<i>BSkyB v. HP Enterprise Services</i>

Earlier this year, a British trial court, in BSkyB Ltd. v. HP Enterprise Services UK Ltd., No. HT-06-311, 2010 WL 20033 (E.W.H.C., Q.B.D. Jan. 26, 2010), issued a notable 468-page decision that is being closely scrutinized by IT-service companies worldwide.

The claimants (“Sky”) provide satellite broadcasting and related services, and the defendants Electronic Data Systems Ltd. (“EDS”) (now HP Enterprise Services UK Limited), offer information-technology services.

The litigation concerned Sky's procurement of a new customer-relationship management (“CRM”) system meant to improve service between customers and call-center representatives.

Following a bidding process in 2000, Sky selected EDS to design, build, manage and integrate the technology for the CRM System. After an initial letter of intent, the parties entered into an agreement (“prime contract”).

The Court's Decision

The crux of Sky's claim was that EDS made negligent and fraudulent misrepresentations during the pre-contract period and, thereafter, about its ability to deliver on its promise of when the new CRM system would go live, thereby inducing Sky to enter into the contract and continue with EDS after problems became apparent.

EDS countered that liability should be barred or curtailed by certain clauses in the contract, and because other alleged misrepresentations did not amount to actionable fraud.

Largely on the basis that a single EDS employee had provided false spreadsheets to Sky about the time estimates to fulfill the contract, in general “approached the whole question of the time to achieve go-live in a cavalier fashion,” and gave timescales for the project “knowing he had no proper basis for doing so,” the court found EDS liable in fraud to Sky for the misrepresentations that were made at the time of the bidding process. The court also found that at the time of the conclusion of the prime contract, Sky had relied on misrepresentations when it awarded EDS the work.

Notably, the court rejected Sky's misrepresentation claims concerning other aspects of the contract.

In the end, the court ruled that Sky was entitled to damages for, among other things, losses caused by entering into the prime contract ' namely increased cost damages and lost benefit damages. In the court's opinion, the project would have been completed more quickly and cheaply by another vendor, and Sky would have been able to obtain benefits from an earlier go-live date.

Analysis

Under state and federal law in the United States, plaintiffs must generally plead a heightened standard to establish a successful claim based in fraud.

It is no different under British law.

Regarding its fraudulent misrepresentation claim, Sky had the burden of proving that:

• EDS made a representation;
• The representation was false;
• EDS knew it to be untrue or was reckless as to whether it was true;
• EDS intended that the claimant should act in reliance on the representation; and
• Sky relied on the representation to its detriment.

Mere negligence is insufficient to prove fraud. This is an important distinction because, generally speaking, liability for negligent misrepresentations (as opposed to fraudulent misrepresentations) in arm's-length commercial transactions may be limited by the limitation-of-liability clause in the contract. See, e.g., Sound Techniques, Inc. v. Hoffman, 737 N.E.2d 920 (Mass. App. Ct. 2000). But see, Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d. 171 (Tex. 1997).

On the other hand, it is much more difficult to use contractual disclaimers to limit damages for fraud in the inducement. While a general, boilerplate, merger clause is generally insufficient to sidestep a fraudulent-misrepresentation claim, an unambiguous, and specific, no-reliance clause in the contract can, in some cases, defeat allegations that the contact was executed in reliance upon misrepresentations, particularly an agreement between sophisticated commercial entities. See, Aetna Cas. & Sur. Co. v. Aniero Concrete Co., 404 F.3d 566 (2d Cir. 2005).

In such a case, where a party in the contract specifically disclaims reliance upon a representation, that party cannot, in a subsequent action for fraud, assert that it was fraudulently induced to enter into the contract by the very representation it has disclaimed, unless the facts underlying the fraud were peculiarly within the knowledge of the party invoking the disclaimer. Danaan Realty Corp. v. Harris, 5 N.Y. 2d 317 (1959); Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 734 (2d Cir. 1984). But see also, MBIA Ins. Corp. v. Royal Indemnity Co., 426 F.3d 204, 218 (3rd Cir. 2005) (“When sophisticated parties include a broad but unambiguous anti-reliance clause in their agreement, the Delaware Supreme Court will likely indulge the assumption that they said what they meant and meant what they said.”).

The BSkyB-EDS contract contained a broad, but unspecific, “Entire Agreement,” or merger clause. Clause 1.3.1 stated:

[T]his 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 notwithstanding the existence of any provision of any such prior agreement that any rights or provisions of such prior agreement shall survive its termination. ' This clause does not exclude liability of either party for fraudulent misrepresentation.

EDS contended that Sky's claims for negligent misrepresentation were excluded by the clause. Sky contended that the clause was insufficient to exclude misrepresentation of any sort. The court examined a number of other English cases and concluded as follows:

1. The words “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” do not amount to an agreement that “ representations are withdrawn, overridden or of no legal effect so far as any liability for misrepresentation may be concerned,” and if EDS “had intended to withdraw representations for all purposes, the language would ' have had to go further.” What was needed was a “contractual renunciation of the right to rely” on the representations, which was absent in Clause 1.3.1. As it stood, the clause “prevented other terms of the agreement or collateral contracts from having contractual effect,” but it “did not supersede those matters as far as there might be any liability for misrepresentation based on them.”

2. The words “This clause does not exclude liability of either party for fraudulent misrepresentation” was effective to indicate that liability for fraudulent misrepresentation was not excluded, but did not serve to imply that the first part of Clause 1.3.1 served to exclude liability for negligent misrepresentation. See, generally, BSkyB, at ”381-388.

Lessons Learned

The outcome of this case provides important lessons to IT vendors and will undoubtedly have an impact on the IT-procurement process in general, though not in such far-reaching ways as some may think.

Despite the lower-court victory by the customer, it is clear that the prospect of a complex, 10-month-long trial (along with the payment of considerable legal and experts' fees) would dissuade future parties embroiled in a troubled technology deal from running to court. Beyond the costs and resources, the legal burden of proof to establish a fraud or deceit claim is a high standard under UK and U.S. law, and without a thorough investigation and sufficient evidence, it is a legal strategy that is generally not to be embarked upon lightly.

To be sure, in the competitive field of information-technology services, vendors, like any other professional representative, sprinkle their proposals with attractive sales talk and ordinary puffery in an effort to win a large contract. Following the British decision, however, IT vendors could reexamine their sales procedures to attempt to eliminate the possibility that their employees might engage in actionable misrepresentation, and also look to strengthen their hiring and employee-review processes to prevent any overzealous or dishonest employees from representing a company in important IT-procurement transactions.

In addition, from the legal perspective, the negotiation over the language of entire agreement or merger clauses may be more focused in future deals, as vendors may seek broader clauses limiting all liability for misrepresentations and reliance thereon, and as customers seek less expansive clauses. One suggested clause, from the vendor's perspective, based on the BSkyB decision would be:

This Agreement, including the Schedules attached hereto, constitutes the entire agreement between the Parties with respect to the subject matter hereof, and that the Agreement is entered into after consultation with legal counsel. All prior or contemporaneous representations, understandings or agreements, whether oral or written, that are not expressly set forth within the four corners of this Agreement are hereby deemed waived, superseded and abandoned. There are no representations, warranties, covenants, conditions, understandings 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 statement, representation, information, discussion, agreement or understanding in entering into and completing the transactions contemplated in this Agreement.
[Insert no-reliance provisions specifically-tailored to the deal] For example: “Customer is experienced in ' and has made a lengthy, detailed, independent examination of the '. Not by way of limitation of the foregoing, Vendor has not made and does not make any representations as to ' and Customer hereby expressly acknowledges that no such representations have been made as to'.”

The customer may want to add to this:

This clause does not exclude liability of either party for fraudulent misrepresentation.

However, because case law of each state may vary, there is no guarantee that the above merger clause would be enforceable in a given jurisdiction. Indeed, some states may not allow an exclusion of negligent misrepresentation, and others may enforce specific merger and no-reliance clauses, but with strict limitations, and others may view any exclusion of fraudulent misrepresentation as against public policy.

In any event, legal counsel should be consulted as to the enforceability of such attempted exclusions.

Earlier this year, a British trial court, in BSkyB Ltd. v. HP Enterprise Services UK Ltd., No. HT-06-311, 2010 WL 20033 (E.W.H.C., Q.B.D. Jan. 26, 2010), issued a notable 468-page decision that is being closely scrutinized by IT-service companies worldwide.

The claimants (“Sky”) provide satellite broadcasting and related services, and the defendants Electronic Data Systems Ltd. (“EDS”) (now HP Enterprise Services UK Limited), offer information-technology services.

The litigation concerned Sky's procurement of a new customer-relationship management (“CRM”) system meant to improve service between customers and call-center representatives.

Following a bidding process in 2000, Sky selected EDS to design, build, manage and integrate the technology for the CRM System. After an initial letter of intent, the parties entered into an agreement (“prime contract”).

The Court's Decision

The crux of Sky's claim was that EDS made negligent and fraudulent misrepresentations during the pre-contract period and, thereafter, about its ability to deliver on its promise of when the new CRM system would go live, thereby inducing Sky to enter into the contract and continue with EDS after problems became apparent.

EDS countered that liability should be barred or curtailed by certain clauses in the contract, and because other alleged misrepresentations did not amount to actionable fraud.

Largely on the basis that a single EDS employee had provided false spreadsheets to Sky about the time estimates to fulfill the contract, in general “approached the whole question of the time to achieve go-live in a cavalier fashion,” and gave timescales for the project “knowing he had no proper basis for doing so,” the court found EDS liable in fraud to Sky for the misrepresentations that were made at the time of the bidding process. The court also found that at the time of the conclusion of the prime contract, Sky had relied on misrepresentations when it awarded EDS the work.

Notably, the court rejected Sky's misrepresentation claims concerning other aspects of the contract.

In the end, the court ruled that Sky was entitled to damages for, among other things, losses caused by entering into the prime contract ' namely increased cost damages and lost benefit damages. In the court's opinion, the project would have been completed more quickly and cheaply by another vendor, and Sky would have been able to obtain benefits from an earlier go-live date.

Analysis

Under state and federal law in the United States, plaintiffs must generally plead a heightened standard to establish a successful claim based in fraud.

It is no different under British law.

Regarding its fraudulent misrepresentation claim, Sky had the burden of proving that:

• EDS made a representation;
• The representation was false;
• EDS knew it to be untrue or was reckless as to whether it was true;
• EDS intended that the claimant should act in reliance on the representation; and
• Sky relied on the representation to its detriment.

Mere negligence is insufficient to prove fraud. This is an important distinction because, generally speaking, liability for negligent misrepresentations (as opposed to fraudulent misrepresentations) in arm's-length commercial transactions may be limited by the limitation-of-liability clause in the contract. See , e.g. , Sound Techniques, Inc. v. Hoffman , 737 N.E.2d 920 (Mass. App. Ct. 2000). But see , Schlumberger Tech. Corp. v. Swanson , 959 S.W.2d. 171 (Tex. 1997).

On the other hand, it is much more difficult to use contractual disclaimers to limit damages for fraud in the inducement. While a general, boilerplate, merger clause is generally insufficient to sidestep a fraudulent-misrepresentation claim, an unambiguous, and specific, no-reliance clause in the contract can, in some cases, defeat allegations that the contact was executed in reliance upon misrepresentations, particularly an agreement between sophisticated commercial entities. See , Aetna Cas. & Sur. Co. v. Aniero Concrete Co. , 404 F.3d 566 (2d Cir. 2005).

In such a case, where a party in the contract specifically disclaims reliance upon a representation, that party cannot, in a subsequent action for fraud, assert that it was fraudulently induced to enter into the contract by the very representation it has disclaimed, unless the facts underlying the fraud were peculiarly within the knowledge of the party invoking the disclaimer. Danaan Realty Corp. v. Harris , 5 N.Y. 2d 317 (1959); Grumman Allied Indus., Inc. v. Rohr Indus., Inc. , 748 F.2d 729, 734 (2d Cir. 1984). But see also , MBIA Ins. Corp. v. Royal Indemnity Co. , 426 F.3d 204, 218 (3rd Cir. 2005) (“When sophisticated parties include a broad but unambiguous anti-reliance clause in their agreement, the Delaware Supreme Court will likely indulge the assumption that they said what they meant and meant what they said.”).

The BSkyB-EDS contract contained a broad, but unspecific, “Entire Agreement,” or merger clause. Clause 1.3.1 stated:

[T]his 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 notwithstanding the existence of any provision of any such prior agreement that any rights or provisions of such prior agreement shall survive its termination. ' This clause does not exclude liability of either party for fraudulent misrepresentation.

EDS contended that Sky's claims for negligent misrepresentation were excluded by the clause. Sky contended that the clause was insufficient to exclude misrepresentation of any sort. The court examined a number of other English cases and concluded as follows:

1. The words “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” do not amount to an agreement that “ representations are withdrawn, overridden or of no legal effect so far as any liability for misrepresentation may be concerned,” and if EDS “had intended to withdraw representations for all purposes, the language would ' have had to go further.” What was needed was a “contractual renunciation of the right to rely” on the representations, which was absent in Clause 1.3.1. As it stood, the clause “prevented other terms of the agreement or collateral contracts from having contractual effect,” but it “did not supersede those matters as far as there might be any liability for misrepresentation based on them.”

2. The words “This clause does not exclude liability of either party for fraudulent misrepresentation” was effective to indicate that liability for fraudulent misrepresentation was not excluded, but did not serve to imply that the first part of Clause 1.3.1 served to exclude liability for negligent misrepresentation. See, generally, BSkyB, at ”381-388.

Lessons Learned

The outcome of this case provides important lessons to IT vendors and will undoubtedly have an impact on the IT-procurement process in general, though not in such far-reaching ways as some may think.

Despite the lower-court victory by the customer, it is clear that the prospect of a complex, 10-month-long trial (along with the payment of considerable legal and experts' fees) would dissuade future parties embroiled in a troubled technology deal from running to court. Beyond the costs and resources, the legal burden of proof to establish a fraud or deceit claim is a high standard under UK and U.S. law, and without a thorough investigation and sufficient evidence, it is a legal strategy that is generally not to be embarked upon lightly.

To be sure, in the competitive field of information-technology services, vendors, like any other professional representative, sprinkle their proposals with attractive sales talk and ordinary puffery in an effort to win a large contract. Following the British decision, however, IT vendors could reexamine their sales procedures to attempt to eliminate the possibility that their employees might engage in actionable misrepresentation, and also look to strengthen their hiring and employee-review processes to prevent any overzealous or dishonest employees from representing a company in important IT-procurement transactions.

In addition, from the legal perspective, the negotiation over the language of entire agreement or merger clauses may be more focused in future deals, as vendors may seek broader clauses limiting all liability for misrepresentations and reliance thereon, and as customers seek less expansive clauses. One suggested clause, from the vendor's perspective, based on the BSkyB decision would be:

This Agreement, including the Schedules attached hereto, constitutes the entire agreement between the Parties with respect to the subject matter hereof, and that the Agreement is entered into after consultation with legal counsel. All prior or contemporaneous representations, understandings or agreements, whether oral or written, that are not expressly set forth within the four corners of this Agreement are hereby deemed waived, superseded and abandoned. There are no representations, warranties, covenants, conditions, understandings 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 statement, representation, information, discussion, agreement or understanding in entering into and completing the transactions contemplated in this Agreement.
[Insert no-reliance provisions specifically-tailored to the deal] For example: “Customer is experienced in ' and has made a lengthy, detailed, independent examination of the '. Not by way of limitation of the foregoing, Vendor has not made and does not make any representations as to ' and Customer hereby expressly acknowledges that no such representations have been made as to'.”

The customer may want to add to this:

This clause does not exclude liability of either party for fraudulent misrepresentation.

However, because case law of each state may vary, there is no guarantee that the above merger clause would be enforceable in a given jurisdiction. Indeed, some states may not allow an exclusion of negligent misrepresentation, and others may enforce specific merger and no-reliance clauses, but with strict limitations, and others may view any exclusion of fraudulent misrepresentation as against public policy.

In any event, legal counsel should be consulted as to the enforceability of such attempted exclusions.