Member Article

On 27 January 2010, the UK High Court (Technology and Construction) handed down its decision in the long running case of BSkyB v EDS. The decision by Ramsey J, although subject to potential appeal, could well become a landmark case affecting tenders, pitches and contracts for the provision of services.

In finding EDS liable on the grounds of (among other things) fraudulent misrepresentation committed during a tender process, the UK High Court has highlighted the need for service providers to be able to substantiate, or at least show they have made the effort to substantiate, representations made to customers in the course of pitching for jobs or pre-contractual discussions. As this decision shows, the result of a failure to do so could be disastrous.

While this decision is not directly applicable in Australia (and indeed turns on its particular facts), it nevertheless contains some salutary lessons for service providers (and their lawyers) in their pursuit of tender successes. Australian service providers should take note, however: in Australia it is likely that similar principles apply, both at common law and in statute.

The dispute

The dispute concerned the failed implementation by EDS of a new customer relationship management (CRM) system for use in BSkyB’s Scottish call centres.

In 2000, BSkyB ran a tender process for the provision of services to design, implement and manage its CRM. EDS emerged as the successful tenderer, following representations made by EDS regarding its ability to deliver the project in terms of timeframe (‘go live’ within 9 months, completion within 18 months), cost and skills. Subsequently, a contract was entered into between BSkyB and EDS to supply the CRM.

The implementation of the project did not go well. By 2001, key deadlines had been missed and the project had, essentially, fallen off the rails. The parties attempted to rectify the situation through various means, including through re-planning delivery of the project and signing a 'Letter of Agreement' to supersede the primary contract. This was to no avail: in early 2002 BSkyB severed its relationship with EDS and completed the project in house (at a reported cost of £265m).

Litigation ensued, in which BSkyB made claims of, among other things, deceit (fraudulent misrepresentation), negligent misstatement and breach of contract in relation to the way EDS won and executed the project. BSkyB claimed damages in the vicinity of £700m. For its part, EDS counterclaimed that it had terminated the contract for failure by BSkyB to pay its invoices.

The level of damages claimed by BSkyB is noteworthy, as it is well in excess of the £30m limitation of liability stipulated in the Letter of Agreement between the parties. The Letter of Agreement was also entered into on terms which purported to settle 'all known claims and unknown claims' between the parties.

The matter progressed to multiple hearings in the High Court, the last of which took place 18 months ago, before judgment was received last week.

The judgment

Despite EDS arguing that the project was derailed by the inherent risks in an IT project of this nature and of BSkyB’s ‘vague and shifting requirements’, Ramsey J held that EDS was liable for fraudulent misrepresentation, negligent misstatement, and breach of contract.

The negligent misstatement related to EDS’ failure to carry out a proper analysis and re-planning exercise during the 'Letter of Agreement' phase, while breach of contract was found on a number of grounds, including for EDS not acting with reasonable care and skill.

The most significant finding, however, was of fraudulent misrepresentation, which arose as a result of statements made by an EDS employee during the tender process. This was the only allegation of fraudulent misrepresentation against EDS that was successfully made out.

A claim of fraudulent misrepresentation requires the claimant to satisfy a relatively high burden of proof – demonstration of mere carelessness is not sufficient. BSkyB had to establish that: (i) EDS knew the representation was untrue, or was reckless as to whether it was true; and (ii) EDS intended that BSkyB rely on the representation. It also had to establish that it relied on the representation to its detriment.

In this case, the EDS employee was found to have fraudulently misrepresented that he had conducted an appropriate assessment of ‘the time needed to complete the initial delivery and ‘go-live’’, when in fact these were made without any ‘proper analysis’. Further, the court found that the conduct of the EDS employee ‘went beyond carelessness or gross carelessness and was dishonest’, a finding no doubt influenced by the EDS employee being discredited in court when he was exposed as having committed perjury in his statements regarding his academic qualifications (highlighted when BSkyB’s barrister managed to arrange for his dog to receive similar qualifications!).

Importantly, the court held that it was on the basis of the EDS employee’s ‘serious’ misrepresentations that EDS was awarded the tender to the exclusion of other tenderers (raising an interesting, though unresolved, question as to the remedies available to unsuccessful tenderers in these circumstances).

The significance of a finding of fraudulent misrepresentation is that, for BSkyB, this circumvented the £30m limitation of liability provision in the Letter of Agreement. Indeed, the contractual limitation of liability was found to be restricted to contractual and negligent misrepresentation claims; it did not apply in circumstances where a misrepresentation was fraudulently made (a tortious claim).

Perhaps one of the most interesting parts of the decision was EDS’ inability to rely on provisions of the Letter of Agreement which was agreed "in full and final settlement of all known claims…and all unknown claims…". EDS claimed that the Letter of Agreement impliedly settled "all complaints which could have been advanced on the basis of breach of contract". This was said to have included claims for misrepresentation, which, if they were established, would also amount to breach of certain warranties under the contract.

The court found that the Letter of Agreement excluded claims for breaches of the original contract, but not for "all known claims and all unknown claims" outside the contract. This meant the tortious claims for fraudulent or negligent pre-contractual misrepresentations were not excluded.

In fact, EDS made several attempts to exclude or limit liability. In addition to seeking to rely on the £30m cap, it sought to rely on an entire agreement clause to avoid liability for negligent misrepresentation. The clause stated that the contract will "represent the entire understanding and constitute the whole agreement between the parties in relation to its subject matter and supersede any previous discussions, correspondence, representations or agreement between the parties…". However, the court agreed with BSkyB’s contention that those words merely meant that pre-contractual representations did not form part of the contact, not that they never existed. Therefore, the clause did not prevent BSkyB’s claim.

Whilst further hearings in relation to damages are yet to occur (and EDS, now owned by HP, has indicated its likelihood to appeal), estimates believe damages could reach £200m.

Australian position

In Australia, it is likely that a similar finding would have been arrived at, albeit through different means.

Specifically, under section 52 of the Trade Practices Act (TPA), a corporation is prohibited from ‘in trade or commerce engaging in conduct that is misleading or deceptive or likely to mislead or deceive'. It is well established in Australia that representations made during pre-contractual negotiations can amount to misleading or deceptive conduct (see, for example, Unisys Australia v RACV Insurance Pty Ltd and RACV Group Services Pty Ltd [2004] VSCA 81), provided, of course, that the necessary elements of a section 52 claim are met.

Notably, a claim under section 52 of the TPA is unable to be restricted, excluded or limited by agreement between the parties.

Even if an action under section 52 of the TPA could not be made out, common law claims for fraudulent or negligent misrepresentation could still be pursued, as they were in the UK.

Implications

While the decision in BSkyB v EDS does not materially change or update the existing law (in particular in relation to misrepresentation), it nevertheless contains some important reminders for service providers and lawyers alike. It also highlights the dim view courts take of fraudulent or deceitful behaviour.

Lawyers are once again reminded of the care which needs to be taken in drafting limitation and exclusion clauses. They are often the most heavily negotiated parts of a contract and it is important that the provisions actually reflect the agreed position. Although liability for deceit in this case could not have been avoided, no matter how accurate the drafting.

For service providers, this decision has been anticipated with some trepidation, and highlights the fine line that must be trodden in promoting one’s wares while pitching for jobs. Above all else, a key lesson to be taken from this case is that, during tender processes, service providers should ensure they do not exaggerate their capabilities and should conduct thorough, documented assessments of prospective delivery timing before making any representations. Reliance on the inherent risks in IT projects is unlikely to be sufficient in the event that a service provider is abjectly unable to substantiate its representations. Statements which have in the past been dismissed as "things said by the sales guys", may take on new significance.

Furthermore, given the untold damage one individual’s dishonesty will (subject to appeal) cause to EDS, it highlights the crucial importance for service providers to select appropriate and responsible ‘mouthpieces’ for their organisation during tender processes, and carefully examine the way in which they are motivated and compensated. Such a person must be made aware of the potential consequences of making representations without substance, and on which a customer relies.

Ultimately, it remains to be seen whether this case will radically affect the behaviour of sales teams as a whole (as some commentators have suggested), but one would assume it will make service providers at least think twice before making promises they will find hard to keep.