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Misrepresentation in IT Sales

PRACTICE AREA GROUP: Technology and Innovation
DATE: 20.06.2011

The London Technology and Construction Court was recently the venue for the hearing of one of the more significant IT disputes in recent times. The outcome of the case is not yet known (judgment is pending) but it could have significant implications for the IT sector.

BSkyB initiated proceedings against IT services provider Electronic Data Systems. The dispute related to the implementation of an IT system that would assist BSkyB in the operation of its contact centre. It was claimed that EDS made fraudulent misrepresentations about its ability to deliver the required system and then failed to deliver that system. In its defence, the supplier claimed that the specifications and requirements for the system were never properly determined. To the extent that it related to scope and cost creep and allocation of responsibility for that between supplier and customer, the dispute is not unusual. What is unusual (apart from the fact that the case went to full hearing over a period of months) is the claim that, as part of the sales process, fraudulent misrepresentations were made to win the deal.

A successful claim of fraudulent misrepresentation could prevent a party against whom such a claim was made from relying on contractual limitations and exclusions of liability. In other words, the potential financial exposure to damages could be unlimited rather than, as is good practice, limited as agreed in the contract to a level that represents a fair and reasonable allocation of the risk between the parties. A finding of fraud may also have implications for the availability of insurance. In this case, the customer brought a claim for damages apparently amounting to in excess of ten times the original value of the contract and included a claim for loss of profits.

There has been no similar reported case in Ireland to date in the IT sector but if such an issue did arise, the Irish courts may be persuaded by decisions of the English courts. Under Irish law, it isn’t a defence to a claim of fraud to say that there was no intention to act fraudulently. If the statement is made knowingly, without believing it is true and with reckless disregard for whether it is true or not, then the basis for a fraud is established. If the court finds in favour of the claimant in this case, then the manner in which IT deals are sold could dramatically change into the future.

Most reports suggest that IT spending is at best set to remain stagnant for some time and at worst likely to reduce over the coming year. However, IT deals will still be done and this case is a timely reminder of the importance of avoiding the temptation to oversell in order to win the deal, despite the intensity of the competitive bid environment and the increased pressures presented by restricted customer budgets. Ensuring those involved in selling and winning the deal and those negotiating the contract to deliver it are joined up so that the engagement is properly de-risked is of paramount importance.

The following are a few guidelines on managing and reducing the risk in that process:

  • Never assume low value equals low risk;
  • Identify, at the outset, the critical business requirements of the customer;
  • Get early stage engagement by key stakeholders and legal advisers on the associated risks presented by customers' requirements;
  • Develop a standard format for all formal sales communications to customers, from initial engagement to deal completion;
  • Ensure there is a clear reporting structure in the sales chain and that the individual with overall responsibility for sales is informed, has access to and uses legal support;
  • Engage early with the customer in relation to legal terms and conditions for the deal or where there are none proposed, set expectations as to their content and process for agreeing them;
  • Maintain a good quality audit trail of all communications and always follow-up on oral communications in writing to confirm what was discussed;
  • Where practical, ensure continuity of personnel between the sales process and commercial negotiation and where this is not possible, conduct a comprehensive handover between teams.

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