Fraudulent misrepresentation – what now?

There has been a lot of press comment over the past week about the recent Court ruling that HP/EDS must pay damages (“in excess of £200M”) to BSkyB for a failed CRM system. Surprisingly, much of this comment seems to suggest that this case will result in significant changes to the ways that IT suppliers will sell and contract in the future.

Yet the basis of the Court decision is that HP/EDS was guilty of fraudulent misrepresentation, and that HP/EDS could not rely on its ‘limit of liability’ clause to limit he amount of damages it had to pay to BSkyB. But this is neither a change to contract law – nor a new interpretation – under the Unfair Contract Terms Act 1977 (UCTA) suppliers have always been unable to exclude fraudulent misrepresentation, and under UCTA they cannot limit liability for such fraud.

What are surprises are the size of the likely damages (several times the value of the original contract), the apparently blatant misrepresentation carried out, and that the case ever came to court (it most similar cases there is an out of court settlement – note that in this case HP/EDS is rumoured to have spent over £40M in legal fees to date – suggesting that, yet again, the real winners in such cases are the legal eagles).

Hopefully, this case will serve as a wake-up call to Directors and senior managers to revisit their own internal procedures, training and guidance to all their customer-facing staff – and not just their sales staff (although they are the main concern), as it is just as likely that pre-sales staff, consultants and/or other staff could misrepresent the capabilities of a system being proposed to a prospect.

Most importantly, in addition to the proposal/tender vetting process, the contractual negotiation phase must be used by a supplier to fully vet its own proposal, collecting together any documentation and/or ‘side letters’, to try to avoid any prospect from relying on any statements that could be false. When I used to negotiate larger contracts I always openly asked the customer if there were any statements, email or documents that he was relying upon – and if so I insisted that they were referenced or included in the contract.

As I have said many times before, from my own experience gained in trying to turn around problem projects – as clearly happened in this BSkyB project - most failed projects have gone wrong before the contract is signed….