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Rules and industry standards
Describe any industry-standard form contracts used in the energy sector in your jurisdiction.
Regarding the electricity sector in Chile, contracts are governed by different rules according to the specific segment of the market in which companies operate. The regulatory framework offers three markets in which energy companies are allowed to participate.
The spot market
Generating companies can trade electricity and capacity with other generating companies through the system operator, which operates the power grid based on the marginal cost of producing electricity. The electricity wholesale market is formed by generation companies that trade energy and capacity between them, based on supply contracts they have entered into. If a company’s electricity generation exceeds the volume of energy they have committed in contracts, those companies, called ‘surplus companies’, can sell to other companies, called ‘deficitaries companies’, whose electricity generation is below what they have contracted with their customers. In the spot market, transactions between generators are mandatory by law based on the marginal cost of electricity determined by the system operator.
The market of contracts
Generators can enter into an agreement with consumers who are not subject to price-regulation by the authority, through private contracts freely agreed between the parties. Consumers with a connected capacity above 5,000kW (typically large industrial facilities) are considered by the law as ‘non-price-regulated’ consumers, therefore they can freely negotiate prices and conditions for the supply of electricity with generators or distribution companies through a power purchase agreement (PPA). The law also provides the same option for price-regulated consumers (consumers with connected capacity below 5,000kW) located within the concession area of a distribution company, whose connected capacity is between 500kW and 5,000kW, to choose to become non-price-regulated customers.
Finally, public auctions for supplying electricity to price-regulated consumers. For consumers with connected capacity equal to or less than 5,000kW (typically residential consumers and small businesses), the law treats them as ‘price-regulated’ consumers. In this case, for those consumers electricity is provided by distribution companies whose electricity supply is contracted with generation companies through public auctions in which the distributor auctions off different blocks of electricity to be supplied by generators, usually for periods of 20 years. In this case the National Energy Commission, the regulatory body in charge of conducting the auction process, determines the terms and conditions of the respective contracts.
Another specific form of contract used in the liquefied natural gas (LNG) industry in Chile are ‘take-or-pay’ contracts, consisting of the obligation assumed by the buyer to purchase a minimum volume of natural gas during a particular period and pay the agreed price whether it takes that volume or not. The purpose of the deal is to guarantee the seller with a revenue ensuring an adequate return on the significant investment and risks taken.
What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?
Our civil law system embraces the ‘subjective method of contractual interpretation’ based on the principle of subjective good faith, by which, the intention or real will of the parties has to be preferred over the literal meaning of the words used to express it or what has been declared. The key principle is given in article 1560 of the Chilean Civil Code, which reads, ‘When the intention of the contracting parties is clearly known, this intention shall prevail over the literal expressions or words used to convey it’. If, when executing the contract it is not possible to clearly establish this intention, either because the parties have not foreseen a particular situation (silence) or because the written expressions used are unclear, the interpretation must be done using ‘objective good faith’ parameters, looking for the parties’ intentions in their conduct, the average man standard and the law.
Describe any commonly recognised industry standards for establishing liability.
In the Chilean civil law system, fault is the main element for the existence of civil liability whether for contracts or torts.
In contracts, our law recognises three degrees of fault or negligence a party can be liable for: slight fault, ordinary fault and serious fault (a concept akin to gross negligence). The legal degree applicable to a particular breach will depend on the benefit the non-compliant party derives from the contract (an application of the Roman principle utilitas contrahentium). Nevertheless, the principle has proven to be difficult to apply in practice and our courts have instead adopted the principle of average diligence. For fault to be proven, there is no need to look into the non-compliant party’s state of mind; it is enough to contrast the actual conduct of the party at fault with the expected conduct of a ‘reasonable and prudent man’ (objective test), unless the parties themselves or the law have provided a different standard. Thus, in Chile, the establishment of contractual fault is based on the abstract method.
Regarding proof of fault, our law presumes fault if breach of contract has been proven; the burden of proof is on the non-compliant party to rebut that presumption.
Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility, recognised in your jurisdiction?
The only true legal excuse - unless parties have provided otherwise - for fulfilment of a contractual obligation under Chilean law is the principle of force majeure, understood as an unforeseeable event impossible to resist or avoid. In general, damage caused by an unforeseeable event does free the party from its contractual obligations. For a fact to constitute force majeure and free the obliged party from all liability it is necessary, first of all, for the event to be totally unforeseeable and unexpected; secondly, for the obliged party to have used all means at his or her disposal to avoid the unforeseeable event and to diminish its consequences (ie, to have used all due diligence (this is why there can be no force majeure if the party was in arrears)); thirdly, it is necessary that the event takes place under circumstances absolutely independent from the debtor’s will.
Even if all the above premises are met, it is always necessary for the party asserting the force majeure to have acted with all due diligence, without fault, because in Chile liability (save in cases of obligations of result) is subjective, which means even a force majeure event will not free the party from liability if there has been negligence. So it is not enough for a causal link to a force majeure event to exist, the lack of fault or negligence is also required to exempt from liability.
In the cases in point, like an excuse of performance during periods of commodity price or supply volatility, these events will not constitute a true force majeure under Chilean law as both events can be regarded as expected occurrences in the industry and part of the underlying risks of trade, and even if they were to be construed as true force majeure events, due diligence must be established before the principle can be invoked successfully to avoid liability.
What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?
Within the Chilean civil law tradition, nuisance is not recognised as an action to obstruct development of projects or other activities. Public agencies may apply sanctions indirectly if the activity that is causing the nuisance constitutes a violation to specific regulations or permits.
Notwithstanding the above, there is an institution called a ‘preliminary injunction for new construction’ that may be used by third parties as a nuisance claim. This institution was created to protect the possessor of certain land or easement from third parties that may affect their domain or possession by starting a construction within their property or easement. Moreover, if the new construction takes place over a public land, any individual from the local community may file the injunction. The purpose of the injunction is to temporarily stop the construction and to compensate the plaintiff for any damages caused. In order to prevent the misuse of the injunction by land owners or mining rights owners in such land, the Electric Services Act has been recently amended by providing that in cases where the plaintiff obtains the temporary delay of the construction, the court may suspend such decision subject to an escrow deposit performed by the energy project developer (who may be the owner of an electric concession or a non-conventional renewable energy developer). This escrow deposit must cover the eventual expenses of the eventual demolition of the works already made on the land, or the amount of damages that the court may impose to the developer in the final decision of the injunction.
Liability and limitations
How may parties limit remedies by agreement?
As mentioned in question 5, it is usual practice for the parties to anticipate the consequences of a breach of contract by agreeing to the payment of a fixed or determinable amount of money in case of actual breach, regardless of its causes. These clauses are, in fact, an anticipated liquidation of damages, which will avoid the need to prove them (the damages) as a requirement to obtain compensation for breach of contract.
Likewise, parties can choose a lesser standard of liability than the one the law affords them. Such clauses are perfectly legal as our civil law system recognises the principle of contractual freedom where the parties can choose the terms and conditions, with the only limitation being respect for the law applicable to the particular contract.
Is strict liability applicable for damage resulting from any activities in the energy sector?
Strict liability for damages in the energy sector is, of course, the exception and there are only two instances in which there can be liability regardless of fault. Firstly, in the nuclear energy sector and secondly when dealing with hydrocarbon pollution. We will briefly explain both situations.
Strict civil liability for nuclear accidents
The national regime is established in Law No. 18.302 published in 1984 and by the 1963 Vienna Convention on Civil Liability for Nuclear Damage, ratified by Chile in 1990. Both legal bodies provide that operators of nuclear power plants are liable for any damage caused by them, regardless of fault and even in cases of force majeure. This norm simplifies and speeds up any eventual civil liability claim for damages, which is a significant benefit to potential victims, who will have certainty about whom to claim against. Also in order to benefit any potential victims, the law defines the expression ‘nuclear accident’ as ‘any event or succession of events that, having the same origin or cause, have caused nuclear damage’.
The operator’s liability is limited in time and amount. Although the Vienna convention allows each nation to determine for the pecuniary liability limit (although not below US$5 million), Chilean law has fixed this amount to not less than US$75 million. The time bar to demand for damages is 10 years following the nuclear accident.
Strict civil liability for hydrocarbon pollution damage to the sea
The national regime is established in Law Decree No. 2,222 published in 1978 and by the 1969 International Convention on Civil Liability for Oil Pollution Damage, ratified by Chile in 1977. Both protect against pollution caused to seawater subject to Chilean jurisdiction.
The Civil Liability Convention was adopted to ensure that adequate compensation is available to persons who suffer oil pollution damage resulting from maritime casualties involving oil-carrying ships. The Convention places the liability for such damage on the owner of the ship from which the polluting oil escaped or was discharged and as such, it is restricted to pollution from hydrocarbons. Subject to a number of specific exceptions, this liability is strict.
Law Decree No. 2,222 makes clear the same strict civil liability regime regarding pollution from any toxic substances or residues, not only hydrocarbons, occurring within the territorial waters, whether this pollution comes from ships or naval artifacts and regardless of the activity that was being performed at the time of the incident.