Be careful what you promise when bidding for contracts

In these angst-ridden, recessionary times, businesses are under a lot of pressure to "make that sale". In their bid to win work, sales teams, in particular, driven by targets, sometimes make promises, without carefully checking that operational teams can deliver on those promises. A recent case between BSkyB and EDS dramatically demonstrates the cost of this approach.

In that case, EDS, an IT contractor, won a £48m contract to provide BSkyB with a new customer relationship management system. EDS falsely represented, that having analysed the time needed for the project, it would be able to deliver that project on time. Because of this representation, BSkyB awarded the contract to EDS.

There were problems with EDS' ability to deliver the project on time and BSkyB then took action against EDS for various defaults (including deceit, negligent misrepresentation and breach of contract). BSkyB claimed damages of over £700m against EDS. In its contract with BSkyB, EDS had a clause capping its financial liability for any default or breaches by EDS at a maximum of £30m.

It is standard practice for suppliers to seek to cap their liability for damages pay-outs for their defaults in such contracts. However because it was proved that EDS had made a fraudulent misrepresentation about its ability to deliver under the contract before the contract was entered into, this cap on their liability was not effective (and not enforceable) and was disregarded by the courts.

EDS is expected to pay out an anticipated £200m as damages to BSkyB (although the final figure has not yet been decided).

Where you are the service provider, two issues which you should therefore consider are as follows:

• ensure that your sales team does not make unfounded claims about its ability to perform or deliver on a project, deal or product.
• ensure that your contracts with customers, in particular the clauses dealing with limitations on your liability, are drafted carefully to ensure that they are more likely to be enforceable and actually work as a limitation on your liability. The above case shows that contractual caps will be ignored where a party has proved to be dishonest. Other issues could affect the effectiveness of such a clause and because of other recent cases, it is important to keep such clauses under review on a regular basis.

We would advise that your contracts should be reviewed in light of this case and other recent cases. If you would like to discuss this or any other aspect of the case, please contact Kinnary Vyas on kinnary.vyas@harveyingram.com or call 0121 214 1206 .