Court of Appeal finds contractual cap had to be applied to each party's liability before set-off

The Court of Appeal has held that an agreed £5 million cap on the "total liability of either party" under a contract had to be applied to each party's liability separately before setting off the amounts owed. In doing so it overturned the High Court's decision which had applied the cap to the net position on the claim and counterclaim: Topalsson GmbH v Rolls-Royce Motor Cars Ltd [2024] EWCA Civ 1330.

While each case will turn on its facts, the decision suggests that a cap on each party's "total liability" is likely to be interpreted as applying to each party's liability separately, and if the parties intend the cap to apply only to the net liability they should say so. This is reinforced by the Court of Appeal's view that applying the cap to each party's liability separately reflected commercial common sense. It pointed out that, if the cap applied only to the net position, a party that had a claim in damages could potentially get round the cap by withholding payment and retaining the benefit of a contractual set-off in addition to recovering the full amount of the cap.

The decision also suggests that, in the absence of clear language, a contractual liability cap is unlikely to be interpreted so as to include within the cap a liability to pay interest on late payments. This could lead to uncertainty and would incentivise the late payment of sums due.

Overall, the decision highlights the importance of precise drafting of contractual liability caps to make clear what they cover and how they operate.

Background

The claimant, Topalsson, contracted with the defendant car manufacturer, RRMC, to build and maintain digital visualisation software to assist in the selling of RRMC's vehicles. The contract contained a liability cap in the following terms:

"…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)".

There were delays to the project and RRMC terminated the contract alleging that Topalsson was in breach. 

Topalsson brought proceedings against RRMC for wrongful termination. RRMC defended the claim and counterclaimed for damages for breach of contract. The Technology and Construction Court found in favour of RRMC, finding that Topalsson had been in breach of contract and RRMC had been entitled to terminate.

The judge awarded RRMC nearly €8 million in contractual damages, reducing that figure by the amount she found due to Topalsson at termination of around €800,000. The judge then reduced this net figure to the contractual cap of €5 million and awarded contractual interest on this €5 million figure.

Topalsson appealed the quantum of this judgment to the Court of Appeal on two grounds:

1. that the judge had erred in applying the €5 million contractual cap to the net amount owed between the parties, rather than applying the cap to the liability of each party separately before setting off amounts due (which would have resulted in Topalsson only being liable for around €4.2 million); and
2. that the contractual cap should have applied to the total sum owed to RRMC, including contractual interest on late payments.

Decision

The Court of Appeal allowed the first ground of appeal, finding that the cap should have been applied separately to each party's liability, but rejected the second. Coulson LJ gave the leading judgment, with which Phillips and Zacaroli LJJ agreed.

Cap vs set-off

The Court of Appeal considered the language used in the disputed clause. The reference to the "total" liability of either party to the other suggested a totting up of claims, rather than a netting off. Further, the reference to the total liability of "either party to the other" indicated that the cap should be applied to each party's liability to the other separately, before netting off. The court noted that if the parties had intended the cap to apply only to the net financial position, it would have been easy for the clause to say that.

The Court of Appeal considered this interpretation to be fortified by both commercial common sense and the only existing authority on the point, Lord Denning's decision in The Tojo Maru (No.1) [1969] 2 Lloyd's Rep 193. Applying the cap only to the net amount due would allow it to be evaded by a party with a right to set-off, by simply not paying sums it owed to the other party. Lord Denning explained using the example of a laundry service with a cap on its liability per article of damaged or lost clothing. A customer could render such a liability cap useless by simply letting their laundry bill fall into arrears and setting off the sums owed.

The judge had distinguished The Tojo Maru on the basis that Lord Denning's illustration applied to a "per article" cap rather than a cap on total liability. However, the Court of Appeal held that this made no difference to the analysis. If it did, Lord Denning would not have used it as an illustration in The Tojo Maru, as that case was itself about a total liability cap.

RRMC argued that the common law approach to the assessment of damages was a net loss approach and that, based on Triple Point Technology v PTT Public Co [2021] UKSC 29, clear words were needed for the contract to be interpreted as derogating from the parties' normal rights and obligations. The court rejected this argument, noting that the only question was the sequencing between the cap and set-off, which was a pure matter of construction. The cap would apply in any event, and a contractual cap is (at least potentially) a denial of both parties' common law rights, which is designed to promote certainty. It may therefore override otherwise obvious rights and obligations.

Interest

The Court of Appeal refused to allow Topalsson to appeal on this point as it had not been properly pleaded or raised before the judge. However, the court provided its obiter view on the merits, stating that this ground of appeal would have been rejected in any event.

While the Court of Appeal agreed that the terms of the liability cap could arguably encompass liability to pay interest on late payments, it noted that a counterpoint was that the cap was designed to promote certainty. Including interest for late payment within the cap would create uncertainty about whether the cap might be reached – since it would never be clear for how long the monies would remain unpaid and therefore what interest might become due.

Next, the court noted the context of the contract, which provided that the interest for late payment was a substantial remedy and the sole remedy available. It would be contrary to this express agreement if the interest on late payment could be denied by the cap. In any event, a provision that interest for late payment would be caught by a liability cap would require clear words as it denied the common law rights of the innocent party (applying Triple Point).

The Court of Appeal also pointed out that Topalsson's preferred interpretation was contrary to commercial common sense, as it was a positive disincentive on the wrongdoer to pay sums due when they fell due.

Finally, while noting that the submissions on the point were brief and it was not sure it had been given all the necessary material to make a fully reasoned decision on the point, the court addressed Topalsson's argument that the court's power to award statutory interest could not apply where a contractual right to interest existed (albeit, on their case, it was effectively nullified by the liability cap). Topalsson relied on section 35A(4) of the Senior Courts Act 1981, which provides: “Interest in respect of a debt shall not be awarded under this section for a period during which, for whatever reason, interest on the debt already runs."

The Court of Appeal rejected this argument, stating that the claim brought by RRMC was characterizable either as a debt or as contractual damages. In such a case, the argument based on s.35A(4) did not get off the ground. There was no authority, the court said, for the proposition that a party in RRMC's position could be denied interest completely because the sum due was a debt and the contract allowed the contract-breaker to refuse to make the payment due without liability for interest (once the cap was reached).