How The Dog With The Degree Led To A Contract Without A Cap

Ineffectiveness of liability caps.

A great deal of lawyers' ink has been spilt crafting carefully worded liability caps in IT contracts. In EDS' case, this ink was spilt in vain as a finding that EDS had made fraudulent misrepresentations allowed BSkyB to claim over £700 million and to circumvent a £30 million cap in the contract between the parties. Interim damages of £270 million have so far been awarded.

Not an ideal start...

At the turn of the millennium, BSkyB invited companies to tender for a £50 million contract to design, build, manage, implement and integrate a new customer relationship management system. EDS was appointed in July 2000 and work commenced shortly afterwards pursuant to a letter of intent.

From this point onwards, the project did not go as BSkyB had hoped and it expressed early concerns as to whether EDS could implement the project within the promised timescales. EDS provided a revised programme and the parties entered into what became known as the "Prime Contract". Continued poor performance led to a renegotiation in 2001 and, subsequently, to BSkyB terminating the contract and taking over from EDS in March 2002.

Rather than costing £50 million and going live in the summer of 2001, the final stages of the project were not completed until March 2006, at a cost of £256 million.

BSkyB's allegations

BSkyB pleaded its case in three ways:

fraudulent misrepresentation inducing BSkyB into selecting EDS for the work; negligent misrepresentation during the 2001 renegotiation, inducing BSkyB into continuing with EDS; and "repudiatory" breach resulting from EDS' failure to exercise reasonable skill and care or conform to good industry practice. Allegation 1: fraudulent misrepresentation

Any contract which seeks to exclude or restrict liability for misrepresentation must satisfy the test of reasonableness set out in the Unfair Contract Terms Act 1977. The courts have held that it is never reasonable to exclude liability for fraud (Thomas Witter Ltd v TBP Industries Ltd [1992] Q.B. 600) and therefore liability caps in a contract will not apply to any claim for fraudulent misrepresentation.

In order to establish fraudulent misrepresentation, a claimant must demonstrate that: (i) a false representation has been made knowingly or recklessly; (ii) with the intention that the claimant would act on the misrepresentation; and (iii) the misrepresentation induced the claimant to enter into the contract.

Mr Justice Ramsay held that EDS had...