Y2K Technology Issue

On January 1, 2000, many believe that the world's computers will crash. The cause is called the "Year 2000 Problem", "Y2K" or the "Millennium Bug".

The unanswered question is who will bear the cost associated with these failures as they affect commercial transactions and contractual relationships, including the high cost of litigation.

The Y2K issue is bilateral. It impacts the supplier/seller in performing its obligations to deliver services under a supply contract. It also impacts the customer/buyer in fulfilling its contractual obligations to receive and accept goods or services.

The various legal causes of action are limited only by the creative ability of skillful lawyers. Some obvious legal causes of action include breach of contract, personal injury suits, computer malpractice, negligence, fraud and misrepresentation, fraud in the inducement, negligent misrepresentation, breach of implied warranties, breach of express warranties and shareholder derivative suits.

There are creative legal theories providing legal arguments to excuse performance. Some of the theories to excuse performance are the following legal arguments: (1) force majeure, (2) impossibility/impracticability, (3) mistake, (4) statute of limitations.

Corporations need a reasoned, strategic approach to deal with the Y2K issue.

I recommend the following actions:

  1. Existing negotiated form contracts should be amended to reflect the corporate strategy and agreed upon risk allocation between the customer and the supplier. Emphasis should be placed on amending existing longer term contracts that will continue to be enforce as we approach the year 2000. Existing short-term contracts should have a lower priority and may not require any action.

  2. Change printed form contracts and templates for a negotiated contract to represent an explicit allocation of obligations and risks associated with the Y2K problems and supply chain contracts.

  3. To the extent that changes to all or most existing contracts and contract forms is impractical, prepare an analysis of critical supplier and customer contracts and contracts of long duration and work to modify them as needed.

  4. Consider working within trade groups to define an industry standard to deal with the Y2K supply chain issues.

  5. To the extent necessary, as a customer or a supplier, consider formally requesting a supplier to provide adequate assurances that the contract will be performed. Suppliers should also consider whether allocation of supply will be necessary.

  6. Also identify vendors who may have legal liability to fix problems and put them on appropriate legal notice in writing as soon as possible.

  7. Review vendor license agreements, review software maintenance agreements.

  8. Specific attention should be paid to potential director and officer liability (i.e.) a review of insurance and indemnification provisions in the bylaws, articles of incorporation, etc.). Periodic updates to the board of directors regarding Y2K progress should be made so that they can be shown to have been taking action to deal with the supply chain issues to avoid breaches of fiduciary duties to their stockholders.
In any case, a party to the contract should: (1) formally request information on the activities of the other party in dealing with the Y2K problem; (2) require periodic updates with regard to progress; and (3) ask the other party to work collaboratively to minimize disruptions.

The Y2K supply chain issues represent a significant, but unknown exposure for companies. These companies should develop a comprehensive strategy to deal with these issues and then implement a business-oriented strategy. I hope that this article will raise corporations awareness of this global issue.

Provided as an educational service by John Raymond Dunham, III, Esq..

This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail: jrd@jrdlaw.com, Web site: www.jrdlaw.com or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, SARASOTA, FLORIDA 34236.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.