… or will it maintain the status quo?

The trial in the High Court of BSkyB -v- EDS has just ended. The outcome is eagerly awaited, as this case could have vitally important consequences for IT companies working on projects. It is potentially more important than St Albans -v- ICL. Depending on what the judge decides, it could be the most important case yet for the IT services sector.

Summary of BSkyB’s claim

BSkyB is claiming approximately £700m from EDS in damages in respect of a project to implement CRM (customer relationship management) software to run BSkyB’s new contact centre. BSkyB claims that EDS’s bid team made fraudulent misrepresentations in order to win the contract, notably that EDS had the capability to deliver BSkyB’s project. BSkyB’s alleges (a) that EDS mismanaged its part in the project and (b) from this it must be inferred that the representation that EDS was capable of doing the job was untrue. BSkyB claims that because of the alleged fraud, the contractual limitations and exclusions of EDS’s liability do not apply.

EDS denies the allegations and attributes the project cost and time overruns to the undefined scope of BSkyB’s requirements.

Why BSkyB -v- EDS could be so important

The case is expected to determine when and how statements by contract bid teams in IT projects can expose their company to unlimited liability, if the project does not turn out as expected.

The demise of UCTA claims

St Albans -v- ICL was the IT project case that established that limitations and exclusions on liability should in principle be enforceable but could be overcome if they were unreasonable in the terms of the Unfair Contract Terms Act 1977 (UCTA). Contract draftsmen for IT services companies have taken great care since then to ensure that limitations and exclusions of liability were “reasonable”, to make sure they would be enforceable against the customer if something went wrong with the project.

More recently, the High Court has tightened up the applicability of UCTA. UCTA’s primary purpose is to protect consumers, not businesses dealing at arms-length, with expert legal advice available if they want it. On the face of it, this means that customers will usually have to live with limitations on and exclusions of IT suppliers’ liability.

The rise of fraud claims

When IT projects run into serious problems, aggrieved customers are now trying a different tack to overcome limitation and exclusion clauses: fraudulent misrepresentation. A customer can establish fraud if it can prove (a) it entered into a contract in reliance on a statement made by the supplier’s bid team; (b) the statement was not true; and (c) the bid team actually knew the statement was untrue or was “reckless” (very careless) as to whether the statement was true or not.

A fraudulent misrepresentation can potentially altogether defeat the exclusion and limitation clauses agreed in the ensuing contract. If the claim is successful, the supplier would have unlimited liability for all losses, including loss of profit or expected benefits and indirect/consequential losses.

Such fraud claims in the past were very rare. There was a perception that judges disliked them and that very strong evidence indeed would be necessary to prove a case. However, that perception has changed. The Technology Disputes team at Nabarro has dealt with several cases recently in which fraudulent misrepresentation was alleged against an IT supplier. These cases all settled on favourable terms to our clients. BSkyB -v- EDS is the first fraudulent misrepresentation case on an IT project to go all the way to the end of trial.

What will the case decide?

The judge may decide either (a) to uphold the former status quo – that fraud is a very serious allegation that needs very strong proof; or (b) to allow (in effect) careless statements, made in the heat of high-pressure, competitive bid situations to overturn agreed contract terms limiting and excluding liability.

When will the case be decided?

The judgement is expected any time after 1 October 2008.