Fraud May Not Always Unravel All'What Does The Contract Say?

• Published date: 19 February 2024
• Subject Matter: Litigation, Mediation & Arbitration, Food, Drugs, Healthcare, Life Sciences, Criminal Law, Arbitration & Dispute Resolution, Personal Injury, Food and Drugs Law, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: K&L Gates
• Author: Andrew D. Connelly and Martin King

INTRODUCTION

In the recent case of Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC), the English High Court has determined that a limitation of liability clause in a research agreement was effective to limit a party's liability for breach of contract, even if the breach was committed fraudulently.

FACTS

Innovate Pharmaceuticals Ltd (Innovate) holds the patent to a form of liquid aspirin (the drug) and contracted with the University of Portsmouth (the University) to conduct a research testing programme as part of a plan to develop and ultimately commercialise the drug.

The University prepared and published a promising research paper in a well-known scientific journal. However, it transpired that the reporting of certain data in that paper contained multiple errors, and it was subsequently retracted.

Innovate claimed that: the University had breached the parties' agreement by failing to use reasonable skill and care to ensure the accuracy of its work; the lead scientist on the research programme had manipulated research data dishonestly; Innovate would have to repeat the research programme at significant cost and delay; the value of its patent would be materially diminished by that delay; and the University had caused loss in excess of '100 million as a consequence.

As part of its defence, the University relied on exclusion and limitation clauses in the parties' agreement that, among other things:

1. Excluded liability for any loss of profits, unless such losses arose from a fraudulent representation; and
2. Limited the University's liability howsoever arising from any breach of the agreement to '1million, except in the case of death, personal injury or fraudulent misrepresentation

Innovate contended that these exclusions and limitations would be ineffective where a breach of contract is committed fraudulently (as alleged in this case) and were unreasonable (and thus unenforceable) pursuant to the Unfair Contract Terms Act 1977 (UCTA).

DECISION

The court determined that:

• The University had failed to use all reasonable skill and care to ensure the accuracy of its work;
• The exclusion and limitation clauses were effective and reasonable, and operated to cap Innovate's recoverable loss at '1 million;
• The exclusion and limitation clauses carved out liability for fraudulent misrepresentation (i.e. the tort of deceit) which was not excluded or capped. However, as drafted, those carve-outs did not extend to a...