Herbert Smith secures victory for BSkyB in landmark litigation against EDS

Herbert Smith's dispute resolution team has secured a major victory for BSkyB against IT supplier EDS (now part of Hewlett-Packard) in a claim for deceit, negligent misrepresentation and breach of contract. The judgment was handed down this afternoon by Mr Justice Ramsey in the Technology and Construction Court.

Background

In 2000 EDS undertook to design and build an advanced customer relationship management (or CRM) system at BSkyB's customer contact centres in Scotland. EDS was one of a number of companies which bid for the CRM project in a competitive tender process. The bid was successful and EDS was awarded the contract. However, they failed to implement the new CRM system and were ultimately removed from their role as systems integrator in 2002 by BSkyB, who then went on to complete the project themselves.

Herbert Smith was instructed in the Summer of 2002 to investigate and formulate potential claims. BSkyB's primary claim in the proceedings was that key personnel leading EDS' bid dishonestly made false representations as to the company's ability to design and build the CRM system within the anticipated budget and timeframe. As a result, BSkyB was fraudulently induced to award the contract to EDS. But for the misrepresentations by EDS, BSkyB argued that it would have contracted with one of the other bidders who would have successfully implemented the project earlier and at a lower cost overall.

Judgment

In his judgment delivered today, Mr Justice Ramsey found that EDS acted dishonestly in making false representations during the tender process and in advance of entering into the contract with BSkyB in 2000. In particular, he ruled that EDS falsely represented that they had carried out a proper analysis of the time needed to complete an initial delivery and go-live of the new system and that they held the opinion, and had reasonable grounds for holding the opinion, that they would deliver it within 9 months. In fact there had been no proper analysis carried out and there were no reasonable grounds for believing that the project could be completed within that time scale.

The Judge also found that EDS made further negligent misrepresentations during negotiations which took place the following year and that they were in breach of contract. The judge decided that BSkyB incurred significant damage as a consequence of EDS' actions. Whilst the contract contained a cap on liabilities of £30 million, this was not effective to limit EDS' liabilities for fraud, allowing BSkyB to recover a significantly higher sum. While a final figure for the amount to be recovered by BSkyB has yet to be given, it is anticipated that EDS will be liable to pay BSkyB a sum of at least £200 million.

Comment

Today's ruling is a landmark decision in one of the most significant commercial trials to take place in this country in recent years. The trial lasted for almost an entire court year, starting on 15 October 2007 and ending on 30 July 2008. It involved the court sitting for 109 days of submissions and cross examination of factual and expert witnesses. Herbert Smith reviewed in excess of 500,000 documents and evidence was given by over 70 witnesses in the course of the dispute.

The Herbert Smith team was led by four disputes partners: Ted Greeno, James Farrell, Julian Copeman and James Baily. 

Ted Greeno, the lead partner, commented: "This has been large scale litigation by any measure. However, Sky's determination to see the case through, coupled with Herbert Smith's expertise and experience of conducting large and complex litigation, has enabled Sky to recover an amount many times greater than the contractually agreed liability cap."

The decision has important implications, especially for the technology, outsourcing and consulting industries and for the clients of firms in those sectors. Although the case was decided on existing principles of law, it serves as a reminder that parties who make estimates or promises in pitches, tender responses or similar documents without a proper foundation in fact or reasonable analysis leave themselves open to major risk of legal liability. It also re-affirms that contractual caps on liability cannot be relied upon where a party has been proved to be dishonest. Today's decision shows that, in such circumstances, the courts are prepared to award very significant damages to compensate a client for the full financial consequences of any dishonest misselling.

Mark Turner, the head of Herbert Smith's outsourcing practice, commented: "Although this case concerned a very unusual set of circumstances, the repercussions of the judgment will be felt across the IT industry. A lot more attention will be paid to pre-contract discussions: suppliers will have to ensure that statements made during negotiations concerning system performance, time for delivery and cost are supportable and have been verified. Exclusion clauses limiting the liability of the supplier will be re-examined. We also expect that those insurers who cover suppliers for negligence to take a closer interest in their clients' sales processes and the terms of their contracts concerning misrepresentations to customers."

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© Herbert Smith LLP 2010