Ireland: Legal Implications of Y2K non-compliance

There are various types of liability which may give rise to Year 2000 litigation. When dealing with litigation of this type certain issues arise, namely, the statute of limitations, proofs, evidence, defences, and tactics. These will each have to be dealt with in the course of the Y2K litigation that seems certain to arise after January 1, 2000.

Many analysts have tried to estimate the cost of dealing with Year 2000 problems. The average cost of fixing a computer program is anything from fifty pence to five pounds for each line of computer code and programs these days contain possibly hundreds of thousands of lines of code. These costs can be expected to rise as we get closer to December, 1999 due to the inevitable pressures of demand for skilled IT consultants and technicians. It has been estimated that the cost of litigation which is expected world-wide will be over US$1 trillion. This is likely to mean millions of pounds in litigation costs for Irish businesses.

Will it be the 3rd of 4th of January 2000, the first Monday or Tuesday of the year? Undoubtedly these will be significant dates but while there have only been rumblings of discontent in Ireland so far, Americans have not been slow to set the ball rolling. Approximately 75 Y2K litigation suits have already been filed in the state courts in the United States. One of the first reported of these was a complaint which was filed as early as the 11th of July, 1997 in a case called Produce Palace International Limited -v- Tec-America Inc. This case concerned a claim by a supermarket owner against a manufacturer of cash registers. The supermarket owner alleged that the registers were incapable of correctly processing credit cards with an expiration date in or after the Year 2000. The Plaintiff in the case alleged losses of hundreds of thousands of dollars as a result of the registers not working correctly and at times shutting down completely. The case was ultimately settled out of court for US£250,000.00.

This case highlights the potential gravity of Y2K non-compliance as it demonstrates that difficulties with something as common as a credit card transaction can cause serious business interruptions and consequent losses.

Unfortunately, practitioners advising clients at present, are in a difficult position, as there are no Irish precedents specifically on this topic which can assist us. It is true to say that many of the principles which we expect the courts to apply, are general principles of contract and tort law. However, the unusual and unprecedented phenomena of Y2K non-compliance may prompt the courts to depart from the usual applications of the legal principles with which we are all so familiar.

Before discussing the legal issues which we expect in this jurisdiction it may be useful to take a brief look at some of the claims which have been instituted in the United States. These serve as a reminder that the issues we are discussing today are in no way abstract and it is most likely that most lawyers here today will be at the issuing or receiving end of a Plenary Summons for Y2K litigation in the near future.

There are approximately seventy five cases know to have been instituted in the US courts. After the Produce Palace case, mentioned earlier, the style of litigation in the US dramatically changed. Law firms specialising in class action suits initiated several class actions against software companies and from that point onward much of the Y2K product litigation in the US followed a class action model.

These cases serve to illustrate the types of claims which we can expect to see in Ireland. They also serve as useful examples of some of the defences which have been pleaded.

It is worth noting that in the US most Y2K law suits have been filed against software companies which are not supplying their customers with compliant versions of their software or alternatively they are charging for Y2K compliant upgrades.

The first class action case in the US was filed in December, 1997 against a software company, Software Business Technologies Inc. This company develops and sells accounting software. The average licensee spent US$3,000.00 and purchased the software through a re-seller. Although a re-seller was involved there was licence agreement between the software manufacturer and the end user. There was an express warranty in this licence agreement against all defects in the software. The software company refused demands to fix the Y2K problem for free. Instead they offered customers a Y2K compliant version at an extra cost. The Plaintiffs sued for breach of warranty and fraud among other things. This case was settled in October 1998. The terms of the settlement were that the Defendant would offer a free kit to enable users of some versions make their software compliant. Users of older versions received a discount on Y2K compliant upgrades.

Another case, the Macola case, highlights the potential legal consequences of representations which may be made through sales, advertising or marketing practices. In a class action where users of software issued proceedings against Macola, Macola offered to fix the Y2K defects for a substantial fee. Although the licence agreement did not contain any significant express warranty against defects, the product was advertised as "software you will never outgrow". The Plaintiffs claimed that this was a warranty and they sued for breach of warranty and fraud. The Plaintiffs case was ultimately dismissed on the grounds that the licence agreement contained disclaimers of warranties. If the facts were slightly different however, and there was no such clause in the licence agreement it is possible that the Plaintiffs could have succeeded.

The last US case that I wish to mention here relates to proceedings being brought against consultants. Initially Y2K litigation in the US was confined to claims against product manufactures and re-sellers. More recently however, negligence actions have been issued against consultants. The following types of consultants could find themselves as defendants or co-defendants in Y2K litigation; IT consultants, accountancy firms, law firms, software and hardware maintainers, IT out-sourcing firms

In the first and most well known case involving a consultant, a company by the name of J. Baker Inc. had contracted with one of the world’s largest consulting firms, Andersen Consulting, to recommend a package which would replace all of its mission critical merchandising and accounting software. Software costing several hundred thousands of dollars was recommended. The consultants never told their clients that the software was not Year 2000 compliant. In addition the consultants were hired at a later stage to make modifications to the software and these modifications were not Year 2000 compliant. Again the client was not made aware of this. The client then had to spend considerable sums of money remedying the Year 2000 defect in the software and they demanded compensation from Andersens. Interestingly, the consultants refused to pay and instead instituted pre-emptive proceedings seeking a declaratory judgement that their conduct did not constitute negligence, misrepresentation or breach of contract. Ultimately this case was resolved by mediation and each party agreed to dismiss their claims with no payment to either side.

Although these US cases serve to highlight the types of claims which are being made and the types of defences being pleaded, many of the cases were settled or resolved by alternative dispute resolution and accordingly they do not set legal precedents which could guide us. More information in relation to Y2K litigation in the U.S., can be found at www.thefederation.org/Public/Y2K/lawsuits.htm and also at www.2000law.com/html/lawsuits.html

The Statute of Limitations, 1957 sets out the following time periods within which an action must be brought;

Breach of contract - six years from the date the cause of action accrued.

General Tort - six years from the date the cause of action accrued.

Personal Injuries arising from negligence - three years from the date the cause of action accrued or the date of knowledge of the injured person (whichever is the later).

It is expected that a large percentage of Y2K litigation will concern defective hardware, software or equipment containing embedded chips which are non-compliant. These defects will in many cases fall into the category of latent defects because they may not be obvious to those purchasing the product at the time of purchase or delivery. The issue of latent damage (other than latent personal injuries) is a particularly vexed one in many jurisdictions, including Ireland. One of the leading cases on this topic Tuohy -v- Courtney No. 1 suggests that time begins to run from the date of damage, even where the damage is not apparent. For example, in the case of a machine fitted with defective (i.e. non-compliant) equipment, the relevant date from when time will run is likely to be the date of purchase or delivery of the machine. The difficulty is that this machine may operate without any problems up until the 1st of January 2000.

This rule will also apply in relation to negligence actions. Take the following example; An IT consultant recommended a particular computer system to a client in 1990. The system was non-compliant. It is most likely that the owners of the system will discover this in the year 2000 or shortly beforehand. In this case it would appear that the claim against the consultant for negligent advice will be statute barred before the Plaintiff even became aware that they have a cause of action.

This rule has been severely criticised and in many cases and it has been described as "harsh and absurd". It has been suggested that an interpretation of the "accrual of a cause of action" as being earlier than the time when a person was or ought to have been aware of the existence of the cause of action, may be unconstitutional. Although this approach is undoubtedly harsh from a Plaintiff’s perspective, to hold otherwise introduces the very uncertainty which the Statute of Limitations is designed to eliminate.

This issue may not be of practical importance in relation to software or products which are reliant on software for their operation. The reason for this is that software products and systems are generally upgraded more frequently than on a six year basis. Accordingly most software that was developed and sold in or around 1994 is unlikely to be in widespread use on the 31st of December, 1999. The issue of latent damage however, is more likely to arise in products which contain embedded chips. As you may be aware such products range from cars and toasters to processing machines in factories. There is no doubt that some of the first claims which will be instituted will require the courts to look at this issue in the context of the Statute of Limitations and it is hoped that some of the first cases will set a useful precedent.

Wendy has already explained the types of claims which may arise and accordingly I do not propose to repeat these save to say that we can expect numerous and varied types of claims. Software developers in particular may find themselves as defendants in a large percentage of Y2K litigation. Accordingly the specific terms of licence agreements will play an important role in framing and defending such claims. It would be possible to devote a whole afternoon to a discussion on terms of licence agreements and consequences for Y2K litigation however, as we can expect many other types of claims I think it would be more helpful to deal in broader terms with issues of proofs and evidence.

Where breach of contract is the cause of action the Plaintiff will need to prove that a contractual relationship exists between themselves and the Defendants. In some US cases Plaintiffs have sued software manufacturers as opposed to re-sellers from whom they purchased the software. The manufacturers have argued that they had no privity of contract with the Plaintiff. In the Macola case the Court did not entertain this Defence on the basis that the software licence agreement specifically stated it was a contact between the software developer and the end user not withstanding that a re-seller had been involved.

This may not always be the case however. Very often re-sellers are used in the sale of hardware and software and in such cases this issue should be considered and the contractual relationship which exists should be ascertained prior to issuing proceedings in order that difficulties will not be encountered with proofs at a later stage.

In relation to proving a breach of contract the proofs which will be required of a Plaintiff will depend on the particular contractual clauses which they use to ground the claim. One of the most likely clauses grounding claims for breach of contract will be the warranties which are implied by virtue of the Sale of Goods Act 1893 as amended by the Sale of Goods and Supply of Services Act 1980. These Acts provide for an implied warranty that goods are of merchantable quality i.e. that they are as fit for the purpose or purposes for which goods of that kind are commonly bought and they are as durable as it is reasonable to expect having regard to the description, price and other relevant circumstances.

The age of the non-compliant product will be important in a claim of this nature. If a product is purchased in 1994 and numerous upgraded versions of the product have been released since then it is likely that a court may decide that at the date of the contract the goods did not breach this implied warranty. It is possible that expert evidence will be required in many cases in order to establish what would be reasonable to expect in relation to the durability of a particular product having regard to the circumstances of the sale.

Most Y2K claims in Tort will be actions for damages for negligence. In these cases the Plaintiff must establish facts from which an inference of negligence can be drawn. In addition the Plaintiff must prove that a duty of care was owed by the Defendant and that it was reasonably foreseeable to the Defendant that the Plaintiff would suffer loss or damage by reason of their action or inaction. There are no specific Y2K legal issues in this regard and it is expected that the general principles of negligence will apply to proving this aspect of the case.

Many Plaintiffs in Y2K litigation will require the assistance of expert witnesses to prove negligence. For example, to establish that an IT consultant provided negligent advice in respect of the design or installation of a computer system, it shall be necessary for the Plaintiff to prove that the consultant failed to take reasonable care in advising them. In this regard there is one defence, which I will discuss later, which I expect will be pleaded regularly. Many consultants and advisors will argue that their practice and advice, at the relevant date, was in accordance with the standard practice of their profession at the time, having regard to the state of art in relation to Y2K issues. In anticipation of this type of defence and in order to prove negligence many Plaintiffs’ will require Y2K experts from various fields in order to establish that, having regard to the state of art at the time, the consultant and/or manufacturer in question, did not take the necessary steps to discharge the duty of care they owed to the Plaintiff.

Once a Plaintiff has succeeded in proving that a Defendant has been negligent, it is then necessary to prove damages and loss which have resulted from the Defendants negligence. It may happen that numerous suppliers to a Plaintiff’s company will be non-compliant and the Plaintiff may experience a general disruption of business operations as a result. If this happens it may be difficult for a Plaintiff company to prove that the losses they have experienced arise from a particular Defendant’s negligence. It may be necessary for Plaintiffs to engage a specialised consultant prior to embarking on litigation, to carry out an assessment and analysis of the Y2K related damage. This should assist the Plaintiff in linking defects and damage to a particular supplier.

In relation to any court action it is essential that critical evidence is collected and preserved. In addition evidence which can easily be altered must be preserved in its original state. Practitioners who are advising clients at this stage regarding Y2K compliance programmes or possible Y2K litigation, should advise their clients that it is of critical importance to maintain a complete audit trail in relation to communications with third parties concerning Y2K compliance issues. This is the case whether your client will be a Plaintiff or a Defendant in a Y2K action.

Clearly from a Plaintiff’s point of view it is important to have a complete record of any form of representations which were made to the Plaintiff regarding the compliance status of products or services. These representations may have been made in a letter, e-mail, completed questionnaire or in a marketing brochure.

From a Defendant’s point of view it will assist the Defendant if they have a comprehensive audit trial which evidences reasonable steps they have taken to ensure that their products or services are Y2K compliant and that no loss would be caused to third parties as a result of any non-compliance on their part.

As solicitors we must realise that much of the evidence in Y2K litigation will be in electronic form and it is important that we are aware of the pitfalls of electronic or digital evidence. Electronic evidence may be subject to automatic deletion or accidental manual deletion. In addition it is possible that critical evidence may be corrupted as a result of Y2K defects themselves.

It is also very difficult for electronic or digital evidence to be authenticated for trial purposes. In this regard I am aware that prosecutions under the Criminal Damages Act 1991 have proved troublesome due to the fact that it is difficult to authenticate electronic evidence for the purposes of a prosecution. Although different standards apply to criminal and civil action, similar principles apply in relation to the integrity of evidence being presented to the court. If clients have electronic files which contain information which would be relevant in Y2K litigation it is important to ensure that these files are not altered from their original condition and that they are carefully maintained in the state they were in at the relevant time. Clients should be advised to keep a controlled archive of electronic files and where alterations are necessary the details of the alteration together with the date of same should be recorded.

Again it is most likely that expert witnesses will be required to prove or disprove the integrity of evidence in Y2K claims.

One particular issue which concerns me in respect of electronic evidence is the fact that in Y2K litigation the courts will impose a duty on the Plaintiff to mitigate their own losses. When Plaintiff companies discover that certain systems are not operating correctly on the 1st of January they may instruct their IT consultants to take immediate steps to limit the damage. It is possible that by taking these steps important electronic evidence may be altered, corrupted or deleted. Accordingly if advice is sought prior to taking any such steps clients should be advised that although clearly they have a duty to mitigate their losses, every step should be taken to try to maintain important evidence in its original form prior to carrying out any remedial works. This may not always be possible and it remains to be seen how the courts will view a lack of evidence due to steps which the Plaintiff took to limit the damage.

As with other forms of litigation there may be a broad range of defences available to defendants in Y2K litigation. The defences I will talk about now are those defences which we expect will be pleaded in this type of litigation. We have seen that some of these defences have already been pleaded in claims which have been instituted in the United States.

This has already been discussed and I mention it here as a reminder that a Defendant could plead that an action is statute barred.

In a claim for breach of contract either party could claim frustration i.e. that the contact was, in effect terminated and that both parties were discharged without liability on the occurrence of an extraneous and unavoidable event for which neither party was responsible. If the performance of an agreement is disrupted by Y2K problems which are not the responsibility of either party this would appear to be an appropriate argument. Since Y2K related computer failure has the potential to effect any computer systems or vulnerable products which are non-compliant, it is possible that the extent and scope of the resulting damage will have wide ranging effects. If a Y2K related computer failure occurs in a relatively remote computer system and this effects the ability of either the Plaintiff or the Defendant to perform their obligations under contract, the defence of frustration could be pleaded.

If the damage caused by a ‘remote’ non compliant computer system is not irreparable damage, it is unlikely that this would be enough to terminate the agreement on the basis of frustration. However, it may lead to an enforced delay of the performance of the agreement, for which neither party may be held liable. Finally even if frustration does occur the agreement is not void ab initio and so the obligations of the parties would remain to be fulfilled.

Many agreements contain a force majeure provision. The purpose of this is to provide a suspension from liability to a party which is effected by an external event where that event is outside the reasonable control of that party. In the absence of a specific force majeure clause in the contract there could be a common law relief from liability. External events, although not brining a contract to an end, may provide a defence for non performance of obligations. A defendant could argue for the application of this principle in circumstances where their failure to perform contractual obligations arises through no fault of their own but rather, as a consequence of Y2K defects in the systems or business operations of other parties upon which they are reliant.

It is expected that much Y2K related litigation will arise as a result of products which are allegedly defective. Section 14(2) of the Sale of Goods Act, 1893 (as amended by Section 10 of the 1980, Act) provides

Section 14(3) of the Sale of Goods Act, 1893 (as amended by Section 10 of the 1980, Act provides

By virtue of Section 39(d) of the 1980, Act this implied warranty as to merchantable quality also applies in relation to goods which are supplied under a contract for the supply of services.

Many suppliers or manufactures of goods will argue that, at the date of the contract for the sale or supply of the goods in question it could not reasonably have been expected that they would function many years later. This argument is most likely to be used in relation to software or products which rely heavily upon software for their operation. The fast changing nature of the high tech industry means that many products which are more than two years old may not function properly for the purpose for which they were initially purchased.

In negligence actions against software manufacturers or IT consultants it is most likely that many of these defendants will argue that at the time a particular product was developed or sold it was common place to use two digits to represent the date field. A defendant may be able to establish that the steps which they took were standard industry practice having regard to the state of art at the relevant time. If this can be established a court may conclude that the defendant was not negligent.

In the Andersen Consulting case mentioned earlier, Andersen argued that up to and including 1991, it was common place to use two digits to represent the date field and accordingly advising clients to install a particular system which transpired to be non-compliant was not negligent of them.

Interestingly Andersen also claimed that at the relevant time making the Plaintiffs system compliant would not have been economically viable as the only software packages available to support their clients requirements were not compliant. Andersen claimed that if any software packages had to be customised for their client this would have been significantly more expensive than the cost of repairs at a later stage when the client could benefit from advances in Y2K remediation technology. This case was resolved by alternative dispute resolution and accordingly we do not have the benefit of a judgement in relation to these defences.

Although this is not a defence to liability I mention it here in the context of defending a claim as clearly it could have an impact on any award of damages in a case.

An example of contributory negligence may simply be that the Plaintiff company took no steps whatsoever to ensure that their business systems would be compliant. It is most likely that the overwhelming amount of public awareness in relation to Y2K issues over the last year will be of assistance to a Defendant in this regard. It could be argued by a Defendant that the Plaintiff was aware or ought reasonably to have been aware of the Year 2000 problem. And they should have taken steps to try to limit their exposure. In a case where a small business does not implement any compliance programme whatsoever and then seeks damages from various third parties who supply goods or services to them, it is likely that a court may find that they have contributed to the negligence by taking no preventative steps themselves.

A Defendant may be able to show that they notified the Plaintiff of difficulties which were anticipated and they suggested a solution to the Plaintiff . If a Plaintiff took no steps on foot of this notification a Defendant may successfully argue that the Plaintiff contributed to their own loss.

A Defendant could also argue contributory negligence where the Plaintiff worked together with the Defendant in relation to the design of a new computer system for installation in the Plaintiff company. In fact this was one claim which was made by Andersen Consulting in their case in the US. In that case Andersen claimed that the Plaintiffs employees worked with Andersen personnel and they approved of the design of the enhanced system.

Mitigation is relevant in two respects in Y2K litigation. In relation to Plaintiffs I intend to discuss briefly a Plaintiff’s duty to mitigate their losses. In relation to Defendants I will discuss some steps which a Defendant can take in order to limit their expose to litigation in the first instance.

Section 34(2)(b) of the Civil Liability Act, 1961 provides that a negligent or careless failure to mitigate damages is deemed contributory negligence in respect of the amount by which such damage exceeds the damage which would otherwise have occurred. This, I expect, will be significant in Year 2000 Litigation.

As mentioned earlier, it is possible, given the high level of awareness of the Y2K problem that courts may take a strong view of the Plaintiffs duty to mitigate their losses. Many companies may take the view that they are not going to spend valuable time and resources on ensuring they are Y2K compliant and instead they will turn to their suppliers in an action for damages if they suffer any losses. Having regard to the huge amount of activity which the Y2K problem has generated it is highly likely that this approach will not be well received by a court.

To demonstrate that a Plaintiff has taken steps to mitigate their losses it would be useful if they could provide evidence of correspondence they have sent to their suppliers enquiring of the Y2K compliance status of various products and requesting results of tests which have been carried out. In addition if Plaintiffs have carried out a Y2K audit using their in-house IT personnel or IT consultants and if Plaintiffs have taken steps on foot of their recommendations, clearly this would assist in proving that they have taken reasonable steps to mitigate their losses.

There are steps which a defendant can take in order to limit their exposure to large damages awards in Y2K litigation. Although such steps are pre-litigation steps designed to avoid or reduce litigation, I mention them here for completeness.

The following steps should be taken by parties who feel they may be exposed to Y2K litigation and in particular parties who sell or supply products which may be non-compliant.

Implement a comprehensive Year 2000 compliance programme. This should include testing products to ascertain their compliance status. This will assist in identifying risks and exposure areas.

Notify customers/clients of difficulties which they expect will arise in relation to the products or services which they have supplied or sold.

Offer some form of solution in relation to any problems you have identified. For example, in relation to software products offer an upgrade to a compliant version or a patch to temporarily fix the problem. Whether or not these should be offered free of charge or at a cost will depend on the facts of each case and what is reasonable in the circumstances.

Carry out a review of all contracts and identify clauses which need to be amended or inserted in order to limit exposure as a result of breach of contract.

Many companies have commenced these courses of action one or two years ago and with less than four months left until the year 2000, it would seem somewhat late to start at this stage. Notwithstanding this however, companies who have done nothing to date could take some of these steps to limit their exposure.

Tactical decisions which are made prior to and during the course of the litigation can have important consequences for the client. Tactical decisions may also assist in the early resolution of a dispute

A Plaintiff must identify a blame worthy and solvent Defendant. Many businesses may experience loss and damage which may have been caused by numerous parties in their supply chain. Accordingly it will be necessary to ascertain whether all of the defects resulted from the knock on effect of one party or whether numerous parties were responsible. A Plaintiff and his legal advisors may not be able to identify among a potential group of defendants which party should ultimately be responsible. For this reason it may be necessary to issue proceedings against a number of parties on the basis that one particular party may take over the proceedings or provide an indemnity to some of the other parties.

In cases where Plaintiffs suffer damage as a result of a Y2K defect in their computer systems, it may be difficult to ascertain whether a software manufacturer or a hardware manufacturer is responsible. Certain versions of software may be compliant in a particular operating environment however, they may be non-compliant in other environments. In addition hardware may be fully functional when some software is installed however, Y2K defects could arise if other software is installed. In these cases it may be difficult to identify which party is responsible for the Plaintiffs loss. If proceedings are issued against both the software and hardware manufacturers they may claim that in specific defined situations their product is Y2K compliant and it was only when the Plaintiff interfaced a particular software with the hardware or vice versa that a difficulty arose. It is most likely that expert consultants will be required to identify the correct defendant in such cases

If a particular defendant is the subject of a large number of Y2K actions they may eventually go into receivership, examinership or liquidation. In such a case a Plaintiff will only be one of a number of unsecured creditors and the likelihood of obtaining any damages from the Defendant may be slim. It is this particular scenario that has prompted some Plaintiffs in the United States to issue proceedings claiming that they will suffer damages as a result of the fact that certain software will not work at all after the 31st of December, 1999.

In particular I refer to the Intuit case where a class action was initiated on behalf of the users of Quicken software. Intuit acknowledged that the current version of their software would only function properly if the user downloaded a patch from their website. For the Plaintiffs who use the earlier versions however, they had to upgrade at a cost of approximately US$30.00. After proceedings were issued the Defendant offered a free fix for the earlier products and said that this fix would be available in mid 1999. The Plaintiffs however refused to settle the case arguing that they would still be harmed because the fix would come several months after the product would first lose some of its functionality. In August 1998 the Court dismissed the complaint on the ground that the Plaintiffs had not yet suffered an actionable harm because the software had not yet failed and Intuit had announced they would make a free patch available by mid-1999,

Following from this last point it would appear that if an allegation is made that a product is not Year 2000 compliant this may be insufficient in itself to bring a successful claim if it is not possible to show damage or likelihood of damage. There is an essential difficulty with a claim for an anticipated injury because even if it could be shown that the product in its current state will not function correctly in the Year 2000, there may be an intervening act in the interim which could cure the defect, for example, a free upgrade.

While we have not yet seen any of these types of actions in this jurisdiction it is possible that the closer we get to the Year 2000 companies may come under increasing pressure to ensure they will not experience Y2K related losses and accordingly we may see proceedings such as those in the Intuit case being issued in this jurisdiction. In such cases solicitors should consider an application to strike-out a claim on the basis that the Plaintiff suffered no actionable damage or loss.

It is most likely that many Y2K disputes will involve more than two parties. By way of example, in the case of a breakdown of a factory production line the factory owner may initiate a claim involving a number of different providers of components of the machines (which may or may not have been Y2K compliant), IT consultants who recommended one or more of the machines and oversaw the development of software and possibly even legal advisors who failed to advise the factory owners of the requirement to deal with Y2K compliance in their relevant contracts.

In these circumstances Defendants will need to make a decision as to the approach they wish to take in order to maximise the contributions from other parties to the overall "pot" to be made available to the Plaintiff.

Defendants will be advised by their legal team of the merits of the Plaintiff’s case and the likelihood of successfully defending it. The strengths or weaknesses of a claim or defence are very important in making a decision to fully defend the action or to enter into settlement discussions. These are not the only considerations however. As with any other form of litigation a Defendant will consider the likely cost of litigation and company resources i.e. management time and internal costs which will be wasted on lengthy litigation.

In addition the business relationship between the Defendant and the claimant may have a bearing on whether or not a case should be settled. As many companies will be looking to their existing suppliers and consultants for compensation a business relationship may already exist between the parties. The benefits of continuing this relationship will need to be factored into any decision to settle the claim.

One of the most important issues in considering whether to settle a Y2K claim is the possible precedent which may be set either by settling the case or proceeding to full trial. For example if one claim is initiated against a company in respect of a non-compliant product they have sold, it may make commercial sense for the company to dispose of the case as fast as possible by offering to settle the case. The difficulty however, is that this course of action may set a damaging precedent for a company and other uses of its product may be inclined to initiate actions on the basis of the first claimants successful settlement. Accordingly in settling any case and in particular the first claim a defendant should bear in mind that they may be exposing themselves to future claims.

If any settlement agreements are entered into it would be useful if the agreement contained a confidentiality clause in respect of both the terms of the settlement and the fact of the settlement.

The converse of this situation is that defendants need to be aware of the risk of proceeding to trial it is possible and receiving a judgement which could set a damaging precedent for their business. In this regard one important issue for larger IT companies is a courts view as to when the Y2K problem could generally be said to have become know. Any judicial pronouncements on this point will have a major impact for future Y2K litigation and as legal advisors and their clients have no guidance on this point at present it is possible that clients would wish to avoid setting an unhelpful precedent.

The Year 2000 problem will undoubtedly result in claims being made under a wide variety of policies. The question is whether or not those claims will have to be accepted and paid or whether they can be excluded through the use of exclusion clauses. Whether or not such exclusion clauses will withstand a challenge in the Irish courts is primarily a matter governed by the general principles of contract law. In addition any exclusions will be subject to statutory controls such as the European Communities (Unfair Contract Terms in Consumer Contracts) Regulations.

There has been much discussion in the insurance industry in relation to whether or not claims arising from Y2K defects are insurable at all. Essentially an insurance contract provides that in return for the payment of a premium the insurer contracts to compensate the insured in monitory or other terms when one or more specified events occur. Either the happening of the event of the timing of the happening of the event must be uncertain. There is a certain inevitability about the disruption that will be caused by the Y2K problem, particularly if businesses do not take the necessary precautionary steps. Although the exact timing of the disruption may not be certain the disruption itself is inevitable.

If an insured’s conduct increases the risk of loss in circumstances where the insured knew or ought to have know the result of its action or inaction, insurers will argue that the loss will not have been fortuitous and accordingly it is not insurable.

Insurance is not to be taken as an indemnity. For example in the case of City of Carter Lake –v- Aetna Casualty & Surety (1979), the insured city had been repeatedly warned or sewage equipment failure leading to flooding, unless certain repairs were carried out. The repairs were not made and subsequently flooding occurred in accordance with warnings which had been given. It was held that the flooding did not constitute an "accident" or "occurrence" under the relevant insurance.

It is possible that even if this basic argument in respect of loss not being fortuitous fails, an insurer may still avoid paying on foot of a policy if any exclusion clauses they have used are enforced by the courts.

One of the issues which is likely to be litigated in the context of the recovery of monies will be the timing of the notification of claims to insurers. Some insured parties have already made a ‘laundry list’ of claims on their insurance policies. In many cases this was prompted by the insured receiving a notification that Year 2000 related defects and losses would be excluded from the forthcoming annual renewal of their policies. Although there must be serious doubts in relation to the prospects of success of any such claims, some have argued that they ought to notify such claims because of the likelihood of damage occurring even though the extent of the damage can not yet be quantified.

A detailed discussion of these issues is outside the scope of this paper, however, it is worth drawing attention to these issues which may arise if people look to insurers for compensation.

The following three points are of the utmost importance in relation to Year 2000 litigation.

1. It is very important that parties to an action have a comprehensive audit trail evidencing all of the steps they took in relation to Year 2000 compliance.
2. Electronic evidence may give rise to particular difficulties and every care should be taken to preserve such evidence in its original state.
3. For Defendants, serious consideration should be given to the precedent value of fully defending or settling a claim.

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.