The eagerly awaited judgment in BSkyB v EDS was handed down last week. The case concerns the liability of service providers to their customers for misrepresentations. But is it the landmark ruling everyone expected?

SUMMARY

In short, the ramifications of this case may be less than many commentators are suggesting. The case is highly fact sensitive and the finding of fraudulent misrepresentation relies on a “perfect storm” of events: the controlling mind of the supplier – the managing director – was dishonest; he continued his dishonesty in the witness stand and the supplier’s performance of the contract was so poor that it resulted in the customer taking over the project.

In particular, the judge did not seek to criticise internal supplier processes or systems. That is, there was no finding of systemic failures within the supplier’s bid process. Ultimately, the judgment reflects more on corporate governance and management issues: why was a man who deliberately lied able to become managing director and why were there not appropriate checks on his behaviour?

THE DISPUTE

EDS contracted to build a customer relationship management (CRM) system for Sky at a cost of £48 million. EDS missed the initial and renegotiated delivery dates. Sky took over and completed the build itself. EDS’ failures resulted in implementation being delayed by 5 years and Sky spending an additional £200 million. Sky alleged breach of contract and that EDS had made a number of false representations which had induced Sky to select EDS for the project and keep EDS in place as supplier despite its failures. The misrepresentations concerned such things as the resources that EDS had available for the project, the total cost of the system and the date by which the system could be delivered. Sky claimed that EDS made these misrepresentations throughout the sales process including in the initial response to Sky’s invitation to tender and subsequently in emails, presentations and meetings.

THE JUDGMENT

In an unprecedented 468 page ruling, Mr Justice Ramsay found that EDS had made a fraudulent misrepresentation and was also liable for negligent misrepresentation and breach of contract. He held that EDS had fraudulently misrepresented that it could meet the delivery dates. By giving these dates to Sky, EDS had represented that they were based on a proper assessment of the time that it would take to build the system. In fact, EDS had never carried out such an assessment and so it had no grounds for believing that it could ever meet these dates. The misrepresentation had been made by one of EDS’ managing directors, Joe Galloway, who in the judge’s opinion was motivated by a desire to win the contract and career advancement. In pursuit of these objectives, he was willing to “tell Sky whatever they wanted to hear”.

It is critical to remember that the only representation which was held fraudulent was the representation that EDS could deliver within Sky’s deadline. Joe Galloway was solely responsible for this misrepresentation. The other claims for fraudulent misrepresentation were rejected on the basis that Sky’s interpretation of what EDS had represented to them was unreasonable or unsustainable.

The finding of fraudulent misrepresentation has a direct impact on the extent of EDS’ liability to Sky. It is not possible to exclude or limit liability for fraudulent misrepresentation. This means that although EDS has capped its liability at £30 million in its contract with Sky, this cap will not apply to the fraudulent misrepresentation, leaving EDS exposed to unlimited liability (the cap will apply to the negligent misrepresentation and the breach of contract). Sky initially claimed £700 million in damages and is likely to be awarded around £200 million.

WHAT IS FRAUDULENT MISREPRESENTATION?

Fraudulent misrepresentation requires deceit on the part of the representor. Deceit in this context means fraud or a deliberate lie not embellishments or accepted ‘sales talk’. In BSkyB v EDS the judge was satisfied that Joe Galloway – the managing director of EDS’ CRM Practice - was deceitful. Mr Galloway gave false evidence under oath on a number of matters one of which concerned an MBA degree. Mr Galloway testified in some detail that he had studied at ‘Concordia College’ in the Virgin Islands and had obtained an MBA. Sky proved that no such college existed and that Mr Galloway had in fact bought his ‘degree’ on the Internet. One of Sky’s barristers applied for the same degree for his dog. The application was successful. The dog not only obtained a degree but was awarded higher marks than Mr Galloway.

The judge was satisfied that these lies demonstrated “an astounding ability to be dishonest”. Mr Galloway’s credibility was “completely destroyed by his perjured evidence over a prolonged period and reflected his propensity to be dishonest whenever he sees it in his interest in his business dealings”. On the basis of this, the judge was not willing to believe Mr Galloway’s explanation about why he had given Sky delivery dates that had not been properly assessed. The judge concluded that Mr Galloway deliberately made false statements to Sky to win the contract and ultimately advance his career.

This case does not lower the threshold test of a fraudulent misrepresentation. Fraud was established in this case on its facts specifically because Mr Galloway was proved to have deliberately lied. If he had not, it is likely that EDS would have been found liable only for negligent misrepresentation and would have had the benefit of the contractual liability cap of £30 million.

ARE THERE ANY LESSONS FOR SUPPLIERS?

While it remains the case that fraudulent misrepresentation is a high threshold, there are lessons which can be gleaned from this case although these should be seen more as reminders of old lessons:

  • Suppliers should always ensure that they drill down to the detail of CVs, particularly for key employees. In this respect, care needs to be taken around employment and data protection laws but the issue still needs to be addressed.
  • In a number of instances in the case, the inability of EDS to explain how costings had been arrived at (eg. where notes had not been taken or drafts deleted) did not assist their case. In large bids, the use of appropriate administrative resource should be considered for this purpose.
  • Entire agreement clauses should be drafted to expressly exclude liability for misrepresentation (other than fraudulent misrepresentation). The judge in BSkyB reiterated existing law that a party seeking protection cannot be “mealy-mouthed in his clause” when excluding representations.