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When IT Projects Go Bad - An Analysis of the Kingsway Hall Hotel Case & the BSkyB case

16 September 2010
Mayer Brown Article

Two recent English cases show how buyers of IT can sometimes escape from the exclusion clauses that their suppliers try and impose on them.

The Kingsway Hall Hotel case

One of the cases involved the company behind the Kingsway Hall Hotel, a four star hotel in Covent Garden, London.  It used an IT contractor called Red Sky to supply a software package and related services.  The software package related to front and back office reservations and point of sales systems, including software to facilitate advance reservations, the checking in and out of guests and billing.  There were some significant problems: the system did not accurately show room availability at any given time – often showing that all the rooms were fully booked when they were not!  Nor could it handle group bookings, and it frequently froze and crashed.  Kingsway asked Red Sky to put the problems right but it failed to do so.  Not surprisingly, Kingsway then rejected the software and found a replacement system.  It sued Red Sky on the basis that the software was not of "satisfactory quality", nor "fit for purpose" (terms which have a special meaning under English law).  Red Sky tried to rely on terms in its contract which excluded liability for these.

Red Sky's standard terms and conditions only warranted that the program would "in all material respects provide the facilities and functions set out in the Operating Documents" (i.e. software manuals) and excluded all liability for fitness for purpose etc.  Where a business is contracting on an IT suppliers' standard terms, as will often be the case, English law says that these kind of exclusions are only valid if they are reasonable.

The way in which Red Sky's documents worked pre-supposed that its customer would have the opportunity to examine the software and the manuals before it signed up to the contract and the exclusion clause only applied where manuals were handed over to the customer.  However, this did not tally with what actually happened in practice.  Red Sky did not provide any manuals to Kingsway and so Kingsway had no way of ensuring that the software was suitable for its needs.

This meant that the exclusion clause did not apply but even if it had done, it would not have been reasonable.  So Kingsway won the case and established that the software was not "fit for purpose" or of "satisfactory quality".  The judge awarded Kingsway damages under four heads; lost profits and loss of goodwill, the cost of a replacement system, additional staff costs (including hiring an additional reservations manager) and wasted staff costs (including daily manual checking of room availability) which totalled £110,997.54.

The outcome might have been different if Kingsway had had the opportunity to satisfy itself that the software met its needs.  Instead, it had relied on Red Sky's advice that the software would be appropriate for a busy London hotel and Red Sky's employees had known that group bookings would have been an essential requirement for the hotel. 

The BSkyB case

Assurances given by salesmen were also relevant in the other case, between media company BSkyB and its supplier EDS.

BSkyB had gone out to tender for a contract to design, build and implement a new customer relationship management system.  EDS won the pitch but the project ran into difficulties (to put it mildly) and eventually BSkyB had to take over responsibility for implementing the software.  It then sued EDS claiming damages of more than £700million.  Interestingly, damages for breach of contract and negligent misrepresentation appeared to be capped in the contract between EDS and BSkyB at £30 million and so BSkyB's claim of £700million was dependent on it being able to prove fraudulent misrepresentation (i.e. fraudulent statements, on which BSkyB had relied) which fell outside the liability cap.  BSkyB alleged that EDS had made fraudulent misrepresentations in relation to resources, costs, time, technology and methodology at the bid stage, before the contract was entered into, and which had led to BSkyB awarding EDS the contract.  The court found that EDS had no basis for honest belief in the truth of its time estimates – in part because it was unable to evidence that any proper analysis of them had been carried out before or after the tender process.  The promises made in relation to time were therefore made dishonestly by an EDS representative.  However, the fact that BSkyB only succeeded on one of its five claims highlights the difficulty in proving fraudulent misrepresentation. 

Not surprisingly, EDS tried to rely on an "entire agreement" clause contained in the agreement which prevented prior representations from giving rise to contractual liability.  However this clause was not clear enough to exclude liability for the misrepresentations which had been made and which had induced BSkyB to enter into the deal.

Although BSkyB won the case, the parties agreed to settle the action with Hewlett Packard (formerly EDS) paying BSkyB £318 million.  While this figure is substantially less than the amount BSkyB claimed, it is significantly higher than the £30million liability cap contained in the agreement.   When contracting with IT suppliers – and in any other kind of contract where bespoke services or products are being provided – it is always a good idea to make sure that assurances given by the supplier's sales team are written into the contract.  If they are not, you may well find that you are not able to rely on them.

For enquiries related to this Legal Update, please contact:
Sara Byrt ( )
Mahisha Rupan ( )

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