Corporate Focus - February 2010

Sky’s the Limit

The long-awaited judgment in the BskyB Limited (“Sky”) v Electronic Data Systems Limited (now part of Hewlett-Packard) (“EDS”) case has finally been handed down by the Technology and Construction Court (“TCC”). It has confirmed the worst fears of many IT suppliers and has potentially global implications for the industry.

Background

Following a lengthy tender process in 2000, Sky selected EDS to design, build, manage, implement and integrate its new customer relationship management system (“CRM”).

The relationship floundered. In 2001 Sky and EDS amended the main contract to extend the project timetable. However, the difficulties continued and in 2002 Sky terminated the contract and brought a claim for damages for over £700 million.

The Claim

Sky claimed that:

• EDS had made fraudulent misrepresentations in relation to resources, cost, time, technology and methodology during the tender process and these misrepresentations had led to Sky awarding EDS the CRM system project and entering into the initial contract;
• EDS had made negligent misrepresentations in relation to progress to date, resources, planning, and cost, and these misrepresentations had led to Sky varying the contract;
• EDS was in breach of a number of its obligations under the initial contract and that such breaches amounted to a repudiatory breach of the initial contract.

Damages awarded for fraudulent and negligent misrepresentations are recoverable whether foreseeable or not. The duty to mitigate loss is still applicable, however.

If Sky proved the allegations of misrepresentation therefore, the contractual liability cap of £30 million would not apply.

The Decision

The TCC found that:

• EDS had made fraudulent misrepresentations in relation to the time it required to complete and deliver the project within the promised timescales. Sky’s other allegations were not upheld.
• EDS had made negligent misrepresentations in relation to planning prior to entering into the contract variation and such misrepresentations had induced Sky to enter into the variation.
• Whilst the ‘Entire Agreement clause’ EDS sought to rely upon in its defence, was ineffective to exclude liability for negligent misrepresentation, TCC held its liability was subject to the overall contractual liability cap.
• EDS were held to be in breach of the initial contract; however these breaches were not of a repudiatory nature. EDS's liability for breach of contract was subject to the overall contractual liability cap.
• Sky had not failed to mitigate its losses by implementing the CRM itself.

Damages are still to be assessed; however the Court has ordered EDS to make an interim payment of £200 million. It is thought the final damages will be around £400 million.

The decision is likely to be appealed.

Implications

Understandably, this case has attracted a lot of attention within the IT industry. The sums of money involved are vast- legal fees alone are estimated at £70 million. However, it is hard to see how the facts and the circumstances of this case could be replicated in order to reproduce a decision like this.

Sky was resourceful in that it was able to produce documentary evidence that EDS’s representations at tender induced them to enter into the initial contract. Sky was also able to show that, had EDS not made such representations, it would have engaged the services of Pricewaterhouse Cooper.

In Court, Sky’s barrister was able to show that EDS’s Managing director (the man who made the representations to Sky at tender) had been dishonest about his MBA degree. It was discovered that he had not attended university, but had bought the degree online. Arguably this enabled Sky to establish EDS had been deceitful in its claims made at tender something which could not have been done otherwise.

Despite this, the case does serve to highlight two important areas which IT suppliers should not overlook:

1. Greater awareness of the methods employed by their workforce when tendering for work is needed (checks on qualifications senior staff purport to have could also prove invaluable!). Only considered and rational promises should be made to prospective customers in relation to, amongst other things, their costings and ability to deliver the product and/or services within timescales. If problems are encountered, an open and honest approach with customers, to effectively manage their expectations, may reduce the risk of litigation. EDS maintained to Sky throughout that progress was going according to plan, whilst internal memos demonstrated this was simply not the case.
2. A review of the “entire agreement clause” contained within standard terms and conditions should be undertaken. The clause needs to be drafted so that it will cover negligent misrepresentations. Case law has shown that such a clause will be upheld; however in EDS’s case, its clause was insufficient.

Customers should think about keeping a detailed record of their selection process including evidence which shows where reliance is made on statements made during pre-contractual discussions. They may also start to ask for evidence to support statements made during any tender process, in particular in relation to timescales for delivery.

If you have any questions in relation to fraudulent or negligent misrepresentations, or would like guidance on your “entire agreement” clause, please contact Sean Crotty, Partner in our Corporate team on 0151 242 6517 or sean.crotty@weightmans.com