Excluding liability for dishonesty
Innovate Pharmaceuticals v University of Portsmouth (High Court) [2024]
It is often said that a contracting party cannot exclude or limit liability for fraud as a matter of public policy, but this case demonstrates that clauses can be effective to limit liability for careless and even deliberate breaches
Facts:
Innovate claimed damages from the University arising out of a Research Agreement. Innovate had developed a drug which had potential applications in connection with cancer treatments. The University were assisting with the research and testing of the drug.
Clause 11.1 imposed an express obligation upon the University to exercise all reasonable skill and care in carrying out the Research Programme.
The Research Agreement contained the following exclusion and limitation of liability clause:
“11.4 Except as provided in clause 11.5 the University is not liable because of any representation (unless fraudulent), or any warranty (express or implied), condition or other term, or any duty at common law, non-observance or non-performance of this Agreement, for … any loss of profits, business, contracts, opportunity, goodwill, revenues, anticipated savings, expenses, costs or other similar loss … and/or any indirect, special or consequential damages or losses (whether for loss of profits or otherwise).
11.5 The liability of a Party to another howsoever arising (including negligence) in respect of or attributable to any breach or any error or omission (except in the case of death or personal injury or fraudulent misrepresentation) shall be limited to £1 million.”
The lead researcher at the University published an academic paper in a renowned medical journal, which was alleged to have been “infected by errors”. The paper was subsequently retracted by the journal. It was claimed these errors were careless and dishonest. Innovate brought a claim for damages in excess of £100m.
Decision:
The judge found that the University was in breach of the Research Agreement, having failed to use all reasonable skill and care to ensure the accuracy of the work performed (which included the work of preparing the paper) or in the giving of information (including the information provided in the paper).
The Court considered the following principles to be “well established”:
(1) Exclusion clauses mean what they say;
(2) It is a matter of construction as to whether liability for deliberate acts will be excluded;
(3) Limitation clauses are not regarded by the courts with the same hostility as exclusion and indemnity clauses;
(4) A contracting party cannot exclude liability for its own fraud in inducing a contract (as distinct from fraud in the performance of a contract);
(6) An exclusion or limitation clause is more likely to be construed as effective if it is excluding the liability for fraud of an agent or employee rather than the fraud of the contracting party itself;
(7) The words “howsoever arising” are capable of effecting an exclusion of liability for wilful default.”
The Court held that the exclusion of liability in respect of loss of profits was applicable to all claims (death and personal injury claims aside), except where the claim was based upon a fraudulent [mis]representation. This meant that the claim for loss of profits caused by a breach of contract not involving a fraudulent [mis]representation was excluded even if that breach was committed dishonestly. Innovate had not argued fraudulent misrepresentation, so its loss of profit claim was excluded.
The Court also concluded that claims for breaches of contract (whether fraudulent or not), to the extent they were not excluded by clause 11.4, would be capped at £1m save only for cases of fraudulent misrepresentation or those involving death or personal injury.
The Court rejected arguments based on the application of UCTA, concluding that the exclusions and limitations of liability agreed were reasonable. In particular, it was considered that the parties had equal bargaining power, that the University’s payment was low in comparison to alternative testing agents, and that the Research Agreement had been actively negotiated on behalf of Innovate by a qualified lawyer.
The Court disagreed with the argument that the fact the clauses extended to dishonest breaches of contract automatically rendered them unreasonable.
The judge made an interesting final point. He said ”The amount of the claim in this case (arguably in excess of £100 million) compared to the amount payable to the University under the Agreement (around £50,000) underlines the commercial reality, perhaps necessity, of the two clauses”.
The court went on to give an interesting analysis of when recklessness in reporting results can potentially amount to dishonesty and even fraud. Was the researcher involved being dishonest or simply ‘overenthusiastic’ in putting a positive gloss on the research findings? Innovate had sought to establish a case of dishonesty based upon recklessness. The court decided that consideration of motive is an important factor in establishing dishonesty. Innovate’s case was that the totality / number of mistakes led to the conclusion that the principal researcher was acting deliberately / dishonestly. In the event the court found that despite the number of mistakes this was found to be consistent with carelessness rather than dishonesty but it did not seem to close the door entirely on the possibility that the number of errors could indicate dishonesty and therefore fraud. This could be very important if, on the drafting, fraud was explicitly outside of any liability cap. This may be an area of focus for future disputes.
Points to Note:
- The Court’s finding would seem to suggest that generally worded exclusion or limitation clauses will usually cover dishonest or even deliberate breaches of contract by employees.
- The Court’s approach to the reasonableness requirement under UCTA would appear to continue a broad trend giving effect to generally worded exclusion or limitation clauses.
- Customers may want to consider insisting on carve-outs from exclusion and limitation clauses for intentional or dishonest breaches of contract. It is worth noting that the UK Government’s Model Services Agreement simply provides that “Neither Party limits its liability for fraud or fraudulent misrepresentation by it or its employees”.
- The judgment referred variously and almost interchangeably to ‘fraud’, ‘fraudulent [mis]representation/ deceit’ inducing entry into a contract, ‘[mis]representation’ in the performance of a contract, ‘recklessness’ ‘dishonesty’, ‘wilful / deliberate’ acts. Careful consideration as to exactly what is meant when using those terms in a contract would be sensible.