FIDIC

Consequential Loss from Defective Work Under FIDIC — Scope and Recovery

Defects often cause losses beyond the cost of repair: business interruption, lost revenue, damage to third-party property, or project delay costs. Recovery of these consequential losses is limited by the Hadley v Baxendale principle and often expressly excluded by contract.

7 min read · Updated 23/05/2026

In this article

1. Consequential Loss — Definition and Scope
2. The Hadley v Baxendale Principle
3. Causation — Linking Defects to Loss
4. Types of Recoverable Loss
5. Exclusion and Limitation of Consequential Loss
6. Procedures for Claiming Consequential Loss

Key takeaway

Consequential loss recovery is severely limited by the Hadley v Baxendale principle: loss is recoverable only if it is a natural and foreseeable consequence of the breach, or if the other party had notice of the circumstances making the loss likely. Most FIDIC contracts expressly exclude consequential loss. Even where recovery might be theoretically available, proving causation and quantum is difficult.

1. Consequential Loss — Definition and Scope

Consequential loss is loss that flows indirectly from a breach, rather than the direct loss (the cost of repair or completion of work). Direct loss is the cost to fix the defect. Consequential loss includes:

• Business interruption (closure of a facility or suspension of operations due to the defect)
• Lost revenue (for example, a hotel closed for remediation loses room bookings and revenue)
• Increased costs (for example, rental of temporary facilities whilst the permanent facility is being repaired)
• Damage to third-party property caused by the defect
• Personal injury or consequential harm to persons
• Reputational damage or loss of business opportunity
• Costs incurred in consequence of delay caused by the defect (project delay costs, acceleration costs)

The distinguishing feature: the loss does not flow directly from the defect itself, but from the consequences of the defect.

2. The Hadley v Baxendale Principle

The seminal case, Hadley v Baxendale (1854) 23 LJ Ex 179, established that damages for breach of contract are limited to losses that were: (1) reasonably foreseeable as a probable result of the breach; or (2) within the knowledge of the party in breach (i.e., the breaching party knew or should have known that the specific loss would result).

Example: A contractor fails to complete MEP installation on time. The direct loss is the cost to complete the work. But if a hotel opening was scheduled for the incompleteness date, and the hotel lost bookings and revenue due to the delay, is the hotel’s lost revenue recoverable?

Under Hadley v Baxendale, recovery is limited to losses that were reasonably foreseeable to the contractor at the time of contract. If the contractor did not know the hotel was opening on that date (so did not know delay would cause revenue loss), the revenue loss is not recoverable. If the contractor did know (e.g., the contract stated explicitly: “MEP must be complete by 30 June to allow hotel opening on 1 July”), and the contractor breached, the lost revenue may be recoverable.

3. Causation — Linking Defects to Loss

To recover consequential loss, the claimant must establish direct causation: the defect caused the loss. This is often difficult where multiple factors contribute.

Example: A concrete structural defect (cracks in a column) is discovered during construction. The project is delayed whilst the contractor investigates and remedies the defect. The employer claims for losses incurred during the delay period (lost productivity, additional management costs, or financial charges on borrowed funds).

To succeed, the employer must prove: (1) the contractor’s defect caused the delay (not other concurrent events); (2) the delay would not have occurred but for the defect (the “but for” test); and (3) the loss claimed (lost productivity, borrowing costs, etc.) actually resulted from the delay.

If other events also contributed to the delay (for example, bad weather, subcontractor delays, regulatory approval delays), the contractor may argue concurrent delay, reducing or eliminating liability for the employer’s loss.

4. Types of Recoverable Loss

Consequential losses that have been awarded by courts and tribunals in construction disputes include:

5. Exclusion and Limitation of Consequential Loss

Most construction contracts, including FIDIC, expressly exclude or limit consequential loss. FIDIC Red Book, Clause 15 (in some editions) or equivalent provisions typically state that neither party is liable for consequential loss, including lost profits, lost revenue, business interruption, or economic loss.

These exclusion clauses are generally enforceable, and they severely limit recovery of consequential loss. Even where Hadley v Baxendale might theoretically allow recovery, an express exclusion clause prevents it.

However, exclusion clauses have limits: they cannot exclude liability for fraudulent conduct, for breach of fundamental obligations (e.g., core payment obligations), or for matters that are not reasonably within the parties’ contemplation at the time of contract. Courts also construe exclusion clauses narrowly — they will not be read to exclude liability unless the language is clear and unambiguous.

6. Procedures for Claiming Consequential Loss

To succeed in claiming consequential loss, the claimant should:

• Identify the defect or breach with specificity and provide supporting evidence (photographs, test results, expert reports)
• Establish the causal link between the defect and the claimed loss — “but for” the defect, the loss would not have occurred
• Prove that the loss was reasonably foreseeable or that the other party had notice of the circumstances making the loss likely
• Quantify the loss with precision, supported by financial evidence (invoices, accounting records, expert assessments of lost revenue)
• Demonstrate mitigation: the claimant must have taken reasonable steps to minimise the loss
• Check whether the contract expressly excludes the claimed type of loss; if so, expect the exclusion to be enforced

Consequential loss claims are difficult and expensive to pursue. Many claimants abandon them once they understand the burden of proof required. In practice, recovery of consequential loss is unusual unless the contract expressly provides for it or the defect was so severe and obvious that exclusion clauses fail.

Consequential Loss Assessment and Recovery

We advise on causation analysis, Hadley v Baxendale application, exclusion clause interpretation, and quantum assessment. Consequential loss claims require sophisticated analysis — early evaluation is essential.

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