February 9, 2024
Contract Law

In the recent High Court decision of Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC), it was held that a limitation of liability clause in a research agreement effectively limited liability for potentially dishonest conduct by an employee, which breached the terms of an overarching agreement.

Background facts

The claimant was a pharmaceutical company (Innovative) that had developed a drug, a form of liquid aspirin, which it hoped to licence to pharmaceutical companies for cancer treatment.

Innovate hired the University of Portsmouth (UoP), the defendant, to conduct a research programme into the properties of the drug and they signed a research agreement. This research programme was to be undertaken under the direction of Dr Robert Hill; a researcher employed by the University.

After the research was finalised, Dr Hill submitted a paper to an academic journal called Cancer Letters. Although there were 11 authors, the principal author was Dr Hill. A website called PubPeer, where users discuss published scientific research, questioned the accuracy of the data contained in the paper. Subsequently, the paper was retracted by UoP due to inaccuracies in the reported data. Afterwards, an UoP disciplinary panel found Dr Hill guilty of research misconduct.

Innovative initiated legal proceedings arguing that Dr Hill knowingly and negligently misrepresented the findings of the research programme, which constituted a breach of UoP’s contractual obligations under the research agreement.

According to Innovative, UoP failed to exercise reasonable skill and care in ensuring the accuracy of the work, pursuant to clause 11.1 of the research agreement. Furthermore, UoP did not uphold the general principles of honesty, fairness, and integrity in all its dealings as agreed upon in clause 18.1 (due to the alleged dishonesty of Dr Hill). These failures resulted in the discrediting of the research programme and damage to the drug’s reputation. As a consequence, Innovative suffered damage, primarily loss of profits in not being able to market the drug, and additionally the costs of undertaking a new research programme.

The action 

The relevant clauses in the Research Agreement are as follows: 

In clause 11.1 of the Agreement, UoP expressly agreed that it will use all reasonable skill and care to ensure that the work performed and information given is accurate, but it makes no warranty as to accuracy and won’t be liable for any consequences arising out of inaccuracies or omissions that are the result of UoP or its agents’ negligence.

Clause 11.4 of the Agreement provides that UoP is not liable to Innovative for any representation (unless fraudulent) or any warranty, condition or other term or any duty in 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

Clause 11.5 further states: the liability of a Party to another howsoever arising in respect of or attributable to any breach, non-observance or non-performance or any error or omission shall be limited to £1 million, except in the case of death or personal injury or fraudulent misrepresentation. 

Innovate argued that while compiling the paper for the Cancer Letters, Dr Hill was aware that he was using images or words that were not correct or accurate and that this made his conduct objectively dishonest because he either knew or did not care that some statements in his paper were incorrect. For this reason, UoP did not comply with clause 11.1 of the Research Agreement and moreover that clauses 11.4 and 11.5 should not be given effect because it is not reasonable to exclude liability for lying about the research under Section 11 of the Unfair Contract Terms Act 1977 (UCTA 1977). Moreover, even if these clauses were reasonable fraud is expressly excluded from the restrictions on liability.

Therefore, Innovate argued that UoP is liable for breach of contract and, amongst other things, claimed loss of profits exceeding £100 million. 

High Court’s decision 

Construction of clauses 11.4 and 11.5

The Court found in favour of UoP that the limitation clause effectively limited liability for dishonest breach of the contract as a result of an employee’s conduct.

In reviewing the relevant law, the Court emphasised the following principles applicable to exclusion clauses: 

  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 Court applied a literal meaning to clause 11.4 and 11.5 and found that the exclusion of liability in clause 11.4 in terms of loss of profits, was ‘applicable to all claims except where the claim is based upon a fraudulent representation, that is to say a claim in the tort of deceit’. Consequently, loss of profits resulting from a contract breach not involving a representation is excluded, even if the breach was fraudulent.

In plain terms, whilst you cannot exclude your own liability for fraudulently (dishonestly) getting another party to enter into a contract, there is nothing wrong with limiting your own liability if you or your employees were to do something dishonest in performing the contract itself.

Clause 11.5 would limit any claim to £1 million, unless the cause of action is in respect of death, personal injury or fraudulent misrepresentation. The latter is the key point. Dr Hill’s allegedly dishonest conduct was not a representation that persuaded Innovate to enter into the research agreement.

‘Reasonableness test’ under UCTA 1977

The Court affirmed that in contract law, parties are able to agree apportionment of liability in cases where the performance of the contract involves fraud or deliberate breach, provided it meets the ‘reasonableness test’ under the UCTA 1977. Court took into account the bargaining power of each party and concluded that there was no inequality between the parties as Innovate was represented by a legally qualified individual who actively negotiated the terms of the Research Agreement, instead of merely accepting them. 

The Court deemed both the exclusion and limitation of liability reasonable under section 11 of UCTA 1977 and just because the clause limits liability for dishonest breaches in performance of the contract does not make it unreasonable. 

Dishonesty 

When assessing whether Dr Hill’s actions constituted dishonesty, the Court referred to the judgement in Lord Hughes in Ivey v Genting Casinos (UK) Ltd [2017] that for someone’s conduct to be considered dishonest, it is important to ascertain the actual state of mind of the individual’s knowledge or belief as to the facts and then apply the objective standards of ordinary decency to determine whether their conduct was honest or dishonest. 

Regarding dishonesty, the Court rejected that Dr Hill acted dishonestly and found no evidence of any motive, despite numerous errors in his paper which were careless, and likely due to the pressure Dr Hill was facing at the time. The Court stated that there is no indication that any person, for whom UoP was responsible, acted dishonestly. Even if Dr Hill was found to be dishonest, this would not invalidate UoP’s reliance on the limitation and exclusion clauses outlined in the research agreement.  

Reasonable skill and care 

UoP expressly stated in 11.1 that it would not give warranties as to the accuracy of the work performed or the information given. However, clause 11.1 imposed an express obligation upon UoP to exercise all reasonable skill and care to ensure the accuracy.

The Court ruled that UoP did not use all reasonable skill and care as the errors present in the paper should not have occurred, as they did not align with the data generated by the research programme and a meticulous drafting of the text would have reflected that data. This would be the case whether the underlying conduct was dishonest or not. Hence, these errors constituted a breach of clause 11.1 of the Research Agreement and UoP is liable to Innovative for failing to use all reasonable skill and care toguarantee the accuracy of the work published in the Cancer Papers. The High Court awarded damages of £1 million to Innovate.  

Comment

High Court’s ruling underscored the significance of clear contractual terms and the construction of exclusion and limitation of liability clauses. Employee misconduct can be contemplated and excluded, if the situation requires it. Similarly, businesses can contractually limit or exclude liability for their own dishonest breaches, with the interpretation of the limitation clause being pivotal. 

Further, as demonstrated in this case, expressly excluding warranties in contracts makes a difference. Clause 11.1 expressly did not give a warranty as to the accuracy of the data. Therefore, Innovate was without an action for a breach of a warranty. Had there been a warranty, it is arguably easier to succeed in a claim for a breach of warranty than it is to succeed in proving a breach of the duty to exercise reasonable skill and care due to its legal complexities. Had the clause been silent on the warranty, there would have been a risk that it would have been implied into the contract by the Court and by that mechanism actionable. 

At EM Law, our contract lawyers are commercially focused experts who have their clients’ best interests at heart. If you require assistance with discussing the limitation clause in your or your business’ contract or if you wish to delve into contract law matters more broadly, please reach out here and we will be happy to assist you.