Legal analysis - fraudulent misrepresentation: Love my tender

At the end of last month, in an eagerly anticipated judgment, Mr Justice Ramsay upheld British Sky Broadcasting's claim that it had been defrauded by Electronic Data Systems during the tender and bidding stages for an IT services contract.

Following a tender process in 2000 to install a customer relationship management system in the broadcaster's contact centres, EDS entered into a contract (the prime contract) with SSSL, a subsidiary of Sky, to provide it. The performance of the contract appears to have gone awry from the start and, despite a renegotiation in 2001, Sky took over the running of the contract from EDS in 2002.

A project costed by EDS as being deliverable for £47.6m and completed within 18 months, actually cost £265m and was completed by Sky four years later.

The broadcaster alleged that EDS made fraudulent misrepresentations from the tender process onwards and claimed damages of £706m. It also alleged that the cost and time estimates could never have been delivered and that EDS provided inaccurate estimates to induce its selection over and above the competing bids.

High burden of proof

Fraudulent misrepresentation is notoriously difficult to prove as it requires proof of intent and Sky had to demonstrate that EDS knew the representation was false at the time it was made — or was at least reckless as to its truth (mere carelessness or incompetence is insufficient) — and that Sky relied on the fraudulent misrepresentations in awarding the contract.

EDS denied all allegations of fraud and claimed that the scope and complexity of the broadcaster's requirements kept changing. Furthermore, EDS sought to rely on: a contractual limitation of liability clause to cap liability at £30m; an entire agreement clause — a clause that seeks to prevent the party relying on it from being liable for any representations, including pre-contractual representations, except those expressly set out in the agreement; and Sky's failure to mitigate its loss.

One of the more intriguing aspects of the judgment was the finding that a former managing director of EDS, Joe Galloway, gave dishonest evidence to the court when he lied about his qualifications at Concordia college. The point was amusingly illustrated by Sky's barrister who presented the court with an MBA from the same college awarded to his dog Lulu. While this may turn out to be one of the more memorable facts about the case, there are other findings that will give in-house lawyers, accountants and anyone involved in drafting contracts a useful reminder on the importance of checking the ambit of boilerplate clauses.

Given the impact of discrediting a key witness, it is perhaps surprising that only one out of a number of allegations of fraud was made out. But proving dishonest intent remains a difficult test for a claimant to meet. For example, there were no misrepresentations as to resources; phrases such as "we have the resources reserved for this project" were not construed as meaning that EDS actually possessed and had readily available all those resources in skills and numbers, given the uncertainty as to the scope of the project at that time.

Equally, there were no misrepresentations as to costs because there was evidence that an estimating process was followed in producing the costing spreadsheets. The judge was not persuaded that Sky had established the budget was prepared on an improper basis.

But it was in relation to timing that EDS was unable to show a proper assessment — in particular, whether 'go-live' could be achieved in nine months. The judge found that Mr Galloway had lied to cover up the unsatisfactory process by which the timescales had been assessed and he deliberately gave timescales he thought that Sky wanted — knowing there was no reasonable basis for them. As one of the aims in the tender offer was to achieve go-live within nine months, it was clear that Sky did rely on the timing representation.

EDS tried to limit the claim by reference to the prime contract. However, the judge found that the words "this agreement shall supersede any previous representations" were not sufficiently clear to exclude liability for negligent misrepresentation. The limitation clause did limit EDS' liability for such negligent misrepresentation to £30m but the case confirmed it is not possible to limit liability for fraudulent misrepresentation.

Significant costs

This case is ongoing — there will be a quantum hearing and possibly an appeal. However, the costs for EDS (unless the appeal is successful) are significant, with a probable £200m award for misrepresentations made during a tender as to the length of time for the project to achieve go-live (rather than its cost), in a contract with a limitation of liability clause at £30m.

The case provides a number of salutary lessons for suppliers and their insurers. If suppliers seek to exclude liability for non-fraudulent pre-contractual representations, there must be very clear wording in the contract. Those in government who manage large-scale IT contracts that have come in for much criticism will also be looking carefully at how this case was decided and how the tender process for such projects can be improved.

Furthermore, the judgment highlights the lengths to which a court will examine the level of analysis involved in a sales pitch process. Those tendering for such contracts will have to ensure bids are managed appropriately and based on sound facts. Parts of the judgment are applicable to most commercial negotiations in which suppliers 'over promise' to customers who often do not know exactly what they want. Ultimately, a finding of fraud is very likely to vitiate any insurance cover they have in relation to a dispute over the contract.

Dipti Hunter is an associate, and Michael Williams a solicitor, in the commercial dept of DAC