BSkyB v EDS: Do not make promises you can't keep - representations made in tenders & on entering into contracts

A recent decision of the England and Wales High Court serves as a useful reminder about how representations as to capabilities made during tendering and contract negotiations can lead to liability in the event of underperformance of the contract. The case also highlights the importance of carefully drafted limitation of liability and exclusion clauses in contractual documents.

Background

Following a tender process in July 2000, BSkyB selected EDS to design, build, manage, implement and integrate the process and technology for a customer relationship management (CRM) system.

The project was beset by issues and delays from the start. In July 2001, following representations made by EDS as to its continued ability to perform the contract, the parties signed a Letter of Agreement which amended the terms of the original contract "in full and final satisfaction of: (a) all known claims…; and (b) all unknown claims…".

The performance of the project then again ran into difficulties and in March 2002, BSkyB terminated the relationship claiming that EDS failed to meet its contractual obligations and took on direct responsibility for the CRM system integration.

Instead of the CRM project going live on 31 July 2001 at the estimated cost of £47.6 million, the CRM system was completed in March 2006 at a cost of approximately £265 million.

The claims

1. Misrepresentations made prior to entering into the contract - BSkyB alleged that EDS was awarded the contract based on representations made that EDS had analysed the requirements to do the work and had reasonable grounds for believing that it could meet the time requirements agreed to in its tender response.

The court agreed with BSkyB’s analysis and found that EDS had not carried out a proper analysis of its capabilities to determine whether it could comply with the "go-live" and completion time requirements. The court confirmed that a duty of care was owed to ensure that there was a reasonable basis to make the representations.

In the circumstances, EDS had knowingly misrepresented its capabilities and the time that it would take to complete the work. In so finding, the court found that the managing director of EDS who made the misrepresentations was dishonest because he knew that the representations made were false. EDS was found liable in deceipt for the losses suffered by BSkyB as a result of the false (fraudulent) misrepresentations.

2. Misrepresentations made during the course of the contract - BSkyB alleged that EDS made further misrepresentations in the lead up to the parties agreeing to sign the Letter of Agreement in July 2001. In those discussions, EDS effectively claimed that it had available the resources needed to ensure that the project would be completed successfully in accordance with the revised programme and budget.

The court found that these representations were made by EDS in the negligent (as opposed to knowing) belief that they were correct. EDS was found liable for the negligent misrepresentations under the relevant statutory provision.

3. Breach of contract - BSkyB alleged that EDS breached the contract by failing to provide sufficiently experienced personnel, deliver the services and documentation in accordance with the contract or at all and exercise reasonable skill and care or conform with good industry practice.

The Court agreed with BSkyB’s claims that EDS had breached the contract. It found that there was no effective project management and there were insufficient technical and managerial resources. The Court found that even after issues had been identified and the contract was amended in mid 2001, EDS had still failed to properly resource the project. EDS had failed to exercise reasonable skill and care or conform to good industry practice in the way that it had attempted to perform the contract.

Limitation of liability clauses

The contract contained provisions purporting to limit EDS’s liability for breach of contract in the amount of £30 million. The Court was required to determine whether the limitation of liability provision applied to losses flowing from EDS’s liability for fraudulent misrepresentation. The Court found that the limitation of liability clause did not apply to the fraudulent misrepresentation claim thereby exposing EDS to liability over and above the contractual cap of £30 million.

EDS also attempted to rely upon an entire agreement clause in the contract to avoid liability for negligent misrepresentation. The contract contained the fairly common provision that the signed contract represents "the entire understanding and constitutes the whole agreement between the parties in relation to its subject matter and supersede any previous discussions, correspondence, representations or agreement between the parties…..". The Court found that the pre-contractual representations did not form part of the contract but nevertheless existed and could be relied upon by BSkyB to support a non-contractual based claim. For the pre-contractual representations to have no force or effect, the contract would have needed to have gone further to expressly state that the pre-contractual representations were "withdrawn, overwritten or of no legal effect".

Applying similar reasoning, the Court also found that the Letter of Agreement only resolved the claim for breaches of the original contract but not other non-contractual claims such as negligent misrepresentation.

Conclusion

The importance of the BSkyB v EDS case is clear. To minimise the risk of a possible claim:

• Care must be taken to ensure that preparatory analysis work has been performed to ensure that all representations are reasonably made and are well founded.

• The negotiations should be handled by proven and trustworthy personnel.

• Suppliers should ensure that they have the appropriate resources to deliver a project on time.

Whilst careful drafting of limitation of liability and other exclusion clauses in contracts may exclude liability for some claims, they may not provide protection where fraudulent misrepresentation or statutory misleading and deceptive conduct is found to have occurred. To mitigate this risk, the parties to a contract can agree on exactly what representations are relied upon by each party - by attaching a schedule of representations relied upon to the contract - and confirming that they do not rely on any other representations.

This case also demonstrates the Court’s reluctance to confirm the operation of limitation of liability and exclusion clauses unless they are clear and unambiguous in their terms.

Author - Gavin Stuart