Court of Appeal rules on how to calculate damages in liability clause
Clarifying liability caps: Key lessons from the Topalsson v Rolls Royce case
Parties often seek to limit their liability to manage the scope of their risks in commercial contracts. In the case of Topalsson GmbH v Rolls Royce Motor Cars Ltd, the Court of Appeal has looked at how to calculate the cap in a liability clause.
The case revolved around Topalsson's delivery of software for Rolls Royce. After delays in delivery, Rolls-Royce sought to terminate the agreement and claimed damages resulting from Topalsson's breach. Topalsson did not agree with the purported termination and made claims of its own.
There was a €5m cap on liability under the agreement, but how should this be calculated?
Firstly, the High Court decided that Rolls Royce's termination of the agreement was justified. On the question of damages, the Court had decided that Topalsson owed Rolls Royce €5m in damages.
On appeal, the Court of Appeal upheld the justification for termination but made a different ruling about damages. It agreed with Topalsson's argument that the €5m applied before applying the set-off, i.e. Topalsson's own claims against Rolls-Royce. Once you took into account Topalsson's claims and offset those, the amount of Topalsson's liability was reduced from €5m to €4.2m.
In other interpretations given here, the Court of Appeal ruled that the caps on liability applied to each party separately rather than as a total of both parties' liability in aggregate. In addition, the interest calculation did not fall within the cap, but that decision was arrived at due to explicit wording in the agreement that made it clear that interest was the substantial and sole remedy for late payment.
As with the High Court, the Court of Appeal also emphasised the need to construe the words actually used in the agreement. Each case would therefore be decided on the actual wording used. It is therefore important to look at the wording in the agreement carefully. A decision on how to interpret things in one particular case would not automatically flow to another if the wording is different. This shows the importance of careful drafting of such a key clause in commercial contracts. However, the case does point to a general rule that the liability cap would typically refer to one party's liability before the other party's liability is offset against it.