Everyone who works in the IT industry should be used to hearing sales-reps making exaggerated claims about their company's offering. Equally, any customer with any sense generally takes these claims with a pinch of salt.
If a customer wants a supplier to stand behind a particular claim or representation then that customer needs to ensure this is set out in their contract. The supplier and the customer then know exactly what "sales talk" the customer can - or cannot - rely on. Suppliers and customers then agree the liability limits that will apply to any claims for damages if the project goes wrong.
Hidden away in the contract terms, however, will almost certainly be a clause that says that if the supplier (or its sales rep) has made "fraudulent misrepresentations" - has deliberately lied or has been so reckless as to whether the claims it has made are actually true or not - these limits may no longer apply. The supplier can then face uncapped liability claims from the customer.
This is what has happened in the recent BSkyB vs EDS case.
BSkyB vs EDS
BSkyB engaged EDS in 2000 to implement a customer relationship management system. The contract contained a liability cap of £30m. However, the project went horribly wrong. BSkyB sued for £709m in damages from EDS, arguing that, because EDS had made fraudulent misrepresentations to BSkyB and because the broadcaster had relied on those misrepresentations in entering into the contract, the contract liability limits should not apply.
The court found in favour of BSkyB on one of the claimed grounds of fraudulent misrepresentation. Earlier this week the court ordered EDS - now owned by HP - to pay £200m by 17 February. Once the full amount of the damages is determined EDS may end up paying even more.
EDS may appeal. However, even if EDS wins an appeal, the consequences of fraudulent misrepresentation being proved will remain.
What is important for suppliers and customers to note is that this is the most significant case yet to be raised on this ground. Customers - and their legal advisers - will be well aware that this is potentially a realistic way of allowing customers to claim significantly more in damages from their suppliers.
Importantly, it highlights the dangers for all suppliers in allowing their sales reps/bid teams the unfettered ability to make representations to customers in the sales process.
What should suppliers do?
All suppliers should revisit their sales/bid team training programmes, flagging up the risks to the potential survival of their business if they make fraudulent misrepresentations in any part of the sales process.
Suppliers should review their standard bid document templates and check the representations or claims made in the standard text within them. Suppliers may wish to include within these documents (for deletion prior to issue) formal warnings about the possible effects of making a representation in a bid/negotiation situation where the bid team either knows that it is wrong or are reckless as to whether it is true or not.
Suppliers might also consider instituting a review process for all bid documents prior to issue to independently check and seek validation for the claims/representations made in the bid documents. It will be important for that process to be driven by someone who is not incentivised by bonus arrangements for contract wins.
There are other things that suppliers can do from a process and documentation perspective to reduce their exposure to unlimited liability claims. They should speak to their in-house and/or external counsel in connection with this - especially in light of the judgement in this case.
What should customers do?
If an existing project has gone wrong and a customer has suffered significant losses in excess of any agreed liability limit, the customer should consider with its legal advisers if the supplier in the bid and contract negotiation process made fraudulent misrepresentations. That may open up new bases for claims against the supplier.
In any new bid or contract negotiation process the customer should retain and note any representations made by the supplier. If any such representation is made and is one which you are relying on to enter into the contract - make sure this is documented. It may assist in the future if the project goes very wrong.
Allan Wardhaugh is a partner in the technology group at law firm Dundas & Wilson.
This was first published in February 2010