Construing exclusion and limitation of liability clauses – fraudulent performance of a contract

Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corp [2024] EWHC 35 (TCC)

The key takeaway

A party cannot contract out of their own fraud in inducing the making of a contract, but this is different to a party seeking to rely on a clause that excludes liability for fraud in the performance of a valid contract. Excluding liability for fraud in the performance of a valid contract is a matter for construction of the contractual provisions and allocation of risk, whether by way of insurance or otherwise.

The background

The claimant, Innovate, was set up as a vehicle to develop and commercially exploit a formulation of liquid aspirin known as Glioprin, for which it holds a patent. In July 2016, Innovate and UoP entered into a research agreement by which UoP would carry out a pilot study of Glioprin, to be led by Dr Richard Hill, from the UoP’s “Brain Tumour Research Centre of Excellence”.

In August 2018, Dr Hill told Innovate that he had made a breakthrough in his research. Dr Hill produced a paper on the work that was published in a respected academic journal. While producing the paper he was affected by some problems at UoP and by personal problems. Later, an academic forum which reviews scientific publications, spotted errors and discrepancies in the paper. This led to disciplinary proceedings against Dr Hill, a finding of misconduct and, ultimately, the paper being retracted.

It was Innovate’s case that Dr Hill had deliberately and dishonestly manipulated the data contained in the paper and that its retraction rendered the results coming from the research programme commercially worthless. Innovate brought a claim for breach of the research agreement claiming in excess of £100 million for loss and damage suffered including (i) the cost of undertaking a fresh research programme and (ii) a diminution in the value of the patent.

UoP relied on the following exclusion and limitation clauses:

“11.4 Except as provided in clause 11.5 the University is not liable to the Funders 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, non-observance or non-performance of this Agreement or any error or omission (except in the case of death or personal injury or fraudulent misrepresentation) shall be limited to £1 million.”

The decision

The judge was satisfied that the UoP was in breach of the research agreement having breached its obligation to use “all reasonable skill and care to ensure the accuracy of the work performed and any information given” (clause 11.1).

Clause 11.4 expressly excluded liability for loss of profits as well as “opportunity, goodwill, revenues …” – wording sufficiently clear to encompass Innovate’s claim for diminution in value of the patent. The carve-out in the clause in respect of what was fraudulent was limited to representation (and Innovate was not advancing a case based on fraudulent misrepresentation or deceit). Loss of profits caused by a breach of contract not involving a representation was excluded even if that breach was committed fraudulently.

Even if that were not the case, the judge considered that the limitation of liability in clause 11.5 would apply to any claim (whether for loss of profits or otherwise) unless the relevant cause of action was in respect of death or personal injury or for fraudulent misrepresentation.

The judge was also satisfied that both clauses were reasonable under the Unfair Contract Terms Act 1977. Neither was a blanket exclusion of all liability and as a matter of construction the two clauses distinguished between liability for deceit and liability for breach of contract. There was no inequality between the parties, and a lawyer at Innovate had actively negotiated aspects of the terms and had suggested changes to the terms including to other parts of clause 11. The judge also took account of the fact that the amount of the claim in this case (arguably in excess of £100 million) compared to the small amount payable to UoP under the agreement underpinned the commercial reality of the two clauses.

When considering the serious allegation of whether Dr Hill’s conduct amounted to dishonesty, the judge found that Dr Hill was not dishonest in any event and had no motive to be dishonest. While there had been a “number of mistakes”, to the judge these seemed to be at least consistent with a high level of carelessness explicable by the personal and professional pressures which Dr Hill was under. There was no evidence that any other person under the responsibility of UoP was dishonest.

Having found that UoP breached clause 11.1 by failing to exercise reasonable skill and care, rendering the research commercially worthless, the court awarded Innovate the cost of further research required to validate it, up to the £1 million limit.

Why is this important?

It shows the court’s approach to construing exclusion and limitation clauses particularly in the context of clauses excluding or limiting liability for fraud. The judgment also highlights the following “well established” principles on the construction of exclusion clauses: 

• exclusion clauses mean what they say;
• it is a matter of construction as to whether liability for deliberate acts will be excluded;
• limitation clauses are not regarded by the courts to the same exacting standards as exclusion and indemnity clauses;
• a contracting party cannot exclude liability for its own fraud in inducing a contract;
• as to whether a clause excludes liability for fraud in performance of a valid contract is a matter of construction of the commercial provisions and risk allocation;
• 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;
• the words “howsoever arising” are capable of effecting an exclusion of liability for wilful default.

Any Practical Tips?

The court’s continuing willingness to acknowledge the parties’ freedom to allocate risk between them as they see fit should be kept firmly in mind when drafting or reviewing exclusion and limitation clauses.

When dealing with liability for fraud, consider whether the clause in question excludes/ limits or is intended to exclude/ limit liability for fraudulent performance of contractual obligations. For example, should there be a carve out for “fraud or fraudulent misrepresentation”. If that is not intended then it should be clearly reflected in the drafting, which also shouldn’t exclude more than is legally permissible.

Spring 2024