4 March 2010 | Lorna Kelly

What happens when a supplier misrepresents its capability in order to win a contract?

THE CASE

In 2000, BSkyB (Sky) appointed Electronic Data Systems (EDS, now owned by HP and called HP Enterprise Services UK) to design and implement a new customer relationship management (CRM) system. As part of its sales process, EDS made various claims regarding time, cost, technology and implementation methodology.

The project quickly ran into difficulties. In 2002 Sky took over, completing the project itself at a cost of £265 million. Sky sued EDS, claiming that EDS had, prior to Sky entering into the contract, fraudulently misrepresented its ability to perform the contract, in particular about the development and timescale of the project. Had it not been for these misrepresentations, Sky claimed, it would have awarded the contract to another bidder.

EDS denied the allegations, claiming that the time and cost overruns were caused by a lack of specificity on the part of Sky, leading to changes in requirements for the CRM system and consequent delays.

The judge considered the meaning of “fraudulent misrepresentation”, focusing in particular on claims about timescales made by one employee. He held that EDS was liable for fraudulent misrepresentation in respect of the statements made by its employee, but as EDS’s sales processes generally did not involve fraudulent misrepresentation, dismissed some of Sky’s other claims of fraud.

By finding in favour of Sky in a claim of fraudulent misrepresentation, the court can set aside the contractual liability cap and EDS now faces an actual damages claim in excess of the £30 million contractual liability cap (as well as potential court and legal costs estimated to be more than £70 million). Sky’s original claim in damages was £709 million. While the court assessed the damages claim, it ordered EDS to make an interim payment to Sky of £200 million. HP has stated its intention to appeal.

WHAT THIS MEANS

This decision is not new law. Even if HP wins an appeal, the consequences of fraudulent misrepresentation will remain, and fraudulent misrepresentation by a supplier will still be difficult for a customer to prove.

However, this is the most significant case raised on this ground. Customers have been reluctant to argue fraudulent misrepresentation as a ground for setting aside contractual liability limits. But this is now potentially a realistic and useful ground with which to threaten a supplier if a project fails.

This case potentially paves the way for customers to claim significantly more in damages from suppliers. For projects that have gone wrong and where a company has suffered significant losses in excess of an agreed liability limit, buyers should consider whether the supplier made fraudulent representations that they relied upon.

For new projects, procurement professionals should ensure they retain details of representations made by bidders or suppliers prior to contract signature. If you rely on a representation to enter into a contract, ensure this is documented, including, if possible, in the contract itself.

By Lorna Kelly, senior associate, Dundas & Wilson