Fraud May Not Always Unravel All–What Does the Contract Say?

Introduction

In the recent case of Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC), the English High Court has determined that a limitation of liability clause in a research agreement was effective to limit a party’s liability for breach of contract, even if the breach was committed fraudulently.

Facts

Innovate Pharmaceuticals Ltd (Innovate) holds the patent to a form of liquid aspirin (the drug) and contracted with the University of Portsmouth (the University) to conduct a research testing programme as part of a plan to develop and ultimately commercialise the drug. 

The University prepared and published a promising research paper in a well-known scientific journal. However, it transpired that the reporting of certain data in that paper contained multiple errors, and it was subsequently retracted.

Innovate claimed that: the University had breached the parties’ agreement by failing to use reasonable skill and care to ensure the accuracy of its work; the lead scientist on the research programme had manipulated research data dishonestly; Innovate would have to repeat the research programme at significant cost and delay; the value of its patent would be materially diminished by that delay; and the University had caused loss in excess of £100 million as a consequence.

As part of its defence, the University relied on exclusion and limitation clauses in the parties’ agreement that, among other things:

1.  Excluded liability for any loss of profits, unless such losses arose from a fraudulent representation; and
2.  Limited the University’s liability howsoever arising from any breach of the agreement to £1million, except in the case of death, personal injury or fraudulent misrepresentation

Innovate contended that these exclusions and limitations would be ineffective where a breach of contract is committed fraudulently (as alleged in this case) and were unreasonable (and thus unenforceable) pursuant to the Unfair Contract Terms Act 1977 (UCTA).

Decision

The court determined that:

• The University had failed to use all reasonable skill and care to ensure the accuracy of its work;
• The exclusion and limitation clauses were effective and reasonable, and operated to cap Innovate’s recoverable loss at £1 million; 
• The exclusion and limitation clauses carved out liability for fraudulent misrepresentation (i.e. the tort of deceit), which was not excluded or capped. However, as drafted, those carve-outs did not extend to a breach of contract committed fraudulently;
• The question of whether parties have agreed to limit or exclude liability for breaches of contract committed fraudulently is a matter of contractual interpretation, and parties are free to allocate between them the risk and responsibility of, for example, a fraud committed by an employee in the performance of contractual obligations;
• Innovate’s claim was not in the tort of deceit (since it did not pursue claims or establish any losses flowing from any actions taken or not taken in reliance on a fraudulent misrepresentation). Instead, Innovate claimed for loss suffered as a consequence of breaches committed fraudulently;
• The clauses did not fall foul of UCTA. Neither clause was a blanket exclusion of liability, they had been reviewed and negotiated by lawyers, the outcome of the research programme was uncertain at the time of contracting, there was no inequality of bargaining positions, Innovate could have chosen to conduct the research programme elsewhere if it was not prepared to accept the limitations on liability, and the sum being paid for the University’s services was relatively low, certainly by comparison with the potential exposure to high-value claims (such as this one for over £100 million), which served to underline the commercial need for liability limits in agreements of this nature;
• Innovate’s claim for diminution in the value of its patent was thus excluded by the clause excluding liability for loss of profits, and its claim for the costs of repeating the research programme was capped by the limitation clause at £1 million; and 
• Whilst the court considered that the lead research scientist had not been dishonest or fraudulently manipulated data, the exclusions and limitations of liability would have operated to cap the University’s liability at £1 million even if he had.

Comment

The judgment provides an interesting summary of principles of contractual interpretation where exclusion and limitation clauses are concerned (both derived from the issues considered in this case, and in another recent case concerning exclusion clauses: Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc [2023] EWHC 2506 (TCC), including:

• Exclusion clauses mean what they say—commercial parties are free to make their own bargains and allocate risks as they see fit, and exclusion and limitation clauses are an integral part of pricing and risk allocation.
• Whether liability for deliberate acts is excluded will depend on the words used.
• Limitation clauses are not regarded by the courts with the same hostility as exclusion clauses.
• A party cannot exclude its own liability for fraudulently inducing the formation of a contract.
• The effectiveness of a clause excluding liability for fraud in performance of a contract will depend on the words used and the parties’ allocation of risk.
• An exclusion or limitation clause is more likely to be effective where it excludes liability for fraud of an agent or employee rather than the fraud of the contracting party itself.
• The words “howsoever arising” can be widely interpreted and be capable of effecting an exclusion of liability for wilful default.
• The more valuable the right, the clearer the language of the exclusion clause will need to be.

Exclusion and limitation clauses can be short and buried in the contractual boilerplate, though they can have very significant consequences for the financial outcomes of claims on liability. In this case, their effect was profound; limiting a claim for over £100 million to a recovery of £1 million, in circumstances where the court found careless failures to use reasonable skill and care, yet the result would have been the same even if it had found that the lead scientist had acted fraudulently. Thus, careful thought needs to be given to: what could go wrong, who is assuming responsibility for it, how much responsibility, and do the clauses accurately reflect that bargain and the risk allocation?

It is not unusual for service contracts in respect of research programmes or trial services to incorporate relatively wide exclusion and limitation clauses, given the commercial realities of the parties’ respective positions (as was recognised by the court in this case). Whilst, at first glance, a decision upholding a limitation of liability for breach of contract even if the breach is committed fraudulently might seem surprising, it flows from the bargain the parties struck, the commercial reality of the situation and of the terms agreed, and the allocation of risk and responsibility the parties assumed in their contract.