Opinion: BSkyB vs EDS: time to rethink IT services contracts

Such disputes rarely reach the courts and this decision could set an important ­precedent, since among other things it will test the circumstances in which: (a) a ­supplier can be held to account for its pre-contract sales pitches; and (b) suppliers can rely on, or customers overturn, ­contractual limitation of liability clauses.

In 2000 EDS won a £48m contract to provide BSkyB with a new customer ­relationship management system. The project soon ran into trouble and, in
2002, BSkyB brought a claim alleging that, ­during the tender stage, EDS had ­misrepresented its ability to deliver the project. BSkyB said that, were it not for those misrepresentations, it would not have awarded the contract to EDS.

The stakes were raised significantly when BSkyB set its damages claim at just more than £700m, an amount far in excess of the maximum exposure that EDS might have contemplated upon entering the contract. While the contract capped EDS’s liability at a much lower level, BSkyB alleged that the misrepresentations made by EDS were deceitful (as EDS had made them knowing they were false, or at least being reckless as to their truth) and, as a result, the ­contractual ­liability cap did not apply.

The type of pre-contract ­representations that BSkyB has alleged were deceitful may sound familiar to those accustomed to suppliers using what some may view as ‘sales talk’. For example, BSkyB has pointed to representations from EDS that the key products that EDS intended to use in its solution represented “proven leading-edge technology” (when in fact EDS had not previously used the products together) and that EDS would “meet the financial and budgetary targets that you have set” (when EDS had not ­carried out a proper estimate of costs).

EDS has vigorously denied BSkyB’s ­allegations, claiming that its representations were not false and that there was no deceit. EDS has also countered by arguing that BSkyB had no clear idea of what it wanted from the project and by ­continually altering its requirements had caused long delays and other problems.

If the court upholds BSkyB’s ­allegations of deceit, this could be a major turning point for the IT and outsourcing industry and could lead to the following effects:

• Suppliers may need to become more ­circumspect when trying to sell their ­services to avoid the risk of misleading their customers.
• There may be an increase in claims alleging deceit against suppliers (which to date have been difficult to prove and are rarely successful), not least because such claims may allow customers to bypass ­liability caps that would otherwise limit the amount of damages they can claim for.

If BSkyB can recover anything close to the £700m-plus it has asked for, other customers may be encouraged to push the boundaries by seeking to recover damages for financial losses (such as loss of cost savings and loss of profits) that are usually excluded by liability caps. In response, suppliers may become far more reluctant to take on complex projects, where the risk of failure (and therefore exposure to ­damages) is higher than ­normal.

On the other hand, if the court finds that there was no deceit by EDS, then BSkyB’s case may be fundamentally undermined. In this event, customers not wanting to be caught in the same position as BSkyB may start to exercise more ­diligence when conducting tenders, including asking their suppliers to ­provide firm evidence to support statements made in their tender responses. As such, ­suppliers may need to work harder to ­justify their sales claims.