Exclusion Clauses & Limitation Clauses. Does Fraud Unravel All?

In commercial disputes, the decision whether to plead a claim in deceit requires rigorous scrutiny as it attracts significant procedural and professional obligations, as well as a raised evidential threshold. The decision is particularly significant in the context of exclusion and limitation clauses and in relation to which the key question can be distilled as follows: does fraud unravel all?

In HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2023] UKHL 6, Lord Bingham stated:

“… fraud is a thing apart. This is not a mere slogan. It reflects an old legal rule that fraud unravels all: fraus omnia corrumpit.”

It should be noted that Lord Bingham, in HIH, was dealing with fraud in the making of a contract rather than fraud in performance of a contract. This key distinction was addressed by the High Court in Innovate Pharmaceuticals Limited v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC), in which the High Court considered exclusion and limitation of liability clauses in a case involving allegations of dishonest breach of contract and negligence.  

Mr. Roger Ter Har KC, sitting as a Deputy High Court Judge in the Technology and Construction Court, summarised the following “… well established principles:

1. ‍Exclusion clauses mean what they say;
2. It is a matter of construction rather than law as to whether liability for deliberate acts will be excluded;
3. Limitation clauses are not regarded by the courts with the same hostility as exclusion and indemnity clauses;
4. A contracting party cannot exclude liability for its own fraud in inducing a contract;
5. 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;
6. 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;
7. The words “howsoever arising” are capable of effecting an exclusion of liability for wilful default.”

Mr. Roger Ter Har KC proceeded to determine that the exclusion and limitation of liability clauses were effective (and reasonable under the Unfair Contract Terms Act 1977), and limited recovery to £1,000,000.

The Tort of Deceit

To successfully plead a claim in deceit, a Claimant must establish the following:

1. False Representation: a representation that was factually false.
2. Knowledge: made knowingly or recklessly.
3. Intention: intent to induce reliance.
4. Causation and Loss: reliance and resulting loss.

Does fraud unravel all?

Following Innovate the answer must be delivered in two parts.

First, in relation to fraud in the making of a contract, the answer is straightforward: yes.

Second, in relation to fraud in performance of a contract, the answer is more complicated and necessarily qualified: it is a matter of construction, rather than law, whether liability for deceit can be excluded or limited and each case will turn on its own facts.

How do Court’s approach the question of construction?

The key principles set out in Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies PLC [2023] EWHC 2506 (TCC) provide a helpful guide and can be summarised as follows:

1. Exclusion and limitation clauses are an integral part of pricing and risk allocation between commercial parties and the exercise of construing such clauses must be undertaken in accordance with the ordinary methods of contractual interpretation.
2. A court will start with a presumption that in the absence of clear words the parties did not intend to derogate from the framework of rights and obligations established by the common law.
3. The more valuable the right, the clearer the language required to give effect to an exclusion clause.
4. In the commercial context it is wrong to place a strained construction upon words in an exclusion clause which are clear.
5. Notwithstanding 1-4 above, an exclusion clause will not normally be interpreted as extending to a situation which would defeat the main object of the contract or create a commercial absurdity, notwithstanding the literal meaning of the words.
6. Where language is susceptible of one meaning only, that meaning must be attributed to it unless the meaning is repugnant to the contract.

Analysis

Drawing the threads together, it seems probable that, in most cases, the Court’s will respect the principle of freedom of contract and give effect to clauses negotiated between commercial parties and expressed in clear terms, including clauses excluding and/or limiting liability for fraud in performance of a contract.  

Legal Assistance

If you require assistance in relation to exclusion and/or limitation of liability clauses, whether at the point of drafting and negotiating commercial contracts or in relation to prospective or ongoing litigation, we can help.  

We recognise that every commercial contract is unique and strive to offer pragmatic, tailored and creative legal solutions and to maximise outcomes for our clients.

How to Get in Contact

If you require assistance and are interested in finding out how we can help, please contact Paul O’Donnell at paul.odonnell@ilaw.co.uk or 07521 417579.

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