BSkyB hired IT company EDS to build it a £48 million customer relationship management system in 2000. Relations between the companies broke down in 2002 and Sky ended up building the system itself at a cost of £265 million.
BSkyB sued EDS, claiming that the company had lied about the development and timescale of the project during the sales process.
The contract signed by the two companies contained a limitation of liability clause which would apply if the project faced difficulties. That cap would not apply, though, in the event of fraud.
BSkyB claimed that EDS's behaviour involved a fraudulent misrepresentation. The High Court has agreed, introducing the prospect of damages far in excess of the liability cap. The claim is for £700 million and expected damages are likely to run to £200 million.
The case was keenly watched by IT companies concerned that it could force them to change the way they sell their products and services.
Mr Justice Ramsey found that an employee of EDS had made a fraudulent misrepresentation, and that EDS was also liable for negligent misrepresentation and breach of contract. He rejected many of BSkyB's other claims of fraud in his ruling, though.
The ruling said that one of EDS's managing directors, Joe Galloway, told BSkyB that the system could go live within nine months and be completed within 18 months. The statement was made without any basis or assessment of the actual time it would take and was made purely to ensure that EDS won the contract and to advance Galloway's own career.
"He proffered timescales which he thought were those which Sky desired, without having a reasonable basis for doing so and knowing that to be the position," said the ruling. "He knew that no proper analysis of time had been carried out and he knew that he had no basis for saying that go-live could be achieved in nine months and complete delivery in 18 months. Indeed, he said that he did not consider the timescales to be sufficient."
"In my judgment his conduct went beyond carelessness or gross carelessness and was dishonest. I consider that he acted deliberately in putting forward the timescales knowing that he had no proper basis for those timescales. At the very least he was reckless, not caring whether what he said was right or wrong," it said.
Mr Justice Ramsey said that Galloway committed perjury in evidence he gave in relation to his academic qualifications and gave dishonest answers in the same confident way that he delivered the rest of his evidence. "He therefore demonstrated an astounding ability to be dishonest," said the ruling.
David McIlwaine, an IT law expert at Pinsent Masons, the law firm behind OUT-LAW.COM, said that this focus on one individual lessens the significance of the judgment for the broader industry, though the judgment will make salutary reading for all involved in IT procurement.
"It was widely anticipated that a finding in favour of BSkyB would trigger a large-scale review of sales processes. However, given the emphasis in the judgment on the dishonest conduct of one man, and that only one of the five allegations of fraud against EDS succeeded, the ramifications for the IT industry may be less significant than expected," he said. "Importantly there were no findings in Mr Justice Ramsay's judgment of more systemic or widespread internal failures or recklessness in relation to EDS's sale processes."
The Judge's approach may have differed had EDS's employee purely been reckless in putting forward the timescales. However, the extreme nature of his deception (extending to sustained perjury in the witness box) tainted the balance of his evidence, including about the relevant representations.
HP, which now owns EDS, said in a statement that the company did nothing to deceive BSkyB and that it would seek permission to appeal the ruling.
The case began in 2004 but the ruling has only now been published and it is thought to be one of the most expensive in UK legal history. The judgment itself, at almost 500 pages, is also one of the longest ever.
Sky had initially sought £700m in damages, and now says that it will be seeking an amount "in excess of £200m".
McIlwaine said that companies looking to avoid being caught in the same position as EDS must take great care when choosing sales staff.
"Suppliers can do little other than tighten recruitment processes to protect themselves against rogue employees," he said. "Provided that suppliers have confidence in their employees, i.e., that they will be honest, the judgment should not be cause for wholesale review of sales processes."
Hear the case discussed on OUT-LAW Radio
For a transcript and downloads, see: Sky's landmark sales fraud victory, OUT-LAW Radio, 28/01/2010