When Should Liability Caps Be Applied – Before or after Set-Off ?

Technology contracts frequently include liability caps. For example, a technology vendor might agree that “no more than 12 months’ fees” can be claimed. But complications often arise when both parties have contractual claims against each other. Should the parties set off their claims first and then apply the liability cap to the net amount? Or should the cap bite on each party’s liability separately, with set-off only after the cap has reduced one side’s claim? The recent Topalsson v Rolls-Royce decision shows just how significant this question can be in high-value technology disputes.

Background

Topalsson GmbH entered into a services agreement with Rolls-Royce Motor Cars Ltd to deliver a new digital configurator for the Ghost model. Implementation plans agreed in late 2019 and 2020 contained dated milestones. When those milestones were missed, Rolls-Royce terminated. At first instance, the Technology & Construction Court held that the second termination was valid and awarded Rolls-Royce damages of €7.9m, reduced to €5m under the contract’s liability cap. On appeal, the dispute primarily centred not on liability but on how the €5m cap interacted with set-off and counterclaims. The relevant contractual provision read as follows: 

‘… 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).’

Decision

Whilst Rolls-Royce argued that the parties’ claims should first be netted off (Circa €7.9m – €0.8m = €7.1m), and only then should the €5m cap apply, Topalsson argued the cap applied to each party’s liability separately, and only then should the figures be set off.

In its decision, the Court of Appeal sided with Topalsson and held that the phrase “the total liability of either party to the other” means the cap applies individually to each side’s liability. Therefore, Rolls-Royce’s €7.9m liability was reduced to €5m, while Topalsson’s claim stood in full. After set-off, Rolls-Royce recovered €4.2m rather than the full €5m awarded by the High Court. Importantly, contractual interest for late payment was held to sit outside the cap.

Key Takeaways 

1. If parties want the liability cap to apply after netting off, they must say so expressly.

2. Standard wording (“total liability of either party to the other”) will be read as capping each party’s liability separately, then set off.

3. Interest for late payment is generally treated as outside the liability cap, unless expressly included.

4. This appears to be the leading authority on liability caps and set-offs. It would be prudent for customers and vendors in SaaS, IT, and outsourcing deals to review template MSAs to confirm that drafting reflects their intended risk allocation.

Balogun Harold's insights are shared for general informational purposes only and do not constitute legal advice. For tailored guidance, please contact our Technology and Dispute Resolution Lawyers at bhlegalsupport@balogunharold.com