In the recent case of Topalsson GmbH v Rolls-Royce Motor Cars Ltd [2024] EWCA Civ 1330, 5 November 2024 the Court of Appeal considered the interpretation of a liability cap in a commercial contract and its interplay with other contractual provisions. The Court held that the liability cap applied to each party’s claim before calculating the parties’ net position and suggested that it had no effect on a claim for contractual interest.
Rolls-Royce had engaged Topalsson to design, build, implement and maintain digital visualisation software. The agreement 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 €5 million”.Under a separate clause, each party could charge interest on late payments. The interest payable was stated as being a “substantial remedy” and “the sole remedy available” to the party entitled to interest for late payment.
After Rolls-Royce purported to terminate the agreement, Topalsson issued proceedings. The first instance decision found that the agreement had been validly terminated and that Rolls-Royce was entitled to termination damages of almost €8 million. Applying the liability cap, the judge interpreted the cap as limiting the aggregate of all claims between the parties and then set-off against the sum approximately €800,000 owed to Topalsson. She then applied the €5 million cap thus awarding Rolls-Royce the full amount of the cap of €5 million.
Topalsson appealed the calculation of termination damages and contended that the set-off should occur after applying the liability cap, reducing the amount owed to €4.2 million.
The Court of Appeal ruled that on the proper construction of the wording, the liability cap should first be applied separately to each party’s liability to the other, and only then would the claim and counterclaim be set-off against one another.
This resulted in Topalsson’s €8 million liability being reduced to €5 million and reducing the overall liability overall from €5 million to €4.2 million. That is, damages capped at €5 million, less the €800,000 in unpaid charges. The Court relied not just on the clause’s wording, but on commercial sense. In other words, if the cap applied to the net balance of claims, a customer could extend or even negate the cap by withholding payment of undisputed charges.
After the appeal judgement, Topalsson sought to add a claim for contractual interest to the claim for the capped liability. The Court would not allow this, as it was too late in the process. However, the Court did give its opinion as to whether the cap on liability would have affected the interest claim and suggested that the cap did not affect a claim for contractual interest. It was judged that the wording of the interest clause coupled with commercial sense demanded that the clause should give an incentive to pay on time. If interest were to be capped, it would cease to provide that incentive and undermine the contractual remedy.
The judgment also noted that this decision reflected the wording of this particular clause and that parties were free to agree otherwise in their contracts.
Conclusion
The Court of Appeal’s decision in Topalsson GmbH v Rolls-Royce Motor Cars Ltd emphasises the importance of precise contractual language and its interpretation in commercial agreements. By ruling that liability caps should be applied to each party’s claims before setting them off, the Court emphasised the need for clarity and commercial sense in contract drafting. Additionally, the Court’s view that liability caps do not affect claims for contractual interest highlights the necessity of maintaining incentives for timely payments.
The Birketts View
This case serves as a critical reminder for parties to carefully negotiate and clearly define their contract terms to avoid disputes and ensure that their commercial intentions are effectively captured. Future cases may yield different outcomes based on their specific facts, but the principles of clear drafting and commercial practicality will likely remain influential following the judgement in Topalsson v Rolls-Royce Motor Cars Ltd.
Key Contacts
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at November 2024.