More than a matter of trust

The recent High Court decision in BSkyB Limited and Another v HP Enterprise Services UK Limited and Another (2010) has certainly made the legal community sit up and take notice. Although a case notionally about an IT contract and the level of damages due to BSkyB, it serves as useful reminder to everyone working in the property and construction industries about the effectiveness of entire agreement clauses and caps on liability, as well as the possible consequences of not being able to verify assertions made at tender stage.

An unbelievable tale
The case centred on misrepresentations – untrue statements or conduct which induce another party to enter into a contract. A misrepresentation is fraudulent if the maker knows it is untrue; it is negligent if the maker could have no reasonable grounds for believing it to be true.

Electronic Data Systems Limited (EDS), now a part of Hewlett Packard, was selected to design, build, manage, implement and integrate a new customer relationship management system for BSkyB. At the tender stage, EDS’ managing director Joe Galloway made a number of representations about EDS’ ability to deliver the project; in particular in relation to time, costs and resources.

BSkyB and EDS entered into a £48m contract, which estimated that the new system would become operative in approximately nine months. However, there were problems almost from the outset, and it became clear that the project timescale would have to be extended. EDS and BSkyB entered into discussions about this and the contract was amended accordingly.

This did not solve the problems though and the project once again ran into difficulties. Approximately two years after entering into the contract with EDS, BSkyB’s patience ran out. It took over responsibility for implementing the project and reduced EDS to the role of IT supplier. In the end, the customer management system was finally implemented at a cost of £252m.

BSkyB brought proceedings against EDS in which they claimed damages of over £700m.

A central argument in BSkyB’s case was that EDS and Mr Galloway had made both fraudulent and negligent misrepresentations which had caused it to select EDS and then retain it when the original contract was renegotiated.

Fraudulent misrepresentation
Judge Mr Justice Ramsey agreed with BSkyB that EDS had made fraudulent misrepresentations; in particular false statements at tender stage in relation to timescales.  It was clear that EDS had done no real analysis, planning or sequencing to establish the operative date. Further, Mr Galloway admitted in cross examination that, although he knew the timing plans submitted at the tender stage were insufficient, he had not sought to work out any alternative plan. He had therefore deliberately proffered timescales in which he had no belief.  

On the basis of the evidence (or lack of it) before the judge, it is unsurprising that he found that the representations made by EDS at the tender stage in relation to timescales were negligent – even suggested that they were grossly negligent.

A contributory factor to the decision, and one of the reasons why this case has caused such a stir, was the conduct of Mr Galloway himself. He had originally claimed that he had an MBA from Concordia College in the US Virgin Islands. Although notionally true, it transpired that the Concordia in question was a diploma mill – a website which from which people could buy a degree without having done any study. To prove Mr Galloway’s perjury, BSkyB’s QC, Mark Howard, bought the same degree for his pet dog Lulu. Amusingly, the dog achieved better grades than Mr Galloway.

To make matters worse for EDS, Mr Galloway maintained the lie for three whole days; repeatedly and confidently giving dishonest answers about the circumstances in which he had obtained his degree and fabricating an entire story about living, working and studying at a non-existent university. The judge considered that this conduct demonstrated an “astounding ability to be dishonest” which, while it did not in itself prove that fraudulent representations had been made, was certainly a relevant factor to be taken into account.

Negligent misrepresentation
EDS was also held to have made negligent misrepresentations prior to entering into the amended contract. The representations made at this time were not considered to be fraudulent because EDS was able to adduce evidence to show there had been some analysis and planning. However, BSkyB persuaded the court that the revised plans were not achievable. EDS had therefore been negligent.

Damages for negligent and fraudulent misrepresentation are not subject to the normal rules of foreseeability and, as such, BSkyB can claim all of its losses flowing from EDS’ misrepresentations. These damages are still to be assessed and quantified. However, it is understood that EDS has already had to pay out over £200m in interim damages to BSkyB.

It has long been accepted that damages for fraudulent misrepresentation cannot be limited by contract. However, the same rules do not apply to liability for non-fraudulent misrepresentation. EDS argued that the wording of an entire agreement clause in the contracts acted to exclude liability for non-fraudulent misrepresentation.

The judge did not agree. He decided that the wording of the entire agreement clause was not sufficiently clear to exclude liability for negligent misrepresentation.
 
In short, unless there is express wording which excludes liability for non-fraudulent misrepresentation, then no such exclusion will apply. There was no such wording in this entire agreement clause.

To make matters more confusing, there was wording in the contract which stated expressly that fraudulent misrepresentation was not excluded. EDS tried to argue that this implied that other types of misrepresentation were excluded. This wording was held to be insufficient.  

There was nothing which said, “liability for negligent misrepresentations is excluded” and it now appears nothing short of that will do.

Lessons to be learnt?
With recent cases suggesting a culture of dishonesty in the seeking of property and construction sector contracts, this case serves as a helpful reminder to four specific points about contract law.

First, it emphasises the importance of keeping documentation to substantiate any assurances or representations made when bidding for work. Care must be taken to ensure that any assurances made – for example, in relation to project timescales – do not cross the line from optimistic or competitive to negligent.  

Second, although representations made at the tender stage will not normally influence contractual interpretation, if they are negligent or fraudulent and induce the other party to enter into a contract, then they are likely to be actionable. 

Third, this case reminds us that liability for fraudulent misrepresentation cannot be excluded – and therefore such misrepresentations will not fall within any clause which caps, limits or excludes liability.  A carefully drafted entire agreement clause could exclude liability for negligent misrepresentation, but only if clear words are used.
Finally and most obviously perhaps, don’t tell lies about made-up qualifications bought online, this will more than likely be found out.

Stuart Pemble is partner and Susannah Wilson a solicitor at Mills & Reeve LLP Visit: mills-reeve.com