This is the third in a series of articles in which Christopher Hamel-Smith addresses some of the key legal issues arising out of the Y2K challenge. They were written in order to make a contribution to the Trinidad & Tobago business community’s efforts to prepare for the transition into the Year 2000 and to manage the associated risks. Forming part of a broader series on "Information Technology and the Law" by the same author, these articles were first published in the "Business Guardian" over the period June 10, 1999 to September 9, 1999.
A number of legal issues arise in connection with potential Y2K supply-chain disruptions and your relationships with key business partners, particularly suppliers and customers. These issues need to be appreciated by management in order to design and implement an appropriate strategy to minimise Y2K risks. The general objectives of such strategy will be:
- To minimise exposure to what may be potentially significant legal liabilities; and
- To preserve any legal rights to be indemnified for losses caused by Y2K.
In pursuing this strategy with your key business partners, your main focus will be:
- To stop the flow of new problems and risks into your business;
- To attempt to effectively negotiate, or renegotiate, your contractual terms; and
- To communicate effectively, yet carefully, with them.
New Contracts
The first step is to stop creating new Y2K problems and risks for your business. In order to do so, it is important to recognise that the full range of contracts which you enter into in the ordinary course of your business may need to be reviewed in the light of Y2K. Obviously this applies to all new contracts for the supply of computer-related products and services (including equipment which includes embedded systems) as well as to contracts for specific Y2K remediation services. However, it also applies to all other types of contracts for any products or services on which your business depends.
To avoid new Y2K risks, you should carry out additional investigation before deciding whether or not to enter into new relationships. Or you may negotiate suitable contractual terms to deal with the issue. For example, a financial institution will want to investigate the extent to which a significant borrower’s credit risk is increased by exposures from the Y2K problem. This may lead to a decision not to proceed with the transaction. Or the transaction may proceed after the negotiation of terms designed to protect the lender from Y2K risks. The same applies to all kinds of companies. We all enter into many different contracts where Y2K issues can be anticipated and addressed.
In negotiating and drafting contracts, it is also important to recognise that references to "Year 2000 compliance" or to being "Y2K ready" are not satisfactory. These terms, if undefined, are vague and likely to lead to expensive disputes and litigation. The challenge is to use appropriate and precise language to cover so much of the technical requirements of "Year 2000 compliance" as are relevant to the particular contract under consideration.
Existing Contracts
Having implemented appropriate procedures to cover new contracts, companies need to undertake an inventory and legal analysis of their other significant contractual relationships.
With just over 6 months remaining to the Year 2000, as I have stressed previously, it is hardly possible to be too tightly focused in your business’ efforts to tackle Y2K. In this area too, for the purposes of identifying which of its contractual relationships to focus upon, it may be helpful to make use of a definition of a " Y2K mission-critical failure". Again, this could be based on a modified version of the Gartner Group’s definition i.e. any business dependency which, if it were to fail, would cause one of the following:
- A health hazard to individuals;
- A shutdown of business, production, or product delivery operations;
- A significant loss of customers or revenue; or
- A significant litigation expense or loss.
In relation to each contractual relationship which could cause the business to experience such a "mission-critical failure", the aim is to identify the extent and nature of the company’s rights or obligations that might be affected by Y2K. These include any warranties, representations, limitations on liability, force majeure clauses or other provisions which may impact on your position.
Depending on the outcome of this legal analysis, you will then be in a position to explore your options to manage your risks associated with the Y2k in any number of ways as appropriate. These could include:
- putting a party on notice of their existing legal responsibilities;
- seeking to re-negotiate all or some of the terms of a contract; or
- looking for alternative suppliers or new customers.
Communicating About Y2K
In addition to analysing and reviewing your contracts, another important concern is what and how to communicate with your customers, suppliers and other third parties about Y2K issues. In my next article, we shall look at the legal implications of these communications.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.