Legal Briefing

Death of the salesman? Implications of a landmark ruling

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Technology, Media and Telecoms | 01 March 2010

On 26 January, Ramsey J handed down a 468-page judgment in BSkyB Ltd & anor v HP Enterprise Services UK Ltd (formerly Electronic Data Systems (EDS) Ltd) & anor (Rev 1) [2010]. The decision, awaited since July 2008, saw Ramsey J uphold (in part) BSkyB’s claim that EDS had won the contract to supply BSkyB’s new customer relationship management (CRM) system by mis-selling its capabilities. HP, which took over EDS, has allegedly been ordered to pay £200m in interim damages, although the company is reported to be seeking leave to appeal.

Background

Following a competitive tender process in 2000, EDS was selected by BSkyB to design, build, manage, implement and integrate BSkyB’s CRM system, an essential part of its contact centre dealings with its customers. The new CRM system was to be implemented as a replacement for legacy systems and technology, delivering business benefits to BSkyB, including the potential to reduce customer churn rates.

A letter of intent between BSkyB and EDS was signed on 9 August 2000 so that work could start in advance of the finalisation of the main agreement, with a view to achieving a ‘new contact centre live’ by April 2001. During September and October 2000, there were revisions to the scope in light of increased project costs, and EDS provided a revised programme showing that it could ‘go live’ in July or August 2001. On 30 November 2000, the parties signed the prime systems integration contract (the prime contract), which included a baseline budget of around £48m and a key ‘go live’ milestone of 31 July 2001 for part of the CRM system.

The performance of the prime contract did not go as anticipated and, in July 2001, BSkyB and EDS signed an agreement amending its terms. The project ran into further difficulties, with the first major phase being completed behind schedule. After further negotiations, BSkyB took over from EDS as systems integrator on 6 March 2002.

BSkyB contended that the CRM system was only complete and functional by March 2006, at a cost of approximately £265m. At the commencement of the hearing, BSkyB’s claim for damages stood at £709m, which included claims for costs, and lost business benefits and profits.

Legal Issues

BSkyB’s claims can be split into three broad categories:

  1. fraudulent misrepresentation/deceit;
  2. negligent misrepresentation; and
  3. breach of contract.

Ramsey J’s judgment provides a very useful summary of the legal principles applicable to the first two categories. It also covers a range of other issues relevant to lawyers working in the IT or general contract fields, including detailed construction of exclusion, limitation and entire agreement clauses, and an analysis of the ‘subject to contract’ rule. There is not space to deal with these points here but we will comment on some of them in future briefings.

Commercially, the key issue in BSkyB pertained to the judge’s findings in relation to deceit, ie whether EDS made a fraudulent misrepresentation that BSkyB relied on. A fraudulent misrepresentation is, in short, a representation that is made by a person who knows it is untrue or is reckless as to its truth. It was accepted that if deceit was shown, the limitation and exclusion clauses in the prime contract (which contained both a limit on liability to a maximum of £30m and typical exclusions, both for indirect and consequential loss, and for ‘loss of profits, revenue, business, goodwill and/or anticipated savings’) would not protect EDS from losses arising as a result of deceit.

BSkyB’s Allegations and the Judgment

BSkyB alleged that EDS knowingly made various fraudulent misrepresentations to induce it to enter into the contract, including in relation to cost, resources and timing.

Misrepresentation of cost

BSkyB claimed that EDS had represented that a proper estimate of the costs to be incurred had been made in relation to the baseline budget. EDS maintained that no express representation as to the effect of the budget had been made and that none could be implied.

Ramsay J agreed with EDS, finding that the way in which the baseline budget was incorporated into the contract strongly indicated that EDS was not representing that it could or would deliver the project within budget. Ramsey J added that he was not persuaded that the budget was not prepared on a proper basis and it could not be implied that EDS held, or had reasonable grounds to hold, an opinion that they would deliver the project within budget.

Misrepresentation of resources

BSkyB claimed several misrepresentations in relation to resources, both in terms of availability and readiness to start the project, and in terms of skills and experience. Ramsay J did not support these claims, finding that either no representation had been made or, for those representations that had been made, that EDS had reasonable grounds for doing so or that there was no material breach of such representations.

Misrepresentation of timing

However, BSkyB did succeed in its claim that EDS falsely represented ‘that they had carried out a proper analysis of the amount of elapsed time needed to complete initial delivery and ‘go live’ of the contact centre’, both in EDS’ response to BSkyB’s invitation to tender and in correspondence from the EDS sales lead (Joe Galloway), which BSkyB relied on in selecting EDS.

Having found this representation to be false, Ramsay J turned to consider the knowledge and intent of the EDS personnel involved, asking if they were dishonest, negligent or innocent? In the main, Ramsey J found most of EDS’ key witnesses to be ‘generally honest’, but was highly critical of Joe Galloway, who led the sales process and was found, during the case, to have dishonestly covered up the fact that his degree was fake, to have forged e-mails, and to have generally lied and acted dishonestly. Although Ramsay J stated that care must be taken not to assume that dishonesty, in itself, establishes deceit, the lack of Galloway’s credibility proved to be crucial in the outcome of the misrepresentation claims.

Ramsay J commented:

‘I am driven to the conclusion that he [Galloway] proffered timescales, which he thought were those that BSkyB desired, without having a reasonable basis for doing so and knowing that to be the position.’

He added that Galloway’s conduct ‘went beyond carelessness or gross carelessness and was dishonest’, and that Galloway’s aim was to win the CRM project and to use that for his own advancement within EDS.

Ramsay J accordingly concluded that EDS did make misrepresentations that proper processes had been followed in arriving at timescales and that these representations were based on deceit by Galloway, who knew that they were not true. Further, Ramsey J found that EDS had intended for BSkyB to rely on these representations, which BSkyB did when they selected EDS. EDS’ position in relation to this was weakened by the evidence that its own contract review team had come to the conclusion that the project could not be delivered in the timescale that had been represented to BSkyB.

Other findings

Ramsey J also found in favour of BSkyB in its claim for negligent misrepresentation where EDS had developed an achievable plan that had been the product of proper analysis and re-planning. While it may be expected that any damages for this are excluded by a properly drafted entire agreement clause, Ramsay J’s analysis was that the entire agreement clause in the prime contract did not exclude liability for negligent misrepresentation, despite stating that any previous representations were superseded. This shows the need for very careful and technical drafting in what may appear to be a boilerplate clause.

Damages for the successful claims for negligent misrepresentation, and for other, established, breaches of contract, were subject to the exclusion and limitation clauses in the contract. However, no such exclusion or limitation would apply to the damages assessed for the fraudulent misrepresentations held to have been made by EDS. This opens up various areas of damage, some of which run into hundreds of millions of pounds.

Comment

While BSkyB does not significantly change current law, by establishing fraud in connection with the sales process for a major technology transaction for the first time, it does contain a salutary lesson. Its findings also demonstrate the critical importance of achieving clear and technically correct contract drafting of clauses relating to liability.

BSkyB has already prompted fierce debate among the IT supplier community because it highlights some of the familiar risks associated with bidding for contracts in the competitive IT services industry when faced with customers who have high expectations. However, the outcome has implications for all organisations in the business of supplying products and services. Suppliers must appreciate the risks posed by over-enthusiastic sales teams and recognise that the actions of a single individual can defeat the key contractual protections that they rely on in their contracting arrangements.

In practice, what customers are told throughout the sale process, whether in writing or orally, will need to be closely policed. Where, prior to contracting, a supplier does find that representations have been made that are not properly supportable, it would be well advised to ‘come clean’ with the potential customer. It must be better to face embarrassment and the loss of a deal than to enter into an agreement that it is unlikely to perform as represented, and for which it may be exposed to potentially unlimited damages.