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Case comment: BSkyB v. EDS [2010] EWHC 86 (TCC) case no:HT-06-311 26.01.2010

Helen Rose

Bristows, London, UK

Keywords:

BSkyB v. EDS

Fraudulent misrepresentation

IT systems contracts

0267-3649/$ e see front matter ª 2010 Bristodoi:10.1016/j.clsr.2010.03.008

a b s t r a c t

The Technology and Construction Court has issued its long-awaited decision in the epic

court battle between BSkyB and EDS. Mr Justice Ramsey found that EDS had fraudulently

induced Sky into a £54 million contract for a new customer relationship management

(CRM) system. Since judgment was given, EDS has been ordered to pay Sky £270 million in

damages and interest.

ª 2010 Bristows. Published by Elsevier Ltd. All rights reserved.

1. Background to the dispute persuaded on the basis of the plan to continue with EDS as

Sky’s CRM project was by no means unusual as an IT systems

development and integration project that ran into difficulties

over delays and everincreasing costs. It is more unusual in

that those disputes have rarely come to court. In its claim

against EDS, BSkyB sought over £700 million in damages and

alleged fraud, misrepresentation and breach of contract.

Below, the background to the disputes is summarised, and key

findings from the 468 page judgment are highlighted.

In 2000, Sky identified an urgent need to update its

customer relationship management system which had been

built up over a number of years. Sky was concerned about

the ability of the existing system to deal with an increasing

number of customers. A new, enhanced CRM system would

lead both to costs savings and to increased profits resulting

from a decline in the number of dissatisfied customers

leaving Sky.

Sky issued an Invitation to Tender for a contract to build

and implement a new “world class” contact centre for Sky and

to implement the new system in existing call centres.

Suppliers including EDS and PWC put in formal responses to

the ITT. After further commercial discussion EDSwas selected

as the preferred supplier. In November 2000, EDS entered into

a contract with Sky for delivery of the new CRM system to go

live 9 months later. Delays in implementation of the project

arose. EDS provided Sky with a “catch-up” plan and Sky was

ws. Published by Elsevie

systems integrator. In July 2001, the parties amended the

contract to reflect the new plan but further delays arose and,

as a result, Sky decided to take over EDS’s role as systems

integrator.

Ultimately, Sky provided the CRM system itself. The project

was completed 4 years late and more than £2 million over

budget. Sky claimed damages of over £709 million from EDS

2. The misrepresentation claims

Sky alleged that EDS had made various misrepresentations

that had induced Sky to enter into the contract with EDS for

delivery of the CRM system. Sky claimed that those false

statements were made fraudulently or, in the alternative,

that they were made negligently. Sky also alleged that, after

delays arose in delivery of the project, Sky was induced to

enter into an amendment to the contract by EDS’s negligent

misrepresentations.

Theallegationof fraud, as opposed tonegligence,wascrucial

because EDS’s liability for negligence under the contract was

capped at £30 million. In addition, an exclusion of certain cate-

gories of loss, including loss of anticipated savings and loss of

profits, applied to EDS’s liability for negligence. By contrast,

EDS’s liability for fraudulent misrepresentation was unlimited.

Indeed,onthebasisofexistingcase law, thesafestapproachisto

r Ltd. All rights reserved.

c om p u t e r l aw & s e c u r i t y r e v i ew 2 6 ( 2 0 1 0 ) 3 1 7e3 1 9318

draft on the basis that a clause purporting to exclude or limit

liability for fraud will not be enforced by the courts.

2.1. The fraudulent misrepresentation e “We can deliveron time.”

Mr Justice Ramsey found that there was an implied represen-

tation by EDS that it believed it could deliver the new CRM

systemon time andhad reasonable grounds for so believing.He

hadnodoubt that statementsmadebyEDS in its response Sky’s

ITT and in subsequent project plans amounted to representa-

tions by EDS that it held the opinion that it could achieve go-live

of the system by 31 July 2001. The response included references

to EDS providing the system “on time” and “within the required

timescales” and included project plans showing go live occur-

ring on 31 July 2001 or, after later revisions, on 6 August 2001.

Mr Justice Ramsey also found that EDS made an implied

representation that it had carried out a proper estimate of the

time required to complete the project and had reasonable

grounds for holding the opinion that go-live by the specified

date was achievable. In the context of the procurement

process, whereby Sky hadmade clear that ability to achieve go

live within 9 months was a requirement for selection, Sky

would reasonably have understood that the representations

made by EDS about ability to meet timescales were made on

the basis of proper estimates and on reasonable grounds.

In fact, key employee Joe Galloway, described by the court

as “the mastermind behind EDS’s Response to the ITT”, did

not believe that EDS could deliver on time, had made no

calculations supporting such a belief and had been told by

colleagues that the timescales could not be met. There were

no reasonable grounds for a statement that EDS believed it

could deliver on time, so that the implied representation that

there were such grounds was false.

Not only was the representation false, it was also made

dishonestly. Similar timescales submitted by other bidders for

different packages did not suggest to the court that EDS’s

estimate of timescales was honestly made. EDS’s case on

dishonesty was not helped by the fact that Joe Galloway was

found to have lied repeatedly in court about his qualifications

and to have forged emails supposedly sent to Sky, so that his

credibility as a witnesswas “completely destroyed”. Mr Justice

Ramsey found that Joe Galloway had approached the whole

question of time to achieve go live in a “cavalier fashion” and

had ignored the need for analysis. He had simply told Sky

what it wanted to hear with respect to timescales. Sky did not

realise that EDS had carried out no proper planning process

with respect to timescales and was induced to enter into the

contract by the fraudulent representations.

The successful claim in fraudmeant that the liability cap of

£30 million did not apply to Sky’s claims for losses suffered by

it as a result of having been induced to contract with EDS.

2.2. The negligent misrepresentation e “We can stilldeliver.”

Again, EDS was held impliedly to have represented that the

revised plan for completion of the project by July 2002

produced by it and provided to Sky was achievable and had

been the product of proper analysis and re-planning. Sky was

persuaded by that representation to enter into an agreement

amending the contract and settling existing claims for breach

of it. However, in this case, the misrepresentation was negli-

gently rather than dishonestly made. Therefore, the liability

cap in the prime contract operated to limit EDS’s liability.

2.3. The failed misrepresentation claims

The court rejected Sky’s other allegations of misrepresenta-

tions against EDS concerning costs, availability/skills of

resources, and the technology and methodologies to be used.

For example, the court found that there had been no misrep-

resentation by EDS as to cost because, in estimating a budget

of £54 million for the project in its tender documents, EDS had

carried out a proper analysis of the cost of completing the

project and therefore had reasonable grounds for holding the

opinion that it could and would deliver the project within that

budget. This contrasted with the position with respect to

estimates of time required to complete the project, where no

proper analysis had been carried out. It is interesting that the

court took a fairly relaxed view of the extent of analysis

required to be carried out as the basis for a reasonably held

opinion that a costs estimate could be met. Mr Justice Ramsey

acknowledged that the process was fairly informal and to

some extent necessarily took a “broad brush” approach but

rejected Sky’s submissions that a more detailed and rigorous

analysis of likely costs and resources required ought to have

been carried out.

3. Mitigation of losses

EDS alleged that Sky failed to act reasonably to mitigate its

losses. The parties’ IT experts agreed, and the court found that

therewas a large gap between the effort and time taken by Sky

to complete the CRM project and the effort and time that

would have been expended by a competent systems inte-

grator. However, the court found that Sky had acted reason-

ably in its conduct of the project and rejected the suggestion

that any difference between Sky’s performance and that of

a competent systems integrator would establish that Sky had

acted unreasonably. Neither did Sky act unreasonably in

choosing to prioritise initial implementation of a version of

the CRM systemwith less than the full expected functionality.

4. Liability to and of corporate groupmembers

It was decided that no duty of care should be imposed upon

EDS’s parent company (EDS Corporation) in favour of BSkyB or

its subsidiary (Sky Subscribers Services Limited (SSSL)), or

upon EDS Limited in favour of BSkyBwhichwould circumvent

or escape the contractual exclusions or limitations of liability

in place between the contracting parties, EDS Limited and

SSSL. The respective parent companies had been involved in

the bid process and Sky alleged that negligent misrepresen-

tations had been made by EDS Corporation to BSkyB.

However, the court decided that no duty of care on which

liability in negligence could be based arosewith respect to EDS

c om p u t e r l aw & s e c u r i t y r e v i ew 2 6 ( 2 0 1 0 ) 3 1 7e3 1 9 319

Corporation or in favour of BSkyB. The contractual structure

decided upon by the parties, with EDS Limited contracting

with SSSL to provide the system subject to agreed exclusions

and limitations of liability, prevented any such duty of care

arising which would circumvent those exclusions and

limitations. This result is a pragmatic one andwill be a relief to

contracting parties who may deal (before or after contracting)

with employees of various members of a group of companies

with little distinction being drawn between them.

5. Contractual interpretation issues

In deciding Sky’s claims, the court decided some points on

interpretation of the contracts which should be borne inmind

by those drafting IT systems contracts (or indeed any

contracts for services).

� The “entire agreement” clause in the prime contract did not

exclude EDS’s liability for negligent pre-contractual

misrepresentations. A statement that the contract “super-

seded all previous representations between the parties” did

not exclude liability for misrepresentations inducing a party

to enter into the contract in the first place. Neither did

a statement that the clause did not exclude liability for

fraudulent misrepresentation imply that the clause did

exclude liability for negligent misrepresentation. A clear

acknowledgement that the parties had not relied on any

representations when entering into the contract was

needed to exclude liability for negligentmisrepresentations.

The clause, as drafted, did not go far enough.

� EDS’s argument that an interim settlement which settled

then-existing claims for breach of contract had also settled

claims for misrepresentation was rejected. If the parties to

a settlement agreement mean to “wipe the slate clean” with

respect to all potential claims, they must make that inten-

tion clear.

� A Memorandum of Understanding marked ‘subject to

contract’ and signed by the parties was not a legally binding

agreement e the parties had clearly contemplated that

a revised contract would be entered into. Once Sky took over

as systems integrator, EDS and Sky proceeded on the basis

of the terms set out in the Memorandum but they did so “at

risk” pending execution of a binding agreement giving effect

to its terms. No such agreement was ever entered into but

the court held that this was because the commercial

impetus to agree and sign a revised contract was lost once

the Memorandum was in place. If any aspects of a letter of

intent or heads of terms or other document capturing

principles intended to form the basis of a future agreement

are intended to be legally binding (for example, confidenti-

ality provisions or interim payment terms) this should be

expressly stated in the document.

6. Conclusion

Before judgment, Sky’s claims for fraud had raised concerns

that the decision could lead to an increased “legalisation” of

tender processes. With the threat of unlimited liability for

fraudulent misrepresentations looming over them, suppliers

might take a defensive, overly cautious, attitude to submitting

bids. In turn, this attitude might lead to an increase in bid

costs which would be passed on to customers or even cause

a decline in the number of suppliers willing to bid for certain

contracts at all.

In the event, Sky’s claims for fraud succeeded where the

court found that no proper process had been gone through at

all to support the relevant statements made in a response to

ITT and the supplier knew that this was the case. The result is

not surprising and in its analysis the court took into account

the difficulties of providing completely accurate projections at

the bid stage where requirements are unclear. Therefore, the

likelihood of a drastic change in suppliers’ approaches to

bidding for work should not be over-estimated. Of course,

suppliers will need to take care when giving estimates of time,

costs and statements as to capability to deliver a project. Such

statementsmust be carefully considered,must be supportable

and the basis for them must be recorded.

The case acts as a reminder of the importance of care in

drafting exclusions and limitations of liability. Yes, EDS is

liable to pay Sky damages of over £200 million. But the

amount of that liability is attributable to the court’s finding

that EDS acted dishonestly. If Sky’s fraud claim had failed,

with EDS found liable only for negligent misrepresentation

and breach of contract, EDS would have succeeded in relying

on the limitations and exclusions of liability in the contract

such that its liability would have been capped at £30 million,

with liability for loss of profits and loss of anticipated savings

totally excluded. The gulf between the level of damages

obtained by Sky and that which would have been obtained

had the liability cap applied may encourage customers to

seek to achieve the same result without the burden of

proving fraud. Those customers in a strong negotiating

position may seek to include specific key representations in

their contracts and then to carve liability for breach of these

out of the cap. This approach would avoid the need to show

fraud in order to reach the result achieved by Sky in this case.

Helen Rose (helen.rose@bristows.com) Associate, Bristows,

London, UK.