Misstatements during contract talks might cost EDS an extra $270 million

by Dell C. "D. C." Toedt III on 2010-02-02

I plan on spending some time in my contract-drafting class talking about this case:

British Sky Broadcasting contracted with EDS to develop a customer relationship management (CRM) software system, and eventually filed suit when things didn’t go as planned.
The judge concluded that EDS made fraudulent misrepresentations when one of its senior UK executives lied to Sky about EDS’s analysis of the amount of elapsed time needed to complete the initial delivery and go-live of the system (see ¶ 2331 and ¶¶ 194-196.)
The judge also concluded that during subsequent talks to modify the contract, EDS made misstatements that didn’t rise to the level of fraud, but still qualified as negligent misrepresentations (see ¶ 2336).
One clause in the contract capped the potential damage award at £30 million — but by its terms, that limitation did not apply to fraudulent misrepresentations, and the judge held that the limitation didn’t apply to negligent misrepresentations either (see ¶¶ 372-389).

After the decision was handed down, Sky announced that it expected the damage award to be at least £200 million. Had it not been for the misrepresentation claims, the pure-contract damages presumably would have been capped at £30 million. The difference works out to about US$270 million.

One of the most interesting aspect of the judge’s opinion, it seems to me, is its detailed exposition of the facts, which illustrate the ‘sausage factory’ by which technology deals sometimes get made — and how even just one vendor representative can make a deal go terribly wrong for his employer.

UPDATE 2010-07-14: In early June 2010, EDS agreed to pay Sky some $460 million — more than four times the value of the original contract — to settle the case. See this ComputerWorld article for details and links.

Hat tip: ContractsProf blog.

{ 3 comments… add one }

Chris Lemens 2010-02-03, 08:10
Wow. Just read this, from the opinion:
The relevant words of Clause 1.3.1 are “…this Agreement and the Schedules shall together represent the entire understanding and constitute the whole agreement between the parties in relation to its subject matter and supersede any previous discussions, correspondence, representations or agreement between the parties with respect thereto…”.
Those words do not, in my judgment, amount to an agreement that representations are withdrawn, overridden or of no legal effect so far as any liability for misrepresentation may be concerned. The provision is concerned with the terms of the Agreement. It provides that the Agreement represents the entire understanding and constitutes the whole agreement. It is in that context that the Agreement supersedes any previous representations. That is, representations are superseded and do not become terms of the Agreement unless they are included in the Agreement. If it had intended to withdraw representations for all purposes then the language would, in my judgment, have had to go further.
Really? To supersede a representation for all purposes, we need to say more than that we are superseding the representation and not include any limitation on that language? Instead, we have to list every conceivable situation in which we would expect our superseding language to have effect? That’s crazy.
At least the judge does us the favor of telling us the magic words that are required:
There are no representations, warranties, covenants, conditions or other agreements, express or implied, collateral, statutory or otherwise, between the Parties in connection with the subject matter of this Agreement except as specifically set forth herein and none of the Parties has relied or is relying on any other information, discussion or understanding in entering into and completing the transactions contemplated in this Agreement and the Ancillary Agreements ….
Frankly, I’ve always seen this language as unnecessary belt-and-suspenders language. Now it seems we have to include it because a judge can’t read plain English.
Chris Lemens
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D. C. Toedt 2010-02-03, 09:19
Thanks Chris. Actually, I’ve been putting the no-reliance language into vendor-clients’ contracts for a long time, for just that reason — and also to help them try to avoid the expense and burden of discovery into fraud- and negligent-misrepresentation issues.
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Chris Lemens 2010-02-03, 18:05
D.C.:
So have I, but I always hoped that it was pointless. And there are the rare cases where the agreement is so short in substance that adding another long sentence to a one-sentence entire-agreement clause is offensive, which could lose you the deal.
Chris
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