December, 2024 - Navigating liability caps: Topalsson v Rolls-Royce

In the recent case of Topalsson GmbH v Rolls-Royce Motor Cars Ltd EWCA Civ 1330, the Court of Appeal considered the interpretation of liability caps in commercial contracts and their interaction with other contractual provisions and remedies. This case is of particular interest to the shipping industry, where complex contracts and liability issues are commonplace.

The facts

Topalsson GmbH (“Topalsson”), a software development company, was engaged by Rolls-Royce Motor Cars Ltd (“Rolls Royce”) to design and implement customer visualization software, allowing customers to design realistic renderings of their orders. The contract included a liability cap clause limiting the total liability of either party to €5 million as follows:

"20. Liability

[…] 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 €5m (five million euros) […]”

Following disputes and delays, Rolls-Royce terminated the contract, leading Topalsson to claim unlawful termination and lost profits. Rolls-Royce counterclaimed for losses arising from the termination.

At first instance, the Technology and Construction Court found in favour of Rolls-Royce, awarding them €8 million in termination damages, which was then reduced by €794,759 owed to Topalsson, and further capped at €5 million. This would have resulted in a net payment of damages of €5 million by Topalsson to Rolls Royce, plus contractual interest for late payments.

Topalsson appealed, arguing that (i) the liability cap should apply separately to each party's liability before any set-off and (ii) it should not affect claims for contractual interest.

Court of Appeal decision

Finding in favour of Topalsson on the first point of appeal, the Court of Appeal found that the liability cap should indeed apply separately to each party's liability before any set-off. This had the effect of reducing Topalsson's liability to €4.2 million following set-off of €794,759. The court emphasized that the wording of the liability cap clause suggested a totting up of liabilities rather than a netting off.

The court’s reasoning was detailed and focused on the interpretation of the contract terms. The liability cap clause must be interpreted in the context of the entire agreement and, in this case, the clause clearly indicated that the cap applies to the total liability of each party, not the net liability after set-off. The court stated that “it is the only result that accords with commercial common sense”, which is to limit the financial exposure of each party independently.

In terms of the second point of appeal and the claim for interest, the court considered that the liability cap would not affect claims for contractual interest. This aligns with the principle, which the Court of Appeal found to be correct, that payment of interest in this case was plainly the means  of providing “a substantial remedy for late payment” and “the sole remedy available”, which should not be subject to the cap.

However, Topalsson’s pleadings did not include a claim that interest fell within the cap and it was too late for this claim to be added. During the initial 18 day hearing, there was only a single passing reference to including interest within the cap. It should be noted that an “unsatisfactory background”, in which Topalsson failed to pay an interim payment on account of costs and was in breach of numerous court orders, influenced the decision of the Court of Appeal in their exercise of discretion on the second issue on appeal about interest. 

Conclusions

For the shipping industry, where contracts often involve significant financial stakes and potentially complex liability issues, this case highlights the critical importance of clear and precise drafting and language in commercial contracts, particularly in respect of key contractual terms such as liability caps and set-off provisions.

The scope of any liability cap should be clearly defined and, as demonstrated by this case, specify whether the cap applies to claims for contractual interest. This can prevent misunderstandings and ensure that parties are adequately compensated for late payments. Ambiguities can lead to costly disputes and litigation, as widely worded contractual caps can cut across other contractual provisions and remedies.

As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.