Liability clauses can be contentious in negotiations. They enable the allocation of risk if things go wrong - neither party will want to shoulder risks that they cannot quantify or insure – but addressing the risk of an unlikely but disastrous event can be a difficult task.
A recent dispute between Innovate Pharmaceuticals and the University of Portsmouth shows how this can play out in a research collaboration, and demonstrates the importance of getting the clauses right.
Innovate had patent protection for a stable liquid formulation of aspirin and were looking for ways to develop and commercialise it. Innovate and the University of Portsmouth carried out a pilot study looking at the possible use of the formulation in treating brain tumours that were resistant to existing drugs. This gave promising results and they agreed to take the work forward to a preclinical study, involving both in vitro and in vivo work, to be funded jointly by Innovate and a charity.
The study agreement
The study agreement contained exclusions and limitations of liability.
The University’s liability excluded the following:
- “liability because of any representation (unless fraudulent), or any warranty (express or implied), condition or other term, or any duty at common law, non-observance or non-performance of this Agreement, for:
- any loss of profits, business, contracts, opportunity, goodwill, revenues, anticipated savings, expenses, costs or other similar loss; and/or
- any indirect, special or consequential damages or losses (whether for loss of profits or otherwise).”
The liability of each party was limited as follows:
- “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 £1 million.”
The problematic Western blots
Things did not go well.
During the course of the study, the University research team produced and published Western blots of samples from the in vivo work. Some of these, however, were not an accurate reflection of the results of the work. This may have been in error or, as argued by Innovate, dishonestly. The published research paper was subsequently withdrawn.
Under general contract law principles, a party cannot contract out of its own fraud in inducing the making of the contract. Here, though, the possible dishonesty was in the performance of the contact, and by an employee rather than the University itself.
Overall, the judge concluded that the University fell short of its contractual obligations by failing to ensure the accuracy of the work performed or of the information it gave to Innovate. He did not consider the lead researcher to be dishonest, but instead, extremely careless while working under pressure.
Claimed losses
Innovate claimed for the costs of repeating the project – the judge accepted that the loss would be around £1.3m. However, this amount was capped at £1m due to the overall limit of liability in the contract. Innovate’s argument that the cap did not apply because of the dishonesty of the researcher in performing the contract on behalf of the University was unsuccessful.
Innovate also claimed over £100m for loss of value of its patent, due to the delay in carrying out the work. This claim the judge considered over-optimistic, but did not assess it in detail because it fell into the University’s exclusion clause.
The project was clearly a disaster for both sides, leaving the University with a substantial bill.
Takeaway points
This case highlights the importance of careful drafting in life sciences contracts, including research agreements, both to allocate risk and to reduce the risk of a dispute. Some risks are hard to envisage, but exclusions and liability caps are usually effective in setting out a limit on a party’s liability and, as demonstrated in this case, can be very powerful.
In the context of research, a greater degree of involvement and oversight by the research sponsor might have helped to identify problems sooner. We would normally expect to see structured interaction throughout a research project. It is always preferable to identify and address problems as they arise, rather than participate in a court battle later on.
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