In the recent case of Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC), the High Court has held that a limitation clause was effective to limit liability for a dishonest breach of contract.
Facts
This case involved a contract between the University of Portsmouth and Innovate Pharmaceuticals Ltd (Innovate) where the University of Portsmouth carried out a research testing programme to develop and commercialise a drug patented by Innovate.
Research was carried out by the University and a paper was then published setting out the University’s findings. However, the paper was later withdrawn by the publisher as there were allegations of research misconduct and incorrect data.
Innovate claimed damages from the University, stating that the paper was infected by errors that were the product of dishonesty. The research produced was commercially worthless and would therefore have to be carried out again from scratch by the University. The delay in providing the research meant that the value of the patent would reduce significantly, and the University had caused Innovate a loss of more than £100 million as a result.
Clauses of the contract in question
The contract contained a limitation and exclusion of liability clauses which included:
Clause 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).
Clause 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 contract also included a clause at 11.1 that the University was required to “use all reasonable skill and care to ensure the accuracy of the work performed and any information given”.
Issues and arguments
The parties disputed the interpretation of Clauses 11.4 and 11.5. Innovate claimed that the clauses could not apply to dishonest/fraudulent breaches of the contract, but the University argued that on the plain wording of the contract its liability, even in case of a dishonest breach, was excluded for loss of profits and similar losses, and was otherwise limited too £1 million.
Decision
In short, the High Court awarded damages of £1 million to Innovate. However, it found in favour of the University that the limitation clause was effective to limit liability for dishonest breaches of contract.
Limitation of Liability for fraud
The court determined that the University was not dishonest. Even if they had been, the court stated that dishonesty alone would not have prevented the University from relying on the limitation and exclusion provisions. The wording required fraudulent misrepresentation.
In relation to clause 11.4, the court also stated that whilst the law does not permit a contracting party to exclude its liability for its own fraud in inducing a contract, dishonesty, after the contract has been entered into, is a different matter. Parties are free to allocate this latter risk of fraud via contractual provisions and risk allocation, such as insurance. Therefore, whether parties have excluded or limited for fraud is a matter of construction.
In relation to clause 11.5, the court found that it applied to any claim (whether for loss of profits or otherwise) unless the relevant action was in respect of death or personal injury or for fraudulent misrepresentation. Therefore, clause 11.5 was effective to limit Innovate’s claim for the costs incurred in re-running the research to £1 million.
UCTA and fraud
The court also held that the clauses were reasonable under Unfair Contract Terms Act 1977. The judge took into account that the contract was negotiated and drafted by lawyers, the University paid a modest sum for the research, and that the potential liabilities of the university were huge without the limitation clause. The judge did not accept that the clause was unreasonable because it purported to limit liability for dishonest breaches of contract as this was a matter of construction and not a general rule.
Failure to use all reasonable skill and care
The court held that the University was liable for failing to use all reasonable skill and care to ensure the accuracy of its work and was therefore in breach of clause 11.1. However, the University’s liability was limited to £1 million.
Conclusions
The outcome of the case highlights the importance of clear drafting, and that exclusion and limitation clauses can have very significant consequences and financial outcomes on claims of liability.
In this case, a claim for over £100 million was limited to a recovery of £1 million even though the court found failures to use reasonable skill and care. Furthermore, this result would have been the same even if the University had acted dishonestly.
Therefore, when entering a contract, greater thought should be given to the potential risks involved, who is accepting responsibility for those risks and the commercial reality of the parties. A contract should accurately reflect these risks and ensure that they are allocated appropriately.
If you need a contract drafted or negotiated contact Nick Attwell at nick.attwell@attwells.com or call him on 01473 229200.
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