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

No, the words “consequential loss” are not defined in Iranian law.

Under Iranian law, the key legislation dealing with damages are the Iranian Civil Procedure Code 2000 (Civil Procedure Code”) (as amended) and the Civil Code of 1928 (with subsequent amendments) (Civil Code).

The Civil Procedure Code

Based on a well-established doctrine under Iranian law, parties to a contract are only responsible for foreseeable damages naturally arising from the breach of contract in the ordinary course of events. The Civil Procedure Code requires a direct causal link between the breach and the loss arising from that breach.

Article 515 of the Civil Procedure Code, Note 2, provides that “[d]amages arising from loss of non-profit (adam o-naf’a) shall not be recoverable. While the recovery of damages for the delay in payment is recoverable in statutory instances.” 1 Adam-o-naf’a does not have a clearly defined meaning in Iranian law. However, in simple terms, loss of profit is divided into two categories: “materialised non-profit” (adam- o-naf’a Mohaghagh) and “probable nonprofit” (adam o- naf’a Mohtamal). The difference between “materialised non-profit” (adam- o-naf’a Mohaghagh) and “probable non—profit” (adam o- naf’a Mohtamal) is that “materialised non-profit” (adam- o-naf’a Mohaghagh) relates to a loss of profit where the requirements for generating the intended profit already materialised and if it was not for the other party’s action or omission, it would be more probable than not that the profit would have been generated. By contrast, “probable non-profit” (adam o- naf’a Mohtamal) happens where if it were not for the other party’s action, the profit could probably have been expected to accrue. The commonly held view is that Article 515 of the Civil Procedure Code should solely apply to probable non-profit because, the argument further goes, it is the only logical way to resolve the inconsistencies between this article and the Criminal Procedure Code and other legal principles in the Iranian legal system under which a claim for damages for loss of (materialised) profit appears to be permissible. Liquidated damages clauses, which may include an element of loss of profits, are recognised under the Civil Procedure Code.

According to Article 520 of the Civil Procedure Code, the injured party must prove that the immediate cause of the loss was failure or delay in performing a contractual obligation, or non-delivery of goods contracted for. This provision in Article 520 is generally taken to mean that only direct losses are recoverable.

The Civil Code

The position regarding consequential loss under the Civil Procedure Code may be compared to the position in the Civil Code.

Article 221 of the Civil Code provides that if any party undertakes to perform or to abstain from any act, it is responsible to pay compensation to the other party in the event of failure to carry out its undertaking, provided that the compensation for such loss is specified in the contract or is implied in the contract by law.

Article 331 states that anyone who causes property to be destroyed shall replace it with its equivalent or pay its equivalent value. The offending party will also be held responsible for any depreciation in value.

As a result of the above, there is thought to be a conflict in relation to the recoverability of loss of profits under the Civil Procedure Code and the Civil Code.

The view held by the majority of Iranian jurists and judges is that Article 515 of the Civil Procedure Code must be interpreted narrowly so that its application will be limited to “likely realisable profit”. Based on this view, damages for “possibly realisable profit” should be recoverable pursuant to Article 211 of the Civil Code. 2 Verdict No. 89/9/8909975112401285-27, case No. 891187 court No. 29 Public Court, Mashhad  However, the approach of the courts is not always consistent. For instance in 2016, a lorry owner did not succeed in his appeal for damages for loss of profit. He was prevented from getting his lorry back from customs due to an illegal directive by Iranian customs and was unable to transport goods as a result of this (i.e. a loss consequential upon the performance of another contract). 3 Verdict No. 1610 dated 2016 Jan 29, appeal court No. 6, Tehran

The position of the Iranian arbitrators is also worth noting. In arbitration, there is a difference between the approach adopted by domestic tribunals and international arbitral awards. In domestic arbitral awards, the tribunals have typically rejected claims for loss of profits due to the interpretation of the Civil Procedure Code. For instance, in a domestic arbitration case brought against Eni Company, 4 Award Number: 36/D/237/9/89  a car rented by Eni was damaged and it was not returned to the owner on the agreed date. This resulted in the owner of the car missing a subsequent contract to rent the car to someone else. The owner of the car claimed for the cost of repair and the loss of profit for the cancellation of the second contract. The arbitrator awarded the cost of repairing the car but rejected the claim for loss of profit (i.e. a loss consequential upon the performance of another contract). The arbitrator found that there should be a causal relationship between the action of the defendant and the loss claimed. Moreover, the loss of profit whilst the car was being repaired, which deprived the owner of the “likely realisable profit”, is an instance of adam o-naf’a which is not recoverable under the Civil Procedure Code.

The compensation awarded for loss depends on the following four conditions:

1. The loss suffered must be evident. This involves a requirement for decisiveness so that there is no doubt that future loss was suffered and that the loss is not speculative or imaginary.
2. The loss must be direct. If there is no direct causal relationship between incurred losses and adverse action, the loss cannot be compensated.
3. The loss must be permanent. It is a commonly accepted doctrine in Iranian civil liability jurisprudence that the aim of compensation is to restore the injured party to the position that it would have been in had it not been for the breach.
4. The loss must be foreseeable at the time of the act or omission that caused the loss: The requirement of foreseeability arises from the principle that a foreseeable loss arising from a party’s breach can be attributed to the party who had foreseen or should have reasonably foreseen the loss. However, if the loss arises from an unforeseeable event, then the loss cannot be attributed to any party.

Yes, there are some examples of energy contracts that use the words ‘consequential loss’:

Iranian Petroleum Contract

Neither Party shall be liable to the other Party for any indirect or consequential loss or damage arising out of or resulting from the performance or breach of the Contract, including any loss of revenues or profit.

Energy Conversion Agreement

Unless and to the extent expressly set forth in the Contract, neither Party shall have any liability to the other Party (i) for indirect or consequential loss or damage however arising, or (ii) for loss of profit or loss of revenue.

General terms and conditions of Oil and Gas contracts

Any loss or damage to oil, or any property of Seller or of any other person and also damages resulting from any type of pollution caused by the vessel, during breathing, loading and unearthing shall be borne by the Buyer.

There are significant differences in the meaning attributed to ‘consequential loss’ in Islamic and Iranian law. This has led to ambiguity in the interpretation of the term. Consequential damages can be interpreted to mean that the damages arise out of: “likely realisable profit”; “possibly realisable profit”; or loss of non-profit (adam o-naf’a).

Given the requirements of Article 221 of the Civil Code and the lack of clarity in Iranian law on the meaning of the words ‘consequential loss’, the most reliable way to ensure that indirect losses or ‘consequential losses’ are excluded by the contract is to agree on the scope of those liabilities in the contract using recognised Iranian law concepts.

The notion of consequential loss under the Civil Code is based on the establishment of ‘fault’. The interpretation of ‘fault’ is defined by Articles 951, 952 and 953. In principle, ‘fault’ is an infringement on the rights of others. Pursuant to the Civil Code, ‘fault’ encompasses encroachment and negligence. ‘Fault’ is thus a critical element for civil liability under Iranian law.

There is no specific contractual interpretation rule in relation to exclusion clauses. However, some general rules such as the meaning of the words, the intention of the parties, the circumstances and situations in which the contract has been signed will be applied. Also, such clauses will be construed in favour of the party that was not involved in drafting them.

In Iran, monetary compensation is the most usual form of compensation for civil and contractual liability. The judge will usually follow the remedies provided under the contract in question. This approach arises as a result of Article 230 of the Civil Code which states that:

If in a transaction it is stipulated that in case of failure the defaulting party should pay to the other a sum of money as compensation, the judge may not sentence him to pay more or less than the sum he has bound himself to pay.

Special court orders in the form an injunction or temporary relief are only granted where the court is convinced that such measures are necessary to prevent the plaintiff from suffering a loss. Where the loss is purely speculative, e.g., consequential loss (possible-not-profit of the type explained under footnote 1) or if excluded by the contract, the court would not be willing to grant such measures. By contrast, where the loss is an actual loss and it has not been expressly excluded by the contract, or the loss is of the type that, by law, cannot be contractually excluded, then the court would be more likely to grant interim measures to protect the plaintiff from such loss.