26/4/2010

By Dai Davis, a partner at law firm Brooke North

Dai Davis, a partner at law firm Brooke North, discusses the implications of the recent high profile case of BSkyB v EDS, which the former finally won at the turn of the year after much argument, potentially smashing the constraints of limited liability in the IT contract/outsourcing world

Electronic Data Systems (EDS), now part of HP, agreed in 2001 to supply a Customer Management System to British Sky Broadcasting (BSkyB). It didn't work. BSkyB therefore decided to sue over what it saw as the failings of the system. The firm, successfully as it transpired, claimed that an EDS salesman made negligent and fraudulent representations during the course of the original negotiations. Although many claims were made, the main one that succeeded in court was in respect of a fraudulent misrepresentation that EDS had the ability and skill to perform the project within the agreed timescales. In law, a misrepresentation occurs when a salesperson makes a false statement that persuades a party to enter into a contract. The statement needs to be one of fact, as opposed to opinion, but may be made verbally or in writing.

IT contracts invariably contain limitations of liability. In this case, EDS had sought to limit its liability to $30 million. However, if BSkyB could show that there had been a false representation (made fraudulently), this limitation would not then apply. Indeed, one can never limit one's liability for acting fraudulently1*.

In a civil case such as this, it is significantly easier to show 'fraud' than in a criminal case. In the end the court decided in January this year that negligent and fraudulent misrepresentations had indeed been made. BSkyB could therefore claim all the damages that have been caused by EDS' misrepresentations, without any limit.

Why is the case so important?
The case shows how a customer can avoid a supplier's limitations of liability in a spectacular manner. Limitations are of critical importance in IT contracts where the consequences of the system failing are often much higher than the cost of the IT system itself, especially if complicated integration work is involved. In this case the value of BSkyB's claim, £700 million, was vastly disproportional to the monies paid, £48 million, and the agreed limit of liability in the contract, £30 million. The case is important because it will undoubtedly encourage dissatisfied buyers of large IT systems to 'have a go' in future, even where limitations of liability have previously been agreed in the contract. For instance, a bank or insurer who is unhappy that a piece of software or outsourcing contract isn't delivering the promised benefits could sue. The case should cause all IT suppliers to reflect on their salespeople and consider whether they ever 'oversell' products and services. Re-training or new sales literature may be required.

The case is an example of how the English litigation system is not for the faint hearted. The final costs have yet to be assessed but it has been estimated that the total legal costs to be borne by the losing party, EDS, will be approximately £70 million; far greater than the cost of the original system, £48 million. Even those in the financial services sector are likely to baulk at those figures!

The case also exemplifies the protracted nature of litigation in England:
• Some 500,000 documents were reviewed by the lawyers
• The court hearing involved some 70 witnesses and lasted for about a year of real time (109 days in court)
• The case started in summer 2002, and the judgment was given in January 2010. However, it was nearly 18 months after the trial ended before the judge was able to give his decision
• The January 2010 judgment is 468 pages long.

The original damages claimed by BSkyB were £700 million. The parties have yet to have further arguments about the amount of damages that will actually be awarded following the judge's ruling, however, they are expected to be about £220 million.

One reason that the costs were so high was because the case was, in part, a 'who said what, to whom, and when' dispute. Given that was the case and that BSkyB were alleging fraud, the credibility of witnesses became most important. One of EDS' main witnesses, Joe Galloway, the managing director of the relevant part of EDS, gave evidence that he had obtained an MBA from Concordia College, St. Johns, US Virgin Islands. He stated that he had studied there for about a year. It transpired that he had bought the MBA on the internet. Counsel proved this in open court by buying a degree with an identical glowing reference, but with better marks, for his dog Lulu! Case closed as they say.

*1 See Thomas Witter Limited v TBP Industries Limited (15 July 1994, unreported) and South West Water Services -v- International Computers Limited [1999] BLJ 420.