Rahman Ravelli
Rahman Ravelli Solicitors Logo
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

About Us Expertise PEOPLE International Legal Articles News Events Contact Us toggle button for phone toggle button for search
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
search
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
search

Actions in fraud: Can a party limit their liability in the contract?

Author: Nicola Sharp  22 February 2024
4 min read

It is settled law that no exemption clause can protect a person from liability for his or her own fraud.

But can you limit the liability for the performance of the contract, even if the performance of that contract included fraudulent conduct?

The answer comes down to the way that the contract, and the clauses, are constructed. The court looked at these questions (among others) in Innovate Pharmaceuticals Limited v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC).

In this case, the judicial discussion made clear that a party cannot limit its liability for fraudulently inducing another party to enter a contract. But a limitation on liability for the performance of the contract may be acceptable.

Brief summary of the relevant facts

According to Innovate, it has created the world’s first (and only) stable, liquid form of aspirin (the ‘drug’). Potentially, this could be a new mechanism and a novel approach to glioma treatment.

Dr Richard Hill worked for the University of Portsmouth and was the group leader of Novel Therapeutics Unit at its Brain Tumour Research Centre for Excellence. The university contracted with Innovate to carry out a research programme on the drug.

Dr Hill published a research paper, which later was found to contain errors and the article was retracted. Ultimately the work carried out by the university was deemed “commercially valueless”, at least unless it is validated by further testing.

Innovate sought damages of around £100 million to cover their loss of profits and other losses. But the university relied on a limitation clause to limit its liability to £1 million. Innovate say that the limitation clause does not apply, because the conduct of Dr Hill was dishonest, and they are entitled to the full extent of their damages.

The relevant clauses

The relevant clauses were 11.4 and 11.5 of the contract and we include their wording in the Appendix to this article for reference.

For now, it is sufficient to say that clause 11.4 provided for the exclusion of liability for loss of profits. i.e The university cannot be liable for Innovate’s loss of profits. In any event, clause 11.5 limited the university’s liability for any losses to £1 million.

Clause 11.4 is subject to two carve outs:

  • “ except as provided for in clause 11.5” and
  • “because of any representation (unless fraudulent)”

So, where the cause of action by Innovate is in respect of fraudulent misrepresentation, the exclusion for liability for loss of profits will not apply. In those circumstances, the university can be liable for Innovate’s lost profits. If Innovate had a claim in fraudulent misrepresentation (also known as deceit), then their damages would not be capped to £1 million because the limitation of liability would not bite.

But with the facts of this case, Innovate could not make out a claim in deceit. Instead, their case was that the university and / or its agents (i.e. Dr Hill or his students) acted in breach of contract, and those breaches were committed dishonestly. The fraudulent act was allegedly that Dr Hill (or somebody else) “flipped the images” that appeared in the published paper, and that those images misrepresented the research.

The judge rejected that submission. His view was that the limitation of liability was only disapplied where the claim is based upon a fraudulent representation, that is to say a claim in the tort of deceit. Innovate cannot claim for loss of profits caused by a breach of contract that did not involve a representation.
Even if that were not correct, then clause 11.5 provides a back-up for the university. The limitation of liability will apply to any claim, except for a claim in respect of death, personal injury or fraudulent misrepresentation.

The question of dishonesty becomes moot in that discussion, but it is worth saying that the judge found that Dr Hill was not dishonest.

A party can contract out of its own fraud in performing the contract

In the course of the judgment, there was an interesting discussion about whether a party can limit their liability for fraud. In particular, the judge considered the difference between the operation of fraud in inducing a party to enter a contract, and the performance of the contract that involved an act of fraud.

When it comes to inducing another person to enter a contract, a party cannot contract out of his own fraud. In other words, each party will assume that the other party is honest and acting in good faith when they enter into a commercial contract. That is of course reasonable, and the only context in which business can operate successfully.

However, the position is different for the performance of the contract. A party can contract out of its own fraud in performing the contract, especially where the fraud relates to that of an agent or employee of the contracting party.

Whether or not the clause that limits a party’s liability is valid, is a matter of construction. In principle, liability for deliberate wrongdoing can be limited in commercial contracts, provided appropriate wording is used.

A 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.

In all circumstances, the clause needs to pass the test of reasonableness in Unfair Contract Terms Act 1977 (UCTA) to be valid.

Appendix – Wording of the relevant clauses

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).

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.

Nicola Sharp C 09983

Nicola Sharp

Partner

nicola.sharp@rahmanravelli.co.uk
+44 (0)203 910 4567 vCard

Download Profile PDF

View Profile

Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

Share this page on