High Court Rules limitation clause effective to limit liability for dishonesty

On 12 January 2024, the High Court handed down its judgment in the case of Innovate Pharmaceuticals Limited v University of Portsmouth Higher Education Corporation.

The case concerned a claim for damages by the Claimant, Innovate Pharmaceuticals Limited (Innovate) against the University of Portsmouth Higher Education Corporation (the University) pursuant to a Research Agreement between the parties. 

Background

Innovate, a pharmaceutical development company, and the University entered a Research Agreement in July 2016 for the study of a patented liquid aspirin known as IP1867B or Glioprin (the drug).

A charity called Headcase was also party to the Research Agreement, having agreed to partly fund the study (Innovate and Headcase being collectively referred to as the Funders).

The Research Agreement was entered into following a successful pilot study carried out by the University which suggested that the drug had some potential to be used as treatment for Glioblastoma Multiforme, a form of brain tumour. 

The paper

In May 2019, a paper authored by Dr Hill of the University regarding the results of the study was submitted to a respected academic journal known as the Cancer Letters and later published.

Soon after, however, a website called Pubpeer launched a fierce attack upon the paper and the data within it, eventually leading to the retraction of the paper from the journal due to (according to the Retraction Notice) "concerns regarding the legitimacy of images and data presented in the paper". 

Subsequently, following a disciplinary investigation carried out by the University, Dr Hill was found to have committed research misconduct. 

The claim

Innovate argued that the errors in the paper which led to its retraction rendered the results coming from the study useless and that the University acted in breach of contract and/ or negligently in several respects. Innovate consequently sought damages from the University representing (i) the reasonable cost of repeating the study and (ii) the diminution in value of the drug caused by Innovate being unable to exploit its patent and license the drug until a further study was undertaken.

The University however argued that it was entitled to rely on a limitation clause in the Research Agreement in respect of its liability, even if Dr Hill was found by the Court to have acted dishonestly.

Further, and with regards to fraud, the University argued that whilst it's well established that a party can't contract out of its own fraud in inducing the making of a contract, that is not the position with regard to the performance of a contract, especially where the fraud relates to that of an agent or employee of the contracting party. 

Limitation of Liability

Clause 11 of the Research Agreement limited the liability of the University as follows:

"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."

Judgment

The High Court found that the construction of clause 11.4 excluded loss of profits caused by a breach of contract not involving a representation, even if that breach was committed fraudulently (taking care to note that the carve out in clause 11.4 in respect of what is fraudulent was limited to the representation only).

So whilst there were allegations of dishonest performance advanced by Innovate, there was no claim set out for fraudulent misrepresentation, and as such the limitation in clause 11.4 was sufficient to encompass Innovate's claim for the diminution in value of the drug (i.e. the lost profits). 

Further and in any event, the High Court found that even if that were not so, the limitation of liability in clause 11.5 (i.e. the £1 million cap) applied to any claim (whether for loss of profits or otherwise) unless the relevant cause of action was in respect of death or personal injury or for fraudulent misrepresentation.

In light of the above, the High Court held that Innovate was entitled to damages limited to the sum of £1 million for the costs of further testing, but did not make any award for damages in respect of its claim for the diminution in value of the Drug. 

In determining that the limitation clause was reasonable pursuant to the Unfair Contract Terms Act 1977, the Court gave regard to the fact that (i) there was no inequality of bargaining power between the parties, (ii) the terms of the Research Agreement were properly negotiated with the involvement of legally qualified professionals, (iii) the clause was not simply a blanket exclusion of all liability and (iv) the sum being paid to the University for carrying out the work was just £50,000 (demonstrating a commercial reality for the clause). 

What can we learn from this case?

The High Court's judgment in this case demonstrates that a limitation clause may be effective in limiting a party's liability for the dishonest performance of a contract even where there is no express mention of dishonesty.

The case therefore also highlights the importance of carefully drafted limitation clauses (especially where such a clause forms part of a negotiated commercial contract). Should a contracting party wish to avoid the risk of not being able to recover damages arising from dishonest performance, the construction of the contract should make that position clear.

This is particularly the case in sectors, such as the Higher Education sector, where the performance of the contract is inherently tied to the conduct of researchers (or other employees/ agents). 

If you would like to discuss any of the issues raised in this article in more detail, please get in touch with a member of the team below.