On 5 November 2024, the Court of Appeal delivered its judgment in the case of Topalsson GmbH v Rolls-Royce Motor Cars Ltd. The case concerned the calculation of damages in accordance with the contractual cap on liability. The court was asked to consider a number of issues, including whether: (1) to apply the cap before or after setting-off each party's claim; and (2) contractual interest fell within the scope of the cap.

Background

Topalsson entered into a Services Agreement with Rolls-Royce (RRMC), pursuant to which Topalsson was to design, build, implement, and maintain digital visualisation software for RRMC. The agreement included a cap on liability which read as follows:

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 agreement was terminated by RRMC in April 2020 due to delays to the project and ongoing disputes between the parties. Topalsson initiated legal proceedings which led to a trial in the High Court and a subsequent appeal to the Court of Appeal.

The calculation of damages issue: liability cap or set-off first?

In the initial High Court trial, the judge awarded RRMC termination damages amounting to €7,962,323. From this amount, she deducted a sum of €794,759 which was due to Topalsson, resulting in a net sum of €7,167,564. This amount was then reduced to €5 million as per the contractual liability cap, with additional contractual interest awarded to RRMC.

In its appeal, Topalsson argued that the cap should have been applied separately to each party's liability prior to the set-off calculation. This would have meant that RRMC's damages would have been reduced from €7,962,323 to the liability cap of €5 million; meanwhile, the sum due to Topalsson would have remained at €794,759 (this being well below the €5 million cap). Only after each party's liability had been calculated in line with the liability cap could set-off be applied, resulting in a net sum due to RRMC of just over €4.2 million.

The Court of Appeal agreed with Topalsson. The court found that, in the absence of any contractual wording to the contrary, the liability cap should be applied to each party's liability separately before calculating any set-off. This interpretation was supported by the wording of the liability clause itself (which referred to the “total liability of either Party to the other"), as well as the practical consideration that parties should be prevented from circumventing their liability caps (as the court put it: “if the claim for set-off was taken into account before the cap was applied, the result could be manipulated, so that the party with a right to set-off can avoid the consequences of the cap altogether”).

The interest issue: to be included or not to be included?

In its appeal, Topalsson also contended (for the first time - this was not pleaded by Topalsson during the initial trial) that RRMC's entitlement to interest should also fall within the €5 million cap, instead of being payable in addition to the cap. 

Ultimately, the court did not allow Topalsson to amend its claim to include this new argument as a matter of principle (particularly given that Topalsson had breached numerous court orders). Nevertheless, the court did remark that Topalsson's argument regarding the inclusion of interest within the liability cap would have failed. In reaching this conclusion, the court considered the wording of the agreement which stated that interest on late payments was a “sole" and "substantial remedy” for late payment of any sum payable under the agreement. Therefore, including an interest payment within the cap “would be contrary to the express agreement”, as well as depriving RRMC of its financial remedy for interest.

Our thoughts

From a commercial contracts’ perspective, the case is another reminder of the importance of clear drafting in agreements, particularly when it comes to the calculation of damages. Indeed, had the parties wished to agree that the liability cap was to be applied after setting-off any amounts owed between the parties, this should have been expressly stated in the contract. 

From a litigation perspective, in each case of contractual interpretation, the court will need to balance the relevant principles according to the applicable facts. This is an example of the court reading “the words actually used” in accordance with business common sense in order to reach “the only result that accords with commercial common sense” and is likely to be persuasive in similar circumstances.