Liability caps are among the most heavily negotiated terms in commercial contracts.
They also come under close scrutiny in litigation when the defendant seeks to rely on the liability cap to reduce the amount it has to pay in damages.
Our In-House Counsel Support team considers a recent case that provides insight for anyone drafting, negotiating or seeking to rely on a cap on contractual liability.
On 5 November 2024, the Court of Appeal handed down its judgment in the case of Topalsson GmbH (Topalsson) v Rolls-Royce Motor Cars Limited (RRMC) which involved the calculation of damages in accordance with a limitation of liability clause. The court was asked to consider various issues, including: (1) whether to apply the cap before or after setting-off each party's claim; and (2) whether contractual interest fell within the scope of the cap.
RRMC engaged Topalsson under an agreement for services to design, build, implement and maintain digital visualisation software. The agreement included a limitation of liability clause capping the parties' liability as follows: 'the total liability of either Party to the other under this Agreement shall be limited in aggregate for all claims no matter how arising to the amount of €5 million'.
In addition, the agreement contained a clause allowing both parties to charge interest on late payments.
Due to Topalsson's failure to meet deadlines, RRMC terminated the agreement, and Topalsson issued proceedings claiming damages for unlawful termination and lost profits. RRMC also counterclaimed damages arising from the alleged breach and claimed losses.
In the decision at first instance, it was held that termination of the agreement was valid, and RRMC was awarded €7,962,323 which was reduced by the amount owed to Topalsson at termination (€794,759) — leaving a balance due to RRMC of €7,167,564.
The judge then applied the contractual liability cap to that amount and awarded damages of €5 million to RRMC. The judge also went on to award contractual interest to RRMC in addition to the €5m damages.
After obtaining permission, Topalsson appealed the decision arguing that in the process of calculating the net sum due to RRMC, the court should have first applied the €5 million cap and only then performed the set off calculation, which would have left an overall sum due to RRMC of €4.2 million.
As a new point to the claim, Topalsson also sought to argue that the interest to which RRMC was entitled should fall within the €5 million cap instead of being payable in addition to that capped amount.
In relation to Topalsson's argument surrounding when the liability cap should be applied, the Court of Appeal agreed, finding that in the absence of any wording to the contrary, the cap on liability should be applied to each party's liability separately before calculating any set-off.
This view was supported by the fact that the wording of the liability cap referred to 'total liability', not net liability.
The court stated that this interpretation aligns with 'commercial common sense' to prevent attempts to manipulate the cap through set-offs. This reduced the amount payable to Rolls Royce by Topalsson to approximately €4.2 million.
In relation to Topalsson's argument surrounding interest for late payments, the Court of Appeal did not allow Topalsson to amend its claim to include this new argument as a matter of principle.
The Court of Appeal did however provide its opinion confirming that the €5 million liability cap did not affect a claim for contractual interest, stating that interest on late payment was a 'sole' and 'substantial remedy' for late payment of any sum under the agreement and that the inclusion of an interest payment within the liability cap would deprive RRMC of its financial remedy for late payment and 'would be contrary to the express agreement'.
This decision from the Court of Appeal emphasises the importance of clear contractual drafting, especially in relation to clauses dealing with the calculation of damages and limitations on liability.
Additionally, it serves as another indicator that English courts rely on the language used in the agreement when attempting to interpret the parties' obligations.
It therefore follows that, had the parties wished to agree that the liability cap was to be applied after setting-off any amounts owed between the parties, and for interest for late payments to be included within the cap, then this should have been expressly stated in the agreement.
Our expert In-House Counsel team is here to help.
Whether you're negotiating complex commercial contracts, reviewing limitation of liability provisions, or managing disputes, we provide clear, practical, and commercially-focused legal advice tailored to your business.
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Karam has experience acting as a Commercial solicitor. Karam regularly advises clients on drafting and negotiating commercial arrangement across a range of sectors including Technology, Intellectual Property and Data and Privacy.
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