BSkyB vs EDS ruling could push up price of IT contracts

IT departments could face higher costs, and may find that suppliers boycott their tenders in the wake of a landmark judgement last week in a £700m legal dispute between HP/EDS and broadcaster BSkyB.

IT departments could face higher costs, and may find that suppliers boycott their tenders in the wake of a landmark judgement last week in a £700m legal dispute between HP/EDS and broadcaster BSkyB.

The Technology and Construction Court found in favour of BSkyB following a five-year battle with EDS over a failed customer relationship management (CRM) system. The case is the most expensive legal dispute in the history of the IT industry, costing both sides an estimated £40m each.

But the judgment, which runs to 460 pages, is expected to prove the most important yet for the IT services sector.

Rob McCallough, a partner in the Outsourcing, Technology, Communications Group at law firm Pinsent Masons, says, "It is rare for an IT supplier to be accused of fraudulent misrepresentation. It is even rarer for a supplier to be found guilty of it.

"It is a landmark decision which could give rise to suppliers reviewing sales techniques, contractual arrangements, and what is presented to customers in terms of their capabilities, services and products."

Clive Seddon, a senior partner at Pinsent Masons, says that in the wake of the legal judgement, the consequences for suppliers of getting projects wrong are too great for them to take chances.

They will have to be more careful in assessments of risk, more careful in what they bid for, and will face increased bidding costs because of extra prepatory work, he says.

Suppliers are likely to face increased insurance premiums - assuming that they and their employees can get cover for liability for IT project failures - pushing up bid prices.

And suppliers' insurance premiums to cover fraudulent misrepresentation may prove prohibitive, says Andrew Dodd, a lawyer at Field Fisher Waterhouse.

These costs will be reflected in bid prices, says Seddon. Some suppliers may not bid at all if they perceive the user to be uncertain about what exactly they want and likely to keep changing requirements.

Some facts of the case 
 Legal costs: About £40m for each side
 Days in court: 109
 Time taken for legal action to be concluded: six years
 Damages to be paid: estimated at a minimum of £200m
As a result, IT departments may find that they are faced with fewer bidders - or no bidders at all.

BSkyB won its five-year legal battle against EDS after the judge in the case, Vivian Ramsey, accepted BSkyB's claim that EDS had misrepresented its capabilities in selling a CRM system, though EDS owner HP will seek leave to appeal.

Chronology of BSkyB versus EDS 
Summer 2000 BSkyB selects EDS, a specialist in systems integration, to provide day-to-day management of a customer relationship management project on its behalf. The contract was to design, build and implement an advanced customer service system at BSkyB's customer contact centres.

March 2002 BSkyB terminates the relationship, claiming that EDS has failed to meet its contractual obligations. Sky assumes direct responsibility from EDS for systems integration.

August 2004 BSkyB begins legal action against EDS.

March 2006 BSkyB successfully completes the CRM project.

October 2007 Trial begins at the High Court.

July 2008 Trial concludes.

January 2010 Judgement is handed down.

Damages have yet to be set, but BSkyB's lawyers, Herbert Smith, say EDS will have to pay a minimum of £200m - several times the cost of the original system.

BSkyB was able to show that EDS's main witness, CRM practice head Joe Galloway, had lied. As soon as EDS discovered that Galloway had lied in court, it dismissed him.

Seddon says the judgment will cause lawyers to question the contracts between suppliers and users.

"Misrepresentation undermines the contractual deal," he says. "It means the customer can recover an amount greatly in excess of the contract value. It undermines the certainty and contracting principles which suppliers and customers have assumed for many years."

In the past, the contract was regarded as sacrosanct. But the judgment shows that a contractual cap on potential liabilities in the event of a failure may mean little if the user can establish that the supplier misrepresented its capabilities.

Part of the trial focused on whether the specifications for the BSkyB CRM project had been clear. EDS argued that BSkyB had been vague about what it wanted.

EDS's QC said in court, "Sky was well aware that the specifications for this project were still, even at contract, so general that EDS could be hired on a time-and-material basis."

But the ruling went against EDS. Some suppliers may in future only bid for deals where there is a clearly defined beginning, middle and end to a project in advance of the contract being signed.

"Suppliers will be more risk averse," says Seddon.

If the judgment makes IT professionals more disciplined when selling and delivering computer systems and services, that cannot be a bad thing. Many in the IT profession have long advocated that the industry should work to the engineering principles of, say, bridge builders.

Lawyers comment on BSkyB's win in legal case against EDS/HP

Dai Davis, IT lawyer and partner at Brooke North, says, "It is by far the most important legal case in the IT area for a decade."

He says the judgment will encourage dissatisfied buyers of large IT systems to "have a go", even where limitations of liability have been agreed in contracts.

A lawyer at a large firm who asked not to be named says, "The case appears to be part of a trend. We have had a number of cases recently involving IT services suppliers and enterprise software vendors in which similar allegations were made and which resulted in legal and arbitration proceedings."

Stephen Wares, technology underwriter at insurance specialist Hiscox, says, "This judgment catapults sales misrepresentation to the top of the list of risks facing IT professionals today.

"This landmark decision could lead to a heightened level of litigation against technology suppliers and almost certainly increases the expectations of aggrieved clients for the amount of compensation that can be claimed for sales misrepresentation."

Read more on IT outsourcing