The High Court has held that a limitation of liability clause in a research agreement could limit liability for dishonest breach and that the clause was reasonable under the Unfair Contract Terms Act 1977.

The University of Portsmouth (UoP) entered into an agreement with a company called Innovate to undertake scientific research into the development of a liquid aspirin drug to treat brain cancer. Innovate argued that the research paper published on the drug was allegedly "infected by errors” and was the product of dishonesty of the scientist involved. Innovate said that it would have to obtain fresh data, and sought damages of £100m for breach of contract and for failure to exercise due skill and care when carrying out the research.  

The UoP relied on a clause in the agreement which excluded their liability for loss of profits and other specified losses, including where arising "because of any representation (unless fraudulent)". Otherwise, their liability "howsoever arising (including negligence)" including in respect of “any error or omission (except in the case of […] fraudulent misrepresentation)” was limited to £1 million.  

Innovate claimed that the UoP could not rely on the exclusions because of the dishonesty.

The court's decision

The judge declined to find that the researcher had been dishonest. 

He then considered the relevant case law on limitations of liability for fraud.  Because the clauses expressly carved out fraudulent misrepresentation, he concluded that the clause excluded loss of profits caused by fraudulent (dishonest) breach of contract. Even without this exclusion, the limitation clause applied to any claim (including dishonest breach) unless the relevant cause of action related to death, personal injury or fraudulent misrepresentation.

In addition, he held that both the exclusion and limitation of liability were reasonable under section 11 of the Unfair Contract Terms Act 1977. The judge considered it relevant that the contract was negotiated by lawyers and UoP only expected to be paid a modest sum while assuming potentially huge liabilities (if you did not take the exclusion clause into account). Even though the clause was intended to limit liability for dishonest breaches of contract, it was not unreasonable.

Finally, the court held that UoP was liable for failing to use all reasonable skill and care to ensure the accuracy of the work performed by its researcher, based on the mistakes in the research paper. However, UoP's liability was limited to £1 million.

What does this mean in practice?

The case is a useful illustration of the fact that while you may not induce someone to enter into a contract using dishonest means, dishonesty once the contract is in force is a different issue - the liability for this can be allocated by contractual means and/or insurance.

With regard to UCTA, the judge accepted that the issue of whether a clause is reasonable under UCTA depends on various factors such as bargaining power, whether it had been negotiated and the value of the contract.