Following a high-profile English High Court trial, extending over 10 months, the Technology and Construction Court has delivered its verdict in the legal action brought by BSkyB (Sky) against Electronic Data Systems (EDS) arising out of a project to design, build, manage, implement and integrate a customer relationship management (CRM) system for the Sky business. In a judgment that holds up a spotlight on conduct in the lead-up to contracts, EDS Limited has been found liable to Sky for, among other things, fraudulent misrepresentation.
The judgment of Mr Justice Ramsey is 468 pages long. It contains a forensic narrative of the project from inception to collapse, and contains a wealth of stories, insights and anecdotes into how an IT project should – and should not – be conducted. Sales teams, business managers, procurement teams, risk managers and lawyers will find the judgment – parts at least – compelling reading, with many salutary lessons.
This is a high-level bulletin. Its purpose is to alert you to the decision and highlight some key features. Bird & Bird will be producing a further bulletin in due course, analysing the legal reasoning in detail and highlighting practical lessons.
EDS liable for making fraudulent misrepresentations to Sky as to time
The central finding of the Court is that EDS have been held liable in fraudulent misrepresentation to Sky. The misrepresentations in question related to time. They were made prior to the selection of EDS to carry out the CRM project, and comprised two elements:
- that EDS had made a proper analysis of the amount of time needed to complete the initial delivery and go-live of Sky's CRM-enabled contact centre; and
- that EDS held the opinion that, and had reasonable grounds for holding the opinion that, EDS could and would deliver the project within the timescales referred to in their responses to Sky.
Both of these representations were found to be false, and to have been made dishonestly. The judge found that EDS did not undertake a proper exercise to work out what was required in order to deliver go-live in nine months, and the whole project in eighteen months. Likewise, they did not undertake a proper exercise of planning, sequencing and resourcing to establish that go-live could be delivered in nine months and the project as a whole in eighteen.
Furthermore, the Court found that EDS intended Sky to rely on these statements to select EDS for the Sky CRM project, and that Sky did indeed do so. Accordingly, EDS were held liable to Sky in deceit. The monetary significance of the finding of deceit is that contractual caps on the amount of a party's liability are ineffective against fraud.
Who made these misrepresentations?
The crucial misrepresentations were attributed to then managing director of the EDS CRM Practice, Joe Galloway. He is described in the judgment as having approached the whole question of the time to achieve go-live in a "cavalier fashion". The Court concluded that he put forward timescales to Sky which he thought were those which Sky desired, knowing that he did not have a reasonable basis for doing so, or at the very least being reckless about the timescales, not caring whether what he said was right or wrong. He acted in this way despite the "strong disagreement" of those working for him in his team: indeed, he caused his own colleagues "clear distress".
EDS denied that it had deceived Sky and argued that the reason the project did not fully succeed was because Sky had not adequately specified its needs. However EDS's defence was set back by the witness box conduct of Mr Galloway, who was the mastermind behind EDS' responses to Sky's Invitation to Tender and was EDS' main witness. He was found to have given false evidence over a prolonged period in answer to questions about an academic qualification that he had mentioned in his witness statement. EDS dismissed him from his employment during the trial, accepting that this evidence was false. EDS argued that his evidence on the relevant issues in the case was still credible. The judge, however, found that the false evidence completely destroyed his credibility not just on his academic qualification, but on all aspects of his evidence.
Most of Sky's other allegations of EDS misrepresentation fail
Sky made eight other allegations of fraudulent or negligent misrepresentation by EDS. These concerned EDS resources, risk profiling, and the use by EDS of certain methodologies. Seven of these claims failed. A claim for negligent misrepresentation based on EDS' representation mid-project that they had developed an achievable plan, which had been the product of proper analysis and re-planning, succeeded. That representation had led to a mid-project settlement agreement.
Breaches of contract by EDS
EDS have also been held to be in breach of contract for particular ways in which they failed to resource the project properly, delayed in carrying out work, and failed to achieve project milestones. EDS were held in breach for various instances of failing to exercise reasonable care and skill or conform to good industry practice. There was found to be "no effective programme management", the design and development of the system was not properly documented, and EDS did not provide sufficient technical or managerial resources. However, these were held by the Court not to amount to repudiatory breach, nor was any repudiatory breach accepted by Sky as bringing the contract to an end. The damages for breach of contract were subject to the contractual cap on the amount of EDS's liability, of £30 million.
Did Sky mitigate?
EDS alleged that Sky failed to mitigate their losses, but the High Court rejected this. Sky had taken over the project itself in order to salvage it. The Court observed that there was a "large gap" between the effort and time which Sky took to complete the project, and the effort which a "competent, alternative" systems integrator would have taken. But it concluded that in the circumstances Sky had not acted unreasonably. Nor had Sky failed to mitigate by a 'descoping' exercise they carried out as part of the rescue of the project.
Sky's alternatives to EDS, and its damages
The Court found that if EDS had not made the misrepresentations to Sky prior to the selection of EDS for the project, Sky would not have continued with EDS but would have engaged PwC instead, in order to implement a PwC CRM system. Similarly, if EDS had not made a negligent misrepresentation prior to Sky entering into a mid-project settlement agreement, Sky would have engaged an alternative integrator to continue with the CRM project. The damages claimed by Sky were originally £709m. Sky press statements immediately after the verdict estimate an award of at least £200m. The amount of Sky's damages will be the subject of a further Court decision, as will a counterclaim by EDS for unpaid invoices of £4.8 million.
Hewlett Packard denies that EDS deceived BSkyB and will seek to appeal
EDS is now part of Hewlett Packard. The case concerns matters that occurred before HP's acquisition of EDS. HP has said: "We are pleased the Court dismissed the majority of the allegations made. While we accept that the contract was problematic, HP strongly maintains EDS did nothing to deceive BSkyB. HP will be seeking permission to appeal."
The judge also made findings on issues including:
- The Entire Agreement clause in the main contract. This was held not to amount to an agreement that prior misrepresentations were withdrawn, overridden or of no legal effect. Nor did it exclude liability based on a duty of care in relation to prior misrepresentations. It therefore did not prevent Sky from advancing a claim for negligent misrepresentation or misstatement against EDS.
- Anticipated savings. Sky's claim for damages based on staff reductions that would have been made if the project had succeeded were held to be excluded (except for deceit) by a clause excluding loss of anticipated savings.
- The existence or otherwise of duties of care concurrently with contractual obligations. The judge held that no duty of care should be imposed that would circumvent or escape the contractual exclusion of limitation of liability which the parties put in place.
- The mid-project settlement agreement was held only to settle claims for breach of contract.
The decision reminds suppliers of the extent to which they can be held accountable for statements made in the pre-contract phase of a project. It is certain that many suppliers will use this decision to galvanise further action on the risk management, training and communications aspects of their bidding and sales processes. The finding of negligent misrepresentation prior to the mid-project settlement agreement emphasises the need for suppliers to take care when making proposals to a customer to re-baseline a failing project.
Customers may be emboldened by this decision to consider taking action in response to pre-sales statements which they believe to have been made falsely. But they should brace themselves for what may often be a long, challenging and costly process. And it will not be every case in which the supplier's main witness implodes as the result of 12 words in his CV!