Implications of BSkyB v EDS ruling?

February 2010

The ruling in the most significant IT Contract Law case of recent times has just been made and very interesting reading it is too!

I believe that the case will have far reaching implications for the selling of IT services and will lead to significant changes in the market place.

BSkyB issued an RFP for a new CRM system in March 2000 and EDS was awarded the contract later that year. The contract value is believed to be in the region of £50m. The project ran into trouble and in 2002 BSkyB brought an action against EDS claiming that EDS had misrepresented its ability to deliver the system. EDS replied by stating that BSkyB did not know what it wanted to buy and also constantly changed the requirements.

This is a very familiar story in outsourcing where the customer and the supplier do not fully understand the requirements and both proceed on the basis of different assumptions. A common statistic is that 50% of all outsourcing agreements do not deliver the expected benefits and this mismatch of expectiations is often the root of the problem.

The difference in this case is that BSkyB claimed damages based on “deceit” and brought an action in tort, rather than under Contract Law. This allowed BSkyB to claim £700m in damages when the contract maximum was stated as £30m.

The judge has found in favour of BSkyB, ruling that EDS induced BSkyB to enter into the contract through misrepresentation and therefore that EDS is liable to BSkyB in deceit for fraudulent misrepresentation. This will allow the awarding of much higher damages.

This has obviously cost EDS substantial money and loss of goodwill, but what are the likely consequences for the wider outsourcing market place? I am sure that all of the major service providers are busily reviewing their contracts to see if they may fall foul of this ruling.

I think the implications will be:

Suppliers will have to be more disciplined when they put together proposals for IT services – This is a good thing!
Suppliers are likely to be more selective about which opportunities they bid for, which may reduce competition – This is a bad thing!
Cost of service provision may rise as suppliers have to spend more on the quality control of their bid processes – This is also a bad thing!

It can be argued that the ruling only confirms what good practice has always been, understand what you want to buy and ensure that the supplier can deliver against your requirements. However, given the frequency of failure of outsourcing contracts, this clearly does not happen often enough!

Overall I can see this being a positive benefit to customers as they will ultimately have a much better understanding of what they are actually buying. However, the downsides will be, the process will probably take longer, with much more legal input required, and, at least in the short term, prices will rise.

Mike Hill – Head of Commercial Services – Itica Consulting – March 2010

mike.hill@itica.co.uk

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