Cap-tivating: what is caught by a liability cap?

The Court of Appeal's recent judgment in Topalsson v Rolls-Royce looks at how the set-off of counterclaims should be addressed as well as interest when it comes to liability caps.

Background - delay and termination

Topalsson contracted with Rolls-Royce to design and supply visualization software for Rolls-Royce's prospective customers. The project experienced delays, leading Rolls-Royce to terminate. Topalsson issued proceedings for wrongful termination and Rolls-Royce counterclaimed for losses arising from termination. The High Court ordered Topalsson to pay Rolls-Royce nearly EUR8m in "termination damages." Topalsson appealed.

Issues on appeal - effectiveness of cap

The appeal considered:

1. Whether the liability cap in the agreement should be applied before or after the set-off of each party's claims.
2. Whether Rolls-Royce's substantive claim and the claim for interest on late payments were both subject to the liability cap.

The contractual liability cap said: "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."

Liability cap: before or after setting off?

Topalsson argued that the cap should be applied separately to each party’s liability, with any application of set-off then applying after the liability cap. As a result, in Topalsson’s view, the amount Rolls-Royce owed to Topalsson at termination should be deducted from the EUR5m cap, reducing Topalsson's payment to Rolls-Royce to just over EUR4m.

The Court of Appeal found in favor of Topalsson. It held that, in the absence of clear words, it should assume the parties did not intend for the agreement to derogate from their normal rights and obligations. 

The words referred to “the total liability of either party to the other” (court's emphasis). This, the Court of Appeal said, suggested a totting up, not a netting off. It was contrary to the idea that the net position had to be ascertained before the cap was applied. Moreover, this meaning accorded with commercial common sense: Rolls-Royce should not be in a better position as a result of its failure.

Interest on late payments: inside or outside the liability cap? 

Topalsson argued that both Rolls-Royce's substantive claim and its claim for interest on late payments should fall within the liability cap, and that Rolls-Royce could not recover any interest for late payments.

The Court of Appeal considered the agreement in its entirety, and found that the parties' express intention was that interest would be outside the liability cap. Further, including interest within the cap would deprive Rolls-Royce of its "sole and substantial remedy" for late payment. A provision to include interest within the cap would require clear words, as it would otherwise deny Rolls-Royce common law rights and disincentivise Topalsson from timely payments, contrary to commercial common sense. 

Judgment: Topalsson v Rolls-Royce