Contractual interpretation of liability cap clauses explored by Court of Appeal in ‘victory for common sense’

A recent Court of Appeal judgment has major implications for litigants dealing with breach of contract claims as well as anyone drafting liability clauses in contracts.

Contracts often contain limitations whereby liability is ‘capped’ at a maximum sum that’s payable in the event of a breach. In the case of Topalsson GmbH v Rolls-Royce Motor Cars Limited [2024] EWCA Civ 1330, the Court considered issues of the contractual interpretation of such clauses.

Here, Glyn Lancefield explains why the case is a victory for ‘common sense’.

Rolls Royce terminates service agreement

Rolls Royce had entered into a services agreement with Topalsson for digital visualisation software.  The contact included a €5m liability cap and provided that “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)”.

Rolls Royce purported to terminate the contract. Topalsson accepted termination but argued that Rolls Royce was in repudiatory breach of contract and issued Court proceedings in the Technology & Construction Court. 

Rolls Royce brought a counterclaim for its own losses.

The decision at first instance

Mrs. Justice O’Farrell decided that the termination was valid. In a Judgment that the Court of Appeal later commented was “crisp and neat”, the Judge awarded €7,962,323 to Rolls Royce and reduced that by the amount due to Topalsson at termination of €794,759 — leaving a balance due to Rolls Royce of €7,167,564. 

The Judge then applied the cap to that amount and awarded damages to Rolls Royce of €5m.

Topalsson obtained permission to appeal and argued that the cap on liability should be applied to each side’s claim separately before the set-off exercise is carried out. This would have fixed Topalsson’s liability at €5m, while Rolls Royce’s liability would be €794,759 — and deducting that from the €5m would have produced an overall net sum due to Rolls Royce of €4,205,241.

A victory for common sense

The Court of Appeal agreed with Topalsson in this part of the appeal. Lord Justice Coulson stated that if the parties had intended for the cap to apply after the net financial position had been calculated, “it would have been very easy for the clause to say that”. 

The Court of Appeal decided that applying the cap to the sums due to either party accorded with “commercial common sense”.

Is interest subject to the liability cap?

The Court went on to consider a second contractual interpretation issue — whether or not interest is subject to the liability cap. 

This was a new point taken by Topalsson in the appeal proceedings and the Court of Appeal Judgment gives a helpful reminder of how that Court will deal with late applications to amend. 

Here, the Court of Appeal exercised its discretion to refuse permission to amend. The Judgment referred to Topalsson as having breached numerous Court orders and not being “a party who should be granted any further indulgence by this court”. The Court of Appeal Judgment is a stark reminder of the need to comply with Court Orders and of the risks of not doing so.

Nevertheless, the Court of Appeal went on to consider the merit of the issue regarding interest — deciding that it fell outside of the liability cap. There were separate interest clauses in the contract which stated that the interest payable under them was a substantial remedy.

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