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12 Apr 2010

BSkyB v EDS - unrealistic sales promises could cost EDS ₤200M

by Simon Newcomb, Andrew Hynd

A supplier's unrealistic sales promises in an IT procurement could cost it more than ₤200M.

A major battle over a failed IT implementation in the UK highlights the need for customers such as Government to evaluate a supplier's claims properly and assess potential exposures if they turn out to be false. The judgment in BSkyB Limited v HP Enterprise Services UK Limited [2010] EWHC 86 (TCC) may result in a damages award of over ₤200 million despite a liability cap in the contract of only ₤30 million.

The implementation that led to litigation

British Sky Broadcasting and Sky Subscribers Services Limited (Sky) called for tenders in March 2000 to provide a new customer relationship management (CRM) system.

Electronic Data Systems Limited (EDS) bid for the project. During the tender process, Joe Galloway, the Managing Director of the EDS regional CRM group, made confident claims about the ability of EDS to achieve go-live in nine months, completion within 18 months and that the new system would be provided on time and on budget. Sky and EDS then entered into a contract in August 2000 for EDS to provide the CRM system.

The project ran into significant difficulties, costs and delays. There were several attempts to save the project, including a letter of agreement in July 2001 varying the terms of the contract. However, these attempts ultimately proved unsuccessful.

Sky subsequently took over EDS' role on the project in early 2002 and completed the job in-house by early 2006.

EDS liable on several grounds

Sky successfully sued EDS for breach of contract, negligent misstatement and fraudulent misrepresentation.

Breach of contract was made out on the basis that EDS failed to meet the contracted milestones and provide sufficient resources.

Negligent misstatement was found in EDS' representations made prior to the letter of agreement that EDS had developed an achievable plan to rescue the project which had been the product of proper analysis and re-planning. In fact, no such analysis or re-planning had actually taken place.

There were also fraudulent misrepresentations in EDS' claims that it had carried out a proper analysis of the time required to complete the initial delivery and go-live of the system. In fact, Galloway "was aware that no proper attempt had been made" and instead "proffered timescales which he thought were those which Sky desired, without having a reasonable basis for doing so". Justice Ramsey found that Galloway's "conduct went beyond carelessness or gross carelessness and was dishonest".

Sky dodged the liability cap

The contract contained a limitation clause which capped the liability of EDS at ₤30 million. Sky needed to get around this if it was going to win its claim for much more than that - initially, over ₤700 million.

Firstly, Sky argued that the cap did not apply to its negligence claim because the limitation clause was only binding on the specific Sky and EDS subsidiaries who entered the contract. Sky claimed that the company group structures of both parties meant that there were duties owed by and to entities that weren't bound by the contract. The court disagreed and said that no duty of care could be imposed upon EDS to permit Sky to escape the limitation clause.

Secondly, Sky also ran and won its case on fraudulent misrepresentation. Under the common law it is not possible to exclude liability for fraud. So, this meant that EDS had unlimited liability for its deceit.

More lies (and Lulu) destroyed Galloway

A critical part of EDS' defence was Galloway's evidence . The tactics of the Sky legal team in setting a trap to discredit him were amongst the more interesting aspects of the case.

Galloway had claimed to hold an MBA from Concordia College on St John Island in the US Virgin Islands. Sky's lawyers questioned Galloway extensively about this during the trial and he responded in great detail about it. He testified about physically attending the college (which he described), the project which required being based at Coca Cola's St John office and his flights between islands.

All of that the Sky team knew to be completely false - neither a college, nor any Coca Cola office, ever existed on St John, and the islands Galloway claimed to have flown between were 2 kilometres apart and one did not even have a runway. After the set-up, the Sky team revealed that Galloway was lying and that in reality he had purchased his MBA online from the Concordia College website. Sky's lead counsel even produced an MBA identical to Galloway's, which he had purchased for his dog Lulu (only with slightly higher marks than Galloway).

This severely damaged EDS' case, as the credibility of a key witness was "completely destroyed by his perjured evidence over a prolonged period". Justice Ramsay found that Galloway had a "propensity to be dishonest whenever he sees it in his interest, in his business dealings".

Damages

The damages have yet to be finally determined. However, the principles for calculating them were discussed in the case.

Again, the most significant damages related to the fraudulent misrepresentation claim. The approach for calculating these starts with working out what scenario would have unfolded "but for" the deceit. So, if EDS had not made the representations, Sky would have selected Pricewaterhouse Coopers (PwC) instead.

Then, the damages are the lost benefits and extra costs in what actually happened compared to what would have happened in that alternate scenario. Here, that included lost business benefits between PwC's expected completion date and Sky's actual completion date and Sky's additional in-house implementation costs.

Also, for fraudulent misrepresentation, the damages extend to all actual damages directly flowing from the deceit and are not limited to those which are reasonably foreseeable.

Sky now estimates that its damages are at least ₤200 million. HP (the current owner of EDS) has announced its intention to appeal.

Lessons from the case

Although the law in Australia is different, the case still contains some valuable lessons.

For Government purchasers, the case demonstrates the importance of documenting all important sales promises. Promises that induce a customer to award a contract are not obligation free - the reality is they don't get swept away when the formal contract is signed but can ultimately have legal consequences that a customer can use.

Both sides should carry out a proper evaluation to gain a clear picture of what the project actually requires and the supplier's capability to deliver.

Promises which influence the evaluation should be incorporated into the contract. That will usually be much easier to rely on later than digging up statements made in a tender process.

The customer should properly understand and negotiate its potential exposure in the contract to avoid being in Sky's position of looking down the barrel of a completely inadequate liability cap. While Sky ultimately achieved a good result in the case, it may have been lucky to avoid the liability cap by proving that its supplier had lied - something that will often be hard to do.

For Government procurement, this also means complying with relevant procurement guidelines which deal with carrying out tender evaluations, documenting specifications and assessing and allocating risk.

The case is also a lesson for customers finding themselves with failed project on their hands - to consider not only the contract but also how they got there in the first place. In Australia, there is also section 52 of the Trade Practices Act which covers misleading and deceptive representations made in the course of trade or commerce. It gives another angle of attack for customers - for example, it was used successfully in a high-profile Australian case by RACV against Unisys over misleading claims made in an IT procurement process.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.