This cap is gross! UK Court of Appeal confirms the interaction between liability caps and set-off

Although highly fact specific, the court ruled that “the total liability of either Party to the other” required the liability caps first to be applied separately to each party’s liability, and then set off the (possibly reduced) claims of each party against one another.

The dispute

The underlying issue arose after RRMC terminated its contract with Topalsson after Topalsson failed to meet deadlines to provide digital visualisation software for RRMC to use in its new ‘Ghost’ model.

After the original case in 2023 found that RRMC had effectively terminated the contract, this appeal centred on how much Topalsson should pay RRMC in damages. In particular, the appeal queried whether €800k in unpaid charges due to Topalsson should be netted off against RRMC’s damages claim of €8m before, or after, the application of Topalsson’s  €5m liability cap.

In the first instance decision, it was found that Topalsson owed the full €5m allowed by the liability cap to RRMC. This was because the court applied the €800k counterclaim to RRMC’s damage claim first, reducing the €8m to €7.2m and then applying the €5m liability cap to the remaining €7.2m. This effectively rendered Topalsson’s €800k counterclaim irrelevant.

On appeal, Topalsson successfully argued that they should instead owe only €4.2m. The Court of Appeal unanimously decided that, on the proper construction of the liability cap drafting, the liability caps should first be applied separately to each party’s liability to the other (resulting in Topalsson’s €8m liability being reduced to €5m), and only then would the claim and counterclaim be set-off against one another.

Is interest for late payment capped?

The Court of Appeal dismissed Topalsson’s attempt to argue that the interest it was required to pay to RRMC for late payment of the €4.2m should also be capped. Instead, the court said that this would run counter to the certainty promoted by the clause which described the interest as “substantial” and the “sole remedy available” to RRMC for late payment, and also to the parties’ assumption that this remedy was outside the scope of the liability caps. The court also noted that capping interest payments would encourage non-payment of sums due and benefit the wrong-doer.

While the guidance that ‘clear words’ are needed to include interest for late payment within any liability cap may well be encouraging, it remains advisable to include express carve outs of liabilities that are not intended to be caught within any aggregate cap on liability.

Gross or net? Applying limitation of liability clauses where there is a counterclaim

The case provides helpful guidance on the interpretation of limitation of liability clauses.

Clause 20 of the contract stated 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)....”

Contract parties may previously have expected a netting off of liabilities between the parties before the application of the cap – indeed this is how the first instance judge understood the clause to operate. However this case clarifies that that interpretation is incorrect, at least on this particular wording. There was nothing in the clause that required a netting off of liabilities before the cap was applied. Rather, the wording of the clause required a separate calculation of each party’s liability with each liability being the subject of the cap – treating the claim and the counterclaim entirely separately.

It was noted in the judgement that it was open to contract parties to make it clear that the cap on liability applied to the ‘net’ liability position between the parties. However, contract parties should be wary of taking that approach as it could result in the cap being circumvented by the exercise of set-off.