Apart from establishing that Lulu the dog could get a degree, one of the key lessons to be learned from the case of BSkyB –v- EDS was the liability that could flow from over enthusiastic (a.k.a. fraudulent) sales pitches in the pre-contract phase of an IT project.

Of course, the usual “entire agreement” clause could not assist EDS in that case because the law, as a matter of policy, does not allow parties to contract out of their own fraud.

In most cases, however, even if over zealous promises have been made it is unlikely that they will amount to fraud. In those circumstances, the party that has over promised will, you might think, be able to rely on the entire agreement clause to exclude liability for pre-contractual promises. Assuming that clause is comprehensively drafted, it should provide a way for vendors to protect themselves against reliance by buyers on the (commission driven) sales team’s excessively enthusiastic sales promises.

However, in a recent non-IT related but significant recent case, the Courts have highlighted another weapon available to the victims of over promising. Mr & Mrs Armstrong were independent financial advisors who agreed to join, and bring their book of business to, an organisation called Thinc Group. The Armstrongs were planning to retire in a few years and it was therefore of paramount importance to them that the payment they received for the goodwill (in other words the value of their list of 10,000 clients) could not be clawed back from them in any circumstances as long as they chose to remain with Thinc for at least 3 years. This was so important that they raised it again and again in the negotiations. There was then some delay whilst FSA approval was obtained and only at the end of the process were they given contracts to join Thinc and, a little while later, a contract purchasing the goodwill of their business. Needless to say the contract documents contained a raft of provisions in Thinc’s favour which entitled them to claw back the goodwill payment. They terminated the arrangement with the Armstrongs before the end of 3 years and duly claimed it back. Mr & Mrs Armstrong defended the case during which they had to admit, sadly, that they had not read the contract but had relied on the pre-contractual promises.

Happily for the Armstrongs, both the High Court and the Court of Appeal ruled in their favour, finding that the promises made in the negotiations amounted to a collateral contract, the terms of which prevailed over the contrary provisions in the signed written agreements. Both courts were rightly conscious about allowing promises made in negotiations to trump the written agreements but took into account that: the promise was critical to the deal, the promise was made repeatedly by a senior director and manager of Thinc, the contract wording was contained in two different documents and it was difficult to see how those worked together and, finally, that the Armstrongs placed great store in what they were told by people whom they believed they could trust.

As they say, sometimes the courts deliver law and sometimes they deliver justice.  On this occasion they may have managed both.

Lessons for IT Contracting

In the context of IT contracts there are some pints to take away from this.

  1. Sales staff should be discouraged from over promising.
  2. Anyone entering into an agreement should make sure that it reflects the deal they are agreeing. Take a step back and make sure that it reflects the commercial understanding. In the case of the Armstrongs the court was heavily influenced by the possibility that Thinc could end up with the Armstrongs’ client base effectively free of charge, and concluded that could never have been the deal.
  3. Vendors should ensure that their contracts include a well drawn entire agreement clause. It is curious that there was little discussion of the law of misrepresentation in the Armstrongs’ case. There was a provision in the documents which excluded liability for pre-contractual representations. The implication is that the clause prevented a claim from being brought for misrepresentation (or that the representation was not a statement of fact which would give rise to a misrepresentation claim) but it is clear in any event that the clause was not well enough drafted even to allow an argument that it excluded or superseded liability under a collateral contract.
  4. All contracting parties should note that an oral statement made as part of the contractual negotiation can be treated as a contract or warranty collateral to the main transaction, particularly where one party refuses to enter the contract unless the other gives him an assurance on a certain point (or promises not to enforce a term in a written agreement). Vendors should pay close attention, therefore, to any circumstances where a buyer is insisting on certain conditions or insurances as those will have to be honoured.