Preparing for Year 2000 Litigation

• Publication year: 1998
• Pages: 71
• Citation: Vol. 27 No. 12 Pg. 71

27 Colo.Law. 71 Colorado Lawyer 1998.

1998, December, Pg. 71. Preparing for Year 2000 Litigation

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71

Vol. 27, No. 12, Pg. 71

The Colorado Lawyer
December 1998
Vol. 27, No. 12 [Page 71]

Specialty Law Columns
Technology Law and Policy Review
Preparing for Year 2000 Litigation
by Carole Jeffery

One trillion dollars is one estimate of the future cost of Year 2000 ("Y2K") litigation to the business community.1 Not only is the projected cost enormous, the litigation itself is inevitable because as many as 55 percent of all small companies worldwide will have at least one system failure, along with from 40 to 45 percent of midsize companies and 15 percent of large companies.2

For more than fifty years, "software defect removal operations" have been less than 100 percent accurate.3 Here in the United States, the average overall "defect removal efficiency" is currently only about 85 percent.4 The chairman of Software Productivity Research, a provider of software measurement and assessment and a leader in Y2K analysis, has estimated that as many as 20 percent or more of the Y2K problems still will be unrepaired and remaining in software after the century ends.5

The reasons for such a large percentage of potential failures to remediate Y2K problems are several: (1) companies are starting too late;6 (2) they are not devoting adequate resources, either personnel or money, to the effort;7 (3) there is insufficient trained personnel to complete the corrections;8 and (4) companies have not allowed adequate time to test systems, which could be the most expensive and time-consuming phase for many businesses.9 These problems are compounded by two additional factors. First, even if a particular company becomes fully compliant, its systems may be contaminated by data or software supplied by others. In addition, no company is a unit unto itself. Each is subject to the vagaries of its community. A city or geographic area that does not have Y2K-compliant telecommunication and electric utility systems could have infrastructure failures that negatively impact the company

Lawsuits Against Hardware/ Software Vendors

Many of these computer failures are destined to end in litigation. Of the potential defendants in these suits hardware and software vendors are the most obvious. Indeed although there is still a year left before the turn of the century, at least nine lawsuits involving Y2K issues have been filed against defendants of this type.10 Of these cases, the first one filed already has settled11 and another has been dismissed by the trial court.12

The seminal case, Produce Palace v. TEC-America Corp.,13 was filed in July 1997.14 The suit alleged that the plaintiff's computerized cash register system, manufactured and distributed by TEC-America and installed in 1995, did not process credit cards that expire on or after the year 2000. The problem that gave rise to the litigation began when Produce Palace, a grocery retailer, purchased a new TEC computer system for its business. The system was purchased contemporaneously with the opening of the plaintiff's produce market to enable it to take in money, network all of its cash registers, monitor inventory, process credit cards, and expedite accounting. The system allegedly malfunctioned on 100 days out of the first 500 that it was in place.

Produce Palace claimed that the computer system's lack of Y2K compliance led to business interruption, loss of income, expensive employee downtime, and customer irritation leading to loss of goodwill. Interestingly, as one basis of damage, Produce Palace alleged that the frequent necessity to reboot the computer allowed the store manager to be exposed to sensitive accounting information to which he would not otherwise have had access.

In a suit that alleged, among other things, breach of warranty, breach of contract, violation of the Magnusson-Moss Warranty Act,15 and fraud, Produce Palace sought revocation, damages, attorney fees, and costs. The case was settled in mid-September for a reported $250,000.

Notify Potential Defendants

The article in this column in the October 1998 issue of The Colorado Lawyer described the steps that companies should take in order to help assure that they will not have business problems as a result of Y2K failures.16 Part of her recommendation was that companies should perform an audit of their software and hardware agreements to determine whether there is a basis to assert claims against those vendors in the event of a Y2K failure. Once that advice has been followed and potential defendants have been identified, companies should put each of those vendors on notice of potential claims against them.17

Contracts for computer hardware and software typically are covered under Article 2 of the Uniform Commercial Code.18 CRS § 4-2-607(3)(a) provides that once goods have been accepted, the buyer must notify the seller of a breach within a reasonable time after it discovers or should have discovered the breach or be barred from any remedy. The timeliness of the notification is determined by applying commercial standards to a merchant buyer.19

The content of the notice must be sufficient to let the seller know that there is or may be a Y2K problem with the hardware or software. However, the buyer is not required to provide a statement of all of the objections that it will rely on in the event that the problem is not resolved.20 The notice should include the following information: (1) the products or services are not, or may not be, Y2K compliant; (2) the user expects the vendor to make the products or services Y2K compliant before any disruption or damages are caused; (3) the user intends to hold the vendor liable for all damages caused by any non-remedied Y2K problems with its products or services; and (4) a request for written confirmation that Y2K-compliant products and services will be provided by a specified date.

It is important that a company protect its rights by giving this notice. If it does not do so, a court may find that it has waived the right to enforce its contract against the vendor.21 The failure to give notice also may be considered a failure to mitigate damages. Under both contract and tort law, a party cannot recover damages that reasonably could have been avoided.22 Thus, if a company knows that it has hardware and/or software that is not Y2K compliant and that the vendor will not make it compliant, the company itself may have an obligation to attempt to rectify the problems.

The last element of the "notice" described above, the request for confirmation from the vendor that it will provide Y2K-compliant products and services by a specified date, is governed by CRS § 4-2-609. Pursuant to this provision, a contract for sale imposes an obligation on each party to assure that the other's expectation of receiving full performance will not be impaired. When a buyer has reasonable grounds for insecurity with respect to the performance of the seller, such as a concern that its hardware or software is not Y2K compliant, it may make a written demand for adequate assurance of due performance from the seller.23 Indeed, until the buyer has received that assurance, it may, if commercially reasonable, suspend its future performance. In other words, the buyer may be able to stop paying.24

A demand for assurance also is significant because if a seller fails to provide adequate assurances within thirty days after receipt of a justified demand, it has repudiated the contract.25 In the face of a...