Weak wording in the EDS agreements with broadcaster BSkyB left the IT supplier entirely unprotected from statements it made in a sales pitch, according to legal experts.
A misleading sales pitch ten years ago, followed by legally problematic clauses in the contract, combined to create a successful fraudulent misrepresentation case against EDS, experts said.
The first draft of the contract was created by BSkyB lawyers on 19 September 2000. But weeks of negotiations followed and a final agreement was signed on 30 November, containing shortened exclusion clauses, and a changed limitation of liability clause, among other significant changes.
At the end of a lengthy court case, EDS was found liable of fraudulent misrepresentation, after the former head of its customer relationship management division lied about realistic timescales for delivering the £48 million system, as he made a sales pitch for the deal.
The aim of the “deceit”, the judge said, was for EDS to win the contract in the place of rival bidder PricewaterhouseCoopers. BSkyB expects to receive more than £200 million damages from HP.
HP strongly rejects the notion that EDS deceived BSkyB. It has announced it will appeal, and argues that BSkyB did not know what it wanted from the system, and was continually introducing new requirements as the project went along.
While individuals and companies cannot under law create clauses covering deliberately fraudulent statements, they can protect themselves from negligent comments, which will form a part of the award in this case. The judge noted in his judgment of the case that the Entire Agreement Clause failed to explicitly cover EDS from claims of negligent misrepresentation.
The lack of clarity in the clause left it open to interpretation, laying out a path in which stronger claims of fraud could be made, experts told CIO sister title Computerworld UK. Alistair Maughan, partner at Morrison Foerster, said: “Sky saw a weakness in the Entire Agreement Clause, and that encouraged them to seek out a more eye catching claim.”
The clause needed to be “watertight”, but failed to achieve this, he said. This, combined with what the judge termed “lies” by EDS’ customer software division head, made for a “perfect storm”, he said.
Paul O’Hare, commercial technology partner at specialist law firm Kemp Little, said the fraud claims themselves then enabled BSkyB to circumvent a liability cap of £30 million in the contract, and launch its £709 million claim.
“This is another example of the English courts being quite prepared to sidestep liability caps,” he said. “It’s been done before in different ways: in the early 2000s South West Water proved that liability terms in its failed contract with ICL, now known as Fujitsu, were unfair, and it won far larger damages than the cap would have allowed. In the BSkyB-EDS case, fraud claims were used to the same effect.”
The final contract signed in 2000 contained the words that the time schedule and project delivery stated in the deal and attached schedules “represent the entire understanding” and “the whole agreement”, and “supersede any previous discussions, correspondence, representations or agreement”. But it did not state directly that the previous representations that no longer counted included negligent statements.
The judge highlighted this point in his 468-page judgement of the case. The contract terms did not “amount to an agreement that representations are withdrawn, overridden or of no legal effect so far as any liability for misrepresentation may be concerned”, he said. If EDS, he said, “had intended to withdraw representations for all purposes then the language would ... have had to go further”.
“There needed to be the express exclusion of liability for negligence,” said a spokesperson at the Society for Computers and Law, a membership organisation. Furthermore, “ambiguous” wording in a Letter of Agreement a year later, as the project began to fail, contributed to the problem, the spokesperson said.
Industry experts said that with a second major case of of liability caps being circumvented in IT contracts, outsourcers could become extremely wary of anything they promise when pitching deals.
Martyn Hart, chairman of the National Outsourcing Association, wrote in a blog that while sales teams were under “pressure” to secure a win, the IT industry might need to seriously reconsider “the issue of commissions and targets”.
The BSkyB-EDS judgement, unless it is successfully appealed, gives other outsourcing customers “real ammunition” against their providers, O’Hare said, indicating that other dissatisfied companies may consider launching lawsuits against their outsourcers.
But Maughan cautioned against outsourcing customers considering similar claims of fraud, saying that it was the particular factors in this case that led to the claim.
"It's very difficult to prove fraud," he said. "But claims of negligence and breach of contract are common, and the problems here with the Entire Agreement Clause certainly give pause for thought."