In brief

  • Australian service providers need to be aware of the implications of the recent English High Court decision in BSkyB Ltd v HP Enterprise Services UK Ltd.
  • In this case, overly optimistic and apparently unfounded estimates of delivery time was found to constitute fraudulent misrepresentations, which meant the supplier could not rely on the liability cap in the contract.
  • The case also provides a warning about drafting exclusion clauses. In this case, the clause was held not to contain sufficiently clear evidence of an intention to exclude liability for negligent misrepresentation.  

Introduction

On 26 January 2010, after 109 days in the English High Court, BSkyB and Sky Subscribers Services Limited (SSSL) (together, Sky) succeeded in their claim against information technology supplier Electronic Data Systems (EDS).1 The claim arose out of a failed project for EDS to build a Customer Relationship Management (CRM) System for use in Sky’s call centres. Sky established that EDS had made fraudulent and negligent misrepresentation during the tender process. While damages are yet to be quantified, it will likely be far in excess of the £30 million liability cap prescribed by the agreement.

The case has important lessons for any company involved in a major IT tender.

Background

During the tender, a managing director of EDS, Joe Galloway, represented that EDS had made ‘a reasonable assessment’ and undertaken a ‘professional approach’ in estimating and planning the CRM project. He said they could achieve go-live in nine months with overall transition in 18 months and could carry out the work for some £54 million. Although BSkyB played an integral part in negotiating the agreement, the Prime Contract was signed in August 2000 between SSSL and EDS. The contract was terminated after two years and various attempts between the parties to salvage the project, including amending the terms of the Prime Contract through a Letter of Agreement in July 2001.The CRM System was completed by Sky and proceedings were commenced against EDS and others in 2004 with damages estimated at £709 million.

The claims

Sky successfully claimed that EDS was guilty of fraudulent and negligent misrepresentation during the tender process and in breach of contract during the execution of the CRM System project.

Breach of contract

EDS was found to be in breach of contract on a number of grounds including not exercising reasonable care and skill and not conforming to good industry practice. This was evidenced by EDS failing to properly resource the project; being in serious delay in carrying out the work, achieving the milestones and delivering the deliverables; failing to capture the requirements or manage the process; and failing to provide sufficient technical or managerial resources.

Negligent misrepresentation

Ramsey J held that EDS made negligent misrepresentations before entering the Letter of Agreement. The statements, which EDS intended Sky to rely upon, amounted to a representation that EDS had an achievable plan which was based on proper analysis and re-planning. It was found that EDS did not carry out a proper analysis and re-planning exercise and therefore the representation was false and made negligently. As it was a material misrepresentation that induced Sky to enter into the Letter of Agreement, EDS was liable under section 2(1) of the Misrepresentation Act 1967 (UK).

Deceit (Fraudulent Misrepresentation)

EDS was found to have made a fraudulent misrepresentation in order to be selected to deliver the CRM system. The misrepresentation had been made by Joe Galloway who, in Ramsey J’s opinion, was motivated by a desire to advance his career by winning the contract and willing to ‘tell Sky whatever they wanted to hear’. The statements, which Galloway intended Sky to rely upon, amounted to a representation that EDS had carried out a proper analysis of the resources, cost, time, technology and methodology required to complete the initial delivery and go-live of the system and that EDS would deliver the project within the timescales referred to in its Response to Invitation to Tender. Ramsey J found that there had been no such assessment and therefore had no grounds for believing that it could ever meet these dates. EDS was held to be liable to Sky for fraudulent misrepresentation.

Limitation of liability

There were two clauses in the Prime Contract and one in the subsequent Letter of Agreement that purported to limit or exclude liability of EDS: a Limitation of Liability clause; an Entire Agreement clause; and a Liability Exclusion clause.

Liability cap

A clause in the Prime Contract stated that ‘…the Liability Cap for the Term shall not at any time be less than £6 million (six million pounds), nor greater than £30 million (thirty million pounds).’ Liability was defined as ‘any liability, whether under statute or in tort (including negligence), contract or otherwise…’ .

It was accepted that the cap applied to SSSL’s claims for breach of contract and negligent misrepresentation.

However, a clause purporting to exclude losses for deceit is generally ineffective at common law and so from the onset it was common ground that the cap did not apply to SSSL’s fraudulent misrepresentation claim.

BSkyB submitted that the cap did not apply to its claims for negligent misrepresentation as it was not party to any contract with EDS. While Ramsey J agreed with this contention, his Honour concluded that no duty of care could be found in favour of BSkyB as this would circumvent or escape the contractual limitation of liability which the parties put in place. He held that ‘the contractual structure…negatives any possibility that such a duty of care should arise’. Thus, BSkyB could not succeed in a negligent (or fraudulent) misrepresentation claim.

Exclusion clause A clause in the Letter of Agreement’ stated that ‘[t]he terms set out in this letter have been agreed between us, subject to the approval of our respective managements, in full and final settlement of (a) all known claims… [between the parties] for any breach of the Prime Contract as of the date [of] signing this letter; and (b) all unknown claims [between the parties] for any breach of the Prime Contract during the period up to and including 17 June 2001’.

It was common ground that this clause excluded liability for breach of contract, but not for fraudulent misrepresentation.

EDS failed in its attempt to rely on this clause to exclude liability for negligent misrepresentation. Exclusion clauses are to be construed strictly and Ramsey J concluded that clear words are needed before liability for negligent misrepresentation can be excluded.

Even though there was a reference to representations within the provision, if it had intended to exclude negligent misrepresentation ‘the language, in my judgement, would have had to go further’.

Entire agreement clause

A clause of the Prime Contract stated that ‘… this Agreement and the Schedules shall together represent the entire understanding and constitute the whole agreement between the parties in relation to its subject matter and supersede any previous discussions, correspondence, representations or agreement between the parties with respect thereto…’.

It was held that this provision was concerned with the terms of the contract only, and did not amount to an agreement that representations were withdrawn, overridden or of no legal effect so far as any liability for misrepresentation was concerned. According to Ramsey J, the words provide that the contract ‘represents the entire understanding and constitutes the whole agreement. It is in that context that the Agreement supersedes any previous representations. That is representations are superseded and do not become terms of the Agreement unless they are included in the Agreement’. As a result, EDS could not avoid liability for misrepresentations leading up to the Prime Contract.

Australian law

While Australian law in this area varies from English law, the same finding may be reached on similar facts.

It is well established that representations made during pre-contractual negotiations can amount to misleading and deceptive conduct under section 52 of the Trade Practices Act 1974 (Cth) (and equivalent provisions of state legislation). A claim under that section cannot be excluded or limited in any way by agreement between the parties. In addition, Australian claimants can pursue common law claims for fraudulent or negligent misrepresentation.

Risks for service providers

While this decision is only persuasive in Australia and not binding on Australian courts, it is important that service providers, including technology companies, understand BSkyB v EDS and repercussions it may have. Tenderers should conduct and document assessments of prospective delivery timing before making representations and ensure estimates of their capabilities are not exaggerated. Service providers need to select responsible sales personnel who are aware there may be consequences of making unsubstantiated claims.

The decision also highlights the care that needs to be taken when drafting limitation and exclusion clauses. As these clauses are often heavily negotiated, it is important that the final drafting reflects the agreed position. Parties also need to be clear on what liability can and cannot be avoided.