What exactly does a liability cap, cap?

In the recent case of Topalsson GmbH v Rolls-Royce Motor Cars Limited [2024] EWCA Civ 1330, the Court of Appeal considers the interpretation of a liability cap and its interplay with other contractual provisions. In this instance, the Court held that the liability cap is applied before calculating the parties’ net position, and further, that contractual interest will not form part of the liability cap.  The Court emphasised the importance of considering the words actually used in the contract when it comes to matters of contractual interpretation, concluding that these were consistent with commercial common sense. The case also reiterates the importance of parties having well-defined contract terms.

Background

Rolls-Royce Motor Cars Limited (Rolls Royce) engaged Topalsson GmbH (Topalsson) via a services agreement (Agreement) on 11 October 2019 to design, build, implement and maintain digital visualisation software for Rolls Royce.

There were delays in the development and supply of the software, which resulted in termination of the Agreement by Rolls Royce.  Topalsson argued the termination was a repudiatory breach of the Agreement, which it accepted.  Topalsson then issued proceedings in the Technology and Construction Court (TCC),¹ claiming damages for unlawful termination and lost profits.  Rolls Royce also counterclaimed damages from the alleged breach, claiming losses. Both parties agreed that under clause 20 of the Agreement, total liability to either party was capped at €5 million.

The TCC found that, amongst other things, Rolls Royce validly terminated Topalsson’s appointment as supplier under the Agreement,² and further, that Rolls Royce was owed €7,962,323 in termination damages.  The TCC set off against this sum the amount of €794,759 which was due to Topalsson, and only after performing the set off did the TCC apply the contractual cap of €5 million, as specified in clause 20 of the Agreement.  As a result, damages of €5 million were awarded to Rolls Royce.  Rolls Royce was also awarded contractual interest for late payments from Topalsson in accordance with the interest provisions of the Agreement (clause 14.11 provided that each party could charge interest on late payments).

Topalsson appealed and argued to the Court of Appeal (Court)³ that:

1. In the process of calculating the net sum due to Rolls Royce, the TCC should have first applied the contractual cap of €5 million and then performed the set off, which would have left an overall sum due to Rolls Royce of just over €4.2 million; and
2. The contractual interest for late payments awarded to Rolls Royce should also be included in the €5 million cap.

Decision

Issue 1 (Set off and liability caps)

The Court decided that the TCC’s interpretation of the Agreement’s liability cap being applied after calculating the net financial position between the parties was incorrect. Topalsson argued that the cap should be applied separately to each party’s liability before any set-off, which would reduce the amount payable to Rolls Royce.

The Court disagreed with the TCC’s interpretation, stating that the Agreement’s wording (“total liability of either party to the other”) suggested that the liability cap should be applied to each party’s liability separately and that this interpretation aligns with commercial common sense to prevent manipulation of the cap through set offs e.g., by ensuring that the cap is not avoided by the withholding of payments by a party.  The Court referred to Denning MR’s obiter remarks in the case of The Tojo Maru (No. 1)⁴ to support its interpretation and ultimately held that the cap should be applied separately to each party’s liability (and would not result in any double counting). This reduced the amount payable to Rolls Royce by Topalsson to approximately €4.2 million.

Issue 2 (Is interest subject to the liability cap?)

The Court rejected Topalsson’s claim regarding issue 2 in two steps.  Firstly, by identifying the issues with Topalsson’s pleaded claim and presentation of its claim at trial.  Secondly, by addressing the construction and interpretation of the terms of the Agreement relating to interest and the liability cap.

Pleadings and presentation

The fundamental issue with Topalsson’s claim regarding the interest was that Topalsson needed permission to amend its pleadings to include the argument that interest was within the cap. 

The Court emphasised the importance of Topalsson having pleaded its position that the €5 million liability cap applied to interest – it was not enough for Topalsson to have merely denied interest without explicitly raising the cap as a defence.  The Court also noted the contradiction in Topalsson’s claim at trial, since Topalsson sought interest on sums due without regard to the cap.

The Court ultimately decided not to exercise its discretion to allow the late amendment and rejected Topalsson’s claim as a matter of principle. However, the Court then went on to consider the merits of the claim.

Construction

The Court concluded that interest on late payments fell outside of the €5 million liability cap since the parties had agreed, by the wording of clauses 14.11 and 14.12 of the Agreement, that interest was a “substantial” and “sole remedy” for late payment – supporting the Court’s conclusion that it should not be limited by the cap.

In addition to the wording of the Agreement however, the Court noted that including interest within the liability cap would discourage timely payments and benefit the party in breach, which would be contrary to commercial common sense.  The Court further indicated that clear words would be required to include interest within a liability cap, and such wording was not present in this Agreement.

The Court briefly addressed Topalsson’s argument about statutory interest, noting that the sums awarded by the TCC were categorised as termination damages, not a debt, that there is no authority for the proposition that a claim for damages would not attract statutory interest, and that statutory interest was therefore applicable.

The Court therefore upheld the decision that interest on late payments was not subject to the €5 million cap, ensuring Rolls Royce’s entitlement to interest as set out in the Agreement.

Comment

This decision is interesting from the perspectives of a contracting party as well as those involved in disputes.

Firstly, it is yet another reminder of English courts relying on the language used in the contract itself when interpreting the parties’ contractual obligations – this was also discussed in our recent article on Part 8 proceedings.  In Topalsson’s case, the Court also found that the words actually used provided the “only result that accords with commercial common sense”.

Secondly, it is a reminder to contracting parties of the importance of clear legal drafting, at negotiation stages of an agreement.  Liability caps and interest provisions, particularly in the context of a construction contract, should be carefully considered and unambiguously drafted.  In this case, the Court commented that if the provision that interest for late payment was to be included within the cap, clear words should have been included to that effect, as this would exclude a common law right.  No such words were included, and interest was decided to be outside of the cap.

Finally, the Court highlighted some of the issues involved with making late amendments to a pleaded case.  In this instance, the Court decided not to exercise its discretion to permit a late amendment to Topalsson’s pleadings, as the proposed amendment involved a volte face on the part of Topalsson, as it sought to run on appeal an argument contradictory to what it had presented at trial.  The Court also noted that allowing amendments is a matter at the court’s discretion and that it would not grant Topalsson that discretion in any event, due to its failures to comply with court orders and pay any part of the judgment sum that had been awarded thus far.

Footnotes

1. EWHC 1765 (TCC) (12 July 2023) (the TCC Judgment).
2. Paragraph 299, TCC Judgment.
3. EWCA Civ 1330 (5 November 2024).
4. [1969] 2 Lloyd’s Rep 193 per Denning MR at 203.