Court out?

What opportunities do purchasers have to challenge pre-contractual negotiations? In the recent judgment of Mr Justice Ramsay, Electronic Data Systems (EDS) fell foul of claims it had made to British Sky Broadcasting (referred to by the judge as "Sky") during the tender process for an IT services contract.

The dispute arose out of a bidding process in 2000 for a contract to install a customer relationship management system (CRM) in Sky's contact centres. EDS entered into a contract (the prime contract) with SSSL (a subsidiary of Sky) to provide the CRM system. The project soon ran into difficulties and, despite a renegotiation in 2001, Sky replaced EDS as systems integrator in 2002. It is striking that EDS had forecast the project would be completed within 18 months at a budget of £47.6m when in fact it was completed by Sky four years later at a cost of £265m.

Sky claimed damages of £706m, alleging that EDS had made fraudulent misrepresentations from the tender process onwards. Sky alleged that EDS could never have delivered the costs and time estimates it gave and that EDS provided inaccurate estimates to induce Sky to award the contract to EDS, instead of the competing bidders. EDS denied all allegations of fraud and claimed that the scope and complexity of Sky's requirements kept shifting.

Sky faced the difficult test of proving fraudulent misrepresentation - that EDS knew that the representation was false at the time it was made or was at least reckless as to its truth (carelessness or incompetence being insufficient) - and that there was reliance by Sky on the fraudulent misrepresentations when it awarded the contract to EDS.

The decision

Notwithstanding the legal obstacles, it was alleged during the course of the trial that EDS' main witness, former managing director Joe Galloway, had not told the truth about his qualifications. However, other aspects of the judgment are instructive of the requirements of a proper process to underpin pre-contractual negotiations and there are also important lessons in clear contractual drafting to exclude liability for negligent misrepresentations.

In relation to the representations as to timing, the judge found that EDS was liable to Sky for fraudulent misrepresentation because Galloway had supposedly covered up the unsatisfactory process by which the timescales had been assessed and he gave timescales he thought that Sky wanted, knowing there was no reasonable basis for them.

It might be expected that such representations could be excluded, but fraudulent misrepresentation cannot be excluded by contract. Nevertheless, the reasoning as to the fraud was only applied by the judge to timing and not the sales team's budgeting. The budget was based on costs spreadsheets, which set out an estimate of the development effort required, and the judge was satisfied they reflected reasoned group discussions, i.e. there were witnesses other than Galloway to establish the facts. Crucially, although the costing spreadsheets provided the overall days to work, they did not assess what work was needed over what period to go-live in nine months. There was no such credible documentary evidence of a group analysis of the resources necessary to carry out the work in the nine-month period.

There remain a number of issues yet to be decided regarding the quantum of the claim. Although the initial project was costed at £47.6m, Sky's claim was for more than £700m. Since Sky elected to take over the role of EDS on the CRM project, EDS tried to argue that Sky had failed to mitigate its loss. The court analysed in detail the work that Sky had to undertake to get the project to completion. Complex expert evidence was provided as to the modelling and architecture of the CRM and how this was managed subsequently by Sky. Although the IT experts agreed that Sky performed less well and took longer than a competent systems integrator (CSI), EDS accepted that it was right for Sky to take over the role. The court subsequently found that Sky had not failed to mitigate its loss as it could not be expected to perform to the same standards as a CSI.

Companies and Government bodies negotiating failed IT projects will want to pay close attention to how Sky managed the project without EDS. Purchasers often stick with a provider believing it to be too difficult to end the relationship, rather than start with a new provider or take the project on themselves.

Comment

This case is ongoing and there will be a quantum hearing and possibly an appeal. However, the main interest of the case will be to examine what lessons can be learnt from both a supplier and purchaser point of view in managing large-scale IT projects and how the costs of the programme of works can be limited both through the contractual documentation and through the subsequent management of the project. The pressure on sales teams to win a contract has been put in the spotlight and the data upon which sales teams base their bold assertions will be scrutinised by the court in detail. However, the fact that Sky only partially won the case on one of five grounds indicates the contractual framework remains of great importance to IT suppliers so they have the comfort that they fully understand their potential liability.