FIDIC

Limitation of Liability Under FIDIC — Enforceability and Scope

FIDIC contracts typically include caps on liability — limits on the amount either party can recover for breach. These clauses are generally enforceable but are subject to fairness and reasonableness tests, and do not apply to all types of liability.

7 min read · Updated 23/05/2026

In this article

1. Limitation of Liability Clauses — Purpose and Function
2. Scope of Limitation Clauses
3. Enforceability — The Reasonableness Test
4. Cavendish v Makdessi and Core Obligations
5. Liability Caps — Calculation and Effect
6. Carve-Outs and Exceptions

Key takeaway

Limitation of liability clauses are enforceable but subject to fairness tests. They do not apply to gross negligence, fraud, or breach of core obligations (such as payment). The reasonableness of a cap depends on its proportionality to the contract value and the risks allocated. Both parties benefit from protection — but clauses that are extremely one-sided or unconscionable may be struck down.

1. Limitation of Liability Clauses — Purpose and Function

A limitation of liability clause caps the amount of damages recoverable for breach of contract. Rather than allowing unlimited damages, the parties agree that liability for specified breaches will not exceed a defined amount (often a percentage of the contract sum, or a fixed monetary cap).

The purpose: to make the contract insurable and commercially predictable. A contractor tendering for a large project needs to know its maximum exposure — if exposure were unlimited, the risk could be uninsurable and the commercial proposal unaffordable.

Example: A FIDIC contract for AED 100 million in works may include a clause: “Neither party shall be liable for any loss or damage in excess of AED 50 million.” This cap applies to most breaches (defects, delay, incomplete work), but typically not to fraud, gross negligence, or payment obligations (see below).

2. Scope of Limitation Clauses

Limitation clauses typically specify what types of loss are capped. Common provisions:

• Mutual application: The cap applies to both parties’ liability (the contractor and the employer are equally limited)
• Excluded categories: Some losses are excluded from the cap — for example, loss arising from gross negligence, willful default, or fraud are usually not capped
• Core obligations: Payment obligations are often excluded from caps — a party in breach of payment cannot hide behind a liability cap
• Insurance proceeds: Some clauses clarify that insurance recoveries are not counted against the cap — the cap applies to uninsured losses

3. Enforceability — The Reasonableness Test

In jurisdictions with unfair contract terms legislation (such as the UK’s Unfair Contract Terms Act 1977, or equivalent), limitation clauses must satisfy a “reasonableness” test. A clause is reasonable if, at the time the contract was made, it was a fair allocation of risk given the circumstances known to the parties.

Factors courts consider:

• The strength of the parties’ bargaining positions (was the cap negotiated, or imposed on the weaker party?)
• The contract value and industry norms (is the cap proportionate to the contract value and typical in the industry?)
• The availability of insurance (can the party protect itself through insurance?)
• The clause’s clarity (is the cap clearly expressed, or buried in dense terms?)

A cap of AED 5 million on an AED 100 million contract (5%) is typically considered reasonable. A cap of AED 500,000 on the same contract (0.5%) may be challenged as unreasonably low and unenforceable.

4. Cavendish v Makdessi and Core Obligations

The landmark case Cavendish Square Holdings BV v Cavendish Resort Holdings SpA [2015] UKSC 67 (Cavendish v Makdessi) established an important principle: limitation clauses may not apply to breach of a “core” or “essential” contractual obligation.

The principle: if a clause imposes a penalty or limitation that effectively eviscerates an essential obligation, the clause may be struck down as unreasonable or unfair. For example, a clause that said “the employer will pay AED 10,000 per month regardless of the work performed” would be unreasonable — it undermines the essential payment obligation.

In FIDIC contracts, the core obligations are: the contractor’s obligation to complete works in accordance with the specifications, and the employer’s obligation to pay for completed work. Liability caps may not apply to breaches of these core obligations in all circumstances.

5. Liability Caps — Calculation and Effect

A liability cap typically specifies a maximum amount of damages. Common formulations:

Once the cap is reached, no further recovery is available, even if damages exceed the cap. The cap typically applies cumulatively — all claims for a particular type of breach (e.g., defects) are aggregated, and the cap applies to the total.

6. Carve-Outs and Exceptions

Most limitation clauses carve out specific types of liability that are not subject to the cap. These typically include:

• Gross negligence or willful default: Liability for gross negligence is usually uncapped (the parties agree that if a party is grossly negligent, liability is unlimited)
• Fraud and dishonesty: Liability for fraudulent conduct cannot be limited by contract
• Payment obligations: The employer’s obligation to pay for completed work is often uncapped — the contractor can always recover amounts due for work done
• Indemnity obligations: Where one party indemnifies the other (e.g., the contractor indemnifies the employer for third-party claims), the indemnity is often uncapped
• Insurance obligations: Failure to maintain required insurance is often uncapped

These carve-outs ensure that the parties’ core protections are preserved — a party cannot use a liability cap to shield itself from the consequences of fraud or willful breach.

Limitation Clause Negotiation and Enforcement

We advise on cap calculation, reasonableness assessment, carve-out negotiation, and enforceability challenges. Limitation clauses are critical commercial protections — getting them right matters.

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