Technology Transactions and Outsourcing
A long-awaited judgment by an English court could have significant implications for the IT industry, both in the United Kingdom and globally. It also shows where to go if you want to get your dog an MBA.
In finding that the initial sales process which led to a significant IT services contract involved elements of deceit, the court opened up the service provider to a huge damages exposure, way beyond the value of the contract. In the future, customers of unsuccessful IT projects may be encouraged to seek similar remedies – and IT service providers on projects partly or wholly delivered in the UK will be wary of conduct which might lead to similar massive liabilities.
On 26 January 2010 – and after a wait of 18 months since the trial ended – the English High Court has finally ruled on the complex, long-running dispute arising out of an IT services contract between satellite broadcaster BSkyB and global IT contractor EDS (which is now part of HP). In addition to “ordinary” breaches of contract by EDS, the Court found EDS liable for a deceitful misrepresentation which induced BSkyB to contract with it, exposing EDS to potentially unlimited liability. Damages claimed were originally over £700 million (US$1 billion) although more recent estimates suggest that the figure may be closer to a minimum of £200 million (US$325 million).
The case, the first IT dispute in the UK in which deceit of this sort has been established, has potentially wide-ranging consequences for the IT and outsourcing services industry in the UK – although the effects could well be felt globally if the large multinational service providers react by adjusting their approach to the contract sales process across their entire operation. In particular, the case will affect the way in which service providers take their services to market and run bids, addressing as it does the circumstances in which: (a) a service provider can be held to account for its pre-contract sales pitches; and (b) service providers can rely on, or customers overturn, contractual limitation of liability clauses.
The dispute originated in 2000 when EDS won a £48 million contract to provide BSkyB with a new customer relationship management (CRM) system. Unfortunately, the project soon ran into trouble and, in 2002, BSkyB brought a claim against EDS alleging that, during the tender stage, EDS had misrepresented its ability to deliver the project. BSkyB said that, were it not for EDS’s misrepresentation, BSkyB would have awarded the contract to PwC instead of EDS. EDS countered by arguing that BSkyB had no clear idea of what it wanted from the project and had continually altered its requirements, resulting in delays and other problems (all of which are completely standard defences in claims under IT contracts).
BSkyB claimed damages of over £700 million, an amount far in excess of the maximum exposure that EDS might have contemplated on entering the contract. While the contract capped EDS’s liability at a maximum of £30 million, BSkyB alleged that the misrepresentations made by EDS were deceitful (as EDS had made the representations knowing they were false or at least being reckless as to their truth) and, as a result, the contractual liability cap did not apply.
Although the court rejected certain of BSkyB’s allegations of misrepresentation (including as to EDS’s costing of the project and capability), it found that EDS was deceitful, firstly, when it claimed that it had carried out a proper analysis of the time needed to complete the initial delivery and go-live and, secondly, when it claimed that it held (on reasonable grounds) the opinion that it could and would deliver the project within the promised timescales. The court found that these representations were made dishonestly by EDS’s CRM Manager, who knew that there had not been the “proper analysis” and that there weren’t “reasonable grounds” for the opinion that the work would be completed on time but who nonetheless made the claims.
BSkyB successfully proved that EDS breached the contract – and the court held in its favour in relation to contract damages up to the liability cap. It also proved that liability for negligent misrepresentations outside the contract were not properly excluded by the contract, but those again were subject to the liability cap.
Key to this case though is the fact that BSkyB successfully proved one deceitful pre-contract misrepresentation by EDS and it is that which blew away the contract liability cap, which everybody agreed could not apply when lies were told.
It’s also important that proof of pre-contract deceit rendered redundant (for the purpose of that particular head of claim, at least) issues as to whether BSkyB had brought the project failure upon itself by not delivering on its obligations or by changing its requirements.
The case itself is notable for the fact that judgment came in 2010, 10 years after the original contract. The trial lasted for 110 days, involved 500,000 documents and 70 witnesses. Even the judgment is almost 500 pages and 2,500 paragraphs long. Legal fees are estimated at over £70 million. And, of course, with so much riding on the outcome, an appeal is likely. It illustrates why disputes in big technology contracts/projects rarely come to trial but, when they do, the issues can be very complex to deal with.
While the size of BSkyB’s claim may have grabbed the headlines, it is the finding of deceit that will have the most far-reaching impact and may force changes to the IT services market. In an industry in which sales have always been the yardstick of success, where promises are made to clinch a deal and then worried about afterwards, in which the concept of “time” has always been taken with a pinch of salt and delays on both sides treated as the norm (and sometimes even relied on), the threat of potentially unlimited liability may force greater bid scrutiny. In particular:
A Note of Caution
This case has been long awaited and expectations have built up about it. The result is the one which the IT services industry feared most. Unless overturned on appeal, the case certainly deserves its “landmark” tag. But let’s not get carried away by the huge numbers and the Enron-like thrill of a case turning on allegations of dishonesty.
The court hasn’t created new law here – it has merely applied existing principles of English law. BSkyB was bold (in pursuing both the “normal” breach of contract claim and the more aggressive deceit claim); lucky (not everyone will have a Perry Mason moment and destroy the credibility of a key witness by proving that he committed sustained perjury); rich (to be able to gamble an estimated £40 million in fees to pursue its claim); and resourceful (to be able to come up with evidence that showed EDS’s deceit and that the contract would have gone elsewhere but for that deceit).
Few wronged customers on IT contracts will be in the same boat – although others may try. Most customers will stick to the simpler task of proving a breach of contract – although even that’s not easy in a complex IT project with inter-twined responsibilities. It will remain a rare event to go for – and win, as BSkyB has done – the icing on the cake of a liability cap-busting deceit claim.
And, of course, although the court’s judgment has now been handed down, it will not be the end of the story, with HP (which now owns EDS) having said already that it will seek permission to appeal which is unsurprising given that it has already invested so much into the case (not least an estimated combined £70 million in legal fees). Another hearing is due in February 2010 to begin the process of assessing the exact amount of damages due.
But, even so, although new law may not have been created, this case does represent a milestone and, in the future, a service provider may be less inclined to put its money where its mouth is if it isn’t sure that it’s making a safe bet.
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