Every market allows commercial parties to cap liability and agree damages in advance, but each one sets its own limits. English law tests exclusion clauses for reasonableness, with exceptions for international supply contracts; India allows only reasonable compensation up to the named sum; Germany lets courts reduce excessive penalties except between merchants; US states void unreasonably large liquidated damages; and the Saudi and new UAE civil codes let courts adjust agreed compensation and refuse exclusions for fraud or gross fault.
Caps and exclusions
In England, Wales and Northern Ireland, liability for death or personal injury caused by negligence cannot be excluded, and other negligence exclusions must be reasonable. These controls do not apply to international supply contracts for goods, and most of them do not apply where English law governs only because the parties chose it. That makes English law attractive for cross-border supply, but the clause must still work under the law of the place where it is enforced.
Under the Saudi Civil Transactions Law, parties may exclude compensation for non-performance or delay, but not where the damage results from fraud or gross fault. A cap or exclusion that would be valid under English law may therefore not protect a supplier sued in Saudi Arabia for grossly negligent performance.1234
Liquidated damages and penalties
India allows the injured party to recover reasonable compensation not exceeding the sum named in the contract, whether or not actual damage is proved. Germany lets a court reduce a disproportionately high contractual penalty on the debtor's application, but not once paid, and not at all where a merchant agreed it in the course of business. Under the Uniform Commercial Code as enacted by US states, liquidated damages for a sale of goods must be reasonable, and unreasonably large amounts are void as a penalty.
In the Gulf, agreed compensation is subject to court adjustment. Under the Saudi law it is not payable if the debtor proves no harm, may be reduced if excessive or if the obligation was partly performed, and may be increased only for fraud or gross negligence. The UAE Civil Transactions Law in force from 1 June 2026, according to a law-firm analysis, lets a court reduce exaggerated amounts, or amounts where the creditor's fault contributed, and increase them for fraud or gross fault, replacing the broader power under the old Article 390.5678910
| Market | Rule | Court power | Source |
|---|---|---|---|
| India | Contract Act s74 | Reasonable compensation up to the named sum; proof of loss not required | India Code |
| Germany | § 343 BGB; § 348 HGB | May reduce a disproportionate penalty; not for a merchant's penalty | gesetze-im-internet.de |
| United States (state law) | UCC 2-718(1) | Unreasonably large liquidated damages void as a penalty | Cornell LII (model text) |
| Saudi Arabia | Civil Transactions Law Arts 178 to 179 | Not payable if no harm; reduce if excessive; increase only for fraud or gross negligence | Gibson Dunn (secondary) |
| United Arab Emirates | Civil Transactions Law 2025 Art 340 | Reduce if exaggerated; increase for fraud or gross fault | Afridi & Angell (secondary) |
| United Kingdom | Exclusion clauses: UCTA ss2, 26, 27 | Reasonableness test, not for international supply contracts or chosen-law-only cases | legislation.gov.uk |
Decisions to make
- Is the contract an international supply of goods?2If so, UCTA's reasonableness test does not apply to the liability limits under English law.
- Where will a liquidated damages claim be enforced?56910Indian, German, Saudi and UAE courts can each cut down agreed sums on different tests.
- Are both parties merchants in Germany?7A merchant's penalty cannot be reduced under § 343 BGB.
- Does the cap carve out fraud and gross fault?4Saudi law does not allow exclusion of compensation for damage caused by fraud or gross fault.
Documents usually needed
- Liability schedule setting out caps, exclusions and carve-outs
- Pre-estimate of loss supporting each liquidated damages figure
- Evidence of negotiation of liability terms, relevant to reasonableness
- Performance records showing partial performance, relevant to Gulf and German reductions
- Insurance certificates matching the agreed caps
Common mistakes
- Copying an English-law liability clause into a contract enforced in Saudi Arabia without a fraud and gross-fault carve-out
- Setting liquidated damages with no record of how the figure was estimated
- Assuming an Indian court will award the full liquidated sum automatically
- Expecting a German court to reduce a penalty agreed between merchants
- Relying on old UAE Article 390 case law after 1 June 2026
Questions businesses ask
Will an Indian court enforce our liquidated damages figure?
Section 74 of the Indian Contract Act allows reasonable compensation not exceeding the named sum, whether or not actual damage is proved, so the figure is a ceiling rather than an automatic award.5
Can a Saudi counterparty avoid agreed compensation?
Under Articles 178 and 179 of the Saudi Civil Transactions Law, as described by a law firm, it is not payable if the debtor proves no harm and may be reduced if excessive or partly performed.9
What this guide does not yet confirm
These points need checking with a qualified local professional before you rely on them.
- The English common-law penalty rule (Cavendish Square Holding v Makdessi, UK Supreme Court 2015) could not yet be checked on the Supreme Court website.
- French rules on penalty clauses (Code civil Article 1231-5) and limitation of liability could not yet be checked on Legifrance.
- Singapore's approach to penalties (common law) was not researched.
- The Saudi and UAE agreed-compensation articles are from law-firm sources; the official UAE text was truncated before Article 340 and the Saudi official text could not yet be checked.
Sources and review status
Each statement is numbered to the source it was checked against. We use official sources where we can, and each statement says whether it was checked against an official or a secondary source. Sources last checked on 19 October 2026. None of it has been professionally reviewed yet: it is research checked against official and secondary sources by WONE Global, not legal or tax advice.
In England, Wales and Northern Ireland a contract term cannot exclude or restrict liability for death or personal injury resulting from negligence, and liability for other loss caused by negligence can be excluded or restricted only if the term satisfies the requirement of reasonableness. Unfair Contract Terms Act 1977, section 2(1) and (2); business-to-consumer terms are governed by the Consumer Rights Act 2015. Scotland has separate provisions.
The Unfair Contract Terms Act limits on excluding or restricting liability, including the reasonableness test, do not apply to international supply contracts: sales of goods between parties whose places of business are in different states, with goods crossing borders or offer and acceptance in different states. Section 26(3) and (4) set the conditions.
Where the law of part of the UK applies to a contract only because the parties chose it, and would otherwise be a foreign law, sections 2 to 7 and 16 to 21 of the Unfair Contract Terms Act do not apply; the Act still applies where a foreign-law clause was imposed mainly to evade it. Section 27(1) and (2)(a).
Under the Saudi Civil Transactions Law the parties may agree to exclude compensation for non-performance or delay, except where the damage results from the debtor's fraud or gross fault. Article 173(1); sale-specific limits apply where a seller intentionally conceals a defect (Article 343).
Secondary (law firm) source; article wording is the firm's translation.
Under section 74 of the Indian Contract Act, where a contract names a sum payable on breach or contains a penalty stipulation, the injured party may recover reasonable compensation not exceeding the amount named, whether or not actual damage is proved. Central law.
In Germany a forfeited contractual penalty that is disproportionately high may be reduced by the court to an appropriate amount on the debtor's application, taking account of every legitimate interest of the creditor, but not after the penalty has been paid. § 343(1) BGB.
A contractual penalty promised by a merchant (Kaufmann) in the course of its commercial business cannot be reduced under § 343 BGB. § 348 HGB. Penalty clauses in standard terms are also subject to the standard-terms controls in the BGB, not reviewed here.
Under Uniform Commercial Code section 2-718(1), damages for breach of a contract for sale may be liquidated only at an amount reasonable in light of the anticipated or actual harm, the difficulty of proving loss and the inconvenience of other remedies, and a term fixing unreasonably large liquidated damages is void as a penalty. State law; sales of goods.
Read on the Cornell Legal Information Institute reproduction of the Uniform Commercial Code, which is a model text; each state enacts its own version, so confirm the enacted text in the state whose law applies.
Under the Saudi Civil Transactions Law, agreed compensation is not payable if the debtor proves the creditor suffered no harm; the court may reduce it if it is excessive or the obligation was partly performed, and may increase it only where the debtor's fraud or gross negligence caused greater harm. Articles 178 and 179 of the Civil Transactions Law (Royal Decree No. M/191 of 1444H). Agreed compensation cannot be set for an obligation to pay a sum of money (Article 178).
Secondary (law firm) source dated May 2025; the official text on the Bureau of Experts portal could not yet be checked.
Under the UAE Civil Transactions Law in force from 1 June 2026, a court may reduce agreed compensation that is exaggerated or disproportionate to the actual harm, where the obligation was partly performed or where the creditor's own fault contributed, and may increase it where the creditor proves the debtor's fraud or gross fault. Article 340 of the 2025 law, replacing Article 390 of the 1985 law, under which courts could amend agreed compensation to equal the loss and any agreement to the contrary was void.
Secondary (law firm) source dated June 2026; Article 340 was not reached in the truncated official text read.
Questions on this topic
10 statements on liability limits and penalties
