We're sitting on a legal timebomb

With the year 2000 timebomb ticking away, financial directors face a legal conundrum. The puzzle is, which is worth less: software that isn’t millennium compliant – or the supplier’s promise that it is?

At least the technical aspects of the problem are being taken seriously.

For example, a survey by national law firm Eversheds found that the overwhelming majority of users (92%) believed they had already contacted their key suppliers to make sure their systems will work after 1 January 2000.

However, a huge discrepancy emerged from the same survey as suppliers claimed that 68% of users have not approached them. Suppliers also reported that just 16% of all their customers have approached them for a written assurance that their systems will be millennium compliant.

Any complacency might arise from the fact that many users simply believe a supplier has a legal obligation to sort out millennium compliance. Not so. In truth, many companies could soon discover that any promise they think they have that their programs will work past the turn of the millennium will not be worth the paper it is – or isn’t – written on.

Dai Davis, partner of the national computer and IT group at Eversheds, says users are in a risky position. “Users think there isn’t a problem and they have a legal remedy. In reality, it appears both from what suppliers said and analysis of the users’ legal positions that’s wrong. There is a risk and they have ignored it,” he warns. “Most companies are blindly assuming the risk automatically rests with the supplier, when that is, in fact, far from the case.”

Part of the problem, Davis says, is that “millennium compliance” has no precise legal definition. The only way to be sure of your legal ground is to get an express warranty which conforms to DISC PD 2000-1, the British standard definition of “millennium compliance” that was developed by a committee of the “kite mark” organisation, the British Standards Institute – copies are available from Eversheds as part of its survey.

The chances are, any company that bought a system in the last year or two will be covered for the year 2000 by such an express warranty. But the Eversheds survey found that 76% of key systems are three or more years old. One-third of systems are six or more years old. These older systems may be covered by an implied warranty – though it becomes an increasingly more difficult legal argument to make.

“There’s no cut-and-dried answer to determine whether those implied warranties exist, because it depends on the circumstances,” explains Davis. “You can say; the older the system, the less likely the implied warranty encompassed year 2000.”

Getting written confirmation of millennium compliance from suppliers will help. Two words of caution, though: first, a supplier’s letter is not a legally enforceable contract without “consideration”. Second, the clock is ticking on contracts as well as the millennium problem.

“Consideration basically means that each party gives something to the table,” Davis explains. “Now the supplier is giving the user a promise that the system is millennium-compliant. The question is, what are you giving him?

“One way around that is to hand over #1, so you have a sort of nominal consideration, which is valid. Or alternatively you say, ‘In consideration, we will retain you on our suppliers list and will make sure we continue to buy spares and maintenance from you, which otherwise we might not.’ You imply that there is some future contract, or you will consider entering into one which you otherwise wouldn’t.”

With older systems there is also the problem of the limitation period, the period of time within which you have to make a claim to the courts.

Under contract law, a claim has to be filed within six years of the breach – but the breach doesn’t occur on 1 January 2000.

“The breach is actually the date the system was installed,” Davis explains.

“The clock starts ticking from the day it was supplied and you have six years to bring a claim.” This means if a year 2000-compliant system bought five years ago crashes as the millennium begins, it will be too late to sue for damages because the limitation period will have passed. One way to combat the risk is to get an express warranty from the supplier – now.

However, not even a current, enforceable warranty will resolve every potential problem. For example, support is likely to be in short supply come the millennium. Nearly one out of five (19%) of users have been told by their suppliers that they would not provide support after the year 2000, the Eversheds survey found. A similar number of users (18%) fear that suppliers which have not already withdrawn support, will do so in future.

There is another option, though not an entirely satisfying one. Many companies are avoiding the problem by outsourcing their systems. The survey showed a quarter of users are planning to wash their hands of the problem by outsourcing to third parties. But this may involve passing on responsibility for the problem, rather than actually solving it. Again, the wording of the contract will be vital – and the outsource service-provider may not want to give any guarantees relating to creaking systems, groaning applications or two-digit databases.

One final point: even if your system crashes, will your supplier still be worth suing on 2 January 2000?

Copies of the report are available from Sara Mace at Eversheds. Fax your details to (0171) 919 4919.