Australia: A game of liability cap and mouse: court upholds limit on loss from careless research

In Innovate Pharmaceuticals Limited v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC), the UK High Court considered whether a party's ability to recover loss caused by inaccurately published research could be limited by a liability cap in the research agreement. The case raises important considerations for Australian universities and other research institutions in the life sciences sector.

In this article, we discuss:

• the Court's interpretation of the limitation of liability clause in circumstances where there were allegations of fraudulent conduct by the University;
• the key considerations taken into account by the Court in determining whether the University had acted fraudulently when publishing the inaccurate mouse study results; and
• key takeaways from the case for universities and other institutions that conduct research with the private sector.

Background to the patent, research agreement and proceedings

Innovate Pharmaceuticals Limited (Innovate) held a patent to a liquid aspirin (IP1867B) formulation, which it was seeking to develop and commercially exploit. In partnership with the University of Portsmouth Higher Education Corporation (University), a pilot study showed some potential for IP1867B to be used as a treatment for Glioblastoma Multiforme, a fast-growing and aggressive brain tumour.

Research program

On the back of these encouraging results, the parties entered into a research agreement. Under the agreement, the University would be paid to undertake a research program into IP1867B, which included a right for the University to publish results. The principal investigator for the program was the University's employee, Dr Richard Hill.

On 26 May 2019, a paper principally authored by Dr Hill was published in the academic journal Cancer Letters. This paper included figures from the in vivo mouse study claiming to reflect that IP1867B reduced the ability of tumour cells to resist certain cancer treatments. However, the paper was the subject of public criticism and was ultimately retracted by the journal due to concerns regarding the legitimacy of images and data in the paper.

Proceedings

Following the retraction, Innovate brought an action in the English and Welsh High Court seeking damages for a breach of the agreement by the University.

Innovate complained that Dr Hill had been dishonest in the presentation of the results of the research program, rendering the research program commercially useless and delaying Innovate's opportunity to commercialise the patent in the protected time period.

Innovate sought damages for:

• the cost of reperforming the research program with an alternative commercial provider; and
• the diminution in the value of the patent.

The Court held that the University had breached its obligation under the agreement to use all reasonable skill and care to ensure the accuracy of the work performed. It said Innovate was entitled to damages for that breach. Even though the Court later found that Dr Hill's conduct was careless and not fraudulent, the case ultimately turned on whether the University could rely on a limitation of liability clause in the agreement to 'cap' the damages it had to pay.

How did the limitation of liability apply to reduce the University's liability?

The agreement limited the University's liability as follows:

Interpretation of the limitation of liability terms

Innovate claimed that the limitation of liability, or 'liability cap', in the agreement would not apply to limit liability arising from any fraudulent breach of contract by the University, as this was carved out in clause 11.4. Instead, it argued the University's liability for the fraudulent conduct was unlimited.

The Court referred to a number of established principles for construing exclusion clauses under UK law. These included that:

• a party cannot exclude liability for its own fraud where it induces another party to enter into a contract with it using fraud;
• whether parties have excluded liability for fraud that occurs in the performance of a contract is a matter of contractual construction based on the circumstances; and
• a party is more likely to be successful where the exclusion relates to fraud of a party's agent, rather than the fraud of the party itself. (Under Australian law, a party must use clear and unmistakeable language in a contract to effect an exclusion of their agent's fraud).

The Court found against Innovate's claim that a liability cap could not apply where the University engaged in a fraudulent breach of contract.

It was held that while the liability cap did not apply to loss specifically arising from fraudulent misrepresentation, loss arising from fraudulent breaches of contract did fall within the remit of the limitation of liability (as this loss had not been expressly excluded from the liability cap).

Under Australian law, a party cannot exclude liability for its own fraud. As opposed to UK law, this includes fraud that occurs in the performance of a contract. Accordingly, had this case been heard in Australia, Innovate's claim may well have been successful, resulting in a disastrous outcome for the University.

Application of the limitation

The basis for Innovate's claim was that the University had engaged in a fraudulent breach of contract. On the basis that Innovate's claim was not based on fraudulent misrepresentation, it therefore did not successfully make out an exception to the limitation of liability. As a result, the University's liability for breach of contract was capped at £1 million.

The Court also held that the exclusion of liability for loss of profit, amongst other things, extinguished the University's exposure to liability for the damages claimed by Innovate for the diminution in the value of the patent.

This was a very significant finding for the University because the claimed diminution damages exceeded £100 million, and the University was only paid £50,000 under the agreement to carry out the research. The finding that the limitation of liability was effective emphasises the importance of universities limiting liability for research to a level that is commensurate with what they are being paid to conduct the relevant research.

Key takeaways for universities and research institutions

There are a number of learnings for universities and other institutions which conduct research with the private sector:

1. Potential risks in the conduct of university research needs to be considered carefully and managed through appropriate terms in a research agreement.
2. While it is common to exclude concepts such as negligence and fraud from a liability cap, particular care should be taken to consider all conduct including careless conduct, reckless conduct or dishonesty.
3. The financial exposure arising from research can be very significant and may far exceed the benefits a university may receive for performing or publishing the research.
4. An exclusion of liability for consequential losses, such as loss of profit, can protect universities and other public institutions that conduct research for the private sector. (As this case highlights, commercial parties may seek to claim significant indirect losses in a dispute which may not have been apparent or even contemplated at the time that the parties entered into the contract).
5. Limitation and exclusion of liability terms are critical in research agreements. The precise drafting of those terms can have a significant impact on what damages are awarded by a court in any litigation arising from that research.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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