Chihuahuas…Retrievers…even St Bernards…Our evening constitutional round the Mid-Levels brings my wife and I into contact with a wide range of our canine friends, in varying degrees mostly unsuitable for living in the confines of the average Hong Kong apartment. However, I eye these mutts with new respect, following the influence of a particularly well-qualified pooch called Lulu, on a recent decision of the Technology & Construction Court in London.
IT supplier EDS is to pay a total of GB£318 million to settle a dispute over a contract which it entered into 10 years ago with the broadcaster BSkyB . This payment marks the end of one of the IT industry’s longest-running and most expensive court cases. The original contract was worth £48 million and contained a limitation of liability cap set at £30 million. As some Governments wield the axe on public-spending budgets, creating even greater pressures on the Construction sector to win mandates to build a reducing number of projects, the case serves as a very painful reminder that the law of misrepresentation is alive and that senior management need to have processes in place in order that they can take immediate action if there is any suggestion of fraudulent practices during the sales process.
The case is reported as BSkyB Limited (“BSkyB”) (and others) v HP Enterprise Services UK Limited (formerly Electronic Data Systems Limited) (“EDS”) and others  EWHC 86 (TCC).
BSkyB hired EDS to build it a £48 million customer relationship management (CRM) system in 2000. The project ran into difficulties at an early stage and re-planning amendments were made to the Prime Contract in July 2001. The first major stage of the project was completed late and further serious performance issues led to relations between the parties breaking down. Relations between the companies broke down in 2002 and BSkyB assumed responsibility for implementing the CRM system itself, and ultimately completed delivery in March 2006 at a cost of £265 million. BSkyB and Sky sued EDS, claiming that the company had lied about the development and timescale of the project during the sales process. BSkyB alleged that EDS had made fraudulent misrepresentations in relation to the availability of resources, time, cost, ‘proven technology’ and methodologies. It also sought damages for negligent misrepresentation and for breach of contract. In total, it originally sought more than £700 million from EDS. The contract signed by the two companies contained a £30m limitation of liability which would apply if the project faced difficulties. That cap would not apply, though, in the event that fraud was established.
In January, the High Court upheld one of BSkyB’s five fraud claims. EDS’s claim that the project would deliver “on time and budget” was fraudulent, ruled Sir Vivian Ramsey in a judgment which ran to almost 500 pages. A key witness for EDS was the Managing Director of its CRM business at the time of the contract. Sir Vivian found that he had masterminded the bid for the contract and said he displayed an “astonishing ability to lie.” One month after issuing its judgment on the facts, the High Court ordered that EDS should make an interim payment of £270m to BSkyB pending a final ruling on damages.
The judge found that only one of BSkyB’s five claims of fraudulent misrepresentation, relating to the anticipated timescale of the project, was established. Ramsay J. also found that EDS was liable for negligent misrepresentations in respect of statements made during the 2001 re-planning negotiations and that EDS was liable for certain breaches of contract for failure to exercise reasonable skill and care or conform to good industry practice by:
failing to properly resource the project;
being seriously in delay in performing the works; and
carrying out little work due to either failing to properly capture requirements, manage that process or through general lack of progress.
During the bid phase, the MD had told BSkyB that the system could go live within nine months and be completed within 18 months (in accordance with the timescale set out in the Prime Contract). Ramsay J. decided the statement was made without any basis or assessment of the actual time it would take and was made purely to ensure that EDS won the contract. As such, the MD was reckless as to the truth of the representation and, as BSkyB had relied on it in selecting EDS above its competitors, the cause of action for fraudulent misrepresentation was established:
“In my judgment his conduct went beyond carelessness or gross carelessness and was dishonest. I consider that he acted deliberately in putting forward the timescales knowing that he had no proper basis for those timescales. At the very least he was reckless, not caring whether what he said was right or wrong.”
The emphasis in the judgment is on the dishonesty of one man, since dismissed from EDS, and there were no findings of systemic or widespread internal failures or recklessness in relation to EDS’s wider sales processes. The extreme nature of the individual’s deception tainted the balance of his evidence, including evidence about the relevant representations. The judge’s approach may have differed if EDS’s employee had purely been reckless in putting forward the timescale, and had otherwise proven credible in the witness box. As it was, a key point in discrediting the EDS employee arose when BSkyB’s lead Counsel exposed the witness’ perjury in claiming that he had completed an MBA at Concordia College, St. John, when he had actually bought the qualification ‘online’ – much apparently as Counsel’s dog ‘Lulu’ was able to do… though apparently with slightly better grades!
Assurances as to the achievability of challenging technical solutions, demanding programmes and of course lump sum prices for significant work packages, are not uncommon in the Construction sector. This case serves as a timely caution to construction companies and consultants of the very serious consequences of a rogue employee securing a bid through dishonest means, and reflects an earlier finding of the Court as to the circumstances in which fraudulent misrepresentation may be established, where an architectural practice was found to have failed to inform a client of the resignation of a key individual prior to entering into written professional appointments, in Fitzroy Robinson Ltd v Mentmore Towers Ltd  EWHC 1552 (TCC).
Clearly, sound corporate governance requires that companies plan and estimate their work in the bid and sales process and reduce any tolerance they may have for “cowboy” sales practices. Bid and pitch documentation should be robust and verified – and verifiable. Estimates and statements as to capabilities should be closely scrutinised. Any such statements should accord with the provisions of the contract when it comes to be signed. It is also imperative that companies preserve records of their bid calculation e.g. resource needed and timescales for delivery. EDS fell foul of the fact that much of its calculation was said to have taken place on ‘whiteboards’ – the actual working product not having been recorded in any meaningful way.
Construction contracts often encounter difficulties and of course there are risks attached to any project of scale. Robust change management procedures and certainty around timetables can help to contain such problems for both contractors/consultants and employers alike. Ultimately, companies looking to avoid being caught in the same position as EDS should also ensure that they have confidence in their procurement procedures and, of course the honesty of their employees – great care must be taken when recruiting sales staff and of course, while tightening recruitment processes to protect against rogue employees is of course important, so too is ongoing training to ensure that the BSkyB case lessons are known to sales teams – so that, unlike EDS following Lulu’s surprising contribution to their case, Construction sector players can avoid any future cases of – ahem – ‘ruff’ justice!