30 September 2010
Information technology (IT) projects that go seriously wrong can be costly, as UK satellite TV broadcaster Sky found out when its contract with EDS to design, develop and integrate a new customer relationship management system overran by more than three years and cost Sky some £217 million more than it had anticipated (from a baseline budget of £47.6 million). The recent high-profile judgement in the English case of BSkyB v. EDS highlights not only specific issues involving misrepresentation, but also a number of wider concerns relating to the procurement process with implications for the IT and outsourcing industries.
Sky sought to obtain a new customer relationship management system that would provide improved service to its call centre customers. Electronic Data Systems (EDS) won the invitation to tender in 2000 but performed poorly at implementing the new system and meeting the 18-month timeline agreed upon with Sky. Sky ultimately took over EDS’ role in 2002 but only finished the project in March 2006 at a total cost of about £265 million.
Sky launched legal proceedings in 2004, claiming damages of £709 million for EDS’ fraudulent misrepresentations that led Sky to select and contract with EDS, negligent misrepresentations that had led Sky to renegotiate the contract in 2001 and breach of contract. EDS sought to rely upon an entire agreement clause in the contract to exclude pre-contract representations, and a limit of liability clause which capped its liability at £30 million. Because liability for fraud cannot be limited or excluded under English law, proving fraudulent misrepresentation was vital if Sky was to recover more than £30 million.
Credibility of EDS’ Key Witness
Critical to Sky’s case was the allegation that Joe Galloway, a managing director who led EDS’ response to the tender, was dishonest in his conduct with Sky. By way of example, Sky’s counsel demonstrated that although Mr. Galloway had said in his witness statement that he had obtained an MBA from Concordia College, St. John in the US Virgin Islands, it was in fact possible to buy an MBA from Concordia College’s website. Sky’s counsel actually did this in the name of his dog Lulu, obtaining a certificate and transcripts that gave Lulu better results than Mr. Galloway’s. Mr. Galloway asserted that he had not bought his MBA online but, rather, had taken flights from a nearby island to St. John to attend classes at the university for a year while working on a project there for Coca Cola. However, these claims were rebuffed with evidence that was no Concordia College, Coca Cola office or airport on St. John.
Sky also showed that before it selected EDS, Mr. Galloway had sent Sky a rate card spreadsheet containing errors that would have led to EDS making significantly lower profits from the project than he had calculated. After EDS had been selected and Sky sent to EDS the draft letter of intent to appoint them, attaching this rate card, Mr. Galloway realised his mistake and forwarded to Sky a fabricated email. The email contained a corrected rate card spreadsheet, representing a substantial increase in costs to Sky, which Mr. Galloway said had been sent to Sky soon after the original rate card in an attempt to make it appear that he had spotted the error and tried to rectify it before the selection of EDS.
The evidence led the judge to the conclusion that Mr. Galloway had shown “an astounding ability to be dishonest,” that his “credibility was completely destroyed by his perjured evidence over a prolonged period” and that his evidence could not be relied upon alone.
Despite the judge’s conclusions, Sky still needed to demonstrate that it had relied upon dishonest representations that Mr. Galloway had made on behalf of EDS.
Sky submitted that EDS had made five major misrepresentations, but the court only found one allegation of fraudulent misrepresentation to be proved: that while EDS had represented to Sky that EDS had carried out a proper analysis of how long it would take to complete the project, Mr. Galloway had in fact, despite leading the estimating process, approached the whole question in a cavalier fashion while aware that no proper attempt had been made to assess whether the project could be completed in the time- scales proposed.
The judge concluded that Mr. Galloway ignored the need for analysis, proffering timescales which he thought were those Sky desired without having a reasonable basis for doing so. The judge further held that Mr. Galloway had known that the timescales were inadequate because he had initially disagreed with them as insufficient in an earlier EDS draft, but still allowed their use in EDS’ response to Sky. The judge found that Mr. Galloway’s conduct “went beyond carelessness or gross carelessness and was dishonest . . . he acted deliberately in putting forward the timescales knowing that he had no proper basis for those time-scales. At the very least he was reckless, not caring whether what he said was right or wrong.” Sky relied on this misrepresentation in awarding the contract.
The court found that the entire-agreement clause in the contract excluded contractual liability for any representations made by EDS before entering into the contract, but in the absence of express wording to the contrary, did not exclude liability for negligent misrepresentation.
The finding of fraudulent misrepresentation circumvented the £30 million liability cap and the entire-agreement clause. EDS was ordered to make an interim payment of £270 million when judgment was handed down in January 2010. In June 2010 it was reported in the press that the parties had agreed to settle, with EDS making a total payment of £318 million to cover Sky’s damages, costs and interest.
The fact that Sky only succeeded in proving one of its allegations demonstrates the difficulty of establishing fraudulent misrepresentation under English law, even where a leading employee of the supplier has clearly been dishonest. If Sky had failed to prove fraudulent misrepresentation, the company could only have recovered a maximum of £30 million, a fraction of the costs that they allegedly incurred. In any event, Sky recovered approximately 45 percent of the £709 million in damages claimed.
This case demonstrates the need for customers to carefully investigate proposed suppliers and their responses while running a procurement process, and to ensure that any cap on liability is sufficient for the losses that the customer might experience as part of the project. Suppliers should ensure that correct procedures are in place for carefully considering invitations to tender and diligently preparing their responses. Suppliers should also identify all pre-contract representations that they want to exclude and expressly reference them in entire-agreement clauses.