UK: Commercial Briefing - Lessons from the recent BSkyB v EDS Judgment

What are the facts?

In July 2000 the IT services company EDS (now part of Hewlett Packard) won a competitive tender to design, build and implement a customer relationship management system for the satellite television broadcaster BSkyB (Sky).

The project ran into difficulties and delays which, following renegotiations, ultimately led to Sky issuing court proceedings in August 2004 against EDS and claiming damages of £709m for breach of contract as well as fraudulent and negligent misrepresentation. The contract included a £30m cap on EDS' liability.

On 26 January 2010, 18 months after the end of the trial, the court handed down its judgment which, although it contains no new law, is significant for both suppliers and customers.

What did the judgment say?

EDS was found to have fraudulently misrepresented that it was able to deliver the system by the deadlines set out in its tender response and the contract. The representation was held to be false and to have been made by EDS without belief in its truth, because EDS had not carried out any proper analysis or planning to determine whether it could actually meet the specified deadlines.

The finding of fraud is significant not only because any damages awarded for EDS' deceit will not be subject to the contract's £30m liability cap, but also because the damages award will be based on a tortious measure so that, in contrast to normal contractual damages, the losses recoverable by Sky did not need to be foreseeable. EDS has already made a £200 interim payment but the full amount of damages payable has yet to be decided.

EDS was also found to have negligently misrepresented its ability to meet the amended milestone dates during the contract renegotiation and the Court held that the contract's entire agreement clause was not effective in excluding EDS' liability for this.

Why did the entire agreement clause fail?

Although it is not possible under English law to exclude liability for fraudulent misrepresentation, a properly constructed entire agreement clause can exclude a party's liability for negligent misrepresentation and misstatement.

The contract's entire agreement clause did not include a statement that the parties had not relied on any pre-contractual representations not set out in the contract. Accordingly, following established case law, it was held that the entire agreement clause did not exclude EDS' liability for negligent misrepresentation.

Lessons for suppliers

Actionable representations can arise from statements made in various ways including in emails, conversations and details in spreadsheets. Suppliers should be aware that what they consider to be "sales talk" could potentially lead to a misrepresentation claim being made against them.

The motivation and remuneration of sales teams should be reviewed and best practice would now suggest that the remuneration for sales personnel is not overly weighted towards the making of the sale itself (to the exclusion of the long term benefits and risks of the entry into the contract). Sales teams should ensure that they always consult their delivery counterparts when responding to tenders, to ensure that their sales pitch is made on a reasonable basis.

Suppliers can reduce the risk of potential misrepresentation claims by ensuring that all tender responses are reviewed before submission by staff external to the bid team. No statements of fact or opinion should be included in a response that cannot be verified. Even where a statement is incorrect, having a good audit trail of documents to support the making of that statement can help to reduce the risk that a court will find a supplier acted fraudulently or negligently when making that fact or statement.

Exclusion whole agreement clauses and limitations of liability should be carefully drafted and suppliers should consider including wording in tender responses to prevent customers from relying on the statements that they contain.

Lessons for customers

Fraud remains very difficult to establish and negligent misrepresentation claims will normally be excluded by properly drafted entire agreement and exclusion clauses. Given this, customers should therefore ensure that those representations of the supplier upon which the customer is relying are included in the agreement.

Tender responses and, in particular, those statements regarding resourcing, timing and cost of project delivery, should be carefully analysed to help ensure that inaccurate statements are identified and verified as early as possible. This can help avoid the potential for costly litigation later on.

Rather than simply rewarding a supplier's effort, gain sharing provisions and milestone related achievement bonuses are a useful tool, as they link contractual payments to the supplier's achievement of project milestones and their overall performance under the contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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