United Kingdom: Sow The Wind, Reap The Whirlwind

Last Updated: 29 January 2010
Article by Ian Stevens, Elizabeth Alpass, Susan Barty and Tim Hardy

BSkyB v EDS: The Technology and Construction Court in London yesterday handed down one of the most awaited judgments in one of the largest cases ever to come to trial in the outsourcing and IT services sector.

Mr Justice Ramsey found that Electronic Data Systems ("EDS") had deceitfully induced TV operator British Sky Broadcasting ("Sky") into a £54 million contract for a new customer relationship management ("CRM") system. As is usual following Thomas Witter v TBP Industries [1996] All ER 573, the contract provided that neither party excluded liability for fraudulent misrepresentation. That was effective to prevent damages being capped at £30 million since the deceit amounted to fraudulent misrepresentation.

The judgment highlights the need for those involved in negotiating similar contracts to be aware that a fraudulent misrepresentation can give rise to potentially uncapped damages. As a result of this judgment, it is anticipated that UK based suppliers may change the way they pitch their services, to take account of the risk of being held similarly liable.

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BSkyB v EDS: The Technology and Construction Court in London yesterday handed down one of the most awaited judgments in one of the largest cases ever to come to trial in the outsourcing and IT services sector.

Mr Justice Ramsey found that Electronic Data Systems ("EDS") had deceitfully induced TV operator British Sky Broadcasting ("Sky") into a £54 million contract for a new customer relationship management ("CRM") system. As is usual following Thomas Witter v TBP Industries [1996] All ER 573, the contract provided that neither party excluded liability for fraudulent misrepresentation. That was effective to prevent damages being capped at £30 million since the deceit amounted to fraudulent misrepresentation.

The judgment highlights the need for those involved in negotiating similar contracts to be aware that a fraudulent misrepresentation can give rise to potentially uncapped damages. As a result of this judgment, it is anticipated that UK based suppliers may change the way they pitch their services, to take account of the risk of being held similarly liable.

EDS (now owned by Hewlett Packard) contracted in 2000 to provide CRM technology for Sky's customer contact centres in Livingston and Dunfermline, Scotland. The project ran into difficulty, and in early 2002 Sky terminated and in-house staff went on to complete the work. In 2004, Sky initiated proceedings against EDS on the grounds that it was falsely induced to enter into the contract during the tender stage because EDS misled it in terms of the project's estimated budget and time frame, and EDS' general ability to deliver. Sky made various claims in deceit, negligent misrepresentation/misstatement, breach of contract and others. EDS denied these allegations, and attributed the problems with the project to its unspecified scope.

Mr Justice Ramsey found that EDS had been fraudulent in its bid to win the business to supply and install the CRM software. It was held that EDS had deliberately misrepresented the estimated length of time needed to complete the project. However EDS was not found liable to Sky for misrepresenting the estimated cost of the work. The judge further found that EDS had made an actionable misrepresentation in order to induce Sky to enter into a compromise agreement after the project had failed. Sky was also able to establish that, but for EDS' deceit, it would have contracted with PwC.

The initial contract value was in the region of £48 million, but included a liability cap of £30 million. However, as is typical, the liability cap did not apply to instances of fraud. Since, in this case, the court ruled that the misrepresentation was fraudulent, damages above the liability cap could be awarded (damages for fraudulent misrepresentation are for all losses directly flowing from such a breach, and not just those that are reasonably foreseeable). EDS therefore faces unrestricted damages, potentially including for loss of profit, loss of cost savings and loss of business benefits. Sky initially claimed more than £700 million in damages, an amount far in excess of the exposure that EDS might have contemplated on entering the contract. Sky has said in a statement that it now expects to receive in the region of £200 million and further hearings will take place shortly to decide the figure for damages.

The case is a reminder that, in certain circumstances, contractual limits can be defeated. Given that the case conjured up the spectre of unlimited liability, the decision may result in far more carefully restricted sales pitches for IT contracts. There will be greater scrutiny and accountability of sales processes and it will be important to be able to demonstrate how a supplier arrives at estimates of costs and time. Further, prices of similar contracts may rise on the basis that suppliers will be wary of the risks involved.

The case may also lead to more claims alleging deceit against suppliers, although allegations of deceit will always be difficult to prove. Whereas in the past successful fraudulent misrepresentation claims have been rare, this trend appears to have been changing more recently. However this is the first time that a claimant has been successful in making such a claim on this scale.

One disincentive to potential claimants will be the time and cost involved in this trial. Court hearings ran for 10 months and concluded in July 2008, and the judge spent about 15 months determining the issues before producing his judgment, which runs to some 460 pages. It is reported that the costs of the case are in the region of £70 million, significantly in excess of the £48 million cost of the original contract. Accordingly this may be the most expensive legal dispute in the history of the IT industry. Hewlett-Packard has stated that it plans to seek permission to appeal.

Please click on or copy and paste the link below to the judgment: http://www.bailii.org/ew/cases/EWHC/TCC/2010/86.html (http://www.bailii.org/ew/cases/EWHC/TCC/2010/86.html)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 27/01/2010.

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