Recently, I was captivated by the English High Court’s ruling in Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC). The judgment casts doubt on the widely held assumption that parties cannot restrict their own liability for fraud or fraudulent misrepresentation due to public policy constraints. This holds significant implications, especially for those engaging in contractual agreements governed by English law. It underscores the importance of vigilance and awareness when navigating the intricacies of contractual obligations and negotiations.
The Innovate Pharmaceuticals Case
Innovate Pharmaceuticals Ltd (IPL) holds the patent to a liquid form of aspirin and wanted to test its ability to treat brain tumors. It concluded a research agreement with the University of Portsmouth (UOP). Dr Hill, an employee of UOP, led the research team as principal investigator. The findings of the research program were published in an academic journal. Following attacks on the findings due to errors identified in the data, the paper was retracted from the journal. IPL thereupon claimed damages from UOP for (i) the cost of re-running the research program (assessed at GBP 1.4 million), and (ii) the diminished value of the patent resulting from reputational damage, given its association with the misrepresentations (estimated at GBP 95 million).
A central issue at trial was whether IPL’s claims based on allegations of Dr Hill’s dishonesty regarding the research findings were excluded or limited by the limitations of the liability clause in the research agreement. This provided amongst others that UOP was not liable for loss of profits, and that the liability of each 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” (my emphasis).
Amongst the issues which the court had to consider were whether the paper contained misrepresentations or fraudulent misrepresentations, and whether recovery of losses was excluded or limited by the liability clause. More particularly, whether Dr Hill’s conduct amounted to ‘fraudulent misrepresentation’, given the carve-out from the exclusion clause.
The court found that Dr Hills representations and data contained significant inaccuracies, and that UOP was in breach of its obligation to carry out the research with reasonable care and skill. UOP was found to be liable in principle for both heads of damage claimed by IPL. However, the court held that the liability clause in the research agreement limited UOP’s liability to GBP 1 million, given that Dr Hill was not guilty of dishonesty (i.e. there was no fraud). Consequently, the second – and most substantial – head of loss was excluded in entirety. This was a narrow escape for UOP: If Dr Hill had been found to be ‘dishonest’, the outcome would have been very different.
While there was thus no finding of dishonesty on the part of Dr Hill here and the discussion by the court regarding fraud was therefore obiter, it is nevertheless significant!
Deliberate Exclusions of Liability for Fraud
Both the IOP case and older cases, like Frans Maas (UK) Ltd [2004] EWHC 1502, envisage that it is possible to limit (and possibly exclude) the fraud and dishonesty of employees and other agents for which the contracting party is vicariously liable. In this case, Dr Hill was the agent for which UOP was vicariously liable and the judge was clear that limiting liability for the dishonesty of such a person was perfectly possible if drafted correctly.
The earlier Frans Maas case concerned thefts by warehouse staff. There, the judge actively interpreted a general limitation clause as applying to the dishonesty of staff: “Accordingly, as it seems to me, amongst the commonplace risks which the parties must contemplate when contracting, are negligence, losses by unexplained causes and deliberate wrongdoing, extending to dishonesty on the part of the bailee’s employees for which he may be vicariously liable“.
The comments of the judge in the IPL case take things one step further, as the judge suggests the same is true of a party’s personal fraud. This casts doubt on the assumption that a party cannot limit its own liability for fraud committed during the contract. Public policy is not the issue here – it is the clarity of the drafting.
Exclusion of Fraud in the Formation vs. Performance of a Contract
Note that the IPL case did reiterate that parties cannot exclude liability for their own fraud in inducing a contract. There is and remains a fundamental difference in English law between fraud in the formation of a contract and fraud in the performance of a contract: The law is hostile to the former for reasons of public policy, and any attempt by a party to exclude or limit its liability in respect of this type of fraud will be void and ineffective. The same consideration does not, however, apply to fraud in the performance of a contract.
Conclusion
In summary, while the discussion relating to fraud in the IPL case was obiter and may be overturned, it demonstrates a trend in courts enforcing caps and exclusions of liability in B2B contracts under English law. Widely drafted limitation clauses may be given their full effect. If parties wish or expect anything to be carved out, including for instance dishonesty by staff, they must do so expressly and unambiguously. It is in any event crucial for contracting parties to stay vigilant during negotiations, particularly when other legal systems and governing laws are involved.
Comments or questions? Let me know!
Gundo Haacke, Interim Legal Counsel & Owner of Haacke Commercial Legal Services.
Blog article first published on 7 May 2024.
Image credit: clipart-library.com
