Liability caps are included within contracts to limit the potential financial exposure of a party in a contract. A liability cap clause specifies the maximum amount of damages that a party can be held liable for, even if the other party suffers a greater loss. The Court recently considered how liability caps should be applied in the case of Topalsson GmbH v Rolls-Royce Motor Cars Ltd.
What was the background to this case?
Topalsson was engaged by Rolls Royce under a design, build and implementation contract. The contract contained a provision confirming the total liability of either party under the contract was €5m. The relationship broke down between the parties and Rolls Royce purported to terminate the contract. Proceedings were subsequently issued by Topalsson.
At first instance, the Court ruled in favour of Rolls Royce. The Court calculated the damages payable to Rolls Royce by Topalsson on the following basis:-
- Calculation of the losses suffered by Rolls Royce due to Topalsson’s breach of contract.
- Deducting any monies that Rolls Royce to Topalsson under the contract for services provided.
- Finally applying the liability cap.
The Court ultimately awarded Rolls Royce €5m in damages plus interest.
What were the grounds for appeal?
Topalsson appealed the decision and the Court of Appeal (“CoA”) was asked to consider whether:-
- The liability cap should be applied before or after the set-off of mutual claims; and
- Interest for late payment was caught by the liability cap.
What did the Court of Appeal decide?
In respect of the first issue, the CoA concluded that the cap should be applied to each party’s liability separately before any set-off. The CoA placed emphasis on the fact that the wording of the liability cap clause referred to “total” liability as opposed to “net” liability. This reduced the damages award from €5m to €4.2m because the sums owed to Topalsson was deducted after the liability cap was applied.
In respect of the second issue, the CoA held that the interest should be dealt with separately to the liability cap, as an additional remedy (unless the contract expressly stated otherwise). The rationale behind this was that it would not make commercial sense if parties could delay payments without facing additional financial consequences by weaponising a liability cap.
Conclusion
The CoA’s approach reiterates the importance of carefully considering the wording used within contracts to ensure that there are no unintended consequences later down the line. We would therefore always recommend that legal advice is sought prior to entering into a contract. At Stephens Scown, our Corporate and Dispute Resolution teams are well placed to advise you on the appropriate wording of clauses to be included within the contract to ensure your position is protected if there is a dispute later down the line.
Laura Stanley and Stephen Wray have a significant amount of experience dealing with contractual disputes. If you have any queries arising from this article or require assistance, please do not hesitate to contact us on 01392 210 700.