In Topalsson GmbH v. Rolls-Royce Motor Cars Limited,[1] the Court of Appeal helpfully re-affirmed that the ‘commonsense’ approach to the application of liability caps is to apply them before any set-off calculation.
Background
In October 2019, Rolls-Royce contracted with Topalsson to design, build, implement and maintain digital visualisation software which allowed Rolls-Royce’s prospective consumers to configure and realistically render a vehicle they were considering purchasing. Following significant delays in delivery, Rolls-Royce took the decision to terminate the services agreement in April 2020.
Particular consideration was given to the application of the liability cap:
‘… 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 decision
The court considered the question of liability and determined that, upon termination, Rolls-Royce was due 7,962,323 euros and Topalsson was due 794,759 euros. The court then had to consider the correct approach to applying the liability cap. The court held that the correct way to approach that exercise was to:
- Calculate the sum due to Topalsson on termination (794,759 euros).
- Calculate the sum due to Rolls-Royce on termination (7,962,323 euros).
- Calculate the net sum due to Topalsson or Rolls-Royce (7,167,564 euros).
- Apply the cap on liability, as per clause 20 (5,000,000 euros).
The High Court therefore awarded Rolls-Royce damages in the sum of five million euros, plus interest. Topalsson appealed.
The Court of Appeal
Topalsson did not dispute the gross liabilities found by the High Court to be owing to it and Rolls-Royce; however, it argued that the set-off exercise to establish the net sum due should be carried out after the application of the cap on liability. This would mean that, with reference to the steps identified above, the correct way to approach the allocation exercise was to:
- Calculate the sum due to Topalsson on termination (794,759 euros).
- Calculate the sum due to Rolls-Royce on termination (7,962,323 euros).
- Apply the cap on liability, as per clause 20 (thus having no effect on the sum due to Topalsson and reducing the sum due to Rolls-Royce to 5,000,000 euros).
- Calculate the net sum due to Topalsson or Rolls-Royce (4,205,241 euros).
The Court of Appeal agreed.
The court considered that there was nothing in the clause that suggested that the liability caponly applied once the net financial position between the two parties had been calculated. If that had been the intention of the parties, it would have been very easy for the clause to say that, and to make clear that the cap only applied to the net liability between the parties.
The court also held that this approach was the only one that made commercial commonsense. It also accorded with the single authority directly on the point, The Tojo Maru (No.1).[2] In that case, Lord Denning had used the following instructive illustration of the principle:
Suppose a laundry has a clause limiting their liability to 10s. for any article that was damaged or lost, and the customer agrees to it … The laundry washes a lot of articles in one week at a charge of £2, but during the next week loses a shirt worth £3. It seems to me that the laundry ought to be paid £2 for the work done, and to be able to limit its liability for the shirt to 10s. Equity does not in that case require a set-off of the £3 against the £2, but only of the 10s. against the £2. Were it otherwise, the clause could be rendered useless by an adroit customer. The customer would only have to let his laundry bill fall into arrear, and he could get round the clause.
Topalsson’s appeal was upheld, and the Court of Appeal reduced its liability to Rolls-Royce to 4,205,241 euros.
Takeaway
This is an instructive decision as to the approach the courts are likely to adopt regarding the interplay between liability caps as set off. However, the correct interpretation of the application of a cap in any given contract will of course be subject to the specific wording of the relevant terms. It would be relatively easy for parties to draft a limitation clause so that the cap was to be applied after set-off, but they should be alive to the fact that that would mean the liability cap could – in effect – be increased or avoided altogether.
[1] [2024] EWCA Civ 1330.
[2] As per Lord Denning in The Tojo Maru (No.1) [1969].
Contributors
Ben Sharrock-Mason