An English court recently ruled that the HP-owned EDS should pay £200m to BSkyB for a failed CRM system; this ruling may yet go to appeal, and the court may then overturn the judgement; either way, this is a significant case for the IT industry says Lesley Meall, FSN managing editor.
Those of us who have never set foot inside a courtroom get our (doubtless distorted) perspectives on the legal system from the world of make believe. The likes of Law and Order, Perry Mason, and The Firm, have led us to expect legal proceedings which are significantly more interesting and entertaining than reality can deliver – most of the time. But the recent UK High Court ruling on the dispute between satellite broadcaster BSkyB and (the HP-owned) EDS is an exception.
It may or may not have prompted highs and lows of drama, emotion, hilarity or tension among those participating in the courtroom proceedings, but the edited highlights do not disappoint those observing from a safe distance. It managed to deliver: big name participants, lies and deceit, a whopping pay out (of £200m plus costs) for the aggrieved, a dog with an MBA, and the potential to be a ‘landmark’ ruling (if not in legal terms) for providers and purchasers of IT services (of which more, later).
The tale began back in 2000 when EDS (now HP Enterprise Services) was awarded a £48m contract to provide BSkyB with a new customer relationship management (CRM) system. But by 2002 the honeymoon period was over and the relationship was in trouble: BSkyB brought a claim against EDS alleging that, during the tender stage, EDS had misrepresented its ability to deliver the project. EDS countered by arguing that BSkyB had no clear idea of what it wanted from the project and had continually altered its requirements, resulting in delays and other problems.
If you have not been following the case, you may (understandably) be wondering how BSkyB managed to end up with a £200m payout on a failed contract worth £48m. But this was no run of the mill IT dispute (even if the mud-slinging claims and counter claims do have a familiar ring). BSkyB alleged that the misrepresentations made by EDS were deceitful, as EDS had made them knowing that they were false (or with reckless regard for their truth), that as a result (under UK law), the contract liability cap (of £30m) did not apply, so it’s damages were in the region of £700m.
“Evidence of pre-contract deceit on the part of a contractor will not always have the effect of destroying a cap on liability,” explains Alistair Maughan, head of global sourcing with the law firm Morrison & Foerster, “but BSkyB was able to prove not just that it had been deceived but also that, in reliance specifically on that deceit, it had awarded a contract to EDS.” If the satellite broadcaster had not been misled, it alleged, it would have awarded the contract not to EDS but to PwC. “It was the combination of the deceit plus the reliance by the customer that made the difference,” Maughan adds.
Proving this sort of allegation is no small achievement. “Claims in deceit or fraudulent misrepresentation are rare because of the higher than usual standard of proof that is imposed on lawyers in England before they can make such an allegation,” reports Miles Alexander, a partner with the law firm Simmons & Simmons, in contrast to the US, where it is a commonplace allegation. “This was a fairly high-risk strategy for BSkyB,” comments Maughan, because if the allegation was unsuccessful, there was a chance of the other side’s costs being awarded against the accuser as a punitive measure, along with disciplinary action against its lawyers. But BSkyB did manage to prove its case.
Even if the case goes to appeal (as it may well) and even if the Appeal Court does not uphold the ruling in favour of BSkyB (as it may well), the case has wide-ranging implications. “I think that the scale of the damages award is likely to cause a change in the way that IT outsourcing services are procured,” says Maughan, as although it contained a “perfect storm” set of circumstances, it is not an abberation. “The judge applied existing law, rather than made new law,” explains Maughan, “and the case highlights the dangers of being too blasé about the sales process and how it gets translated into the eventual contract.”
As a result, service providers and purchasers of IT outsourcing services are likely to change their ways, to varying degrees. “Customers may start to exercise more diligence when conducting tenders, including asking their service providers to provide firm evidence to support statements made in the tender responses, including particularly dates for delivery,” suggests Maughan, and they will need to be much clearer about what they want from any outsourcing arrangement. “Customers need to invest more time in understanding what they require,” adds Alexander; while even bigger investments may be necessary among those providing IT services.
Service providers may need to change their internal processes to avoid the risk of misleading customers. “Rigorous take-on procedures need to be enforced, and suppliers will have to improve the training of sales teams in terms of better understanding the consequences of their actions,” recommends Alexander, because as Maughan observes: “Sales teams need to ensure that they can deliver on promises going forward and do not make hasty or ill-considered promises that could sow the seeds of a future deceit claim.”
There may also be repercussions for the bid process. “Service providers may need to work harder to justify their sales claims, and bid processes may end up being better and more detailed, but slower,” says Maughan, so the case might actually result in fewer failing IT projects in the future. “Both parties may need to spend greater time and resource in the preparation of bids and documentation,” he adds, taking a more protective and restrained behaviour thoughout the bid process, to ensure that there are no gaps or grey areas from which liability may arise.
“For a time at least, this may make both sides of the initial sales process more cautious about claims made and more prudent in their statements,” observes Maughan, but the success of BSkyB also has a potential downside. “One effect of the case that is perhaps less generally welcome, is the encouragement it might give to aggressive lawyers seeking to persuade their clients to engage in speculative fraud claims, by dangling the carrot of huge potential damages,” he adds, “even if the realistic chance of meeting another set of BSkyB type cirumstances is very low.”