One of the most significant disputes in the IT and outsourcing industries in recent history was resolved on 26 January 2010 when the High Court handed down its long anticipated judgment in BSkyB v EDS. Mr Justice Ramsey upheld several of Sky's claims, most notably finding EDS liable for fraudulent misrepresentation. The court initially ordered EDS to pay interim damages of £200 million on 03 February 2010, and on 01 March 2010 made a further order that EDS pay an additional £70 million, pending determination of the final amount due at a hearing scheduled for April 2010. The interim damages awarded to date far exceed the £30 million liability cap in the original contract. Herbert Smith represented the successful claimant BSkyB.
In March 2000, Sky issued an invitation to tender for the establishment of a £50 million "world class" customer relationship management system at its contact centres in Scotland. In July 2000, Sky selected EDS as software supplier and systems integrator, and the parties entered into a contract in November 2000. The project started poorly with delays from the outset, and the parties consequently amended their original contract in July 2001 to afford EDS relief. However, poor performance continued and Sky eventually removed EDS and assumed the role of systems integrator itself in March 2002.
In August 2004, Sky issued court proceedings against EDS for various claims, including fraudulent and negligent misrepresentation and breach of contract. Sky claimed that it was fraudulently induced to award the contract to EDS as a result of EDS’ wrongful conduct. Sky contended that but for the misrepresentations by EDS it would have contracted with a different bidder who would have successfully implemented the project earlier and at an overall lower cost. Meanwhile, Sky continued with the project on its own and eventually completed the system in March 2006 at an estimated cost of £265 million.
Three of Sky's claims were successful: that EDS made fraudulent misrepresentations that it had carried out a proper analysis of the amount of time needed to complete the initial delivery and go-live of the contact centre, and that it held, and had reasonable grounds for holding, the opinion that it could and would deliver the project within the timescales put forward; that EDS negligently misrepresented that it had carefully developed a recovery plan; and that EDS was in breach of contract. Of these, the most significant is the first claim. Fraudulent misrepresentation, or the tort of deceit, is rarely alleged in IT contract disputes due to the gravity of the allegation and the requirement for the claimant to meet stringent evidential thresholds to succeed. However, if a claimant is able to successfully prove deceit, the consequences are that the defendant cannot limit its liability for fraud. In this case, the result was that the contractual cap of £30 million on EDS’ liabilities in relation to the project was no longer effective.
The judgment is a potent reminder of the potential pitfalls under existing law, in particular what constitutes a misrepresentation, the value of effective exclusion clauses and settlement agreements, and the dangers of operating under MoUs, LOIs or other interim arrangements. Both suppliers and customers in large IT and outsourcing projects will be advised to review their bidding and contracting practices and processes, and ensure they comply with best practice, such as with respect to appropriate due diligence, bid review processes, motivation/incentivisation of bid and sales teams, and clearly allocating and defining the roles of different suppliers that may be involved in complex projects.