The outcome of the £700m BSkyB vs EDS case has been awaited with bated breath by both IT suppliers and businesses.

Since EDS – which was bought by HP in 2008 – was found guilty of fraudulent misrepresentation in last week’s ruling, many believe that suppliers will need to be more careful about what they claim they can accomplish.

In 2002, BSkyB brought the case against EDS, alleging that claims made by the sales team regarding how quickly, efficiently and cheaply it could install a customer relationship management (CRM) system amounted to fraudulent misrepresentation after the system ran over time and over budget.

The case is arguably vital for two reasons. First, it means IT suppliers’ sales teams must now be much more careful about their claims when they are trying to sell a system. There has always been a disparity between what is sold and what is delivered, and that gap is likely to close.

Second, EDS’s liability cap proved to be immaterial. The cap was supposed to mean that if anything went wrong with the system, EDS would not be liable for more than £30m worth of damages. But because fraudulent misrepresentation was proven, the liability cap was rendered irrelevant.

Next month, lawyers representing BSkyB and HP will meet to discuss how much compensation will be awarded. It is thought they will agree on about £200m – not as much as BSkyB claimed it had lost, but much higher than EDS’s liability cap.

Many think that customers – or even public sector authorities – who have been oversold systems will now routinely claim for much higher compensation, including loss of earnings, because of this ruling.

“This is the result suppliers have been dreading,” said Alan Owens, a partner with law firm Morrison & Foerster. “Those who have oversold systems and services in the past and left the technology guys to fill in the gaps are going to be really worried about this ruling.”

Vendors’ sales teams often work on a bonus system and are keen to make sales. Many suppliers may now review that system, and introduce better training for people selling the system so they don’t overclaim on what is achievable.

The ruling is also likely to have important implications for the way customers select suppliers and how they assess a vendor’s ability to do the job.

“Suppliers can expect an increased interest in things such as outcome-based pricing, gain-sharing and more stringent contractual practice around what happens if things go wrong,” said Martyn Hart, chairman of the National Outsourcing Association. “End users will also be increasingly reticent to sign contracts that unrealistically limit supplier liability.”

But others have been quick to point out that the case may not be as precedent-setting as suppliers fear. Fraudulent misrepresentation is notoriously difficult to prove and there has been no actual change in the law. In the five areas where EDS was accused of making fraudulent misrepresentations, it was cleared of doing so in four – resources, methodology, technology and cost. It was only in regard to the time taken that BSkyB’s claims were upheld.

Moreover, the judge’s ruling was likely to be heavily influenced by the fact that EDS’s key witness in this area – Joe Galloway, who was managing director for CRM solutions at EDS at the time – was shown to have misled the court after he was found to have obtained his degree from the internet.
Galloway was even shown in court to have gained a worse mark in his fake degree than Lulu, the opposition QC’s miniature schnauzer.

“Before IT suppliers say the sky has fallen in, it’s worth remembering that the evidence for this was unusually case-specific,” said Andrew Dodd, partner at Field Fisher Waterhouse. “The judge placed great importance on the evidence of one rogue EDS employee and the bar is still set very high for fraudulent misrepresentation.”

How BSkyB’s relationship with EDS unravelled

• BSkyB hired EDS in 2000 to build a £48m customer service system. The intention was to build the new contact centre and then carry out work fitting out the existing call centres in Scotland at Carnegie Campus, Dunfermline, and Kirkton Campus, Livingston.
• The contract was ended in March 2002 after what BSkyB described as a “woeful” performance by EDS.
• BSkyB began legal action in 2004, and the trial started at the High Court in 2007. EDS denied the allegations during the court hearings, attributing the project cost and time overruns to the undefined scope of BSkyB’s requirements.
• The case had its last court hearing in July 2008.
• HP bought EDS in late 2008.
• The judge spent 15 months determining, among other issues, what constitutes a fraudulent misrepresentation.
• In early 2010, the judge found HP/EDS guilty of fraudulent misrepresentation. It is expected to have to pay about £200m in damages.