High Court upholds limited liability for dishonest breaches of contract
In a judgment of 12 January 2024, the High Court in Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation held that a limitation clause in a contract was effective in limiting liability for dishonest breaches of a contract, and was reasonable under the Unfair Contract Terms Act 1977.
Background
The claimant, a pharmaceutical company, had entered into a research agreement with the defendant, the University of Portsmouth, in respect of a drug patented by the Claimant. The resulting academic paper was alleged by the Defendant to have been “infected by errors” and “the product of dishonesty” on the part of the scientist engaged by the Defendant to lead the research project.
In response, the Defendant relied on a clause in the research agreement, which excluded liability for any loss of profits because of “any representation (unless fraudulent representation)”. A further clause limited liability “howsoever arising […] (except in the case of death or personal injury or fraudulent misrepresentation)” to £1 million.
The Claimants submitted that neither clause operated to exclude or limit the Defendants’ liability if the relevant breach of contract was committed fraudulently.
Decision
The High Court found in favour of the Claimant on liability but found that the limitation clause was effective to limit liability for dishonest breaches of contract. The Claimant was accordingly awarded £1 million in damages. The Court commenced its reasoning by summarising the principles relating to the construction of exclusion and limitation clauses:
- "Exclusion clauses mean what they say;
- It is a matter of construction rather than law as to whether liability for deliberate acts will be excluded;
- Limitation clauses are not regarded by the courts with the same hostility 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."
Applying those principles, the Court rejected the Claimant’s argument: the exclusion of liability in respect of liability for loss of profits was applicable to all claims except where the claim was based upon a “fraudulent misrepresentation”. Consequently, loss of profits caused by a breach of contract not involving a representation was excluded even if that breach was committed fraudulently. The Claimant was awarded damages in respect of certain aspects of its claim, but those damages were limited to £1 million pursuant to the limitation clause in the contract. The further limitation clause would have applied to limit any claim to £1 million unless the relevant cause of action was in respect of death or personal injury or fraudulent misrepresentation.
Lastly, the Court considered, and rejected, the Claimant’s argument that the exclusion and limitation clauses should not be given effect as the terms were unreasonable under the Unfair Contract Terms Act 1977. In rejecting that argument, the Court considered it relevant that there was no inequality between the parties: the contract was negotiated by lawyers and the Defendant had actively negotiated aspects of it and made a number of suggested changes to the terms. Further, neither clause was a blanket exclusion of liability. Lastly, the remuneration agreed between the parties was modest whereas, without the limitation clause, the Defendant would have assumed potentially extensive liabilities.
Comment
This case highlights an important distinction in the ability to exclude liability for fraud. Whilst case law has established that a party cannot exclude its own liability for fraudulently inducing another party to enter into a contract, it is possible to exclude or limit liability for fraud in the performance of the contract. In respect of the latter, whether liability for fraudulent performance is effectively excluded or limited will be a matter of contractual interpretation and subject to the fact-dependent reasonableness test in the Unfair Contract Terms Act 1977.
With special thanks to Francesca Puig for their invaluable assistance in drafting this article.