UK: High Court Finds Limitation Clause Effective To Limit Liability For Dishonest Breaches Of Contract

The High Court has held that a limitation clause was effective to limit liability for a dishonest breach of contract (and, in any event, dishonesty was not established on the facts): Innovate Pharmaceuticals Ltd v Univeristy of Portsmouth Higher Education Corp [2024] EWHC 35 (TCC).

The decision highlights the distinction between a party's own fraud inducing a counterparty to enter into a contract, which cannot be excluded, and the fraudulent performance of a contract. In the latter situation, it is a matter of construction rather than law as to whether liability for deliberate acts can be excluded. This is consistent with other recent authority to the effect that the same approach to construction applies when considering whether a clause excludes liability for deliberate repudiatory breach as for other breaches of contract (see our blog post here).

Parties are therefore free to agree the apportionment of liability in such situations, and their agreement will be upheld so long as it does not fall foul of the test of "reasonableness" under the Unfair Contract Terms Act 1977 ("UCTA"). As for when that test will be met, the decision illustrates that a clause will not necessarily be found to be unreasonable merely because it excludes liability for deliberate breaches of contract. Each case will turn on its facts, but in the present case it appears to have been significant that it was not a blanket exclusion of liability, there was no inequality of bargaining power, and the defendant was being paid a very modest fee under the contract, which explained the requirement for a limitation of liability clause.

Background

Innovate holds the patent to a liquid form of aspirin (the "Drug"). It wanted to test the potential of the Drug for the treatment of brain tumours, with the hope of commercialising the Drug for such use at a later stage. It thus paired with the University of Portsmouth ("UoP") to carry out a pilot study, which was carried out without charge. As the pilot study seemed promising, the parties entered into a Research Agreement under which Innovate, together with a charity called Headcase, would fund UoP to conduct further research.

The Research Agreement contained a limitation of liability clause which included:

Research was carried out by a team at UoP led by Dr Hill, following which a paper was published in an academic journal, Cancer Letters, setting out the team's findings. The paper was, however, later withdrawn by the publisher amidst allegations of research misconduct and incorrect data.

Innovate claimed damages from UoP, alleging that the paper was infected by errors that were the product of dishonesty, which meant the research carried by UoP was commercially worthless and would have to be carried out afresh. It sought damages representing the cost of repeating the work, as well as the diminution in value of the patent resulting from the consequent delay.

The parties disputed inter alia the interpretation of Clauses 11.4 and 11.5. Innovate contended that the clauses could not apply to dishonest/fraudulent breaches of the contract, whilst UoP argued that, on the plain wording of the Research Agreement its liability, even in case of dishonest breach, was excluded for loss of profits and similar losses, and was otherwise limited to £1 million.

Decision

The High Court (Roger Ter Haar KC sitting as a Deputy High Court Judge) awarded damages of £1 million to Innovate. It found in favour of UoP that the limitation clause was effective to limit liability for dishonest breaches of contract (though in any event, it rejected the allegations of dishonesty on the evidence).

Construction of Clauses 11.4 and 11.5

UoP accepted that a party cannot contract out of its own fraud in inducing a counterparty to enter into a contract, as established in HIH Casualty & General Ins v Chase Manhattan Bank [2003] UKHL 6 ("HIH"). It submitted, however, that the position was different where an agent acted fraudulently in the performance of a contract. In this regard UoP referred to Frans Maas (UK) Ltd [2004] EWHC 1502, which the court in the present case described as useful in setting out the following well established principles relating to the construction of exclusion clauses:

1. Exclusion clauses mean what they say
2. It is a matter of construction rather than law as to whether liability for deliberate acts will be excluded
3. Limitation clauses are not regarded by the courts with the same hostility as exclusion and indemnity clauses
4. A contracting party cannot exclude liability for its own fraud in inducing a contract
5. 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
6. 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
7. The words "howsoever arising" are capable of effecting an exclusion of liability for wilful default

Innovate submitted that neither Clause 11.4 nor 11.5 operated to exclude or limit liability if the relevant breach of contract was committed fraudulently. The court rejected that submission. It found that the exclusion of liability in Clause 11.4 in respect of liability for loss of profits (and similar losses) was "applicable to all claims except where the claim is based upon a fraudulent representation, that is to say a claim in the tort of deceit". This meant that loss of profits caused by a breach of contract not involving a representation was excluded, even if that breach was committed fraudulently. That was sufficient to dispose of the claim for diminution in value of the patent.

Even if Clause 11.4 did not apply, Clause 11.5 would have applied to limit any claim (including for dishonest breach of contract) to £1 million unless the relevant cause of action was in respect of death, personal injury or fraudulent misrepresentation.

Unfair Contract Terms Act 1977

In finding that Clauses 11.4 and 11.5 applied to the relevant claims, the court also looked at whether the exclusion of liability for dishonesty was unreasonable under the Unfair Contract Terms Act 1977. It found that this was not the case, in particular because there was no inequality of bargaining power as the person who negotiated the contract on Innovate's behalf had been legally qualified and there had been active negotiations as to its terms. Other relevant considerations included:

• Clauses 11.4 and 11.5 were not blanket exclusions of all liability. Rather, Clause 11.4 restricted the range of losses for which UoP could be held liable, and Clause 11.5 limited the amount of UoP's liability.
• If Innovate was correct, the clauses would fall away for all breaches of contract, whether deliberately committed or not. Supposing the allegations of fraud were well-founded, the facts of this case were highly unusual and very unlikely to have been in the contemplation of the parties when the Research Agreement was concluded. The court was hesitant to strike down the clauses because of the occurrence of events outside that contemplation.

In light of the fact that UoP had been paid only GBP 50,000 under the Research Agreement, Clauses 11.4 and 11.5 seemed reasonable and underlined the commercial reality, perhaps necessity, of the two clauses. This was especially so as the amount of the claim in this case was arguably in excess of £100 million.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.