Go Big or Go Home - BSkyB v. HP-EDS

If you work in the IT outsourcing industry or  follow legal headlines in any way, you've probably seen some press related to this issue - and honestly the numbers are a bit staggering: BSkyB initially claimed £700m in damages (roughly $1.098 BILLION) on a £48m contract ($75.25m). The legal fees are estimated at £70m ($110m) and the initial award - which HP-EDS is seeking to appeal - sits at £200m ($314m). 

At its heart, this is a fraudulent misrepresentation case - no new law was created to reach the decision. The sticker shock of this case grabs headlines because there was a limited liability clause in the contract that limited liability to £30m ($47m).  However, that clause could only come into play in the event of negligence (that is, negligent misrepresentation). The court found that HP-EDS' representations with respect to the time required to complete the project - made during the bidding process for the project - were made fraudulently, opening the door to unlimited liability for HP-EDS to BSkyB.

So why does this case matter? Companies embarking on similar IT or outsourcing services contracts should be concerned whether this case will affect service providers' view of risk (and, consequently, price) and whether their projects will feel the impact of more constrained service provider behavior - especially in the bidding process. This case could affect the way in which service providers can be called to account for its pre-contract sales pitches and the degree to which either party can rely on contractual limitation of liability clauses. 

Many times, the sales team comes in and makes promises about their company's capabilities thinking that they'll worry about those issues later or let the lawyers hammer it out later. This case could serve to change this process significantly by inserting a new tension: greater risk leading to greater cost. Service Providers will argue that this case increases their risk of exposure and justifies a higher contract price. Customers will counter that they don't want to bear the cost of the risk (which is going to be difficult to accurately measure in the first place, especially in the bidding stage where the project may not be fully scoped) and that such costs should be absorbed by the Service Provider anyway. 

Overall, this case is a milestone - but perhaps not in the way it has been hyped.  BSkyB was able to catch a key HP-EDS witness perjuring himself and that, but for HP-EDS' deceit, BSkyB would have selected a different service provider to perform the project. Not everyone is going to be able to gamble the kind of money that BSkyB did in this case. Combine that with the fact that BSkyB was able to prove fraud rather than mere negligence - kicking open the door to unlimited liability - you have a truly unique case on your hands. Many dissatisfied customers may try to go down this path, but far fewer will succeed. However, the fact that a precedent exists should be enough to cause many sales departments to evaluate their current bidding process with an eye to reducing their exposure to these types of claims.