Contracts, Limitation Clauses and Fraud
Can a contractual clause limiting a party’s liability for fraudulent performance of a contract be legally valid? The court has recently held that a particular clause was broad enough to do so.
Limitation clauses, of course, are a vital inclusion in commercial contracts, but their interpretation is frequently the subject of judicial ruling. Here, the High Court1 considered the scenarios of fraud inducing the making of a contract and fraudulent performance of the contract.
What led to the dispute?
Portsmouth University entered into a research agreement with a company (‘Innovate’) which holds the patent to a type of liquid aspirin. A dispute arose in relation to the reporting of testing of a preclinical drug research programme, which the university claimed was fraudulent.
The research was overseen by an employee at the university, who was the principal investigator. The case turned on an academic research paper published in a respected academic journal which was alleged to have been “infected” by careless and dishonest errors. (The individual concerned was subsequently found guilty of research misconduct.)
Under the terms of the agreement, Portsmouth University was under an express obligation to exercise “all reasonable skill and care to ensure the accuracy of the work performed and the information given”; and “to adhere to the general principles of honesty, fairness and integrity in all its dealings”.
Innovate sought damages from the university for the cost of re-running the programme with a different organisation; as well as diminution in value of a patent whose reputation was now tarnished. It argued that the university and its employee/agent knowingly or negligently misrepresented the outcome of the programme in breach of the contract. The errors were, said Innovate, the result not simply of failures to exercise reasonable skill and care - but were the result of dishonesty.
The court concluded that the university was in breach of the contract and liable to Innovate.
Limitation of liability
The agreement included a general limitation and exclusion of liability clause which included limiting the parties’ liability to £1 million – “except in the case of death or personal injury or fraudulent misrepresentation”.
A party cannot, for public policy reasons, contract out of his own fraud in inducing the making of a contract. Here, the university argued that this was not the case in respect of actual performance of the contract. The court agreed: the judges found that the limitation clause was broad enough to limit liability for fraudulent performance of the contract (the judge narrowly declined to make a finding of dishonesty against the employee).
However, it is not a blanket prohibition – each case will be considered on its facts.
Innovate’s damages were therefore limited to £1 million (the total claimed was in the region of £96.4 million).
Principles
The judge helpfully set out well-established principles governing limitation and exclusion clauses, which businesses should note when considering their own commercial contracts:
(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.
The ruling is a timely reminder of the purpose and scope of limitation and exclusion clauses and their application to negligent, and potentially dishonest or fraudulent performance of a contract.
1Innovate Pharmaceuticals Limited v University of Portsmouth Higher Education Corporation [2023] EWHC 2394
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