Tender pitfalls

In economically difficult times, tender teams may be tempted to say and do things to win work by any means. However, such behaviour could have serious repercussions if the project goes wrong, as was demonstrated in a case involving BSkyB and EDS (now part of Hewlett-Packard).

BSkyB case

After a tender process in 2000, BSkyB contracted with EDS to design, build, manage, implement and integrate a new customer relationship management (CRM) systemthe technology at BSkyB's existing call centres in Scotland.

The relationship quickly soured. There was a renegotiation in 2001 but in the end BSkyB provided a CRM system itself. Instead of the project going live as intended on 31 July 2001 and being completed by 1 March 2002 at a cost of £47.6 million, the project was only completed in March 2006 at a cost of £265m.

BSkyB sought damages of £709m at the High Court in 2010, claiming that EDS had made fraudulent misrepresentations in the tendering process in relation to resources, cost, time, technology and methodology for the project. BSkyB also claimed that EDS was liable for negligent misrepresentations made during the 2001 re-planning negotiations, and that EDS was liable for certain breaches of contract.

Misrepresentation

The law of misrepresentation concerns liability for making untrue statements of fact before a contract is signed. Such statements may be made innocently, negligently or fraudulently. A claim arises where the false statement was made in order to induce the other party to enter into a contract and the other party was influenced by and relied on the statement when deciding to enter into the contract.

Fraudulent misrepresentation

Fraudulent misrepresentation is covered by the tort of deceit. It occurs where a false representation has been made knowingly, without belief in its truth or recklessly as to whether the statement is true or not.

In order to pursue EDS for deceit, BSkyB had to show:

• that EDS had made a representation;
• that the representation was false;
• that EDS knew that the representation was false or was reckless as to whether it was true;
• that EDS intended BSkyB to act in reliance on the representation;
• that BSkyB relied on the representation to its detriment.

The normal test of foreseeability does not apply to damages claims for fraudulent misrepresentation. This means that the party who made the false statement must repay all the damage directly caused by the other party relying on that statement, including consequential or indirect losses. However, the normal rules of mitigation do apply, requiring the other party to take reasonable steps to avoid or minimise its losses. In addition, liability for fraudulent misrepresentation cannot be limited by contract.

Negligent misrepresentation

A negligent representation is one which is made carelessly, or without reasonable grounds for believing it to be true. Where a party enters into a contract with another as a result of a negligent misrepresentation and suffers loss as a result, it has the right to claim damages if it would have been entitled to do so if the statement had been fraudulent. Once the party proves that the other's statement was in fact false, the other party can defend itself if it can prove that it reasonably believed the truth of that statement up until the time that the contract was entered into.

Limitation of liability

BSkyB and EDS' contract contained an 'entire agreement' clause which purported to restrict the scope of the parties' agreement to what was in the contract. The court had to consider whether this clause excluded or limited EDS' liability for negligent misrepresentations. The clause stated expressly that it did not exclude or limit EDS' liability for fraudulent misrepresentations which, as noted above, cannot be excluded by contract anyway under English law.

The contract also contained a liability cap, limiting EDS' liability to £30 million, however it was agreed that the cap would not apply to any fraudulent misrepresentation made by EDS before the contract was entered into. Again, it is not permissible to limit liability for fraudulent misrepresentation. If BSkyB was successful in bringing a claim for fraudulent misrepresentation, then the losses recoverable would be unaffected by the entire agreement clause and cap on liability.

Judgment

In the High Court Mr Justice Ramsey found that EDS had made fraudulent misrepresentations at both bid stage and during pre-contract negotiations in relation to how long the project would take, and that this had induced BSkyB to award the CRM project to EDS. However, BSkyB's other fraudulent misrepresentation claims were not accepted. The judge also found that EDS was liable for negligent misrepresentations during the 2001 pre-planning negotiations. It was also liable for certain breaches of contract for failing to exercise reasonable skill and care in properly resourcing the project and being seriously in delay.

In addition, the judge found that the entire agreement clause did not exclude EDS' liability for negligent misrepresentation - however, EDS' liability for negligent misrepresentation was subject to the overall contractual liability cap.

Practical implications

It is rare to succeed in a claim for fraudulent misrepresentation. However, although much of the outcome of this case turned on the particular facts, many of the lessons to be learnt have direct relevance for the construction industry.

Employers should:

• always test and challenge pre-contract statements and representations made by tenderers. The objective is to enter into a contract with an appropriate and capable contractor, rather than to have to claim for misrepresentation if things go wrong;
• consider the drafting of any entire agreement clause and caps on liability to ensure they provide sufficient protection. If a tenderer is seeking to exclude or restrict liability for negligent misrepresentations then ask why it is seeking to do this. Otherwise, try to incorporate any important issues in the final agreement, typically in the form of representations and warranties – especially if there is a term excluding reliance on pre-contractual statements;
• investigate any pre-contract misrepresentations as soon as they are discovered.

Tenderers should:

• make tender teams aware of the serious potential consequences of making misrepresentations in a tender process. In the BSkyB case, the final cost to EDS far outweighed the original contract price for the project;
• ensure that tender teams are kept informed by the engineers and research and development teams of all developments so that statements can be corrected if necessary;
• inform the other party as soon as possible, in writing before the contract is finalised, if mistakes have been made when making representations. If a party becomes aware that a statement is not correct or that it has become incorrect since it was made it may be liable for fraudulent misrepresentation if it does not inform the other party of this before the contract is signed;
• consider their vetting and checking procedures when recruiting personnel, and also consider incentives for tender teams that are linked to the overall success of the project rather than their ability to win the work in the first place;
• keep records to justify their claims, estimates and costings made in pre-contract negotiations. Ideally, all significant claims should be subject to independent review;
• review any required entire agreement clause to make sure that it effectively excludes non-fraudulent or negligent misrepresentations. However, bear in mind that requesting such amendments may also flag up to the employer that there is a problem that the tenderer is trying to hide.