Out-Law Guide | 02 Nov 2007 | 8:31 am | 5 min. read
BSkyB Limited ("BSkyB") (and others) v HP Enterprise Services UK Limited (formerly Electronic Data Systems Limited) ("EDS") and others
The case involved the implementation of a new customer relationship management ("CRM") system sought by BSkyB in 2000 to update and improve its service to customers through various BSkyB call centres.
A tender process was entered into following the issue of an invitation to tender ("ITT") by BSkyB in March 2000 following which EDS (acquired by Hewlett-Packard in 2008) was selected to implement the CRM system at a budget of £48 million and within a specific timescale. The "Prime Contract" signed by the parties on 30 November 2000 included a milestone of 31 July 2001 for "eCRM Live in One Hall" and completion of the CRM system by March 2002. The Prime Contract also contained a limitation of liability clause of £30 million designed to limit the parties' exposure should the project encounter problems.
The project ran into difficulties at an early stage and re-planning amendments were made to the Prime Contract in July 2001. The first major stage of the project was completed late and further serious performance issues led to relations between the parties breaking down. BSkyB assumed responsibility for implementing the CRM system itself, and ultimately completed delivery in March 2006 at a cost of £265 million.
At the commencement of the court hearing in 2008, BSkyB sought damages of some £709 million in its Particulars of Claim, and alleged that EDS had made fraudulent misrepresentations in relation to resources, cost, time, technology and methodology for the project during the tender process and prior to the signature of the Prime Contract. BSkyB also claimed that EDS was liable for negligent misrepresentations in respect of statements made during 2001 regarding re-planning negotiations in which the parties engaged after their relationship first began to sour, and that EDS was liable for certain breaches of contract.
Ramsay J. considered his judgment for some time; it runs to over 2000 paragraphs, 468 pages, and took almost 18 months to deliver since the trial ended in September 2008.
The judge found that only one of BSkyB's five claims of fraudulent misrepresentation, relating to the anticipated timescale of the project, was made out. Ramsay J. also found that EDS was liable for negligent misrepresentations in respect of statements made during the 2001 re-planning negotiations and that EDS was liable for certain breaches of contract for failure to exercise reasonable skill and care or conform to good industry practice by:
During the bid phase, EDS' Managing Director of the CRM unit, Joe Galloway, told BSkyB that the system could go live within nine months and be completed within 18 months (in accordance with the timescale set out in the Prime Contract). Ramsay J. decided the statement was made without any basis or assessment of the actual time it would take and was made purely to ensure that EDS won the contract. As such, Mr Galloway was reckless as to the truth of the representation and, as BSkyB had relied on it in selecting EDS above its competitors, the cause of action for fraudulent misrepresentation was made out.
The judge described Mr Galloway as the "mastermind" of EDS' response to the original tender. In respect of Mr Galloway's conduct he stated:
"In my judgment his conduct went beyond carelessness or gross carelessness and was dishonest. I consider that he acted deliberately in putting forward the timescales knowing that he had no proper basis for those timescales. At the very least he was reckless, not caring whether what he said was right or wrong."
Mr Galloway was found to have committed perjury in evidence he gave in relation to his academic qualifications and gave dishonest answers in the same confident way that he delivered the rest of his evidence. The judge concluded that Mr Galloway's credibility was completely destroyed by his sustained dishonesty, including in the witness box. The finding of fraudulent misrepresentation introduces the prospect of damages far in excess of the contractual limitation of £30 million; the contractual limitation of liability clause did not apply in the event of fraud. As a result, damages are expected to run to £270 million (the value of the interim damages awarded).
Not surprisingly, the finding of fraud is significant although Ramsay J. also considered other issues of note during the course of the trial to include arguments around repudiatory breach, the effectiveness of entire agreement provisions, exclusion clauses and liability caps, causation and EDS' contentions as to the extent to which BSkyB sought to mitigate its loss.
It was widely anticipated that a finding in favour of BSkyB would herald a significant review of IT companies' sales processes.
Only one of BSkyB's five allegations of fraud against EDS was successful notwithstanding the obvious link between time and cost. The emphasis in the judgment is on the dishonesty of one man, since dismissed from EDS, and there were no findings of systemic or widespread internal failures or recklessness in relation to EDS's wider sales processes. The extreme nature of Mr Galloway's deception tainted the balance of his evidence, including about the relevant representations. The judge's approach may have differed if EDS's employee had purely been reckless in putting forward the timescale, and had otherwise proven credible in the witness box.
In light of the above, the ramifications of the judgment may not be as significant as first thought. When the dust settles it should nevertheless serve as a caution to IT suppliers of the very serious consequences of a rogue employee securing a bid through dishonest means. That caution is likely to create some introspection as to the manner in which IT companies plan and estimate their work in the bid and sales process and reduce tolerance of "cowboy" salespeople.
IT suppliers should ensure that bid and pitch documentation is robust and verified and that estimates and statements as to a supplier's capabilities and the functionality of its product be closely scrutinised. Any such statements should accord with the provisions of the contract when it comes to be signed. It is also imperative that IT suppliers preserve records of their bid calculation e.g., resource needed and timescales. EDS fell foul of the fact that much of its calculation was said to have taken place on whiteboards.
IT contracts often encounter difficulties and there are risks attached to any project of this size. Robust change management procedures and certainty around timetables can assist to alleviate such problems for both suppliers and customers alike. Ultimately, companies looking to avoid being caught in the same position as EDS should also ensure that they have confidence in their procurement procedures (and, of course the honesty of their employees).The longer term implications of this case will become clearer following the outcome of any appeal. Hewlett Packard, which now owns EDS, said in a statement that the company did nothing to deceive BSkyB and that it would seek permission to appeal the ruling.