20:20 hindsight or RTFC?

This is another in our infrequent series of case reports that shows how normal commercial transactions can go badly wrong, with the insult of massive legal costs being added to the mess.  This one, between BSkyB (Sky) and HP Enterprise Services (formerly EDS),  is particularly noteworthy, as the damages that may be payable will be in excess of £200 million.

The case will no doubt receive a lot of attention in the IT world.  However, the facts and the outcome are relatively straightforward, even if the recent judgement from the Technology and Construction Court extends to over 400 pages: BSkyB Ltd & Anor v HP Enterprise Services UK Ltd & Anor (Rev 1) [2010] EWHC 86 (TCC).  The  case involved the not uncommon facts of an IT company aggressively selling its capabilities and capacity.  So common is heavy selling that it is standard in commercial contracts to include what is called an ‘entire agreement clause’.  The aim of this clause is to ensure that only the agreement itself, which may include any number of schedules, annexes, appendices or other documents by explicit reference, is the document upon which the parties will rely.

So when Sky claimed that EDS has made a number of misrepresentations, both negligently and fraudulently, EDS sought to rely on this entire agreement clause to exclude liability for negligent misrepresentation.  The clause said:

Subject to Clause 1.3.2, 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 notwithstanding the existence of any provision of any such prior agreement that any rights or provisions of such prior agreement shall survive its termination. The term “this Agreement” shall be construed accordingly. This clause does not exclude liability of either party for fraudulent mis-representation.

When I asked a group of trainees and junior commercial lawyers what they thought of this clause, it took them less than a minute to agree that this clause did not exclude liability for negligent misrepresentation.  This is fortunate, because the Technology and Construction Court (TCC) came to the same conclusion.

As the delivery of the customer management system that was the subject of the Sky (SSSL) and EDS agreement was delayed and other problems arose, the parties attempted to resolve differences with a letter agreement.  Paragraph 17 of the Letter of Agreement provided:

“The terms set out in this letter have been agreed between us, subject to the approval of our respective managements, in full and final settlement of:

(a) all known claims which SSSL may have against EDS or which EDS may have against SSSL and/or British Sky Broadcasting Group Plc for any breach of the Prime Contract for any breach of the Prime Contract as of the date of both parties signing this letter; and

(b) all unknown claims which SSSL may have against EDS or which EDS may have against SSSL and/or British Sky Broadcasting Group Plc for any breach of the Prime Contract during the period up to and including 17 June 2001.”

Our group of trainees and juniors also spotted that the paragraph only states that it is in full and final settlement of claims for any breach of contract, but says nothing about tortious or other claims, including for negligent misrepresentation.

So it is not that surprising that after a careful examination of the law on negligent misrepresentation and fraudulent misrepresentation and the facts of the case, the TCC found that EDS was liable for a series of fraudulent misrepresentations made by its sales manager pre-contract.

It may be that 20:20 hindsight is a wonderful thing, which is why our trainees and juniors were able to see the flaws in these clauses so easily.  However, this may simply be another example of RTFC, the lawyers’ answer to the IT industry’s RTFM, or more politely, read the contract carefully before you sign.

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