Contract Types
Cases
The Validity of Shrink-Wrap Licences in Scots Law (S JA Robertson)
1998] JILT 37 (1998)
Computer software can be sold in different ways. Bespoke (tailor made) software is expensive and usually involves a direct and detailed contract between the author and the end user. An increasingly popular means of sale is for the purchaser to download the software from the Internet and pay for it on-line. However, mass-produced, ‘off the shelf’ software is most commonly sold by mail order. The average purchaser, eager to try his or her new program, invariably tears off the cellophane to get inside the box containing the disks or CD-ROM, without a second thought for the piece of paper between the box and the cellophane. This piece of paper is the shrink-wrap licence. This article explores the legal significance of that missing second thought.
Shrink-wrap licences are licence agreements which state that acceptance on the part of the user of the terms of the agreement is indicated by opening the shrink-wrap packaging or other packaging of the software, by use of the software, or by some other specified procedure. There is no signature by the licensee. The purposes of shrink-wrap licences include restricting the use of the software, declaring the governing jurisdiction, disclaiming legal warranties and limiting the availability of monetary damages. In fact, they are the most common means by which software companies attempt to limit their potential liability. It follows that the validity or otherwise of the licences is of great significance to both the software companies and the users.
There are different types of shrink-wrap licence. A ‘box-top’ licence is visible beneath the wrapping on the box. An ‘envelope licence’ is printed on the outside of a sealed envelope containing the licence. A ‘referral licence’ has a sticker over the disk or CD-ROM box that states, ‘Do not open this before reading the licence attached.’ The vast majority of shrink-wrap licences are not available for inspection prior to purchase. The validity of such licences is the subject of this article.
A computer program is protected by copyright because it constitutes a literary work under the Copyright Designs and Patents Act 1988.[2] From a purchaser’s point of view, unless there is some agreement with the owner of the intellectual property in the program, it is almost impossible to use software without infringing the copyright. This is because, in order to load and run a program, the program has to be copied from its permanent storage medium, into the computer. Legitimate use of software therefore depends on having the permission of the owner of the copyright. The shrink-wrap licence purports to preserve the owner’s rights whilst enabling the software to be used.
Until recently, the legal significance of such licences was considered precarious at best (Stone, 1996 et al ), although the practice was widespread among software companies. The reason for doubting the validity or enforceability is that the supply generally occurs before the purchaser has the opportunity to consider the terms of the licence. Depending on the type of licence, it may or may not be possible to view the licence terms before the box is opened. The focus of this article is a case which did not investigate this distinction. What will be considered are two broader concepts. First, whether it is legally justifiable to hold the purchaser to licence terms which only come to his or her attention after the apparent point of sale; and second, whether the software company can rely on its licence in a contract between two other parties.
Prior to 1996 the software company was thought to be unable to rely on contract law to enforce the conditions of the licence. However, the case of Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd [3] has apparently changed this position for Scotland. This case, in the Outer House of the Court of Session, was the UK’s first judicial consideration of shrink-wrap licences. What follows is a detailed study of the case. The arguments put forward by each party will be described and the deciding judgement by Lord Penrose will be considered.
It will be argued that, notwithstanding the desirability or otherwise of shrink-wrap licences, the relevant law did not exist to justify the findings of the Court. The position in Scotland will be summarily contrasted with the positions in English and United States law.
2. The Facts of the Case
Adobe placed a telephone order with Beta Computers for the supply of Informix software to upgrade their existing software. Informix produce information management software. The software was a standard ‘off the shelf’ upgrade identified by both parties when the order was placed. Beta obtained the software package and delivered it to Adobe. The terms and conditions of sale were not discussed. When the software was delivered it was packaged in such a way as to show that the software was subject to a strict end user licence and that the package contained ‘End User Licence Conditions’ under the name of Informix. The packaging was shrink-wrapped. Visible beneath the wrapping were the words ‘Opening the Informix S.I. software package indicates your acceptance of these terms and conditions.’
Adobe never opened the packaging and decided to return the software after delivery without payment. The reasons for rejection were not investigated in the case. There may have been unfavourable conditions in the licence, or Adobe may simply have had a change of mind. Beta refused to take back the software and sued for the price.
3. The Arguments
Beta contended that there was an unconditional and unqualified order for identified software. This order was made on the telephone and Adobe purchased it ‘blind’ so far as any terms and conditions of contract were concerned. Beta met the order and claimed that Adobe should pay the contract price. Beta was of the view that the shrink-wrap conditions, produced by Informix, were irrelevant because the contract had been made prior to Adobe seeing them. Beta had no concern with the interests of Informix, the software company and owner of the intellectual property in the software.
Adobe said the contract was less simple. While Beta was content to treat it as a sale of goods, Adobe considered it a sale of software, which should be treated differently. The software was supplied on disks. The disks themselves had little value; it was the program contained on them which mattered. Adobe pointed out that the program could not be used without the permission of the copyright owner, since the use would be an infringement of the copyright. The reason for this was the need to ‘copy’ the program, inherent in the use of software, as explained above. The use would therefore need to be licensed by the owner of the copyright, making the licence an essential ingredient in the transaction. Both parties agreed that it was standard practice in transactions for packaged software for the owner of the copyright, invariably the software company, to fulfil this by including end user conditions. The purchase was of the software and the licence to use the software. Adobe argued that the conditions of use stipulated that opening the package bound the purchaser to the conditions. The conditions advertised the right of the purchaser to reject the software if not prepared to accept them. If one rejected the package, there was no concluded agreement. Accordingly, Adobe submitted that ‘acceptance of the licence conditions was a condition suspensive of agreement.'[4]
Adobe accepted that the licence conditions were created by Informix but averred that, if Beta imposed them on Adobe, they would become Beta’s conditions for the purposes of the contract. If Betawas held to be supplying only the physical medium without seeking to impose the conditions, the transaction would result in Adobe having unrestricted use of the software. This might cause some concern in the industry. Accordingly, implication of a condition suspensive of agreement was necessary to give the contract business efficacy. However, if no condition was implied and the contract had been entered into unconditionally, then delivery of the product with previously undisclosed conditions was not a proper performance of the contract. Again, Adobe must be allowed to reject the software.
4. The Result
Lord Penrose was of the opinion that both parties had analysed the transaction incorrectly. He said that the first step should be to identify what the customer sought to have supplied by the dealer. He found that the subject of the contract was a complex product comprising the medium and the manifestation within it or on it of the intellectual property of Informix, the author of the software. Lord Penrose decided that there was only one contract and that it was not simply a sale of goods contract. He saw the product as one which absorbed the intellectual property of the author or software company. He also recognised a conferred right of access to that material which, generally and in the absence of a consent derived from the owner, is owned by the author or software company to the exclusion of all third parties.
He found this consistent with the legislative policy of the Copyright, Designs and Patents Act 1988. He reviewed the various sections of the Act which he regarded as relevant to computer programs. Lord Penrose was of the opinion that the scheme of the Act made impossible the legitimate supply of the medium with the facility to access the program material recorded on it independently of the authority of the owner of the copyright, however obtained, for the use of the program material. Such consent must be by licence conferred from the acquisition of the software. That must be derived from the owner of the intellectual property or someone authorised by the owner to confer rights of use on third party purchasers. He believed that in the present dispute, it was an essential feature of an effective transaction that the supplier undertakes to make available to the purchaser both the medium and the right of access and use.
The circumstances were such that the supply was intended to be made in pursuance of an order without discussion of any terms and conditions of supply, but with both parties being aware of the practice of software companies of seeking to impose end user conditions qualifying the purchaser’s right of exploitation of the software. Both parties accepted that it was standard practice for software companies to include end user conditions in packaged software. Seeing the transaction as a supply contract, Lord Penrose recognised a choice of two possible solutions.
First, to deny any contractual role to the conditions when they appeared on delivery on the packaged software. Lord Penrose stated,
‘In my opinion it is not possible to hold that there is a new contract between author and end user which comes into existence at the point of delivery with acceptance occurring on unwrapping the product.’
He reasoned that, if there was such a contract, the supplier’s contractual obligations with the purchaser would be left untouched by the new contract and the supplier would have already performed his contractual obligations and become entitled to the price independently of any new arrangements involving the software company and the end user. Thus Lord Penrose specifically rejected the existence of a contract between the purchaser and Informix. He believed that if the conditions were ignored, the position of the owner of the intellectual property could be undermined in the assertion of control over the extent of permitted use of that property if the attempt at imposing the conditions were ineffective.
The second choice would be to hold that the conditions form part of the contract between the supplier and the end user. This risks exposing the supplier to rejection of the supply upon the end user deciding, on seeing that there were conditions, that he was not prepared to be bound by them. However, on this alternative the supplier is likely to have infringed the author’s copyright by making an unconditional supply. Lord Penrose considered this risk for the supplier as insignificant. He believed that the industry as a whole, in the efficient and sensible management of transactions, required that effect should be given to the conditions.
Thus Lord Penrose rejected the existence of a separate contract between the purchaser and Informix. He said that this case was concerned with ‘the arranging of that essential aspect of the parties’ contractual relationship which is intended to define the conditions for use of the intellectual property reflected in the program material.’ He went on to say:
‘It appears to me to be consonant with a proper view of parties’ commercial relationships that there should not be consensus in idem until there are produced and accepted by parties to the contract those conditions stipulated by the owner of the software for its use. That point could not come earlier in this case than the stage at which the supplier, deriving the material from the owner, tendered to the purchaser an expression of those conditions which the purchaser might accept or reject before becoming bound to the contract. On this ground alone, it is my opinion that the pursuers’ case is irrelevant and falls to be dismissed.'[5]
Lord Penrose said that such a contract would be consistent with Scots law. The software company’s conditions would apply to the end user by way of the doctrine of jus quaesitum tertio . By the operation of this doctrine, Scots law allows two parties to confer an enforceable right upon a third party who is not a party to the contract. In the present case, the supplier and purchaser were parties contracting for the supply of something which was owned by and was in the control of a third party. The agreement that the supply should be subject to the protection of the third party’s interests on such terms as he may stipulate seemed acceptable to Lord Penrose. If Adobe had accepted the licence terms, Informix would be entitled to enforce the conditions in its favour directly against Adobe.
In summary, the Court held that consensus in idem did not exist until the licence terms had been offered to and accepted by the purchaser. If the purchaser had accepted the licence terms these terms could have been enforced by Informix by a jus quaesitum tertio . Adobe rejected the software without opening the wrapping. The Court did not enforce the shrink-wrap conditions against Adobe because the wrapping had not been removed. If the wrapping were opened and the software used then, on Lord Penrose’s reasoning, the terms of the licence would have been incorporated into the contract between the supplier and the end user.
5. Analysis of the Decision
Lord Penrose reasoned that the licence terms had to be given effect in order for the contract to work. The present writer agrees with Smith ( 1996 ) et al in arguing that this is incorrect. The Court believed that in a software contract, the purchaser had to have the right to use the software. However, Lord Penrose went on to suggest that an unconditional contract would not give the purchaser any such rights. As Smith observes, the flaw in this argument is that, ‘when an object, in which intellectual property resides, is sold it is quite clear that the sale of the object does not affect the intellectual property in it.’ The peculiarity of software is that the program contained on a disk cannot be used without infringing the copyright in the program. This fact seems to have persuaded Lord Penrose that the author’s licence conditions must form part of the contract, otherwise the purchaser could not use the software. Lord Penrose implies that when a copyrighted article is sold the contract is incomplete until licence terms are agreed. However, a contract is complete when it is made and there are no express licence terms unless these are incorporated when drafting the contract.
Section 50C of the Copyright, Designs and Patents Act 1988, inserted by the Copyright (Computer Programs) Regulations 1992, implements in the UK the provisions of Article 5(1) of the European Directive on Computer Programs 1991. The directive is effectively a right to use a program. It states that, in the absence of contractual provisions, a lawful acquirer of a computer program has the right to copy or adapt it when such reproduction is necessary for the use of the program in accordance with its intended purpose. It is both surprising and unfortunate that Article 5(1) and Section 50C were omitted from the court’s consideration.
Relying on Section 50C, it would not have been necessary to conclude that the conditions of Informix were incorporated in the contract between supplier and purchaser in order for the purchaser to use the software. There is a statutory right of use for the purchaser. The contract was concluded on the telephone. If Informix had wished to impose its licence terms on Adobe it should have instructed Beta to refer to those conditions when making the telephone call.
The doctrine of jus quaesitum tertio was used to hold that any terms in the licence which were intended to benefit Informix could have been enforced by Informix against Adobe if the licence terms had been accepted. Acceptance would be demonstrated by opening the wrapping. The type of licence in this case appears to have been the box-top type by which the licence terms are visible without the need to open the wrapping. It is submitted that enforceability is contingent on the finding that such a licence forms part of the contract. This article considers that in the circumstances of this case, the licence did not form part of the contract. If the licence were not part of the contract the doctrine could not apply. The licence would be merely an unenforceable set of guidelines.
If the contract between Beta and Adobe had referred to and specifically included the licence terms, they would indeed be enforceable by Informix by operation of the jus quaesitum tertio . The Scottish Courts have shown a reluctance to recognise a right in favour of a third party unless that is the clear intention of the contracting parties.[6] On the authority of Morton’s Trustees v The Aged Christian Friend Society of Scotland ,[7] the parties to the contract must expressly state that the third party is to benefit. It is insufficient to show merely that the third party did incidentally benefit.[8] It is piquant to recall that Beta regarded the interests of Informix as irrelevant.
The concern exhibited by Lord Penrose for the software industry in general is probably misplaced. Much computer software is sold without added licence. The result of the decision was that Beta,having performed its contractual obligation of supply, lost the sale and had to take back the software. Lord Penrose believed that no contract existed until acceptance of the licence conditions. If this were correct, there would be no reason to distinguish it from other types of transaction involving the attachment of conditions. No contract would exist until the conditions were agreed. This raises the question of what constitutes a condition. Lord Penrose did not qualify his statement and applied it in circumstances where the present writer considers the ‘conditions’ to carry the legal weight of mere guidelines. It is conceivable that a product warning is a condition. Accordingly, if a label on an electric drill warns the purchaser to ‘keep out of reach of children,’ could the product be returned to the retailer because the purchaser is unhappy with the ‘condition’?
The licence is arguably unnecessary because the law of copyright would protect the position of software companies such as Informix. Infringement of copyright would include inter alia piracy by making multiple copies, the publication of variations of the original and making arrangements by translation between programming languages.[9] The remedies for infringement include interdict/injunction, delivery up, damages and account of profits. The attempts at the limitation of liability would perhaps be negated by statute in any event. The Unfair Contract Terms Act 1977 was so applied in the recent English case of St Albans City and District Council v International Computers Ltd. [10]
One further criticism of Lord Penrose’s approach is in his treatment of the supply of software for a price as a contract sui generis . He correctly observed that the rights of the parties should not depend upon the medium of supply. However he distinguished the software transaction from one for a book or record on the basis that a computer program could be obtained ‘over the telephone system for a price’ and therefore all supplies of software must be treated as sui generis . The present writer agrees with Adams ( 1997 ) that this reasoning is flawed. It overlooks the fact that any copyright work can be delivered either on a physical medium or on-line. On this rationale, all sales of books, paintings, music etc. must be treated as sui generis.
It is submitted that, in the circumstances, Adobe should have been held to its bargain with Beta, and able to use the software free of Informix’s licence conditions. Informix would not have a jus quaesitum tertio but would still enjoy the protection established by having the copyright in the software. If a software company expects an end user to be bound by licence conditions, it should take further steps. Such steps will be considered at the end of this article.
6. Shrink-Wrap Licenses under English and US Law
Although Lord Penrose found that there was no consensus in idem between Beta and Adobe, he recognised the validity of shrink-wrap licences per se , on the basis of jus quaesitum tertio . The concept is alien to English law. The doctrine of privity in English law provides that contracts are binding only on those party to them. This means that where there is a software company, supplier and end-user, the software company must seek to create a contract with the ultimate customer. In circumstances similar to Beta v Adobe , it could be argued that the shrink-wrap licence would be unenforceable by English law because there is no consideration from the purchaser to the software company. The licence then becomes an unenforceable set of guidelines. However, any ‘promise’ by the purchaser might be interpreted to be a form of consideration. A contract could then exist between the software company and purchaser. If so, the outstanding question concerns the fact that the licence terms only come to the attention of the purchaser after the apparent point of sale. The issues are the same as those considered above. To date, no English court has addressed the question of the validity of shrink-wrap licences. If the issue should arise, Beta v. Adobe may hold some persuasive authority.
Shrink-wrap licences originated in the United States. It is also the biggest source of software publication. Like English law, federal law demands privity of contract, although this is diluted to some extent by the US doctrine of warranty. The validity of shrink-wrap licences was unresolved [11] until the case of ProCD, Inc. v. Zeidenberg .[12] In this case the Court of Appeals held that shrink-wrap licences are enforceable as a matter of contract unless their terms are objectionable on grounds applicable to contracts in general. The case is not of itself binding precedent for the validity of the licences. However, it is the most recent and most extensive consideration of the matter.
This case can be distinguished from that of Beta v. Adobe . The US Uniform Commercial Code governs the sale of goods. Section 2-206(1)(b) thereof states that, ‘a buyer accepts goods when, after an opportunity to inspect, he fails to make an effective rejection.’ Accordingly, if the sale of software constitutes the sale of goods, the implied acceptance is at a later stage to its UK equivalent. The licence in ProCD was a so-called ‘click-wrap,’ by which positive action is required on-line to indicate acceptance of conditions. As Judge Easterbrook observed:
‘the software splashed the licence on the screen and would not let [the purchaser] proceed without indicating acceptance. (…) ProCD extended an opportunity to reject if a buyer should find the licence terms unsatisfactory. Zeidenberg inspected the package, tried out the software, learned of the licence and did not reject the goods.’
The case is important to US practice because it recognises the potential validity of the licence. However, in ProCD there was no intermediary (the Beta equivalent) and therefore the question of enforceability by a third party did not arise. The case, and those before it, explicitly rejected the argument that a provision stating that ‘opening this package indicates your acceptance of these terms’ were of themselves sufficient to demonstrate a conditional acceptance.
7. Conclusion
Shrink-wrap licences have been supported by industry practice for some years. Individual companies will be reluctant to stand out against such an established practice and will continue to supply such licences with software. The Scottish legal system has now endorsed the practice. The present writer is of the view that the validity of these licences has been introduced by dubious reasoning.
This writer is of the view that shrink-wrap licences are a reasonable concept. However, the prudent software company would be well advised to incorporate them in a different manner to that adopted by Informix. The customer should be offered the opportunity to receive a copy of the licence before placing an order. The purchaser should be required to view the entire licence agreement before the order process can be completed. The software company should obligate the supplier by written agreement to instruct every customer that the order is being accepted conditioned upon the shrink-wrap licence and that it will be supplied with the product. The supplier should accept returns from and refund any customer unwilling to accept the licence terms. The supplier should enjoy a reciprocal arrangement with the software company. The click-wrap licence used in ProCD is increasingly popular and offers a better means of ensuring that the conditions come to the user’s attention. The problem is that the packaging will be open and accordingly it will be necessary to rely on a procedure for return. Notwithstanding any such licence protection, the software company should bear in mind that the law of copyright will protect its basic rights.
Software companies should find safer ways of validating the conditions in their shrink-wrap licences than relying on the Beta v Adobe case. It would be tempting to advocate the continued disregard of the piece of paper between the cellophane and the box, if only to bring the issue before the courts again. It is hoped that a judicial second thought on the question of validity will relieve the burden from the purchaser.
Bibliography
Cornish, W. R. (1996) Intellectual Property (London, Sweet & Maxwell)
Edwards, L. and Waelde, C. (1997) Law & the Internet – Regulating Cyberspace (Oxford, Hart)
Klinger, P. and Burnett, R. (1994) Drafting and Negotiating Computer Contracts (London, Butterworths)
Reed, C. (ed. 1996) Computer Law (3rd ed., London, Blackstone Press)
Walker, D. M. (1985) The Law of Contracts and Related Obligations in Scotland (2nd ed., London, Butterworths).
Woolman, S. (1987) An Introduction to the Scots Law of Contract (Edinburgh, W Green & Son Ltd.)
Journal Articles
Adams, J. N. (1997) ‘The Snark Was a Boojum, You See’, Edinburgh Law Review Volume 1, page 386.
Bainbridge, D. I. (1997) ‘Software Licencing Fundamentals’, Computers and Law , Volume 8, Issue 2, page 4.
Covington, T. A. (1997) ‘The Future of Shrink-Wrap Licences’, Fenwick & West LLP, California – Web site publication:
Gringas, C. (1996) ‘The Validity of Shrink-Wrap Licences’, International Journal of Law and Information Technology , Volume 4, Number 2, page 77.
Hayes, D L (1997) The Enforceability of Shrink-Wrap Licences On-Line and Off-Line , Fenwick & West LLP, California – Web site publication:
Marsland, V. (1997) ‘Online Services – Copyright in the Online World’ (London, Hawksmere) – Seminar Paper.
Silverleaf, M. (1996) ‘Beta v Adobe’, Commercial Lawyer , February, page 7.
Smith, G. P. (1996) ‘Shrink-Wrap Licensing in the Scottish Courts’, International Journal of Law and Information Technology , Volume 4, Number 2, page 131.
Stone, S. (1996) ‘Shrink-Wrap Licences – Are They Enforceable?’ Commercial Lawyer , February, page 7.
Turner, M. J. (1997) ‘Anatomy of a Computer Contract Dispute’, Computers and Law , Volume 8, Issue 3, page 12.
Footnotes
[1] Trainee Solicitor, Bishop and Robertson Chalmers , Glasgow. The author invites comments on this article. Email: struan.robertson@virgin.net
[2] Section 3(1)(b).
[3] 1996 SLT 604; 1996 SCLR 587.
[4] At page 606.
[5] At page 611.
[6] Woolman (1987), page 142.
[7] (1899) 2 F 82.
[8] Finnie v Glasgow & South-Western Railway Co . (1857) 3 Macq. 75.
[9] Copyright, Designs and Patents Act 1988 section 21, as amended following the European Directive on Computer Programs 1991, Article 5(5).
[10] [1996] 4 All ER 481.
[11] See: Step-Saver Data Systems Inc. v Wyse Technology and The Software Link, 939 F 2d 91 (3rd Cir 1991); Arizona Retail Systems Inc. v The Software Link Inc ., 831 F Supp 759 (D Ariz 1993); Vault Corporation v Quaid Software Ltd , 847 F 2d 255 (5th Cir 1988); For consideration of these cases, see David Hayes (1997).
[12] 86 F. 3d 1447 (7th Circuit 1996).
Last revised: Wed 23 Feb 2005
Sam Business Systems Ltd v Hedley and Company
[2002] EWHC 2733 [2003] Masons CLR 11, [2003] 1 All ER (Comm) 465, [2002] EWHC 2733 (TCC)
Introduction
The claimants are suppliers of computer software. The defendants are stockbrokers.
This action concerns the supply of software to the defendants for use in their business. The claimants claim money alleged to be due to them for that supply. The defendants counterclaim substantial damages for alleged defects in what was supplied. Because both claim and counterclaim hinge on those alleged defects, it has been agreed that the defendants should open the action.
I shall refer to the claimants as SAM and to the defendants as Hedley’s.
Hedley’s is a small firm of Lancashire stockbrokers practising in Blackburn, Preston and Southport. At the relevant time there were three partners, Anthony Hedley, Timothy Scott and Nicholas Baldwin. It handled the business of individual and corporate clients both in general stockbroking and in financial products such as PEPs and ISAs. At the time of the contract with SAM, Hedley’s had some 10,000 clients on its books of whom some 2,000 could fairly be described as “active”. Some transactions between the parties have been carried out by Pendle Investments Limited, Hedley’s service company. The parties agree that Pendle should be treated as Hedley’s agent and in this judgment I shall refer to anything done by Pendle as done by Hedley’s.
Hedley’s used to handle their stockbroking business with a system known as ANTAR. Hedley’s did not have an IT department or specialist IT employees. The staff used their old ANTAR system competently but they did not know how to use a mouse.
Rather late in the day, in mid 1999, Hedley’s formed the belief that ANTAR was not Year 2000 compliant (i.e. that it would not work once dates were inserted into it for 1 January 2000 onwards). As it turned out, that belief may have been unduly alarmist but both parties have proceeded on the assumption that it was correct. In any event, there were good reasons for Hedleys to change their system. ANTAR was an old DOS based, or “Green screen”, system operated by keyboard strokes and not a mouse operated Windows based application. Moreover, the suppliers had a very small customer base and seemed to be unlikely to be able to update the system. It is important that when Hedleys contacted SAM in 1999 they both assumed that it was essential that Hedleys should have a new computer system working before 1 January, 2000. However, although ANTAR employed rather old fashioned technology, it was relatively sophisticated and would perform many functions, such as the application of Stamp Duty and Corporate actions automatically. Hedley’s complain that these functions were not done as well by the system provided by SAM.
Sometimes, particularly when an avowed aim of the Board of a company is to produce savings by redundancies, the introduction of a computer system is resisted by the staff. There was no such resistance in this case. Hedley’s and its staff wanted the system to work.
SAM is a small software company whose only product is its software known as InterSet. InterSet is a ready-made package of software modules made by SAM for stockbrokers and others (such as Banks) dealing in stocks and shares in administering their “back-office” systems. Those systems include processing and settling transactions in buying and selling shares, accounting for clients’ money, and communicating with CREST, the UK computerised settlement system for the securities industry. Buying InterSet is not as simple as going into a shop and buying a shrink wrapped package, but it is not a bespoke system. The customer can make choices between certain modules and certain services, but it is sold as a developed system.
SAM claim £310,509.84 plus interest for balances alleged to be due for licence fee, post-installation maintenance and other services after a voluntary reduction of about £91,000. Hedley’s have already paid SAM £184,605.32. In pre-sales representations, SAM told Hedley’s that the system would cost no more than £180,000 and that there was a “money back guarantee in the event that a system proves unacceptable for the customer’s purposes”.
Hedley’s counterclaim damages now, after some changes, set at £789,658.44 plus interest including all sums paid to SAM,increased cost of working, write-offs, fines and additional charges, mitigation costs, and loss of profits.
History
On 7 and 9 July, 1999, SAM responded to an enquiry by sending two letters to Hedley’s. On 7 September, 1999. SAMgave a demonstration of InterSet. On 18 October, 1999, Hedley’s signed a Licence Agreement and a Maintenance Agreement. Over the weekend of 18 and 19 December, 1999, InterSet was commissioned at the Blackburn office of Hedley’s for “Go-Live” on 20 December, 1999.
Immediately after Go-Live, serious problems were apparent, many of which were fixed, some speedily. Hedley’s continued to use InterSet but problems continued to arise. In January 2001, Hedley’s decided to cease using InterSet and instead to “outsource” their back office to Pershings. Hedley’s did not tell SAM of that decision until 8 February, 2001. On 21 May, Hedley’s went live with Pershings. On 1 June, 2001, the Claim Form was issued starting this action. On 30 July, 2001 Hedley’s Defence and Counterclaim was served, later amended.
By paragraph 37 of the Defence and Counterclaim, Hedley’s pleaded:
“By reason of the misrepresentations and the breaches of the licence and maintenance agreements, Hedley’s were entitled to rescind the two agreements alternatively to reject the system alternatively to treat the agreements as having been repudiated by SAM. In or about June, 2001, Hedley’s duly rescinded the agreements and/or rejected the system and/or accepted SAM’s repudiation of the agreements. Alternatively by this defence, Hedley’s rescind the agreements and/or reject the system and/or accept SAM’s repudiation of the agreements.”
It is notable that by their Defence, Hedley’s do not identify a specific letter or conversation by which rescission, rejection, or acceptance of repudiation was effected. In the light of the dates I have mentioned in the previous paragraph of this judgment, the reference in paragraph 37 to June 2001 must be a mistake.
At the trial, and in closing submissions, counsel for Hedley’s identified a fax message dated 8 February, 2001 as the act by which Hedley’s rejected InterSet.
I have set out a very selective narrative from the history by way of introduction to show the unusual nature of the claim by Hedley’s for return of everything paid to SAM after using InterSet for 16 or 17 months. To do justice to the cases of both parties, it is necessary to consider the history in greater detail and I shall return to the narrative later. First, I must consider the contracts between the parties.
The Contracts
Hedley’s rely on representations made before contract by SAM. Hedley’s submit that those representations were incorporated into the contract.
Hedley’s expected and were encouraged by SAM to expect that what they were getting was a product at least as sophisticated as the now obsolescent ANTAR.
On 7 July, 1999, Hedley’s, without the advice of a consultant, approached SAM. The same day, Mr. Whitehouse of SAM sent to Hedley’s a brochure describing InterSet and making great claims for it.
The brochure included the following:
“InterSet has been designed from the outset to be the complete Book Entry Transfer settlement system for CREST, for the CGO [the Central Gilts Office settlement system] and for international usage. It is already in use at two of the UK’s four high street banks.”
Counsel for Hedley’s comments that InterSet may well have worked for High Street banks; the problem was that it may not have been geared for small firms with no IT department. The evidence was that it was in use at only one stockbroking firm.
The point has frequently been made during the trial that InterSet works well elsewhere (and I have received evidence from stockbrokers, Hoodless Brennan to that effect) and accordingly it is said, if it did not work for Hedley’s there must be something wrong with Hedley’s method of working. That line of argument has prompted me to ask, (a) if it is a tried and tested system, why when supplied to Hedley’s did it have admitted bugs? (b) what is the difference between a bug and a defect? Mr. Peter Susman Q.C. concealed any annoyance he may have felt when I returned to these questions more than once and he promised to answer them in his closing submissions but witnesses were not asked by him to deal with the questions, which I regard as questions of fact. In his closing speech, Mr. Susman Q.C. relied on some dicta of Staughton L.J. in Saphena Computing Limited v. Allied Collection Agencies Limited [1995] FSR 616 at 652. However, in that case, the court was dealing with an undeveloped system which was sold with bugs “warts and all”. Staughton L.J. referred to expert evidence that in a bespoke system bugs were inevitable. However, in another case of a bespoke system, St. Albans City v. International Computers Limited [1996] 4 All ER 481 Nourse L.J. said at page 487, “Parties who agree respectively to supply and acquire a system recognizing that it is still in the course of development cannot be taken, merely by virtue of that recognition, to intend that the supplier shall be at liberty to supply software which cannot perform the function expected of it at the stage of development at which it is supplied”. By contrast, InterSet was sold as a developed system allegedly already working well in other places. This is a much stronger case than St. Albans against toleration of bugs. I am in no doubt that if a software system is sold as a tried and tested system it should not have any bugs in it and if there are any bugs they should be regarded as defects. Of course, if the defects are speedily remedied without charge, it may be that there will be no consequential damage.
The brochure continued by praising what was called “straight through processing” or STP. This was a claim that information coming into the office would go to the level where the account was to be found and would settle the account without human intervention:
“The idea of STP is to greatly improve the level of automation in office procedures by ensuring that correctly initiated transactions require no human intervention to be successfully processed through to completion.”
“These accounts are maintained as an integral part of the STP process, and can be reported on at will, but in summary and detailed levels. It is possible to produce daily a full balance sheet, according to user defined reporting rules, in which all customers, counterparties, stocks, currencies, depositories, open deals, stock borrowing liabilities, collateral, bank accounts, corporate actions et cetera are detailed. With these types of report, it is simple to spot trends which expose inefficiencies in the business, such that senior managerial effort can be efficiently directed.”
“So in InterSet, STP is not merely enabled for some transactions, but carefully implemented to ensure that the settlement environment is efficient as a whole,whether or not the ideal of STP is achieved for individual transactions … dramatically reduces overall settlement costs.”
“… every movement of stock or money is rigorously accounted for, leaving a complete and audited record of how stock and cash assets are being moved around, as well as why, when and by whom. All these accounts are maintained locally”
I agree with the submission made by counsel for Hedley’s that what was being presented to Hedleys was a system with a very high degree of automation, a system that was going to be operable by ordinary people, and not technically qualified people.
Mr. Tustain of SAM then sent a letter to Hedley’s on 9 July, 1999 containing the following representations:
“I attach an analysis of the likely costings of running your back office with our software.”
“As you will see, this suggests a cost per bargain in the £8-£9 range, including all your staffing, and allowing a 30 per cent per annum cost for any capital investment. I have attached a copy of the five year trading summary I mentioned.
“InterSet is highly automated. You can quite literally get to the point where you enter the trade and forget it, as long as your typists are accurate. At the point of entry, the system immediately updates the client portfolio, enters cash (multi-currency) into client’s account, maintains full control of stock and money outstanding both with clients and the market, sends instructions off to CREST for matching, monitors your transactions’ statuses, records their settlement, reconciles your CREST stock and cash accounts, transfers proceeds to and from customers’ deposit accounts (at settlement). Even contracts and statements are produced automatically in unattended executions. You can also send them via fax, SWIFT or e-mail, or directly from your computer.
“A suite of reports is executed unattended overnight, primarily to allow you to identify problem transactions in the back office. These are both compliance and exceptions based reports, and will focus your attention to old debtors, late settlements, exceptional CREST statuses, unmatched transactions, large exposures, et cetera. The system includes a very detailed balance sheet which can be produced daily and will provide a full and easily audited statement of your business.
“All these overnight reports, and many others, can also be executed at any time during the day, and they will be bang up to date because the whole system is based around a modern and on-line data base being continually updated by CREST.”
Implementation usually takes about 12 weeks. All output is laser printed.”
By that letter, SAM represented firstly that InterSet was fully automated, and secondly, that it produced reports both for Hedley’s internal purposes and for compliance with the requirements of the Regulator. Reports for Hedley’s internal purposes included debt collecting. The Regulator or the FSA are the terms used throughout the trial to refer to the regulatory body charged with overseeing the conduct of financial services including stockbrokers. The Financial Services Authority (FSA) was the overall regulatory authority. The FSA required frequent periodic reports about the state of all stockbrokers’ businesses and if not satisfied they had the power to impose fines or ultimately to close the business.
At the meeting at the Blackburn office of Hedley’s on 7 September, 1999 oral representations were made that were recorded in minutes of that meeting made by Mr. Paul Tustain of SAM. All three of the partners of Hedley’s attended that meeting together with Miss Roberts who was in charge of the administration of Hedley’s office. SAM sought to portray Miss Roberts as an IT Manager and Project Manager, but it is quite clear that she was in charge of administration of the whole business and had no special IT skills. She was appointed not long before the contract with SAM and it is not surprising that she had to answer, “I don’t know”, to many of the questions put to her. I found her an honest and truthful witness doing her best to help the court. As was pleaded on behalf of SAM in their Amended Reply and Defence to Amended Counterclaim, “Sue Roberts had very little experience of the ANTAR system or of Hedley’s use of that system”.
After recording that the day was particularly useful in explaining to SAM further details of Hedley’s operation, the minutes state:
“Having considered the issues raised SAM is absolutely confident that there are no major technological or functional obstacles to implementing InterSet at [Hedley’s] to manage their back office. However, bearing in mind the tightness of timescales it would be necessary to move quickly forward to be able to meet the Y2K deadline. If agreements were not in place by mid October it would start to become impractical to port the business before the new year.”
That part of the minutes is important in that it was shown that, having seen everything they wanted to see at Hedley’s, SAMwas confident that firstly, there was no obstacle to implementing InterSet at Hedley’s, and secondly that provided contracts were signed by mid-October (which they were) the implementation could be completed within the timescale required. SAM now say that they were not asked to make a survey, which is true. But they had the opportunity to see whatever they wanted to see. If they had thought that they did not know whether there were major or any technological or functional obstacles to implementing InterSet at Hedley’s to manage their back office they should not have said the contrary. It would have been open to them to require a survey, for which they might have demanded payment.
After detailing various improvements to be obtained from InterSet, including improved reporting, the minutes state:
“…SAM have indicated that the likely costs for the overall project are in the region of £120,000 to £200,000. This is expected to include hardware, licenses installation, data upload from CREST, minor customisations and some data transfer utilities. Events subsequent to the presentation suggest a downwards revision of the top end cost to £180,000. This investment is subject to the terms of SAM’smoney back guarantee in the event that a system proves unacceptable for the customer’s purposes.”
The written agreements other than this document did not specify the total cost of the system. However, the parties worked on the supposition that the total cost was to be £180,000 of which £116,000 was to be the licence fee paid to SAM and about £19,000 for hardware paid to hardware suppliers. The hardware included laser printers of a type recommended by SAM. A complaint about a failure to print reports was at first sought to be explained by alleging that Hedley’s had not bought appropriate printers, but it became clear that Hedley’s had bought precisely what was recommended by SAM.
In those Minutes, other facilities were discussed in detail with emphasis on “full automation”, in particular with regard to “drill down”, reports and “corporate actions”.
Drill down was required because some accounts were like a family tree. A head account might be in the name of John Smith and under that name might be John Smith’s trading account, his family account and PEPs and ISAs. Drilling down was the process whereby information would come in to the head account and be drilled down into the sub-accounts. The minutes stated:
“The drill down facilities were used, starting from an on-line valuation, and showing how each balance, position et cetera is supported by underlying accounting, all of which is available on-line and updated throughout the day – for both stock and money -as the customers’ deals are recorded.”
It was said that there were about 20 standard InterSet reports.
Corporate actions are such things as company takeovers or 2 for 1 share issues that require revision of a stockbroker’s records and accounts without any instructions having been given by the client.
The minutes record:
“Corporate actions were discussed. All the enterable CREST transaction types (e.g. transfer to escrow, unmatched stock event, free delivery, free payment) are fully supported by InterSet. Additionally, all the centre generated transaction types (eg unmatched stock events, transfers from escrow, claims) are processed with full automation by InterSet. InterSet’s pro rata distribution tool was explained, detailing how it distributes funds to entitled dated holders of an underlying security, and how this is appropriate to dividend distribution under a large pool of nominees.”
ANTAR had done all these things for Hedley’s and Hedley’s were led to believe that InterSet would be at least as good as ANTAR.
There was a further matter discussed and recorded as follows:
“The remaining element: reporting re inadequate customer documentation can easily be accommodated within the allowances which we make for custom reports during implementation.”
Hedley’s had got into trouble with the Regulator in the previous year for failing to get all the required agreements with clients completed and signed. This item clearly relates to that problem. Despite suggestions to the contrary made on behalf of SAM, Hedley’s had no other difficulties with the Regulator before taking up InterSet. This representation recorded in the minutes was indicating that InterSet would prevent a repetition of such trouble.
Hedley’s case, which I accept, is that SAM was indicating that SAM had examined the workings of ANTAR at Hedley’s and were satisfied that they could successfully transfer from the old system to InterSet.
In a letter dated 4 October, 1999, quoting various costings, Mr. Tustain on behalf of SAM wrote:
“We offer a standard money back guarantee on licence if we fail to be acceptable, but this has never occurred.”
Hedley’s are claiming their money back, but the starting point for considering their entitlement to make that claim must be the contract that they later entered into.
SAM and Hedley’s entered into two written agreements, the Licence agreement and the Maintenance agreement. They were signed by SAM on 12 October and by Hedley’s on 18 October, 1999.
The Licence agreement gave Hedley’s a licence to use the software. Attached to the Licence were “Acceptance Criteria”.
The term of the licence was perpetual until terminated by written notice by either party. Neither party relies on termination by written notice under this clause.
The consideration was, as has been previously indicated, £116,000 payable as to £58,000 on signature of the agreement, £29,000 on installation, and £29,000 on completion. It is clear is that SAM was responsible for installation and installation had to include migration of information from ANTAR onto the new system. The agreement defined “completion” as the earlier of Acceptance and 30 days after SAM had informed the client in writing that the software had been installed unless within that 30 day period the client informed SAM of instances where the software failed the Acceptance Criteria. Within that definition completion never occurred.
SAM has made much of the tightness of the timescale for the installation of InterSet, but the Licence agreement, drawn up by SAM, provided for delivery well within that timescale:
“Delivery and installation of the Application Software shall take place within the later of 30 days after suitable computing environments have been made available to SAM by client and 30 days from signature of this agreement.”
Clause 2.10 of the Licence Agreement set out a detailed machinery for Hedley’s to make acceptance tests and if not satisfied to reject the software with SAM having the right to demand arbitration if not satisfied that rejection was justified. That machinery was not operated, but it is necessary to consider the terms of this clause together with clause 2.11.
Clause 2.10 included the following:
“30 days from delivery of the application software by SAM, acceptance tests will be completed by the client in order to test the application software …Client will advise SAM of any instances where the application software fails to achieve the stated acceptance criteria. Such advice shall be in writing …Any individual software component reissued by SAM… may be subjected to retesting by client for a further 30 days …If, having followed these procedures, and within 90 days from the original date of delivery, there remain acceptance criteria correctly notified by client according to the procedures outlined above but not achieved by the application software, client shall be entitled to initiate procedures for rejecting the application software. In the event that SAM consider the rejection of the application software to be unreasonable, SAM shall have the right to request client to enter into arbitration via an independent third party, and client shall not unreasonably refuse this request.
In the absence of a valid written advice from client, detailing unacceptable behaviour of the application software, and referencing a particular acceptance criterion not attained, the application software will be deemed accepted.”
Clause 2.11 included the following:
“In the event of the application software not being accepted according to the obligations and procedures outlined in sections 2.9 and 2.10, client shall have the right at its entire discretion to rescind this agreement and to be repaid all sums which have previously been paid to SAM in respect of the licence under this agreement. This shall be the sole and exclusive remedy available to client in the event of the application software not being accepted.”
The Licence agreement also included an entire agreement clause in clause 3.6 and exclusion of liability and limitation of liability clauses in clauses 3.2 and 3.3.
This case has been fought mainly on the contested facts as to whether InterSet worked or not and, to the extent that it did not work, whose fault it was. I have had limited help about the construction of these terms. In closing submissions, Mr. Susman Q.C. said that his reliance on the contractual limitation clauses remained a fall-back position but he relied on the evidence of Mr. Tustain to show that the clauses were reasonable under the provisions of the Unfair Contract Terms Act, 1977. It is common ground that both the licence agreement and the maintenance agreement are on SAM’s “written terms of agreement” and that therefore section 3 of the Unfair Contract Terms Act applies to their exemption and limitation clauses. Mr. Susman Q.C. also said that he reserved the “entire contract” point for a higher court if necessary. When asked for an explanation of that, he said that he would if necessary seek to persuade the Court of Appeal that its decision in Watford Electronics Limited v. Sanderson CFL Limited [2001] 1 All ER (Comm) 696 was made per incuriam, and if unsuccessful in that endeavour would seek to persuade the House of Lords that it was wrong. Mr. Mawrey Q.C. for Hedley’s agreed with the submission that the decision in Watford Electronics Limited v.Sanderson CFL Limited was wrongly decided. In answer to my question, Mr. Susman said:
“We place no confidence at all in persuading your Lordship that the entire contract point in the case would enable us to succeed on the exclusion clause if we otherwise would not, or on the point that we made in opening that the acceptance criteria is an exclusive way of rejecting. If we did not otherwise succeed on it, and the reason for that is the decision of the Court of Appeal in the Watford Electronic case which we feel precludes us from advancing that argument to your Lordship, what we want to reserve is the possible argument that Watford Electronic was wrongly decided.”
I find it difficult to understand that statement by Mr. Susman Q.C. The Court of Appeal in Watford Electronics Limited v.Sanderson CFL Limited was considering the reasonableness of exclusion clauses in a computer contract and in doing so considered what was labelled an Entire Agreement clause in the following terms:
” Entire Agreement. The parties agree that these terms and conditions (together with any other terms and conditions expressly incorporated in the Contract) represent the entire agreement between the parties relating to the sale and purchase of the Equipment and that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract.”
Commenting that that clause was in two parts, the Court of Appeal held that the second part was an effective and binding acknowledgement by the parties “that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract.” The contract in the present case was very different. There were two contracts, the Licence agreement and the Maintenance agreement, but only the Licence agreement related to “the sale and purchase of the Equipment” so the Licence agreement could be the entire agreement relating to sale and purchase notwithstanding the existence of the Maintenance agreement. In clause 3.6 there was an “entire agreement” clause, but it was in different terms from the clause in Watford Electronics Limited v. Sanderson CFL Limited.
Unlike the agreement in Watford Electronics Limited v. Sanderson CFL Limited, the Licence agreement in this case did not include an agreement “that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract.”
However, there was an Entire Agreement clause that did refer to representations in the following terms:
“This agreement constitutes the entire understanding between the parties relating to the subject matter of this agreement and, save as may be expressly either referenced to or referenced herein, supercedes all prior representations, writings negotiations or understandings with respect hereto but nothing in this section 3.6 shall exclude liability for any fraudulent misrepresentation.”
Clause 3.6 did not include an acknowledgment of non-reliance such as was considered by Chadwick L.J. in Grimstead (EA) & Son Limited v. McGarrigan [1999] CA Transcript 1733 and Watford Electronics Limited v. Sanderson CFL Limited at paragraphs 38 onwards and so there was no evidential estoppel of the sort put forward by Chadwick L.J. in those cases.
Moreover, I find that the “entire agreement clause”, was waived by SAM. On 20 June, 2000, Hedley’s wrote to SAMraising some questions about an invoice for the costs of implementation. The letter said that there was a “Must have list”, a “Should have list” and a “Wish list” for the software system. The letter stated that it was only for the “Wish list that there should be extra charges. That letter made it plain that the view of Hedley’s was that complete implementation had not yet occurred, a viewthat was not disputed, and I shall return to that, but that is not the present point. In reply, Mr. Whitehouse on behalf of SAMwrote on 5 July, 2000 first of all emphasising that the invoice related to the licence agreement and then saying:
“You refer to the production of the three lists, which I agree is certainly a good idea, and will help us focus on what you require for your business. However, I am sure you understand that we simply cannot use such a list as the basis of our contractual relationship. This, and the cost of delivering it, is covered by the acceptance criteria, by conversations and letters between yourself and
Paul Tustain, prior to signature of the contract.”
Mr. Whitehouse plainly treated the conversations and letters between Hedley’s and Mr. Tustain as incorporated into the contract, as Mr. Mawrey Q.C. submits they were.
Mr. Mawrey also submits that there were implied terms of the Licence agreement. In his opening written submissions he wrote:
“Subject to the validity of SAM’s purported exemption clauses, it cannot be disputed that the licence agreement would be subject to implied terms to the effect that:
a) InterSet would be constructed and installed at Hedleys’ premises with all proper and professional care and skill;
b) InterSet would be reasonably fit for the purposes for which Hedleys required it;
c) InterSet would be of satisfactory quality;
d) InterSet would properly and efficiently perform all the required functions;
e) InterSet would perform all such functions in such a way as to enable Hedleys to fulfil its professional obligations to its clients and its statutory duties as required by the FSA;
f) SAM would efficiently carry out the migration and processing of the ANTAR data.”
That submission was not disputed. It was supported by reference to sections 4 and 13 of the Supply of Goods and Services Act, 1982 and to the judgment of Sir Ian Glidewell in St. Alban’s DC v. International Computers Limited [1996] 4 AER 481 at 492-4. I accept that submission. I have to decide whether those implied terms have been effectively excluded by the exclusion clauses in the contract. Those clauses include clauses 2.10, 2.11, 3.2 and 3.3.
Those clauses present two questions:
(a) What is the proper construction of the clauses?
(b) On that construction are the clauses fair and reasonable within the meaning of the Unfair Contract Terms Act, 1977.
I know of no ground on which it might be argued that Watford Electronics Limited v. Sanderson CFL Limited was decided per incuriam. As to the first question, that decision gives me little help because it relates to a contract in different terms. I shall return to that later. As to the second question, that decision gives some guidance as to the approach to be followed but in no way decides the question before me. In his closing speech, Mr. Susman abandoned a submission made in opening and in my view did so for no good reason. I will therefore consider that submission.
In his written opening, Mr. Susman Q.C. submitted:
“Hedleys never invoked the Licence Agreement’s straightforward and exclusive regime governing any rejection of InterSet by Hedleys, which was to the following effect:
Schedule 2 to the Licence Agreement comprised a very detailed and comprehensive set of “Acceptance Criteria” [1.194-309], countersigned by each party [1.195];
the Licence Agreement provided that Hedleys should give written notice of alleged failures to meet the Acceptance Criteria, which would give SAM time to remedy the alleged failings: clause 2.10 [1.189]; and if SAM did not remedy the alleged failures, Hedleys could reject and recover all sums previously paid to SAM: clause 2.11 [1.189];
this regime was exclusive, since there was no other promise of performance by SAM: clause 3.2 [1.190]; and the provisions of the Licence Agreement constituted (in relation to its terms) the entire agreement between SAM and Hedleys: clause 3.6 [1.191].”
I do not see that that submission is in any way affected by the decision of the Court of Appeal in Watford Electronics Limited v.Sanderson CFL Limited. It does not, of course, follow that the submission is well founded.
It is correct that the Licence agreement does provide a detailed machinery of notices based on the Acceptance Criteria and if Hedley’s had initiated that machinery and received an inadequate response they would have been entitled to reject the system and get their money back. They did not initiate the machinery. Does that mean that because they did not initiate the machinery they have no remedy for any defects in the software? As I understand Mr. Susman’s opening, he was submitting that the answer to that question is, Yes. Clause 2.11 concludes with the words, “This [i.e. money back] shall be the sole and exclusive remedy available to client in the event of the application software not being accepted”. I interpret those words as referring to the only remedy available to the client on the software not being accepted under the machinery of clauses 2.10 and 2.11. I do not read those words as restricting any remedy if the software is rejected for any reason outside that machinery, if that is possible.
The Licence agreement did however make a sweeping exclusion of warranties. By clause 3.2, SAM warranted that SAM had the right to licence the use of the application software and that use of the application software “will not infringe any patent, copyright, design, trade or service mark or any intellectual property rights of any third party (whether British or foreign)”. The clause then continued:
“Except as set out in the preceding paragraphs of this section 3.2, there are no warranties, either expressed or implied, by this agreement. These include, but are not limited to, implied warranties of merchantability or fitness for a particular purpose, and all such warranties are expressly disclaimed to the extent permissible by law.”
By clause 3.3, the licence agreement continued:
“Except as provided in clauses 3.2 and 3.3, SAM will not be responsible for any direct, incidental or consequential damages such as, but not limited to, loss of profits resulting from the use of the software, even if SAM have been advised of the possibility of such damage.
Except as provided in clauses 3.2 and 3.3, any liability to which SAM might otherwise become subject shall, in aggregate, be limited to the licence fee paid.”
By clause 3.2 SAM sought to exclude liability for every form of liability likely as a matter of practice to arise (except for misrepresentation), but as the final words “to the extent permitted by law” indicate, there was a lingering doubt that there was something that might not have been excluded, so by clause 3.3 remedies in damages were excluded. That exclusion excluded not only loss of profits and “incidental or consequential damage” but also direct damage. If that were not enough, liability was limited in aggregate to the amount of the licence fee paid. The exclusion of liability in damages was expressed to relate to damages “resulting from the use of the software”. That exclusion was not limited to breaches of warranty. It included damages resulting from the use of the software because it failed to come up to representation. So although I have found that the entire agreement clause was waived, subject to the issue of reasonableness of Clause 3.3, there is no liability on SAM for misrepresentation. In Watford Electronics Limited v. Sanderson CFL Limited at page 710 paragraph 41, Chadwick L.J. said:
“Where both parties have acknowledged, in the document itself, that they have not relied on any pre-contract representation, it would be bizarre (unless compelled to do so by the words which they have used) to attribute to them an intention to exclude a liability which they must have thought could never arise”.
That comment was made about a document in different terms from the document before me. Looking at the document before me, it is so obviously a “belt and braces” collection of overlapping exclusions and limitations of liability that in that contract (and I emphasise, in that contract and no other) I find nothing strange about one clause excluding liability already excluded by another clause. For example, having excluded liability for every conceivable form of damage, (with the exception of infringement of intellectual property rights) the contract then goes on to limit the amount of the damages payable (except in the case of infringement of intellectual property rights). The absence of a “non-reliance” term distinguishes this case from Watford Electronics Limited v. Sanderson CFL Limited the authority of which is unquestioned as far as I am concerned, but that is not the only distinction, as I hope I have made clear. The totality of the relevant terms in that case and this differ widely.
By their Defence to Counterclaim, SAM, with some reservations, admits making most of the statements to which I have referred but states “no admissions are made as to whether the words used constitute representations” though when dealing with the summary of the alleged representations there is an express denial that the matters relied on constitute representations as a matter of law.
By paragraph 52 of the Defence to Counterclaim, SAM contends that clause 3.2 is reasonable within the meaning of the Unfair Contract Terms Act 1977. Nothing is said there about clause 3.3 but I will take it that the same case is made about that clause. As to clause 3.6 it is said in the pleading that the terms of the Unfair Contract Terms Act do not apply to that term, but if they do then that term also is reasonable.
I take the view that the terms of the Unfair Contract Terms Act do apply to clause 3.6. That clause was one of SAM’s written terms of business and so section 3 of the 1977 Act applied to it. The clause did not include words to provide an evidential estoppel of the sort found in Watford Electronics Limited v. Sanderson CFL Limited, but by that contract term, SAM did, in the words of section 3(2)(b) “claim to be entitled to render a contractual performance substantially different from that which was reasonably expected of him”. What was reasonably expected was what was represented in the pre-contract representations. As I have already indicated, SAM itself as well as Hedley’s relied on those representations as showing what was reasonably expected and as there are no words providing an evidential estoppel against putting forward such reliance the decision in Watford Electronics Limited v. Sanderson CFL Limited does not prevent consideration of what performance was reasonably expected of SAM by reference to pre-contract representations.
As was made plain by Chadwick L.J. in Watford Electronics Limited v. Sanderson CFL Limited at page 16 paragraph 50, the reasonableness of each term to which the 1977 Act applies must be considered separately even to the extent of looking to see whether each clause contains one term or more than one, “although, of course, in considering whether that requirement is satisfied in relation to each term, the existence of the other term in the contract is relevant”. I shall endeavour to bear in mind and apply the subtle distinction between that approach and the approach of His Honour Judge Thornton Q.C. under appeal in that case where he seems to have viewed the requirement of reasonableness as applying to the clauses affected by the Act as a package together. As I understand it, the effect of that decision of the Court of Appeal is that, by way of example, I might find that the virtually total exclusion of liability for breach of warranties is unreasonable but at the same time find that the limitation of the amount of liability to getting one’s money back is reasonable. Or I might find that because of the ability to get one’s money back under the Acceptance Criteria machinery, the exclusion of other liability including the liability in tort or under the 1967 Act for pre-contractual statements is reasonable.
As to reasonableness, Mr. Mawrey Q.C. has throughout taken the stance that the burden of proving reasonableness is on SAM,as it is, and has not called evidence of unreasonableness. Mr. Mawrey did establish in cross-examination that SAM is not insured against claims such as are made in this case. As to that one has to bear in mind section 11(4) of the Unfair Contract Terms Act:
“Where by reference to a contract term … a person seeks to restrict liability to a specified sum of money and the question arises … whether the term … satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.”
That section of the statute requires consideration of insurance in relation to the circumstances of the person who seeks to restrict liability to a certain sum of money, that is, in this case, SAM, by the second part of clause 3.3. But the question is not whether he did or did not obtain insurance. It is established that he did not. The statute requires consideration of the two questions set out in (a) and (b) of section 11(4) neither of which were examined in this case. The fact that SAM did not obtain insurance is entirely neutral. Either they did not try, or it was difficult, or prohibitively expensive, or impossible. It is not unlikely that they did not try to obtain insurance because they considered that having regard to the terms of the contract it was an unnecessary expense to do so. We do not know. Notwithstanding some unsupported assertions by Mr. Mawrey Q.C., there is no evidence before me as to how far it was open to SAM to cover itself by insurance with or without exclusion clauses in the contract. Mr. Mawrey Q.C. put to Mr. Whitehouse that it was reasonable for a company in the position of Hedley’s to assume that SAM was insured, to which the answer was that if they had asked we would have told them that we were not. There is no evidence that Hedley’s did assume that SAM was insured, but if they did make that assumption, what difference would it make? SAM would only be insured against the risks that they undertook, which included the exclusion and limitation of liability clauses. The real questions are the extent to which SAM could have obtained insurance without those clauses or some of them and at what cost, as to which I have no evidence.
In Photo Production Limited v. Securicor Limited [1980] AC 827at 851, Lord Diplock said:
“It is generally more economical for the person by whom the loss will be directly sustained to do so [insure] rather than that it should be covered by the other party by liability insurance.”
But Lord Diplock made that comment in relation to a “misfortune risk” – “something which reasonable diligence of neither party to the contract can prevent”. It was in any event a statement of fact derived from his great experience rather than a statement of law.
There is no reason why Hedley’s should have insured against SAM failing to perform their contract, or to put it more neutrally, failing to do what was expected of them, and they did not.
The absence of insurance on either side does not help resolve the question of reasonableness in this case because there is no evidence about ability to obtain insurance or its cost.
In Salvage Association v. CAP Financial Services [1995]Fleet Street Reports 654 at 676, His Honour Judge Thayne Forbes Q.C. said:
“Generally speaking where a party well able to look after itself enters into a commercial contract, and with full knowledge of all relevant circumstances willingly accepts the terms of the contract which provide for apportionment of the financial risks in the transaction, I think that it is very likely that those terms will be held to be fair and reasonable.”
That statement was approved by Peter Gibson L.J. in Watford Electronics Limited v. Sanderson CFL Limited at paragraph 63. On its face, the statement of Judge Thayne Forbes makes obvious good sense even without the approval of the Court of Appeal, but the statement contains within itself a number of conditions and it remains to be considered on the facts of each case whether those conditions are satisfied. In the circumstances of this case, was Hedley’s “well able to look after itself”. In 1999 there was a considerable amount of panic about Year 2000 compliance and Hedley’s, having already been in some trouble with the Regulator were under pressure from the Regulator to ensure that their computer system was Year 2000 compliant. There was no one at Hedley’s who knew about computers whereas computers were SAM’s business.
Schedule 2 to the Act provides Guidelines for the application of the reasonableness test. Those guidelines are prescribed by section 11(2) of the Act to sections 6 and 7. Accordingly, the guidelines do not have direct application to this case, but they are usually regarded as of general application to the question of reasonableness: Stewart Gill Limited v. Horatio Meyer & Co Limited [1992] 1 QB 600 at 608 per Stuart Smith L.J.
Schedule 2 to the Act in paragraphs (a) and (b) requires consideration to be given to whether Hedley’s could have got a Year 2000 compliant system without similar exclusion clauses. This is a live issue. I have heard evidence in other cases that it was a standard feature of the computer software industry to supply software only on stringent terms excluding all or virtually all liability. In Watford Electronics Limited v. Sanderson CFL Limited, His Honour Judge Thornton Q.C. heard similar evidence, as was recorded by Chadwick L.J. in paragraph 23 of his judgment in that case. I am not suggesting that evidence in other cases is admissible in the case before me, but I am put on notice of the need for evidence on this topic. Section 11(5) of the Act puts upon SAM the burden of proving that that the terms relied on are reasonable, and reasonableness includes satisfaction of the requirements of Schedule 2 to the Act. I therefore turn to the evidence of Mr. Tustain on which Mr. Susman Q.C. relies for that purpose.
Mr. Tustain, in paragraph 45 of his written witness statement confirms that it is standard practice for his competitors to exclude warranties of merchantability or fitness for purpose. Having stated that there were competitors (whom he naturally regarded as inferior) he said:
“The Licence Agreement between SAM and Hedley’s expressly disclaims implied warranties of merchantability or fitness for a particular purpose to the extent permissible by law. I believe this is normal practice for suppliers of software in the securities markets because there are many different ways of using the facilities of the London Stock Exchange, and a supplier like SAM would not ordinarily know the detail of a firm’s individual services.” (my emphasis supplied).
Although Mr. Tustain said that “a supplier like SAM would not ordinarily know the detail of a firm’s individual services”. He did go on to say that “The business of Hedley’s which was described to me by Nick Baldwin…appeared to be a broadly typical retail stockbroking business and appeared to be similar to another client of SAM’s (Hoodless Brennan) although apparently with more paper based settlement at that time.”
That evidence, together with the rest of Mr. Tustain’s written and oral evidence suggests that Hedley’s choice was limited. The only way to get the software they needed was by contracting on terms that made rigorous exclusions of liability because those were the terms on which all suppliers were contracting. Moreover, the negotiating positions were not equal. Hedley’s had to get a system in a short space of time that was Year 2000 compliant or go out of business. But that was a difficulty of their own making. If they had woken up to the problem earlier, as most people did, they would not have had a problem as to time. On the other hand, SAM no doubt wanted the work to make a profit, but there is no evidence that they would have gone out of business if they did not get the work. However, although the agreements were signed by SAM on 12 October, 1999 and sent to Hedley’s, they were not signed and returned until 18 October, 1999. In the interval, as Mr. Tustain said, Hedley’s asked no questions about the terms and made no attempt to negotiate any changes to the standard terms of SAM’s contract. The only changes they requested were certain additional systems enhancements. If there had been any attempt to negotiate those terms SAM could perfectly easily have said “take it or leave it” as both parties knew, or they might have agreed changes. As we now know from the oral evidence of Mr. Tustain (Day 6 page 29,) he would probably have said, “We cannot expose our business to that degree of risk. We cannot do that business”. As to the degree of risk, the counterclaim in this action is high enough, but it has been stressed on behalf of Hedley’s that because of alleged defects in the software, Hedley’s might have been closed down by the Regulator. If that had happened, the counterclaim for loss of profits, costs of paying off staff, and indemnities against claims from clients could have been enormous. In that event, it is not unlikely that both companies (in the absence of insurance) would have been in liquidation, though I have to say that I have no detailed evidence about the funds available to either party beyond the evidence that they are both small companies. Although it has not been said in so many terms, SAM’s attitude seems to be, “We did not have to take on this contract. Having taken it on on our terms, why should the contract be re-written to expose us to a huge risk and possibly put us out of business?” That is a freedom of contract attitude that would have been entirely acceptable in the nineteenth and early twentieth centuries. Can it survive since Parliament intervened at the behest of the Law Commission in 1977?
Not forgetting my duty to look at each term individually, it is important to look at each in relation to the whole contract. Before contract, SAM says, “We think our system is marvellous and will do everything you need, but if you are not satisfied you can ask for your money back”. The contract, signed by Hedley’s after they have had a few days to think about it but without any attempt to negotiate on their part, says, “So far as possible we exclude any liability for our system, but if you are not satisfied and you go through the right machinery, you can have your money back”. Having regard to the enormous potential liabilities, that seems to me to be a reasonable arrangement in the circumstances existing between the two parties. The big question is, “Not having gone through the contractual arrangements for getting their money back, can Hedley’s nonetheless get their money back or recover any other damages?”
If SAM had not offered what Mr. Tustain on 4 October, 1999 called “a standard money back guarantee on licence”, I would have regarded the exclusion of liability and entire agreement clauses as quite unreasonable though I would have regarded the limitation of liability to the amount of money paid under the licence agreement as reasonable. But on the evidence before me and in all the circumstances to which I have referred (which would not necessarily exist with other contracts signed on the same terms) I find that all of the terms to which objection is taken in the contract were reasonable. The parties were of equal bargaining power in terms of their relative size and resources. Hedley’s were in a difficult position of their own making because of their lateness in tackling the problem of Year 2000 compliance. The evidence from SAM is that other companies like theirs had similar exclusion clauses, but on the other hand, Hedley’s did not even try to negotiate for terms more favourable to them.
The effect of that finding is that SAM are under no liability to Hedley’s for breach of contract or for misrepresentation. However, as this was put as a back stop defence to the counterclaim, and in case I am found to be wrong about it, I will deal with the case on the facts. It is in any event necessary for me to consider the merits of the claim.
I must consider the terms of the Maintenance agreement.
Like the Licence agreement, the Maintenance agreement was signed by SAM on 12 October, and by Hedley’s on 18 October, 1999.
The Maintenance agreement included the following terms:
“This agreement shall be effective once it is executed and the licence agreement is executed.
This agreement shall be effective for an initial term of 12 months from the date on which it becomes effective, unless upon a breach by SAM of the licence agreement the licence for the application software is terminated prior to the expiry of the initial term of 12 months, in which case this agreement may be terminated co-terminously with the licence agreement.
Upon expiry of the initial term of 12 months,either party may terminate this agreement by giving the other at least six months prior written notice …
“Scope of agreement.
SAM will provide the following services:
diagnosis and correction of reproducible software errors during normal office hours;
telephone support of the application software to two named operators or their alternates during normal office hours;
the delivery by remote link of application software maintenance, releases and corrections as they become available for the application software;
periodic documentation updates as they become available for the application software;
version control of the application software.”
As to the scope of the agreement, Mr. Mawrey submitted:
“Assume for the moment that the licence agreement is not apt to exclude all warranties or terms, rather, relating to fitness, merchantability, suitability, function and the like; so assume that the supplier is liable for supplying software that does not work and has to be corrected. Our submission is that the scope of the maintenance agreement, diagnosis and correction of reproducible software errors, cannot include software errors that are the result of a breach of contract by the supplier; otherwise, the effect of the two agreements would be that the supplier would be entitled to charge the customer for putting right his own breaches of contract.”
I accept that submission, but I would go further. I have found that the Licence agreement is apt to exclude liability for all warranties etc. But nonetheless, I cannot see that it is right that SAM should be paid for putting right a defect in respect of which they have excluded liability to pay damages. Of course, any product, whether it be a motor car, or a washing machine, or computer software, may, after working well to start with, then develop faults and faults arising in that way, provided they did not exist in a hidden form on delivery, would be the proper subject of a maintenance agreement. But no consumer would or should accept liability to pay for rectification of defects existing in goods on delivery even if there was no contractual liability on the part of the supplier to pay damages arising out of those defects. If a company supplies to a factory a power unit that from the outset does not work, the supplier may be able to sustain a case that he cannot be sued because of his exclusion clauses, but he could not conceivably charge for making it work under a maintenance contract. Exclusion clauses exclude liability for breach of contract: they do not amount to an agreement that performance has been given by providing equipment that is fit to be maintained: nor do they amount to an agreement that the purchaser should pay for any efforts made by the supplier to put right the defects.
……
The claims made are supported by the evidence of Mr. Oates and calculated on a very conservative basis. I would allow those claims.
SAM’s Claim
This action was begun by SAM making a claim for £310,509.84 inclusive of VAT (as set out in an invoice attached to the Claim Form) plus interest. More detail was given in an Amended Reply and Defence to Counterclaim and in a schedule attached to that pleading. Evidence in support of the claim was given by Mr. Whitehouse as Managing Director of SAM. Mr. Whitehouse is a Chartered Accountant.
The parties are agreed that the basic cost of supplying, installing and implementing InterSet was capped at £180,000 of which £116,000 represented the licence fee and £19,000 represented the hardware, equipment and third party licence costs and £45,000 represented installation costs. The parties agree (by paragraph 38 of the Amended Defence and Counterclaim and paragraph 70 of the Amended Reply and Defence to Counterclaim) that Hedley’s have paid £183,893.27. Those payments include two instalments on the Maintenance contract of £6,788.60 each totalling £13,577.20. Subtracting the Maintenance payments from the sums paid, Hedley’s have paid £170,216.07 of the agreed £180,000 leaving a balance of £9,783.93. There were some other payments for maintenance made at the end of the relationship when SAM refused to attend except for cash.
Looking at the Schedule to the Amended Reply and Defence to Counterclaim, the first large item is a claim for £29,000 for the final payment of the licence fee. That sum was payable on completion, and as I have explained in paragraph 40 of this judgment, completion never occurred. That sum is therefore not payable.
Accordingly, £29,000 should be deducted from the overall sum of £180,000. That deduction swamps the balance of £9,783.93 leaving nothing to be paid on the claim apart from items listed as “Recharge expenses” and “Time and materials”. It is not challenged that there were attendances on the occasions for which charges are made. The dispute is as to whether payment should be made for those attendances. SAM have put forward in their favour the fact that they made very many attendances without making a charge, and there were very many indeed. I find it difficult to see any distinction between those attendances for which SAM made a charge and those for which they made no charge.
It may be that some of the attendances by SAM at Hedley’s were due to user error, though I have not been satisfied that there were any such, and if there were any the attendance may well have been due to inadequate training. Some of the attendances are alleged to have been for providing additional functionality, but any additional functionality was wasted because the system overall was unsatisfactory. Some of the attendances for which charges were made were made because the installation was more difficult than SAM had anticipated. Those charges are an unacceptable increase over the agreed £180,000. Some attendances were made to help to satisfy the Regulator represented by KPMG that the Reports could be made satisfactorily. Those attendances were made to remedy defects. The overwhelming majority of the attendances seem to have been made to correct what are called “bugs”. Although SAM has sought to say that charges have been made for “on-site help” that help has been provided to remedy defects. SAM, like some others in the computer industry seem to be set in the mindset that when there is a “bug” the customer must pay for putting it right. Bugs in computer programmes are still inevitable, but they are defects and it is the supplier who has the responsibility for putting them right at the supplier’s expense. It has also to be remembered that Hedley’s had a Maintenance Contract for which they were charged. The evidence to support the claim for the additional charges comes mainly from Mr. Beardsall, Miss Orton and Mr. Whitehouse. I do not accept that those additional charges relate to any matters other than defects for which SAM was responsible or matters that should have been dealt with under the Maintenance Contract. Accordingly, I do not accept that any of the additional charges made by SAM are sustainable.
Because of inconsistencies between the pleadings, the evidence, and submissions, I found it difficult to put a figure on the claim by SAM. In the draft judgment provided to counsel I put forward a calculation upon which I invited further argument:
Agreed sum for Licence, hardware and installation £180,000
Less: Last payment on Licence £29,000
£151,000
Maintenance £6,788.60
£6,788.60
£13,578
£164,578
Less paid: £170,216
Overpaid: £5,639
In his closing speech, counsel for Hedley’s set the figure of payments at £152,504.91 as opposed to the figure that I had taken from the pleadings. That figure would leave £12,074 to be paid.
I therefore invited further argument.
In response to my request for further argument, Mr. Bergin most helpfully detected that the discrepancies in the figures were explained mainly by some figures being inclusive of VAT and others exclusive of VAT. As a result of his explanation, counsel for both parties are agreed that it follows from my findings that on the claim SAM is entitled to £7,467 exclusive of VAT and £8,773,73 inclusive of VAT. I give judgment on the claim for the latter amount and dismiss the Counterclaim.
I also award interest on the claim in the sum of £1,077.89 being interest at 8% for 12 months.
I heard substantial arguments on costs. For the reasons given orally and recorded on the tape of the proceedings, I make no order as to costs.
Permission to appeal was requested by counsel for SAM on three heads:
(a) The effectiveness of the exclusion clauses;
(b) The calculation of Temporary Staff costs;
(c) Costs.
I refuse permission to appeal on each head. I extend the time for applying to the Court of Appeal for Permission to Appeal until 24 January, 2003.
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Kingsway Hall Hotel Ltd. v Red Sky IT (Hounslow) Ltd.
[2010] EWHC 965 (TCC) (, (2010) 26 Const LJ 542
His Honour Judge Toulmin CMG QC :
This is a claim by Kingsway Hall Hotel Ltd (Kingsway), a company which operates Kingsway Hall Hotel, a four star, 170 bed hotel located at 66 Great Queen Street, Covent Garden in the centre of London.
The defendant, Red Sky IT (Hounslow) Ltd (Red Sky), is a limited company carrying on business as a supplier of information technology systems, inter alia, to the hotel trade, including front and back office reservations and point of sale systems. These systems include advance reservations for both individuals and groups who wish to book rooms at the hotel and systems for checking in and checking out of the hotel and for the payment of bills.
Kingsway claims that the “Entirety” front office software system supplied by Red Sky in October/November 2006 with the “Aztec” point of sale and back office software and “Kx” sales, catering and marketing software at a total cost of £49,999, with an annual maintenance support fee including software licence fee of £7,528, was not of satisfactory quality and was not fit for its purpose. Kingsway contends that Red Sky knew that its purpose would include use by the hotel’s front and back office staff, in particular, in providing accurate information in respect of reservations, the checking in and out of guests and billing.
Kingsway contends that it gave Red Sky until 31 March 2007 to resolve the problems. Red Skyfailed to do so and Kingsway contends that it was entitled to and did reject Red Sky’s IT system by a letter from its solicitors to Red Sky dated 20th April 2007.
Kingsway further contends that, after an extensive search, it found a replacement system, Protel, at a cost of £26,051.90 plus vat with Sage software which replaced the Aztec software at a cost of £3,840.21 plus vat. It retained the Kx sales, catering and marketing software.
Kingsway also claims for alleged financial loss because it claims that the Entirety software reported fewer rooms as being available for reservation than were in fact available. During the time that the system was in use this, it claims, caused fewer rooms to be available for letting than should have been available and would have been let.
The claim under this head is put on two alternative bases: (a) the value of the assumed lost profit is claimed at £248,703 at a reduced occupancy rate of 4% or £310,947 at a reduced occupancy rate of 5%. On the alternative basis (b) the hotel claims that it would have sold 1,700 to 1,800 rooms more than it did in the period during which Entirety was installed giving a lost profit of between £222,139 and £235,206.
In addition, Kingsway claims to have incurred additional staff costs in that (a) it had to employ an additional reservations manager from March 2007 to November 2007 at a cost of £13,500, (b) it incurred wasted salary costs of £29,900 and (c) it had to employ three additional shift leaders at a cost of £36,333.
Red Sky’s case is that the Entirety package was an off the shelf package which was bought by Kingsway after a first demonstration given to six of Kingsway’s employees including the General Manager, the Revenue Manager and the Conference Manager and a further demonstration to other Kingsway employees. Following the demonstrations there was a visit to the East India Club where senior Kingsway employees had a further opportunity to evaluate whether the Red Sky software, and particularly Entirety, was suitable for their requirements.
It is common ground that the alleged problems with Entirety related to Group Bookings. Red Sky denies that Kingsway made any specific purpose or requirement known to it before Kingsway bought the package.
Red Sky, also denies that the system was of unsatisfactory quality or unfit for the purpose for which was sold. Red Sky claims that, this was an off the shelf package and not a bespoke system. Kingsway had every opportunity to inspect it before purchasing it and furthermore, since Kingsway had, as its IT Manager, Mr Benson who had worked for Red Sky and knew its products, Kingsway relied on its own judgement in deciding that the Entirety system was fit for its purpose and therefore that it would purchase it.
In its Reply, Kingsway says that the purpose of the demonstrations, enquiries, and site visit was to demonstrate the suitability of Red Sky’s software and especially Entirety and to demonstrate that it satisfied Kingsway’s requirements. It further contends that before entering into the agreement the operational deficiencies of the software were not apparent from any of the demonstrations.
There is a dispute between the experts as to the nature and extent of the defects and what Kingsway could reasonably have expected of the Entirety system.
Red Sky also claims that any losses which were incurred by Kingsway were caused or contributed to by Kingsway’s failure to ensure that its staff was properly trained in the use of the Entirety system and its failure to put in place and maintain adequate Standard Operating Procedures.
Red Sky also contends that on Kingsway’s case there were widespread problems with Entirety. If this was correct, ( a proposition not accepted by Red Sky) Kingsway failed to report many problems to the Red Sky help desk where they could have been investigated and the cause could have been discovered. Further Red Sky claims that many of the alleged problems were caused by the hotel staff’s failure to use the system correctly. This is denied by Kingsway.
Red Sky counterclaims £32,483.04 in respect of various unpaid invoices. This claim is denied on the basis that Red Sky failed substantially to perform its obligations.
……
I am satisfied on the evidence that screen freezing did take place to an unacceptable extent. I accept the evidence of Kingsway witnesses that it was a frequent problem which had to be worked around by re-booting the system. I am not surprised in view of the loss of confidence which had occurred long before February 2007, and the response to Mr Cola’s letter dated 17 January 2007, that it was mentioned so infrequently during the seven week monitoring period ending on 31st March 2007.
I conclude that screen freezing occurred frequently, was caused to an unacceptable extent by Entirety and that this was a fundamental defect in Entirety.
5. Check in of group bookings was unwieldly and prone to error
The group booking system was such that adjustment of the reservation details of any guest booked under a group booking required an adjustment of that guest’s reservation and then a further adjustment of the group master reservation by means of a lengthy sequence of discrete steps.
The alleged effect on the hotel was that the process was too unwieldly to be practical at a busy check in desk. The system allowed the user to perform only the adjustment to the guest details but then the room availability would be in error with no means of correction. Red Sky acknowledged that there was a problem and offered to provide a “booking history button” which was installed between the 27th February 2007 and 2nd March 2007. Kingsway said that it did not provide much more efficiency and did not provide a refresh function. Red Sky said that this improvement was not possible until new software was written and tested. If all went well it would be due for release in September/October 2007.
In his second witness statement Mr Herrmann attempted to calculate how frequently such amendments took place. Over a six month period 61 groups stayed at the hotel. By a process of mathematics Red Sky seeks to argue that this equates to two changes a day on average. This would equate to between 2 and10 minutes a day. It is argued that this was an irritant but did not amount to a breach of contract.
The experts are agreed that there were a number of steps which were not user friendly. Mr Sykes concludes that the system, as supplied, was not workable on a busy front desk in a central London four star hotel. He said that the Group Booking facility was unsuitable for use in that form at the time. The problems were caused by actual defects and by the software’s lack of controls within its design that allowed the operator to amend the customer’s details without making a further adjustment in a different part of the software. Mr Smith concluded that a PMS by design should be expected to produce such reports.
Mr Smith said that Kingsway was not a particularly heavy user of group bookings. It accounted for 7% -11% of its business. Staff training was offered by Red Sky and if the operators were trained to use the system correctly, and did so, the system was suitable for use.
I prefer Mr Sykes’ evidence which is supported by Kingsway’s witnesses. I do not accept Red Skys’attempt at a mathematical calculation to minimise the impact of the problem on Kingsway. I am satisfied that at times it caused serious delays to Kingsway’s business.
I find that this was an important part of the system, and that it must have been clear to Red Sky, when they recommended that Kingsway should purchase Entirety from them, and that the system Group Booking amendment system. I find that it was so unsatisfactory as to amount to a fundamental defect in the system sold to Kingsway.
Other Problems
I should add that I accept the following:
a) The production of accurate yield management reports was a standard PMS function.
b) Folio errors occur following a system crash because the data in the system becomes lost or damaged. The replacement system uses Sage software (rather than Aztec) which prevents the loss of data which has previously been entered.
c) Entirety failed to provide a proper audit trail. This was important for a busy London hotel.
d) I also accept the evidence of Ms Leonard, Mr Sepahi and Mr Pass, that no proper manuals were provided – see in particular the evidence of Mr Sepahi, and the history which I have already set out.
e) I also accept that the training provided by Red Sky in September/October 2006 did not address amending group bookings-see the evidence of Ms Leonard. Further, I accept that the people who Red Sky recommended should attend training did so–see again the evidence of Ms Leonard. In any event I have concluded that training issues were not in any way decisive in relation to the matters that I have to decide.
Contractual Issues
The documents recording or evidencing the contract (in the absence of Kingsway’s proposed amendment which I have not allowed) are as follows:
a) Kingsway’s purchase order dated the 13th July 2006.
b) The proposal document, including the provision that the contract is subject to Red Sky’sstandard conditions.
c). Contract number 11062 signed by Mr Benson and Mr Edwards.
d) Red Skys’ standard terms and conditions.
The standard terms and conditions can be summarised as follows:
a) Under clause 2 Red Sky was required to sell the equipment and licence the computer system, provide (if any) the operating documents (paragraph 2.1.5) and provide the services set out in Schedule C (including training) and provide maintenance and support cover.
b) Clause 10.1 excluded all terms as to performance, quality, fitness for purpose etc except as provided in clause 10.2.
c) Clause 10.2 contained an express warranty that “the programmes will in all material respects provide the facilities and functions set out in the Operating Documents.
d) Operating Documents were defined in clause 1.1.6 to include “any operating documents supplied by the defendant to the claimant.”
e) Clause 10.4 provided that the sole remedy for breach of the warranty in clause 10.2 was the Maintenance and Support Cover. The Maintenance and Support Cover was defined by clauses 1.1.4 by the Schedules in the four page signed document, by clause 13 and by clause 28 which set out the hours during which support would be provided and also the response times which could be expected from Red Sky.
f) Clause 10.7 provided that clause 10, together with clause 18 stated the entire liability of the defendant in respect of any fault or error in the IT system.
g) Clause 18 contained limitations and exclusions of liability as follows:
i) Clause 18.3.2 excluded liability for any indirect or consequential loss. The term expressly excluded loss of profits and similar losses
ii) Clause 18.3.3 limited liability for direct loss to four times “Total Price”. By clause 1.1.26 the “Total Price” was £18,250 before discount. A net discount of £1,800 was applied to the contract price for the package. Applying the discount pro-rata to the services gives a figure of £17,615.82. The cap on recovery of damages in this case would therefore be £70,463. These figures are agreed by the parties solely as figures.
h) Clause 23 was an entire agreement clause and clause 26 provided for English law and jurisdiction.
Red Sky contends that clause 10.1 excluded all terms relating to performance, quality, fitness for purpose etc: “to the fullest extent permitted by law.” Therefore the implied terms on which Kingsway relies are incompatible with the express terms of the contract.
In its final submission Red Sky suggests that under the definition in clause 1.1.16, operating documents would include instruction manuals and similar documents setting out how the software was intended to operate.
Red Sky claims that clause 10.4 provides the sole remedy for breach of warranty. The support cover to be provided was defined by clauses 1.14, by the schedules contained in the four page signed documents, by clause 13 and by clause 28. This provides a very high level of support from 7 am to 11 pm each day of the year with an estimated response time of four hours.
Red Sky emphasises that clause 10.7 should be read with clause 18 and provides the further exclusions as follows:
a. Clause 18.3.2 excluded liability for any indirect consequential loss which expressly excluded loss of profits and similar losses.
b. Clause 18.3.3 limited liability for direct losses to the sum of £70,463
While Red Sky accepts that Section 3 of the Unfair Contract Terms Act 1977 (UCTA) applies, it contends that the test of reasonableness is satisfied.
Section 11(1) of the UCTA provides:
“The term shall have been a reasonable one to be included having regard to the circumstances which were or ought reasonably to have been known to or in the contemplation of the parties when the contract was made.” The Guidelines in Schedule 2 are helpful guidelines.
Red Sky claims:
a) That the parties were of equal bargaining power relative to each other. There were over thirty property management systems competing in this highly competitive market.
b) The customer received a significant inducement to agree to the terms in that a significant discount was given and concessions were made on payment terms despite the fact that the contract price was very modest.
c) There was a long course of dealing between the parties so that Kingsway ought to have become aware of the existence of and extent of the terms. Clause 18.3 contained a prominent warning.
d) This was not bespoke software but it was adapted to the special order of the customer in that it would be configured for the particular customer. Entirety was used by a wide range of customers and the consequences of a breach would differ widely depending on which customers were using the software.
Red Sky also relies on section 11(4) of the UCTA which provides that in considering whether or not a clause or clauses in a contract satisfy the requirement of reasonableness, regard shall be had to:
a. “the resources which he could expect to be available to him for the purpose of meeting liability, should it arise.
b. how far it was open to him to cover himself by insurance.”
The position of insurance is not known although Mr Edwards said that he thought cover might have been arranged at Group level.
Red Sky relies in particular on the judgement of Chadwick LJ in Watford Electronics v Sanderson CFL [2001] All ER (Comm) 696 at para 55 page 716 that where experienced business men, representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them and to be the best judges of the commercial fairness and reasonableness of the agreement which they have reached including the fairness of each of the terms of the agreement. This, so Red Sky contends, clearly applies to this case.
Specifically, Red Sky contends, that clause 10.2 applies to exclude any terms to be implied under section 14 of The Sale of Goods Act 1979 to the effect that the goods are of satisfactory quality (section S 14(2)) and that where the buyer (as in this case is alleged by Kingsway) makes known to the seller expressly or by implication the purpose for which the goods are bought, that the goods are fit for that purpose.
Red Sky also contends that clause 10.2 would exclude the warranty in Section 4 of The Supply of Goods and Services Act 1982 that the goods were of satisfactory quality.
Kingsway contends, as set out in paragraph 5 of the Reply, that these clauses do not apply since clause 10.2 only applies if there are Operating Documents. The term is defined in clause 1.1.16 of the agreement as “such operating documents as may be supplied by the supplier to the customer in conjunction with the equipment and the Red Sky IT system (as updated, corrected or modified from time to time) and which expression shall include any and all copies of the operating documents which may be supplied by the supplier to the customer. Kingsway contends that no such documents were supplied at the time when Entirety was installed.
Further Kingsway contends that clause 10.2 is not inconsistent with implied terms as to fitness and quality. Kingsway notes that these are Red Sky’s terms and under the contra proferentem rule any doubt or ambiguity in meaning is to be construed against Red Sky.
Further, Kingsway contends that if clause 10.2 must be construed in the manner contended for by Red Sky and the term did otherwise preclude the normal implied terms as to quality and fitness for purpose, it would be unreasonable within the meaning of section 11 of the UCTA because:
1. It would purport to exclude these criteria without substituting any other and would allow a seller to provide unsatisfactory software without any benefit to the purchaser.
2. The terms, other than price were not discussed and conferred no benefit on Kingsway.
3. The bargaining power of the parties was all one way-save for the question of price and payment terms. The contract was entirely under the control of Red Sky – it was a take it or leave it arrangement especially where Kingsway had no real option but to replace the Innsite software as Red Sky had said that they were not going to continue to support it or maintain it.
4. There is no evidence that Kingsway even knew of the existence of the terms of exclusion. Red Sky did not draw it to Kingsways’ notice clearly or at all.
5. Red Sky continued to protest that the goods were off the shelf and were not made specifically for or specifically adapted for Kingsway.
6. Red Sky were specialists in the supply of hotel PMS software.
7. By the date of the agreement, Red Sky had the knowledge of supplying Entirety software to other hotels and were therefore in the best position to assess the likelihood of the existence of any defects and their likely consequences.
8. There is no evidence that one party was in a better position to insure against the risk of the consequences of defects in the software although, given the factors set out in 6 and 7 above, it was a reasonable inference that Red Sky would have been in a better position. Further Mr Edwards seemed to indicate that in fact Red Sky was insured.
Taking these points in reverse order, I conclude that, in principle, the UCTA does apply and that the test of reasonableness is not satisfied. I adopt Kingsway’s’ submissions set out above. I conclude in relation to those submissions that:
1) The parties were not of equal bargaining power.
2) Kingsway and Red Sky bargained on price. Kingsway did not receive any inducement to agree Red Sky’s’ standard terms.
3) On the facts, it is not correct that there was a long course of dealing between the parties such that Kingsway ought to have known the existence of and the extent of the terms.
4) This was not bespoke software.
Further it seems to me that clause 10.1 may provide the key to the answer to the contractual dispute and to the question of the circumstances in which the implied terms as to fitness and quality can properly be excluded.
Red Sky’s contract is predicated on the basis it was able to sell its software as off the shelf rather than customised software and that the manuals, together with the demonstrations of the software, would enable a customer to understand the strengths and the limitations of the software and thus to decide whether it would fulfil its needs. The representations in the manuals would be crucial in explaining to potential customers whether the system provided the level of sophistication and speed which they required. Of course, the operating documents could later be supplemented by further documents which set out the benefits of updates etc.
Without the manuals being supplied before the contract was entered into, it was not possible for potential customers to understand this and to make up their minds whether or not the system would be suitable for their needs. There is no evidence that such documents were provided at the time when the contract was signed. Mr Marshall for Red Sky was forced to say (doing his best) in oral closing that “it is still a valuablewarranty even if one does not have the full text of the operating documents” This is not sufficient, even if it is an accurate representation of the factual position. It certainly does not amount to compliance with the contract so as to invoke clause 10.2.
Mr Marshall went on to say that the warranty was that the software would perform “appropriately.” In this case this must mean that the software would perform appropriately “for a hotel which was recommended by Red Sky to use it as being suitable for its needs.” This software was not suitable because in relation to group bookings it had serious defects.
I also accept Kingsway’s submission that clause 10.2 must be construed contra proferentem. In the event of any ambiguity, the clause must be construed against the drafter of the clause i.e. Red Sky. I conclude that operating documents must be construed as being those documents to be supplied by Red Sky either in hard copy or computer readable form which would enable a customer in advance of signing the contract to understand fully the system being offered for sale including the functionality and level of sophistication of the system. This would enable a potential customer to assure himself in the course of a demonstration by Red Sky that its product was suitable for customers needs.
In this case there is also a further complication because the terms of the contract are predicated on the basis that the customer will decide itself whether or not to purchase Red Sky’s product. In this case, I have found that Kingsway relied on Red Sky’s positive recommendation as to the suitability for its purpose in making its decision to purchase Red Sky’s software.
It might be reasonable for the contract to have the effect of precluding the implied terms to satisfactory quality and fitness for purpose where the customer has the means to satisfy itself as to the quality and fitness of the product(Entirety) and does not rely on the advice of Red Sky. In the absence of such a construction of clause 10.2 I am satisfied that the detailed submissions by the claimant are correct and that the UCTA would apply.
I note further in relation to bargaining power, that these were Red Sky’s’ standard terms. Apart from price, this was not a negotiated contract. The Contract was far removed from the circumstance postulated by Chadwick LJ in Watford Electronics.
I should add that on the evidence, Kingsway was in fact induced to purchase Entirety by reason of representations made by Red Sky staff. The standard conditions, as I have said, are predicated on the basis that the customer will receive the operating manuals, have the demonstration and decide for itself.
In Kingsway’s case this did not happen. Kingsway, as I have found, relied on Red Sky’s advice that Entirety would be fit for the purpose of use in a busy central London hotel. Red Sky’s employees knew that group bookings formed an essential part of the system which it was supplying. I conclude therefore that Red Sky’s standard terms excluding liability or limiting damages do not apply.
To summarise on the Contractual issues:
1. Red Sky’s’ standard terms were predicated on the fact that a prospective customer would investigate Entirety and make up its own mind whether or not to purchase based on demonstrations and the Operating Documents which Red Sky had previously supplied. It did not apply to circumstances in which the customer relied on Red Sky’s’ advice in deciding to purchase Entirety.
2. The exclusions in clause 10.2 only applied where the Operating Documents as defined in Clause 1.1.6 were supplied to the customer before the contract was signed. In this case such documents were not supplied by Red Sky to Kingsway. Therefore, Clause 10.2 and the exclusions derived there from did not apply.
3. In any event, for the reasons set out above, the UCTA Section 11 applies. The terms following which restricted liability were unreasonable to be included having regard to the circumstances which were or reasonably ought to have been known to Red Sky or Kingsway, or be in the contemplation of the parties when the contract was made.
4. Pursuant to S14 of the Sale of Goods Act 1979, a term is to be implied into the contract that Entirety would be fit for the purpose for which it was bought, namely that the system would increase revenue and occupancy levels and would allow quicker check-in and check-out, including accurately processing groups and making changes to group reservations while preserving the accuracy of the system. I am satisfied that Entirety was not fit for the purpose for which it was sold.
5. Pursuant to Section 4 of the Supply of Goods and Services Act 1982 a term is to be implied into the contract that the goods were of satisfactory quality. Entirety did not meet the standard that a reasonable person would regard as satisfactory, taking into account any description of the goods, the price and all other circumstance so as to satisfy S4(2A )of the 1982 Act.
6. Kingsway was entitled, as they did, to reject Entirety which, as delivered, was not of satisfactory quality or fit for its purpose. They were entitled to do so after giving Red Skyevery opportunity to improve Entirety, so that it would become of satisfactory quality and fit for its purpose.
Damages
Kingsway claim damages under four heads:
a. Lost profits and loss of goodwill
b. Cost of a replacement system
c. Additional staff costs
d. Wasted staff costs
I deal with each in turn.
a) Lost Profits and loss of goodwill
Kingsway claims in the re-amended Particulars of Claim that it suffered substantial inconvenience and disruption to its business resulting in loss of profits by reason of the defects in Entirety and the consequential screen freezing and folios.
In the re-amended pleading the claim is made on two alternative bases. First it is alleged that, as a result of defects in the system, the loss (excluding weekends and bank holidays) was £248,703 at a reducedoccupancy of 4% or £310,947 at a reduced occupancy of 5%.
Alternatively the claim is based on the claim that, but for the Entirety system and its defects, Kingswaywould have sold 56,500 or 56,600 rooms in the year 2006 – 2007. This was 1,700 – 1,800 more rooms than it actually sold. The average room charge was £130.67. Therefore, so it is said, the loss amounted to £222,139(1,700 lost rooms) or £235,206(1,800 lost rooms).
These figures are also intended to compensate Kingsway for damage to its business reputation and loss of goodwill. Paragraph 18(2) of the Re Amended Particulars of Claim pleads as follows:” By reason of the defects which caused substantial delays at the check-in desk and the production of inaccurate bills, customer dissatisfaction and disgruntlement was further created or increased and customers who would, but for the delays at check- in during their stay, and at check-out, the inability to locate bookings or details, manual amendments of bookings and inaccurate charges as aforementioned, have stayed at and/or returned to the Claimant’s hotel, decided to stay elsewhere and/or decline to re-book.”
Mr Herrmann’s evidence was that the hotel operates by varying its room prices in order to maximise its occupancy. This happens even during the day on which the reservation is to be taken up. Thus if, on a particular day, there are many rooms available, the price can be lowered. If the hotel is virtually full, a premium rate can be charged for the few rooms which remain unsold.
In order to operate this system, reporting of available rooms needs to be accurate and accordingly it is done internally four times a day. Mr Herrmann said that, as a result of inaccurate reporting, the occupancy of the hotel was lower than it should have been.
In their evidence, Ms Leonard and Mr Pass gave anecdotal evidence of customers being turned away or having to be put up at one of Kingsway’s sister properties. It is also supported by Mr Cola’s evidence and by the Kingsway Hall Duty Management log.
It is also clear from the evidence of Mr Sepahi, Ms Leonard and Mr Cola that the implementation of the patch in February 2007 did not cure the problem as far as Kingsway was concerned. They still had the practical difficulties which they had had before.
Mr Herrmann has provided a graph showing the difference in sales occupancy during the period when Entirety was installed as compared with its successor system, Protel, and its predecessor Innsite.
The three years seem to show a number of similarities. March seems to be a good month for the hotel. There was a drop in occupancy in February although much less pronounced than in 2007/2008. This was followed by a rise which itself was followed by another trough.
Red Sky in a separate table, has shown the figures for 2005/2006 and 2006/2007. It concludes that of the total “lost sales”, over half occurred in December 2006. On further analysis it claims that the majority of the loss of room sales occurred in the second two weeks around Christmas and New Year of that year and cannot be attributed to lost sales caused by problems with Entirety.
I find the statistical information to be of some value in supporting the anecdotal evidence that Kingswaysuffered significant loss in terms of actual sales and goodwill. Red Sky contends that Kingsway could have produced much more convincing evidence as to whether it suffered or did not suffer a quantifiable loss. On this basis I am asked to find that no loss has been proved.
I am not persuaded, on the basis of the evidence produced by Kingsway, that its loss can reasonably be calculated on the basis of Mr Herrmann’s statistical evidence. However it would have cost a quite disproportionate amount for Kingsway to have produced the type of sophisticated evidence which Red Sky contends should have been produced. This is a claim for £200,000, not for two million pounds and the sort of analysis which Red Sky suggest ought to have been produced would have cost a verysubstantial sum of money. I am satisfied that Kingsway has proved that it has suffered very significant damage in respect both of lost profits and loss of goodwill for which it is entitled to be compensated. I must do my best to assess a reasonable figure and in my judgement the reasonable figure is £50,000.
b) Replacement Software
Under paragraph 18(4) of the re-amended Particulars of Claim, the cost to Kingsway of installing a replacement system is pleaded at £26,051.90 plus vat together with the cost of replacing the Sage software in the sum of £3,840.21 plus vat to provide the accounting part of Entirety.
In addition Kingsway claims the sum of £13,937.63 plus vat. The basis for this claim is that since Protel could not operate with Aztec, Kingsway had to replace it with the alternative software DOTPOS.
Alternatively, under paragraph 19 Kingsway claims the sum of £23,738.79 being the sum of £31,988.79 paid for the Entirety package less the sum of £8,250 being the cost of Kx software which Kingsway has retained.
The figures are not disputed as figures by Red Sky.
Red Sky claims that Kingsway made no effort to find an equivalent replacement system, did not need to replace Sage and was not entitled to claim for DOTPOS. Kingsway should have obtained a system which was compatible with Aztec. In so far as Protel represented an advance on Entirety there should be a reduction for enhancement. These matters were not investigated in detail in evidence. I find that Kingsway is entitled to recover the reasonable cost of providing a reasonable system to replace the system which they were entitled to inspect as being suitable for their needs when Entirety was installed in 2006.
I am satisfied that the Protel system provided such a replacement. If this was the appropriate system they were entitled to order it, even if it meant that it incurred the other additional cost. I have heard no specific evidence to support the claim that Kingsway acted unreasonably e.g. by not installing a particular system, or alternative replacement systems which would have achieved their objective at a more reasonable cost.
The alternative pleaded basis is that set out in paragraph 19 of the re-amended Particulars of Claim namely the loss of £23,738.79 being wasted expenditure. In addition Kingsway claims the various losses of profit, goodwill etc in paragraph 18 of the re-amended Particulars of Claim.
Having considered the matter, I find that the proper measure of damage is to be derived from the alternative claim. This is on the basis that apart from the £8,250 which Red Sky is entitled to be paid for the Kx software, the balance was paid for a failed system. A claim on this basis avoids a number of complications in trying to work out what discount (if any) should be given for the fact that Kingsway was forced to use the defective system for a significant number of months. It seems to me that it represents together with the claims for loss of profit etc claimed in paragraph 18 the proper measure of loss.
C Additional Staff Costs
These relate to additional staff costs. They are as follows:
a. Additional Reservations Manager from 15th January 2007 – November 2007 i.e. eleven months at the rate of £20,000 per annum making a total claimed of £18,334
b. Three additional shift leaders with annual salaries of £15,000, £16,000 and £17,500 for a period of eight months at an average cost of £16,000 per annum making a total claimed of £32,000.
c. Wasted staff time. These figures have been substantially amended since the service of the amended Particulars of Claim. The claim is now for:
i) Alex Sepahi, Assistant Group IT Manager £4,550
ii) Sarah Hoare, Front of House Manager £8,067
iii) Zac Pearse, General Manager £6,722
iv) Melinda Ryan then Stacey Leonard, the Revenue Manager £6,240
I deal with each claim in turn.
a) Additional Reservations Manager
In his email dated the 15th January 2007, and confirmed by Ms Leonard, Mr Cola stated that an additional Reservation Agent had to be recruited throughout the period because of deficiencies in Entirety. Initially Gaby Kazlauzkaite was engaged at a salary of £13,000 from the 20th November 2006.i.e one month after Entirety went “live.” Then when Melinda Ryan left in April 2007, Louise Chapman was employed as the additional member of staff. Ms Leonard said in her first witness statement that the salary was £20,000.
Although £13,000 was the salary of the additional member of staff, it does not represent the total cost to Kingsway. They must pay national insurance contributions and staff benefits in addition to the basic salary. It may well be that Ms Leonard’s estimate of the staff costs is accurate but I have no precise evidence about this. As a conservative figure, I reduce the £20,000 estimate to £18,000 and the time from eleven months to ten months. This comes to £15,000. I am prepared to have brief further evidence about the precise figure unless it can be agreed.
b) Three additional shift leaders
The claim for three additional shift leaders depends on the evidence of Mr Pass, the Assistant Front Office Manager since April 2007 and the evidence of Mr Cola. Mr Pass said, at paragraph 21 of his witness statement, that at the time when Entirety was in operation, Kingsway employed three shift leaders or supervisors to deal with rate changes or corrections. He said that this work could not be left to the front office staff. In cross examination Mr Pass said that shift leaders would spend between half an hour and one hour a day sorting out the difficulties which Kingsway was experiencing with Entirety. Otherwise they were carrying on their normal duties which included dealing with customers. Mr Cola said that three shift leaders were employed while Entirety was in operation but not thereafter.
On the evidence, the sum claimed is excessive. On Mr Pass’ evidence, they were not employed specially to deal with Entirety problems but undertook substantial other duties. Doing the best I can, I will allow one half of one salary of £16,000 or £8,000 under this head.
c) Wasted Staff time
I come finally to wasted staff time. I accept that Kingsway staff spent a considerable amount of time addressing problems caused by Entirety and in seeking to mitigate them. These problems included:
a. The daily manual checking of availability information by reservations and front staff and substantial staff time, constantly checking reports
b. Rebuilding of data approximately every hour
c. Time wasted by an inability to locate guests by room number. I accept that this included nine specific occasions between January 2007 and July 2007
d. Time consuming weekly conference calls with Red Sky
e. The need to address the daily freezing of screens/system freezes
f. Filling in the freezing log
g. Mr Sepahi’s time in telephoning Red Sky on a daily basis in the early months of 2007
h. Checking in of Group Bookings which was time-consuming and slow
i. Inaccurate folios once or twice a week
j. Three weeks training required for Entirety rather than one week
As a result it is claimed that Mr Sepahi spent approximately two hours a day in dealing with these matters while Entirety was in operation. He was employed from January 2007 i.e eight months at a cost of £4,550(reduced from £6,760 in Mr Cola’s statement) I accept this claim.
It is claimed that the Front of House Manager, Sarah Hoare, also spent about two hours a day. Mr Cola in his evidence makes no attempt to substantiate this or to set out in detail what Sarah Hoare is claimed to have done. Mr Cola’s statement simply says that “one a similar basis of calculation her wasted time over a year amounts to…” In my view the claim for two hours a day is insufficiently substantiated although it is clear on the limited evidence before me that she spent some additional time. I make an award of £1,000 in relation to her claim.
Mr Cola in his evidence said that the General Manager, Zac Pearse spent one hour a day on specific problems caused by Entirety during the eleven months during which is was in operation. Taking the large amount of written and oral evidence into account, I find that the claim is exaggerated .I will allow just over one-half of the claim or £3,500.
Finally, I accept that the Revenue Manager first Melinda Ryan and then Stacey Leonard spent approximately two hours a day related to problems caused by Entirety. I accept the figure put forward by Kingsway of £6,240.
This gives a total under this head of claim of:
a. £15,000
b. £8,000
c.
i) £4,550
ii) £1,000
iii) £3,500
iv) £6,240
This gives a total of £ 38,290. I have to consider whether, overall, this sum represents reasonable compensation for wasted staff time. In my view it does.
In relation to Red Sky’s counter-claim, the invoices indicate that the sums claimed relate to varyingdates between the 3rd October 2006 and 4th May 2007. They relate to what appear to be stage payments, to licence fees and support, and in one instance to training. On the basis that the system was never fit for the purpose for which it was sold, the counter-claim fails except in relation to the supply and retention of Kx. Kingsway agrees that on analysis Red Sky should receive a credit of £1031.25 in respect of licence fees, support fees or the use of Kx during this period.
Subject to this Kingsway is entitled to recover:
a. Lost profits etc £50,000
b. Wasted expenditure on Entirety £23,738.79
c. Additional staff costs/wasted staff time £38,290.
This makes a total of £112,028.79 less £1031.25. I therefore give judgment in the sum of £110,997.54.
BSkyb Ltd & Anor v HP Enterprise Services UK Ltd & Anor (Rev 1)
[2010] EWHC 86 129 Con LR 147, [2010] CILL 2841, 26 Const LJ 289, (2010) 26 Const LJ 289, [2010] BLR 267
The Hon Mr Justice Ramsey :
A: GENERAL BACKGROUND AND INTRODUCTION
Introduction
The Claimants in these proceedings, British Sky Broadcasting Limited (“BSkyB”) and Sky Subscribers Services Limited (“SSSL”) provide satellite broadcasting and related services. The Defendants, Electronic Data Systems Limited (now HP Enterprise Services UK Limited)(“EDSL”) and Electronic Data Systems Corporation (now Electronic Data Systems LLC) (“EDSC”) provide Information Technology services.
There are issues as to the extent to which BSkyB can pursue claims and the extent to which EDSC has liabilities arising from the matters alleged in these proceedings. It is therefore generally convenient to refer to the Claimants in the neutral term “Sky” and the Defendants as “EDS” in this judgment as a general description of one or both of the Claimants or Defendants without entering into that particular debate when rehearsing and dealing with the facts and allegations.
This case is concerned with the procurement of a new customer relationship management (“CRM”) system so that Sky could provide improved service to its customers focussed, at least initially, on telephone contact between customers and the Customer Advisors (“CAs” also known as Customer Service Representatives “CSRs”) at Sky call centres.
Following a tender process in 2000, Sky selected EDS to design, build, manage, implement and integrate the process and technology for the CRM System. After an initial Letter of Intent, SSSL entered into a contract with EDSL (“the Prime Contract”) to provide the CRM System at Sky’s existing contact centres located at Dunfermline and Livingston.
The relationship was not a success. There was a renegotiation in 2001 which led to a Letter of Agreement. Then in 2002 Sky took over the performance of EDS’ role of Systems Integrator and a Memorandum of Understanding was signed. Sky alleges that EDS made fraudulent misrepresentations which led to EDS being selected, to a Letter of Intent and to the Prime Contract. They also allege that EDS made negligent representations prior to the Letter of Agreement.
Sky went on to provide a CRM System. Instead of the intended CRM Project going live on 31 July 2001 and being completed by 1 March 2002 at a baseline budget of £47.6m, Sky contend that the functionality for the CRM System was only completed in March 2006 at a cost of about £265m. In the Particulars of Claim as they stood at the commencement of the hearing Sky claimed damages of some £709m.
Sky Customer Relationship Management
The main method of contact between Sky and its customers is a telephone call to one of Sky’s call centres, which are also referred to as contact centres. In addition to the telephone there are other channels of communication including fax, email, WAP, the internet and, in particular, Sky’s digital set-top box.
The CRM System is therefore important to Sky’s business and forms an essential part of all contact centre dealings with customers, as well as other “self-service” dealings by customers. It facilitates, governs and records all customer related transactions, such as setting up a new account, closing an account, reporting a fault, calling out an engineer or changing a package. It also allows Sky to bill and process payments from their customers.
In 2000, Sky perceived an urgent need to replace the existing Digital Customer Management System (“DCMS”). It was an old system built up over the years and there were concerns in its ability to allow Sky to deal with the increasing number of customers and services. It was also recognised that a new CRM system with enhanced functionality would bring business benefits to Sky, including a reduction in the number of customers who “churn” or leave Sky each year, known as the “churn rate”. Sky therefore decided to undertake a project, referred to as the Sky CRM Project which included the provision of a new CRM system.
At the time, Sky operated a number of legacy systems in addition to DCMS. In summary, the systems consisted of:
(1) DCMS – which included billing and payment processing.
(2) The Subscriber Card Management System (SCMS): a system by which SSSL provided conditional access services to broadcasters including BSkyB and the management of ‘smart’ cards distributed to customers.
(3) The Management of Information for Digital and Analogue Systems (MIDAS): this was a data warehouse for the storing and retrieval of marketing and financial information.
(4) The Field Management System (FMS): a system that provided for all aspects of Sky installations.
The SCMS did not form part of the new CRM system but it was a system then integrated with DCMS and the ITT included a detailed interface specification for the interface with the CRM System.
The new CRM System included the replacement of the DCMS and FMS systems and the implementation of a new telephony solution. It also needed to include functionality to replace billing and operational finance functionality in DCMS.
…..
B: THE MAIN DOCUMENTS
The ITT
The Invitation to Tender (“ITT”) was dated 17 March 2000. In the title, it described the project as being “The Build and Implementation of a World Class Contact Centre for BSkyB and the further retrospective fitting of environment, culture, process and technology to existing sites.” The intention was to build the new contact centre and then carry out work fitting out the existing call centres in Scotland at Carnegie Campus, Dunfermline and Kirkton Campus, Livingston.
At paragraph 2 of the introduction, Sky made it clear that the tender document included work carried out by Sky which set out “envisioned functions, processes, mechanisms and technology”. It said that the documents formed the high level definition of the end product and would require further analysis as the project progressed.
At that stage paragraph 3 identified four key areas: “Location” being the internal design and “kit” out of the new contact centre; “Business Process Model” being the detailed definition and introduction of new business processes; “Technology” which had to be sourced, integrated and implemented and “Transition plan” which was the work to “backfill” the existing Livingston and Dunfermline sites with the processes, technology, culture and environment delivered at the new contact centre.
At paragraph 2.4 it included a “high level view of the business functions which the new contact centre will need to support”. It stated that it did not represent the future functional design of the new contact centre and was included purely to ensure that all potential suppliers “understand the customer contact overview”.
Paragraph 2.5 dealt with the launch of the new contact centre. At paragraph 3.1 under the heading “World Class Customer Experience” it was stated that “at the heart of every aspect of this project is the absolute requirement to provide world class customer management and for BSkyB to be in a recognised leading position in this regard”.
At paragraph 3.3 it was stated that the Sky design team had created a high level business process model which was included as Appendix A to the ITT. That had been prepared by Scott Mackay of Sky using a Hyperknowledge tool. The purpose of the model was stated as being to set out the “core business processes” that the new contact centre would need in order to support “key strategic business objectives” of BSkyB. It stated that the model did not preclude any technical or functional solution.
Paragraph 3.5.1 set out specific requirements for the technology response.
Project Timing was dealt with at Section 4. That stated that for the new contact centre “BSkyB have an organisational desire to conclude the initial delivery of the contact centre within 9 months of project commencement.” In relation to the existing contact centres (four halls at Livingston and two halls at Dunfermline), these were envisaged to be fitted out with the same package as the new contact centre, on a hall by hall basis, once that contact centre had been established. For both the new call centre and the existing centres, Sky requested that the responses should include milestone plans showing “key commitment and decision dates” and also show “detail within each key project phase (i.e. design, build, test, integrate, accept and implement)”.
Section 5 referred to Supplier Resources and BSkyB Key Roles and Responsibilities. This included the following requirements:
(1) At paragraph 5.1.1 the supplier was to appoint an overall Programme Manager “dedicated for the full project life cycle”, who was to report directly to a person appointed by BSkyB.
(2) At paragraph 5.1.2 the supplier was to appoint workstream project managers for each workstream.
(3) At paragraph 5.1.3 staff were to be competent and qualified to work within the workstream.
(4) At paragraph 5.3.1 BSkyB were to appoint a Programme Manager who would have overall responsibility for all work within the scope of the ITT and associated contracts.
(5) At paragraph 5.3.2 BSkyB were to appoint two workstream managers; one to have overall responsibility for all business aspects of the project and one with overall responsibility for all technological aspects. These roles were, in the event, performed by Scott Mackay and Andy Waddell.
Section 5 also included at paragraph 5.4 various requirements for a project plan. At paragraph 5.4.1 it stated that “Before commencement of the project, a detailed project plan must be agreed with BSkyB and both parties will be responsible for delivering the tasks and milestones agreed.”
Section 6 dealt with the detail of the Tender Response. It provided for a two week “discursive period” from 17 March 2000 during which tenderers could ask questions by way of clarification; a two week “incubation period” for the supplier to begin response preparation; a workshop with BSkyB to “test early ideas and ratify approach” and a final two weeks to complete the response. There was then to be a two hour presentation to Sky ending with the delivery of the tender response to Sky.
Sky said at paragraph 6.3 that they would evaluate the tender submissions on, amongst other things, cost and ability to provide access to appropriate skilled resource by workstream.
The EDS Response
The response to the ITT submitted by EDS (“the EDS Response”) was stated at the front to be “proprietary to [EDSL], its parent company EDSC and any of that corporation’s subsidiaries.” The copyright was stated to be that of EDSC. Gerard Whelan was the point of contact.
At paragraph 1.2 EDS set out the principles of their approach under the following headings: Rapidly identify specific BSkyB customer service failures; use proven leading edge technology; implement best practices as appropriate and deliver a comprehensive programme and change management capability.
In paragraph 1.3 under “Why EDS” the participants in EDS and the consortium were identified and it was stated that this meant such things as “Proven delivery experience”, “Global resources” and “Powerful methodologies”. It also stated:
“Selection of EDS by BSkyB will provide a unique World Class Customer Contact centre on time and on budget.”
At section 4 EDS set out “Our Approach”. They said that they had divided their approach into four workstreams to cover:
(1) Business Process improvement and implementation
(2) Location design, build and implementation
(3) Technology design, build and implementation
(4) Transition approaches from the new Contact Centres into existing Contact Centres (process, location, technology and people)
For the Business Process Workstream the objectives were to identify opportunities to improve current services; to confirm the vision for World Class Customer Service and to align the business processes with the vision and confirm the functional requirements for the New Contact Centre. This was to be done by two parallel “strands”: one “SWAT” was to identify “quick wins”, that is changes to Sky’s business processes which could be identified quickly; the other was “Design”, which was divided into two phases.
The purpose of the first phase of the design “strand” was to ensure that EDS and Sky had a “mutual understanding and definition of World Class Customer Service for BSkyB”. To do this it was stated:
“We will lead a focused four-week workstream to define and agree the Vision for BSkyB for World Class Customer Service. The resources for this work will require 2 BSkyB and 2 EDS staff. The work needs to start on day one…”
The second phase of design was to validate the “To-Be” design of the customer service processes. This was described as being “the validation of the business processes in order to define and agree the bulk of the functional requirements”. It was stated that the objectives for this sub-team were to:
“agree the functional requirements of the key processes and [underlying] sub-processes
develop an indicative view of resourcing levels
develop the technical functional specification which will include the business class model – including all data items, instances and definitions.”
The deliverables were stated to include:
“Agreed Use Cases (in the form of a Use Case Catalogue) and auto generated functional and technical requirement specification for the runner processes to input to the technical design for the new Contact Centre and [be] passed to the Technology workstream for coding and development.”
There was then a diagram which indicated that, for the Business Process workstream, the first phase of design would start in Month 1 and lead to the conclusion of the second phase of design at about the end of Month 4.
Section 4.3 of the Response dealt with the Technology Workstream. It was stated that :
“To meet the high demands and ambition of BSkyB’s existing and future business, the technical architecture has been designed with the following requirements in mind:
100% availability
Massive scalability
Open, modular and flexible architecture
Proven technology”
The approach was stated to be as follows: “that activities will be performed in an iterative and incremental development framework. The workstream phases described below are designed to mark significant deliverables that will provide measurable evidence of progress toward the success of the project. Furthermore, the phases provide a mechanism to limit the commitment required to progress the project and to keep options open to flex the programme to support changes in the business objectives.”
There were three phases to this work which were stated to have the following objectives:
(1) Phase 1 Design
“The objectives of this phase are to confirm the overall application architecture and to produce code from SELECT SE for use in the Chordiant application building on the work being progressed by the Business Process workstream team.”
(2) Phase 2 Build and Prototype
“The objectives of this phase are to develop the new Contact Centre applications and the migration routines.”
(3) Phase 3 Implement and Verify
“The objectives of this phase are to: ensure that the new applications are operational in the new Contact Centre, to verify performance, functionality integration and fully test the new applications. This will provide the technical platform on which to deliver World Class Customer Service.”
There was then a diagram which indicated that, for the Technology workstream, Phase 1 – Design would take until about Month 8; Phase 2-Build and Prototype would take until about Month 12 and Phase 3-Implement & Verify would take until about Month 18, all starting from Month 1.
Section 5 was headed “Programme Management, Change Management & Communications”. At paragraph 5.1 there was a “transition plan” also referred to as an “Overall Programme Plan”. The Transition workstream was concerned with the implementation of processes, technology and “fit out” into the existing contact centres.
By way of explanation of the plan, it was stated that :
“The transition plan below is based on the information provided in the ITT and our understanding of the current operations and technology. The high level plan below will be refined after further analysis of the current situation and business requirements.”
The plan showed three dates: Contract at the middle to end of the second quarter of 2000; “New contact centre live” in the middle of the first quarter of 2001 and Transition complete at the end of the fourth quarter of 2001. This indicated about 9 months from the contract to the new contact centre being live and about 19 months to transition to the existing sites.
In relation to Estimating, EDS stated the following at paragraph 5.4.2:
“For the purposes of this ITT response EDS have concentrated on estimating the size of the software development. Whilst further analysis of the requirement is needed, with BSkyB and EDS working closely together, we have used an approach which provides a high level of comfort.
Our approach has been adopted on many previous developments undertaken by EDS, including major travel reservations systems. Based on these projects it is reasonable to expect an estimating accuracy of between plus and minus 5% following detailed evaluation of the requirements.
Resource estimation is conducted from a “top down” and “bottom up” approach. Top down estimation involves function point counting together with a high level view of the project development methodology, and application of historical size and productivity data from similar projects, suitably tailored to the new environment and toolset, to generate an estimate of resource.
Bottom up resource estimation involves assessment of low level activities to be undertaken during the development lifecycle. Using in-depth knowledge of team capabilities and team sizes help validate the top down approach.
Essential to both of these approaches is a formal size measure of the system to be developed. Our estimating process makes use of Function Points and has been independently assessed by the Guild of Function Point Analysts, who approved of our approach. A Function Point is a unit of measure used as an indication of relative size of a software development in terms of the amount of business functionality delivered to the end user. For each discrete logical functional component of the required system the inputs, outputs and entities are counted and weightings applied to establish a function point count. Totalling the function points across all the identified functions then derives the function point count for the system. Schedule estimation then makes use of the function point count and productivity rate estimates to derive manday estimates.”
At Section 6 under “Choosing the right partner” EDS said this at paragraph 6.1:
“EDS is a leader in the design, development and implementation of Information Technology solutions and services to business and government, offering customers a complete range of Systems Integration and Implementation services and guaranteed levels of delivery in a wide variety of industries including media and communications.
With more than 120,000 staff operating in 47 different countries, EDS offers an unparalleled global IT infrastructure supporting more than 9,000 customers including many of the world’s leading global organisations. In the UK our operation leads the software and services market.”
At paragraph 6.4.1 EDS set out specific consortium examples and qualifications and included this:
“EDS worked with a large international telecommunications company (who also provided digital and cable television) to design and implement a single Contact Centre framework within which Contact Centre Agents carried out their work providing a consistent level of service regardless of the channel used by the customer. The EDS Consortium (including Chordiant for the CRM Package and Forté for Enterprise Applications Interface Layer) delivered efficiencies while implementing scalable architecture and a flexible configuration for future business growth.”
Section 7 set out the proposed team structure at paragraph 7.1 with Dr John Chan as the Programme Director, Mahmoud Khasawneh dealing with Technology and Stephen Vine dealing with Transition. Paragraph 7.2.1 dealt with Programme Costs. It stated that
“Our anticipated costs for delivering the program are set out below. As requested by the ITT they are split into 2 cost types-: consultancy and expenditure.
Activity/Cost Schedule
All activities (excluding consultancy) related to the programme are shown separately as requested, and are also broken out by workstream, or workstream deliverable.
These costs are estimated at present, as detailed requirements for hardware, software and location items are yet to be defined.
Consultancy Costs
The associated consultancy costs for each workstream or workstream deliverable. These are based on EDS daily/hourly rates (see overleaf), and the anticipated resource requirements have been built up to produce the total costs of consultancy for each workstream, or workstream deliverable.
The daily/hourly rates are guaranteed not to change until 31/12/2000. The total cost will vary up or down depending on actual usage during the programme.”
At paragraph 7.2.2 it set out the overall budget in these terms:
“The overall budget combines the consultancy and expenditures for each workstream, and shows a volume based discount offer which is dependent on EDS being awarded all 4 workstreams as part of our contract with BSkyB.
Location-Activities £8,490,803
Location consultancy £1,444,389
Technology Activities £31,035,896
Business Process consultancy £775,980
Design Team consultancy £2,464,000
Program & change consultancy £2,210,577
Transition consultancy £1,763,750
Technology consultancy £6,009,638
Total estimated project costs £54,195,013”
The Letter of Intent
Sky decided to select EDS on about 20 July 2000. A letter of intent was then prepared and the final version was dated 24 July 2000 (“the Letter of Intent”). The Letter of Intent was addressed to Joe Galloway as Managing Director of EDSL. It was written on SSSL company notepaper. The parties who signed the Letter of Intent did so on behalf of BSkyB and EDSL.
The Letter of Intent stated that it confirmed BSkyB’s intention, subject to contract, to appoint EDS as the Prime Contractor for the implementation of the new contact centre and the fitting of the existing contact centres. It provided for EDS to perform services to be agreed between BSkyB and EDS and for EDS to be paid at rates which were subject to a substantial deduction which would be repaid when the contract was concluded.
The Prime Contract
The Prime Contract between SSSL and EDSL, who was referred to as “the Contractor”, was entered into on and dated 30 November 2000. It was signed by Tony Ball on behalf of SSSL and Steve Leonard on behalf of EDSL.
The recitals set out the position as follows:
“(A) On 17 March 2000, SSSL issued an Invitation to Tender (“Tender”) for the building and implementation of a new world class contact centre for SSSL and the retrospective fitting of environment, culture, process and technology to SSSL’s existing contact centres located at Dunfermline and Livingstone (the “Contact Centres”).
(B) The Contractor issued a document dated 31st May, 2000 to SSSL in response to the Tender.
(C) Subsequent to the Tender, SSSL decided not currently to proceed with a new contact centre and to proceed only with the re-fitting of the Contact Centres.
(D) SSSL wishes to appoint the Contractor and the Contractor wishes to be appointed by SSSL on the terms set out in this Agreement to design, build, manage, implement and integrate the process and technology for the refitting of the Contact Centres.”
Clause 1.3.1 contained an entire agreement clause to which I refer below.
Under Clause 2.1 SSSL agreed to engage EDSL upon the provisions of the Prime Contract to perform the “Services” and EDSL accepted that engagement.
In relation to the Services, the following relevant provisions applied:
(1) The Services were defined in Clause 1.1 to mean “the services to be provided and the Deliverables to be delivered by [EDSL] in accordance with the terms of [the Prime Contract]”.
(2) The Deliverables were defined as “the detailed designs, documentation, software, hardware and other products, implementation and other deliverables to be provided by [EDSL] and delivered to SSSL under the Letter of Intent and [the Prime Contract], as the same are set out in section 4 of the Preliminary Specification, and the Bespoke Software Materials together with all other Deliverables agreed pursuant to Clause 17.2.”
(3) At Clause 2.3 it was provided that “Descriptions of the Services to be performed are listed in the Preliminary Specification”. That specification was at Schedule 1 to the Prime Contract.
(4) Clause 2.4 then provided that EDSL “shall deliver the component documents of the Full Specification on the dates set out for their delivery in the Project Plan”. Full Specification was defined in Clause 1.1 to mean “the detailed technical specifications for the Services, including the Acceptance Criteria for the Services, as may be agreed by the parties from time to time.” The Project Plan was defined as the plan in Section 3 of the Preliminary Specification.
(5) Clause 7.3.3 provided that the Deliverables should comply in all material respects with the Full Specification.
In respect of cost, there were the following provisions:
(1) Clause 3.1 provided that: “The Contractor shall be responsible for estimating, budgeting, reporting, forecasting and controlling all costs for which the Contractor is responsible incurred in carrying out the Services under this Agreement within the Baseline Budget and shall use all reasonable endeavours to proceed with the Services in a timely manner.”
(2) Clause 3.2 provided for a Project Management Committee (consisting of two representatives each from SSSL and EDSL) to meet to review actual and anticipated expenditure under the Letter of Intent and Prime Contract against the Baseline Budget.
(3) Clause 3.3 dealt with the situation where either party believed that the cost of performing the works under the Letter of Intent and the Services would exceed the Baseline Budget, other than because of breach by either party. In such case there was a process for the Project Management Committee to recommend authorising EDSL to exceed the Baseline Budget, subject to acceptance by SSSL. There were various provisions to cover default situations.
(4) Clause 3.4 then provided that: “Subject to Clause 10.4, SSSL shall have no obligation to make payment to the Contractor for any costs or other sums … that are in excess of the Baseline Budget unless those costs have been previously agreed in accordance with Clause 3.3 or otherwise in accordance with this agreement.”
(5) Clause 9 dealt with “Success Criteria” and methods by which success was measured, with “Success Measures” in Schedule 4. In brief if EDSL achieved the required Success Criteria then it was entitled to a percentage of Profit as set out in Schedule 4. The relevant Profit was in Part 2 of Schedule 2.
(6) Clause 10 dealt with payment to EDSL of Costs, sub-contractor or third party invoices and the appropriate percentage of Profit. At Clause 10.3 and 10.4 there were provisions relating to payment on completion to SSSL or EDSL depending on the extent to which the amounts paid or payable to EDSL exceeded or were less than the Baseline Budget.
(7) Clause 16 dealt with Milestones and the effect of SSSL’s non-Acceptance.
(8) Clause 22 dealt with termination, including termination for material breach under Clause 22.2.
Clause 7 dealt with warranties and obligations, including at Clause 7.2 the following provision:
“The Contractor warrants to SSSL that it has the knowledge, ability and expertise to carry out and perform all the obligations, duties and responsibilities of the Contractor set out in this Agreement and acknowledges that SSSL relies on the Contractor’s knowledge, ability and expertise in the performance of its obligations under this Agreement.”
The Preliminary Specification included the following relevant parts:
(1) Under Section 1, Introduction & Purpose it stated:
“EDS have been selected by SSSL to act as the systems integrator for the SSSL eCRM Programme (forthwith referred to as the ‘programme’). EDS will manage the design process, build and implementation of the eCRM system and act as systems integrator to ensure that separate technological components of the programme are able to work together as an integrated whole to deliver the required benefits to SSSL.
The purpose of this document is to define the scope of EDS responsibilities within the programme. Specifically, EDS responsibilities cover Process, Technology and Implementation components, with SSSL being responsible for the other components, namely Location and People & Change. This document is intended to reflect EDS responsibilities.
Systems integration covers, people, process and technology (application, data, infrastructure) components, and EDS will work with SSSL and nominated 3rd Parties across these components to successfully deliver the programme.
The overall Sky CRM programme will be managed within a defined methodology agreed by all interested parties. EDS will supply appropriate management resource to make this happen.”
(2) Within section 1 there were Terms and Abbreviations which included the following passage, “In Scope” being EDSL responsibility and “Out of Scope” being SSSL responsibility:
“EDS has been chosen as the Systems Integrator (SI) for the SSSL eCRM project. Business change programmes affect both people and technology. There are 5 key components to any change programme.
People and Change, Location – These cover all people related activities including location.
Business Processes – These are the business processes to be re-engineered to meet the needs of the new strategic business model.
Data – These are the data required to support the new business processes.
Applications – These are the applications (software) which are being developed, or will be interfaced to, to support the new business processes, and new data structure.
Technical Infrastructure-This includes such things as physical hardware (PC’s, servers etc.) and works (Lan, Wan etc) components required to support new and existing applications.
The scope and responsibilities of the Systems Integrator are outlined below:
In-Scope: Process and technology including Application development, Data, Infrastructure components.
Out-of-scope: People and Change and Location (except management of the overall implementation of these workstreams co-ordinated across the Sky CRM programme).”
(3) Section 3 dealt with Milestones. It consisted of the following introductory passage followed by a table of Milestones:
“SSSL and EDS have agreed to 6 major milestones. Part of EDS’s payment will be linked to success criteria and will be measured against the successful and timely meeting of these milestones. Each of the major milestones has key supporting milestones that must occur for each of the major milestones to be a success. Each supporting milestone has specific deliverables associated with it. Milestones shall be deemed met only once the relevant element has been “Accepted” by SSSL in accordance with the provisions of the contract.”
(4) The Table in Section 3 contained Major Milestones such as Milestone 1, 2, 3 and Supporting Milestones such as Milestone 2A, 2B, 2C. In particular there were these Milestones, Descriptions and Dates for Acceptance:
Number Milestone Description Date for Acceptance
2A Technical Architecture Documents Detail definition of SSSL eCRM architecture including Infrastructure, Data, Telephony and Application 25/10/00
3A Full Specifications Complete All UML Use Cases and all non-Use Case functional specifications have been fully defined and delivered to the development team 09/03/01
4 eCRM Live in One Hall System supports new customers in one hall through the following components… 31/07/01
Section 4 of the specification dealt with deliverables, including a table and it stated:
“The table below lists the deliverables known at the date of this preliminary specification, which fall within the scope of EDS’s responsibility to deliver. It is understood that there are many other deliverables required of the programme, however, these will be identified, documented, and managed as part of the IPO mechanism.
1. Due dates agree to the consolidated Overall Project Programme, dated 24th October 2000.
Deliverables shall be deemed delivered only once the relevant element has been “Accepted” by SSSL in accordance with the provisions of the contract delivery.”
Section 5 contained assumptions and Sections 6 and 7 dealt with Process Scope and Technology Scope. At paragraph 6.1 it was stated:
“This document is intended to define the objectives and high level requirements underpinning the redesign of SSSL’s business processes as part of Sky CRM programme (the “Programme”). As such it will form the definition of scope for the process redesign activity. The redesign activity will refine the definition of processes. The overall scope may require modification or enhancement as a result of this redesign activity to ensure an optimum solution. This will be managed through the Programme Office Change Control Process.
This document represents current thinking based on our understanding of available information and views.”
Section 8 dealt with Service Levels and Preformance Characteristics and at paragraph 8.3 stated the following in relation to Performance Characteristics, with Key Performance Indicators (KPIs) being included in Appendix A:
“At this point in time, the technical architecture and functional specifications are not fully defined so that it is not possible to define specific service levels. When the functional specifications and technical architecture are completely designed and approved by the project, EDS and Sky will approve a Service Level Agreement Document that details specific measurable performance characteristics of Sky CRM. EDS understands that there do exist KPI limits, which the current CMS must support. The following target performance characteristics which are currently experienced on existing systems, will be required from the SKYCRM solution, in order to match business expectations:…”
Schedule 2 contained a Rate Card of Costs at Part 1, setting out the rates to be applied for the personnel provided by EDSL. Part 2 dealt with Profit in the sum of £7,440,000.
Schedule 5 contained the Baseline Budget being £19,751,000 for Consultancy Cost and £20,442,000 for Technology Cost making a total of £40,194,000. When profit is added the total came to £47,637,000.
The Deed of Guarantee
In addition to the Prime Contract, Sky also obtained from EDSC a guarantee of EDSL’s contractual obligations and liabilities in the terms set out in a Deed of Guarantee dated 7 December 2000 made by EDSC in favour of SSSL (“the Deed of Guarantee”). It was signed on behalf of EDSC by John McCain, President of EDSC.
The Deed of Guarantee provided as follows:
(1) In the Recitals, it was expressly recorded that the Deed of Guarantee was “supplemental to a contract (the”Contract”) dated 30 November 2000 between [EDSL] of the one part and [SSSL] of the other part”.
(2) By Clause 1: “…the Guarantor guarantees unconditionally and irrevocably the punctual, true and faithful performance and observance by the Contractor of all its obligations, undertakings and responsibilities under and in accordance with terms and limitations of the Contract, including for the avoidance of doubt any amendments or additions thereto made in accordance with its terms, and the Guarantor agrees and undertakes that it shall forthwith make good any default thereunder on the part of the Contractor and that it shall pay or be responsible for the payment by the Contractor of all sums, liabilities, awards, losses, damages, costs, charges and expenses that may be or become due and payable under or arising out of the Contract in accordance with its terms or otherwise by reason or in consequence of any such default on the part of the Contractor provided that the Guarantor shall be under no greater obligations or greater liability under this Guarantee than it would have been under the Contract if it had been named as the Contractor in the Contract and that the combined liability of the Contractor and the Guarantor should not exceed the liability of the Contractor under the Contract”.
(3) By Clause 2: “The obligations of the Guarantor under this Guarantee shall be those of a primary and independent obligor so that any amount which may not be recoverable from the Guarantor on the basis of a guarantee for any reason whatsoever shall nonetheless be recoverable from the Guarantor by way of an indemnity…”.
(4) By Clause 4: “This Guarantee shall be a continuing guarantee and indemnity and shall remain in full force and effect until all obligations to be performed or observed by the Contractor under or arising out of the Contract have been duly and completely performed and observed and the Contractor shall have ceased to be under any actual or contingent liability to SSSL thereunder”.
Sky contend that EDSC are therefore obliged to pay and be responsible for, and have their own liability in relation to, the damages that EDSL are liable to pay SSSL in respect of its breaches of the Prime Contract.
The Letter of Agreement
The Letter of Agreement was signed by Richard Freudenstein and Steve Leonard on 16 July 2001. It varied the Prime Contract and effected a settlement of existing contractual liabilities.
In summary, the Letter of Agreement provided that:
(1) The Prime Contract would continue in full force and effect except to the extent amended by the Letter of Agreement (paragraph 2).
(2) A new schedule of Milestones was agreed to replace those in section 3 of the Preliminary Specification (paragraph 3). The new major and minor Milestones were set out in Appendix 3 to the Letter of Agreement and the payment criteria and acceptance test procedure in Appendix 4 (paragraph 10).
(3) SSSL agreed to pay certain of EDSL’s invoices and EDSL agreed to raise credit notes totalling £1.4 million against such invoices and absorb certain other costs relating to the additional expense of a phased implementation up to a maximum of £2.25 million (paragraphs 4 and 7).
(4) Delivery of the functionality contracted for would be in two phases (paragraph 5). Phase 1 comprised certain critical business functionality to be implemented by 19 October 2001. Phase 2 comprised the full functionality contracted for to be implemented by 31 July 2002.
(5) EDSL would make the necessary resources available to support the revised project plan (paragraph 6).
(6) Variations were made to the manner in which any cost overruns were to be shared between SSSL and EDSL (paragraph 8).
(7) The scope of the project would be reduced by the removal of the obligation to deliver a Strategic CFS (paragraph 16).
(8) PwC was appointed to perform a quality assurance role and to assist SSSL in determining whether the revised milestones met the agreed acceptance criteria (paragraph 10).
(9) Additional provisions were agreed for termination in the event that milestones were not met (paragraph 11).
(10) EDSL agreed that the payment to it of Profit (as defined in Schedule 2 to the Prime Contract) should be “aligned to the realization of business benefits by SSSL and/or British Sky Broadcasting Limited “BSkyB” upon the Implementation of the Full Functionality” (paragraph 13). 80% of this Profit was to be “directly attributable to business benefits that are measured by reference to key performance indicators (“KPIs”) thus enabling EDS to receive its Remaining Profit Balance as SSSL and/or BSkyB realizes business benefits as measured by reference to the KPIs. The categories of the KPIs are set out in Appendix 7. SSSL and EDS shall use all reasonable endeavours to agree within 10 days of the date of this letter the metrics and measures used to calculate the profit allocation to the KPIs, in accordance with the provisions of Appendix 7.” (paragraph 14).
(11) The terms agreed were expressed to be “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 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.” (paragraph 17); and
(12) The Phase 1 functionality was defined in Appendix 1, accompanied by a High Level Integrated Plan (Appendix 2) and a Phase 1 Resource List (Appendix 8).
There is an issue between the parties as to the scope of the settlement under paragraph 17 of the Letter of Agreement.
The Memorandum of Understanding
There were discussions between Sky and EDS in early 2002 which led to a document being produced which was marked “without prejudice and subject to contract.” It set out proposed heads of agreement. On 6 March 2002 there was a telephone conversation between Richard Freudenstein and Steve Leonard which led to Sky taking over the role of Systems Integrator from EDS. Richard Freudenstein and Steve Leonard signed a document referred to as a Memorandum of Understanding on 26 March 2002.
That document was headed “without prejudice and subject to contract”. It was signed under a statement: “We are both happy to have reached this agreement and are looking forward to agreeing further revised terms for our contract.”
The document contains five un-numbered paragraphs above that statement, some with bullet points. The relevant paragraphs are:
“This note is the offer to EDS with regard to the changing of the CRM program and the relationship between SSSL and EDS on that program.
After three meetings with representatives at EDS, both parties agree on the need to renegotiate and redraft the contract between them for SSSL’s call centres. Both parties will strive to renegotiate and agree a new form of contract within the next three months. We both accept that that new agreement will be consistent with the following principles:
• EDS will transfer the role of system integrator to SSSL. SSSL will assume that role effective from the time that an agreed memorandum of understanding is created and signed or verbally agreed between SSSL and EDS.
• EDS has agreed to give up all future claims to profit sharing under the previous contract. This amounts to the sum of £6.7 m profit share plus £0.75m churn bonus. EDS shall also provide a credit of £300k as detailed below.
…
It is clear that some changes would have to be made to the current commercial contract following this agreement.
What follows is the agreed way forward for services provided from the date of this memo, and this is based on the discussions that have been on going with EDS and the conditions SSSL is willing to accept:
• EDS will continue to work with SSSL on the project leaving a minimum of 190 resources on the project at the current rate card for the remainder of 2002. If the resources are not performing or SSSL wishes to remove them for any reason-then if requested EDS will find a replacement for that resource at the same rate card and will be committed to putting acceptable resources in place.
…
• The warranties in the existing contract between EDS and SSSL shall only apply to work that has been done until the date of this memo. These warranties will only apply to Phase 1 and work product accepted and in acceptance with SSSL. This means all deliverables accepted so far, including the August, October/November and December milestones that have been accepted and deliverables in these milestones that have been delivered and are currently undergoing acceptance. EDS warrants that appropriately qualified personnel have conducted the services that have been supplied and rendered, prior to the date of this memo, with all due skill and care. The warranty period for these deliverables will be in accordance with the current contract. EDS’ only warranties in respect of its performance of work from now on are that it will be performed with all due skill and care and any other warranty normal and usual in a contract for the provision of services on a time and materials basis where the services are provided under the management and control of the customer and where the service provider is not the system integrator. EDS will not be required to give a system warranty in respect of work performed after the date of this memo.
The principles for further arrangements in the revised contract will be:
• SSSL will pay EDS an incentive amount of £500,000.00 when increment 2.3 is delivered provided it is delivered on or before March 31st, 2003. In this instance, ‘delivered’ is taken to mean a fully tested application and associated infrastructure ready to go live.
• Any cost reductions which bring the total EDS labour (to include Lucent and Chordiant labour) cost below the agreed amount of the excess costs estimated to date (currently that amount stands at £15m-to be confirmed after detailed planning has taken place) will be split 70:30 SSSL:EDS up to a maximum payment of £1.5 million to EDS.
• Expenses will remain fixed at a maximum of 12% as per the previous contract.
• If requested by SSSL, where existing EDS subcontracts with Lucent and Chordiant allow, or if EDS receives consent from Lucent and/or Chordiant, then EDS will assign these subcontracts to SSSL.”
C: THE EVIDENCE
Sky’s Witnesses of fact
……
D: THE LAW OF DECEIT AND NEGLIGENT MISREPRESENTATION
The Law on Deceit
The following basic principles of law are relied upon:
(1) Fraud is proved when it is shown that a false representation has been made (1) knowingly; or (2) without belief in its truth; or (3) recklessly, careless whether it be true or false: Derry v. Peek (1889) 14 App. Cas 337 (HL) per Lord Herschell.
(2) However negligent a person may be, he cannot be liable for fraud if his belief is honest; mere carelessness or incompetence, is insufficient: Derry v. Peek.
(3) The burden of proof lies with Sky. The more serious the allegation, the higher degree of probability that is required to establish it: Hornal v. Neuberger Products [1957] 1 QB 247 at 248; Re H. (Minors) [1966] AC 563, at 586-7.
(4) If the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion: Smith v. Land and House Corporation (1884) 28 Ch D per Bowen LJ at page 7.
(5) A person who allows a false statement by a third person to the representee to go uncorrected may also make a representation: Pilmore v. Hood 132 ER 1042 [(1838) 3 App Cas 459, per Lord Cairns at p.465]; North British Insurance Co v. Lloyd (1854) 10 Ex Ch 523 per Alderson B at p.529; Bradford Third Equitable Benefit Building Society v. Borders [1941] 2 All ER 205 (HL) per Viscount Maughan at p.211 and Lord Wright at p.220.
(6) Where a statement relied on is ambiguous, the person relying on it must first prove that he understood the statement in a sense which is in fact false: Smith v. Chadwick (1884) 9 App Cas. 187. If there was a fraud and a statement was intended to mislead, its ambiguity would not be a defence: Low v. Bouverie [1891] 3 Ch 82 per Kay LJ at 113.
(7) A claim in deceit may be made where responsibility and the relevant knowledge is divided among several servants and agents: Armstrong v Strain [1952] 1 KB 232 (CA) per Singleton LJ at p.244.
(8) A representation having been made for the purpose of an intended transaction will normally be regarded as continuing until the transaction is entered into or completed, unless varied or withdrawn in the meantime: DPP v. Ray [1974] AC 370 (HL) at pp. 379, 382, 386, 391.
In order to establish a cause of action in deceit Sky must show (a) that EDS made a representation; (b) that the representation was false; (c) that EDS knew it to be untrue or was reckless as to whether it was true; (d) that EDS intended that the claimant should act in reliance on the representation; and (e) that Sky relied on the representation to its detriment: See Clerk & Lindsell on Torts, (19th Edition) at 18-101.
When determining the meaning of an express representation or whether a statement is implicit from it, the Court generally applies an objective test. When, however, the court turns to consider (a) whether EDS knew or was reckless as to the truth of the representation or (b) whether Sky relied upon the representation, the Court takes a subjective approach as to the meaning of the representation, namely what EDS believed it was representing or what Sky understood to be the meaning of the representation.
Sky must prove the claim in deceit to the civil standard of preponderance of probability and not to the higher criminal standard. However, the court will require more convincing evidence to establish fraud. As Lord Nicholls said in In re H (Minors) [1996] AC 563 at page 586:
“…… the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability”.
Dealing with each of those matters in turn:
The making of a representation
The representation must be a representation of a past or existing fact not of opinion. However, a representation as to opinion can amount to a statement of fact to the extent that it is an assertion that the maker does in fact hold the opinion: see Brown v. Raphael [1958] Ch 636 at 641.
The statement of opinion may also involve a further implied representation of fact that the person stating the opinion has reasonable grounds for his belief or knows of facts justifying his opinion. In each case whether there is such an implied representation depends on the particular facts. As summarised by the Court of Appeal in Jaffray & Ors v Society of Lloyd’s [2002] EWCA Civ 1101:
“These cases seem to us to show that all depends upon the circumstances. In each case it is necessary to ask the question identified above, namely what would the reasonable person in the position of the representee understand by the words used in the document. In our opinion there is no rule of law that any particular statement carries with it any particular implication. All depends upon the particular statement in its particular context. So, here, as already stated, the question is whether the particular brochure or set of globals relied upon would be reasonably understood by the ordinary applicant for membership of Lloyd’s to have the meaning alleged. That meaning might either be explicit in the words used or implicit (and in that sense implied) from the words used”.
Where a statement relates to the representor’s own intended future action, the statement will often amount to a promise. Such promises are usually actionable by way of breach of contract. But again, a statement of fact might be implied from the promise to the effect that the representor held the particular intention or that the statement of intent was based on reasonable grounds. However, allegations based on such implied statements must be distinguished from allegations that the intention was not carried out. As Elias J said in Hagen & Ors v ICI Chemicals & Polymers Ltd & Ors (2002) IRLR 31 at paragraph 131 dealing with representations relating to future intentions:
“By definition, the claimant is always complaining in circumstances where the intention has not been carried into effect. It is only because of that fact that the claimant can allege that the representation made was false. The difficulty facing many, if not most, claimants, is that their real complaint is that the intention was not carried out. But absent some contractual undertaking to do so, there never was a representation that it would be. The point is succinctly made in Spencer Bower on Actionable Misrepresentation, 4th. edn para 17:
‘What the representee is generally found to complain of is the failure to carry out the intention, which shows that what really induced him to alter his position was his belief that the intention would be carried out. In other words, he relied upon the statement as if it were a promise, not as a representation. His belief that the representor had a present intention to act according to his statement would not have influenced him unless he had also believed that the intention would be carried out.'”
A representation of fact may be made by conduct. As Lord Maugham said in Bradford Third Equitable Benefit Building Society v. Borders [1941] 2 All ER 205 at 211: “The phrase will include a case where the defendant has manifestly approved and adopted a representation made by some third person. On the other hand, mere silence, however morally wrong, will not support an action of deceit.” Lord Wright said at 220: that “any person who, though not a party to the fraudulent original representation, afterwards learns of it and deliberately and knowingly uses the delusion created by the fraud in the injured party’s mind in order to profit by the fraud” may be guilty of fraud.
The falsity of the representation
As Rix J. said in Avon Insurance Plc & Ors v Swire Fraser ltd & Anr [2000] Lloyd’s Rep IR 535:
“a representation may be true without being entirely correct, provided it is substantially correct and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimants to enter into the contracts.”
Knowledge or recklessness as to the truth
To establish an action of deceit, there must be proof of fraud: Derry v Peek (1889) 14 App Cas 337 (HL) at 374 where Lord Herschell defined what must be proved, as follows:
“Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth.”
Mere negligence, even gross negligence, will not suffice: Derry v Peek at page 373.
In assessing whether a party knew that the statement was untrue there often is an issue as to what the statement meant. Where a statement is capable of being understood in more senses than one, it must be established that the party making the statement should have intended it to be understood in a sense which is untrue or should have deliberately used the ambiguity for the purpose of deceiving the claimant: see Clerk & Lindsell at 18-023, cited with approval by Tugendhat J in Crystal Palace FC v Iain Dowie [2007] EWHC 1392 (QB) at paragraph 20.
In Akerhielm v De Mare [1959] AC 789, 805 the principle was stated as follows:
“The question is not whether the defendant in any given case honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense in which he understood it albeit erroneously when it was made.”
To establish deceit, Sky must therefore prove (i) that EDS knew the representation was untrue, or at least had an absence of belief as to the truth of the representation, and (ii) that EDS understood the representation to have the express or implied meaning advanced by Sky.
In the case of companies, it is “directing mind and will” of the corporation which must be considered to determine whether the corporation had knowledge. As stated by Viscount Haldane LC in Lennards Carrying Co Ltd v Asiatic Petroleum Co. Ltd [1915] AC 705 at 713:
“… a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”
In El Ajou v Dollar Holdings Plc (No.1) [1994] 2 All ER 685 at 696a the approach of the Court of Appeal was reflected in the judgment of Nourse LJ who stated:
“It is important to emphasise that management and control is not something to be considered generally or in the round. It is necessary to identify the natural person or persons having management and control in relation to the act or omission in point.”
Rose LJ at 699h and Hoffman LJ at 706e took similar approaches. Hoffman LJ explained at 702a that knowledge can be imputed to a corporation through its agent in certain circumstances.
In Man Nutzfahrzeuge AG & Ors v Freightliner Ltd [2005] EWHC 2347 (Comm) at paragraph 156 Moore-Bick LJ applied these principles as follows:
“It is obvious that, because it is a fictitious person, a company can only act through one or more natural persons and therefore, as the decisions in El Ajou v Dollar Land Holdings Plc and the Meridian case show, in order to determine whether the company is liable in respect of any particular act or omission it is necessary to identify the natural person who represented the company for that particular purpose and who [can] therefore can be regarded as embodying for that purpose what is sometimes called its controlling mind and will. When seeking to identify the person who is to count as the company for the purposes of a substantive rule of law it is necessary to consider the nature and policy of that rule. The essence of fraudulent misrepresentation, so far as is relevant for this case, is making a statement that is known to be untrue intending that the person to whom it is made will rely on it. Liability therefore depends on the conjunction of a false statement and a dishonest state of mind. In a case where it is said that a company has made a fraudulent misrepresentation the first step must be to see whether a false statement has been made by someone who is authorised to speak on the company’s behalf. Once that has been established the starting point in deciding whether the company acted dishonestly must be to enquire into the state of mind of the person who made the statement. However, if that person was unaware that the statement was false, it may be necessary to enquire into the state of mind of other persons who directed him to make it or who allowed it to be made.”
The court therefore has to determine who made each representation; whether that person was authorised to speak on behalf of the corporation; whether that person had the required state of mind and, if not, whether some other person who directed the representation to be made had the required state of mind. If the person who made the statement or directed it to be made did not have a dishonest state of mind, then the claim for deceit fails: see Armstrong v Strain [1952] 1 KB 232.
Intention that the other party should act upon the representation
The representor must have made the statement with intent to deceive, that is with intent that it shall be acted upon by the representee: see Bradford Building Society v Borders [1941] 2 All ER 205 at 211.
Detrimental reliance of representation
The representee, Sky, must show that the representation induced it to act to its detriment: see Downs v Chappell [1997] 1 WLR 426 at 433 per Hobhouse LJ. The representation need not be the sole cause of the claimant acting as he did, provided that it substantially contributed to deceive him: see JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All ER 583 per Stephenson LJ at 589b and Donaldson LJ at 588c/d.
In Avon Insurance Plc Rix J said this at paragraph 18:
“I derive from that case the distinction between a factor which is observed or considered by a plaintiff, or even supports or encourages his decision, and a factor which is sufficiently important to be called a real and substantial part of what induced him to enter into a transaction.”
Where a claimant alleges that a representation has a particular meaning, the claimant has to establish that his understanding as to the meaning of the representation at the time was the same as now alleged: see Smith v Chadwick (1884) 9 App. Cas. 187.
The law of negligent misstatement or misrepresentation
The modern foundation for claims for economic loss caused by negligent misstatement is the decision of the House of Lords in Hedley Byrne v Heller [1964] 2 AC 465.
In Henderson v Merrett Syndicates Limited [1995] 2 AC 145, Lord Goff identified the principle in Hedley Byrne as being assumption of responsibility by the defendant along with reliance by the claimant. In determining whether there was an assumption of responsibility an objective test is applied; see Lord Goff at 181.
In Smith v Eric S Bush [1990] 1 AC 831 at 862 Lord Griffiths said:
“The phrase ‘assumption of responsibility’ can only have any real meaning if it is understood as referring to the circumstances in which the law will deem the maker of the statement to have assumed responsibility to the person who acts upon the advice.”
As Lord Oliver said in Caparo Industries Plc v Dickman [1990] 2 AC 605 at 637F:
“[Voluntary assumption of responsibility] is a convenient phrase but it is clear that it was not intended to be a test for the existence of the duty for, on analysis, it means no more than that [sic] the act of the defendant in making the statement or tendering the advice was voluntary and that the law attributes to it an assumption of responsibility if the statement or advice is inaccurate and is acted upon. It tells us nothing about the circumstances from which such attribution arises.”
The passages in Smith v Eric Bush and Caparo were also cited in HM Customs & Excise v Barclays Bank [2006] UKHL 28 by Lord Bingham at para 5 and Lord Mance at para 88.
In Caparo Lord Bridge identified a threefold test at 617:
(1) That the damage caused must have been foreseeable.
(2) There should exist between the party owing the duty and the party to whom it is owed a relationship characterised by the law as one of “proximity” or “neighbourhood”.
(3) The situation should be one in which the court considers it fair, just and reasonable that the court should impose a duty of given scope upon the one party for the benefit of the other.
Lord Bridge observed at 618 that the concepts of proximity and fairness are “not susceptible of any such precise definition as would be necessary to give them utility as practical tests, but amount in effect to little more than convenient labels to attach to the features of different specific situations which, on a detailed examination of all the circumstances, the law recognises pragmatically as giving rise to a duty of care of a given scope”.
He continued by referring to the incremental approach and said:
“Whilst recognising, of course, the importance of the underlying general principles common to the whole field of negligence, I think the law has now moved in the direction of attaching greater significance to the more traditional categorisation of distinct and recognisable situations as guides to the existence, the scope and the limits of the varied duties of care which the law imposes. We must now, I think, recognise the wisdom of the words of Brennan J. in the High Court of Australia in Sutherland Shire Council v. Heyman (1985) 60 A.L.R. 1 , 43-44, where he said:
“It is preferable, in my view, that the law should develop novel categories of negligence incrementally and by analogy with established categories, rather than by a massive extension of a prima facie duty of care restrained only by indefinable ‘considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed.””
In HM Customs & Excise v Barclays Bank [2006] UKHL 28 at para 71 Lord Walker said.
“The increasingly clear recognition that the three-fold test (first stated by Lord Bridge of Harwich in Caparo Industries plc v Dickman [1990] 2 AC 605 , 617–618) does not provide an easy answer to all our problems, but only a set of fairly blunt tools, is to my mind progress of a sort. I respectfully agree with the observation of Kirby J. in Perre v Apand Pty Ltd (1999) 198 CLR 180 , 284:
“As against the approach which I favour, it has been said that the three identified elements are mere ‘labels’. So indeed they are… Labels are commonly used by lawyers. They help steer the mind through the task in hand.””.
In addition, Lord Hoffman said at para 36 of the Barclays Bank case:
“It is equally true to say that a sufficient relationship will be held to exist when it is fair, just and reasonable to do so. Because the question of whether a defendant has assumed responsibility is a legal inference to be drawn from his conduct against the background of all the circumstances of the case, it is by no means a simple question of fact. Questions of fairness and policy will enter into the decision and it may be more useful to try to identify these questions than simply to bandy terms like “assumption of responsibility” and “fair, just and reasonable””
Lord Bingham said this at para 8:
“..it seems to me that the outcomes (or majority outcomes) of the leading cases cited above are in every or almost every instance sensible and just, irrespective of the test applied to achieve that outcome. This is not to disparage the value of and need for a test of liability in tortious negligence, which any law of tort must propound if it is not to become a morass of single instances. But it does in my opinion concentrate attention on the detailed circumstances of the particular case and the particular relationship between the parties in the context of their legal and factual situation as a whole.”
Lord Bridge observed in Caparo at 627D:
“…It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless. ‘The question is always whether the defendant was under a duty to avoid or prevent that damage, but the actual nature of the damage suffered is relevant to the existence and extent of any duty to avoid or prevent it’: see Sutherland Shire Council v Heyman.”
This observation was applied by Chadwick LJ in Man Nutzfahrzeuge AG v Freightliner Ltd [2007] EWCA Civ 910 at para 48.
EDS submit that, given the high level of abstraction at which the tests for the existence of a duty of care operate, the court must consider the detailed circumstances of the case and the relationship between the parties to determine whether it is sensible and just for a duty of care to be found to exist. That, I consider, is a sufficient summary of the position which the law has reached so far as the general test for the existence of a duty of care. I now turn to consider the impact of the contractual regime on the existence of a duty of care.
The starting point for a consideration of the effect of the contract is Henderson v Merrett [1995] 2 AC 145. At 191B to D Lord Goff referred to Central Trust Co. v. Rafuse (1986) 31 D.L.R. (4th) 481. He said:
“Le Dain J., delivering the judgment of the Supreme Court of Canada, conducted a comprehensive and most impressive survey of the relevant English and Canadian authorities on the liability of solicitors to their clients for negligence, in contract and in tort, in the course of which he paid a generous tribute to the analysis of Oliver J. in the Midland Bank Trust Co. case. His conclusions are set out in a series of propositions at pp. 521-522; but his general conclusion was to the same effect as that reached by Oliver J. He said, at p. 522:
“A concurrent or alternative liability in tort will not be admitted if its effect would be to permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort. Subject to this qualification, where concurrent liability in tort and contract exists the plaintiff has the right to assert the cause of action that appears to be the most advantageous to him in respect of any particular legal consequence.”
I respectfully agree.”
In the course of considering liability Lord Goff said this at 193H to 194 B:
“My own belief is that, in the present context, the common law is not antipathetic to concurrent liability, and that there is no sound basis for a rule which automatically restricts the claimant to either a tortious or a contractual remedy. The result may be untidy; but, given that the tortious duty is imposed by the general law, and the contractual duty is attributable to the will of the parties, I do not find it objectionable that the claimant may be entitled to take advantage of the remedy which is most advantageous to him, subject only to ascertaining whether the tortious duty is so inconsistent with the applicable contract that, in accordance with ordinary principle, the parties must be taken to have agreed that the tortious remedy is to be limited or excluded.”
At 194D he concluded:
“But, for present purposes more important, in the instant case liability can, and in my opinion should, be founded squarely on the principle established in Hedley Byrne itself, from which it follows that an assumption of responsibility coupled with the concomitant reliance may give rise to a tortious duty of care irrespective of whether there is a contractual relationship between the parties, and in consequence, unless his contract precludes him from doing so, the plaintiff, who has available to him concurrent remedies in contract and tort, may choose that remedy which appears to him to be the most advantageous.”
At 195G to 196C he said this:
“I wish however to add that I strongly suspect that the situation which arises in the present case is most unusual; and that in many cases in which a contractual chain comparable to that in the present case is constructed it may well prove to be inconsistent with an assumption of responsibility which has the effect of, so to speak, short circuiting the contractual structure so put in place by the parties. It cannot therefore be inferred from the present case that other sub-agents will be held directly liable to the agent’s principal in tort. Let me take the analogy of the common case of an ordinary building contract, under which main contractors contract with the building owner for the construction of the relevant building, and the main contractor sub-contracts with sub-contractors or suppliers (often nominated by the building owner) for the performance of work or the supply of materials in accordance with standards and subject to terms established in the sub-contract. I put on one side cases in which the sub-contractor causes physical damage to property of the building owner, where the claim does not depend on an assumption of responsibility by the sub-contractor to the building owner; though the sub-contractor may be protected from liability by a contractual exemption clause authorised by the building owner. But if the sub-contracted work or materials do not in the result conform to the required standard, it will not ordinarily be open to the building owner to sue the sub-contractor or supplier direct under the Hedley Byrne principle, claiming damages from him on the basis that he has been negligent in relation to the performance of his functions. For there is generally no assumption of responsibility by the sub-contractor or supplier direct to the building owner, the parties having so structured their relationship that it is inconsistent with any such assumption of responsibility. This was the conclusion of the Court of Appeal in Simaan General Contracting Co. v. Pilkington Glass Ltd. (No. 2) [1988] QB 758. As Bingham L.J. put it, at p. 781:
“I do not, however, see any basis on which [the nominated suppliers] could be said to have assumed a direct responsibility for the quality of the goods to [the building owners]: such a responsibility is, I think, inconsistent with the structure of the contract the parties have chosen to make.””
…
Here however I can see no inconsistency between the assumption of responsibility by the managing agents to the indirect Names, and that which arises under the sub-agency agreement between the managing agents and the members’ agents, whether viewed in isolation or as part of the contractual chain stretching back to and so including the indirect Names. For these reasons, I can see no reason why the indirect Names should not be free to pursue their remedy against the managing agents in tort under the Hedley Byrne principle.”
The earlier decision of the Court of Appeal in Pacific Associates v Baxter [1990] 1 QB 993 illustrates the way in which a contract between two parties may affect the existence of a duty of care between one of those parties and a third party. In that case the contractor sought to bring a claim in tort against a firm of engineers who acted as the Engineer under the contract between the contractor and the employer. That contract contained a clause disclaiming any liability of the engineer.
At 1010 F to H Purchas LJ said this:
“…where the parties have come together against a contractual structure which provides for compensation in the event of a failure of one of the parties involved the court will be slow to superimpose an added duty of care beyond that which was in the contemplation of the parties at the time that they came together. I acknowledge at once the distinction, namely, where obligations are founded in contract they depend on the agreement made and the objective intention demonstrated by that agreement whereas the existence of a duty in tort may not have such a definitive datum point. However, I believe that in order to determine whether a duty arises in tort it is necessary to consider the circumstances in which the parties came together in the initial stages at which time it should be considered what obligations, if any, were assumed by the one in favour of the other and what reliance was placed by the other on the first. The obligations do not, however, remain fixed subject only to specific variations as in the case of contract. I would not exclude a change in the relationship affecting the existence or nature of a duty of care in tort.”
At 1011 F to G he said:
“The central question which arises here is: against the contractual structure of the contract into which the contractor was prepared to enter with the employer, can it be said that it looked to the engineer by way of reliance for the proper execution of the latter’s duties under the contract in extension of the rights which would accrue to it under the contract against the employer? In other words, although the parties were brought into close proximity in relation to the contract, was it envisaged that a failure to carry out his duties under the contract by the engineer would foreseeably cause any loss to the contractor which was not properly recoverable by the contractor under its rights against the employer under the contract?”
Ralph Gibson LJ said at 1032 D to E:
“Nevertheless, in agreement with Purchas L.J., it seems to me to be neither just nor reasonable in the circumstances of the contractual terms existing between the contractor and the employer (absent the disclaimer clause) to impose a duty of care on the engineer to the contractor in respect of the matters alleged in the statement of claim, namely, the alleged failure to certify and final rejection of the contractor’s claims. So to do would be to impose, in my judgment, a duty which would cut across and be inconsistent with the structure of relationships created by the contracts, into which the parties had entered, including in particular the machinery for settling disputes.”
Russell LJ expressed the question in these terms at 1037 G:
“In my opinion the following question is worthy of being posed. Given the contractual structure between the contractor and the employer, can it be fairly said that it was ever within the contemplation of the contractor that, outside the contract, it could pursue a remedy against the engineer?”
In addition at 1022C to 1023A Purchas LJ considered what had been said about the existence of an exclusion clause in a relevant contract:
“Before leaving the question of disclaimer I should refer to the speech of Lord Brandon of Oakbrook in Leigh and Sillavan Ltd. v. Aliakmon Shipping Co. Ltd. [1986] AC 785 , 817. Lord Brandon was commenting on the speech of Lord Roskill in Junior Books Ltd. v. Veitchi Ltd. [1983] 1 AC 520 in which Lord Roskill was considering whether an exclusion clause in the main contract might affect the position as between one party to that contract and a third party. Lord Roskill said, at p. 546:
“My Lords, that question does not arise for decision in the instant appeal, but in principle I would venture the view that such a claim according to the manner in which it was worded might in some circumstances limit the duty of care just as in the Hedley Byrne case the plaintiffs were ultimately defeated by the defendants’ disclaimer of responsibility.”
With reference to this passage Lord Brandon in the Leigh and Sillavan Ltd. case said, at p. 817:
“As is apparent this observation was no more than an obiter dictum. Moreover, with great respect to Lord Roskill there is no analogy between the disclaimer in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] AC 465 , which operated directly between the plaintiffs and the defendants, and an exclusion of liability clause in a contract to which the plaintiff is a party but the defendant is not. I do not therefore find in the observation of Lord Roskill relied on any convincing legal basis for qualifying a duty of care owed by A to B by reference to a contract to which A is, but B is not, a party.”
There can be no doubt of the force of Lord Brandon’s comment as it stands. However, with great respect to Lord Brandon the absence of a direct contractual nexus between A and B does not necessarily exclude the recognition of a clause limiting liability to be imposed on A in a contract between B and C, when the existence of that contract is the basis of the creation of a duty of care asserted to be owed by A to B. The presence of such an exclusion clause whilst not being directly binding between the parties, cannot be excluded from a general consideration of the contractual structure against which the contractor demonstrates reliance on, and the engineer accepts responsibility for, a duty in tort, if any, arising out of the proximity established between them by the existence of that very contract.”
As an illustration of a recent consideration of the effect of the contractual structure I was referred to the decision of Gloster J in JP Morgan Chase Bank and others v Springwell Navigation Corp [2008] EWHC 1186 (Comm) in which the existence of a duty of care between various entities in Chase and Springwell, an investment vehicle, was in issue. At [475] and [498], after referring to Henderson v Merrett she dealt with the relevance of the contract upon the existence of a duty of care between Springwell and other Chase entities. She said:
475. In my judgment the various terms of the principal contractual documents upon which Chase relies (i.e. the Relevant Provisions), and which I have set out above 104, clearly show that Springwell and Chase were dealing with each other on a stipulated and accepted basis that, whatever advice or recommendations may have been given by Chase in the course of their trading relationship (i.e. the sale by CIBL/CMIL to Springwell of emerging markets securities, and the financing by CMB of various of Springwell’s purchases), no obligations to give appropriate investment advice, or duties of care as an investment advisor, were being assumed by either the Private Bank, CMB, or the Investment Bank, as the entity actually selling Springwell the relevant securities, (i.e. CIBL or CMIL), whether in relation to Springwell’s emerging markets portfolio or, more generally, as to what Springwell should do, given the existence of that portfolio. Thus I accept the submissions made on behalf of Chase that the contractual documentation, whether taken at a straightforward contractual level, or looked at more widely, as an indication as to whether any common law duties of care arose, showed that the parties specifically contracted upon the basis of a trading and banking relationship which negated any possibility of a general or specific advisory duty coming into existence.
…
497. Springwell contends that the MFA was entered into between CIBL and Springwell and that it related solely to the forward sale contracts to be entered into between Springwell and CIBL; thus its terms could only avail CIBL, and only in respect of transactions between CIBL and Springwell;124 that it did not seek to address unleveraged transactions (of which there continued to be a number between Springwell and CIBL and, after April 1996, between Springwell and CMIL); that CIBL was the only Chase entity party to the MFA and that, accordingly, its provisions cannot affect the claims against CMB, CMIL or CMSCI; further, since the MFA ceased to be used after 3 October 1997, and, from that date, leverage was provided pursuant to the GMRA, of all the assets in respect of which Springwell claims, only 8 transactions out of 67 were pursuant to the MFA.
498. As a matter of contract, the MFA, and the various confirms, govern each purchase of an instrument made under the MFA, and all and any claims made in respect thereof. However my primary conclusion, as already set out above, is that the MFA and the MFA confirms (like the other contractual documentation) reflect the broader relationship between the parties, and thus their evidential relevance is not just to the particular contracts entered into thereunder. Rather they support the position that none of the Chase entities were assuming any investment advisory responsibility.”
EDS referred me to McCullagh v Lane Fox & Partners Ltd [1996] 1 EGLR 35 where there was a disclaimer of responsibility in an estate agent’s particulars that repeated a (mis)representation that had previously been made orally by the estate agent. Hobhouse LJ held that the disclaimer was effective in that it made it wholly unreasonable for the purchaser to rely on the earlier oral representation. Hobhouse LJ referred to Hedley Byrne and the speeches of Lord Reid at 492, Lord Morris at 504 and Lord Devlin at 533 on the relevance of the disclaimer and summarised the position as:
“Thus the relevance of the disclaimer is to negative one of the essential elements for the existence of the duty of care. It negatives the assumption of responsibility for the statement. It implicitly tells the recipient of the representation that if he chooses to rely upon it he must realise that the maker is not accepting responsibility for the accuracy of the representation. The disclaimer is part of the factual situation which the court has to take into account in deciding whether or not the defendants owed a duty of care to the plaintiff. Put another way, the question is whether the plaintiff was entitled to treat the representation as one for which the defendants were accepting responsibility.”
He also drew a distinction between a disclaimer and an exclusion clause when he said:
“The judge avoided this conclusion by approaching the disclaimer as if it were a contractual exclusion. On such an approach it would need to be strictly construed and the argument was available that it did not as such cover an oral statement. But that is not, in my judgment, the right approach. It is not an exclusion to be construed. The right approach, as is made clear in Hedley Byrne, is to treat the existence of the disclaimer as one of the facts relevant to answering the question whether there had been an assumption of responsibility by the defendants for the relevant statement.”
I was referred by Sky to the Court of Appeal decision in Coupland v Arabian Gulf [1983] 1 WLR 1136 in which Robert Goff LJ said at 1153: “what impact does the existence of the contract have on the claim in tort? In my judgment, on ordinary principles the contract is only relevant to the claim in tort in so far as it does, on its true construction in accordance with the proper law of the contract, have the effect of excluding or restricting the tortious claim.” I do not consider that case of relevance as it was considering the impact of a contract on a claim by an employee for personal injury based on Donoghue v Stevenson principles and not whether a duty of care existed on Hedley Byrne v Heller principles.
From what I have said it follows that I accept Sky’s submission that the correct approach is first to consider whether, absent the Prime Contract, a duty of care would arise as between the relevant parties, and, if the answer to this question is positive, then to consider whether the existence of and the terms of the Prime Contract have the effect of excluding or restricting the duty of care.
In my judgment, in considering whether a contractual provision affects the existence or the scope or extent of a duty of care, the test is whether the parties having so structured their relationship that it is inconsistent with any such assumption of responsibility or with it being fair, just and reasonable to impose liability. In particular, a duty of care should not be permitted to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort.
I shall consider the question of whether there is a duty of care when I have dealt with a number of points of construction of documents.
E: ISSUES OF CONSTRUCTION OF DOCUMENTS
Introduction
It is convenient at this stage to deal with a number of issues of construction which arise. First, there are issues concerning the terms of the Prime Contract and, in particular, the Entire Agreement clause at Clause 1.3, the Warranty provision at Clause 7.2 and the Limitation and Exclusion provisions in Clause 20. Secondly there is a question of the scope of the settlement of claims within the Letter of Understanding. Thirdly there is an issue as to the enforceability and effect of the Memorandum of Understanding.
The Entire Agreement clause
Clause 1.3.1 of the Prime Contract under the heading “Entire Agreement” provides as follows:
“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.”
EDS’ submission
EDS contend that the Entire Agreement clause has the following effect upon the claims by SSSL against EDSL:
(1) No duty of care was owed by EDSL to SSSL in respect of pre-Prime Contract representations and/or it was not reasonable for SSSL to have relied on such representations when entering into the Prime Contract.
(2) No claim for non-fraudulent misrepresentation can be advanced in respect of pre-Prime Contract representations because the Entire Agreement clause treats such representations as overridden and/or withdrawn and/or of no continuing effect.
(3) Liability to SSSL for non-fraudulent misrepresentation by EDSL is excluded by the Entire Agreement clause.
EDS submit that Clause 1.3.1 goes further than fulfilling the purpose of a basic entire agreement clause and contend that:
(1) If Clause 1.3.1 were only intended to limit the contractual terms to those contained in the Prime Contract, the clause would not need to provide, as it does, that all prior representations are superseded;
(2) If the clause were limited to depriving all pre-contractual discussions, negotiations and statements of having contractual force, the clause would not need to provide that liability for fraudulent misrepresentation was not excluded. That statement strongly suggests that non-fraudulent misrepresentation was being excluded.
EDS say that the Entire Agreement clause has the effect of being an agreement that any representation is withdrawn or overridden or of no legal effect. They refer to the principle that a representor can modify or withdraw a prior representation at any time before the agreement is concluded and refer to the speech of Lord Tucker in Briess v Woolley [1954] AC 333, at p.354. They say that there is no reason why he could not do so by suitable wording in the agreement itself and rely on the decision of Moore-Bick LJ in Man Nutzfahrzeuge AG & Ors v Freightliner Ltd & Ors [2005] EWHC 2347 at [125] to [128] as illustrating this. They also rely on the decision of Moore-Bick LJ in Peekay Intermark and Harish Pawani v Australia and New Zealand Banking Group [2006] EWCA Civ 386, CA at paragraph 56 which was cited by Gloster J in JP Morgan Chase v. Springwell at paragraphs 547 to 556.
EDS also submit that, in any event, the effect of the Entire Agreement clause is to exclude EDSL from liability for non-fraudulent misrepresentation in respect of prior representations and rely on the decision of Rix J and the Court of Appeal in Deepak Fertilisers and Petrochemicals Corporation v. ICI Chemicals & Polymers Ltd. & Ors [1998] 2 Lloyd’s Rep 139 and at [1999] 1 Lloyd’s Rep 387 at paragraph 34.
For these reasons, EDS submit that the Entire Agreement clause does more than simply provide certainty as to the terms of the contract between the parties but has the further effect set out above.
Sky’s submission
Sky’s case is that the effect of the clause is simply to provide that pre-contractual representations do not form part of the Prime Contract. They contend that EDS’ submission is in error both on the language of the clause itself and on the basis of the authorities.
Sky submit that there is consistent case law which demonstrates that entire agreement clauses operate to defeat any suggestion of a collateral warranty or contract or other such side agreement, but they are not effective, without more, to exclude liability for misrepresentation. Sky refer to the decision of the Court of Appeal in Deepak Fertilisers and Petrochemicals Corporation v ICI Chemicals & Polymers Ltd and Ors [1998] 1 Lloyds Rep 387, in particular at [39] and also to Inntrepreneur Pub Company v East Crown Ltd [2000] 2 Lloyds Rep 611 at [7] to [8].
Whilst Sky accept that every clause is be construed on its own terms, they submit, in light of the authorities and the terms of Clause 1.3.1, that the first sentence is not effective to exclude liability for misrepresentation, fraudulent, negligent or innocent. Rather Sky submit that the clause does not deal with exclusion of liability for misrepresentation.
In relation to EDS’ submission that the exclusion of liability for non-negligent misrepresentation arises by inference from the wording of the last sentence of Clause 1.3.1, Sky submit that, whilst that inference is, in theory possible, the natural and logical inference is that the final sentence has been included out of a mistaken abundance of caution because the first sentence does not exclude liability for misrepresentation.
Whilst Sky accept that since Photo Production Ltd v Securicor Ltd [1980] AC 827, the law has moved away from adopting unnecessarily strained constructions of exemption clauses, they say that exemption clauses are construed strictly giving “due allowance [to] the presumption in favour of the implied primary and secondary obligation”, per Lord Diplock at 851.
Sky also rely on the fact that any ambiguity in an exemption clause is to be resolved contra proferentem and refers to Lewison, The Interpretation of Contracts (2nd. edn) at para 12.05. They also draw support from Lord Morton’s speech in Canada Steamship Lines Ltd v R [1952] AC 192 that an exemption clause will not relieve a party from liability for negligence unless it does so expressly or by necessary implication.
Sky submit therefore that the Entire Agreement clause is not effective to exclude EDSL’s liability to SSSL for misrepresentation of any sort. Even if it were effective to exclude EDSL’s liability for pre-contractual misrepresentations, Sky submit that it cannot, on any view, extend to the representation made in Clause 7.2 of the Prime Contract itself.
Analysis
The issue in this case is whether Clause 1.3.1 of the Prime Contract excludes liability for misrepresentation. Whilst the effect of that clause depends on the particular wording, it is of assistance to review the principles that the courts have applied in construing similar provisions.
In Inntrepreneur Pub Company v East Crown Ltd [2000] 2 Lloyd’s Rep 611 Lightman J held that an entire agreement prevented a claim based upon a collateral warranty. The clause in question differs greatly from the one in this case. In coming to his conclusion Lightman J said at [7]:
“The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long-forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need that may arise in its absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that accordingly any promises or assurances made in the course of the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save in so far as they are reflected and given effect in that document.”
He also observed at [8] that “An entire agreement provision does not preclude a claim in misrepresentation, for the denial of contractual force to a statement cannot affect the status of the statement as a misrepresentation.” He referred to the leading case of Deepak v. Imperial Chemical Industries plc [1998] 2 Lloyd’s Rep. 139, affirmed [1999] 1 Lloyd’s Rep 387 in which the relevant clause, clause 10.16, read as follows:
“This CONTRACT comprises the entire agreement between the PARTIES, as detailed in the various Articles and Annexures and there are not any agreements, understandings, promises or conditions, oral or written, expressed or implied, concerning the subject matter which are not merged into this CONTRACT and superseded hereby. This CONTRACT may be amended in the future only in writing executed by the PARTIES.”
The Court of Appeal held that this provision was not sufficient to exclude representations. Stuart-Smith LJ giving the judgment of the court said “But we do not think the opening words themselves exclude misrepresentations and they cannot be brought within the specific words. In our judgment the Judge was right on his construction of art. 10.16.”
At first instance Rix J had said this about clause 10.16 at 167:
“Deepak submit that this article excludes liability for neither misrepresentation nor collateral warranties, and that in any event any such exclusion would be limited by the phrase “concerning the subject matter”. Davy submit that it excludes liability for all pleaded misrepresentations and collateral warranties. It is common ground that it does not cover tortious liability in negligence.
I agree with Deepak’s submission so far as concerns misrepresentation. Thus the clause’s language – “agreements, understandings, promises or conditions” – is not apt, expressly or impliedly, to include representations. This was the view of Mr. Justice Browne-Wilkinson in Alman and Benson v. Associated Newspapers Group Ltd. , June 20, 1980, (unreported, Lexis transcript at p. 30):
“Clause 11(1) provides that the written contract constitutes “the entire agreement and understanding between the parties with respect to all matters therein referred to”. It is to be noted that it does not in terms refer to representations. The defendants, however, submit that the word “understanding” covers the representation alleged in this case. I cannot accept this submission. Although it is true that, in one sense, the common assumption by all parties that the plaintiffs were to be in charge of the day-to-day running could be called “an understanding” between them, the plaintiffs are not suing on that bilateral “understanding”, but on the representation of intention implicit in it. Clause 11(1) plainly excludes any contractual claim based on a bilateral understanding, but it does not go further. In my judgment the word “understanding” is directed to excluding any claims arising from warranties collateral to the main agreement. If it were designed to exclude liability for misrepresentation it would, I think, have to [be] couched in different terms, for example, a clause acknowledging that the parties had not relied on any representations in entering into the contract. I therefore hold that the word “understanding” in this contract is not apt to cover representations, and accordingly does not exclude the plaintiffs’ claim.”
The addition of the words “promises or conditions” in this case seems to me to take the matter no further: neither of those expressions refers to a representation as distinct from some undertaking. In Thomas Witter Ltd. v. TBP Industries Ltd., (1994) 12 Tr. L. 145 at pp. 167-170 Mr. Justice Jacob held that even a clause which goes on to provide for an acknowledgement that a party has not been induced to enter into a contract by any other than scheduled representations does not exclude liability in misrepresentation arising out of some other representation, if that party can succeed evidentially in proving, despite that acknowledgment, that he was induced by it. He said (at p. 168C):
“Unless it is manifestly made clear that a purchaser has agreed only to have a remedy for breach of warranty I am not disposed to think that a contractual term said to have this effect by a roundabout route does indeed do so. In other words, if a clause is to have the effect of excluding or reducing remedies for damaging untrue statements then the party seeking that protection cannot be mealy-mouthed in his clause. He must bring it home that he is limiting liability for falsehoods he may have told.”
In Man Nutzfahrzeuge AG & Ors v Freightliner Ltd & Ors [2005] EWHC 2347 Moore-Bick LJ considered a provision at Section 14.10 of a contract which provided as follows:
“This Agreement together with the Ancillary Agreements constitutes the entire agreement between the Parties and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties. There are no representations, warranties, covenants, conditions 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 information, discussion or understanding in entering into and completing the transactions contemplated in this Agreement and the Ancillary Agreements … Nothing in this Section 14.10 shall affect any Party’s liability for fraud or fraudulent misrepresentation.”
He then said at [127] to [128]:
” While recognising that this clause specifically excludes fraud from the scope of its operation, Mr. Vos submitted that it clearly was intended to prevent the purchaser from seeking relief of any kind based on innocent or negligent misrepresentations. He argued that either MN relied on representations or it did not. It made no sense to say that MN did not rely on representations if they were made innocently or negligently, but did rely on representations if they were made fraudulently.
I can see the logic of that submission, but in my view it fails to have sufficient regard to the parties’ intentions in including this provision in the agreement. The first two sentences are in my view intended to make it clear that the agreement contains the definitive statement of the parties’ rights and liabilities arising out of the negotiations. Although the second sentence is worded in terms of an absence of any representations etc. outside the agreement itself, it does in fact operate as a contractual renunciation of the right to rely on anything said or done in the course of the negotiations as giving rise to a ground of complaint, or indeed for any other purpose. To that extent the clause does alter the parties’ positions, but it is subject to the exception in the final sentence which makes it clear that they did not intend to give up the right to hold each other liable for fraud or fraudulent misrepresentations made before entering into the agreement. For these reasons I am satisfied that Section 14.10 does not prevent MN from holding Freightliner liable for the fraud of Mr. Ellis.”
I now turn to consider whether the Entire Agreement clause in this case has the effect of modifying or withdrawing the representations which were alleged to have been made pre-Prime Contract.
I accept the principle that, as stated by Lord Tucker in Briess v Woolley [1954] AC 333, at p.354 that a representor can modify or withdraw a prior representation at any time before it is relied on. It is obviously right that if a representor wrongly represents something then he must be able to modify or withdraw it before it is relied upon. Does the Entire Agreement clause have that effect?
The relevant words of Clause 1.3.1 are “…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…”.
Those words do not, in my judgment, amount to an agreement that representations are withdrawn, overridden or of no legal effect so far as any liability for misrepresentation may be concerned. The provision is concerned with the terms of the Agreement. It provides that the Agreement represents the entire understanding and constitutes the whole agreement. It is in that context that the Agreement supersedes any previous representations. That is, representations are superseded and do not become terms of the Agreement unless they are included in the Agreement. If it had intended to withdraw representations for all purposes then the language would, in my judgment, have had to go further.
In Man Nutzfahrzeuge v Freightliner Ltd the clause went wider and stated that: “There are no representations, warranties, covenants, conditions 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 information, discussion or understanding in entering into and completing the transactions contemplated in this Agreement and the Ancillary Agreements …”. That expressly referred to the fact that the parties were not relying on any other information or discussion in entering into and completing the transactions. In his judgment Moore-Bick LJ said in relation to this second sentence: “Although the second sentence is worded in terms of an absence of any representations etc. outside the agreement itself, it does in fact operate as a contractual renunciation of the right to rely on anything said or done in the course of the negotiations as giving rise to a ground of complaint, or indeed for any other purpose.” It is therefore the “contractual renunciation of the right to rely” which makes the difference in that case. That is absent here.
Whilst I accept that there can be a contractual estoppel, I do not consider that EDS’ reliance on Peekay Intermark and Harish Pawani v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386, CA takes the matters further. The principle was summarised by Moore-Bick LJ at paragraph 56 in these terms:
“There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not.”
In this case the statement that the Agreement superseded any previous discussions, correspondence, representations or agreement between the parties with respect to the subject matter of the agreement prevented other terms of the agreement or collateral contracts from having contractual effect. It did not supersede those matters so far as there might be any liability for misrepresentation based on them.
Does the clause have the effect of excluding a duty of care between EDSL and SSSL in relation to representations? There is no doubt that the clause does refer expressly to representations unlike Deepak v. Imperial Chemical Industies and Alman and Benson v. Associated Newspapers Group Ltd but like Thomas Witter Ltd. v. TBP Industries Ltd and Man Nutzfahrzeuge v Freightliner. Also, like Man Nutzfahrzeuge v Freightliner it concludes with a statement that it does not exclude liability for fraudulent misrepresentation. It therefore falls somewhere in between the decided cases. However I have come to the conclusion that it does not have the effect of excluding liability for non-fraudulent misrepresentation. First, I do not consider for the reasons set out above that it covers liability for misrepresentation rather than contractual liability for representations.
Secondly, while there is reference to representations, there is nothing in the clause that indicates that it is intended to take away a right to rely on misrepresentations. As Browne-Wilkinson J said in Alman and Benson v. Associated Newspapers Group Ltd: “If it were designed to exclude liability for misrepresentation it would, I think, have to [be] couched in different terms, for example, a clause acknowledging that the parties had not relied on any representations in entering into the contract.” Equally, as Jacob J stated in Thomas Witter Ltd. v. TBP Industries Ltd, “In other words, if a clause is to have the effect of excluding or reducing remedies for damaging untrue statements then the party seeking that protection cannot be mealy-mouthed in his clause. He must bring it home that he is limiting liability for falsehoods he may have told.” I consider that clear words are needed to exclude a liability for negligent misrepresentation and that this clause does not include any such wording. As Sky submit exclusion clauses are construed strictly and clear expression is needed to exclude liability for negligence: see Photo Production Ltd v Securicor Ltd [1980] AC 827 at 851 per Lord Diplock and Lord Morton’s well-known test in Canada Steamship Lines Ltd v R [1952] AC 192.
Thirdly, the reference in the final sentence to “This clause does not exclude liability of either party for fraudulent mis-representation” is obviously an indication that the previous words of the clause would otherwise have that effect. However, in the absence of words which do have that effect, I do not consider that such a statement can create an exclusion which it then negatives. Put another way, on my construction of the clause it does not exclude liability for fraudulent mis-representation. It would be strange if the addition of the last sentence then had the effect of imposing liability for non-fraudulent misrepresentation when what it says is correct. The clause does not exclude liability of either party for fraudulent mis-representation.
As a result, for the reasons set out above, I do not consider that the Entire Agreement clause precludes SSSL from advancing a claim for negligent misrepresentation or misstatement against EDSL.
Clause 7.2 of the Prime Contract
Clause 7.2 provides:
“The Contractor warrants to SSSL that it has the knowledge, ability and expertise to carry out and perform all obligations, duties and responsibilities of the Contractor set out in this Agreement and acknowledges that SSSL relies on the Contractor’s knowledge, ability and expertise in the performance of its obligations under this Agreement.”
EDS rely on this clause to show that the parties incorporated into the Prime Contract as warranties any representations which they considered to be of importance. For the reasons given above I consider that this provision is an example of a matter which is incorporated as a term of the Prime Contract and therefore supersedes any prior representations for the purpose of forming a term of the contract or a collateral contract but not in relation to any claim for misrepresentation.
Sky rely on Clause 7.2 for a different purpose. Sky submit that, as between EDSL and SSSL, Clause 7.2 of the Prime Contract gives rise to an estoppel. This estoppel argument formed one of the amendments to paragraph 51 of the Particulars of Claim for which permission was given on 7 September 2007, but that EDS’ responsive Defence at paragraph 154 does not contain any response to this amendment.
Sky say that by the terms of Clause 7.2, EDSL made a clear and unequivocal statement that it “has the knowledge, ability and expertise to carry out and perform all obligations, duties and responsibilities of the Contractor set out in this Agreement”. In addition EDSL “acknowledges that SSSL relies on the Contractor’s knowledge, ability and expertise in the performance of its obligations under this Agreement”.
Sky say that the first part of the statement amounts to a representation of fact that EDS possessed certain knowledge, ability and expertise. In my judgment that provides for a contractual remedy by way of breach of warranty but cannot, in itself, give rise to any independent claim by way of misrepresentation.
In relation to the second part EDS contend that it does not contain an acknowledgment of reliance at the point of entering into the Prime Contract, but rather contains merely an acknowledgment that SSSL would rely in the future on EDS’ knowledge, ability and expertise. Sky submit that this is equivalent to saying that SSSL “will rely” rather than that SSSL “relies” on EDSL’s knowledge, ability and expertise which is not what the clause says.
Sky contend that the statement was a representation of fact that SSSL were there and then in fact relying on that knowledge, ability and expertise. Sky also say that it is clear from the words that the representation was of a nature to induce SSSL, was made with an intention to induce SSSL and did in fact induce SSSL to alter its position to its detriment, by entering into the Prime Contract with EDSL.
I consider that the reference to an acknowledgement by EDSL that SSSL “relies” is, as Sky submit, an acknowledgment that Sky was relying on EDSL’s knowledge, ability and expertise at the time of the Prime Contract. I also consider that, to the extent that EDSL deny that SSSL so relied at the time of the Prime Contract, that would contradict this statement and EDSL would be estopped from asserting that SSSL did not rely on EDSL’s knowledge, ability and expertise.
Limitation and exclusion of liability: Clause 20 of the Prime Contract
Clause 20 contains two provisions which are relied on by EDS. First, Clause 20.2 which provides that:
“Save as provided in Clause 20.1, 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.”
Secondly, Clause 20.5.1 which provides as follows:
“Subject to Clauses 20.1, 20.2, 20.3, 20.4 and 20.6, the total aggregate liability of each party at the time of the relevant claim (other than SSSL’s obligations under Clause 10) and its officers, employees and agents to the other party arising out of any act, omission, event or circumstances relating to this Agreement or with respect to the matters contemplated herein shall in no circumstances exceed:
(a) in respect of the Contractor, the sum of all amounts paid to the Contractor under Clause 10 at the time of the relevant claim (the “Liability Cap”); and…”
Clause 20.5.2 provides in following terms the practical effect of which is that the Liability Cap shall be not greater than £30 million:
“Subject to Clauses 20.5.3, 20.6 and 20.7, the Liability Cap for the Term shall not at any time be less than £6 million (six million pounds), nor greater than £30 million (thirty million pounds).”
Clause 20.8 defines “liability” to mean “any liability, whether under statute or in tort (including negligence), contract or otherwise…”
Clause 20.2
EDS submit that Clause 20.2 affects the claims which are brought by SSSL against EDSL in this case.
EDS say that the losses claimed by Sky, for example at paragraph 108.1 of the Particulars of Claim, fall into three categories: development costs of implementing the CRM system, operating costs and loss of profits and other business benefits.
EDS contend that, absent deceit, SSSL’s claims against EDSL for lost profits and business benefits in respect of reduced Call Handling Costs are excluded by Clause 20.2.
Sky contend that all losses are “direct losses” and are therefore outside Clause 20.2.
EDS submit that Sky’s argument, which depends on a distinction between direct and indirect losses, should be rejected. They say that Clause 20.2 does not limit the exclusion to indirect losses. It specifically excludes “loss of profits, revenue, business, goodwill and/or anticipated savings”, which does not depend on whether such losses are categorised as direct or indirect.
EDS say that SSSL’s claim in respect of Call Rate Reduction benefit is one for the loss of savings in the form of reduced staff costs which Sky say would have been made had the CRM System been in place earlier. EDS submit that this is a claim for loss of “anticipated savings” which falls within Clause 20.2(ii).
Sky submit that the losses arise within the first limb of Hadley v Baxendale (1854) 9 Exch 341 and are therefore direct losses. They say that they are therefore not “consequential” or “indirect” which phrases refer to losses within the second limb of Hadley v Baxendale. They refer to the decision in Croudace Construction Ltd v Cawoods Concrete Products Ltd (1978) 8 BLR 20 and to subsequent Court of Appeal authorities which, they submit, have consistently upheld this view.
I accept that the reference to “consequential” losses in Clause 20.2(i) is a reference to “indirect” losses within the second limb of Hadley v Baxendale, as consistently held in the Court of Appeal starting from Millar’s Machinery Co v David Way (1935) 40 Com. Cas 204 and Croudace v Cawoods and the recent cases cited in McGregor on Damages (Seventeenth Edition) at para 1-037.
However, Clause 20.2(ii) excludes liability for “loss of profits, revenue, business, goodwill and/or anticipated savings” and, as EDS submit, that part of Clause 20.2 is a separate exclusion and does not depend on such losses also being “consequential” or “indirect” under Clause 20.2(i).
EDS submit that SSSL’s claim in respect of Call Rate Reduction benefit falls within the exclusion in Clause 20.2(ii). That claim is based on the premise that the Sky CRM System reduces inbound subscriber calls to the call centres, thereby enabling Sky to reduce the number of CAs required to answer calls. Sky also claim that the reduction in calls will enable it to reduce the number of “CTI Support” and “Sales Support” staff who manage the CAs. I accept EDS’ submission that Clause 20.2(ii) would exclude liability for this loss on the basis that it is loss of “anticipated savings”. Thus, except for claims in deceit, Clause 20.2(ii) has the effect of excluding EDSL’s liability to SSSL for Call Rate Reduction benefits.
Clause 20.5
Sky plead as follows in relation to the Cap:
“On a true construction of the Contract, clause 20 is effective to limit to £30 million EDSL’s liability to SSSL in respect of breach of contract and negligent misrepresentation, but is not effective to limit: (i) EDSL’s liability to SSSL for deceit; (ii) any liability of EDSC; or (iii) any liability to BSkyB Ltd.”
In opening oral submissions Sky said that a claim based on negligent misrepresentation, under the Misrepresentation Act 1967 or at common law, or a claim for breach of contract would be subject to the cap of £30 million.
It is evident that Sky accept that the Cap applies to the following claims against EDSL:
(1) SSSL’s claim for negligent misrepresentation or under the Misrepresentation Act 1967 pre-Prime Contract.
(2) SSSL’s claim for negligent misrepresentation pre-Letter of Agreement and for breach of contract prior to July 2001.
(3) SSSL’s claim for damages for repudiatory or non-repudiatory breach of the Prime Contract as varied by the Letter of Agreement.
It is common ground that the Cap does not apply to any claim by SSSL or BSkyB against EDSL or EDSC for fraudulent misrepresentation pre-Prime Contract.
On their pleaded case Sky also contend that the Cap does not apply to a claim by BSkyB against EDSL or EDSC for negligent misrepresentation pre-Prime Contract or negligent misrepresentation pre-Letter of Agreement. They also contend that the Cap does not apply to claims for breach of the warranties in the Memorandum of Understanding.
As a matter of privity of contract, Sky are evidently correct that a term in the Prime Contract cannot affect liability in relation to a claim for negligent misrepresentation against EDSC or by BSkyB who are not parties to the Prime Contract. Whether there is such liability is an issue I deal with below.
In relation to the warranties under the Memorandum of Understanding, as I have found that there are no such claims, the point does not arise. In fact, it reinforces the view that the application of the Cap to any claim under the Memorandum of Understanding is precisely the type of matter which would have been dealt with in the agreement which the parties were seeking to negotiate.
…..
F:CLAIMS FOR NEGLIGENT MISSTATEMENT OR MISREPRESENTATION
Introduction
Both SSSL and BSkyB make claims for damages at common law for negligent misrepresentation/misstatement. Such claims are made, first, against both EDSL and EDSC in the alternative to the claims for deceit for representations pre-Prime Contract. The matters said to give rise to that duty are those pleaded in relation to the claim in deceit. Secondly, SSSL and BSkyB make claims for representations pre-Letter of Agreement against only EDSL.
EDS’ submissions
In relation to the pre-Prime Contract representations, EDS submit that where the parties have structured their obligations so as to provide for contractual liability for certain non-fraudulent representations made by one of the contracting parties and so as to treat as of no effect other pre-contract representations, then these are relevant factors in determining whether a duty of care exists. They refer to the decisions in Pacific Associates and JP Morgan Chase, referred to above.
EDS submit that there were extensive negotiations of both the limitation and exclusion of liability clauses in the Prime Contract assisted by in-house and external lawyers. They say that Sky and EDS had worked out which company within their respective groups should be the contracting party and intended that, whichever it was, should be subject to the cap, the exclusion of liability and the Entire Agreement clause in the Prime Contract.
On that basis EDS submit that no duty of care should be found to be owed by EDSL to SSSL as the existence of such a duty would be inconsistent with or circumvent the structure put in place by the parties and would not be sensible or fair, just and reasonable. They say that under clause 7, EDSL gave a series of warranties, breach of which would give SSSL a right to claim damages and that the warranty at clause 7.2 as to EDSL’s knowledge, ability and expertise is also pleaded as being a pre-contractual representation. EDS submit that the parties have given contractual effect to certain pre-contract representations and provided a remedy for breach of such representations by way of damages for breach of contract.
In relation to representations other than those forming warranties, EDS say that any duty of care as between EDSL and SSSL is excluded by operation of the Entire Agreement clause or that this clause excludes liability for non-fraudulent misrepresentation.
In relation to each of the pre-Letter of Agreement representations EDS admit that EDSL owed a duty of care to SSSL but deny that they owed any duty of care to BSkyB because any pre-Letter of Agreement representations were made to SSSL and not BSkyB and that such representations related to services being provided under the Prime Contract, to which BSkyBwas not a party.
EDS contend that any duty of care owed by EDSL to SSSL was excluded by the terms of the Prime Contract and that EDSL owed no duty of care to BSkyB. EDS say that the parties arranged the contractual scheme so that EDSL owed no contractual obligations to BSkyB.
In relation to EDSC, EDS say that the parties so arranged the contractual scheme that, save as guarantor, EDSC owed no contractual obligations to SSSL or to BSkyB. On this basis EDS submit that EDSC owed no duty of care to either SSSL or BSkyB.
EDS submit that if the Court were to find that a duty of care was owed by EDSL to BSkyB or by EDSC to BSkyB or SSSL, this would, on Sky’s pleaded case, avoid the intended effect of such arrangement. EDS say that not only would, for example, EDSL have a liability to BSkyB, but the liability would be unlimited. Further, they say that the whole of the losses that BSkyB claim are losses that, if suffered by SSSL, would be excluded by clause 20.2 of the Prime Contract. But if EDSL owed a duty of care to BSkyB, that would leave EDSL owing a greater liability to a non-contracting party than to a contracting party, despite BSkyB being involved in the negotiations and the decision that the contracting party should be SSSL and not BSkyB or BSkyB and SSSL jointly. Equally, EDS submit that it would also leave EDSC having a greater liability to SSSL than the prime contractor, EDSL.
EDS submit that if a duty of care in tort is not established where the duty is concurrent with a limited liability duty in contract, then where the parties have structured their relationship to ensure that there is no contractual duty owed, for instance between EDSL and BSkyB, then the justification for refusing to recognise a duty of care in tort is even stronger.
EDS submit that such a result would not be sensible or just or “fair, just and reasonable” and that, in the circumstances set out above, no duty of care should be found to be owed by EDSL or EDSC to BSkyB or by EDSC to SSSL.
Sky’s submissions
Sky submit that EDS’ contention that EDSL owed no duty of care to SSSL is unsupportable and is founded on a misinterpretation of the Entire Agreement clause in the Prime Contract and overlooks EDSL’s liability under section 2 of the Misrepresentation Act 1967 in relation to which the question of a duty of care does not arise.
Sky say that SSSL has a claim under section 2(1) of the Misrepresentation Act 1967 against EDSL and that to defeat this claim EDSL must prove that they “had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true”. However, Sky accept that, as between EDSL and SSSL, clause 20 of the Prime Contract caps EDSL’s non-fraudulent liability at £30 million and any claim would be capped to that figure.
Sky also submit that EDS’ contention that EDSL owed no duty of care to BSkyB and that EDSC owed no duty of care to either SSSL or BSkyB Ltd also rests on a misinterpretation of the Entire Agreement clause and is not supported, as EDS contend, by the existence of the Prime Contract between EDSL and SSSL and the inclusion of a limitation of liability in the Prime Contract.
Sky say that EDS have not and could not contend that, in the absence of the Prime Contract, duties of care would not arise. Sky say that the representations were made on behalf of both EDSC and EDSL with the intention that those representations were to be relied on by both BSkyB and SSSL in the course of the bid process and subsequent negotiations. Furthermore, the representations were all statements of fact that related to matters peculiarly within the knowledge and expertise of EDS. As such, Sky contend that the only question is whether the existence or terms of the Prime Contract are effective to exclude or restrict these tortious duties of care.
Sky submit that to the extent that representations were made to BSkyB and were relied on in selecting EDS and awarding them the Letter of Intent, the terms of any contract excluding or limiting a duty of care do not arise at that stage. The same, Sky submit applies so far as EDSC’s liability to both BSkyB and SSSL is concerned.
In relation to representations made prior to the selection of EDS and the award of the Letter of Intent, Sky submit that the representations were made to BSkyB and were relied on in selecting EDS and awarding them the Letter of Intent. At this stage, Sky say that their cause of action was complete and there can be no question of the existence of terms of any contract excluding or limiting a duty of care that otherwise would arise. The same, Sky submit applies so far as EDSC’s liability to both BSkyB and SSSL is concerned.
In relation to representations relied on in the conclusion of the Prime Contract, Sky accept that the situation is less straightforward. Sky submit that as far as liability to BSkyB is concerned, nothing changed after the Letter of Intent so as to oust that duty when discussions and negotiations continued after the Letter of Intent and up to the conclusion of the Prime Contract. Sky submit that, in considering the question posed by Lord Goff in Henderson v Merrett Syndicates Limited [1995] 2 AC 145 at 194 of whether the ‘tortious duty is so inconsistent with the applicable contract that, in accordance with ordinary principle, the parties must be taken to have agreed that the tortious remedy is to be limited or excluded’, there is no inconsistency from the Prime Contract itself, which is silent as to any liabilities owed to BSkyB.
So far as the question of the liability of EDSC is concerned, Sky submit that the relevant question again is whether the terms or existence of the Prime Contract are sufficiently inconsistent with the duties which would arise so as to exclude or limit them. Sky say that the Prime Contract does not, on its own terms, purport to oust the liability of EDSC; it has nothing to say on the subject. Sky say that there is nothing unusual or abhorrent in EDSC being liable for the consequences of any negligent misrepresentations on which BSkyB and SSSL relied, notwithstanding the limitation of liability in the Prime Contract between EDSL and SSSL. Sky say that no attempts were made to limit EDSC’s liability and that EDSC should be liable for its negligent misstatements in the usual way.
In relation to pre-Letter of Agreement misrepresentations, Sky contend that representations were made to and duties of care were owed by EDSL to both SSSL and BSkyB in the course of the negotiations leading to the Letter of Agreement. Sky say that these duties are not ousted or limited by the Prime Contract and it is not alleged that the duties were ousted by the terms of existence of the Letter of Agreement.
Analysis
I first deal with the question of whether EDSL owed SSSL a duty of care or whether such a duty was excluded or limited by the terms of the Prime Contract. As Lord Goff said in Henderson v Merrett at 191 where the parties are in contract, a concurrent or alternative liability in tort will not permit a party to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort. However, subject to that qualification, where concurrent liability in tort and contract exists the plaintiff has the right to assert the cause of action that appears to be the most advantageous to him in respect of any particular legal consequence.
In principle, subject to the limitation set out above, I can see no reason why a common law duty of care should not be owed by EDSL to SSSL in relation to any pre-contract representations. There is evidently a sufficient relationship between the parties in the period leading up to the Prime Contract and, in circumstances where SSSL might suffer damage as a result of such representations, I consider that it is sensible and just for a duty of care to be found to exist.
What then is the effect of the terms of the Prime Contract on that duty of care. Sky submit that the terms of the Prime Contract only came into effect at a later stage and therefore cannot affect the existence of a duty of care at the time when EDS was selected and entered into the Letter of Intent. That submission has some attraction but I consider that it ignores the fact that the question for consideration is whether it is sensible or just for a duty of care to exist in the light of all the circumstances. Those circumstances include the fact that the representations were made in the context of the ITT and the Response which were part of the process by which EDS was seeking to be awarded a contract to carry out the Sky CRM Project. The contract which was entered into therefore cannot be ignored. If that were not so then because pre-contract representations are, of necessity, made before the contract, parties could never effectively regulate their obligations in respect of such representations. The terms of the Prime Contract cannot therefore be ignored where they are relevant.
There are three terms of the Prime Contract which are relevant: the Entire Agreement Clause in Clause 1.3, the warranties given in Clause 7.2 and the limitation of liability clause in Clause 20. Those clauses have to be considered to see whether they affect the duty of care which I have held would otherwise exist. In particular, the duty of care will have to take account of any exclusion or limitation clauses in the Prime Contract so as not to permit SSSL to circumvent or escape the consequences of those terms. In the light of my findings as to the scope and effect of Clauses 1.3.1, 7.2 and 20 of the Prime Contract, it is necessary to consider whether there are duties of care owed by EDSC or owed to BSkyB so as to give rise to claims for negligent misrepresentation at common law by BSkyB and SSSL against EDSC and by BSkyB against EDSL and EDSC which would avoid the effect of the limitations in the Prime Contract.
First, though, it is necessary to consider something of the background to the way in which the parties arranged their relationship.
The Contractual framework
The first stage of the process was the preparation of the ITT which was sent to the potential bidders. It was sent to other bidders on 17 March 2000 and then later it was sent to Joe Galloway at the request of Mike Hughes.
The ITT was produced by Scott Mackay. That document had the Sky logo and was an Invitation to Tender for the build and implementation of a World class contact centre for “BSkyB”.The ITT refers to “BSkyB” and to “Sky Services”. Although the references are not entirely consistent, “BSkyB” is evidently a reference to the first claimant, BSkyB and “Sky Services” is a reference to the division within which the second claimant, SSSL, sat. The ITT refers to BSkyB objectives and is generally phrased in terms of BSkyB’s requirements. There is also reference to the involvement of BSkyB and BSkyB staff.
At para 3.5.2 of the ITT there is particular reference to SSSL being licenced to provide conditional access services to broadcasters of which BSkyB is one. There is also reference to “Sky Services” having the two call centres at Dunfermline and Livingston.
In the Response, the EDS logo is used and it is generally written as being the Response of “EDS” and refers to “BSkyB”. Under the Statement of Confidentiality on page 2 of the Response it is stated that “This document is proprietary to Electronic Data Systems Limited, its parent company Electronic Data Systems Corporation and any of the corporation’s subsidiaries.” It is also stated that “EDS and the EDS logo are registered marks of Electronic Data Systems Corporation” and it is stated “Copyright © 2004 Electronic Data Systems Corporation”. It is said to be a “written response from EDS,to BSkyB’s ‘Invitation to Tender'”.
The Letter of Intent was written on SSSL notepaper but was signed for and on behalf of “British Sky Broadcasting Limited”, that is BSkyB. It was addressed to Joe Galloway as Managing Director of Electronic Data Systems Limited, that is EDSL, and was countersigned for and on behalf of EDSL. It referred to BSkyB and “BSkyB’s existing contact centres”. The letter referred to the parties as “EDS” and “BSkyB”.
The first draft of the Prime Contract dated 19 September 2000 from Herbert Smith provided for the contracting parties to be SSSL and EDSC and recorded that the ITT had been issued by SSSL and that “Contractor”, in that draft EDSC, had issued the Response. That draft contained a limit of liability of the higher of £10m or the total amount paid to EDSC and also excluded indirect or consequential loss.
When, on 2 October 2000, Laurence Anderson of EDSL supplied to Keith Russell of Sky comments on the draft contract he noted, under the heading “Parties”, that “the contract will be entered into by Electronic Data Systems Limited, the EDS UK company not the EDS Corporation which is a US based company.”
The drafts which were produced from 2 November 2000 and the Prime Contract itself recorded the parties as being SSSL and EDSL.
Allen & Overy produced a draft on 6 November 2000 which proposed a cap limited to amounts paid less various sums. That and earlier drafts also contained an extended form of exclusion clause. There was then negotiation of the terms of the limitation of liability and exclusion clause culminating in the versions in the Prime Contract.
The Prime Contract was dated 30 November 2000 and stated that SSSL issued the Invitation to Tender and that it was for, among other things, “the retrospective fitting of environment, culture, process and technology to SSSL’s existing contact centres located at Dunfermline and Livingston”. The Response was said to have been issued by the “Contractor”, EDSL. There is a reference to notices for SSSL being sent to BSkyB with a copy to the Managing Director of Sky Services.
By Clause 1.3.2 of the Prime Contract there was a term which effectively provided that the Letter of Intent would cease to have effect on or shortly after the execution of the Prime Contract.
On 7 December 2000, EDSC entered into a deed of guarantee with SSSL which was expressed to be supplemental to the Prime Contract. By Clause 1, EDSC guaranteed the performance by EDSL of its obligations under the Prime Contract.
The question which has to be answered is whether duties were owed by the EDS parties to the Sky parties in relation to statements or representations which were made negligently by an EDS party to a Sky party.
I have found that the Entire Agreement provision in Clause 1.3.1 of the Prime Contract does not, on its terms, prevent EDSL being liable in negligence for misrepresentations made to SSSL in advance of the Prime Contract. However, the effect of Clause 20.2 and Clause 20.5 is to limit EDSL’s liability for such negligent misrepresentation to £30 million and exclude certain heads of loss.
The background to the Prime Contract shows that the EDS and Sky parties decided that the contracting parties would be EDSL and SSSL. On the basis of the ITT and the Response I consider the position was open and could have led to the contract being between EDSL and/or EDSC on the one part and BSkyB and/or SSSL on the other part. The Letter of Intent was between EDSL and BSkyB but on SSSL notepaper indicating that some but not a great deal of thought, had been given to the position for the interim arrangement. When the matter came to be considered in more detail the parties were chosen as EDSL and SSSL and not EDSC and BSkyB. The parties chose to use EDSC as a guarantor of EDSL’s liability and to choose not BSkyB as in the Letter of Intent but SSSL as the contracting party. The parties also chose to limit liability and exclude heads of loss.
If as alleged by Sky, representations were made negligently by EDSC to BSkyB or SSSL or by EDSL to BSkyB which caused loss arising out of the arrangements under which the Sky CRM System was provided under contractual arrangements between EDSL and SSSL and this loss was suffered by SSSL or BSkyB then for there to be a duty imposed between those other parties which enabled them to recover unlimited damages would circumvent the detailed provisions that the EDS parties and the Sky parties had put in place.
As Sky point out the parties did not include any provision within the Prime Contract which expressly referred to liability of EDSC or to BSkyB when they could have done so. Evidently if they had done so that would have avoided the situation. However, as is made clear in the authorities, the tests imposed to determine whether there is a duty of care and the scope and extent of any duty do not depend on whether there is an exclusion clause. They are based on questions of fairness, justice and reasonableness taking account of all the relevant circumstances.
I bear in mind that the position here is somewhat different from those situations which more often arise. This is not a case where the duty being considered is a parallel duty of care to a duty in contract. Nor is it a case of a contractual chain where the duty is said to arise between two parties separated by one or more parties in the chain. Rather it is a case where parties in a group have chosen the parties between whom to have a contract and it is sought to rely on a duty of care so that another member of the group can pursue a claim which circumvents the contractual arrangements. This is more a case which has similarities to Pacific Associates and JP Morgan Chase v Springwell.
To paraphrase the test approved by Lord Goff in Henderson v Merrett at 191: An alternative liability in tort will not be admitted if its effect would be to permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort.
As Ralph Gibson LJ said in Pacific Associates even absent the express disclaimer in favour of the engineer, to impose a duty would cut across and be inconsistent with the structure of relationships created by the contract. Or, using the test of Purchas LJ, to determine whether a duty arises in tort it is necessary to consider the circumstances in which the parties came together to see what obligations, if any, were assumed by the one in favour of the other and what reliance was placed by the other on the first. Russell LJ put it differently but to the same effect: “Given the contractual structure between the contractor and the employer, can it be fairly said that it was ever within the contemplation of the contractor that, outside the contract, it could pursue a remedy against the engineer?”
Applying the test used by Gloster J in JP Morgan Chase v Springwell the contractual documentation, whether taken at a straightforward contractual level, or looked at more widely, as an indication as to whether any common law duties of care arose, showed that the parties specifically contracted upon the basis of a relationship which negated any possibility of a duty by or to other parties coming into existence.
Applying those tests, I have come to the conclusion that a duty of care should not be imposed upon EDSC in favour of BSkyB or SSSL or upon EDSL in favour of BSkyB which would circumvent or escape the contractual exclusion or limitation of liability which the parties put in place. That contractual structure, in my judgment, negatives any possibility that such a duty of care should arise in these circumstances.
Claims under the Misrepresentation Act 1967
Sky make claims under this Act in respect of representations which they contend induced the Letter of Intent, the Prime Contract and the Letter of Agreement.
Section 2(1) of the Act provides as follows:
“Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.”
On the pleadings the claims made by Sky may be summarised as follows:
(1) In relation to the Letter of Agreement, it is pleaded that “The Claimants (Richard Freudenstein, Andrew Carney and Tony Ball) relied on the representations set out above with the result that SSSL entered into the Letter of Agreement with EDS Ltd, as it was intended by EDS Ltd that it should.” Sky rely on section 2(1) of the Misrepresentation Act. The claims for damages in respect of pre-Letter of Agreement representations are advanced by both Claimants against EDSL only.
(2) In relation to the Letter of Intent and the Prime Contract, it is pleaded that the claim for damages is advanced by both Claimants against both Defendants.
EDS refer to the fact that a claim for damages under s.2(1) of the Misrepresentation Act 1967 is only available as between the contracting parties. EDS therefore submit, and I accept, that no claim can be made under the 1967 Act against EDSC and that:
(1) No claim under the Act in respect of representations leading to the Letter of Intent can be made by SSSL.
(2) No claim under the Act in respect of representations leading to the Prime
Contract can be made by BSkyB.
(3) No claim under the Act in respect of representations leading to the Letter of Agreement can be made by BSkyB.
EDS submit that while the burden is on EDSL to establish the necessary reasonable grounds of belief and belief in the representation, the defence relates closely to the allegations of negligence made by the Claimants against EDSL at common law and if the Claimants fail to establish that the representations were made without due care, then the claim under section 2(1) of the Act should also fail.
EDS also accept that on the basis of Royscot Trust Ltd v Rogerson [1991] 2 QB 297, a decision binding on this court, the measure of damages under s.2(1) of the 1967 Act is the measure of damages for fraud. EDS reserve the right to argue in a higher court that the correct measure of damages is that ordinarily applicable to claims in negligence. The difference is that under the measure for fraud both foreseeable and unforeseeable damages are recoverable, whilst under the measure for negligence only reasonably foreseeable damage within the scope of the duty of care is recoverable.
G:THE CASE ON MISREPRESENTATIONS
Introduction
Sky allege that EDS made a number of representations at different times. There are a number of representations which are alleged to have been made prior to EDS being selected, receiving the Letter of Intent or entering into the Prime Contract, which I shall refer to as the “Initial Representations”. There are then further representations which are alleged to have been made prior to the Letter of Agreement which I shall refer to as the “Further Representations”.
In the case of the Initial Representations, it is convenient to deal with the three representations as to resources, time and cost together because much of the evidence is common to all three. I shall then deal with the representations as to technology and methodology separately.
Initial Representations
Resources, time and cost
In cross-examination of the EDS witnesses and in their closing submissions Sky developed a theme which went to the underlying basis for the alleged representations on resources, time and cost.
In a section of their closing submissions in which Sky dealt with “What EDS needed to do in order to bid”, Sky referred to the evidence of Gerard Whelan, Barrie Mockett, Peter Rudd, John Chan, Tony Dean, Steve Leonard and Joe Galloway in cross-examination as to the steps necessary to be able to submit a bid. At paragraph 86 of their closing submissions Sky summarised the position as follows:
“It is obviously correct, as a matter of common sense, that in order to honestly and properly respond to an ITT, and in particular one which indicates certain desired timescales, it is necessary to: ascertain what work is required to arrive at the client’s intended destination; prepare a plan so as to be able to assess whether it is feasible to perform that amount of work in the timescales desired by the client; prepare a resource plan identifying what resources will be required (both in terms of numbers and skill sets) and when, in order to achieve that amount of work in the desired timescale; assess in the light of that resource plan the extent to which one possesses such resources and, if one does, whether suitable resources will be available when required in order to complete the planned work in the planned timescale; and, to the extent that one does not possess the requisite resources, secure commitments from third parties to provide resources, by informing them of your requirement for resources in what type (in terms of skill sets, experience and so on) and when.”
This submission formed the basis for Sky’s contention that, on the basis of what they had in fact done, EDS had not carried out those necessary steps in relation to work/cost, time or resources.
It is therefore convenient at this stage to consider this submission about the underlying basis of the bid because it is central to Sky’s case on misrepresentation as to cost, time and resources.
The documents before the court which demonstrated the basis for the work and cost considered by EDS in their bid were the Costings Spreadsheets. In addition there were two plans, referred to as the Vine Plans, prepared by Steve Vine who was involved in the bid.
Joe Galloway gave detailed evidence of the way in which the work element in the Costings Spreadsheet was prepared and this was also dealt with by Gerard Whelan and Andy Sollis who were involved at the time. In summary, the evidence is that representatives of EDS and the consortium partners assessed the workscope and this led to estimates of effort in terms of days for particular teams. This information on effort, together with daily rates for the team members, was gathered by Joe Galloway and his spreadsheet was then handed over to Tim Webb who carried out the necessary calculations. Sky make a number of criticisms about the evidence and this process which led, in the end, to a spreadsheet which contained the figure which EDS set out in the EDS Response of £54,195,013.
In relation to time, the position is less clear. The Vine Plans were produced in April 2000 at an early stage of the preparation of the Response and pre-date all the costing spreadsheets. Those plans did not form part of the EDS Response and were based on a waterfall method of working where each stage is carried out before the next, rather than a RAD project where steps are carried out together and in parallel. If anything it seems that a waterfall programme would show a longer duration than a RAD programme. It seems that questions of time were left to Steve Vine and Mahmoud Khasawneh, neither of whom were witnesses. Joe Galloway said that he gave “no credence” to the Vine Plans. Gerard Whelan referred to the Vine Plans as being the output of the estimating process. He also referred to discussions with Steve Vine but was not aware of any more detailed plan being produced by Steve Vine. Andy Sollis was involved for a short time in April 2000 in relation to data warehousing. His evidence was that he spoke to Steve Vine to understand when other activities would be carried out on which data warehousing depended and to consider the duration for his work. He left at about the end of April 2000 and therefore could not say anything further on this aspect.
In his evidence Joe Galloway referred to discussions with members of the consortium, in particular Chordiant, on the question “do we believe that we can deliver something in nine months… that would give Sky sufficient activity to represent a new contact centre environment live in one hall”. Gerard Whelan also referred to the fact that the “result of our estimating was a belief that we could complete the work requested in Sky’s ITT and its Appendices within the nine months specified.” He appears to have gained confidence from the fact that other Chordiant projects had been completed in nine months.
In relation to resources, Joe Galloway made it clear that there had been no detailed resource planning. He said that detailed resource planning, in terms of precise numbers or specific individuals, is not carried out at the stage of a bid. He said that he had discussions about resourcing at a very general or “macro level” and did not descend to specific numbers or skills or broad timeframes. The one exception was that five people had been agreed and secured from Chordiant as set out in Joe Galloway’s email of 15 June 2000. That there were discussions within EDS based on broad requirements was confirmed by Barrie Mockett and Peter Rudd. Gerard Whelan’s evidence was broadly consistent with that of Joe Galloway. He said that there was a degree of comfort that the CRM Practice either had sufficient resources or would be able to obtain sufficient resources to deliver the project.
On that basis I now turn to consider the particular alleged representations.
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L: MITIGATION
Introduction
EDS originally pleaded their case on mitigation only in paragraph 233 of the Defence and pleaded that Sky was put to strict proof that they had complied with the duty to mitigate losses.
EDS’ case on mitigation was amended and is now pleaded in paragraphs 233 to 233FF of the Defence. That case is, in summary, as follows:
(1) That Sky failed to act reasonably in relation to six complaints: Definition of requirements; Architecture and Design; Unrealistically Compressed Schedules; Incomplete and Inadequate design; Coding and Unit Test and Non-Functional Requirements.
(2) That the failure to act reasonably in relation to the six complaints led to both non-functional and functional testing taking longer and to data migration being delayed.
(3) That, if the Claimants had acted reasonably they could have delivered Increment 2.3 by November 2005 with about 10,400 man-months of effort but would have increased the time taken by 4 months from 44 to 48 months and the effort by about 3,350 man-months from 10,400 to 13,750 man-months.
(4) That, to the extent that Merlin, Self-Service and Case Management formed part of the project and were removed or “de-scoped” by Sky and if, contrary to EDS’ case, the business benefits were as large as Sky allege, then Sky should have implemented and not have de-scoped the relevant Merlin, Self-Service and Case Management functionality. In de-scoping that functionality EDS say that Sky failed to act reasonably to mitigate their loss.
One of the late amendments was that made on Day 80 to paragraphs 233EE and 233FF where EDS sought to say that the effect of the various failures to mitigate was, essentially, the difference in effort between what Sky expended and what a competent Systems Integrator would have taken. On Robert Worden’s evidence this would obviously be small but, if he were wrong then it would be larger on Ian Murray’s figures.
Legal Principles
The parties have cited a number of authorities for the approach to be taken to questions of mitigation in this case. There is much common ground on this issue and I consider that the principles are as follows:
(1) Mitigation may be defined in terms of three principles as summarised in Chitty on Contracts (29th edition) at paragraph 26-092:
(a) A claimant cannot recover damages for any loss consequent upon the defendant’s breach of contract which the claimant could have avoided by taking reasonable steps.
(b) A claimant who avoids or mitigates his loss consequent upon the defendant’s breach cannot recover for such avoided loss, even though the steps he took were more than could be reasonably required of him.
(c) Where a claimant incurs loss or expense in the course of taking reasonable steps to mitigate the loss resulting from the defendant’s breach, that claimant may recover this further loss or expense from the defendant.
(2) The burden of proof is on the defendant, who must show that the claimant ought reasonably to have taken certain steps to avoid its loss: Roper v Johnson [1873] LR 8 CP 167 at pages 181, 184 and Garnac Grain Co v Faure & Fairclough [1968] AC 1130 at 1140 and that it could thereby have avoided some part of its loss: Standard Chartered Bank v Pakistan National Shipping Corporation [2001] 1 All ER (Comm) 822 CA.
(3) A claimant will not be held disentitled to recover the cost of remedial measures consequent on a breach merely because the party in breach can suggest that other measures less burdensome to him might have been taken: Banco do Portugal v Waterlow [1932] AC 452 at page 506.
(4) It is a question of fact in each case whether a claimant has acted reasonably to mitigate his loss: see Payzu v Sanders [1919] 2 KB 581 and McGregor on Damages (17th edition) at paragraph 7-016.
In closing oral submissions, Sky referred to a passage in the speech of Lord Browne-Wilkinson in Smith New Court v Scrimgeour Vickers [1977] AC 254 where he said at 266:
“Finally, it must be emphasised that the principle in Doyle v. Olby (Ironmongers) Ltd. [1969] 2 QB 158, strict though it is, still requires the plaintiff to mitigate his loss once he is aware of the fraud. So long as he is not aware of the fraud, no question of a duty to mitigate can arise. But once the fraud has been discovered, if the plaintiff is not locked into the asset and the fraud has ceased to operate on his mind, a failure to take reasonable steps to sell the property may constitute a failure to mitigate his loss requiring him to bring the value of the property into account as at the date when he discovered the fraud or shortly thereafter.”
At 285 Lord Steyn said this:
“The third limiting principle is the duty to mitigate. The plaintiff is not entitled to damages in respect of loss which he could reasonably have avoided. This limiting principle has no special features in the context of deceit. There is no issue under this heading and I need say no more about it.”
It is evident that the general principles of mitigation apply equally to a case of the tort of deceit. As Lord Browne-Wilkinson states, the duty can only arise when the claimant becomes aware of the deceit. In this case, Sky had become aware of the deceit certainly by the time they served their draft Particulars of Claim on 19 December 2003 and evidently some time before that. There is though no suggestion that they were aware of the deceit in March 2002 when they took over as Systems Integrator.
Issues of Mitigation
In Sky’s written closing submissions they dealt with the six complaints pleaded by EDS at length. In their written closing submissions, EDS have not dealt with the six complaints but at paragraph 1517 of their written closing submissions have stated that, on the basis of what Ian Murray had said in evidence “it seems unnecessary to examine the detailed criticisms advanced by EDS. To the extent it is necessary EDS’ position is set out in its IT openings and in [the IT experts’ Third Joint Memorandum]”. EDS went further in their written closing submissions in reply where at paragraph 338 they confirmed their view that Ian Murray’s view that a competent Systems Integrator would have performed much better than Sky made the investigation of the six complaints somewhat academic. EDS did however attach a 15 page table of extracts in relation to the six complaints. They did not, however, develop any submissions on the basis of that material.
EDS’ submissions on mitigation in their written closing submissions were based on two separate and distinct arguments:
(1) That Sky expended more effort and took longer in delivering the system than a CSI appointed in its place in March 2002 would have done; and
(2) If and to the extent that the three post-March 2006 enhancements were within scope, Sky acted unreasonably in de-scoping them.
These arguments raised the following issues: Sky’s performance and the standard of a CSI and whether the enhancements were within scope and Sky’s action in de-scoping the project. I will deal with those below.
Sky’s performance
The IT experts agree that Sky performed less well and took longer than a competent Systems Integrator. EDS rely on that as a basis for saying that Sky acted unreasonably. EDS plead at paragraph 233FF of the Defence that Sky’s conduct must be judged by the standard of what a competent Systems Integrator instructed in March 2002 would have achieved.
Sky say that EDS accept that it was reasonable for Sky to take on the role of Systems Integrator and are wrong in seeking to apply the standard of the reasonably competent and experienced Systems Integrator.
Sky refer to the decision of His Honour Judge Newey QC in Board of Governors of the Hospitals for Sick Children v. McLaughlin & Harvey plc (1987) 19 Con L.R. 5, a case where the hospital had followed expert advice in carrying out remedial work to remedy defects caused by negligence. Judge Newey said at 98 that the court had to assess whether the claimant’s actual conduct was in fact reasonable, rather than: “to consider de novo what should have been done and what costs should have been incurred either as a check upon the reasonableness of the [claimant’s] actions or otherwise.”
EDS say that Sky had time to plan the approach it wanted to take and took the view that, with the assistance of outside expertise, it was capable of carrying out the Systems Integrator role. One of EDS’ main criticisms of Sky is that, at all times until at least February 2005, Sky pressed on to get the system delivered at all costs, regardless of the constant slippage in the deadlines and wasted effort in trying to get the project done too quickly with too large a team.
Further, EDS say that Sky’s pleaded reliance on the expertise of Chordiant who carried out substantial work does not deprive Sky of responsibility for mistakes made, or poor advice given, by Chordiant. EDS submit that it is irrelevant whether the fault is that of Sky or the specialist contractor and that to the extent that the time and effort was increased by Sky’s own unreasonable conduct, it is not recoverable because Sky has failed to mitigate its loss.
EDS say that, to the extent that the time and effort was increased as a result of mistakes or poor advice given by Chordiant, it resulted from an independent cause and not from any alleged wrongdoing on the part of EDS. EDS rely on The Sivand [1998] 2 Lloyds Rep 97 at 104, where Evans LJ, having referred to the speech of Viscount Dunedin in The Metagama (1927) 29 Lloyd’s Rep 252, said:
“Viscount Dunedin referred to the act of a third party as another possible type of novus actus interveniens. It is not necessary, in my judgment, that the third party’s act must have been negligent for it to have this effect, although if it is negligent then it may be more likely to do so. I would hold that when the independent act of a third party is properly regarded as the effective cause of damage, to the exclusion of negligence for which the defendant is responsible, then that is because the intervening act was independent, not because it was or may have been negligent.
This therefore is a question of fact, to be answered on a common sense basis for the reasons suggested above, although considerations both of negligence and reasonable foreseeability may be relevant to it.”
EDS rely on the judgment of Evans LJ to establish that a non-negligent act of a third party could break the chain of causation. Sky submit, though, that Evans LJ was not dealing with questions of mitigation but questions of causation and foreseeability in the context of a negligence action. Rather Sky refer to the judgments of Hobhouse and Pill LJJ at 106 to 110 as showing that, where the claimant acted in mitigation of his loss the sole relevant criterion was the reasonableness of the steps that he took in mitigation, provided he acted reasonably he was entitled to recover the cost of mitigation as the correct measure of his loss. Sky also say that negligence by experts does not necessarily break the chain of causation and rely on Webb v. Barclays Bank plc and Portsmouth Hospitals NHS Trust [2002] PIQR P8, CA in which a doctor’s negligent treatment following an accident at work was found not to break the chain of causation. In giving the judgment of the Court of Appeal Henry LJ said at P79 that the later negligence did not eclipse the original wrong-doing.
The Court of Appeal referred to the judgment of Laws LJ in Rahman v Arearose Limited [2001] QB 351 at 366G where he said: “…it does not seem to me to be established as a rule of law that later negligence always extinguishes the causative potency of an earlier tort.” They also cited the decision of the High Court of Australia in Mahoney v. Kruschick Demolitions Pty Ltd (1985) 156 C.L.R. 522 where the court held that the negligent medical treatment did not break the chain of causation and said that the original injury can be regarded as carrying some risk that medical treatment might be negligently given.
Sky also rely on Maersk Oil UK Limited v. Dresser-Rand (UK) Ltd [2007] EWHC 752 (TCC), in which His Honour Judge Wilcox applied the judgment of the Court of Appeal in Webb v. Barclays, in finding that later negligence does not always break the chain of causation but depends on whether the negligence of the third party was foreseeable as a consequence of the original wrongdoer’s negligence.
I accept Sky’s submission. The fact that Sky may not have adopted steps that a reasonably competent Systems Integrator might have adopted does not mean that Sky acted unreasonably. Once it is established, as EDS accept, that Sky acted reasonably in taking over as Systems Integrator in March 2002, the onus is on EDS to show that Sky acted unreasonably. The fact that Sky obtained expert advice and support from specialist contractors such as Chordiant does not impose a higher duty of mitigation on Sky and, in my judgment, if Sky acted reasonably in engaging others then, absent any act which might break the chain of causation, Sky cannot be said to be failing to act reasonably to the extent that the project takes longer or costs more.
The Standard of a Competent Systems Integrator
Sky say that whether they, as a Satellite Television company, acted reasonably or unreasonably in the conduct of the project is a matter of fact to be determined in all the circumstances. They refer to EDS’ amended pleading at paragraph 233FF of the Defence where EDS plead the circumstances which are relevant to their contention that Sky must be judged by the standard of what a competent Systems Integrator instructed in March 2002 would have achieved. Those circumstances, EDS say, include:
(1) The Claimants’ leadership of the CRM programme at all times;
(2) The Claimants’ close involvement in the definition of the functional specifications at Baseline 2;
(3) The Claimants’ carefully considered decision to take over the role of Systems Integrator in March 2002;
(4) The Claimant’s retention of experienced project managers including Simon Post (a one time partner in AA), Jeff Hughes, Karen Flanagan (both of whom were originally seconded by PwC) and Rob Hornby (formerly of AA);
(5) The availability to the Claimants of expert advice and support from a range of specialist contractors including PwC, IBM, Chordiant and CSG (formerly Lucent).
Sky review each of those matters in their written closing submissions at paragraphs 783 to 809 and conclude that the circumstances pleaded by EDS, if anything, show that Sky was not and should not be judged by the standard EDS propose. Sky also say that the significance of the relevant circumstances introduced by late amendment of paragraph 233FF of the Defence on 16 April 2008 is unclear.
EDS do not further elaborate on those points in their written closing submissions. Having reviewed Sky’s submissions and the evidence relevant to those points, I have come to the conclusion that the circumstances pleaded by EDS do not go near establishing that Sky has to be judged by the standard of a competent Systems Integrator to assess whether they acted reasonably. First, the fact that Sky took over as Systems Integrator when they did and therefore became involved in managing the CRM Project and the workstreams does not mean that their conduct must be judged against that of a reasonably competent Systems Integrator so that they can only recover the costs of such a Systems Integrator. Secondly, the fact that EDS accept that Sky’s decision to take over as Systems Integrator was reasonably made meant that they did not go down the route of employing another party to act as a reasonable competent Systems Integrator. Thirdly, the fact that they employed experienced people and had expert advice and support available does not mean that they, as an organisation, have to be judged by the standard of a reasonably competent Systems Integrator.
On the common accepted basis that Sky acted reasonably in taking over as Systems Integrator in March 2002, it seems to me that the matters referred to by EDS go more to establish that Sky acted reasonably. The fact that Sky had leadership of the overall CRM programme at all times and had close involvement in the definition of the functional specifications at Baseline 2 shows that Sky was acting reasonably. After Sky took over as Systems Integrator, the fact that they retained experienced project managers and made use of the availability of expert advice and support from a range of specialist contractors including PwC, IBM, Chordiant and CSG (formerly Lucent) also indicates that they acted reasonably. Unless, as I have said above, there was some action by a third party which broke the chain of causation then Sky can recover for the loss incurred unless they acted unreasonably.
Thus I do not consider that, in judging reasonableness, the performance of the project by Sky, including the time taken, is to be judged against the performance of a competent Systems Integrator, so as to establish the degree to which Sky acted unreasonably. There will be a range of ways in which a competent Systems Integrator may act but that does not set a standard so that any failure to act as a competent Systems Integrator is thereby unreasonable conduct.
The time taken by Sky compared to the estimate for a CSI
Despite my view on the relevance of the time taken by a CSI, I consider that the fact that Sky took 296,460 man-days or 15,603 man-months (based on 19 days per month) compared to PA’s view that the effort taken by an ASI from March 2002 would have been 1,772 man-months or Robert Worden’s view that a CSI would have taken 11,178 man-months does raise a question as to which expert’s view is correct and whether the existence or absence of reasons why Sky might have taken longer supports either experts’ view. On the view that I have taken of the approaches of the experts, there is clear evidence that Sky took much longer than a CSI would have done.
EDS say that Robert Worden and PA do not substantially disagree about Sky’s conduct of the project as Systems Integrator. In particular, EDS say that PA agree at a high level with various of the shortcomings in Sky’s performance identified by Robert Worden, but disagree with most of his specific complaints.
In PA’s third report Ian Murray referred to this significant difference between the estimate for a competent Systems Integrator and the effort taken by Sky to deliver the system. He suggested that it could be accounted for as follows:
(1) That Sky made business decisions to deliver the system for new customers in advance of the delivery for all customers;
(2) That it was necessary for Sky to keep on a large team that was already in existence while the situation was assessed in order to avoid losing potentially valuable knowledge;
(3) That Capers Jones observes that the typical productivity of a Systems Integrator is higher than that of a company developing its own system. A typical Systems Integrator will outperform a typical company by delivering a 10,000 function point system in about 83% of the time using about 71% of the effort;
(4) That, once the previous three factors have been taken into account, there is a remaining balance that can be more than accounted for by mistakes and inefficiencies in Sky’s approach to developing the system that a professional Systems Integrator might have avoided.
EDS say that these factors do not explain the gap. They say that, in their fifth report, PA quantify the impact of a particular factor, schedule compression, predicting in paragraph 469, as corrected on 3 July 2008, that Sky should have taken 20 times the effort for a CSI before schedule compression. EDS say that on the basis of PA’s estimates this would have led to effort which was nearly double Sky’s actual effort. EDS say that PA have not sought to explain this extraordinary estimate or to reconcile it with Sky’s actual effort.
Rather EDS rely on Robert Worden’s evidence in paragraph 113 of the Third Joint Memorandum that PA have mis-applied their schedule compression model. EDS say that PA have wrongly sought to rely on the Putnam Myers formula under which the results of schedule compression are much more extreme than CoCoMo II, relating effort to the fourth power of time. EDS say that PA accepts that the compression was well within the impossible zone and that, in any event, the calculation is for illustrative purposes only.
EDS say that since Sky’s conduct post-March 2002 cannot credibly account for the gap in Sky’s figures, any assessment of whether Sky properly mitigated their loss must consider whether Sky’s CSI figure is correct and, if so, the plausibility or otherwise of the factors cited by PA to account for the gulf in figures between a CSI and Sky’s actual conduct.
This is an aspect where EDS chose to plead a case relying on the specific complaints. It is those to which I now turn.
The six complaints
As I have said, in their closing written submissions Sky refer to the six complaints which EDS made in relation to Sky’s conduct and which EDS say have led to an increase in the effort required. Given that EDS have not developed their submissions on these issues, I can deal briefly with the complaints.
Complaint 1: Definition and Size of Increment 2.3
EDS say that given the size of Increment 2.3 and the fact that Sky allege that business benefits derive from Increment 2.3 and not Increments 2.1 or 2.2, it was unreasonable for Sky to defer work on Increment 2.3 and they should have proceeded with requirement definition for Increment 2.3, in particular the core area of Order Creation and should have divided Increment 2.3 into smaller increments.
Sky submit that the allegation is essentially that Sky should have planned the implementation of Increment 2.3 differently so to achieve a shorter implementation period at a lower cost. I accept that and, in the circumstances it would have to be shown that Sky was aware of the deceit and acted unreasonably in the way in which they decided to implement Increment 2.3.
When Sky took over they decided to proceed first with Increments 2.1 and 2.2 and then to carry out Increment 2.3 as one increment to replace the DCMS in one go. I do not consider that these decisions were unreasonable in the context in which Sky found themselves at the time when, in any event, they were not aware of the deceit.
Complaint 2: Architecture and Design
EDS say that the Application Architecture document of May 2002 and Technical Architecture document of October 2002 were inadequate or incomplete. EDS say that these documents were not updated before late 2003 at a time when the majority of coding had begun and was in test and it was too late to influence the design on which the coding was based.
Sky say that the Application Architecture document was produced about two months after Sky took over from EDS and that the incomplete state of the document derives from EDS’ work. Sky say that, given their position, it is unsurprising that the early draft of the Application Architecture was incomplete.
I accept that the Application Architecture documents were initially inadequate but this was at the commencement of Sky’s work as Systems Integrator. Sky then proceeded to deal with Application Architecture by the Define Teams and they set up a Solution Architecture Team. It is true that there were defects which were picked up in the Design Concerns document but overall these are not matters which can give rise to a complaint in terms of mitigation. I accept Mark Britton’s evidence that the Application Architecture is to be found in a number of documents and that by the time coding was underway developers were relying on design documents which had evolved beyond the scope of Application Architecture and Technical Architecture documents.
Complaint 3: Unrealistically Compressed Schedules
By a late amendment on Day 80 EDS allege that Sky had caused or contributed to their own losses and/or failed to take all reasonable steps to mitigate by reason of the fact that, until February 2005, the planned go-live dates for Increment 2.3 were unrealistic as evidenced by a series of go-live dates that slipped. EDS say that to meet these unrealistic deadlines Sky over-compressed the schedules and this contributed to the lack of adequate design, design review, coding and unit testing.
Sky say that slippage was caused by the significant difficulties encountered during the course of the project which were not of Sky’s making, in particular, problems with Chordiant JX and performance issues arising from server-side design and code. They say that if their planning approach led to over compression of activities, then that was the unintended consequence of the legitimate desire to make progress and implement Increment 2.3 as soon as possible.
I accept Sky’s submission that the schedule was set so as to achieve Increment 2.3 as soon as possible in the light of difficulties which arose during the course of the CRM Project. On the evidence, the planning procedure, certainly in 2002 and 2003, was to set targets which were believed to be achievable and resources were then applied to meet those targets. I consider that, in the circumstances, Sky approach to planning was reasonable. I am not persuaded that EDS has established that any schedule compression caused inadequate design, review, coding and testing but it would have increased the effort.
Complaint 4: Incomplete and Inadequate Design
EDS say, first, that Sky spent insufficient time on detailed design when coding began in November 2002 with the result that the server-side design was still substantially incomplete and inadequately detailed. This allegation is part of EDS’ criticism of performance design. Secondly, EDS rely on six matters recorded in Sky’s Design Concerns document and say that Sky failed to address these concerns. Thirdly, EDS say that Sky failed to address performance issues adequately in the design phase. Finally, they say that Sky failed to carry out any or an adequate review of the architecture and high level design before proceeding to detailed design.
It is clear, as Mark Britton says, that Sky made design errors. He says that they were what could be expected from a company that was putting together a team and process and that they were consistent with a desire to implement the system as soon as possible.
The Design Concerns document was written in August 2003 by Ken Cook who collected points that had been raised by others. The document was produced as part of the “Design Amnesty” that was put in place in mid 2003. That document was obviously put together as part of a concern to make sure that the Architecture was correct. I accept that, taken overall, the evidence from Sky’s witnesses is that Sky knew about the problems, they understood them and properly dealt with them. I do not consider that this shows that Sky acted unreasonably in relation to design.
Complaint 5: Coding and Unit Test
EDS say that Sky caused or contributed to their own loss and/or failed to take all reasonable steps to mitigate their loss in two respects. First they say that they failed to carry out any effective review of the Detailed Design before proceeding to coding with the result, combined with the inadequate and incomplete design, that the code was poorly structured and inefficient. Secondly they say that they failed to carry out any or any proper unit testing against agreed acceptance criteria or any or any adequate regression testing of units after changes to code had been made.
Sky say that reviews of the Detailed Design were carried out as part of the software development life-cycle and that the composition of the Define, Development and Test teams allowed for and facilitated continual review. Sky say that, as disclosed by Sky there were Detailed Design reviews and copies of the 50 design reviews were sent to EDS. I have considered the evidence of Norman MacLeod at paragraphs 34 to 38 of his first witness statement and on Day 33 which, in my judgment, supports the conclusion that Sky carried out adequate design and code reviews. I also accept Sky’s submission that it was not an absence of code reviews that led to poorly structured code and poor quality code and then to increased testing time but it was the problems with server-side code.
In relation to Unit Tests, Sky say unit testing was carried out and refer to a CRM Programme Review of 10 March 2003 which records that they were “in the process of tracing unit test scripts in development back from test and ensuring there is a clear unit test plan for all teams” and that they were “creating a ‘link’ test within development to try and catch the glaring integration errors before moving code into full testing.” Sky say that in addition to unit testing, the development teams carried out end to end testing and dev-link testing before handing over the code to the testing teams. They say that in relation to automated testing, there were pros and cons of going down the non-automated route but it cannot be said that Sky acted unreasonably. I accept that in relation to unit testing there is nothing to show that they failed to carry out unit testing and that any problems were caused by this.
There is little documentary evidence of regression testing but I accept the evidence of Mark Britton that, based on an assessment of the timing of the defects raised, both unit and dev-link regression testing was performed. This is supported by the evidence of Richard Stobart and Rob Hughes that regression testing was undertaken as part of dev-link testing.
Complaint 6: Non-Functional Requirements
EDS say that the Non-Functional Requirements (NFRs) were not developed early enough to influence the architecture or design. They say that the consolidated NFRs were produced on 21 October 2005 which was after the design was largely completed and that any NFRs in existence at the time of the Define team exercise were inadequate.
Sky say that they followed Chordiant’s advice and that shortly after taking over as Systems Integrator they put in place an NFR team and in February 2004, they set up a Non-Functional Group. They say that NFRs were captured in a series of 15 documents that were inputs into the Define Teams and that non-functional testing started in 2004 after functional testing was sufficiently complete and the code was sufficiently stable. The document of 21 October 2005 ignores, Sky say, the earlier versions of that document.
I accept that Sky dealt with NFRs in the manner they say and that EDS’ reliance on the document of 21 October 2005 is misplaced. In any event, there is no evidence to suggest that Sky wasted effort or elapsed time in dealing with NFRs.
Summary on the six complaints
In summary, I am not persuaded that the six complaints put forward by EDS but not developed by them in closing have established a case that Sky failed to act reasonably in relation to those matters. They do not therefore establish a failure to mitigate.
De-scoping the three enhancements and failure to introduce interim Self Service
EDS contend that Sky failed to mitigate their loss in the context of business benefits because they acted unreasonably in two separate respects:
(1) That Sky acted unreasonably in de-scoping the three enhancements given the substantial benefits claimed to arise from those enhancements and the limited effort that would have been required to implement them.
(2) That, in relation to Self Service functionality, Sky unreasonably assumed that go-live for the Actual CRM system was imminent and in those circumstances unreasonably failed to consider implementation of interim Self Service functionality given the benefits claimed from such implementation and the length of time that would otherwise elapse before Self Service functionality was implemented.
De-scoping the three enhancements
Sky say that EDS’ submission fails to recognise that there were competing priorities, with the first priority being the replacement of DCMS with Increment 2.3 as soon as possible. Sky also say that EDS’ observations in relation to time and financial benefits are made with the benefit of hindsight.
Sky say that one of their key motivations for the CRM Programme was the need to replace DCMS and that the view in 2000 was that DCMS was unable to cope with demand and was in danger of collapsing, with issues of usability, maintainability, extensibility and performance.
When Sky took over as Systems Integrator, the Baseline 2 Functional Specification was divided into five increments, 2.1 to 2.5. In October 2002 Sky decided to proceed only with “Channels Scope Pre-Migration”, that is to develop Increment 2.3 merely to reproduce existing DCMS functionality in CRM and not to proceed with Increments 2.4 and 2.5.
EDS refer to Simon Montador’s evidence at paragraph 16.1 of his second witness statement. He was involved with delivery of Self Service since the time of discussions at the Woking workshop. He says that that the decision to de-scope Increment 2.3 was made in the expectation that the implementation of Increment 2.3 was “just around the corner”. EDS say that this was an unreasonable view, not simply with hindsight, but on the basis of facts known to the CRM Steering Committee in October 2002.
EDS say that although there were suggestions that Sky should consider how the Business Case would look without Increments 2.4 and 2.5, there is no evidence that this was ever done and as Ian Shepherd of the Marketing Department recorded at the time, he was concerned that the major marketing benefits were in increments 2.4 and 2.5.
Sky say that in the light of their experience of DCMS and the criticality of the system to Sky’s business, it was entirely reasonable for them to have made replacement of DCMS a top priority. They submit that the decision to descope Increment 2.3 to replace DCMS and implement Increment 2.3 as quickly and as safely as possible was entirely reasonable. In relation to the question of timing of Increment 2.3 Sky say that, in early 2003, they believed that go-live in September 2003 was feasible but, as shown in the Programme Review of 10 March 2003, Sky appreciated that there were risks of slippage and go-live might not be achieved by September 2003. Sky say that it follows that when, in February 2003, Sky were making strategic decisions about what Increment 2.3 should include, they appreciated that go-live might move out to March 2004 and the decisions to de-scope the relevant functionality were made with that knowledge.
Sky also say that they did not know in early 2003 that go-live would not be achieved until September 2005 for new customers and March 2006 for existing customers. They say that they had no way of knowing, for example, that they would experience significant performance problems with the Chordiant JX framework or the WebSphere bug in 2004 or that problems would be encountered with Data Migration in 2004 and 2005.
Inclusion of Merlin in Increment 2.3
EDS rely on the evidence of Robert Worden who sees no reason why the Merlin functionality could not have been included within the scope of Increment 2.3 and that it would have been reasonable to do so given the size of the benefits now being claimed for Merlin and Sky’s own business case for Merlin.
EDS say that Increment 2.3 included a requirement for the system to provide prompts and other assistance to enable the CA to carry out cross-selling and up-selling activity, but this capability was de-scoped in 2004 for reasons which have not been explained. EDS contend that, to the extent that Merlin functionality was in scope, Sky acted unreasonably in de-scoping that functionality and should have implemented it as part of Increment 2.3. EDS rely on Robert Worden’s estimate in paragraph 239 of his sixth report that the required effort to implement Merlin would have been about 80 man-months.
EDS also rely on Ian Murray’s evidence at paragraph 640(i) of PA’s third report that Sky “could have developed the remaining elements that relate to Case Management (number 15) and Sales (numbers 8 and 14) as part of Increment 2.3 without additional time or effort had they been specified at the outset and recognised as critical deliverables.”
EDS say: that the bulk of the development of Merlin could have been carried out independently of the CRM system and implemented as part of CRM go-live in March 2006 but Sky did not develop Merlin until late 2006.
In these circumstances, EDS contend that Sky could and should have implemented those parts of Merlin which were within scope as part of the CRM system delivered in March 2006 and could in fact have implemented Chordiant Decision Manager without significant development effort or delay to the project. As a result, they say that any delay in the receipt of the benefits from Merlin after March 2006 is attributable to Sky’s failure to mitigate its loss.
De-scoping of Case Management
EDS refer to Sky’s acceptance in paragraph 76A6(ii) of the Reply that the limited Case Management of Technical Enquiry, Customer Feedback and Damage Claims could have been delivered as part of Increment 2.3. Sky say that the Case Management functionality is more than that basic requirement and they decided to implement all aspects of this in one Case Management Planning Pack.
EDS rely on Robert Worden’s view that the simple element of functionality now relied upon by Sky could have been defined as a requirement for Increment 2.3 and done as part of it. Robert Worden’s evidence at paragraph 600 of his fourth report is that Sky could have delivered case management as part of Increment 2.3 for an effort of no more than 20 man-months and say that this is consistent with PA’s view at paragraph 640 of their third report that Sky could have delivered Element 15 without any increase in time and effort.
Conclusion on de-scoping Increment 2.3 and not proceeding with Increments 2.4 and 2.5
I have come to the clear conclusion that Sky cannot be criticised as acting unreasonably in de-scoping Increment 2.3 and not proceeding with Increments 2.4 and 2.5. The underlying purpose of the new CRM System was to provide Sky with a replacement for DCMS about which it is clear that Sky had concerns both in terms of performance and stability. I consider that Sky reasonably decided in 2003 that they had to replace the core DCMS functionality by introducing the equivalent functionality on the new CRM System as a first priority in the circumstances in which they found themselves at that stage. Whilst the decision was taken at a time when Sky thought that the implementation of Increment 2.3 would only take a few months, they were aware of the inevitable risk that even the de-scoped system would not be available within that timescale.
I consider that much of EDS’ case on mitigation in relation to the descoping is made with the benefit of hindsight and ignores the fact that once the decision to descope had reasonably been made the priority became the implementation of the core CRM System as soon as possible. In relation to any delay that then occurred the natural and reasonable reaction of Sky would not have been to seek ways to increase the scope so as to re-introduce the de-scoped parts of the project with its impact of the programme and resources. The fact that the de-scoped parts of the project might have involved a small amount of effort to achieve significant benefits does not, in my view, render the decision to de-scope those parts or not to re-introduce them at a later stage unreasonable when viewed in the light of all the circumstances relevant at the time.
Earlier delivery of Self Service
EDS submit that Sky could and should have delivered certain elements of the functionality by developing a stand-alone form of Self Service independently of the CRM system; alternatively, that Sky could have delivered the remaining elements no later than February 2003 by developing the web front end applications in Vignette, as Sky did post-March 2006 and building a non-invasive interface to the DCMS system by “screen-scraping” so as to avoid risking the stability of DCMS. EDS rely on Robert Worden’s evidence that this would have enabled the self-service applications to go-live at any time, independently of Increment 2.3 and that the only costs which would have been thrown away would have been the relatively small costs of interfacing the web front-end with DCMS.
Sky say that it did not act unreasonably in not introducing Self Service functionality in the form of either a stand-alone system or by using screen scraping. They refer to the priority of replacing DCMS with the CRM System because of concerns about the stability and performance of DCMS. Sky rely on Mark Britton’s view that, given the contemporaneous records of DCMS performance and stability and the likely impact on DCMS of a system that was capable of providing Self Service to an adequate standard, it would have been reasonable for Sky to have ruled out expansion of the existing Self Service facilities even by non-invasive methods.
Sky refer to the fact that EDS do not rely on a particular date in late 2003 or 2004 or 2005 and say, at that point, Sky could not possibly have believed that Increment 2.3 would be completed on the date then contemplated and that it was therefore incumbent upon Sky to reconsider their strategy on the functionality which had been de-scoped. Sky say that the idea that in 2004 or 2005 Sky acted unreasonably in failing to add more functionality and more complexity with the result that greater effort and more time would be needed is untenable, quite apart from risk to the project that would be created.
I now consider the two methods suggested by EDS for providing an earlier implementation of Self-Service.
Stand-alone Self Service
Self Service functionality for web or STB Self Service is provided by front-end applications which provide the user interface, data validation and processing for self service transactions. In some cases there would need to be a link into the back-end system.
EDS say that where Self Service requires access to customer data, there will need to be a link of some sort with the CRM back-end system but the link need not be in real time or automated and can be provided by the overnight batch transfer of data between the front-end and back-end systems. EDS say that there seems no technical reason why Sky could not have extended the “view bill” functionality to the web or have supplemented the amount of information which the customer was able to view.
EDS say that where there is no need for access to customer data, such as technical enquiries, Sky could have implemented Self Service independently of the CRM system at any time and did, in fact, implement technical FAQs on the STB in 2005. They submit that any delay in migrating technical enquiries to self service is therefore attributable to Sky’s failure to implement stand-alone technical self service and has nothing to do with the delayed delivery of the CRM system.
Sky rely on Mark Britton’s view that the stand-alone system would be complex and need to replicate much of the functionality in the CRM System but would be limited by the capacity and stability of DCMS. He also refers to the need for additional functionality to synchronise data between both systems in both directions and the difficulty of the length of time that overnight batch processing was taking which would have meant that there would not have been enough time in the day to keep both systems up to date.
I do not consider that Sky acted unreasonably in failing to introduce a stand-alone Self Service system. I am not persuaded that such a modified form of Self Service was a realistic and practical proposition to introduce Self Service functionality on an interim basis. Robert Worden accepted that he had not explicitly considered the quality of a stand-alone system with a Self-Service front-end interfaced with DCMS and there would clearly be complex issues which would require extensive analysis to reach any definite conclusion on this. Whilst Robert Worden said that he saw no decisive argument for the limitations of DCMS leading to an unacceptable quality of service, I am not persuaded that there is any sound basis for this view, in the absence of some analysis of what would have been required to provide stand-alone functionality.
Further, in relation to Robert Worden’s reliance on the fact that Sky had interfaced some Self Service functionality with DCMS for a number of years, I accept Sky’s submission that the IDO functionality implemented by Sky in 2000 and 2003 was much more limited than the Self Service functionality envisaged by Elements 16 to 21 and no conclusion can be drawn from the performance of the IDO functionality. The interface implemented in 2003 between DCMS, IDO and FMS was limited because it only delivered Self Service functionality permitting existing and new customers to purchase Sky+ and an extra digibox online.
Screen scraping DCMS
Essentially a screen-scraped solution would have involved the writing of a program so that the input and output would have operated as if the task was being carried out on the DCMS.
Robert Worden considers that an interim form of self service could have been implemented by screen-scraping customer data from DCMS and that this solution would have avoided making changes to the code of DCMS and thus the risks posed by the perceived instability of the system. Mark Britton does not consider that a workable self service solution of this type could have achieved adequate performance and rejects Robert Worden’s suggestions for overcoming performance issues such as a “pre-fetching” strategy.
Sky again rely on Mark Britton’s evidence that there would be problems with the response time of DCMS exacerbated by the need for a Screen Scraped Solution to navigate across several DCMS screens to gather the data for a single Self-Service screen.
Whilst it might in principle provide a solution to long response times, I am not persuaded that Robert Worden’s suggested solution of using a “pre-fetching” strategy was workable and I accept Mark Britton’s evidence that pre-fetching would make the system much more complicated and extend development timescales.
Robert Worden fairly accepts the points raised by Mark Britton as being valid issues which would have to be considered. In the absence of a proper system design or some comfort as to performance, I am not persuaded that the screen scraping solution would have been a viable and practical solution to provide the required self service functionality on an interim basis.
Self service as part of CRM 2.3
EDS also rely on Robert Worden’s view that Sky could have developed self service largely independently of the CRM system and implemented it with the CRM system within the scope of Increment 2.3.
EDS say that the true position is that there was no particular sense of urgency about extending the existing self service functionality until Sky acquired Easynet in October 2005 and that it was that acquisition which gave the necessary impetus to the self service projects as Sky perceived that it would need to offer online services in connection with its new Broadband product.
Sky submit that it was reasonable for Sky to de-scope Self Service from the CRM System and therefore that it cannot be said that it was unreasonable not to implement Self-Service independently of the CRM System. They say that an independent Self-Service project would be a significant undertaking requiring at least the same effort, resources and management time that would have been required for Self Service within the CRM System and that it would be inevitable that there would be an impact on the CRM System with resources being diverted away from the main objective of delivering Increment 2.3.
Conclusion on Self Service
As I have said above, I consider that the decision by Sky to de-scope Increment 2.3 and not to proceed with Increments 2.4 and 2.5 was reasonable. In such circumstances the suggestion by EDS that Sky acted unreasonably in not introducing Self Service functionality by a stand-alone system, by screen scraping or by proceeding independently of the CRM System, faces difficulty.
I do not consider that EDS have established a case that Sky acted unreasonably in failing to introduce an interim scheme of Self Service in the form of a stand-alone system or by using screen scraping. Both of those interim developments would have faced particular difficulties and, as I have said, I am not persuaded that they would have provided viable and practical Self Service functionality on an interim basis. I am also not convinced that, in any case, much of the effort which would have been expended in developing those interim systems would have provided usable functionality for the CRM System. Nor do I consider that, having de-scoped Self Service, it can be said that Sky acted unreasonably in not introducing Self Service functionality as a parallel system to the CRM.
In my judgment, Mark Britton was also correct in his view that it was unlikely that a system could have been produced which would have achieved sufficient quality to deliver the required benefits either by screen scraping or by building a stand-alone system and transferring data to DCMS in batches. In particular, I consider that the potential number of concurrent users would have been likely to lead to performance issues with these interim solutions.
Summary on Mitigation
In relation to Sky’s performance from March 2002 to March 2006 I accept that there is a large gap between the effort and time which Sky took to complete the Actual CRM System and the effort and time which a competent, alternative Systems Integrator might have taken to achieve that implementation. There are a number of reasons why that might have happened. Those put forward by Sky such as schedule compression could account for some of the gap. EDS has sought to rely on particular deficiencies but I do not consider that they have established a case that the additional costs were caused by Sky acting unreasonably and thereby failing to mitigate their loss.
I do not consider that EDS can merely rely on the gap between the effort and time which a competent, Alternative Systems Integrator might have taken and seek thereby to establish that Sky acted unreasonably. Sky acted reasonably in taking over as Systems Integrator and proceeded in an attempt to achieve go-live as soon as possible using EDS personnel and other external specialist resources. Inevitably there were problems in achieving go-live but that does not establish that Sky acted unreasonably.
Further, for the reasons set out above, EDS has not established that Sky acted unreasonably in de-scoping Increment 2.3 and not proceeding with the implementation of Increments 2.4 and 2.5. They reasonably took the decision to concentrate as a priority on achieving a replacement of DCMS by the core functionality of the CRM System.
In addition, I do not consider that Sky acted unreasonably in not introducing some form of interim Self Service functionality by a stand-alone system or a screen scraping system based on DCMS. Nor was it unreasonable for Sky not to seek to develop separate Self Service functionality in parallel with the development of the CRM System.
As a result, I do not consider that Sky failed to mitigate their loss by acting unreasonably in implementing the Actual CRM System or by de-scoping or by failing to introduce Self Service functionality at an earlier date.
M: BUSINESS BENEFITS
Introduction
It is common ground that the new and improved functionality provided by replacing the original DCMS system with the Actual CRM System gives rise to business benefits. Sky claims damages for the delay in being able to enjoy these business benefits because of the late delivery of the CRM Project compared to the position it would have been in under Scenarios B1 or B2, with either PwC or an ASI producing the relevant CRM System. Those business benefits consist of two aspects: a reduction in “churn” and a reduction in the number of calls made to the call centre.
Sky say that they lost the benefit of the financial contribution from subscribers who “churned” or ceased to be Sky customers but whom they would have been able to retain if the CRM System had been implemented earlier by either PwC in Scenario B1 or by an ASI in Scenario B2. In this way it would have been able to reduce “churn”.
Sky also say that another of the benefits envisaged from the new CRM System was a reduction in the number of calls which would be made to the call centre. Sky say that they would have been able to reduce the volume of incoming calls by the earlier implementation of the PwC or ASI CRM Systems and so would have been able to reduce call centre staff and make costs savings.
In evaluating the benefits which would have flowed from implementing the PwC or ASI CRM System at an earlier date than the Actual CRM System, it is common ground that Sky must give credit for the additional costs of operating the system from the earlier dates on which the PwC or ASI CRM System would have come into operation.
Sky plead that functionality equivalent to Phase 1 and Increments 2.1 to 2.5 of Phase 2 of the Actual CRM System would have been delivered by the PwC CRM System, although the PwC CRM System would not have been delivered in those stages. Similarly they plead that an ASI would have delivered a system with the same scope.
In response to a Request for Further Information dated 22 June 2007, Sky set out 22 elements of functionality which they contend would have formed the relevant functionality in Phase 1 and Increments 2.1 to 2.5. They amended the description of Merlin functionalities 8 and 14 on 14 January 2008. It is these 22 elements of functionality which are therefore relied by Sky on as giving rise to the benefits.
There are three particular aspects of functionality which were not delivered wholly or at all as part of Increment 2.3 but for which Sky makes a claim. They are Merlin, Self-service and Case Management, which I shall refer to as the “three enhancements”. These three enhancements are described by Sky as follows:
(1) Merlin: This is the name of a project by which Sky introduced functionality to make customer information more easily accessible and intelligible to Sky’s CAs via an extra “tab” located in Chordiant. The purpose of this functionality was two fold. First to enable the CAs to have easier access to information in relation to each customer, such as information of what products the customer has, how recently the customer upgraded their equipment and whether they had a history of “churning”. While this information was available in the Actual CRM System in March 2006, the purpose of the Merlin functionality was to make it more immediately and clearly accessible by presenting it in a customer information panel available in Chordiant. Secondly, the purpose of Merlin functionality was to provide cross-sell and up-sell prompts tailored to each customer’s characteristics. For example broadband would only be prompted for someone who lived in a Postcode area where broadband was available. This would allow the CA to identify suitable products, packages and offers for each customer.
(2) Self-service: This is functionality which allows a Sky customer to undertake certain customer service transactions or account management tasks without interacting with a CA at Sky. It involves the use of other channels of communication such as the internet, interactive voice recognition technology (“IVR”) or the set-top box (“STB”).
(3) Case Management: Sky defines this as is functionality which allows Sky to track each enquiry or “customer contact” and to analyse when and how it is resolved.
The implementation of the Actual CRM System
The Actual CRM System was implemented in a number of stages. The first stage was the introduction of a new telephony switch, referred to as the Avaya switch, in February 2001. Although this change features in the list of 22 elements of functionality, it is not relied on by Sky’s experts.
The second stage was the Knowledge Management System (KMS) which was introduced in February 2002. Until the implementation of the Actual CRM System in March 2006, this was available only as a stand-alone system, except to 200 CAs at any one time who could access it within the Chordiant wrapper.
The third stage was the initial “go-live” date for the Core Functionality of the Actual CRM System for new customers in October 2005. Between October 2005 and March 2006, Sky operated both the DCMS and the new CRM System. The DCMS was used to deal with existing customers as at October 2005 and the Actual CRM System to deal with new customers.
The final stage was the introduction in March 2006 of the Actual CRM System for all customers, when the data for existing customers as at October 2005 had been migrated to the Actual CRM System. At this stage, the DCMS was disconnected completely. This then formed the go-live date for what has referred to as the “Core Functionality”.
Following go-live in March 2006, there have been further developments of the Actual CRM System:
(1) Additional Self-Service functionality was introduced. As Simon Montador states in his third witness statement and sets out in the schedule at SAM1 various additions to self-service were made at different dates. The Churn Rate experts have based their calculations on the assumption of a specific implementation date of additional functionality in December 2007, with a 2 year learning and development period.
(2) After pilot testing between December 2006 and July 2007 and a limited roll-out beforehand, Merlin was only fully rolled-out in March 2008. Helen Jenkins assumes an implementation date of August 2007 and a 2 year learning and development period whilst Merlin Stone assumes implementation within the general 2 year learning and development period from March 2006.
(3) Case Management had not been implemented even to the extent of the limited functionality relied on. Helen Jenkins assumes an implementation date of December 2007 and a 2 year learning and development period whilst Merlin Stone assumes implementation within his general 2 year learning and development period from March 2006.
Approach to the Business Benefits Claim
In order to assess Sky’s claim it is necessary to consider the extent to which the Actual CRM System increased the functionality which Sky had with the DCMS system. EDS submit that this is not all that Sky must show to establish a claim for business benefits. They contend that Sky’s claim for lost benefits must be limited to those benefits which were lost as a result of the delay in the implementation of the CRM System. EDS submit that it is the loss of the incremental benefit associated with the implementation of the CRM System over and above the position it would have been in, for which Sky are entitled to claim. The situation it would have been in has been referred to as the “Business as Usual” (“BAU”) position.
EDS say that Sky’s business strategies play an important role in managing customer retention and keeping down call centre costs and Sky had many tools, techniques and strategies for reducing churn and call rates prior to the introduction of the CRM System. Thus EDS submit that benefits which are derived from new strategies, such as entering the market as a broadband provider by acquiring Easynet in October 2005, were not dependent on the CRM System which is only a tool which can be used to assist the CAs in doing their job to implement the strategies. EDS say that Sky can only recover for benefits which Sky was not in a position to realise in the absence of the CRM System.
In principle, I consider that EDS is correct but equally I must bear in mind that with the DCMS there were limits to the extent to which Sky could or as a matter of practicality would develop certain strategies.
In order to come to conclusions on these matters it is necessary to approach the subject by first reviewing the 22 elements of functionality. These Elements can be divided into two. First, there is “Core Functionality” which was provided by the Actual CRM System and which it is accepted would have been provided by either the PwC or the ASI CRM System. The issue here is largely concerned with the extent to which the CRM provides functionality and usability over and above the DCMS.
Secondly, there are the three enhancements: Merlin, Self-service and Case Management. In terms of the 22 elements of functionality, Elements 8 and 14 relate to Merlin functionality but Elements 3 and 7 were also enhanced by Merlin; Elements 16 to 21 relate to additional Self-service functionality and Element 15 relates to Case Management. In relation to the three enhancements there is an issue concerning the extent to which they would have been part of the PwC or ASI CRM Systems, as well the extent to which the CRM provides functionality and usability over and above the DCMS.
Once I have reviewed the 22 elements of functionality, I shall then be in a position to consider the impact of the relevant functionality on churn rate and on call rate.
The 22 elements of functionality
In closing Sky summarised the effect of the functionality which they rely on as relating to two main areas: information and usability. In summary what they say in relation to information is that the Actual CRM System is better at collecting information, improves the accuracy of information, displays more information which is collected or comes from the KMS or is prompted or scripted through Merlin, allows information collected to be analysed by Sky’s management, with the data capable of being updated manually or automatically.
In relation to usability, Sky say that the system is easier for CAs to use in terms of finding information quickly, the screens being more readable and the data accessible; that the system is more flexible so that Sky can obtain reports, reconfigure screens and adjust information on KMS or in scripts more easily and that, with self-service facilities, the customer can make use of the system more easily.
EDS say that, whilst the Actual CRM System has improved usability, Sky have exaggerated the improvements. In relation to information EDS say that information was either available or could have been made available from the DCMS.
The dispute between EDS and Sky concerning which of the 22 functionalities would have been delivered by either the PwC or ASI CRM System was greatly narrowed by the IT experts’ Fourth Joint Memorandum. The position reached is that EDS accepts that both the PwC and ASI CRM Systems would have delivered all Core Elements (Elements 1, 2, 3, 4, 5, 6, 7, 9, 10, 11, 12 and 13) and the other Elements except that:
(1) Elements 3 and 7 where the difference is the extent to which functionality equivalent to the Actual CRM System rather than the Merlin enhancement would have been delivered.
(2) Elements 8 and 14, Merlin, where the issue is whether the functionality would have been based on off-line propensity modelling/evaluation with later on-line propensity modelling or whether it would have been based on propensity models produced by Sky from outside the programme.
(3) Element 9, KMS, where there is a difference in the date when PwC would have delivered it.
(4) Element 15, Case Management, where the difference is whether the functionality in PwC would have required bespoke development or would have been part of the normal Siebel configuration and extension.
(5) Elements 17(b), 18, 19 and 20, Self Service, where the issue is whether “change a payment due date” in Element 17(b) would have been included and the extent to which Elements 18, 19 and 20 would have been delivered.
I shall deal with those issues as I review each of the 22 Elements.
Core Functionality
Element 1
Element 1 is functionality to “enable calls to be directed towards appropriately skilled CAs using skill based routing”. It is common ground that this functionality was delivered with the Avaya telephony system in March 2001 and would not have been delivered any earlier by PwC or an ASI. It is not relied on by Sky or the Churn experts. However Neil Spencer-Jones relies on this Element as he attributes the improvement in Sky’s TCR performance relating to the number of calls to resolve 100 issues between 2000/1 and 2001/2 to this and other elements delivered at that time.
Element 2
Element 2 is functionality to “enable the CA to navigate around the system using a point and click interface. For example, instead of ‘tabbing across’ and using free-text entries, the CA can use a mouse to: (a) access further screens by clicking on ‘link’ buttons or screen tabs; or (b) select options, or input information by clicking on ‘radio’ buttons or using drop- down menus.”
EDS accept that the Actual CRM system permits navigation via a point and click interface and that this represents a change from the DCMS system, which used function keys and code entry. EDS submit that there is some minor improvement in navigability, particularly for inexperienced CAs but that this improvement is to some extent counter-balanced by the greater number of screens to navigate in the CRM system.
Sky submit that the use of the CRM system with graphical user interfaces, point and click navigation, drop down menus, radio buttons, option buttons and trees represents a vast improvement on data entry and navigation over the tab and arrow keys, short cut codes and scrolling text fields that existed in DCMS.
In my view the use of the screen navigation system on the CRM will allow CAs, particularly those who are new or inexperienced, to be able to become more competent in the use of the system more quickly and also allow all CAs to be able to obtain information in a more efficient manner than with the DCMS.
The Churn Rate experts agree that the CRM system delivers an improvement in respect of this functionality but there is an issue as to the extent of the improvement. Helen Jenkins considers the improvement to have a minor effect whilst Merlin Stone considers it to be significant.
In terms of call rate, Neil Spencer-Jones considers that there will be no benefit and that call duration would increase as would the number of calls unanswered. Simon Roncoroni considers that the improved functionality assists CAs to select appropriate options and minimise errors and that this should reduce the need for subsequent calls to resolve problems.
Element 3
Element 3 is functionality to “enable the CA to view relevant customer information presented clearly on key screens, and management to change the customer information presented to the CA (and the way in which it is presented) on those key screens.”
EDS accept that the Actual CRM System provides a clearer view of customer information compared to the DCMS, in that more lines are visible on screen at once, the free text notes are visible in the same window and account details are summarised in a “Customer” tab. Sky emphasise that there are two aspects, the presentation of information and the introduction of new screens or the reconfiguration of existing screens.
As EDS accept, the ability to view information relating to the customer history is clearly much improved in the Actual CRM System. In relation to churn, Helen Jenkins agrees that the display of customer information is improved in the CRM.
Neil Spencer-Jones does not attribute any call rate benefit to this element as he says that he cannot say whether a CA could more readily find and select information to complete a call. Simon Roncoroni does attribute benefit to the fact that the presentation of information will reduce customers calling back to correct errors and the ability to change the screens will ensure that CAs have more convenient access to information and can resolve customers’ cases.
It is evident that the Actual CRM System provides a clearer view of customer information than was available in the DCMS and this is an improvement. I consider this Element further, below, in the context of Merlin.
Element 4
Element 4 is functionality to “enable the CA to manipulate relevant customer information. For example, the CA can sort, search or filter a customer’s previous interaction history.”
EDS accept that the sort function is improved in the Actual CRM system as compared with the DCMS.
Helen Jenkins accepts that there is an improvement but EDS submit that Merlin Stone exaggerates the change from the DCMS which they say did have some ability to sort entries.
Neil Spencer-Jones does not rely on the improved sort function as giving rise to benefits as he considers that the length of the conversation with the customer is not dependent on the time to access data. Simon Roncoroni considers that the CA usually needs to find information about previous customer interactions during a live telephone call and that ease and speed of search is critical.
Element 5
Element 5 is functionality to “enable the CA to capture customer information (including information about general customer enquiries, and information about technical enquiries) using ‘radio’ buttons, drop-down menus and/or full free-text fields. In particular, the CA can capture information using ‘radio’ buttons and drop-down menus about the type of each enquiry, and the outcome of each enquiry.”
EDS say that the DCMS permitted free text entries and the entry of pre-defined reason codes which varied according to the type and outcome of the enquiry. They also say that customer information codes could also be captured on the telephony platform using the call reason codes. EDS also refer to the evidence of Gary Innes to the effect that functionality permitting the capture of information about a customer’s circumstances and preferences was implemented as part of Phase 1 but was deactivated prior to the go-live of Increment 2.3.
EDS accept that the Actual CRM system generates more automatic entries of data as compared with the DCMS and that free text entries can be updated.
Sky rely on certain aspects of the ability of the Actual CRM System to capture data. They say that:
(1) Because data is entered by the CA through the selection of pre-defined options, it is collated in a standard form from call to call and with minimal effort from the CAs. The entry of data is a compulsory requirement, unlike the DCMS where data did not have to be captured. Whilst the DCMS had an “add note” function which allowed the CAs to add free text notes, they were not searchable and could not be exported to the data warehouse to be interrogated and analysed.
(2) Data captured is not only used for display to subsequent CAs in the “Contact History” screens but is also exported to the data warehouse connected to customer records and is available for later analysis and reporting: see Element 13.
Helen Jenkins and Merlin Stone both rely on this as having an impact on churn. Neil Spencer-Jones does not consider that the interface which allows data to be entered will mean that more accurate data is captured. Simon Roncoroni considers that there is improved data capture which improves FTR and that Call Avoidance is improved because there is “richer” or better data which can be used to carry out root cause analysis.
I consider that this Element of functionality provides an important improvement as it allows Sky to capture data in a standard, comparable format and that data is linked to a customer record. This data is then available to be analysed as set out under Element 13 below.
Element 6
Element 6 is functionality to “enable the CA to create and price different packages for a customer by selecting individual products and services.”
EDS accept that the Actual CRM system is able to present the CA with a hierarchy of products which would serve as a navigation tool to identify appropriate products for the customer but say that, according to Gary Innes’ evidence, the functionality is not being used as intended because Sky’s Field Management System can only handle pre-defined packages.
Sky say that creating and pricing packages for customers in DCMS and FMS was not an easy process because with 520 packages and the DCMS only being able to hold 10 lines of text per page, 52 screens had, potentially, to be scrolled through unless the CA knew the short cut code for a package or knew what “mix” (2, 4 or 6) the customer wanted.
Sky say that the collation of a package is much easier using the CRM System because all products (subscription, equipment, broadband and telephony) are selected from the same screen with individual branches of a tree structure used to select what is required in respect of each.
Helen Jenkins accepts that there is an improvement in the use of a “tree” structure in the CRM System compared to the list in DCMS but does not rely on it as reducing churn whereas Merlin Stone does.
Neil Spencer-Jones does not rely on this element but Simon Roncoroni considers it does have a benefit in improving FTR in relation to sales calls but accepts that it is not a major contributor to FTR improvement.
Whilst there is some benefit in the ability to create packages to offer to customers, I do not consider that the improvement in this area is very substantial. There would be improvement from the “tree” structure but under the DCMS the CAs would rapidly develop the ability to scroll down through screens to select appropriate packages.
Element 7
Element 7 is functionality to “enable the CA to identify appropriate offers for which a customer is eligible.”
EDS accept that Merlin provides prompts which enable the CA to identify offers for which a customer is eligible.
Sky say that the Actual CRM System ensures that system rules prevent inappropriate or erroneous use of offers; that a CA’s attention is drawn to available offers and that multiple offers can be applied to a single customer.
Sky accept that offers could be identified in DCMS as a list of all offers was available but they say that the list was not filtered by product or customer, was not user specific and the DCMS did not allow more than one offer to be applied to a customer. Sky say that CAs were unable to identify eligible offers quickly and could not give a customer more than one offer. Sky also say that CAs were only provided with manual briefings and hard copy materials to inform them of available offers and eligibility criteria.
Under the Actual CRM System and independently of Merlin, Sky say that offers could be located by a CA in any “Make Sale” transaction, as well as the “Apply Offers” function. In a “Make Sale” transaction, the offers screen automatically appears as part of the forced screenflow which CAs must follow.
Sky rely on the fact that, on the basis of the application of various rules relating to a customer, the CA team and the combination of products already held by that customer and those placed in the order, the system automatically displays the available offers, applying automatic discounts and extras without the CA having to remember them.
Helen Jenkins accepts that the identification of suitable offers delivers some benefit in the context of Value for Money (VFM) churn or home moving churners who also have those concerns. Merlin Stone considers that benefits are applied across the board as it improves offers.
Neil Spencer-Jones places no reliance on this element. Simon Roncoroni says that making appropriate offers to customers is likely to improve FTR as customers would not have to call back to find a different offering, although the fact that Sky does not have a complex offer structure would reduce this.
I am persuaded, particularly by viewing the screenshots, that there was improvement in the ability of CAs to identify eligible offers for a particular customer using the Actual CRM System, compared to the DCMS. I accept that the Actual CRM System has rules to prevent inappropriate or erroneous use of offers. It draws the attention of the CAs to available offers and permits multiple offers to be applied to a single customer account. I consider this Element further, below, in the context of Merlin.
Element 9
Element 9 is functionality to “enable the CA to access a knowledge management system, including decision tree diagnostics.”
Essentially, the Knowledge Management System (KMS) is a system which stores information electronically instead of being in hard copy form in A4 binders to which the CAs had access. This means that the information in the KMS is easier to access and easier to maintain as it can be updated centrally. Sky say that it has improved the accuracy, consistency and accessibility of information available to CAs and therefore improved the level of service they have been able to provide to customers.
EDS accept that the KMS, which was implemented in February 2002 as part of Phase 1, has delivered churn rate benefits for Sky. Helen Jenkins considers that any benefit derived from KMS will have been derived upon its implementation in 2002 and arises from the CAs having access to information in electronic and searchable form. She does not consider that further benefit accrues either from the integration of KMS into the Chordiant environment or from the MOJO redesign of that system. EDS say that this view is consistent with Sky’s RFI Response that KMS had delivered “recognisable business benefit” and that this was accepted as correct by Jo Ashcroft.
EDS say that the subsequent integration of the KMS into the Chordiant environment did not bring about any further benefits, nor would additional benefits have been available in either of the “but-for” scenarios relied upon by Sky.
Sky accept that the information now available to CAs on screen through the KMS and now known as MOJO, was delivered first as an initial rollout of stand-alone KMS in February 2002 as part of Phase 1 and then the KMS was integrated with the Chordiant-wrapper of DCMS but was only available to 200 CAs at a time. Prior to the implementation of KMS, Sky say that CAs had to resolve customer queries by relying on their initial training and on hard copy prompts which needed to be reprinted periodically to keep information up to date.
Merlin Stone considers that a greater benefit was delivered from the ability to open the KMS screen from within the Chordiant application than from the introduction for the first time of an electronic, searchable KMS database to replace individual A4 binders. He also considers that there was additional benefit from the later re-launch of KMS as MOJO.
Neil Spencer-Jones considers that the early implementation of the KMS will have improved First Time Resolution, in conjunction with other elements of the CRM programme such as the new telephony system. EDS say that this is confirmed by Jo Ashcroft. Simon Roncoroni considers that there will be an FTR benefit available through the integration of KMS/MOJO into the CRM system.
I consider that the greatest benefit and improvement was obtained by the introduction of the stand-alone KMS rather than hard copy documents which had to be referred to by the CA to deal with a call. The subsequent integration with the Chordiant-wrapper of DCMS and then with the Actual CRM System has, in my judgment, produced additional availability of and accessibility to the KMS. So far as the date on which PwC would have delivered the KMS, on the basis of my finding that PwC would have delivered the PwC CRM System after February 2002, I consider that the KMS would have been delivered as part of that integrated PwC CRM System and not as a separate delivery in February 2002.
Element 10
Element 10 is functionality to “enable the CA to use a field management system through an integrated CRM system.”
The Field Management System (FMS) was not integrated with the DCMS but the Actual CRM system is integrated with the FMS. This permits the CA to book an installation or service call without having to go into a separate system and re-enter the customer data. EDS accept that this is an improvement over the position pre-CRM, the main benefit relevant to business benefits being a reduction in errors in data entry.
EDS refer to the evidence of Jo Ashcroft and say that there is no evidence of the extent to which data entry error was a problem in DCMS and therefore as to the degree of improvement which the CRM system may have brought about, although she referred to small elements of functional change, including the integrated calendar and integrated postcode checker.
EDS also refer to the evidence of Jo Ashcroft on Day 86 and Merlin Stone on Day 91 as showing that the need to toggle between two screens in DCMS compared to the Actual CRM System was a minor change and that such toggling is quickly performed.
Both Helen Jenkins and Merlin Stone consider that this would improve Customer Service and Home Moving churn.
Helen Jenkins says that there is an improvement to Customer Service, as it eliminates the risk that mistakes could have been made by the CAs in transcribing the account number and hence booking service calls to the wrong address. She says that this will improve the service related elements of Home Moving churn.
Neil Spencer-Jones says that this element will not deliver any call rate benefit, because the need to toggle between screens is a normal activity in Windows. Simon Roncoroni relies upon this element as improving FTR, but accepts that the benefit is limited to install calls.
There is evidently an improvement in being able to enter data once only so that errors are reduced in copying that data across or entering it into FMS. As EDS point out there is a lack of data on the extent to which errors caused a problem. The fact that the functionality is contained in one screen and therefore a CA does not need to toggle between screens is, in my judgment, a minor advantage which would not otherwise give rise to particular benefits.
Element 11
Element 11 is functionality to “enable the CA to arrange for a customer about to move home to continue his relationship with Sky.”
EDS say that although this is singled out as an element in its own right by Sky, the Actual CRM system does not incorporate any new functionality which is specific to Home Moving but it is the other elements, such as Element 10, which make the improvement.
EDS do not consider that the Actual CRM system incorporates any improvements in functionality relevant to Home Moving over that of the DCMS system.
EDS say that the DCMS had the functionality to add a second address and a date on which that address would become the primary address. EDS accept that the Actual CRM system permits a customer to be contracted into a new service at a new address before moving home.
Merlin Stone relies upon the changes to the data warehouse to record two addresses as being a specific benefit to Home Moving. He says that the ability of keeping track of the old and the new address allows Sky to identify new prospects at the old address and also take advantage of the move to promote up-sell and cross-sell opportunities.
EDS say that, to the extent that the data warehouse was unable to record new and old addresses for a customer moving house, this is not attributable to the absence of the Actual CRM system and is a matter which Sky could have addressed at any time. EDS say that Jo Ashcroft’s evidence in paragraph 52 of her second witness statement and on Day 86 demonstrates that the new data warehouse delivered with the CRM system has the capability to record two addresses against a customer record, whereas the old data warehouse, MIDAS, could not.
EDS say that Jo Ashcroft’s evidence does not show whether Sky had looked into the question whether it was possible to configure the data warehouse to hold two addresses and Neil Spencer-Jones says that MIDAS could have been changed to hold two addresses.
Helen Jenkins considers that the CRM system delivers negligible new functionality in relation to home moving and she attaches no reliance on this element as delivering any churn rate benefit.
Neither Neil Spencer-Jones nor Simon Roncoroni attribute any benefit to this element.
I have no doubt that the ability of the data warehouse to store two addresses is an improvement which has created benefits. Whilst I accept that Sky might have introduced a capability into MIDAS to store two addresses, I consider that the advantage of doing so was to add the function as part of the increased functionality of the Actual CRM System.
Element 12
Element 12 is functionality to “enable the CA to initiate automated post-call posting of paperwork.”
In the DCMS system the CA had to initiate the sending of correspondence but the content and sending of the letter was automated. In the Actual CRM system the initiation of the sending of the letter is also automated.
EDS say that the automatic sending of the letter is a minor improvement. They refer to Jo Ashcroft’s evidence on Day 86 that CAs quickly learn the codes for the letters which they sent most frequently and that the process would not take long. EDS also rely on the fact that Jo Ashcroft could not point to any evidence of the extent to which the manual generation of correspondence was a problem in DCMS because, for example, letters were not sent or the wrong letter was sent.
Helen Jenkins considers that there is a minor benefit in relation to Customer Service and Home Moving. Merlin Stone says that this element of functionality assists in limiting errors and omissions in sending letters and has an impact across the board.
The automatic sending out of a letter after the call is an improvement which will have some benefit but that benefit is difficult to gauge over the position with the DCMS in the absence of data on the extent to which difficulties occurred through errors and omissions in sending letters.
Element 13
Element 13 is functionality to “enable management to generate reports relating to customer enquiries (including general customer enquiries and technical enquiries). For example, management can generate reports using data including the following:
(a) the types of issues driving enquiries;
(b) whether the CA successfully resolved the issue driving an enquiry;
(c) actions taken to resolve issues;
(d) which CA or group of CAs handled particular enquiries;
(e) customer information relevant to issues (eg, type of equipment);
(f) number of enquiries required to resolve an issue.”
EDS say that the capability to generate reports in relation to (a), (d) and (e) existed prior to the implementation of the Actual CRM system. They say that the telephone system used with DCMS permitted the CA to record a technical enquiry by the entry of call work codes into the telephone keypad and that the telephony system implemented in March 2001 enabled the generation of the reports in relation to (a). They say that the DCMS system enabled the generation of reports in relation to (d) and (e).
EDS accept that the Actual CRM system permits the CA to capture more detailed information about technical enquiries than was possible in DCMS, using drop down lists of options. However, they say that the accuracy with which such information is captured depends on the level of compliance by CAs in entering data into the Technical Enquiry function, which is a matter of management control and not dependent on technology.
EDS do not accept that the Claimants have yet implemented the functionality required to deliver reports in relation to (b), (c) and (f).
EDS also say that this is really a repetition of Element 5. The reports are generated in the Data Warehouse using an industry standard application, “Business Objects” with data captured by the CRM System and that it is therefore the capture of data which is important.
Sky accept that the analysis of the data in the form of reports depends on that data being captured in the first place as set out in Element 5. However Sky say that the data is recorded in standard, comparable form and is linked to a customer record. Sky say that under the DCMS, as Edwina McDowall and Simon Montador explain, only very limited reports on technical enquiries were possible using data collected independently through the telephone system codes.
Sky say that reports can be produced which assist them to assess what business strategies, policies, procedures and rules to implement to minimise churn and optimise contact centre efficiency. They say that reports can also be used to resolve problems and improve technical performance. They rely on the fact that reporting is not limited to technical enquiries but that, as Simon Montador explained, Sky has now implemented a call type monitoring functionality for general enquiries, similar to that for technical enquiries, which allows information about the reason for each contact to be recorded in the customer history, permitting Sky to analyse the reasons for the call, to reduce call transfers from one team to another and to manage first time resolution performance better.
I consider that there is a major improvement in the fact that data is captured under Element 5 in a standard form, linked to a customer record and that this allows the information to be analysed and reports produced using this improved data source. The reporting function, I accept, is dependent on there being better data and this leads to the generation of more detailed reports.
Element 22
Element 22 is functionality to “enable the customer, when about to move home, to arrange to continue his relationship with Sky using the Internet.”
This is not a functionality relied upon by either churn or call rate experts as Sky has chosen, for understandable reasons, to adopt a policy that requires telephone contact with a customer on the point of moving house. I do not therefore need to consider this element further.
The three enhancements
EDS submit that, to the extent that Sky is now deriving benefits from elements of the three enhancements which would not have been in scope, those benefits would not have been derived in the PwC or ASI CRM Systems and must be ignored for the purposes of the claim. EDS say that Sky place considerable reliance on the capability of the enhancements, particularly Merlin.
Sky say that in order to achieve a go-live date for the Actual CRM System which was as early as possible, it de-scoped the CRM project with the result that part of the functionality envisaged in Increment 2.3 and the whole of Increments 2.4 and 2.5 were not incorporated in the Actual CRM System at go-live. Since go-live of the Actual CRM System in March 2006 Sky say that they have implemented or intend to implement the three enhancements: Merlin, Self Service and Case Management, all of which would have been within the scope of the ITT.
EDS challenge Sky to establish what aspects of functionality were not incorporated in the Actual CRM System at go-live and the reasons why they were de-scoped. I have considered above EDS’ contention that Sky’s decision to de-scope the three enhancements was unreasonable because, EDS say, it was driven by wholly unrealistic views of when the system would go-live.
The issue is therefore whether the three enhancements were within the appropriate scope for the PwC or the ASI CRM Systems.
In paragraphs 108.3 and 108.8 of the Particulars of Claim Sky has pleaded that the PwC CRM System would have had the full functionality specified in PwC’s bid and that the ASI CRM System would have had the full functionality specified in EDS’ bid. They therefore say that those CRM Systems “would have delivered the functionality equivalent to Phase 1 and Increments 2.1 to 2.5 and would therefore have delivered at least the benefits that the Actual CRM System, as further developed, will deliver.”
Sky now rely on a number of documents to establish that the PWC and ASI CRM Systems would have included this wider functionality.
EDS submit that the Baseline 2 Functional Specification superseded earlier scope documents and provides the broadest definition of the scope both of the system which would have been delivered by PwC in Scenario B1 and by the ASI in Scenario B2.
Sky submit that the requirements contained in the ITT and PwC’s Response to the ITT, together with the technology and implementation approach that PwC proposed, are all critical pieces of evidence that bear on the system PwC would have delivered. Sky also say that developments in CRM technology during the relevant period should be taken into account because such developments would also have influenced and shaped the system that PwC delivered.
Sky say that, by contrast, the Baseline 2 Functional Specifications are a snapshot of Sky’s requirements at a particular time and were the product of a wholly different development approach based on different technology in different circumstances. Further, Sky say that the Baseline 2 Functional Specifications were the product of an incompetent requirements capture process and whilst Sky set out what they required to the best of their ability, it required the knowledge and experience of those who develop and build CRM systems. Sky say that the exercise which PwC would have carried out would have been very different because the focus would have been on what was already there in Siebel and how best to exploit that package functionality. They say that a robust Siebel-based solution would have provided Sky with the technical foundations for further development.
Sky say that Baselines 3 and 4 represented a cut down version of requirements and were the minimum that Sky required to replace DCMS and cannot possibly be construed as a proper representation of Sky’s requirements or what Sky would have received by way of functionality had PwC been awarded the contract. They say that as well as de-scoping Increments 2.4 and 2.5, all of the marketing functionality was stripped out from Increment 2.3.
I have come to the conclusion that Sky’s reliance on wider documentation is misplaced and that the appropriate scope for both the PwC and the ASI CRM Systems is that set out in the Baseline 2 Functional Specifications. This was the basis on which Sky approached this case. First, consistent with that position Scott Mackay gave evidence that the Baseline 2 FS reflected Sky’s business requirements for the CRM System, as set out in the ITT. He said in paragraphs 22 and 26 of his second witness statement that his main concern was to ensure that the requirements in the Baseline 2 FS, once completed, could be tied back to the original table of requirements set out at section 2.4 of the ITT and so reflected what Sky required from the system and encompassed all the requirements of Sky’s business, as expressed in the ITT. Secondly, this approach is reflected more generally in Sky’s submissions. In their written opening submissions at paragraph 1377.2 they stated that the Baseline 2 FS provided “the ‘largest’ statement of Sky’s requirements” and in their written IT opening submissions they stated at paragraph 179 that “Baseline 2 is, if anything, likely to represent a more extensive set of requirements than that which PwC would have needed to fulfil. It follows that Baseline 2 represents an upper bound on what PwC would have been required to build.”
Thirdly, as the ITT says in paragraph 2 of the Introduction the “deliverables form the high level definition of the end product and will require further analysis as the project progresses”. It is therefore necessary to look at how this “end product” was further defined as the project progressed. In the case of the PwC Siebel based CRM System, the question is raised whether the PwC Response to the ITT provides a better definition of the functionality of the Siebel based system than the Baseline 2 FS which, of necessity, is based on a Chordiant CRM System.
As can be seen from the PwC Response, PwC were much more circumspect in the terms in which they submitted their Response to the ITT. They proposed an eight week definition phase at the start of the project which they referred to as being “key” and producing a “blueprint” which “will contain your view of the exact scale and scope of your ‘world class’ solution. Our cost estimates will then be aligned with this.” As a result, PwC stated that their Response was submitted on a “for information only” basis and did not constitute an offer capable of acceptance for the implementation of the project. In those circumstances, I consider that the best guide to scope would be the Baseline 2 FS in which Sky set out their ITT requirements. I am not persuaded that in respect of the three enhancements the Siebel system would have had significant differences in functionality from those expressed in the requirements incorporated into the Baseline 2 FS, although the manner of achieving those requirements would necessarily have differed in a Siebel package application.
In the case of the ASI CRM Chordiant based System then I accept EDS’ submission that the requirements which an ASI taking over the project in July 2001 would have been required to deliver, would have been no more extensive than the requirements contained within the Baseline 2 FS. As an ASI would have been providing a Chordiant based solution, the Baseline 2 FS would be likely to set out the requirements for a Chordiant system. Whilst, there is a suggestion from Sky that the EDS Response or the Preliminary Specification incorporated into the Prime Contract might have included relevant requirements, the reality is that the EDS Response indicated an understanding of Sky’s requirements in June 2000, but was superseded by the more detailed Preliminary Specification which was then, in turn, superseded by the Baseline 2 FS, signed off in October 2001, with the Channels Addenda signed off in December 2001.
Although both sets of experts expressed concerns at certain aspects of the Baseline 2 FS, it seems to me that they provide a much better definition of Sky’s requirements than any other documents for both the PwC and ASI CRM Systems. On that basis I now turn to consider the extent to which the enhancements would have been included within the requirements in the Baseline 2 FS.
Merlin: Elements 8 and 14
As explained by John Ramdenee in paragraph 6 of his third witness statement, Merlin provides functionality so that appropriate messages can be selected for the CA to give while speaking to a customer by telephone. Merlin displays “prompts” to the CA as to the Next Best Action (“NBA”) to take in relation to the customer. This live delivery of prompts is calculated and delivered by the rules engine within Merlin which is referred to as Real Time Decisioning.
The experts have divided the Merlin functionality into three components:
(1) Knowledge/Insight: the “customer data mart”, which is a database of customer related information which collates, joins and analyses customer data from different sources to derive a better understanding of the customer;
(2) Decision: a “decision engine” component which has the ability to identify the information, products and services appropriate for certain customers and customer segments;
(3) Presentation: the screen component with equivalents for other channels, which delivers information, prompts and scripts for an agent and then captures the outcome to enable feedback and refinement.
There is documentation in the following form: the NBA Catalogue which lists available treatments at any given time; the Merlin Master Treatment Library which contains the rules underlying these treatments and the Merlin Leadership Support Pack which describes how Merlin works.
Merlin is based on the Chordiant Decision Manager suite of products, apparently based on a product developed by a company called KIQ which Chordiant Software had acquired by summer 2004. As explained by John Ramdenee, the Chordiant Decision Manager includes three elements: the Recommendation Advisor, the Adaptive Decisioning Server and the Strategy Director and includes an adaptive modelling capability.
The Recommendation Advisor is the “front end” which presents the NBAs to the CA. The Strategy Director is the tool which enables the business analysts to build the rules offline. The Adaptive Decisioning Server both runs the adaptive propensity models and executes the rules in real time to be displayed in the Recommendation Advisor.
It is common ground that the PwC or ASI CRM Systems would have both delivered Real Time Decisioning, in the sense that they would have applied rules and conditions to filter prompts which were delivered in real time. Real Time Decisioning can describe a number of processes and three types of decisioning model have been referred to in evidence and I will use these definitions:
(1) an offline propensity model is a programme which is run offline in the marketing department and which analyses data and applies rules. The resulting file is then updated for the next day’s interactions with customers and sets tags for customers who have been identified as having a propensity to buy particular products, so that the CAs can use filtered prompts delivered in real time;
(2) an online, or real time, propensity model which works in a fixed way and analyses data and applies rules, running in the background on line during the interaction with the customer. The “tagging” is done by the model in real time when the customer rings in;
(3) a real time adaptive propensity model has the additional feature of being “adaptive” in the sense that the model does not work in a fixed way but adapts and learns from responses and data captured by the CA and therefore refines the model in real time.
It is also common ground between the parties that the PwC or ASI CRM Systems would not have incorporated a real time adaptive propensity model. Real time adaptive propensity modelling was not available in 2000. The evidence suggests that online propensity modelling would have been available from 2003 and although uncertain, it appears that Chordiant had a real time adaptive propensity model available from late 2004 which they sold to Sky later in 2006.
Merlin Functionality
EDS’ position in relation to Merlin changed towards to end of the hearing when they adopted Robert Worden’s position and accepted that certain elements of Merlin were within the scope of the PwC and ASI CRM Systems. EDS now accept that the following elements of Merlin would have been delivered as part of both the PWC and ASI CRM Systems:
(1) Prompts for cross and up-selling;
(2) Real time decisioning to filter those prompts; and
(3) Recording of the outcomes of attempts to sell.
EDS continue to contend that the following elements of Merlin, as now delivered, were not within the scope of what would have been delivered in the PWC and ASI CRM Systems:
(1) Prompts other than for the cross-selling or up-selling of the Claimants’ products and services;
(2) Weighting and ranking of NBAs;
(3) Use of call context to filter NBAs;
(4) Recording of customer mindset;
(5) Calculation of the financial impact on Sky of NBA outcomes;
(6) Propensity analysis or propensity modelling, whether adaptive or otherwise;
(7) Recording outcomes of NBAs other than cross-sell and up-sell NBAs; and
(8) Viewing Advisor.
In order to consider the position in more detail, it is necessary to review the relevant Baseline 2 FS and what was provided for within it. It is then necessary to consider whether the eight elements of Merlin which EDS contend were not within scope are, in fact, within the scope of the PwC and ASI CRM Systems.
Functional Specification 5 Cross/Up-Sell
The only Baseline 2 FS which the experts consider to be relevant to Merlin is FS 5, Cross/Up Sell. EDS refer to the four Use Cases in this FS:
(1) UC 05.01 is “Customer Profile Cross/Up-Sell”. EDS say that the description indicates that opportunities are identified from offline analysis based on the customer profile or transaction history held about a customer and that the analysis is outside the scope of the programme and is the responsibility of Sky Marketing. EDS say that once the customer is successfully identified and verified, the system checks pre-defined conditions in real time and, if the conditions are satisfied, the system triggers a prompt which remains for the duration of the contact. EDS say that it is this checking of conditions in real time which constitutes Real Time Decisioning.
(2) UC 05.02 is “Product Relationship Cross/Up-Sell”. Again, EDS say that the product relationships are identified as a result of offline data analysis which is out of scope and that when the customer is in the course of purchasing a particular product, the selection of the product triggers the prompt of a complementary product to be offered to the customer. EDS say that, as before, the system checks the pre-defined conditions in real time before triggering the prompt.
(3) UC 05.03 is “Attempt Profile Based Sale” and EDS say that this does not require any prompting by the system at all and they refer to Ian Murray’s evidence on Day 99. EDS say that, if during a conversation with a customer the CA decides that the appropriate moment has come to attempt a cross/up sell, the CA can press the Sales Prospect button on the toolbar, thus invoking a display of all products currently registered as leads for the particular customer.
(4) UC 05.04 is “Capture Unsuccessful Sales Attempt” which captures the reason why a cross/up sale attempt has not been successful.
I now turn to consider each of the points which Robert Worden considers fell outside the scope of the PwC and ASI CRM Systems.
Propensity model, adaptive propensity model (real time or otherwise)
Sky refer to PwC’s Response to ITT which sets out a scenario where the use of analytics is described to reduce churn, increase up-sell and cross-sell and to apply to a wide variety of other applications. Sky say that, despite EDS’ and Robert Worden’s assertion that all propensity models were out of scope, Robert Worden confirmed that PwC would have provided the capability to analyse data in order to provide prompts to CAs for a broad range of purposes.
Sky refer to the heading ‘Determine prospects’ in the ITT which specified that scripts should be capable of being developed and changed quickly in such a way as to identify a customer’s propensity to buy products and services. Sky refer to Robert Worden’s evidence that the broad picture presented by the ITT was one where Sky was interested in establishing customer propensities and required a system that could exploit such propensities. Robert Worden agreed that analytical tools were part of the toolkit but, in relation to PwC’s Response to ITT, said that what precisely was required would be sorted out in the 8 week scoping study.
Sky also say that CRM concepts and technology in relation to data mining, propensity and adaptive propensity modelling and real time decisioning were developing rapidly and that it is likely that a CRM system developed during 2000 and 2002 would have taken advantage of those advances. Sky rely on Ian Murray’s evidence that they could have had on-line propensity modelling in mid 2003 and on-line adaptive propensity modelling by 2005.
Sky refer to Robert Worden’s view that propensity modelling was not within scope on the basis of Use Case 5.01 which stated that “This analysis (although not the capture and provision of data to support it) is outside the project scope and remains the responsibility of Sky Marketing”. They say that Robert Worden acknowledged that propensity models were within scope of the ITT as set out above. They also refer to John Ramdenee’s evidence that the propensity models themselves were within scope of the project albeit the creation of such models was not and say that this is entirely consistent with the ITT and with the wording of Use Case 5.01.
The experts are in agreement that an adaptive propensity model would not have been delivered by PwC in the first instance and Sky submit that the evidence of Robert Worden and John Ramdenee suggests that there is little difference between benefits achievable by using offline propensity models to those achievable using adaptive propensity models, as the result from the propensity modelling, whether offline or adaptive, is simply a variable used by the rules engine.
EDS say that it is clear from Functional Specification 5, that propensity modelling was not within the scope of the delivery required from EDS and that such modelling, as was required, was to be carried out by Sky offline. Furthermore, EDS say that there was no requirement for an adaptive propensity model, real time or offline. EDS refer to Ian Murray’s evidence that once the relevant technology became available PwC would have been instructed to enhance the PwC system to deliver online propensity modelling and, later, adaptive propensity modelling. He says that online propensity modelling would have been available in 2003, but he cannot say that adaptive propensity modelling would have been available earlier than it was actually introduced.
EDS say that whether PwC would have been instructed by Sky to enhance the system over a year after its delivery is irrelevant as the online and adaptive elements were, on this basis, not within the scope of what PwC would have contracted to deliver in June 2000 and were therefore outside the scope of what Sky has pleaded that PwC would have delivered.
In my judgment, neither PwC in 2000 nor the ASI in 2001 would have provided, within the scope of their CRM System either an online, or real time propensity model or a real time adaptive propensity model. The scope, as set out in the relevant Use Case in the Baseline 2 Functional Specification 5, was limited to an offline propensity model. The specification provided that the marketing department would provide the data and the Use Case required the provision of functionality to apply that data to the CA’s decision process. For the reasons set out above I do not consider that references in the PwC Response to the ITT assist on this issue. In any event, I consider that the capability to analyse data and provide prompts to CAs referred to in the PwC Response was limited to an offline analysis of data which would then be loaded onto the system at regular intervals.
I do not consider that it is correct to consider what might have been ordered as a separate package at a later date rather than what would have been within the original scope of the PwC or ASI CRM System. First, the question of what would have been in scope in each of those “but for” scenarios cannot properly introduce later additions. Secondly, I am by no means persuaded that, given the timing of the further development of Real Time Decisioning, any additions would have been made to those packages.
I consider that the introduction of the further developments in the form of, first, online or real time propensity modelling and, later, real time adaptive propensity modelling each provided significant improvements over the predecessors. I shall consider below what the benefits would have been of the offline propensity modelling which is what I consider would have been provided by both PwC and an ASI with the relevant CRM System.
Prompts other than for cross/up-selling
Sky refer to the fact that Robert Worden in his evidence on Day 100 agreed that PwC’s Response to ITT addresses the use of prompts for a range of transactions broader than just up-sell and cross-sell. Sky say that the ITT specified requirements for customer loyalty and there is no reason to suppose that CAs would not have been prompted to pursue processes designed to achieve this purpose as well.
Sky say that, in relation to direct debit, the ITT specifically explained that CAs should be encouraged to persuade customers to move to direct debit. Sky say that PwC’s Siebel-based solution was not limited in terms of the flags and prompts to up-sell and cross-sell and included generic functionality that would have provided flags and prompts to CAs in a wide variety of circumstances. Sky rely on Robert Worden’s evidence on Day 100 that Siebel SmartScript was a suitable delivery vehicle for the kind of NBA prompting supported by Merlin.
Sky submit that EDS and Robert Worden are wrong to say that the requirement for prompts is a limited requirement relating to up-sell and cross-sell. They say that because the ITT states that any information from the prospect or customer that might be useful should be captured, the system should be intuitive and reactive enough to prompt and collect the data, which included lifestyle data.
Sky say that they set out their requirements for interactive prompts to guide the CAs through interactions with the customer and that the ITT gave cross-sell as a non-exclusive example of where interactive prompts were required. Sky say that they were setting out a generic requirement for the prompting and capturing of any data and they rely on Robert Worden’s evidence on Day 100 that what the ITT was describing was a system with generic capability to prompt CAs and collect data that could be deployed in any number of ways and situations.
EDS say that FS 5 is limited to the provision of prompts for cross-selling and up-selling Sky products and refer to Ian Murray’s acceptance that FS 5 does not explicitly describe any other form of prompts. EDS say that although Ian Murray’s evidence was limited to prompts for sales, he now says that it would be reasonable to assume that Sky would have asked the ASI to include non-sales prompts, although Sky did not in fact ask EDS to do so. Sky say that this was on the basis that because Merlin as now delivered in 2007 includes a wider range of prompts, Sky would have asked an ASI instructed in July 2001 or PwC instructed in June 2000 to do the same. EDS say that this does not take account of the fact that Merlin in its current form sprang from the Woking workshops initiated in November 2004.
EDS say that in his evidence on Day 99 Ian Murray could not point to any evidence that Sky had widened its requirements for prompts between March 2002 when it took over as Systems Integrator and January 2004 when it de-scoped the functionality described in FS 5. EDS also say that he had to concede that he had not done the analysis to determine how big an exercise it would be to extend the NBAs beyond cross-sell and up-sell.
As set out above, I have come to the conclusion that the Baseline 2 Functional Specifications provide a definition of the requirements which Sky required and which would also have formed the basis of the CRM Systems provided by PwC or the ASI. In such circumstances I consider that the general descriptions in the ITT are more specifically defined in the specifications which were subsequently developed and it is those which must be considered.
The fact that the ITT or the PwC Response to the ITT might have indicated that interactive prompts would be wider that the Baseline 2 FS does not, in my judgment, determine how matters would have developed after the eight week scoping study for PwC or after the ASI had been through the detailed requirements phase when cost and time constraints would have come to bear.
Recording outcomes of NBAs other than for cross/up-sell
Sky say that the requirement for the recording of the result of each contact was stated in the ITT under the heading “Every contact with the customer is recorded in full detail”. Sky say that, given the emphasis in the ITT on the collection of data, where prompts were used to elicit the information it is obvious that Sky and PwC intended that the information should be recorded.
Sky rely on Ian Murray’s evidence on Day 99 in which he confirmed that the outcome of NBAs was the critical factor in the learning process because Sky were measuring customer reactions. Sky also refer to Robert Worden’s evidence on Day 100 that Sky required a system that would record the result of each contact.
Sky say that it follows that if during the course of the contact, a prompt delivered to a CA posed a particular question or made a particular offer, the answer to that question or offer would be recorded.
EDS say that FS 5 contemplated only that an unsuccessful sales attempt would be recorded as an input to the offline analysis and that there was no provision for recording other outcomes, because only sales-related outcomes were within scope.
As set out above, I have come to the conclusion that the Baseline 2 Functional Specifications provide a specific definition of the requirements which Sky required and which would also have formed the basis of the CRM Systems provided by PwC or the ASI. In those circumstances, the extent to which an outcome would be recorded was specifically defined in Functional Specification 5 and was to be limited to unsuccessful sales. As a result, I do not consider that there was a requirement to record outcomes other than for cross-sell or up-sell.
Use of call context to filter NBAs
Sky say that the requirement for the call context to be recorded was stated in the ITT under the heading “Every contact with the customer is recorded in full detail”. Sky say that Robert Worden, in his evidence on Day 100, agreed that Sky required a system that would record the reason or trigger for the contact and accepted that any information about the reason for calling was relevant to cross-sell and up-sell.
Sky say that even in relation to the Baseline 2 FS, Ian Murray explained that whilst the requirement may not be explicit, as a matter of commonsense, the filtering by call context would be necessary.
EDS say that Ian Murray was wrong to suggest in his evidence on Day 99 that this aspect of Merlin was expressly contemplated in FS 5 and that he misread the reference in UC 5.03. to “information provided during a current customer interaction” as requiring the CA to click on a call context button. EDS say it is clear that the information received from the customer is processed in the CA’s brain and is not input into the system, and say that Ian Murray accepted this.
EDS also say that Ian Murray was wrong to rely on the fact that FS 5 specifies that rules used to filter cross-sell or up-sell attempts can be related to attributes of the customer and the product, as those rules are not derived from the call context, but are pre-flagged on the customer record, as set out on pages 12 to 13 of FS5.
EDS also say that Ian Murray was wrong to say that, as a matter of common sense “there is no particularly technical difficulty in including call context as a condition”. EDS say that Sky did not in fact choose to include call context in FS 5 and there is no evidence that Sky later changed its mind before de-scoping this functional specification in its entirety in 2004.
As set out above, the Baseline 2 Functional Specifications provide a definition of the requirements which Sky required and which would also have formed the basis of the CRM Systems provided by PwC or the ASI. I do not consider that the Baseline 2 Functional Specification 5 required filtering by call context and this was the document which, in my judgment, set out the specific requirement, rather than the general description in the ITT.
Recording of customer mindset
Sky say that the requirement for the recording of the customer mindset at the beginning and end of each contact was stated in Appendix A to the ITT as one of the ‘headline themes’ and is described under the heading “Every contact with the customer is recorded in full detail”. Sky say that although the requirement is described as the recording of ‘the customer disposition’, this is the same thing as ‘customer mindset’. Sky refer to the fact that later in Appendix A, under the heading “Resolve Customer Query”, the requirement is repeated in the following terms: “Customer disposition at the end of contact is recorded to be used in future contacts with the customer as a reference.”
Sky refer to Robert Worden’s evidence on Day 100 and say that he agreed that Sky required a system that would record customer disposition at both the start and end of each contact and that any information about customer disposition was relevant to cross-sell and up-sell. Sky also rely on Ian Murray’s explanation on Day 99 that as far as the ITT was concerned the reference to using customer disposition was a reference to using it “in some sort of assessment as to whether to do certain things with a customer while they are on the phone.”
Sky accept that they only set out what they required in the ITT at a high level but say that the emphasis placed by PwC in their Response to ITT on personalising each contact and using information about the customer to inform recommendations makes it more than likely that the Siebel-based solution proposed by PwC would not only have recorded customer mindset or disposition at the beginning and end of each call, but would also have ensured that such information was used during the course of the call in terms of the prompts made to the CA. Sky say that the fact that the CRM system did not provide this functionality in EDS’ time or in the period up to go-live in March 2006 is irrelevant.
EDS say that Ian Murray accepted on Day 99 that this aspect is not mentioned in FS 5 but rather he referred to the ITT and suggested that the requirement must then have been missed out owing to the incompleteness of the Baseline 2 FS. EDS say that the more obvious conclusion is that Sky’s requirement had narrowed since the ITT.
On the basis of my conclusion that the Baseline 2 Functional Specifications provide a definition of the requirements which Sky required and which would also have formed the basis of the CRM Systems provided by PwC or the ASI, I do not consider that the general descriptions in the ITT or the matters set out in PwC’s Response to the ITT represent what would ultimately have been within the scope of the PWC or ASI CRM Systems. The reference in PwC’s Response does not, in my judgment, take the matter further as there would need to be further definition during the eight week scoping study and under pressures of time and cost this would have been likely to lead to the final requirements being similar to those contained within the Baseline 2 Functional Specifications.
Ranking of NBAs and showing their weights to the CA
In Merlin as delivered, clicking on the call context/reason generates three NBAs which are ranked in priority order, the weights being shown by bars on the screen and the list can be expanded to up to 15 NBAs. The exercise of determining those weightings is carried out by the marketing department.
Sky say that the description in PwC’s Response to ITT as to how SAS, Business Objects, BroadVision and NetPerceptions was to be used shows that functionality for the personalisation of the contact would have been delivered. Sky say that the process of automating business rules and applying them to flags is the process of ranking and weighting. They refer to Robert Worden’s evidence on Day 100 and say that he agreed that the general thrust of the functionality provided by NetPerceptions was the making of recommendations.
Sky also refer to the evidence of Ian Murray on Day 99 to show that the process of producing weightings, that is the calculation of particular NBAs, is based on the input from the Treatment Library and is within the scope of the system. He stated that the means by which weightings get into the system would have been within the scope of the project, whilst the exercise of determining the weightings would not.
Ian Murray relied on the fact that the product rules defined in FS 5 refer, at page 14, to a “priority rating” which allows campaign cross-sell/up-sell conflicts to be managed. Robert Worden considered that this was a simple mechanism to allow Sky management to cope with potential conflicts between different campaigns and offers and possibly only recommend one in cases where there was a conflict. EDS say that this is supported by a reference to the AA class model produced in May 2001 which had been relied on by Ian Murray.
EDS say that it is clear that FS 5 does not contemplate anything like the sophisticated weighting and ranking mechanism now provided by Merlin and described in Herbert Smith’s fifth letter of 26 February 2008. That letter indicates that the overall numerical value/score for each NBA is a product of six different factors. The numerical values and scores for each NBA are presented in the Merlin Master Treatment Library, which also describes the weighting and ranking mechanism.
On the basis of my conclusion that the Baseline 2 Functional Specifications provide a definition of the requirements and would also have formed the basis of the CRM Systems provided by PwC or the ASI, the references in PwC’s Response do not, in my judgment, take the matter further as there would need to have been further definition during the eight week scoping study. Under pressures of time and cost the scope would have been reconsidered and, in my judgment, this would have been likely to lead to the final requirements being similar to those contained within the Baseline 2 Functional Specifications. I do not consider that the reference to “priority weighting” in FS5 is a reference to the type of weighting and ranking system which is applied to NBAs in Merlin. Rather, I accept Robert Worden’s view that the reference to the management of campaign cross-sell/up-sell conflicts was to a simple mechanism to allow Sky’s management to cope with potential conflicts between different campaigns and offers.
Viewing Advisor
Sky refer to the ITT which set out a requirement for CAs to search the programme guide in electronic format and to prompt CAs on upcoming events that may be of interest to the customer based on information collected in relation to that customer’s lifestyle, with the functionality being required through all media. Robert Worden accepted in his evidence on Day 100 that this looked like a Viewing Advisor but said that the requirement was an aspiration which he felt was superseded by the Baseline 2 Functional Specification.
EDS say that the “Recommendations Engine” was a Woking project in its own right which initially had nothing to do with the Real Time Offers project which was superseded by Merlin. EDS say that Sky implemented the Recommendations Engine on the web in mid-2005 and at some point took a decision to incorporate Recommendations Engine within Merlin, so that it is now integrated as the Viewing Advisor screen which is accessed as a tab within Merlin.
EDS refer to Ian Murray’s evidence that “programme recommendations” might feature in the capability for non-selling activities which it would be reasonable to assume Sky would have asked an ASI to include. EDS say that in his oral evidence on Day 99 Ian Murray accepted that Viewing Advisor already existed pre-Merlin and was brought in and integrated with Merlin and also that he could only express a view as to whether Sky could have integrated Viewing Advisor if they had required it, not as to whether Sky would have required it. EDS also point to the fact that John Ramdenee said on Day 88 that the first time he had heard of the idea of having a recommendations engine was in the Woking workshop of November 2004.
Having come to the conclusion that the Baseline 2 Functional Specifications provides a definition of the requirements which would also have formed the basis of the CRM Systems provided by PwC or the ASI, I do not consider that the Viewing Advisor would have formed part of the scope of the work within the PwC or ASI CRM Systems. Rather it was developed after the Woking workshop in 2004 and was subsequently integrated with Merlin and was not part of the Baseline 2 FS.
Summary
On that basis, it is my view that the CRM System provided either by PwC or by an ASI would have had an offline propensity model and would not have had prompts other than for the cross-selling or up-selling of the Claimants’ products and services; would not have had weighting and ranking of NBAs; would not have used call context to filter NBAs; would not have recorded customer mindset; would not have recorded outcomes of NBAs other than cross-sell and up-sell NBAs and would not have had functionality equivalent to Viewing Advisor.
Merlin
I now turn to consider the relevant Elements, 8 and 14, in the light of those conclusions on the extent to which the Merlin functionality would have been provided either by PwC or by an ASI .
Element 8
Element 8 is functionality to “generate and enable the CA to receive automated prompts, including prompts identifying products, services or offers appropriate for a customer.” This is part of the functionality introduced through Merlin.
For the reasons set out above, the automated prompts or NBAs in Merlin and the adaptive propensity model that supports the presentation of NBAs would not have been part of the PwC or the ASI CRM Systems.
Element 14
Element 14 is functionality to “enable management to control types of prompts given to CAs through the use of configurable rule sets and arrange for CAs to promote particular products and services to particular classes of customer.”
As set out above, in the PWC or ASI CRM System Sky’s marketing department could decide on the types of prompts but only apply those prompts by an offline propensity model. The wider functionality in Merlin would not have been part of the scope of either the PwC or ASI CRM Systems.
Element 3
Element 3 has two aspects: “enable the CA to view relevant customer information presented clearly on key screens” and enable “management to change the customer information presented to the CA (and the way it is presented) on those key screens.”
As set out in paragraph 17 of the Fourth Joint Memorandum, Robert Worden and Ian Murray agree that Element 3 was delivered by Sky in the Actual CRM system on 30 March 2006 and that Merlin delivered enhancements to Element 3.
EDS refer to the evidence of Ian Murray in PA’s sixth report and say that, on the first aspect, he accepts that this was delivered as a “basic function inherent in Chordiant”. They also refer to Robert Worden’s evidence in paragraph 200 of his sixth report that this requirement was met without Merlin. Accordingly, EDS say that the fact that Merlin later enhanced the presentation of customer information on screens is irrelevant as Element 3 was delivered as part of the Actual CRM system in March 2006 and did not require the further delivery of Merlin.
In relation to the second aspect, EDS say that this was delivered as part of the Actual CRM System and refer to Ian Murray’s evidence which suggests that this introduced some further ability to make changes. On that basis, EDS say that the delivery of Merlin was not something which was required by Element 3, and in fact the delivery of Merlin could not be said to have enhanced management’s ability to change customer information in relation to other parts of the system.
I am not persuaded that there was any element of functionality in relation to Sky’s Element 3 that was not introduced as part of the Actual CRM System and which is relevant to Sky’s claim. Rather any enhancement is over and above the scope relied on by Sky as delivering the business benefits.
Element 7
Element 7 is functionality to “enable the CA to identify appropriate offers for which a customer is eligible.”
The IT experts agree at paragraph 17 of the Fourth Joint Memorandum that Element 7 was delivered by the Actual CRM system without Merlin and that the delivery of Merlin enhances Element 7.
EDS refer to Ian Murray’s oral evidence on Day 99 where he indicated that Merlin provided an enhancement to Element 7, in predicting the propensity to accept offers as well as identifying appropriate offers. EDS say that the enhancement relates only to Merlin itself and not to the rest of the system.
Similarly to Element 3, I am not persuaded that there was any element of functionality in relation to Sky’s Element 7 that was not introduced as part of the Actual CRM System and which is relevant to Sky’s claim. Rather any enhancement is over and above the scope relied on by Sky as delivering the business benefits.
Conclusion on Merlin
EDS submit that Sky cannot recover benefits which flow from elements of Merlin as actually implemented which would not have been delivered in the PWC or ASI CRM Systems. As I have found, many of the elements of Merlin were out of scope. EDS say that most of those elements, in particular, the adaptive propensity model, the call context, the weighting and ranking of NBAs and prompts other than for cross-sell and up-sell account for substantially the entire benefit of Merlin and I will consider this below.
Self Service: Element 16 to 21
The self service functionality relevant to these proceedings consists of the ability of Sky’s customers to carry out certain operations either by using the internet or by using the Set Top Box (“STB”). Whilst there are self service capabilities available through the interactive voice recognition technology (IVR) system which, for instance, allow customers to order pay per view items, these do not form part of the claim because they were not enabled by the CRM system.
Sky had significant self service capabilities prior to the CRM system. They had offered web self service since the acquisition of the www.sky.com website in 2000 and they developed a web front end in the form of the IDO application. This allowed TV packages and equipment to be purchased online by new customers and from 2003 the installation process was also automated as part of the function. In 2003, Sky implemented functionality which allowed an existing customer to replace their STB or upgrade it to Sky+ or add an extra digibox over the internet and allowed a new customer to purchase a Sky + digibox or extra digibox online.
In the period before CRM go-live, package upgrades were available to existing customers via the internet for the top three packages: Sky World, Sky Movies World and Sky Sports World.
In relation to STBs, Sky had offered some forms of self service since the launch of these products. Initially, for example, customers could reset an STB PIN and from July 2001 Sky offered its customers the ability to view their bill on the STB, referred to as Customer Interactive Connect (“CIC”). Package upgrades were available via the STB. In 2005, Sky relaunched its STB self service offerings and the “View Sky Statement” capability was extended, customer support in the form of FAQs was added, as was “product information and ordering – to up-sell/cross-sell to existing customers, including interactive ordering of selected products or promotions.”
Both churn rate experts have assumed an overall implementation date of December 2007 for additional Self Service. This date has been chosen for convenience, as some aspects were implemented earlier than December 2007 and others more recently.
Simon Montador gives evidence of the self service functionality which Sky have implemented since go-live of the Actual CRM System. EDS say that it is more extensive than Elements 16 to 22 and includes a number of self service transactions in relation to which Sky make no claim (including reset and confirm STB PIN via the internet; view and modify pay per view (PPV) booking on the internet and sale of wholesale line rental), as well as including a number of transactions which would not have been available in the PwC or ASI CRM Systems because the relevant product was not available, such as adding Sky Broadband, upgrade to HD and upgrade existing Sky Broadband package.
EDS also say that it includes functionality which could have been and in fact has been implemented independently of the CRM system because it only requires access to the front end application, such as technical inquiries via the web and STB and the implementation of the Sky “Virtual Assistant” on the website.
EDS say that the set of self service transactions of which Elements 16 to 22 form part, is itself a relatively limited set of transactions when compared with the full functionality available to a CA. In particular, it excludes downgrading and cancellation, because Sky requires that customers interact with a CA when they want to cancel or downgrade.
There are two particular issues relating to the scope of Self Service:
(1) whether EDS was responsible for delivery of the front end self service applications or only for integrating them with the CRM back end;
(2) which of the transactions listed in Elements 16 to 22 would have been delivered as part of the PwC or ASI CRM Systems.
Front end or back end
EDS refer to PA’s view that EDS was responsible for delivering the entirety of the Self Service capability, including development of the front end applications. However Sky does not contend that EDS was responsible for the development of the front end applications, but only that it was responsible for integrating the front end applications with the CRM back end. EDS accept that it was responsible for the interfaces and therefore it seems that there is now common ground on this issue.
Which elements of Self Service were within the scope of the PwC or ASI CRM Systems?
The IT experts agree that most of the relevant elements of self service (Elements 16 to 22) would have been delivered in either the PwC or ASI CRM Systems as part of the delivery of the main system. They disagree as to the effort and date required for the delivery of those systems.
In relation to Scenario B1, the PwC CRM System, they also disagree as to the degree of bespoke development which would have been required to deliver the elements of self service using Siebel. This reflects part of the general disagreement on Siebel which I have dealt with above.
In relation to both the PwC and ASI CRM Systems the following elements remain in dispute in relation to the scope of Self Service:
(1) Element 17(b), whether functionality would have been provided which allowed customers to change the payment due date;
(2) Elements 18 and 19, the extent to which Self Service could have catered for new products and services not offered by Sky at the date of the relevant CRM System;
(3) Element 20 in so far as it relates to “case tracking”.
Change Payment Due Date (Element 17(b))
Element 17 is functionality of “Account Management” which allows management of a customer account by performing certain actions. Sky say that the functionality to change the payment due date would have been included within the PwC or ASI CRM Systems and Merlin Stone relies on this element of functionality in forming his view on the ability of the CRM system to help save VFM churners and Syscanners. Sky say that the ITT envisaged such functionality in Appendix A at section 1.4.5, Paragraph 3 and they rely on Mark Britton’s view that such functionality would have been delivered as part of PwC’s system or delivered shortly thereafter. He formed this view on the basis that, since PwC’s system would have allowed functionality to be added very easily, there was no reason why it could not have been added if it was not delivered in the first instance. He considered that Sky’s thinking would have developed more quickly if they had had a system in place.
EDS rely on section 3.2.1.6 of the Baseline 2 Billing Account Details Functional Specification Addendum which provides that “a self service customer will not be able to amend the billing cycle.” EDS say that the specific exclusion of this functionality from the ambit of self service indicates that it was not overlooked by Sky, but was excluded for some business reason, presumably because Sky felt that it would be undesirable to permit the customer to change the billing date. EDS also rely on Robert Worden’s evidence in paragraph 83 of the Fourth Joint Memorandum that, since it was excluded from the scope of the Baseline 2 FS, it would similarly have been excluded from the scope of the PwC and ASI CRM Systems.
Mark Britton agrees that it was expressly excluded, but says at paragraph 83 of the Fourth Joint Memorandum that the fact that Sky subsequently decided to enable such functionality when they delivered it in May 2007 indicates that Sky would have required either PwC or the ASI to deliver this element.
EDS say that Mark Britton cannot point to any evidence which suggests that Sky would have changed its mind in time to include this requirement in either the PwC or ASI CRM Systems. EDS also say that Mark Britton’s suggestion in oral evidence on Day 99 that once Sky had a CRM system in place it would have decided to add this element is in fact an acceptance that the requirement would have been out of scope for the main delivery.
As I have set out above, the Baseline 2 Functional Specification provide the best evidence of what PwC or an ASI would have provided. The reference in the ITT to flexible payment options does not, in my judgment, include this functionality to permit the customer to change the payment due date. Nor am I persuaded that the view that Sky have reached in 2007 in wanting to have this functionality indicates that they would have wanted it to be included at an earlier date. There was obviously a decision taken by Sky at the time of the Baseline 2 Functional Specification expressly to exclude this functionality from the scope of the CRM Project and I consider that this is a more accurate reflection of Sky’s requirements than any other document.
Upgrade Package (Element 18) and Upgrade or Replace Equipment (Element 19)
These elements allow various types of upgrades or replacements and, in particular, include functionality to upgrade using the internet or the STB to include Sky Broadband, Sky +, Sky HD and Sky Multiroom. The question is the extent to which these products and services would have been provided.
Sky refer to the Introduction section to the High Level Business Process Model at Appendix A to the ITT and say that this set out Sky’s requirement for a flexible system to support new products and services. They say that this was also reflected in the Preliminary Specification which formed part of the Prime Contract. Sky refer to the fact that, whilst EDS concentrated on paragraph 6.2.2.5 of the Preliminary Specification and the reference to the Web channel requirement being limited to purchasing “core Sky TV Digital product”, at paragraph 6.3 there are set out supported products and services and a table containing “anticipated current and future market offerings” such as “Internet Service Provider”, “Multiple Cards/Multiple STBs per Household”, “Hard Products (e.g. next generation STBs)” “DSL/ADSL” and other items which would include Broadband, Sky+, Sky HD, multi-room and Sky Talk.
Sky also rely on the evidence of Mark Britton in paragraphs 88 and 89 of the Fourth Joint Memorandum and on Day 100 when he said that it would have been extremely simple to add those services to the web interface and that Sky would have insisted on the delivery of a CRM system with sufficient “flexibility” to enable products of these types to be added.
EDS rely on paragraph 6.2.2.5 of the Preliminary Specification which provides under “Web” that “purchasing of the core Sky digital TV product, including arranging installation and upgrades, is within scope”. They say that this, as a matter of construction, does not extend to adding Sky Broadband or Sky Talk, which are not TV products.
EDS say that there is no reason to suppose that Sky would have required PwC or the ASI to deliver a scope wider than that set out in the Preliminary Specification. They rely on Robert Worden’s evidence on Day 100 that, although there was always the intention to develop generic platforms that can easily be extended, the level of success was variable; specific new products have specific requirements and there is only a limited amount that can be done to anticipate those requirements.
Robert Worden also expresses the view at paragraph 100 of the Fourth Joint Memorandum that PwC would not have provided functionality which anticipated the launch of Sky Broadband, Sky Talk and Sky HD more than four years or, in the case of the ASI two years, in advance of the launch of such products. He said on Day 100 that, given that Sky only acquired Broadband several years later, he does not believe that development of an abstract general Broadband selling facility would have been able to anticipate specific requirements that Sky had when they acquired Easynet.
In response to Sky’s reliance on paragraph 6.3 of the Preliminary Specification, EDS say that it expressly provides that: “additional, specific functionality may be required by particular products or services dependent on the eventual nature of these future offerings in order to fully support them. It is not possible to include details for future products within functional specifications and new products will have to be specified and added as additional ad hoc workpackages.”
EDS submit that a valid distinction can be drawn between different types of product. Whilst EDS accept that if PwC had provided the functionality to allow a subscriber to add a STB or a Sky+ STB via the internet or STB, then it is not a great step to also enable the subscriber to add a different kind of digibox, the position is different in relation to adding Sky Talk or Sky Broadband, which had specific requirements which do not resemble requirements to add set top boxes.
It is evident that the scope of functionality was limited to purchasing of the core Sky digital TV product at paragraph 6.2.2.5. I do not consider that Sky is correct in saying that paragraph 6.3 provided for a wider definition of products and services within scope. The only requirement was for there to be generic functionality and I consider that Robert Worden is right when he says that specific new products have specific requirements and there is only a limited amount that can be done to anticipate those requirements. The specific functionality to support Sky Broadband, Sky+, Sky HD, multi-room and Sky Talk could not be anticipated or allowed for in any CRM System. Rather, what was required was the specific functionality for the core digital TV product, with generic, not specific, functionality for the other products. This would, in my judgment, be the limited extent to which flexibility would have been provided to enable these other products to be added when the detailed requirements became known.
Case Tracking (Element 20)
Element 20, Track Order, is functionality to allow a customer to Track a case or product order over the internet. The IT experts agree that tracking of products via Self Service is within the scope of the PwC and the ASI CRM Systems.
EDS rely on Robert Worden’s evidence at paragraph 101 of the Fourth Joint Memorandum. He considers that case tracking was not in scope because it was expressly excluded by UC 32.02 of FS 32 History and Memo page 20 which states “Collate & Display Associated Lines of History & Memo – Web Contact: This use case is not applicable to web contact.” While EDS accept that UC 32.01 “Core History & Memo -Web Contact: The requirements specified in this section, apply to instances where contact is engaged over the Web” does refer to the web channel, they point out that the use case states that “the only facets displayed are the date and time of the last contact”. They say that this means that the customer will only be able to view details of the most recent contact, which is not case tracking.
In relation to this aspect, Sky refer to the evidence of Mark Britton. At Paragraph 90 of the Fourth Joint Memorandum he accepts what is said by Robert Worden, as set out above, but says that as the functionality would be provided to the CA and as both Siebel and Chordiant provide architectures oriented towards making functionality available over multiple channels, Sky would have had the capability of adding this functionality to the Self Service channel.
I consider that, again the use cases within the Baseline 2 Functional Specification provide the best guide to the scope of Sky’s requirements which would have been implemented as part of the PwC or the ASI CRM Systems. For whatever reason Sky accepted that web self service would not apply to case tracking but all that was to be provided was a limited view of the recent contact. Whilst I do not doubt that the functionality could have been added, that was not what Sky sought at the time and I see no reason why Sky’s requirements would have changed in this respect.
Case Management: Element 15
Element 15 is functionality to “enable the CA to track any enquiries or transactions according to a case number.”
It is common ground between the experts, as set out at paragraphs 70 and 71 of the Fourth Joint Memorandum, that limited Case Management functionality forming part of that described in Element 15 would have been delivered by either PwC or the ASI as part of the relevant CRM system.
EDS contend that the functionality would have been limited to Technical Enquiries, Customer Feedback and Damage Claim, in accordance with the scope of Use Case 32.02 in Functional Specification 32 and say that Ian Murray accepted that the use case only covered these three areas.
Sky rely on the requirement set out at paragraph 1.3.1.5 of Appendix A to the ITT that systems must be in place to ensure that CAs can see whether the customer is calling for a second time about the same query. Robert Worden says that it was unclear in this provision of the ITT where the line between the functionality of the CRM System and the work of the CAs was to be drawn.
Sky refer to the evidence of Ian Murray who said that Case Management was a familiar concept in CRM. His view was that Siebel provided the required functionality for Case Management, using its Trouble Ticket or other functionality and that the Siebel product could have shaped the Case Management requirements. Sky say that such functionality would not be limited to the three instances in the Baseline 2 Functional Specification, as EDS contend, because if the functionality was provided by Siebel it is more than likely that Sky would have required it to be implemented.
EDS say that Sky has not displayed great enthusiasm for the delivery of Case Management functionality or the use of it once delivered. EDS say that the only aspect of case management functionality which was delivered with the Actual CRM System in March 2006 was the automatic allocation of a unique identification number to all technical enquiries received in the call centre and that this is not being used by the CAs in practice to track the history of technical enquiries. EDS say that similar functionality was implemented for general enquiries in February 2008 enabling a CA to select an enquiry topic and generate a reference number for the query but that this is only being used for enquiries relating to deceased customers and Sky Talk.
I do not consider that the reference in Appendix A to the ITT provides sufficient definition for Sky to establish that a broad case management functionality would have been provided. The more relevant provision is, I consider that in the Baseline 2 Functional Specification which Ian Murray confirms would cover the limited functionality which EDS contend is included: Technical Enquiries, Customer Feedback and Damage Claim. Whilst Siebel may have functionality which PwC could have used, the limited scope of the Functional Specification together with what I accept is Sky’s limited enthusiasm for Case Management lead me to the view that in both the PwC and the ASI CRM Systems, the functionality would have been limited as EDS contend.
….
Q: OVERALL SUMMARY AND CONCLUSION
I now summarise some of the main findings and conclusions arising from this judgment.
Provisions of the Prime Contract
In relation to construction of the Entire Agreement clause at Clause 1.3.1 of the Prime Contract, this clause does not preclude SSSL from advancing a claim for negligent misrepresentation or misstatement against EDSL.
Except for claims in deceit, Clause 20.2(ii) of the Prime Contract has the effect of excluding EDSL’s liability to SSSL for Call Rate Reduction benefits.
Provisions of the Letter of Agreement
Paragraph 17 of the Letter of Agreement is an exclusion clause for claims for breach of the Prime Contract between EDSL and SSSL but is not an exclusion of “All known claims and all unknown claims” (in the latter case up to 17 June 2001) which SSSL could advance against EDSL on the basis of breach of contract as EDS contend.
The Memorandum of Understanding
In relation to the Memorandum of Understanding, there was no separate binding agreement made by Richard Freudenstein and Steve Leonard on 6 March 2002.
The Memorandum of Understanding signed on 26 March 2002 was not a legally binging agreement when it was signed. It was and was intended to be “subject to contract” and both parties envisaged a later contract which would govern the changed relationship between Sky and EDS dealing with the matters in the document. It is not possible to spell out any contractual relationship founded on conduct after 6 or 26 March 2002.
As a result the Memorandum of Understanding does not give rise to any full and final settlement nor does it give rise to new warranty provisions.
Duty of Care
No duty of care should be imposed upon EDSC in favour of BSkyB or SSSL or upon EDSL in favour of BSkyB which circumvents or escapes the contractual exclusion or limitation of liability which the parties put in place between EDSL and SSSL. That contractual structure negatives such duties of care and no such duties arise in this case. Any liability of EDSL to SSSL arising under a duty of care will not permit SSSL to circumvent or escape the contractual exclusion or limitation of liability provisions for the act or omission that constitutes the tort.
Misrepresentations prior to the selection of EDS and the Letter of Intent
As to alleged misrepresentations as to resources made prior to the selection of EDS and the Letter of Intent: the Greater Resources Representation was not made by EDS and Sky have not established that EDS made a misrepresentation in relation to the Lesser Resources Representation or the Ready to Start Representation. Accordingly, EDS are not liable to Sky for misrepresentation as to resources.
As to the alleged misrepresentations as to time prior to the selection of EDS and the Letter of Intent, EDS represented that they had carried out a proper analysis of the amount of elapsed time needed to complete the initial delivery and go-live of the contact centre and that they held the opinion that, and had reasonable grounds for holding the opinion that they could and would deliver the project within the timescales referred to in the Response. That representation was false as there was no “proper analysis” nor were there “reasonable grounds”. It was made dishonestly by Joe Galloway who knew it to be false. In making the misrepresentation, EDS intended Sky to rely on it and to select EDS for the Sky CRM Project and Sky did so. Accordingly, EDS are liable to Sky in deceit for that misrepresentation.
As to the alleged misrepresentations as to cost prior to the selection of EDS and the Letter of Intent, EDS represented that they had carried out a proper estimate of the cost of completing the project and that they held the opinion that, and had reasonable grounds for holding the opinion that, they could and would deliver the project within that budget in the Response. In putting in an estimate of some £54m in the EDS Response, EDS carried out a proper estimate of the cost of completing the project and had reasonable grounds for holding the opinion that they could and would deliver the project within that budget in the Response. Accordingly, EDS are not liable to Sky for misrepresentation in relation to cost.
EDS has no liability in misrepresentation for the Proven Technology Representation or the Significant Risk Representation or the alleged misrepresentation as to methodologies.
Accordingly, I find that EDS made fraudulent representations as to time both prior to the selection of EDS and the Letter of Intent but otherwise Sky’s other allegations of misrepresentation fail.
Misrepresentations prior to the Prime Contract
As to the alleged misrepresentations made prior to the Prime Contract, EDS represented that they had carried out a proper analysis of the amount of elapsed time needed to complete the initial delivery and go-live of the contact centre and that they held the opinion that, and had reasonable grounds for holding the opinion that they could and would deliver the project within the timescales referred to in the Response. That representation was false as there was no “proper analysis” nor were there “reasonable grounds”. It was made dishonestly by Joe Galloway who knew it to be false. In making the misrepresentation EDS intended Sky to rely on it and to select EDS for the Sky CRM Project and Sky did so. Accordingly, EDS are liable to Sky in deceit for that misrepresentation.
Misrepresentations prior to the Letter of Agreement
In relation to the allegations of misrepresentations prior to the Letter of Agreement, the statements made by EDS did amount to a representation that they had developed an achievable plan, which had been the product of proper analysis and re-planning. EDS did not carry out a proper analysis and re-planning exercise to produce a programme which would have been achievable and the representation was false and was made negligently. The misrepresentation was a material misrepresentation which EDS intended Sky to rely upon and which Sky did rely upon in entering into the Letter of Agreement. EDSL are therefore liable to SSSL for negligent misstatement and under section 2(1) of the Misrepresentation Act 1967. Otherwise, EDS is not liable for any other misrepresentation prior to the Letter of Agreement.
Liability for misrepresentations
The misrepresentations which were made prior to the selection of EDS and the Letter of Intent and also prior to the Prime Contract were only made on behalf of EDSL and not on behalf of EDSC but were made to both BSkyB and SSSL.
EDSL has no liability to BSkyB for the neglegent misrepresentations made prior to the Letter of Intent, the Prime Contract or the Letter of Agreement.
Breach of the Prime Contract
In relation to breach of the Prime Contract, EDS failed properly to resource the project after the Letter of Agreement; EDS were seriously in delay in carrying out the work and achieving the Milestones and delivering the Deliverables and EDS had carried out little work in the period mainly because they had failed to capture the requirements or manage that process or merely because of the general lack of progress. On that basis 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.
However, neither the breaches alone nor the combination of breaches amounted to a repudiatory breach of the Prime Contract, as varied. Further, the evidence does not establish that there was an acceptance of any repudiation.
Causation
In terms of causation, if EDS had not made the misrepresentations to Sky prior to the selection of EDS and the Letter of Intent, Sky would not have continued with EDS but would have engaged PwC to implement the PwC CRM System using Siebel. Sky are entitled to recover losses caused by entering into the Prime Contract on the basis of either the misrepresentations made prior to selection and the Letter of Intent or prior to the Prime Contract. PwC would have implemented the PwC CRM System with a total effort of 2794 man-months and would have achieved go-live on 1 February 2003.
If EDS had not made the misrepresentations to Sky prior to the Letter of Agreement, Sky would not have continued with EDS but would have engaged an Alternative Systems Integrator to continue with the CRM project and implement the ASI CRM System. An ASI would have implemented the ASI CRM System with a total effort of 4,749 man-months and would have achieved go-live on 1 February 2005. EDS are also liable for damages which represent damage for breach of the Prime Contract prior to July 2001 and I find that damages should be awarded on the basis that the wasted costs, being effort expended less useful work, are £16.3 million.
Sky are entitled to damages for breach of the Prime Contract as varied by the Letter of Agreement which should be based on the costs of the effort incurred by Sky after 6 March 2002 in reaching the stage of development that EDS would have reached if they had expended the effort they had charged for in performing their obligations in accordance with their obligations under the Prime Contract as amended. On that basis the Quantum experts have agreed that the figure is £52.8m including the value of the unpaid EDS invoices or £48.8m excluding those invoices, the sum recoverable being subject to the cap under clause 20 of the Prime Contract.
Mitigation
In terms of EDS’ contentions on mitigation, Sky did not fail to mitigate their loss by acting unreasonably in implementing the Actual CRM System or by de-scoping or by failing to introduce Self Service functionality at an earlier date.
Lost Business Benefits
In terms of lost business benefits, the lost benefits in relation to reduction of churn rate should be assessed on the basis that the saved in practice percentages for customers who cancel (Cuscanners) should be:
(1) Home Moving: Change in Lifestyle (Home Moving): 8.1%;
(2) Value for Money: Subscription Fee Issues: 6%; Change in Financial Situation: 3%; Technical Issues (Part):10.2%; Poor Perception of Value: 9% and Contractual Account Issues (Part): 15%;
(3) Customer Service: Service Issues: 19.2% and Technical Issues (Part): 17.7%
The lost benefits in relation to reduction of churn rate should be assessed on the basis that the saved in practice percentages for customers who are cancelled by the System (Syscanners) is 1.8%.
In relation to the lost business benefits to be derived by a reduction in call rate
(1) The benefits to be derived from Self Service by migration of calls to Self-Service should be based on 15% of Customer Service calls over some two years and on 45% of Sales Upgrade calls and 23.3% of Technical Enquiry calls being transferred to Self Service by 2011.
(2) The benefits to be derived from call avoidance by root cause analysis of technical enquiries by the Actual CRM System, should be based on Simon Roncoroni’s figure of a 5% reduction in Technical Enquiry calls.
(3) The benefits to be derived from an increase in First Time Resolution, should be based on a table similar to that in Simon Roncoroni’s first report at paragraph 8.40 but with figures of 95 (2000/1); 60 (2001/2); 50 (2002/3); 11 (2003/4) and 25 (2004/5) and should adopt the approach of Simon Roncoroni as to the two year period, the 60% and 40% and his approach to the B1 and B2 Scenarios.
Quantum Issues
In relation to the quantum issues raised for resolution:
(1) Issue 1: The rates to be applied to determine the cost of effort expended by an ASI in Scenario B2 should be PwC’s rates in 2000 plus 10% from 1 January 2002, with an additional 2.7% increase in fees to be applied for work with effect from 1 January 2003 and again from 1 January 2004.
(2) Issue 2: General Syscanners with financial problems who are saved by the Actual CRM System should be valued on the basis of a figure of 33% of the value of a saved Cuscanner.
(3) Issue 3: The contribution of saved Cuscanners should be valued at £227.
(4) Issue 4: This issue does not arise.
(5) Issue 5: This issue does not arise.
(6) Issue 6: This issue has been resolved by EDS accepting that the Business as Usual Call Rates from 2008/09 to 2010/11 are assumed to be the same as in 2007/08.
(7) Issue 7: There should be no adjustment in relation to the three heads of adjustment where EDS say that there are no supporting documents; where EDS say that maintenance costs appear excessive or where EDS say costs relate to assets acquired after March 2006.
(8) Issue 8: In assessing what maintenance and operating costs Sky would have incurred in relation to the PwC CRM System, it should be assumed that PwC’s estimate was comprehensive in that it covered all maintenance and support activities, including those activities which, in practice, in relation to the Actual CRM System, Sky has carried out using internal resources.
(9) Issue 9: On my findings as to timing, it is not correct to assume that there would have been an abortive training session such as that arranged in October 2004.
(10) Issue 10: This issue has been resolved by EDS accepting that Simon Roncoroni’s estimate of Average Call Handling Time (“AVHT”) for 2007/8 should be applied and that no adjustment is to be made to Simon Roncoroni’s estimates of future AVHT.
(11) Issue 11: There should not be any adjustments in respect of the calculations of loss of benefit in respect of self-service for sales upgrades to take account of the fact that Self Service for certain sales upgrades was available via the web prior to March 2006.
Reservation
As set out above various quantum issues still have to be determined including the impact of tax, discounting and interest, together with the Counterclaim and the effect of the cap. To the extent that further issues or clarification are required for the quantum experts to deal with the detail of quantum then I reserve those matters to a later decision once the relevant matters have been identified. I also reserve the question of EDSC’s liability under the Deed of Guarantee for later determination.
Postscript
On any view this was a case which involved complex issues ranging over a wide variety of topics. The case involved hundreds of bundles and thousands of documents. Over a period of 10 months there were 109 hearing days, including submissions, witness and expert evidence. I would wish to thank counsel and solicitors for the way in which they conducted the proceedings. I have been much assisted in the preparation of this judgment by the detailed expert evidence and by the written and hyperlinked submissions which were provided by the parties. I would also like to thank the court staff who ensured that proceedings ran smoothly, including sitting late or early on occasions to ensure witnesses completed their evidence in accordance with the timetable.