BSkyB –v– EDS
In 2001 Electronic Data Systems (“EDS”) agreed to supply a Customer Management System to British Sky Broadcasting (“BSkyB”). It didn’t work. BSkyB therefore sued EDS. BSkyB (successfully, as it transpired) claimed that EDS salesmen had made negligent and fraudulent representations during the course of the negotiations. Although many claims were made by EDS, the main one that succeeded was in respect of a fraudulent misrepresentation that EDS’ had the ability to perform the project within the timescales stated by EDS. In law, a misrepresentation occurs when a salesman makes a false statement that persuades a party to enter into a contract. The statement needs to be one of fact, as opposed to opinion, but may be made verbally or in writing.
IT contracts invariably contain limitations of liability. In this case, EDS had sought to limit its liability to $30 million. However if BSkyB’s could show that there had been a false representation that had been made fraudulently, this limitation would not then apply. Indeed, one can never limit one’s liability for acting fraudulently. This was decided in the cases of Thomas Witter Limited v TBP Industries Limited (15 July 1994, unreported) and South West Water Services -v- International Computers Limited  BLJ 420.
In a civil case such as this, it is significantly easier to show “fraud” than in a criminal case. In the end the court decided that negligent and fraudulent misrepresentations had indeed been made. BSkyB could therefore claim all the damages that have been caused by EDS’ misrepresentations, without any limit.
Why is the case so important?
The case shows how a customer can avoid a supplier’s limitations of liability in a spectacular manner. Limitations of liability are of critical importance in IT contracts where the consequences of the IT system failing are often much higher than the cost of the IT system. In this case the value of the claim, £700m was disproportional to the monies paid, £48 million and the agreed limit of liability, £30 million. The case is important because it will undoubtedly encourage dissatisfied buyers of large IT systems to “have a go”, even where limitations of liability have previously been agreed in the contract. The case should cause all IT suppliers to reflect on their salespeople and consider whether they ever “oversell” products and services.
The case is an example of how the English litigation system is not for the faint hearted. The final costs have yet to be assessed but it has been estimated that the total costs to be borne by the losing party, EDS, will be about £70 million! Far greater than the costs of the system, £48 million. Even the largest of companies are likely to baulk at those figures!
The case also exemplifies the protracted nature of litigation in England:
- Some 500,000 documents were reviewed by the lawyers.
- The court hearing involved some 70 witnesses and lasted for about a year of real time (109 days in court).
- The case started in summer 2002, and the judgment was given in January 2010: however it was nearly 18 months after the trial ended before the judge was able to give his decision.
- The judgment is 468 pages long!
The original damages claimed were £700 million. The parties have yet to have further arguments about the amount of damages that will be actually awarded, however they will be about £220 million. Weighed against the likely damages, the total costs of £70 million are still significant.
One reason that the costs were so high was because the case was, in part, a “who said what to whom and when” dispute. Given that was the case and given that BSkyB were alleging fraud, the credibility of witnesses became most important. One of EDS’ main witnesses, Joe Galloway, the managing director of the relevant part of EDS, gave evidence that he had obtained an MBA from Concordia College, St. Johns, US Virgin Islands. He stated that he had studied there for about a year. It transpired that he had bought the MBA on the internet. Counsel proved this in open court by buying a degree with an identical glowing reference, but with better marks, for his dog Lulu!
In case you are wondering what happened to EDS, it was bought in 2008, while this case was proceeding in the law courts, by Hewlett Packard.