Can A Business Limit Liability For Losses Caused By Fraud?

It’s not possible, for public policy reasons, for organisations to avoid liability for a fraud that induced the making of a contract – but can you limit liability in the event of a fraudulent breach? At Bahamas law firm ParrisWhittaker, the award-winning corporate disputes team are experienced in advising clients across all sectors on contractual terms and limitation of liability.

A recent High Court¹ ruling from the UK has clarified that a party can limit liability for losses caused by fraudulent contractual performance. The ruling, which may be appealed, has persuasive authority on the courts in The Bahamas and should be noted.

What happened in this case?

A UK university entered into a research agreement with a company called Innovate which owns the patent for a particularly type of liquid aspirin. The agreement involved the testing of a preclinical drug programme.

However, following completion of the research , the principal investigator – a university employee – published a research paper in a reputed academic journal. The paper was allegedly “infected” with careless and dishonest errors and the university claimed that the reporting of the testing was fraudulent.

The employee was, in fact, later found guilty of research misconduct following disciplinary proceedings.

The contractual clauses included an express duty to exercise “all reasonable skill and care to ensure the accuracy of the work performed and the information given”; and “to adhere to the general principles of honesty, fairness and integrity in all its dealings”.

As a result of the paper’s publication, Innovate brought proceedings against the university claiming damages for the cost of a programme rerun with another organisation, given that  the results from the Research Programme were rendered commercial useless.

It also claimed damages for the loss of value of its patent as a result of reputational damage and said the university and  or its employee knowingly or negligently misrepresented the outcome of the programme in breach of the contract.

Innovate also argued that the errors in the paper resulted from dishonesty and were not simply failures to exercise reasonable skill and care. The court concluded that there were several errors

The High Court agreed with the company that the university had breached the contract – but to what extent was the university liable to pay the damages sought?

Limitation of liability

The company’s claim was valued at £96.5 million. Importantly, the agreement between the parties included a clause limiting the parties’ liability to £1 million – “except in the case of death or personal injury or fraudulent misrepresentation”.

A central issue was whether or not it could claim more than £1 million and loss of profits on the basis that the investigator was dishonest.

The court agreed with the university that it was possible to limit liability in respect of fraudulent performance of a contract. It concluded that the limitation clause at issue was broad enough to limit liability in those circumstance, but declined to find the investigator had actually been dishonest.

Innovate’s recoverable damages were limited to £1m.

Guidance

Limitation clauses are commonplace in business contracts for good reason. No party wishes to risk limitless liability should the relationship sour, but such clauses must be reasonable. Each case is to be considered on the particular facts of the case.

The judge helpfully summarised the guiding principles which commercial organizations and their advisors will find useful when negotiating and applying their business contracts:

• Exclusion clauses mean what they say;
• It is a matter of construction rather than law as to whether liability for deliberate acts will be excluded;
• The courts are not so hostile towards imitation clauses as they are with exclusion and indemnity clauses;
• A contracting party cannot exclude liability for its own fraud in inducing a contract;
• 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;
• An exclusion or limitation clause is more likely to be effective if excluding liability for fraud of an agent or employee rather than the fraud of the actual contracting party.

How can we help?

If you have any concerns about your rights and remedies under a business contract, or the extent to which exclusion of limitation of liability may apply in your case, get in touch with the experienced commercial litigation  lawyers at ParrisWhittaker for prompt assistance and representation.

Call now on telephone +1.242.352.6112

¹Innovate Pharmaceuticals Limited v University of Portsmouth Higher Education Corporation [2023] EWHC