Contract liability caps: what can we learn from the Portsmouth University case?

A research contract between a small drug development company, Innovate Pharmaceuticals (Innovate), relating to pre-clinical in vitro research carried out by Portsmouth University (Portsmouth), was the subject of a judgment from the High Court in January this year. Innovate was awarded damages of £1 million as a result of Portsmouth’s breach of the research contract, but the sum could have been much higher if Portsmouth’s liability had not been capped in the contract.

In this article, our life sciences solicitor Vicky Clark explains how contract liability caps work, particularly for companies in the innovative life sciences sector, following Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024].

Do liability caps work?

Yes – the case serves as a reminder of the willingness, or enthusiasm even, of the English courts to uphold negotiated caps on liability in commercial contracts.

It is worth restating the language of the cap as it is short and uncomplicated (underlining added):

“The liability of a Party to another howsoever arising (including negligence) in respect of or attributable to any breach, non-observance or non-performance of this Agreement or any error or omission (except in the case of death or personal injury or fraudulent misrepresentation) shall be limited to £1million.”

As the paper in which Portsmouth’s results were published was retracted, Innovate claimed its drug development program was delayed and that it had to repeat much of the pre-clinical work. Innovate estimated its losses to be more than £20 million, including a large element of loss of profit. Portsmouth was found to be in breach, but as a result of the cap the damages awarded were limited to £1 million.

Fraudulent misrepresentation language

There was an allegation that the principal investigator on the project fraudulently misstated results, leading to the retraction of the published paper. The judge found that there was no fraud, but even if there had been, the exclusion of fraud from the cap related only to misrepresentations, i.e. false statements inducing entry into the contract, whereas the allegation of fraud related to performance of the project, so the exclusion was not operative.

In theory, fraudulent performance could have been excluded but on construction of the clause as drafted it was not.

Are caps in research contracts reasonable?

This is not just an ethical question but a legal one, as under the Unfair Contract Terms Act (UCTA) some business-to-business caps on liability need to pass the “reasonableness test”.

Portsmouth is a not-for-profit, charitable, academic institution. It agreed to carry out pre-clinical in vitro work for which it received around £50,000 (although the work apparently cost £80,000). On its own pleading, it would have cost Innovate over US$4 million to have the same work carried out by a commercial CRO and if the work failed, Innovate would suffer consequential losses exceeding £20 million. Portsmouth was receiving what appears to be below-market rate, to do work which had potential to generate liability in excess of £20 million. Is it reasonable in such a scenario for an academic organisation to accept uncapped liability? The Judge said “no”, finding the cap reasonable from the perspective of UCTA.

With risk allocation you often look at who will serve to make the most if the work is successful, as arguably that party should bear more of the risk. Innovate would be the big winner financially if the pre-clinical work had been successful. The contract contained a full transfer to Innovate of all the results and associated intellectual property relating to their drug candidate. The natural assumption might be that Innovate should accept the majority of the risk related to the project.

Relevant to the reasonableness of caps, it is important to note that many insurance policies exclude coverage of the insured party where it would have been reasonable to cap their liability and they failed to do so. Hence if it is reasonable to require a cap, it is risky from an insurance perspective for the service provider not to do so.

What is an appropriate cap?

For many service providers, their starting point on liability is to cap it to the cost, or two or three multiples of the cost, of the services provided. They argue that their margins are simply not high enough to justify doing the work on the basis of high exposure to risk. In this case, that approach would have capped Portsmouth’s liability at £50,0000–£150,000, substantially lower than the £1 million cap agreed in the contract. It perhaps would not have been unreasonable for Portsmouth to insist on a lower cap, which may even have been a deterrent to litigation.

How can drug developers protect themselves?

For drug developers that outsource pre-clinical and clinical work under contracts that are likely to be capped, what can be done to protect against the significant risks of drug development?

Firstly, the old “buyer beware” adage is important. Buyers of technical services should audit their collaborators/service providers carefully and continue to monitor the work closely. They should carry out thorough due diligence to ensure the collaborator has appropriate expertise, and the outsourcing company needs sufficient in-house knowledge to judge whether the work is being done properly.

Outsourcing companies should build into their contracts the right to receive regular written updates, but also the right to inspect the work from time to time. Those supervising pre-clinical work should act fast if the collaborator or service provider is not performing to the level expected, rather than wait for the work to drag on, as it appeared to do in this case.

It is often said in the life sciences sector that people need to focus more on the relationship and less on the contract. From this judgment, it is clear that immense pressure was put on the principal investigator, who was experiencing high levels of stress over a prolonged period. The outcome was not good for anyone involved.

If you are in the life sciences industry and have questions or concerns about contract liability cap clauses, please contact Vicky Clark.