Decoding liability caps: What do they cover?

Case background

Topalsson entered into an agreement with Rolls-Royce to develop and supply digital software intended to allow prospective Rolls-Royce customers to visualise and configure vehicles for purchase. However, the project overran, causing Rolls-Royce to terminate the agreement. The agreement contained a limitation clause which capped 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 EUR5 million”.

The agreement also included a provision allowing each party to charge interest on late payments.

Following Rolls-Royce’s termination of the agreement, Topalsson initiated legal proceedings for wrongful termination and Rolls Royce counterclaimed for losses arising from termination.

High Court decision

The High Court found that the termination was valid, and the judge awarded Rolls-Royce termination damages of nearly EUR 8 million.  The judge then set-off Topallson’s counterclaim of circa EUR 800,000.   This amount was then reduced to EUR 5 million (being the full amount of liability cap) and contractual interest added.

Topalsson appealed arguing, amongst other things, that:

• the set-off should occur after applying the liability cap, reducing the amount owed to EUR 4.2 million; and
• Rolls Royce’s entitlement to interest should be included within the EUR 5 million cap, rather than being payable on top of the cap (this argument was not raised during the High Court trial).

Court of Appeal decision

The Court of Appeal ruled that the cap applied separately to each party’s claims before set-off. Partly on the basis that, if the cap were applied to the net balance of claims, a customer could potentially extend or even nullify the cap by delaying payment of charges that are not in dispute.

Topalsson’s attempt to argue that contractual interest should be included within the liability cap was rejected due to it not being raised in its initial counterclaim and given Topalsson’s conduct in the trial (it had missed numerous court orders). However, the Court of Appeal did opine that the cap would not affect claims for contractual interest as interest clauses are designed to incentivise timely payment and should not be undermined by liability caps.

Topalsson’s EUR 8 million liability was therefore reduced to EUR 4.2 million after the set-off of the EUR 800,000 counterclaim, a conclusion which, in the leading judge’s own words accorded “with commercial common sense”.

Comment

Topalsson v Rolls-Royce provides valuable insights into the interpretation of liability caps in commercial contracts by English courts. It highlights the importance of precise language and clear drafting, particularly regarding liability caps and their application to counterclaims and interest, and underlines that the courts will consider “the words actually used” in a contract and “commercial common sense” when interpreting contracts.

Contact our Corporate & Commercial team for assistance with drafting limitation clauses for your commercial contracts.

1  Topalsson GmbH v Rolls-Royce Motor Cars Limited – Find Case Law – The National Archives