impact, but the lessons learnt from the experience of consequential loss remains relatively scarce, since these terms are often avoided under French law, despite the influence of common law in industrial contracts, and may not be used in judgments.