Limits on Liability in Oil & Gas Contracts under Libyan Law

I. Introduction:

The Libyan Civil Code was amended in 2016 by Law No 6 of 2016 (Law 6/2016). The amendment focused on the following issues: liquidated damages, waivers, and limitations on liability. In 2020, the Libyan Legislature enacted a sweeping law, Law 1/2020, which was intended as a blanket nullification of a wide range of laws and decrees that were issued after 2014. At the time of its enactment, Law No. 1 of 2020 (Law 1/2020) was understood and interpreted by some to have the effect of repealing Law 6/2016. However, the doubt over the validity of Law 6/2016 has been cleared and the debate has been settled by the Libyan Supreme Court which upheld Law 6/2016 and confirmed its validity and its ongoing applicability in recent decisions. Ruling 453/64, Libyan Supreme Court (LSC), (May 26, 2021).

Thus, it is a devastating mistake (yet very common) to ignore Law 6/2016 when one structures caps and limitations on liability in contracts governed by Libyan law. This is especially true when it comes to the oil & gas sector.

Law firms inside Libya make this mistake because of a common misconception; basically, that Law 6/2016 is repealed by Law 1/2020. This article addresses this common mistake and provides detailed analysis to correct wrong practices in the legal field.

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II. Oil & Gas Contracts: Indemnities, LDs, and Caps on Liability under Libyan Law:

A. Perimeter of Legal Analysis:

Construction contracts in the Libyan oil and gas sector are addressed by Resolution 107/2019. The Resolution is an integral part of those contracts and it includes mandatory rules mandating, for instance, late fees and fines on delays and for the deviation from scheduled Works. Those mandatory rules are binding to the contractual parties. The Resolution, however, leaves many aspects of the contract to the free will of the parties unless there are mandatory rules elsewhere within the Libyan body of law; in that case, the mandatory rules in other Libyan laws must be followed.

??????????? Construction contracts, including the EPCI Contracts, are commercial contracts which invoke the application of mandatory rules in the Libyan Commercial Code. In the absence of mandatory rules in the Commercial code, the Contract will be subject to the mandatory rules of the Libyan Civil Code.

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B. Limitations on Liability, Liquidated Damages, and Indemnity Schemes:

Liquidated damages in the form of a fixed amount or percentage of the contract price are generally prohibited and exceptionally allowed. In general, Libyan law does not allow the contracting parties to limit their liability in transactions such as the sale of goods, supply agreements, and the vast majority of contracts. See Art. 226, Libyan Civil Code (amended 2016) (stating that “the parties shall not fix in advance the amount of damages in the contract…”). Exceptionally, the Libyan law allows the parties to limit their liability, through the use of liquidated damages, in certain types of contracts: namely, services/works contracts such as construction contracts, agency agreements, and public utility contracts. Id. (asserting that pre-fixed damages in services contracts are allowed).

Generally, Libyan courts will view liquidated damages as a limit on liability, a cap on damages, rather than a hard fixed amount to be paid by the breaching party. This is true unless the breach was due to gross negligence, unlawful acts, or willful misconduct. See Ruling 229/48, Libyan Supreme Court, 151 (2005) (reversing a lower court's judgement that awarded compensation in excess of the liquidated damages; the Supreme Court reasoned that in the absence of "fraud or gross negligence," it is not permissible to award damages exceeding the agreed upon/fixed amount in the contract even if the actual damages did.). See, also, Civil Code at Art. 228 (stating that "when the loss exceeds the amount fixed by the contract, the [aggrieved party] cannot claim an increased sum, unless they are able to prove that the [breaching party] has been guilty of fraud or gross negligence.").

It is also important to note that if the non-breaching party has participated in or contributed to its own losses, "the judge may reduce the amount of damages or may even refuse to allow damages" whether there is liquidated damages in the contract or not. Id. at 219.

Further, “if the breaching party established that the [innocent party] suffered no losses,” then liquidated damages shall not be due or owed to the non-breaching party. Id. at 227 (1). Thus, while the parties are free to set the limit on liability at whatever amount they agree is appropriate, the injured party shall only be entitled to actual losses. See, also, id. at 227 (2) (stating that "the judge may reduce the amount of the fixed damages if…the amount fixed was grossly exaggerated or that the core obligation has been partially performed."). Those rules cannot be contracted out of, and once invoked, the judge's intervention in this manner cannot be circumvented by a prior agreement in the contract. Id. at 227 (3).

C. Torts & Personal Injury:

Furthermore, under Libyan law, the extent of liability for personal injury is heavily reliant on and determined by the following: wrongdoing, causation, and the actual harm/injury. Thus, if a wrongdoing directly caused personal injury, the wrongdoer must compensate and make the physically injured person whole, and the extent of the liability is limited by the extent of the injury and cannot be preemptively limited in the contract. See, e.g., Art. 166, Civil Code (1953) (stating that "every wrongdoing causing injury to another imposes an obligation to make reparation upon the person upon whom it is committed."). Note that the same can be said as to vicarious liability.

D. Waivers & the Complete Release of Liability:

Libyan law has a total ban on waivers relating to contractual obligations. Waivers or a complete release of liability for contractual breaches or tortious actions are prohibited by Libyan legislation and Libyan case law. Art. 220, Civil Code (amended 2016); Ruling 1637/56, Libyan Supreme Court, 167 (2013); Ruling 129/51, Libyan Supreme Court, unpublished (2006).

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II. Conclusion:

To sum up, the treatment of Law 6/2016 as nonexistent by scholars and Libyan law firms will lead to inaccurate advice and multi-million dollars losses to major clients in the oil & gas sector. This is particularly true when it comes to EPCI contracts in which "knock for knock" clauses and cross indemnity schemes are very common. Our recommendation is to think carefully about Law 6/2016 and to take it into account when one is consulted on caps and the limits of liability in the Oil & Gas industry.

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Author: Mohamed Dikna

Co-Author: Mahmud Zahaf