There have been no cases reported in the United Kingdom to the writers’knowledge in relation to issues arising from the Year 2000 problem.1In the United States, however, nearly 30 actions have been initiated already.Despite the differences between English law and the laws of the various statesof the United States, there are lessons in these cases for any English companyor professional adviser with an interest in the Year 2000 issues and, perhaps,an indication of how litigation about these issues might progress in thiscountry. We will examine below the type of parties involved in these actions inthe US and the issues arising and compare the US experience with what couldhappen in the English courts.
Subject Matter of the Dispute
Publicity about the Year 2000 problem in this country has increasinglyfocused on the fact that the problem is not just an IT problem which can besafely delegated to the IT purchasing department. In addition to computers andsoftware, a wide range of systems and ‘date aware’ equipment may be affectedsuch as air-conditioning systems, lighting, transport and telecommunications. Ifcompanies are not prepared, the consequences of failure of these systems andequipment could be far wider than a mere systems hiccup, affecting business fordays, weeks or even months.
Most of the Year 2000 actions filed in the United States to date haveconcerned traditional IT systems or software, including anti-virus software,medical practice management systems and financial and accounting software.Nevertheless the very first Year 2000 case, Produce Palace International vTEC America Corp, did involve a system which might not be thought of as atraditional IT system: a grocery store cash register. Voice processing andmessaging systems have also been the subject of Year 2000 litigation.
The Produce Palace case demonstrated another point which thegovernment and other interested parties have been trying to instill into theminds of British management. The Year 2000 problem may affect a business wellbefore 31 December 1999. In Produce Palace the credit card reader onthe cash register system would not (amongst other problems) accept credit cardswith ‘00’ expiry dates. The grocery store’s business was affected well inadvance of the millennium as soon as customers tried to present these cards forpayment.
Parties
In most of the Year 2000 related actions filed in the United States, the maindefendant is a computer or software developer or manufacturer. In some cases aretailer or re-seller of the product has been joined as defendant by theplaintiff. The plaintiff in these cases is the individual or corporate entitywhich has purchased the product in question.
However a group of cases initiated in August and September 19982break new ground in that they have been brought by shareholders in a companyagainst the company or its management because the value of their shares has beenaffected by the Year 2000 problem. In one case the company is a provider of Year2000 correction software whose stock was artificially inflated, the shareholdersclaim, because management overstated the potential value of Year 2000 compliancework. On the other hand in Steinberg v PRT Group Inc, shareholdersallege that the company’s management overstated the company’s potentialliability for non-compliant software and the cost of necessary correction work,resulting in an unnecessary fall in the value of the company’s stock.
Andersen Consulting have introduced an interesting twist3 bytaking pre-emptive action in response to a customer’s demand for reimbursementof the cost of a non-compliant system supplied and installed between 1989 and1991. Andersens have applied to the Superior Court of Massachusetts for adeclaration that it is not liable for breach of contract, negligence,misrepresentation or bad faith by reason of the non-Year 2000 compliance of thissystem.
Class Actions
Except for Produce Palace, all of the cases brought in the UnitedStates by the purchaser of software or systems have been ‘class actions’. Thismeans that the action is not brought by the plaintiff solely on its own behalfbut also on behalf of any other unnamed parties in the same position. In thesecases the plaintiffs are claiming redress on behalf of all the purchasers of thesame computer systems or software who will be experiencing similar problems. Anyaward or settlement made as a result of these class actions must then be madeavailable to all the members of the class. All potential class members areentitled to receive ‘best practicable’ notice of the action and can eitherremain in the class and follow the suit to its conclusion or ‘opt out’ andbring their own suit if they wish. If the defendant prevails, it is protectedagainst further lawsuits from any member of the class.
The concept of ‘class actions’ does not exist in English law despitevarious proposals for reform.4 The only similar form of actionavailable would be a representative action under RSC Ord 15, rr 12 and 13. If agroup of persons or members of a class cannot be readily ascertained and thecourt is satisfied that it is expedient to do so, the court may appoint one ormore persons to represent the group in their action. Any judgment is thenbinding on all persons party to and representing other parties in the action,but cannot be enforced against a non-party without the leave of the court.
What Remedies are Sought?
In many of the US cases, the plaintiff complains that the software developerhas failed to provide a free upgrade for its non-compliant software. Thedeveloper has upgraded its program to be Year 2000 compliant but it is askingcustomers to pay for the new upgrade. In their defence developers have arguedthat the upgrade is not simply a compliant version of the original product butadds value by introducing new functionality. This defence was raised in twocases concerning the Norton Anti Virus software.5
Nevertheless, and not suprisingly, the plaintiffs do not limit their claimsto delivery of a new compliant software package or system but often seeksubstantial damages for consequential loss suffered or anticipated as a resultof the non-compliance of the software or system. In Produce Palace forexample, the plaintiff sought damages for loss of trade and profit.
Significantly the Issokson v Intuit Inc action was dismissed due toa ‘lack of harm’. The Californian Superior Court ruled that the plaintiff hadfailed to show that he had yet experienced any damage since the software wouldcontinue to work until the start of the millennium and Intuit had promised tomake a fix available by June 1999. The plaintiff failed to show that his requestfor a free ‘fix’ had been refused. The plaintiff has now apparently filed anamended complaint alleging that Intuit’s offer of a free fix does not go farenough because it has not been widely publicised, some users have already paidfor the fix and because the offer could be withdrawn by Intuit at any time.
Causes of Action
The possible causes of action which might be pleaded in respect of anon-compliant system or software under English law have been considered atlength by commentators and professional advisers. Despite the differencesbetween English law and US law and between the laws of each US state, many areasof similarity can be identified as discussed below. Not surprisingly, it seemsthat the lawyers drafting claims for plaintiffs in these cases have initiallypleaded every possible cause of action regardless, perhaps, of merit.
1.Breach of contract
Until recently, it is unlikely that a contract for the supply of software orsystems would have included any specific reference to the Year 2000 problem.Nevertheless a supplier may have provided an express warranty to meetperformance targets or that the product had no inherent defects. The suppliermay have guaranteed the product for a number of years or referred to aspecification which used four digit year dates. If the software or system is notcompliant and will stop working within the warranty period, the supplier will bein breach of contract under English law. Similarly, in the Californian case of AtlazInternational Ltd v Software Business Technologies Inc, the plaintiffclaims that the developer and supplier of its accounting software productbrought out in 1995 is in breach of an express warranty that the software wouldoperate ‘in substantial conformity with written specifications’.
2.Breach of implied warranties
Many of the plaintiffs in the US cases claim that the defendant is in breach ofwarranties of merchantability and fitness for purpose implied into the contractbetween the supplier and customer. These warranties are implied by statuteswhich vary between the different US states. For example in the case of RoccoChilleli v Intuit Inc, the plaintiff alleges breach of warranties impliedunder the Magnus-Moss Consumer Product Warranty Act (operative in New York and anumber of other states).
The UK Sale of Goods Act 1979 implies similar conditions of‘merchantable’ or ‘satisfactory’ quality and fitness for purpose intocontracts for the sale of goods. Whether a supplier of non-compliant software orsystems will be in breach of these implied conditions will depend upon when theitem was supplied, what representations were made about the item and the effectof non-compliance on performance. In the case of contracts for services, theSupply of Goods and Services Act 1982 provides that the supplier must have used‘reasonable care and skill’ in providing his services. Arguably if it wasnot standard practice in the computer industry to make software Year 2000compliant at the time that the software was supplied, the supplier will not havefailed to use reasonable skill and care.
In many cases the supplier will have purported to exclude its liability forbreach of these statutory conditions. Such an exclusion will be effective onlyto the extent that it is ‘reasonable’ under the Unfair Contract Terms Act1977 in the particular circumstances of the case.
There is a question under English law as to whether the supply of software isa sale of goods or supply of services. In St Albans District Council v ICL7the Court of Appeal commented that software installed directly on to thecustomer’s hardware and not supplied on disk could not constitute ‘goods’.Nevertheless a term would be implied into a contract between the supplier andcustomer that the software was ‘reasonably fit for its intended purpose’,bringing the obligation on suppliers of software under contracts for services upto a level similar to suppliers under sale of goods contracts.
3.Negligence
Many of the US cases allege that software and systems suppliers were negligentin supplying non-compliant equipment. Although it is now clear that one can beliable concurrently in contract and in tort in English law,8 theEnglish courts are extremely reluctant to allow a claim to succeed in negligencewhen it has or would have failed in contract. Negligence is also harder to provethan breach of contract. It is necessary to show that the supplier owed a dutyof care to the purchaser and that the supplier did not use a reasonable standardof care in discharging that duty.
The question as to when the computer industry should have been aware of themillennium bug and when suppliers should have programmed software and systemswith four digit year dates will be extremely relevant. In the US case of Faegenburgv Intuit Inc, the plaintiff alleges that the computer industry has beenaware of the millennium bug since the mid-1970s but failed to address theproblem because of the expense of converting date recognition commands.
Finally the plaintiff must prove that it has suffered loss as a result of thenegligence. As demonstrated by the Issokson case, it may be that, atpresent, damage is merely anticipated. This may help to explain why no caseshave yet been brought in this country. In addition, it is likely that the damagesuffered in most cases of Year 2000 compliance will be pure economic loss whichis difficult to recover in a negligence action under English law unless aspecial relationship can be demonstrated between customer and supplier.
4.Misrepresentations and False and Misleading Advertisements
Manufacturers or suppliers may have made claims for or statements about theirproducts which mislead customers about Year 2000 compliance. In the US case of Courtneyv Medical Manager Corp, it is alleged that the developer misled customersabout the Year 2000 compliance of its Medical Management software because itsadvertising claimed that the software allowed clients to add functionality totheir information systems while minimising investment.
Under English law if a purchaser has relied on false or misleadingrepresentations or advertisements when buying non-compliant systems or softwarethen the purchaser may be entitled to compensation.
5.Unfair Business Practices and Consumer Legislation
In the US it appears that a number of different statutes and codes relating tounfair business practices and other consumer protection enacted in variousstates, such as the California Consumers Legal Remedy Act, the Michigan ConsumerProtection Act and the various state civil codes, may be used against thesuppliers of non-compliant software and systems.
In England and Wales the Consumer Protection Act 1987 may apply in Year 2000actions although the non-compliant products must fall within the definition of‘goods’ and physical damage must be suffered as a result of a defect in thegoods. EC consumer legislation may also be relevant in certain circumstances. Itis likely that in extreme cases, where property damage or personal injury iscaused by the millennium bug (for example if railway signalling systems fail),those responsible may be liable to criminal as well as civil action.
6.Fraud and Deceit
Some of the US plaintiffs allege that suppliers have acted fraudulently or areguilty of deceit. To be guilty of fraud under English law, the supplier ormanufacturer would have to have knowingly lied about the Year 2000 capabilitiesof their products and thus to have deceived purchasers into buying thoseproducts.
Progress of US Cases
Hearings are pending in the majority of the US Year 2000 cases. However, inaddition to the dismissal of the Issokson case, settlement has beenreached in Produce Palace. The plaintiff pleaded nine causes of actionincluding breach of contract, breach of express and implied warranty, breach ofduty of good faith, misrepresentation, negligent repair and breach of Michiganconsumer legislation. In June 1998 the court dismissed five of the nine countsincluding breach of contract and breach of duty of good faith. The other countsstood until the case was settled by payment to the plaintiff of US$250,000 fromthe manufacturer and a further US$10,000 from the retailer.
The Atlaz International case has reportedly also been settled withSoftware Business Technologies apparently offering a free fix for itsnon-compliant software and a discount on upgrades.
What Next for Us?
It seems almost inevitable that the fall out from the Year 2000 problem willlead eventually to some kind of litigation in the UK, either before or after themillennium. It seems likely that disruption will be suffered at some level andsignificant extra cost incurred in seeking to ensure business continuity throughthe change of century. The most recent research carried out by the government’sAction 20009 found that, while awareness of the problem was good, twoout of every five of the medium-sized UK companies taking part in the survey hadnot yet carried out any inventory or assessment of the potential impact on theirbusiness. It is inevitable that some of these companies will look around for ascapegoat or ‘deeper pocket’ to cover their losses, particularly in view ofthe current reluctance of insurers to provide cover for Year 2000 relatedproblems. Some may decide that their position is sufficiently strong to takelegal action against their suppliers.
Concern has been expressed that the threat of litigation could hamper theUK’s chances of tackling the millennium bug effectively.10 In August1998, Action 2000 launched its Pledge 2000 with high profile support fromcompanies such as Sainsburys and Unilever, requiring signatories to workactively ‘to solve the Year 2000 problem rather than taking legal action’.However, signing up to Pledge 2000 does not prevent a company from taking legalaction if necessary. The US government has tried to encourage a constructiveapproach to the Year 2000 problem with its ‘Good Samaritan Act’ which becamelaw on 19 October 1998 and offers limited immunity from litigation to companiesmaking disclosures statements about their Year 2000 readiness. It seems unlikely that the UK government will follow suit. Proposed legislationin this country has focused on obliging companies to carry out Year 2000 auditsand make declarations of compliance and making it a criminal offence to supplynon-compliant goods or services.11 It is doubtful whether thislegislation will ever reach the statute books.
Action 2000 has also proposed that parties to a potential Year 2000 disputesign a Millennium Moratorium or Immunity Certificate to allow them to shareinformation without fear of litigation. The Moratorium Certificate allows apotential plaintiff to postpone action without its claim becoming time-barred;under the Immunity Certificate the plaintiff waives its right to take actionagainst the supplier of non-compliant equipment completely. It remains to beseen whether UK companies will take advantage of these proposals. In themeantime it will be interesting and informative to track the progress of Year2000 litigation in the US. Any company considering taking action over Year 2000issues in this country should certainly take into account the lessons learnt onthe other side of the Atlantic.
Endnotes
- The information contained in this article was correct to the best of the writers’ knowledge on 24 November 1998.
- Downey v Chan, Bennet v Chan, Cohen v Chan, Lindsay v Peritus Software, Teague v Peritus Software.
- Michael Young (on behalf of Andersen Consulting) v J.‚Baker Inc.
- For example, the Law Society’s 1995 report ‘Group Actions Made Easier’.
- Capellan v Symantec Corporation and Jean Marie Cameron v Symantec Corporation.
- The implied condition of ‘merchantable quality’ was amended to ‘satisfactory quality’ by the Sale and Supply of Goods Act 1994 for all contracts entered into after 3 January 1995.
- [1996] 4 All ER 480.
- Henderson v Merrett Syndicates [1994] 3 All ER 506.
- Research carried out in September 1998.
- For example, The Times, 12 November 1998.
- The Companies (Millennium Conformity) Bill presented to the House of Commons on 29 July 1997 and the Millennium Conformity Bill presented to the House of Commons on 31 March 1998.
