In Innovate Pharmaceuticals Limited v. University of Portsmouth Higher Education Corporation,[1] the High Court of England and Wales held that a limitation clause was drafted sufficiently broadly to limit liability even in cases of fraudulent performance of the contract.
Background
Innovate held the patent in a formulation of liquid aspirin known as Glioprin. The parties had entered into a research agreement, under the terms of which the University of Portsmouth was to undertake testing of Glioprin’s potential efficacy in treating brain cancer.
Having carried out testing, the university’s lead researcher, Dr. Richard Hill, together with other university employees and students, published a research paper in a highly regarded scientific journal. The paper purported to demonstrate extremely positive results from the testing. However, the paper contained a large number of significant errors and, as a result, was retracted by the journal.
Innovate brought proceedings, claiming that the retraction of the paper meant the research carried out by the university was commercially worthless and would have to be carried out again.
The judge found that the university was in breach of the research agreement, having failed to use all reasonable skill and care to ensure the accuracy of the work performed (which included the work of preparing the paper) or in the giving of information (including the information provided in the paper). The question that then arose was whether the university’s liability was limited by the following clause:
‘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.’
Innovate contended that the errors contained in the research paper were, in fact, the product of Hill’s fraud (as opposed to being merely careless). As such, it submitted, the protection of the limitation clause automatically fell away. Further, the errors in the paper were fraudulent misrepresentations, which were specifically carved out of the limitation clause.
Fraud/wilful default and limitation clauses
It is well-established that a party cannot contract out of its own fraud in inducing the making of a contract. There are obvious public policy reasons for this: There would be no deal. However, the judge held that that is not the position with regard to the performance of a contract.
The correct approach to the interpretation of exclusion/limitation clauses, which are now well-established, were summarised by the judge as follows:
- 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.
- 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.
With that in mind, the judge held that the language of the clause – specifically the words ‘howsoever arising’ – were capable of effecting an exclusion of liability for wilful default/fraud.
Innovate’s fraudulent misrepresentation claim
The university submitted that fraudulent misrepresentation is a cause of action relating specifically to the inducement of entry into an agreement by a false statement of facts. As the research paper had not induced Innovate to enter into a contract, this claim must fail.
The judge disagreed that fraudulent misrepresentation claims are limited to cases where the innocent party has been induced into entering into an agreement. However, he stated that the cause of action for such claims is the losses suffered by the innocent party acting to its detriment in reliance upon the false representations. As Innovate had not pleaded any such reliance, its misrepresentation claim failed.
Takeaway
The traditional principles of interpretation of exclusion and limitation clauses, by which such clauses were narrowly interpreted as a matter of course, have been jettisoned. While courts will not hold that a party has given up or limited valuable rights unless the language of the contract is clear that this is the case, they will (in all but exceptional cases) give effect to the ordinary meaning of the language. Accordingly, widely drafted exclusion and limitation clauses will be given their full effect. If parties expect anything to be carved out of such clauses, they must express that clearly and precisely. A specific carve out for wilful default should be a standard feature in most contracts.
[1] [2024] EWHC 35 (TCC).
Contributors
Alex Radcliffe