BSkyB v EDS - the lessons to be learnt

March 8, 2010

The eagerly awaited judgement in BSkyB’s claim against what was Electronic Data Systems Ltd (“EDS”) (and is now part of Hewlett Packard) has been handed down. Although this is an IT case, it is of general interest to customers and suppliers.

The case lies on an unusual set of facts, especially with regard to EDS’ employee’s fraudulent conduct, but has general application.

Facts

In March 2000, BSkyB issued an invitation to tender for the design, development and integration of a new customer relationship management (“CRM”) system. EDS won the tender and entered into a contract with BSkyB’s operating subsidiary, Sky Subscribers Services Limited on 30 November 2000.
The budget for the contract was approximately £50 million and the time-line was 18 months, 9 months for the first-stage to go live and a further 9 months for full completion.

Things quickly started to go downhill, with a renegotiation in 2001 and BSkyB taking some of the work in-house in 2002. The project was finally completed in 2006, at a cost of  approximately £256 million. At this point BSkyB sued EDS, claiming damages of £709 million on the basis that:

• The CRM system was completed four years late and at a significantly increased cost. 

• EDS had made fraudulent misrepresentations in relation to its resources, the cost, timetable, technology capabilities and methodologies.

Terms of the contract

The contract contained the following clauses on which the case turned:

• A limitation of liability clause capping EDS’ liability at £30 million, except in the event of fraud; and

• An entire agreement clause, in which both parties acknowledged that no statements made prior to the signing of the contract were to form any part of the contract.

Fraudulent misrepresentation

As liability for fraud cannot be limited, it was critical for BSkyB to establish that EDS had made fraudulent misrepresentations in its initial bid and pre-contractual negotiations stage, which had led to BSkyB accepting the bid and entering into the contract with EDS.

Entire agreement clause

The Judge held that there was nothing in the entire agreement clause which would prevent BSkyB from bringing a claim for negligent misrepresentation or misstatement as the clause did not expressly provide that any pre-contractual statements or representations were of no legal effect, so far as any liability for misrepresentation might be concerned.

Joe Gallaway

The Judge found that EDS had made a fraudulent misrepresentation. One employee in particular, Joe Gallaway, was found to have made dishonest representations. Joe Gallaway, the bid team leader, had informed BSkyB that EDS had scoped the work fully and he confirmed that the timescales were realistic. He had not done any supporting analysis and on the evidence the Judge found that he knew what he was saying was false, or at the very least was reckless as to whether it was true or not.

Joe Gallaway no doubt undermined his own credibility as a witness when it was discovered that he had lied about his qualifications by claiming to have completed his MBA, when in fact he had bought his degree online. BSkyB’s Counsel demonstrated how this was done by purchasing a similar MBA, albeit with better grades, for his dog Lulu.

Impact

The decision highlights the importance of having internal risk management procedures, protocols and training in place for employees engaged in both the sales and contracting process to ensure that representatives of the company do not make statements or promises that cannot be delivered upon.
The case highlights the risk of overselling in order to win work.  IT suppliers need to ensure that any representations they make are realistic and justifiable.

The results of failing to do so can be extremely serious, as shown in this case, where EDS has agreed to make an interim payment on account of damages of £200 million.

Suppliers need to be aware that a “standard” entire agreement clause is not sufficient. The clause must explicitly exclude liability for any (non-fraudulent) pre-contractual statements.


Related pages:

Technology, Media & Digital more

Terms of Business and Contracts more

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