IT supplier found liable for fraud
BSKYB v EDS [2010]
The much awaited judgment in this high profile case was delivered in favour of B with a possible award of at least £200m in damages. The High Court found an individual employee of E (now part of HP) had made a fraudulent misrepresentation. Nevertheless despite the hype, this decision has not created any new legal concepts or principles nor should it have a major impact on the way IT providers deliver their products and services. However, it is a pertinent reminder to suppliers to ensure their sales personnel do not deliberately or recklessly make pre-contract claims that the company cannot back up. There are also some useful pointers on how to ensure that entire agreement clauses are as watertight as possible and how to make certain that settlement provisions are all encompassing.
facts:
B issued an ITT for a contract to build a customer relationship management system with two key timescales stipulated for its integration schedule. E was awarded the £48m contract on the basis that the managing director of the relevant part of E represented that E could meet these timescales. Problems with the project arose and B stepped in to build the system itself at a cost of £265m.
B brought a claim against E, alleging E had:
- lied about the development and timescale of the project during the bid process;
- made negligent misrepresentations about other aspects of the project; and
- committed several breaches of contract (including failure to provide skilled and experienced personnel and to exercise reasonable skill and care).
The contract had a limitation of liability clause of £30m and there was an entire agreement clause stating the contract superseded “previous discussions, correspondence, representations or agreement between the parties”.
decision:
The court found:
- The employee’s claim that B’s stipulated timescales could be met was dishonest as, amongst other things, this statement was made without any proper analysis of the amount of time required to complete the project. He knew this representation was false and that it had induced B to enter into the contract with E. B’s action for fraudulent misrepresentation was therefore upheld. Although the contract had a cap on liability, this did not apply, as it is not possible to exclude liability for fraudulent misrepresentations. However, B's other allegations of fraud were dismissed.
- E had made negligent misrepresentations relating to progress and re-planning issues which had led to the parties entering into a subsequent letter of agreement. The entire agreement clause did not expressly exclude liability for such misrepresentations but E’s exposure under this head was covered by the liability cap of £30m. B's other claims for negligent misrepresentation failed though.
- E was in breach of contract but liability for this was also caught by the contractual limit.
- B had not failed to mitigate its losses as E had claimed. B’s decision to take over the CRM system itself was reasonable in the circumstances.
B’s claim was for over £700m and an interim award of damages was made of £270m. HP (which now owns E) was going to appeal but since we initially reported on this case in February 2010, the companies have settled on a final total sum for HP to pay of £318m.
points to note:
- As with many cases, this decision turns very much on its facts and in
particular, the conduct of one individual employee. Nonetheless, the duration
of the litigation (2004-2010) and the inevitable legal cost, must indicate
some lessons for those involved in IT procurement.
- The extreme deceitful conduct of the employee (including committing perjury
in court) clearly adversely affected the Judge's conclusion, which may have
had a different outcome if the employee had merely been careless in committing
to the timescales. It is perhaps reassuring that E's sale processes were not
found to have prevalent failures or to be indicative of reckless behaviour.
- The law relating to fraudulent misrepresentations has not changed. As a helpful reminder, this means:
- damages are not limited by the usual remoteness rules found in the law of contract and tort;
- all losses flowing from the claimant’s reliance on the misrepresentation are recoverable, whether they are foreseeable or not;
- the claimant is under a duty to mitigate;
- liability cannot be excluded or limited in a contract;
- carelessness or incompetence are not sufficient to establish fraud.
- B’s pursuit of a claim for fraud therefore got round the contractual cap on liability and thus exposed E to potential unlimited liability. Bidders should therefore take extra care to ensure any statements made about their ability to deliver are properly assessed and grounded in substance to avoid or minimise this risk. This could mean that tender processes become more involved and hence slower and/or that bidders factor in an extra element of risk in their prices.
- Customers may be more willing to pursue such claims in relation to problematic IT projects if the prospect of circumventing a supplier’s liability cap is a possibility. However, proving fraudulent misrepresentation is not a task to be undertaken lightly and several strict criteria must be established for such a claim to be successful.
- Two drafting points for entire agreement clauses:
- they should expressly exclude liability for negligent pre-contractual misrepresentations. As with limitation of liability clauses which should expressly state that they are intended to cover any liability in negligence, entire agreement clauses will only cover any negligent misrepresentations made if there is an express reference to this effect;
- simply saying that the written contract ‘supersedes prior representations’ is only sufficient to ensure that prior representations do not form part of the contract. It does not, according to this judgment, prevent a party who has relied upon the representation from bringing a claim for misrepresentation. To do that, wording stating that a party has not relied on any representations is required.
- Care also needs to be taken when drafting a clause which purports to provide for a ‘clean break’ full and final settlement - particularly to ensure that any settlement covers not just claims for breach of contract but also liability in negligence and misrepresentation. Such claims must be referred to expressly. Also, whether the settlement covers potential claims which are both within the contemplation of the parties as well as so called ‘unknown claims’ should be clear.
- Otherwise, for those of you who are lawyers, although the
judgment comprises nearly 500 pages, it covers the basics of legal concepts
such as the various types of misrepresentation, entire agreement clauses,
liability clauses and repudiatory breach, which make valuable reading (if
you can stay awake!).