Case Comment: BSkyb Ltd & Anor v HP Enterprise Services UK Ltd & Anor (Rev 1) [2010] EWHC 86 (TCC) (26 January 2010)

URL: http://www.bailii.org/ew/cases/EWHC/TCC/2010/86.html On June 8, 2010, BSkyB (Sky) and Hewlett-Packard (formerly EDS) announced a £318 million settlement of the dispute over a £48 million system implementation contract. The settlement, which includes all damages, costs and expenses, follows a judgement of the High Court earlier this year which awarded Sky £270 million in damages pending a further hearing on the full quantum of damages. It ends a saga which featured allegations of fraud and misrepresentation and the dramatic disclosure of perjury by a senior EDS executive. In hindsight, this was a project that was destined to fail. It is also a case study of how not to win a competitive bid for a complex system integration project. And finally, it is a dramatic illustration of the bet-the-farm risks of litigation and an argument for other quicker, cheaper and more effective forms of dispute resolution.

The Project

In February 2000, Sky, a British satellite broadcasting company, was faced with serious revenue problems due to an excessive level of customer “churn”. It announced to the City (the UK public markets) that it would replace four complex legacy systems with a single integrated customer relationship management (CRM) system within 12 months. It then spent the next 5 months issuing a request for tenders and evaluating the responses – leaving very little time to actually build and implement the replacement CRM system. EDS was one of two competing bidders. (EDS was acquired by HP in 2008, long after the events in question had transpired.) The other competing bidder was Pricewaterhouse Coopers (PwC). A letter of intent was signed in August 2000, so work could begin on the project. The parties agreed that the new customer contact center would be live by the following April (already two months late, based on Sky’s original announcement). As contract negotiations continued in the fall of 2000, it was already apparent that the project would take longer and cost more than the original bid. When the prime contract was signed in November, 2000, the new go-live date was July 31, 2001 and the “baseline budget” was £47.6 million. In July 2001, Phase 1 was still incomplete and the parties signed a new Letter Agreement, which increased the budget and extended the time to complete. In March 2002, Sky took over the role of system integrator from EDS, but signed yet another Memorandum of Understanding, which split the remainder of the project into five incremental steps, of which only the first two and part of the third had gone live by 2006.

The Litigation

Sky issued its claim against EDS in the Commercial Court in August 2004 – while work was still continuing on the project – never a good sign. The original contract price was £47.6 million. Sky claimed that it cost £265 million to complete the project. They claimed a total of £709 million in damages, including lost revenues and profits due to the delays. The case was transferred to the Technology and Construction Court in 2006. The trial began in October 2007. It was originally scheduled for 20 weeks, but was extended to July 2008. The factual evidence on liability – including evidence on Sky’s claims of negligent and fraudulent misrepresentation by EDS – was heard between October 2007 and March 2008. There was a month of expert evidence on IT technical issues in April 2008, followed by three months of expert evidence on quantum of damages. The case was extremely complex. The pleadings were amended many times prior to trial. In all, there were 109 hearing days over 10 months. The parties presented thousands of documents, in both paper and electronic form. There were multiple expert reports, including multiple joint reports on specific issues. The judge issued his decision, with an interim award of damages, in January 2009, six months after the hearings concluded. The printed judgement runs to more than 500 pages – 2350 paragraphs. In February, the court ordered HP to pay £270 million immediately. There was to have been a further trial on BSkyB’s claim for additional damages. The £318 million final settlement announced in June included the £270 million HP had already paid, plus additional legal fees and other costs. An HP spokesman was quoted as saying:

"This matter is now closed, having been settled fully and finally on mutually agreed terms. We will not be commenting further publicly on this legacy issue."

The Misrepresentations:

Joe Galloway was the Managing Director of the EDS European CRM Practice. As the Judge notes:

Joe Galloway was the mastermind for EDS' Response to the ITT which was presented to Sky on 1 June 2000 and was closely involved in all subsequent developments. (at paragraph 147)

He left EDS to form his own CRM consultancy company in December 2000, shortly after the Sky contract was signed. He was hired by EDS as a consultant in 2006, presumably to assist with the BSkyB litigation, but was fired midway through the trial, when it came out that he had lied in court about his education and work experience. Much of the initial reporting on the case has focussed on Galloway’s colourful – and fictional – education and employment history. Most notoriously, he claimed to have an MBA from a college in the US Virgin Islands. The college doesn’t exist. It is a website that provides a degree to anyone who fills out a form and pays a fee. This was effectively and amusingly demonstrated by an application which was made on the website for an MBA degree for a dog "Lulu" belonging to Mark Howard QC. Without any difficulty the dog was able to obtain a degree certificate and transcripts which were in identical form to those later produced by Joe Galloway but with marks which, in fact, were better than those given to him. (at paragraph 178) This character evidence led the court to conclude that:

In my judgment, Joe Galloway's credibility was completely destroyed by his perjured evidence over a prolonged period. It is simply not possible to distinguish between evidence which he gave on this aspect and on other aspects of the case. My general approach to his evidence has therefore to be that I cannot rely on the truth of his evidence unless it is supported by other evidence or there is some other reason to accept it, such as it being inherently liable to be true. (paragraph 195)

Nevertheless, in reviewing all of the other evidence of witnesses for both EDS and Sky, it is clear that this was really a fairly typical case of an IT vendor over-selling a solution to a potential customer. The judge refers to the many internal e-mails among the EDS project team that show that they didn’t believe that the project could be completed in the time and for the price quoted to Sky. The project delivery team repeatedly urged the sales team to be more realistic. After reviewing all of the evidence, the judge concluded that the project completion dates proposed by EDS were an illusion. The sales executives were simply telling the customer what they wanted to hear. Does any of this sound familiar to people with experience in IT implementation projects?

I see no basis on which Joe Galloway can have genuinely believed that the [go live] date obtained as a result of the 12 October 2000 planning session was the subject of a proper process. Nor do I think that Joe Galloway had reasonable grounds for believing that the timescales, particularly for go-live and overall completion could be achieved. The evidence of those involved in the process confirms this. ... Given the background to Joe Galloway's visit and the way in which the dates were changed, I do not accept that Joe Galloway can have had any genuine belief in the dates. He was merely arranging the dates so as to achieve the end date. ...

...[Galloway] proceeded in a manner which he could have no genuine belief in by starting from the conclusion and making the programme fit, a process which the other people involved made it plain could and should not be done. ... Joe Galloway knew that it was "a marketing/sales ploy for the client".

He was prepared to act in this way, deliberately providing a date to Sky which he knew had not been the subject of any proper planning process merely to provide the date that the client wanted to hear. He was also prepared to act in this way despite the evident strong disagreement with his approach and even the clear distress which such an approach caused for those who worked for him.

(at paragraphs 910 to 912)

The judge concluded that EDS made fraudulent misrepresentations both prior to submitting its formal bid and prior to signing the letter of intent, in August 2000. EDS was also liable in deceit for misrepresentations relating to the prime contract in October 2000, and for negligent misrepresentations in connection with the Letter Agreement in 2001. The Court found that Sky was induced by the initial misrepresentations to enter into the original contract. If EDS had not misrepresented the capabilities of its system and its ability to complete the work on time, Sky would have gone with the competing proposal from PwC for a completely different CRM system. The judge also found that the misrepresentations leading up to the Letter Agreement caused Sky to continue working with EDS, rather than switching to another service provider to complete the job.

Limitation of Liability

The distinction between fraudulent and negligent misrepresentations is significant, because it affected whether EDS could rely on limitation of liability clauses in the contract documents. The contract had a very standard limitation of liability clause, which provided, in part that:

...neither party shall have any liability to the other party in respect of (i) any consequential or indirect loss or (ii) loss of profits, revenue, business, goodwill and/or anticipated savings. (at paragraph 398)

There was some dispute over which damages were direct and which were indirect, but the judge had no difficulty finding that most of the damages claimed by Sky for lost profits and business benefits from the CRM system were excluded completely by clause (ii) of the limitation wording. More importantly, the prime contract capped liability under the contract at £30 million. This cap applied to all claims for breach of contract, as well as to claims for negligent misrepresentation. However, the cap did not apply to claims for deceit or fraudulent misrepresentation.

Breach of Contract

The judge concluded that EDS breached the contract by failing to provide adequate resources, delaying work and failing to meet the contract milestones on time. He found that:

EDS failed to exercise reasonable skill and care or conform to good industry practice because there was no effective programme management, the design and development of the solution was not properly documented and EDS did not provide sufficient technical or managerial resources. (at paragraph 2339)

Damages

The court had no reservations about holding EDS liable for damages arising from its breach of contract. It awarded £16.3 million for breach of the prime contract prior to July 2001. It also awarded £48.8 million for the amount Sky spent after March 2002 to complete the work that EDS should have performed. However, those damages were subject to the overall limit of liability in the contract. The big damage claim was for loss of revenues and profits as a result of the failure to deliver a functioning CRM system as promised. One of the challenges the judge faced was determining the damages Sky suffered. The IT and accounting experts for both parties provided four different models for calculating damages, based on what BSkyB actually spent on the project and what it would have spent if it had gone ahead with the PwC bid in 2000, or with another service provider in 2002. However, since the judge concluded that some damages were subject to the cap and liability and some were not, none of these models provided a definitive answer. The judge therefore provided his findings on 11 specific questions where the experts had disagreed and left it to them to do the full calculations.

In their oral evidence, the experts confirmed, with admirable confidence that, on the basis of my findings, they saw no difficulty in being able to apply the principles which they had agreed to those findings so as to arrive at the appropriate quantum. I am happy to assume that their confidence is well placed. (paragraph 2251)

I shall provide answers to the particular issues which the parties have raised and shall assume that any differences can be resolved by the experts. If the confidence that this will happen is misplaced then I shall provide any further necessary findings. (paragraph 2254)

This section of the judgment makes it very clear that technical and financial experts were able to agree on the vast majority of the issues relating to damages. They were able to accurately assess the actual implementation costs, including third party licensing, maintenance and support costs. The issues in dispute were whether all of those costs were attributable to the CRM project or to other business operations. The other major area of expert disagreement was over the hypothetical costs of the alternative PwC bid. Both parties acknowledged that there is a large “cone of uncertainty” at the beginning of any large IT project, as much as four times the estimated project cost. Unsurprisingly, the EDS expert concluded that the PwC system would have taken longer and cost more than the initial bid, almost as much as Sky actual spent on its project. The Sky experts argued that it would have been much quicker and cheaper, especially since it was based on an existing Seibel CRM product that could have satisfied a large part of Sky’s requirements “out of the box”. The judge reviewed the evidence of all the experts and, for the purposes of calculating damages, concluded that the level of effort – in man-months – would have been about 100% more than the initial estimate, including an allowance for “bespoke” development of about 30% of the total system. The judge also concluded that the project would have taken about 19 months to complete.

Commentary

The court’s detailed analysis of the technical and financial evidence makes it clear that this project was doomed from the start. The evidence showed that neither the EDS bid nor the competing bid by PwC could possibly have been completed within a year. One can only assume that the Sky project team knew this, if they were even halfway competent at their jobs. And one must question whether they really believed EDS’s misrepresentations (fraudulent or otherwise). However, they must have been under a great deal of pressure to sign a contract and start the work, since the project had already been announced publicly. There is no doubt from the evidence that EDS told Sky what they wanted to hear. But there is also no doubt that the Sky executives were happy to hear it and turned a blind eye to any doubts about whether it was true or not. Even when it was clear that the schedule was slipping and costs were increasing, they were persuaded to continue. But for the dramatic evidence of Joe Galloway’s perjury at trial, which tainted all of the EDS evidence on whether they actually believed they could deliver, especially in light of the e-mail warnings from the project team, there would likely have been no finding of intentional deceit or fraudulent misrepresentation. And if it were only negligent misrepresentation, the £30 million liability cap would have protected EDS from the worst of Sky’s damage claims. One wonders whether there was a deliberate strategy by the Sky legal team to spring Galloway’s fake CV on him at trial, or the evidence of his falsehoods fell into their laps. Either way, it was a high risk strategy. If Galloway had admitted the falsehood immediately, the damage could have been minimized. Instead, he tried to cover it up and compounded his and EDS’s problems. The whole case was a huge gamble for both parties. In the end, Sky won a huge judgment, but they could have lost just as easily. The case provides ample arguments in favour of both dispute management and alternative dispute resolution. If the parties had included effective project governance and dispute management in their contract in the first place, they might have avoided many of the disputes that arose later. This would not have enabled EDS to complete the work as per the original bid – that was impossible from Day 1. But it could have enabled the parties to negotiate and execute a realistic project plan. And Sky could have completed the project more quickly and inexpensively than they actually did. Once the disputes did arise, it is highly likely that mediation and arbitration would have resulted in a more effective settlement for both parties (albeit, not as lucrative a settlement for Sky). A mediator could have facilitated a settlement discussion based on much of the expert IT and financial information presented at trial. Once those numbers were on the table, and with a mutually-agreed discount for the uncertainty of litigation, it should have been possible to come up with a settlement number. And that could have been done in 2004 or 2006, before the litigation got rolling. Or the parties could have gone to arbitration instead of litigation. There is no guarantee that the arbitration hearing would have taken less time than the trial, but in most cases it would have been completed more quickly and cheaply. It would also have been private – which may have been desirable for both parties, since a great deal of confidential business information on both sides has now been made public. Although the High Court judgement did not make an award of costs, and the parties have not publicly disclosed how much they spent, published reports have estimated that each of them spent in the neighbourhood of £40 million fighting the case. If those reports are true, costs are yet another compelling argument in favour of alternative dispute resolution. One of the frequently-heard arguments against arbitration in big dollar commercial disputes is that the risk of an adverse award which cannot be appealed is simply too great. This case, with its £270 million interim award, £318 million final settlement and no appeals, should put that one to rest forever.