The long running case between British Sky Broadcasting ("Sky") and Electronic Data Systems, now HP Enterprise Services ("EDS") has now finally been decided in a decision that has taken 15 months alone for the judgement to be released.
In his recent 468 page judgment, Mr Justice Ramsay of the London Technology & Construction Court (a division of the English High Court) recently ruled that major IT and outsourcing provider EDS was partially liable to Sky in relation to the failed implementation of a new customer care or "CRM" system. Sky are now anticipated to be awarded damages in excess of £200 million. We summarise the facts and the outcome of the case below.
The Facts
Following an extended tendering process, in November 2000 Sky entered into a CRM implementation contract with EDS to refresh their subscriber and customer relationship systems. The implementation services under the contract were priced at initially £48 million and the contract had a liability cap of £30 million.
EDS committed to deliver a system which would "go live" in July 2001 for a baseline budget of £47.6 million. The implementation did not go as planned and the contract was renegotiated twice, in July 2001 and March 2002, when Sky took over as lead integrator. Sky alleged that by March 2002 EDS had repudiated the contract and it was effectively terminated. It was claimed that the CRM system was finally completed (by Sky) in 2006 at an approximate cost of around £265 million.
In August 2004, Sky issued proceedings against EDS, claiming in aggregate around £700 million under various heads of loss.
Because the contract contained a limitation of liability clause which would otherwise have constrained its ability to recover contractual damages at large, Sky not only alleged breach of contract, but also in the tort of deceit (ie for fraud) and for negligent misstatement under the Misrepresentation Act 1967.
The Judgment
Deceit
The Court found that EDS did not make fraudulent representations with respect to having sufficient resources, or in the estimate of costs in providing the system.
However EDS was found to be fraudulent in the timescales it provided Sky as it did not carry out a proper analysis of the time it would require to deliver the system and it had no reasonable grounds for its representations. The key factor in the judge's decision was the credibility and evidence provided by or in relation to the lead on the EDS side of the project, EDS managing director Joe Galloway who Mr Justice Ramsay found "demonstrated an astounding ability to be dishonest".
Negligent Misstatement
Mr Justice Ramsay concluded that the "Entire Agreement" provision in the contract did not prevent Sky from claiming negligent misstatement (a crucial drafting error). EDS were thus also held liable for negligent misstatement under the Misrepresentation Act 1976 for its statements which induced Sky to enter into a subsequent Letter of Agreement. EDS were found not to have "carr(ied) out a proper analysis and re-planning exercise" in producing the reviewed programme for it to be achievable.
Contractual Warranties
The court held that EDS breached warranties of use of reasonable skill and care and good industry practice as it failed to properly resource the project, delayed in carrying out the work and failed to capture the requirements or manage processes effectively.
Lessons to be learned
Whilst the damages that Sky anticipate to receive are huge, most of the allegations against EDS were actually dismissed. EDS have indicated that they will seek an appeal, disputing that they misled Sky. The case must therefore be seen in this context, and there is of course a possibility that the legal outcome will change.
Nevertheless, the case is part of a clear judicial trend and is a stark warning shot to suppliers of services in all sectors (not just those in the IT and outsourcing markets) who must now take time to consider their sales generation cycles and in particular those of their employees who are leading discussions with customers.
What this will mean for both vendors and customers is that "sales talk" and unattainable promises, combined with customers who are unsure of what they want and/or with unrealistic goals may have devastating consequences. Both sides will have to be careful in the way they describe the project and how that project will be delivered in the tendering, selection and contracting stages.
The outsourcing industry in particular is characterised by a model which is to drive sales "at all costs" and to incentivise this behaviour by aggressive use of commission driven sales teams. Local sales managers are in the very worst cases not subject to management oversight at all. The Sky case is perhaps an extreme case of this, particularly in light of EDS' managing director Joe Galloway, who was completely discredited and shown to be, in its classic sense, a liar. However, especially in hard economic times, it is perhaps time for the industry to take stock and consider how the risks of sales cycle processes and lead generation can be mitigated.
So far as outsourcing agreements themselves are concerned, the judgement also dealt with a range of other issues that will have wide implications not restricted to the industry, including:
• unless a standard Entire Agreement clause is worded carefully, a party could still be liable for misrepresentations made before the contract was signed;
• how the phrase "full and final settlement" may not be adequate if it does not explicitly cover "all known claims and unknown claims"; and
• clarifying the impact of the words "subject to contract" in the question of the enforceability of a Memorandum of Understanding.
What can you do ?
From a sales cycle perspective it is vitally important that you understand what your sales force are empowered to do, and how they are incentivised to write new business. Whilst no-one wants a complacent sales force, targets that are too aggressively set may amplify a natural human tendency to exaggerate and put your organisation at risk. It is clear from the facts of the Sky case that Joe Galloway was a "loose cannon". The fact that no-one was aware of his tendencies at EDS was a clear indictment of the supervisory management process within that organisation.
From a drafting perspective, in light of the comments made in the judgment, you should at a minimum revisit whether your standard agreements are effective, particularly in relation to limitation of liability and entire agreement provisions.