Applying the Rolls Royce treatment to limitation of liability clauses

The interplay between limitation of liability and set-off clauses

When drafting limitation of liability clauses, it is important to consider what ‘liability’ is being limited and whether the limitation of liability (the ‘cap’) will apply to the total net liability after all set-offs are reconciled or whether the cap will apply separately to the liabilities of each party to the other.

The recent English Court of Appeal case, Topalsson GmbH -v- Rolls-Royce Motor Cars Limited [2024] EWCA Civ 1330, concerned the proper construction of a limitation of liability clause in a Services Agreement (Agreement) between Rolls-Royce Motor Cars Limited (RRMC) and Topalsson GmbH (Topalsson or Supplier) under the Contract with RRMC.

The services to be supplied by Topalsson broadly involved the design, build, implementation and maintenance of digital visualisation software, which was intended to allow RRMC’s prospective customers to configure and see realistic renderings of the vehicles that they were considering purchasing.

The Agreement contained a limitation of liability clause in the following terms (emphasis added):

“20. Liability

Subject to clause [20.1]3, 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.”

The Agreement also contained a set-off clause:

“14.8 RRMC shall be entitled to set off any charges due to the Supplier under this Agreement against any amount owed by the Supplier to RRMC under this Agreement (including any service credits) or owed by the Supplier to any BMW Group company under any other agreement between RRMC or a BMW Group company and the Supplier.”

After delays and other breaches of the Services Agreement, RRMC terminated the Agreement and sought ‘termination damages’ amounting to €7,962,323. However, at the termination date, it was found that the Topalsson had accrued rights for payment of €794,759 which, after set-offs were applied, left a net figure of €7,167,564. In the court below (the TCC) O’Farrell J had then applied the limitation of liability cap to the ‘net’ amount and concluded that the total liability was €5,000,000.

O’Farrell J had considered the above clauses and held that:

“…under the Agreement, the cap on liability is applicable to the total liability of either party to the other in aggregate for all claims no matter how arising. The total liability of either party to the other requires the application of the above provisions to ascertain the balance of sums due or payable. On a proper construction of the express terms agreed between the parties, under the Agreement the accounting exercise to determine the net sum due to or from each party must be carried out before the cap is applied.”

Topalsson appealed the decision on the basis that the set-off exercise to establish the net sum due should be carried out after the application of the cap on liability to the sums calculated as due to either party. If this construction was to be preferred, it would make a significant difference to Topalsson’s liability to RRMC (of nearly €800,000) because:

• €7,962,323 would be reduced to €5m after the cap
• €794,759 stays the same and is not impacted by any cap; and
• Applying the set-off after the above caps are applied ((a) – (b)) results in a total liability of €4,205,241 (just under €800,000 less than what was ordered in the court below).

Topalsson, in construing the Agreement relied on the express words “total liability of either party to the other” and not the net liability once all claims and cross-claims had been taken into account. Topalsson argued that there was nothing elsewhere in the contractual language to support the judge’s conclusion that the contractual scheme was intended to reflect a ‘net loss’ approach. Topallson further argued that in taking a commercial, common sense approach, that “RRMC should not be in a better position as a result of its failure to pay the charges otherwise due under the Agreement because the parties had agreed a cap of €5,000,000, not €5,000,000 plus whatever amount happened to be owed by RRMC to Topalsson at the time that a set-off was applied”.

When the Agreement was terminated, Topallson had accrued rights to be paid €794,759 but which would have been circumvented had the cap applied to the ‘net’ liability.

The Court of Appeal agreed with Topallson’s construction, with Coulson LJ holding:

“The meaning I would give to the words “the total liability of either party to the other…” (my emphasis). To me, those words assume the calculation of two separate liabilities, either party to the other, with each liability being the subject of the cap. In this way, the cap would be applied to Topalsson’s liability to RRMC of €7 million odd and would reduce it to €5 million. It would be applied separately to RRMC’s liability to Topalsson, but that would have no financial effect because that liability was much less than €5 million. The two liability figures would then be netted off at that stage, resulting in the sum due to RRMC of €4.2 million odd.”

The interplay between the liability cap and interest on an award for damages

A final issue before the Court of Appeal was whether interest on the damages award was subject to the cap. Although the court did not allow Topalsson to amend its case to plead this particular issue, the court nevertheless considered the issue on its merits.

Coulson LJ held that interest for late payment was not subject the cap because (broadly):

• “the cap was designed to promote certainty, and if interest for late payment was included within the cap, then the potential effect of any late payment would be uncertain, because it would never be clear for how long the monies would remain unpaid, and therefore what interest may become due, and when or if the limit of the cap may be reached”[1]
• The Agreement (clauses 14.11 and 14.12) expressly provided an award of interest as a sole remedy for late payment and it was contrary to the express intention of the parties that this remedy be caught within the liability cap; and
• “such a construction would be a positive disincentive on Topalsson to pay the sums due when they fell due, it would be contrary to commercial common sense. It would simply encourage non-payment of sums due and benefit the wrong-doer.”

Key takeaways

In modern day building contracts and consultant’s agreements, it is common for the contractor or consultant to limit their liability to the greater of the total amount of the contract or an amount recoverable under a policy of insurance. This judgment emphasises the importance of clear drafting by addressing precisely, what is the liability that each party wishes to limit?

If the parties want to limit the overall ‘net’ liability (after all set-offs or ‘cross-claims’ are taken into account) then clear words are required, for example:

“The parties acknowledge and agree that the total net liability of either party to the other, after all set-offs are applied under the contract, will not exceed the greater of:

[INSERT CAPPED AMOUNT] or

An amount recoverable under a policy of insurance…”

If the limitation of liability is to apply to each party’s respective liabilities before applying any set-offs, then parties may wish to consider adopting the wording in this case:

“.. 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 [INSERT CAPPED AMOUNT]”.

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Authored by:

Matthew Taylor, Partner
Wesam Chami, Lawyer
Eva Zofrea, Clerk

[1] Topalsson GmbH -v- Rolls-Royce Motor Cars Limited [2024] EWCA Civ 1330 at [65] per Coulson LJ.