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Fraud: can an exclusion clause exclude or limit liability?

Topical Issue 597

There is an old legal rule that “fraud unravels all“. Once fraud is proved, “it vitiates judgments, contracts and all transactions whatsoever“. But what about an exclusion clause? Could that exclude, or limit, liability for fraud? In Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation the court had to consider this question.

In doing so, the court set out these ‘well established’ principles:

  • 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;
  • limitation clauses are not regarded by the courts with the same hostility as exclusion and indemnity clauses;
  • a contracting party cannot exclude liability for its own fraud in inducing a contract;
  • as to 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 construed as effective if it is excluding the liability for fraud of an agent or employee rather than the fraud of the contracting party itself;
  • the words “howsoever arising” are capable of effecting an exclusion of liability for wilful default.

Fraudulent misrepresentation was carved out from the exclusion and limitation clauses in issue in the case but the court said it was important to note that, in the exclusion clause, as a matter of construction, the word “fraudulent” applied only to representation not to the words which followed referring to “any warranty (express or implied), condition or other term, or any duty at common law, or under the express terms of this agreement.

The court ruled that the exclusion of liability in respect of loss of profits applied to all claims except a claim based on a fraudulent representation, namely a claim in the tort of deceit. A claim for loss of profits caused by a breach of contract not involving a representation was therefore excluded, even if that breach was committed fraudulently. Even if that was not the case, the limitation of liability clause would apply 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.

The court added that, in its view:

  • a claim in respect of fraudulent misrepresentation is not limited to a case where the innocent party was induced into entering into an agreement;
  • however, the cause of action is for the losses suffered by the innocent party acting to its detriment in reliance upon the false representation;
  • in this case (where there was no claim for fraudulent misrepresentation or even deceit) fraud on the part of an agent or employee of the defendant would suffice: it was not necessary for the claimant to establish fraud on the part of the defendant itself.

Author

Richard Craven

Mayer Brown LLP

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