Indirect loss in construction contracts: a concept that requires clear agreement

An undefined exclusion leaves all parties uncertain as to how the risk has actually been allocated

An exclusion of “indirect loss” may, depending on a party’s position and the structure of the contract, appear advantageous or disadvantageous. Appearances can be deceptive: when such terminology is used without sufficient thought, the seeds of a future dispute may already have been sown. The problem does not necessarily lie in the exclusion itself, but in the use of a concept that has no fixed statutory meaning under Belgian law. Unless the parties clarify which heads of loss they intend to cover, part of the contractual allocation of risk remains unresolved. The issue will generally only arise after a loss has occurred, at which point both parties have an interest in interpreting the clause differently.

No fixed category under Belgian law

The increasingly common terminology of “indirect damage” or “consequential loss / damage” originates not in Belgian law, but in Anglo-Saxon contracting practice. Under the common law tradition, a distinction is conventionally drawn between loss “that arises naturally” from the contractual breach (direct loss) and loss resulting from special or unusual circumstances (indirect or consequential loss). As a general rule, the latter is recoverable only where those special circumstances were expressly or implicitly known to the party in breach when the contract was concluded.

That common-law distinction cannot simply be transposed into Belgian law. Where parties to a contract governed by Belgian law refer to indirect or consequential damage, they are therefore using concepts that have no fixed legal meaning within Belgian contract law. Their scope must instead be determined by interpreting the contract in light of the parties’ common intention.

In the event of a contractual breach, the injured party is in principle entitled under Belgian law to compensation for both the loss suffered and the profit lost. Article 5.87 of the Belgian Civil Code limits recovery to loss that is a necessary consequence of the non-performance and that was reasonably foreseeable when the contract was concluded. The Court of Cassation interprets those requirements broadly. A wide range of losses that are causally connected to a contractual breach may therefore qualify for compensation.

That assessment does not correspond to the common-law distinction between direct damages and indirect or consequential damages. A head of loss described in a contract or in commercial practice as “indirect” is, under ordinary Belgian law, simply one component of the recoverable loss. Loss of profit, idle-time costs, additional personnel costs, amounts payable to third parties, lost savings or reputational damage may, depending on the circumstances, qualify for compensation. Conversely, describing a loss as “direct” does not automatically make it recoverable. The requirements of causation and foreseeability continue to apply.

Within the limits imposed by law, parties may depart from that general regime by contractually limiting their liability or excluding particular types of loss. Such provisions may not conflict with mandatory rules or public policy, may not exclude liability for intentional misconduct or fraud, and may not deprive the contract of its substance, for example by leaving the creditor without any meaningful remedy.

A clause that merely states that “indirect and consequential loss” will not be recoverable does not, however, establish which financial consequences actually fall within that exclusion. This is precisely where the main source of uncertainty arises.

Possible consequences in construction projects

That uncertainty is particularly relevant in construction contracts. A technical defect or delay often causes more than the cost of remedial works alone. The same event may also result in suspension of the works, delays to other contractors, wasted mobilisation costs, temporary measures, contractual penalties, claims by purchasers or tenants, additional financing costs, the inability to deploy resources on other projects, or loss of operating income. If the contract does not define “indirect” or “consequential” loss in greater detail, it will not be clear in advance which of those heads of loss fall within the exclusion.

The answer also depends not only on the nature of the loss, but on the position of the party concerned and the wider contractual context. Production losses suffered by a customer of the employer may appear to a contractor to be a relatively remote consequence. A developer, by contrast, may regard the resulting loss of revenue as a foreseeable consequence of late completion. Without sufficiently precise contractual wording, the parties’ intended allocation of risk must be reconstructed after the event. That is not always straightforward.

From a general label to a concrete allocation of risk

An effective liability regime that excludes certain categories of loss should therefore not rely solely on general labels. The parties should first identify which events may arise during the project, which financial consequences may reasonably result from them, and which party is best placed to control, insure or price those risks. The contract can then determine which losses remain recoverable, which are excluded and which are subject to a separate liability cap.

Points to consider when drafting and negotiating

1. 01Define the relevant heads of loss. State expressly whether the exclusion covers, among other things, loss of profit or turnover, production losses, loss of use, financing costs, reputational damage, penalties and third-party claims.
2. 02Tailor the clause to the project. A standard provision taken from a foreign form or an earlier contract may reflect a different legal environment or risk profile.
3. 03Consider exclusions and liability caps together. Make clear which losses are excluded entirely, which fall within the general liability cap and whether particular risks are subject to a separate cap.
4. 04Define the carve-outs carefully. Take account of intentional misconduct, mandatory law, essential contractual obligations and losses covered by insurance or an indemnity.
5. 05Maintain consistency with the remainder of the contract. The provisions dealing with delay, penalties, indemnities, insurance and termination should align with the agreed allocation of liability risks.

Clarity before the loss occurs

Whether a broad or limited exclusion is appropriate will vary depending on the party and the project. For contractors and developers alike, the key point is that the choice should be deliberate and clearly reflected in the wording of the contract. A clear regime allows the relevant risk to be taken into account in pricing, insurance coverage and the wider organisation of the project. Parties using the terms “indirect loss” or “consequential loss” should therefore also identify which specific heads of loss they intend those terms to cover.