A recent decision of the English High Court in a case between BSkyB, a satellite broadcaster, and the internationally known IT contractor EDS has sent shock waves through the IT industry and the legal community. While the decision is not binding in Canada, it is bound to have significant repercussions.

The facts in the case are extreme, even bizarre and amusing, but for EDS, the outcome was devastating as damages awarded could potentially exceed $1 billion. Significantly, these damages were awarded despite the fact that EDS was protected by a contract containing broad and commonly used provisions that purported to limit EDS’ liability. The decision shines a spotlight on an area of vulnerability for all parties bidding on contracts.

Background

Following a competitive bid process, EDS won a £48 million (C$73.79 million) contract to provide BSkyB with a new customer-relationship-management system. When the project encountered problems, BSkyB sued EDS claiming damages for breach of contract and misrepresentation on the basis that, during the pre-contract tender phase, EDS had misrepresented its ability to complete the project.

The contract contained typical provisions limiting EDS’ liability for breach of contract or negligent misrepresentation to £30 million ($46.12 million). Regardless, BSkyB sought damages of £700 million ($1.076 billion) and claimed that the cap did not apply because the misrepresentations by EDS were “deceitful”; that is, EDS either knew they were false or was reckless as to their truth.

EDS sought to rely on an “entire agreement” clause in the contract, which stated that the contract was to “represent the entire understanding and constitute the whole agreement between the parties ... and supersede any previous discussions, correspondence, representations or agreement between the parties. ...” BSkyB argued that this wording meant only that pre-contractual representations did not form part of the contract and did not have the effect of negating the misrepresentations for purposes of a claim in tort.

Initially, after the dispute arose, the parties entered into a letter agreement that purported to be a “full and final settlement” of all known and unknown claims. EDS argued that the letter agreement settled all issues that could arise based on breach of the contract including claims in tort for misrepresentation, which could be characterized as a breach of contractual warranties. BSkyB countered that the wording of the letter agreement was clear and that it was not sufficiently broad to apply to tortuous claims.

Court findings

The court found that:

  1. EDS breached the contract;
  2. EDS made negligent misrepresentations outside the contract;
  3. the “entire agreement” clause was not sufficiently specific to negate pre-contract misrepresentations;
  4. the letter agreement excluded claims for breaches of the contract but did not extend to claims in tort for negligent pre-contractual misrepresentation; and
  5. EDS was deceitful in its pre-contract claims.

Damages for breach of contract and negligent misrepresentation were subject to the contract liability cap. However, the crucial finding was that EDS had been deceitful in its pre-contract claims, and it was this finding that left EDS exposed to massive uncapped liability.

Lessons

The implications of the finding of deceit are significant in relation to services contracts and, more broadly, in any tender process. The practice of making “aggressive” claims regarding skills, expertise and ability to deliver is dangerous. Often, these claims are made with the expectation that this sort of “puffery” becomes irrelevant after the contract is awarded because the terms of the contract will absolve the sins of exaggeration by providing that it supersedes all pre-contract representations. The BSkyB decision is a stark reminder that this is not necessarily the case.

Parties bidding on contracts must be careful to avoid using sales hyperbole in their proposal documents. They should ensure there is complete alignment between sales and delivery teams so that there are no misrepresentations. It would be prudent to limit the number of individuals with authority to make statements during the bid process so that all representations can be vetted. Bidders should conduct detailed pre-submission reviews of bids to ensure that all representations are accurate and that all assurances regarding delivery can be performed. Avoid reckless claims and be diligent to exclude all sales hyperbole.

A fraudulent misrepresentation can negate the effectiveness of exclusion and limitation clauses in the resultant contract thereby exposing the service provider to unlimited liability for all losses, including loss of profit or expected benefits and indirect/consequential losses. This can create an exposure to enormous liability in even a small contract.

Consistent with the approach taken in Canadian courts, the court in BSkyB interpreted language in both the contract and the letter agreement that excluded or limited liability very strictly. It found that the “entire agreement” clause did not exclude liability in tort for negligent or deceitful misrepresentation outside the contract. If you want to enjoy those benefits, the contracts must be clear and comprehensive.

BSkyB did not create new law; it merely applied existing common law principles. Nevertheless, the case is a milestone. In the future, service providers should be cautious in making representations regarding their abilities, and it is a safe bet that their customers will be more inclined to pursue remedies outside the contract in tort based on misrepresentation.

Ed.: This article appeared previously, under a different title, in Business in Vancouver, April 6-12, 2010; issue 1067.