Can parties exclude or limit their own liability for fraud?

It has generally been assumed that a party cannot limit its own liability for fraud or fraudulent misrepresentation on the grounds of public policy; however, the recent case of Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC) casts doubt on part of this assumption.

Case background

Innovate Pharmaceuticals Ltd (Innovate) holds the patent to a liquid form of aspirin and wanted to test its ability to treat brain tumours. It entered into a Research Agreement with the University of Portsmouth (UoP) and Dr Hill led the research team. The findings of the research programme were published in an academic journal, but following attacks on the findings due to errors identified in the data, the paper was retracted from the journal. Following this, Innovate claimed damages from UoP for the cost of re-running the research programme and for the diminished value of the patent resulting from reputational damage.

A central issue at trial was whether Innovate’s claims based on allegations of Dr Hill’s dishonesty regarding the research findings were excluded or limited by the limitation of liability clauses. There was in fact no finding of dishonesty meaning that all the discussion regarding fraud was obiter, but interesting, nonetheless.

Can you exclude liability for fraud?

Both this case and older cases, like Frans Maas (UK) Ltd [2004] EWHC 1502, envisage that it is possible to limit (and possibly exclude) the fraud and dishonesty of employees and other agents for which the contracting party is vicariously liable. In this case, Dr Hill was the agent for which UoP was vicariously liable and the judge was clear that limiting liability for the dishonesty of such a person was perfectly possible if drafted correctly. The earlier Frans Maas case concerned thefts by warehouse staff – there, Honourable Mr Justice Gross went so far as to actively interpret a general limitation clause as applying to the dishonesty of staff: “Accordingly, as it seems to me, amongst the commonplace risks which the parties must contemplate when contracting, are negligence, losses by unexplained causes and deliberate wrongdoing, extending to dishonesty on the part of the bailee’s employees for which he may be vicariously liable”.

The Innovate v UoP comments take things one step further as the judge suggests the same is true of a party’s personal fraud, casting doubt on the assumption that a party cannot limit its own liability for fraud committed during the course of the contract. Public policy is not the issue – it is the clarity of the drafting.  Having said that, the case did reiterate that parties cannot exclude liability for their own fraud in inducing a contract, such as fraudulent misrepresentation. This was the crux of the House of Lords decision HIH Casualty and General Insurance Ltd & Ors v Chase Manhattan Bank & Ors [2001] EWCA Civ 1250: “It is clear that the law, on public policy grounds, does not permit a contracting party to exclude liability for his own fraud in inducing the making of the contract”.

However, given this is an obiter point at first instance and it may be difficult to reconcile it with earlier judgements it will be interesting to see if it is overturned.

Takeaways

This case demonstrates a trend in courts enforcing caps and exclusions of liability in B2B contracts. Widely drafted limitation clauses may be given their full effect and so if parties wish or expect anything to be carved out, such as dishonesty by staff, they must do so expressly. Despite this, the distinction between fraud in the formation and performance of a contract remains, with the former incapable of limitation or exclusion.