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, will become a landmark case affecting tenders, pitches and contracts for the provision of services, at least until the Court of Appeal provide their guidance.    Ramsey J found EDS liable on the grounds (among other things) that fraudulent misrepresentation was committed during a tender process.

The UK High Court has thus 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.

The Contract

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 with a purported £30M limitation of liability in the Letter of Agreement between the Parties. This Letter was also written on a "covering all known claims and unknown claims between the parties" basis.

By the time the Prime Contract was signed, Sky’s intention to introduce a new state of the art system within 12 months was already unachievable, so to achieve this timetables the project used a rapid application development methodology, working in parallel and with phased delivery.

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 Contract , 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.

Findings
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.

Negligent Misstatement:
The Court found that EDS failed to carry out a proper analysis and re-planning exercise during the 'Letter of Agreement' phase.

Negligent Misstatement arises where a statement is made in pre-contract negotiations where the party making it believes it is true, but it is negligent in holding that belief (i.e. it ought to have realized that the statement was false). For small companies, this will be almost impossible to plead given the tests. The Claimant needs to be able to show that

(i) it relied on the negligent misstatement in entering into the contract; and

(ii) there was a particular relationship between the parties which gave rise to the defendant having a “duty of care” to the claimant.

When looking at whether there is a “duty of care” the court looks at all the circumstances, including the terms of the contract that the parties entered into and any obligation of good faith.

The judge held that there was nothing in the entire agreement clause per se which would prevent a duty of care arising and thus BSkyB bringing a claim for both negligent and fraudulent misstatement.

If the contract contains any clauses that are inconsistent with there being a “duty of care” relationship between the parties, this is likely to provide a defence for the supplier against a claim for negligent misrepresentation, although such a claim will still be subject to any liability cap.

The Supplier has and will ensure that, at all times, it has reserved and will utilize personnel with the necessary skill and
expertise necessary  for the project in order to meet the specification and timetable.

EDS emailed BSkyB, stating that that EDS was “ready to start this project as of Monday 17 July” and that EDS had “resources reserved for this project; in fact we have picked up some additional high level resources that you have worked with previously. These folks come with great experience of these types and size of project”.

BSkyB alleged that it entered into the contract in reliance on those statements and that EDS was ready to start work with available resources as soon as BSkyB said Go!. EDS argued that it had simply meant that the resources were potentially available should the project go ahead but lost that argument and the Judge agreed with EDS but only because of the express use of the word "ready to start". Had the e-mail stated we're ready for the contract, it is likely that the decision could have gone the other way.

Breach of Contract:
Found on a number of grounds, including for EDS not acting with reasonable care and skill.

Fraudulent misrepresentation:
Arose as a result of statements made by an EDS employee during the tender process. It requires the claimant to satisfy a relatively high burden of proof 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.
(iii) EDS did in fact rely 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’.

Woof! Woof!
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!). Certain Temple rumours have circulated suggesting that the barrister did consider arranging for the judge to receive similar qualifications, but wisely decided to use his dog.

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.

It is now interesting, although unresolved, to consider whether the unsuccessful tendereds may now have a cause of action in these circumstances.


Once a finding of fraudulent misrepresentation arose, this circumvented the £30m limitation of liability provision in the Letter of Agreement.

The Court also found that

• the contractual limitation of liability was restricted to contractual and negligent misrepresentation claims.
• EDS could not rely on provisions of the Letter of Agreement as "in full and final settlement of all known claims…and all unknown claims…" and only excluded claims for breaches of the original contract, not for "all known claims and all unknown claims" outside the contract which meant that the tortious claims for fraudulent or negligent pre-contractual misrepresentations were not excluded.

This Agreement represents 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…"

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; 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.

Further hearings in relation to damages are yet to occur and estimates believe damages could reach record levels.

The trial took over 10 months (109 days) involving thousands of documents and it  took the court 18 months to prepare the 500 page judgment..........
And it’s not over yet as EDS are planning to appeal.

One thing is for sure .............It will be be one of the most expensive pieces of litigation ever conducted.