IT firms can no longer rely on capping liability for failed projects

5 Feb 2010

If the recent landmark stg£200 million BSkyB litigation win over HP EDS is anything to go by, IT firms can no longer hide behind contracts that cap their liability. Indeed the ruling could have wider implications, a legal expert has told

John O’ Connor, a partner in the Technology and Commercial Contracts Group at Matheson Ormsby Prentice, said the landmark court decision has much wider implications than on only IT projects, but anyone involved in large-scale projects involving a tendering process.

He says the ruling may well mean significant changes in the approach by sales teams in bidding for major contracts.

The court in the UK told HP-owned EDS last week it had to pay Sky TV stg£200 million for a failed CRM system. O’Connor said that this is being hailed as the most important IT-related decision to date.

The original damages being claimed for the failed system which was sold to Sky 10 years ago are estimated to have amounted to more than stg£700 million (US$1 billion).

HP acquired EDS in August 2008 for US$13.9 billion.

O’Connor said it was clear from the beginning that if EDS’s alleged misrepresentations were found by the court to have been made fraudulently rather than negligently, then EDS would not be in a position to rely on the contractual cap on its liability in the contract between the parties.

He said it illustrates that even when the most complex technical issues are involved that companies may be held accountable for overzealous pre-contract representations if they are made dishonestly. While the quantum of damages to be awarded to BSkyB is still to be determined, it has been reported that HP (which now own EDS), intends to appeal the ruling so the ultimate outcome of this case will be awaited with great anticipation.

Speaking with, O’Connor said: “In this case what actually happened was EDS made representations in terms of the costing of an IT project and the time frame for delivery on that basis. BSkyB alleges it was induced by those representations to award the contract to EDS as against other bidders.

“It was possible that the representations were overzealous – too much enthusiasm in the representation but not enough enthusiasm in the delivery.

“Where EDS really came into trouble was it couldn’t show that it had done much work estimating the correct time frame during the pre-contractual representation. That’s where they fell down. It was felt to be dishonest by the court and became fraudulent and as such EDS were not entitled to rely on the cap on liability that is standard in contracts.”

Price/scope creep

O’Connor conceded that often IT contracts and other large-scale contracts tend to experience price/scope creep and often can become much more expensive for the end customer. “The way it is usually articulated in business is the customer claims price creep when they see the final bill and the contractor often claims scope creep because the customer may have changed the parameters.

“In reality the onus shifts to the supplier. My advice is the representations and promises made pre-contract in a tendering process need to be very carefully made so as to ensure they are not substantial exaggerations or that they don’t underestimate very substantially what will eventually be required.

“IT contractors need to ensure they take all reasonable skill, care and diligence coming up with estimates for projects and the time frame for implementation and document that process.

“This is a common best practice in the IT industry, anyway, but I think this case very much highlights that even in very technical areas – it was a 500-page ruling by the court – that lawyers are still able to see through all of that and see that some of the representations were not honestly made.

“Up until now it was considered to be difficult to prove fraudulent misrepresentation at such a high threshold. Most parties until now would have felt that a cap on liability in a contract was safe.

“But after this case much greater care will be needed, particularly in larger contracts, to ensure that estimates are given and time frames carefully and honestly made.”

By John Kennedy

Photo: John O’ Connor, a partner in the Technology and Commercial Contracts Group at Matheson Ormsby Prentice

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years