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BSKYB / EDS Litigation: Pre-contractual representations

DATE: 24.06.2011

 

On 27th January 2010, the London Technology & Construction Court (a division of the English High Court) delivered it’s long anticipated judgment in one of the costliest, longest running and most notable IT disputes in recent years.

The Background

In 2000, BSkyB went to tender for a ‘state of the art’ Customer Relationship Management system to support a number of its UK call centres. BSkyB hoped to cut costs and improve service by rolling out this new system.

EDS (now HP Enterprise Services) was successful in the bid. Delivery commenced in July 2000 under what was known as the ‘Prime Contract’. The project was ultimately unsuccessful. In particular the time critical delivery points were not met and the fixed budget was exceeded. In July 2001, the parties signed an amendment to the Prime Contract. The project still faltered and in March 2002, BSkyB took over the systems integration part of the project.

The anticipated budget was £47.6 million, of which approximately £7 million comprised profit. The original scheduled implementation date was 1 March 2002. BSkyB claimed that the work took an additional four years to complete and that the cost was some five times the original budget. Notably, BSkyB claimed damages of some £709 million. BSkyB were awarded interim damages of approximately £270 million.

It has just been reported that this case has been settled, and that HP has agreed to pay BSkyB Stg£308 million. This means there will be no appeal. While the settlement figure is a lot less than the damages BSkyB had claimed, it is significantly higher than the amount of the liability cap in the agreement, which was Stg£30 million.

Court Findings

While BSkyB was not successful in relation to a number of its specific claims against EDS, it was however successful in relation to certain of its allegations of fraud and negligence.

The Court found that:

  • EDS had made dishonest (fraudulent) representations in relation to delivery times for the project which had induced BSkyB into awarding the Prime Contract to EDS and that crucially EDS could not therefore rely on its limitation of liability in the Prime Contract; and
  • that EDS had made negligent misrepresentations that were not excluded by the entire agreement clause in the Prime Contract because the entire agreement clause was not well drafted from EDS’s perspective.

Fraudulent and Negligent Misrepresentation Distinguished

Fraudulent misrepresentation:

is established where it is found:

  • that a party has made a representation knowing that it is not true or with reckless indifference as to whether it is true or not; and
  • a counterparty relies on such representation in deciding to enter into a contract.

Excluding/Capping Liability?

It is not generally possible to exclude liability for fraudulent misrepresentation and accordingly limitations and exclusions of liability clauses and entire agreement clauses (no matter how well drafted) will not operate to exclude liability for fraudulent misrepresentation.

 

Negligent misrepresentation:

 

is established where it is found:

  • that a party has made a representation which it believes is true, but it is negligent in holding that belief because it should reasonably have known that the statement was in fact false;
  • that a counterparty relies on such representation in deciding to enter into a contract; and
  • the counterparty was owed a “duty of care” in the circumstances by the party making the representation.

Excluding/Capping Liability?

Importantly, the limitations and exclusions of liability and entire agreement clauses if suitably drafted in a contract will generally apply to exclude liability for pre-contractual negligent misrepresentation (unlike a claim for fraudulent misrepresentation).

Conclusion

This is a very significant decision not only for suppliers working in the IT space but also for large scale projects in other industries. It highlights the dangers of making over zealous or unsupported estimates, in relation to delivery times and costs in relation to a project, which could ultimately mean that the limitation of liability in the contract might not apply. It also provides a warning to suppliers to take care when drafting exclusion clauses and entire agreement clauses as the entire agreement clause in this case was held not to contain sufficiently clear evidence of an intention to exclude liability for negligent misrepresentation. While the decision is not binding on the Irish courts, it would most probably have persuasive effect.

 
 

 

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