BskyB v EDS - "Wanna buy a used computer system?" (1)

After a lengthy wait, Mr Justice Ramsey handed down judgment in BSkyB v EDS (2), a case which has turned out to be one of the most significant cases in recent years not only in IT law, but also in commercial law. The scale of the case was quite staggering. The case in court started on 15 October 2007 and only ended on 30 July 2008. Judgment was only handed down some 18 months after that. Everything about this case is big - not only the judgment, running to 468 pages, but the claim itself was for damages of some £700,000,000. Following judgment, the judge ordered payment of interim damages of around £270,000,000. In the end, the matter is said to have been settled by the payment by EDS to BSkyB of some £318,000,000. Legal costs of both parties are said to be in the order of £70,000,000.

This note looks at this momentous judgment and - just as importantly - sets out what we can learn from it in terms of steps people can take now.

Facts

Matters went back to 2000 when, in March, BSkyB asked EDS (and others) to tender for the provision of a new customer relationship management system. BSkyB had announced this project to the City as a major new initiative, and requirements and deadlines were tight: go-live with the first phase was to be achieved within 9 months and the full system had to be implemented in 18 months. Following a period of negotiation around the tender proposal, the contract worth £48,000,000 was awarded to EDS and work began in earnest.

Problems soon emerged and in July 2001 the parties entered into a letter variation agreement changing the original agreement. The variation gave EDS more time while providing that BSkyB would have to accept some of the costs. Problems continued, however, so BSkyB took over the responsibility for implementing the system in March 2002. The system was not finally completed until March 2006. It had by then cost £265,000,000 i.e. more than five times the value of the original contract.

The proceedings

The claim as put was for around £700,000,000 and made a large number of allegations. Chiefly, these included claims that:

• EDS fraudulently represented prior to the original contract its capabilities as regards resources, costs and the time required to complete, as well as concerning the available technology and suitable methodologies
• EDS negligently represented prior to the letter variation agreement that it had assessed what steps it needed to take to develop and implement an achievable plan to complete the whole project
• EDS breached various detailed provisions in the original contract regarding the duty to provide suitably skilled and experienced staff, failing to comply with the provisions of the original contract as regards the time and manner of providing its services, and had not performed its obligations with reasonable skill or care
• EDS by so acting had committed a repudiatory breach of the original contract entitling BSkyB to terminate it

EDS fully defended the allegations and made allegations against BSkyB in turn, effectively accusing BSkyB of not understanding its requirements and changing requirements constantly, leading to delays in the project while the implications of the changes were being worked out.

EDS denied making the representations as alleged by BSkyB and also said that the statements as alleged by BSkyB could not in law stand as misrepresentations. EDS also relied on certain provisions in the original contract:

• The "entire agreement" clause provided that the original contractual provisions were 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 with respect thereto notwithstanding the existence of any provision of any such prior agreement that any rights or provisions of such prior agreement shall survive its termination. ... This clause does not exclude liability of either party for fraudulent misrepresentation."
• A limitation of liability provision in the original contract also provided that EDS' liability was limited to some £30,000,000

By way of background, it should be noted that liability for fraudulent misrepresentation cannot be limited in a contract: while the contract stated this explicitly, the general law would not allow a party to limit or exclude its liability for such a cause of action. Another point of note is that damages for fraud are not calculated in the same way as "ordinary" damages, being more generous in favour of the claimant: the normal rules of foreseeability are dispensed with, and a claimant claiming for fraudulent misrepresentation can claim for all losses flowing from reliance on the fraud, regardless of whether they were foreseeable or not.

It is this aspect of the law that made the case so significant: damages for fraud always stood to be higher than non-fraud damages - and no limitation or exclusion of liability could do anything about it.

The judgment

By no means was BSkyB successful on every aspect of its case, but it was successful on the major elements of the claim as follows:

• EDS fraudulently misrepresented to BSkyB before the original contract the time within which the project could be completed
• EDS negligently misrepresented to BSkyB prior to the letter variation agreement that it had an achievable plan to finish the project
• When it came to the entire agreement clause, it could not, of course, affect the successful claim in fraud but the judge held that its precise words were not effective to exclude liability for negligent misrepresentation either
• However, the judge found that the limitation of liability contained in the original contract was effective to limit liability for negligent (as opposed to fraudulent) misrepresentation
• The judge also found that EDS had been in breach of the original agreement, but not in a way that was repudiatory i.e. EDS was not so badly in breach that BSkyB was entitled to terminate the agreement
• However, the limitation of liability in the original contract was effective to limit EDS's liability for these breaches of contract.

We will look at these elements in turn, setting out some more of the detail as found by the judge.

Fraudulent misrepresentation as to time

The original invitation to tender made it clear (as invitations commonly do) that time and cost were important factors in the selection of the ultimate supplier. EDS made representations as to the time within which the project could be accomplished, and thereby represented to BSkyB that they had undertaken a proper analysis of the tasks to be done and had reasonable grounds for believing that the project could be carried out in the timescales required by BSkyB.

Possibly the best known part of the judgment is relevant at this point: Joe Galloway was a principal witness for EDS as being in charge of the tender for EDS, but it became clear during his evidence that he had provided incorrect evidence as to his qualifications, claiming that he had a degree when in fact the claimed college was an online "college" offering degrees without any academic foundation whatsoever. Counsel for BSkyB proved the point by acquiring for his dog, Lulu, a degree from this website. This turn of events did not stand EDS in good stead.

Essentially, the judge found that Joe Galloway had not undertaken a proper analysis of the work to be done and had no proper basis on which he could say to BSkyB that the timescales proposed were capable of being achieved. This went beyond the merely careless and was in fact dishonest, amounting to fraudulent misrepresentation. A claim for fraudulent misrepresentation could be made out not only by showing that someone had no belief in the truth of the representation, but was reckless as to the misrepresentation, not caring whether it was true or false. He intended BSkyB to rely on the fraudulent misrepresentations by appointing EDS instead of one of the other tenderers, and BSkyB did in fact rely on the fraudulent misrepresentations.

Indeed, during the negotiations, EDS tried to have the timescales extended, but BSkyB declined to do so. Joe Galloway on behalf of EDS therefore accepted the original timescales. The judge found that this was a representation that EDS had analysed the requirements and had a reasonable belief that the work could be achieved within the original timescales. Joe Galloway had used his position of seniority to push through the timescales, when the evidence pointed to some dissension within EDS' more junior staff as to whether the project could be accomplished to such tight deadlines.

A further point related to corporate structures. In this case, there were two claimants and two defendants: BSkyB Broadcasting Limited and Sky Subscribers Services Limited were the claimants and Electronic Data Systems Limited (now HP Enterprise Services UK Limited and Electronic Data Systems Corporation (now Electronic Data Systems LLC) were the defendants. The question was this: when you enter into a contract with one particular company in a corporate group, to what extent does that contract replace any misrepresentations made earlier by other companies in your corporate group, and to what extent does it replace misrepresentations made to other companies in the customer's corporate group other than the particular contracting company?

As between the contracting parties, BSkyB accepted that the contract effectively limited EDS' liability for non-fraudulent misrepresentation, but if they could show that non-fraudulent misrepresentations were made by and to non-contracting parties, then no limit would apply.

The evidence was somewhat confusing, with each party at times during the pre-contractual stage simply using their corporate logos without specifically identifying which particular company was making a statement or to which specific company that statement was being made.

In the end, the judge decided not to allow claims by or against non-contracting parties which would simply get around the limits of liability in the final contract. It is possible that with different evidence the result could have been different - and therefore worse for the supplier's position.

Negligent misrepresentation - the letter variation agreement

The crux of BSkyB's case here was that EDS misrepresented, against a project that was already facing severe difficulties, that it had a plan which would allow it to finish the project on time, and that this plan had been developed following a proper analysis of the situation and tasks to be done. BSkyB alleged that EDS made this misrepresentation in order, essentially, to stay alive on the project.

The judge found in favour of BSkyB's allegations. This part of the judgment is highly complicated, as it involved expert technical evidence reviewing the options available to EDS at that stage, and reviewed what the likely outcomes were of actually seeking to put EDS' plan into action. The result was that the judge found that implementing the plan would have involved excessive parallel working and would very likely have led to yet more delays in consequence. While BSkyB did not allege that these misrepresentations were made fraudulently, the judge did agree that they were made negligently and had the effect of inducing BSkyB to accept the revised terms. Of course, there were other factors in play by this stage, not least the generous commercial terms offered by EDS, but the judge nonetheless held that the negligent misrepresentations made by EDS amounted to a material factor which induced BSkyB to enter into the letter variation agreement.

The entire agreement clause

Of course, no entire agreement clause could exclude liability for fraudulent misrepresentation.

At this point, the judge construed the entire agreement clause and found that it was not sufficient as drafted to exclude pre-contractual non-fraudulent misrepresentation. Very clear words are needed to achieve this and the clause, as it stood, only had the effect of "superseding" previous representations, not nullifying them altogether. What was needed were some words which stated clearly on their face that they actually excluded any liability for pre-contractual misrepresentations.

Breaches of contract

The judge found that EDS was in breach of contract in a number of ways, including:

• Failing to provide the personnel for project who had the requisite skillsets and experience
• Failing to carry out the work in a timely fashion and missing contractual milestones and failing to provide deliverables
• Failing to carry out its obligations with reasonable skill and care or in accordance with good industry practice by not providing effective programme management, not documenting design and development of the system and not assigning adequate technical or management resources to the project

While there was undoubtedly delay, the judge held that, even aggregating all the various breaches, they did not amount to a repudiatory breach justifying BSkyB in terminating the contract with EDS.

Mitigation of loss

A party who is the victim of a breach of contract cannot just sit back and let the damages accumulate: that party must act reasonably to limit the losses. In this case BSkyB took over the project and finished it itself, while de-scoping various items of the original requirements.

The judge held that this was reasonable, even taking into account that it would have been in many ways more reliable to have an expert third party take over the responsibility for the completion of the project.

What can we learn from the judgment?

There is nothing new here in terms of new law, and what we have seen is the application of existing principles of law to the particular facts

The first point is that there is no great new law coming out of this judgment - the judge applied what are ordinary principles of law to the facts as he found them. The facts were both the ordinary and extraordinary: ordinary because the history of delay and overrunning costs is one regrettably common in IT projects but extraordinary because of the wealth of evidence (including expert technical evidence) which emerged about this project in particular. Of all the extraordinary facts, none is more so than the evidence around Joe Galloway. In evidence he claimed to have studied for and successfully completed an MBA at Concordia College in the US Virgin Islands. This particular Concordia College turned out to be a website offering online degrees (without the chore of studying for them). It goes without saying that this particular witness' credibility was destroyed - EDS' case could not have been helped, to put it mildly, by this coming out during the trial (and as a consequence Joe Galloway was dismissed by EDS during the court hearing). It is hard to fight your case with your key evidence, from one of your key witnesses, so tainted.

Suppliers need to review who within their organisation has responsibility for the tendering process and what checks and balances exist to ensure that one person cannot override the views of the team as a whole; more caution is going to be required in ensuring that unverified or unverifiable claims are not made as part of the tendering process

One immediate (and trite) point would be to investigate all your employees' CV's - but this is rarely viable in large organisations. What did emerge from the evidence was that one man, albeit the man in charge, was able to push through unjustified and unjustifiable claims about being able to achieve deadlines when it emerged that no-one was in a position internally to correct or even challenge them. This does raise the spectre of whether and, if so, what checks and balances should exist in large corporations to ensure that this sort of behaviour cannot proceed without some sort of challenge. This is a difficult question of corporate governance.

Again, an obvious point to come out of the case is that suppliers need to be far more careful when making representations to customers - and ensuring that any relevant qualifications are spelled out at the same time. Just as important is that suppliers must be prompt in issuing any corrections that may be necessary as the tender proceeds.

From the customer's perspective, it is no good simply accepting at face value what the supplier says: some more cooperative way of working on tenders may be called for by this judgment, where the customer is allowed to verify for itself what claims the supplier is making in a tender.

There is another way of looking at it - look at it from the customer's perspective. Of course, as every customer knows, it is one thing to have a good cause of action at law for the supplier's misrepresentations or breaches of contract, but it is even better to have a working system on time and within budget. While the judge found that Joe Galloway was really just saying what the customer wanted to hear, looking through the other end of the telescope, why was the customer so willing to believe what it was being told? Of course, it is no answer to a claim of fraudulent misrepresentation that no-one should have believed the untruths they were being told. Another way of looking at it is to say that customers should be more assiduous in positively verifying what is being said. A lawyer might advise the customer to have any relevant representations written down and included as warranties in the contract - but this would be missing the point. If you are selecting people on the basis of the representations they are making, you need to be sure that those representations are verifiable and verified and then written down. This is really making a case for changing the way tenders are carried out - more interaction between supplier and customer rather than the adversarial one.

Both parties are now likely to take a more formal and documented approach to recording any relevant pre-contractual statements and keep proper logs of communications

One of the aspects of this case that caused the judge to comment was the comparatively small amount of documentation produced by EDS evidencing how it put its tender together. Suppliers are now advised to be more methodical in documenting all communications and processes and having proper processes in place to keep them safe.

Fraud is still a high risk strategy in litigation and can prevent sensible settlements being reached before trial; however, one result of this case may be that more customers will be tempted to allege fraud so as to be able to circumvent limits or exclusions of liability

Another immediate effect of the judgment will be to encourage more customers to allege fraud. Traditionally, fraud has been almost frowned on by lawyers and judges, and it has always been more difficult to prove than ordinary claims for breach of contract or misrepresentation. There are advantages in alleging fraud as we can see in this case: no limit or exclusion of liability will withstand a finding of fraud and damages are more generously calculated. The downside is that the supplier will be far more likely to defend any such allegation: credibility is on the line as well as fighting large awards of damages. The consequence will be that any such case becomes much harder to settle or mediate before trial: after all, if you have one party alleging fraud and claiming £700,000,000, and the other party wanting to clear its name while claiming the protection of a limit of liability of £30,000,000, how are you going to mediate such a dispute? It does come down to an all or nothing situation. Alleging fraud may be the nuclear option, but this case may mark the beginning of more such claims.

Give more careful consideration to your contractual method of dispute resolution

It has become fashionable for contracts to include some sort of dispute escalation procedure, but many contracts still provide for the ultimate decision maker to be the courts - with all the attendant washing of dirty linen under a very public gaze. It is possible to avoid this to some extent by providing for arbitration instead as the forum for hearing disputes: while arbitration is not necessarily cheaper or quicker than litigation in the courts, it does offer in many cases the advantage of keeping proceedings private.

More care should be taken in using company names and representations should be clearly stated as coming from the proposed contracting party - and limited to the proposed customer contracting party; the contract should also make this absolutely clear

Another issue highlighted by this case was the question of corporate structures. When dealing with large organisations, it is easy to lose sight of exactly who you are dealing with. This case highlighted the problem, not only of who you are contracting with, but to whom you are even speaking.

However, this remains a risk area for as long as business people think in terms of corporate logos rather than corporate structures. The learning point here is that more attention should be paid to identifying the correct contracting parties, and ensuring that any representations are made only by the corporate company intended as the contracting party, and ensuring equally that those representations are addressed only to the customer's intended contracting party. The point should be dealt with specifically in the contract as well, so as to show the parties' common intention that no representations were intended to operate outside of the two contracting parties.

Suppliers need to be wary in reporting to the customer about poor progress: too much information could see them thrown off the project while trying to hide the real problem under overly positive proposals might only be postponing a problem that should be dealt with sooner rather than later

The other problem this case highlights without offering any easy resolution is the problem faced by the supplier as the project starts to go wrong from the beginning. How does a supplier deal with this situation? If you come clean and say that there was no justification for the deadlines agreed, you risk being thrown off the project at that point and facing a claim immediately; if you do your best and offer resourcing to try and pull things back on course, you risk claims being made against you later. It is in truth an unenviable position and one which this case did not resolve: if the supplier tries to cover things up, it is a problem potentially postponed rather than a problem actually solved.

Time to look at the wording of entire agreement clauses again

There are some legal points coming out of the judgment. As ever, wording can be susceptible to bear a meaning in court that it was never thought to have during its drafting. In this case, the clause in question was the entire agreement provision: it is a chance for lawyers to go back to the drafting exercise and become ever more precise. The difficulty is that the brutal precision required to exclude pre-contractual misrepresentations may in fact put customers off agreeing to such a clause. Again, the BSkyB case highlights the problem without offering an easy solution.

Notes

(1) Copyright Richard Stephens 2010. The law is stated as at 17 August 2010.

This note is intended to provide general information about legal developments in England & Wales and you should not apply any of the advice or information contained in it to specific situations without seeking professional advice first.

(2) [2010] EWHC 86 (TCC)