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Limitation of liability under the microscope

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The High Court has held a limitation clause in a research agreement would be effective to limit liability for dishonesty, though not fraudulent misrepresentation.

Research paper errors give rise to dispute

Innovate had patented a drug and engaged the University of Portsmouth to carry out research on it. The research was led by a scientist employed by the university. The scientist published a research paper on the drug that was alleged to have been “infected by errors” said to have been, in part at least, the product of dishonesty. As a result, Innovate said it was required to obtain the results of a fresh set of tests, which it argued would delay the date when it could enjoy the benefits of its patent.

Innovate sued the university for over GBP100 million for breach of contract for failure to exercise reasonable skill and care in carrying out the research. The university relied on: (i) an exclusion clause, which excluded liability for loss of profits, unless due to fraudulent representation; and (ii) a limitation clause, which limited liability to GBP1 million, “except in the case of death or personal injury or fraudulent misrepresentation”. However, Innovate maintained that the breaches were committed dishonestly and that the exclusion and limitation clauses did not apply because “fraud unravels all”.

Limiting liability for fraud?

After “anxious consideration”, the court concluded that the scientist was not dishonest.  Even if they had been, the court said that dishonesty alone would not have prevented the university from relying on the limitation and exclusion provisions. The wording required fraudulent misrepresentation.

The court also noted 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.

UCTA and fraud

The judge further held that the clause was reasonable under the Unfair Contract Terms Act 1977. The judge took into account that the contract was negotiated by lawyers, that the university was 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

Finally, the court held that the university was liable for failing to use all reasonable skill and care to ensure the accuracy of the work performed by its employee, as evidenced by the errors in the published research paper. Nevertheless, for the reasons given above, the university’s liability was limited to GBP 1 million.

Judgment: Innovate Pharmaceuticals v University of Portsmouth