Navigating liability caps: Insights from Topalsson GmbH v Rolls-Royce Motor Cars Ltd

The case of Topalsson GmbH v Rolls-Royce Motor Cars Ltd[1] provides a significant examination of the application and interpretation of limitation of liability clauses in commercial contracts.

This Court of Appeal case revolved around a dispute arising from a services agreement entered into by the parties in October 2019, under which Topalsson was engaged to design, build, implement, and maintain digital visualisation software for Rolls-Royce Motor Cars Ltd (RRMC).

The agreement contained a not unusual limitation of liability clause: “Subject to clause [20.1], 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).”

The High Court

The agreement between Topalsson and RRMC encountered several issues, leading to delays and disputes. RRMC terminated the agreement in April 2020, prompting Topalsson to initiate proceedings. In those initial proceedings, the High Court ruled in favour of RRMC, awarding it termination damages amounting to just over €7m which was arrived at after deducting sums due to Topalsson of €794,759. The court then proceeded to apply the contractual liability cap of €5m. Therefore, RRMC was ultimately awarded €5m in damages. The court also went on to award contractual interest to RRMC in addition to the €5m damages.

Court of Appeal

Topalsson appealed, raising two primary issues related to the limitation of liability:

1. The interplay between the liability cap and set-off.
2. The interplay between the liability cap and interest.

The interplay between the liability cap and set-off

The central issue was whether the contractual cap on liability should be applied before or after the set-off of mutual claims. Topalsson argued that the liability cap should apply separately to each party's liability before any set-off. Therefore, the amount owed to Topalsson at termination, being €794,759, would be deducted from RRMC’s awarded damages, being €5m owing to the application of the cap, thereby reducing the final sum due to RRMC to roughly €4.2m.

In support, Topalsson argued that:

• The wording in the clause referred to “total liability” of either party to the other, not the net liability once all claims had been considered.
• RRMC would be put in a better position by not paying the money owed to Topalsson on termination of the agreement, recovering the full €5m, and effectively “keeping” those payments RRMC should have otherwise made.

The Court of Appeal found in favour of Topalsson and ordered damages of €4.2m. The court concluded that the cap should be applied to each party's liability separately before the set-off. The court stressed that this aligned with commercial common sense and prevented the cap from being circumvented by the timing of payments and set-offs. The court emphasised that if the application of the cap to the net total liability had been the intention of the parties, the clause would have to be clear in containing the word “net”. However, as the clause stood, the words used were “total liability of either party to the other”, which the court explained resulted in the cap being applied separately to the total liability of each party, thereby requiring the netting off exercise after the application of the cap.

The interplay between the liability cap and interest

Topalsson also contended that the cap should include any interest it owed to RRMC. The Court of Appeal rejected this argument, noting that the agreement explicitly provided for interest as a separate and “sole” remedy for late payment. If interest for late payment was included in the cap, then it may never be clear as to how long the money would remain unpaid if the interest was to be consumed by the cap regardless. This had the potential to incentivise non-payment, as the parties could delay payments without facing additional financial consequences beyond the capped amount.

Conclusion

The Court of Appeal's decision emphasises the fact-specific nature of contractual construction, which further underscores the importance of clear contractual drafting and the careful interpretation of limitation of liability clauses. The Court’s rationale appears to be driven by the goal of promoting contractual certainty, predictability and “commercial common sense”.[2] The ruling clarifies that such caps are intended to limit the total liability of each party independently and that interest on late payments is typically treated as a separate remedy unless explicitly stated otherwise in the contract.

This case serves as a reminder for businesses to ensure that their contracts articulate the scope and application of limitation of liability clauses to avoid disputes and unintended financial exposure.