Two kinds of fraud, two different rules
English law treats fraud in inducement and fraud in performance very differently. Fraud that induces the contract - the tort of deceit, lying to get the other side to sign - cannot be excluded. A clause purporting to exclude liability for fraudulent misrepresentation inducing the contract is void as contrary to public policy.
Fraud in performing a contract is different. Here the contract is validly formed, but a party then performs it dishonestly - a researcher manipulating data, a supplier knowingly shipping non-conforming goods. Whether liability for that dishonest breach can be limited is a matter of construction and risk allocation, not an absolute rule.
Why the distinction matters in practice
Most commercial disputes are about performance, not formation. The supplier that cuts corners knowing the work fails to comply; the developer that knowingly uses unlicensed code; the contractor that conceals a defect. These are dishonest-performance cases - and a properly drafted limitation clause may cap recovery even for them.
That is counter-intuitive to anyone who assumes you can never exclude fraud. The accurate position is narrower: you cannot exclude fraud in the inducement; you may, with clear words, limit liability for dishonest breach in performance.
Innovate: a clause that capped dishonesty
In Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC), the research agreement excluded loss of profits unless fraudulent, and capped other liability at GBP 1 million except in the case of death or personal injury or fraudulent misrepresentation. The cap was expressed to apply to liability howsoever arising, including negligence.
The court held those words would have capped liability at GBP 1 million even if the lead researcher had acted dishonestly (in the event, the judge found carelessness, not dishonesty). The carve-outs covered only fraudulent misrepresentation - the tort of deceit - not dishonest breach of contract generally, so dishonest performance fell inside the cap.
How close the wording came
The University's protection turned on a single word. The carve-out said fraudulent misrepresentation, which means deceit in the inducement. Had it read fraud generally, or dishonest breach, and had the judge found dishonesty, the cap might not have applied - and the award could have been the GBP 100 million-plus claimed rather than GBP 1 million.
The phrase howsoever arising did the heavy lifting on the other side, signalling that the cap covered all causes of action, including a dishonest breach. The case is a lesson in how much rides on the precise carve-out language.
Drafting for, or against, dishonest breach
If you are the party giving the limitation and want the cap to apply even to dishonest performance, use howsoever arising and carve out only fraudulent misrepresentation (fraud inducing the contract), not fraud generally. If you are the party receiving it and want full recovery for deliberate wrongdoing, insist the carve-out covers fraud, fraudulent misrepresentation, or dishonest breach, or wilful misconduct.
Either way, the choice should be deliberate. In review, the carve-out from a liability cap is one of the highest-value lines in the contract: whether it says fraudulent misrepresentation or fraud can be the difference between a capped and an uncapped claim.
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Practical checklist
- Remember you can never exclude fraud that induced the contract (deceit), but dishonest breach in performance can be limited.
- To cap dishonest performance, use howsoever arising and carve out only fraudulent misrepresentation (Innovate [2024] EWHC 35 (TCC)).
- To preserve full recovery for deliberate wrongdoing, carve out fraud, fraudulent misrepresentation, or dishonest breach (or wilful misconduct).
- Treat the carve-out from a liability cap as a first-order negotiation point.
- In review, check whether the carve-out says fraudulent misrepresentation (narrow) or fraud (broad).
- Confirm any fraud carve-out aligns with your side of the deal (giving or receiving the cap).
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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