Sky EDS dispute 'shows service contract risks'

Sky's decision to seek £709m in damages from IT services contractor EDS for allegedly acting "dishonestly" when pitching for an IT services contract will be hard to prove in court, a lawyer has warned.

Conor Ward, a partner at law firm Lovells, told Computerworld UK that "the burden of proof is very high when you’re trying to prove deceit and fraud," which made court action rare.

Ward said Sky's decision to allege fraud was the only way to claim more than the £30m liability cap contained in the ill-fated £48m contract that Sky and EDS signed in 2000.

He said suppliers sometimes used the liability cap in their contracts to escape from a deal that was not going well and was unprofitable, but said it was equally hard for suppliers to get a fair deal when negotiating on contracts.

“It is a very thin line between selling your abilities properly when you’re bidding for a contract and pushing your luck on what you can actually deliver – because you may not know what you’re going to have to deliver.”

Ward said when contracts ran into trouble litigation was normally avoided by renegotiating a deal at the earliest possible stage.

Sky is seeking more than 14 times the value of the £48m contract it signed with EDS, accusing it of dishonestly represented the resources it had available for the project. EDS said in opening statements yesterday it took a risk in trying to deliver a system for which the specifications had not yet been formulated.

With EDS's pitch for the contract lying at the heart of the dispute, Jimmy Desai, a partner at Blake Lapthorn Tarlo Lyons, said most contracts explicitly stated that sales pitches could not be construed as an official statement of the supplier’s capabilities.

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“It’s called an Entire Agreement Clause,” he said. “This specifies that unless it is in the contract, representations made before signing it don’t count as legally binding.”

But Desai said that claiming fraud enabled a customer suing a supplier to circumvent such a clause. “It’s about the spirit of honesty in what you say in your sales pitch as a supplier. You’ve got to make representations that are fair and honest. If you’ve been totally dishonest, you can’t rely on protection from the contract.”

Both Desai and Ward advised that customers ensure their contracts cover exactly the requirements they need, and that suppliers also set out clearly what they are able to achieve. This needed to be explicit in the contract, they said, since sales pitches were often based only on partial project information, they said.

“Companies usually bring in the lawyers early to check that all representations made by the supplier are actually reflected in the contract," said Desai.

“But the customer does not always know what it wants, and a project’s scope can escalate as it goes on. EDS’s claim is a standard counter-claim from a supplier.”