Introduction

I thought we had a deal. Everything was fine until the damages kicked in.

Contracts seem simple until damages clauses start eating into your profits. Suddenly, liquidated damages, indemnities, and consequential losses appear, and the cost of a breach is far higher than expected. If you’re in construction, understanding damages is critical to managing risk.

Liquidated Damages: The Built-In Penalty

Liquidated damages (LDs) are pre-agreed penalties for delays or breaches. They offer certainty but can be crippling if uncapped.

Where Are They Found?

• NEC – Option X7
• FIDIC – Clause 8.7 (Delay Damages)
• JCT – Clause 2.29 (Employer’s Right to Deduct LDs)

Legal Stance:

• UK: Enforceable if a genuine pre-estimate of loss (Dunlop v New Garage), but not if punitive (Cavendish v Makdessi).
• GCC/KSA: Courts can reduce excessive LDs (UAE Civil Code 390).

📌 Tip: If LDs are uncapped, your contract could become a financial liability.

Unliquidated Damages: The Open-Ended Risk

If no LDs are defined, the employer can still claim actual losses with no predefined limit.

Legal Stance:

• UK: The claimant must prove actual loss suffered.
• GCC/KSA: Compensation is limited to proven damages.

📌 Tip: No LDs does not mean no damages. It means unlimited exposure.

Consequential Damages: The Chain Reaction You Didn’t See Coming

A breach can lead to indirect financial impacts, such as lost contracts or reputational harm.

The Hadley v Baxendale Test

The landmark case Hadley v Baxendale (1854) set two rules:

• Direct Losses: Naturally arising from the breach (such as delay damages). Recoverable.
• Consequential Losses: Recoverable only if the breaching party knew the risk at contract formation.

Legal Stance:

• UK: Only recoverable if foreseeable.
• GCC/KSA: Enforceable only if proven and reasonable.

📌 Tip: If the contract does not exclude consequential damages, you could be liable for claims beyond your control.

Indemnities: The Hidden Risk Transfer

Indemnities shift liability beyond your control. If broadly written, you could be responsible for unrelated legal claims.

Legal Stance:

• UK: Enforced as written, even if unfair.
• GCC/KSA: Must be reasonable and proportionate.

📌 Tip: If your indemnity clause is vague, you are taking on unnecessary risk.

How to Avoid a Costly Surprise

• Cap LDs to avoid unlimited liability.
• Exclude consequential damages to limit claims to direct losses.
• Limit indemnities to risks within your control.
• Monitor deadlines to prevent LD deductions.
• Understand local laws. UK, GCC, and KSA apply damages differently.

Final Thought

Damages can be the costliest clause in a contract. By the time you realise what’s happening, it is often too late.