THE PRACTICAL PROBLEM

A number of corporations will be experiencing a risk of substantial failures in their computer systems (and devices that have computer chips built into them) when turning into the next millennium. This is due to how computer systems typically handle dates, which does not take into account century changes. (The computer programs operate with two digits instead of four, and cannot distinguish year 1900 from year 2000).

Potential failures range from minor inconvenience to total automatic shutdown of equipment. The computer problems that will arise from the turn of the century are unique and likely to represent one of the largest and most complex project management tasks ever. It may effect any program, application and piece of equipment. Gartner Group, the computer consulting company, has assessed the world wide costs associated with the Year 2000 problem to be between $ 300 - $ 600 billion.


RESPONSIBILITY AND LIABILITY

1 Introduction

There are no special provisions regarding responsibility and liability for damages, losses and costs etc. caused by the Year 2000 problem. Yet, no judgement has been passed by Norwegian courts on this issue.

We have below set out a brief and general survey of responsibility and liability with respect to Year 2000, based upon relevant existing Norwegian contract law (see item 2), corporate law (see item 3), and stock exchange/securities law (see item 4).

2 Contract law

2.1 Introduction

Before discussing the allocation of liability under Norwegian contract law, it is important to determine whether the damages, losses and costs are deduced from a product delivered (e.g. standard or custom designed software) or from services rendered by a consultant. In case of a product delivery, the Norwegian Act on Sales of Goods will apply (see item 2.2). Any ambiguity in the agreement will be interpreted in light of the provisions of the Act. There are however, no specific Norwegian statutes regarding services (except with respect to consumer services) and general principles of Norwegian contract law will therefore apply (see item 2.3).

2.2 Sales contracts

2.2.1 Approach and main rules

Ideally, the parties' respective liabilities, including liabilities regarding the Year 2000 problem, should be determined in the actual agreement. However, contracts entered into before the mid 90's will normally not contain any provisions on this matter.

Assuming that the actual contract does not contain any provisions regarding the Year 2000 problem, the question is whether it is the buyer or the seller's risk if the system and/or equipment does not handle the turn of the century. As a main rule, the seller will be liable for the Year 2000 problem if the buyer, when entering into the agreement, had justified expectations of such capability. The buyer may have obtained such expectations through negotiations with the seller or through information in the market. The Year 2000 problem became generally known in the market some years ago, but it is difficult to exactly point out when. If the awareness of the Year 2000 problem for example arose in 1996, all computer equipment sold after this year should be capable of handling the problem. If it is not, it might be considered as a breach of the seller's obligations.

According to the Norwegian Act on Sales of Goods, a contract concerning sales of goods may be terminated due to material breaches. In general, we believe that a failure of handling the Year 2000 problem, normally will be considered as a material breach which will then give the buyer a right to terminate the contract. However, before the buyer can terminate the contract, the seller has a right to cure or deliver a substitute. The buyer may only terminate the contract, in this respect, the moment the seller fails to do so or neglects his obligations.

Item 2.2.2 discusses briefly the sellers duty to inform the buyer. We then analyse in 2.2.3 when the buyer must notify the seller of the default in order to retain his claim. Item 2.2.4 deals with upgrades. We next consider the scope of the liability in 2.2.5, and finally some words about product liability in 2.2.6.

2.2.2 Seller's obligation to inform the buyer

The seller is under a general obligation to provide the buyer with all relevant information about the product. In other words, if the seller at the time of the sale had relevant information about the product's non-capability of handling Year 2000 problem but did not pass such information on to the buyer, this may be considered a breach of the seller's obligations not to inform the buyer. However, the seller is not (unless the parties agree otherwise) legally obliged to provide the buyer with further new product information after the sale has been consummated. This may, however, be viewed differently in the event that the seller has continuing obligations towards the buyer (such as maintenance, up-grading etc.), cf. item 2.3 below.

A breach of the seller's obligation to inform may give the buyer a right to compensation for upgrading-costs, or even a right to terminate the contract.

2.2.3 Buyer's notification of defaults

First of all, the buyer must notify the seller of any product default within a reasonable period of time after such default was discovered or should have been discovered, in order to preserve his right to compensation.

With respect to the Year 2000 problem, the question is therefore when the buyer is obliged to notify the seller. Is it sufficient that the buyer notifies the seller after the Year 2000 problems occur, or is notification required as soon as the buyer becomes aware of possible product problems related to Year 2000? This question rises several difficult questions, and it will go beyond the scope of this memorandum to discuss all these matters in detail. However, the main rule is that the buyer's obligation to notify defaults do not start to run before the problems occur. In any case, the buyer's right to claim damages is time-barred two years after the date of purchase. A shorter time limit may be agreed in the agreement.

In sales to consumers, the right to complain expires after two or five years, depending on the anticipated working life of the purchased product. If the product is meant to last for a considerably longer period than two years, like computer equipment, the right to notice defaults is time-barred after five years. After such period the seller can not be held liable for product defaults.

The Norwegian Statute of Limitation can also rescind the buyers possibility to claim damages from the seller. The limitation period is usually three years from the default was discovered or should have been discovered, but the time-limit can be prolonged up to ten years if the buyer had a lack of knowledge about the default.

2.2.4 Upgrades

The seller may offer upgrades and other improvements to the system. An interpretation of the agreement will normally decide whether or not the seller is liable for the Year 2000 problems arising after the upgrading is done. If the contract does not regulate the issue, the above mentioned aspects in item 2.2.1 regarding the buyers expectations to the system will apply.

Regarding disclaimers in the contracts limiting or excluding the seller's liability, see item 2.2.5 below.

2.2.5 The scope of the liability - Exemption clauses

Assuming the seller is liable for the Year 2000 problems; is he also responsible for the profit-loss caused by the problem?

If the contract does not regulate the issue, the seller is (as a main rule), only liable for losses directly caused by the breach of contract, and not for indirect losses, such as lost profit.

The seller will be liable for indirect losses (consequential damages) only if and to the extent he has guaranteed the product's quality (such as handling the Year 2000 problem), or if the seller is liable due to gross negligence or wilful misconduct.

Most commercial contracts include exemptions clauses. As a result, the sellers liability for the Year 2000 problem may be reduced or excluded. Whether the exemption clause reduces or excludes liability depends on the wording of the clause and the specific circumstances at hand.

Some provisions in the Sales of Goods Act cannot be dispensed by agreement of the parties. If the parties, in spite of the provisions of the Act, include such clauses in the agreement, the agreement can be modified or set aside by the courts.

The courts will assess the clauses in light of, inter alia, the status of the parties. In general, agreements between a professional party and a consumer will more likely be modified or set aside by the courts than agreements between professionals.

2.2.6 Product liability

The Norwegian Act of Product Liability, stipulates a strict liability for manufacturers of software, computers etc., for damages caused upon consumers by their products. However, the Act does not apply for product damages caused in commercial business. These damages will often be considered as indirect losses, cf. item 2.2.5 above.

2.3 Maintenance contracts

We assume that the suppliers who have entered into contracts with a duration beyond year 2000, are liable for the Year 2000 problems that may occur. In outsourcing arrangements, it is important to assess which party is the owner of the program. It is likely that the owner of the program will be liable for any necessary Year 2000 upgrade.

Another question is whether a supplier can terminate the contract before the turn of the century to avoid liability. This will depend primarily on the wording of the contract. If the agreement grants the supplier a general right of early termination, the supplier might be able to use this right to re-negotiate the terms regarding the Year 2000-liability.

In cases where the contract terminates before Year 2000, and the Year 2000 problem occurs, the question of liability must be resolved in accordance with the rules described under item 2.2.1. above.

2.4 Mergers and acquisitions

The Year 2000 problems are important issues in mergers and acquisitions. It is particularly important to get guaranties from the preceding shareholders in the company which is taken over, and also to include the the Year 2000 problem in the process of due diligence. The questions of responsibility of the Year 2000 in all running contracts must be scrutinised.

3 Corporate law

The main question here is whether the management be held liable towards the company, the shareholders, the creditors or other parties for any loss accrued because of the the Year 2000 problem?

According to the Norwegian Joint Companies Act, the Board and the management can, if they have acted intentionally or negligently, be held liable for any damage or loss suffered by the company, the shareholders or others.

The management must ensure that the company and its officers and employees have the necessary competence to perform their tasks related to the Year 2000 problem, and we assume that directors are under risk of being held liable for any subsequent damage caused to the company if they do not ensure that sufficient actions are taken to resolve any major Year 2000 problem.

If the annual shareholders meeting has discharged the directors from liability, the directors cannot be held liable for the Year 2000 problem, unless the exemption was based upon information that was incorrect or incomplete in some essential respect.

The auditors are under a continuing duty to monitor the Year 2000 problem, and they must «blow the whistle» through audit reports or through advice directly to the management to avoid liability if they are aware of any major Year 2000 problem.

4 Stock exchange/Securities law

According to Oslo Stock Exchange's regulations, companies have a general obligation to disclose information that have a bearing on the pricing of the stocks.

The Securities Trading Act sets out a general obligation to disclose information which can effect the pricing of the securities.

The Act also states that companies which are preparing prospects (where the underwriting offer is directed to more than 50 persons and the amount is greater than 40.000 ECU), have an obligation to disclose all information necessary for the investors to make a well- founded evaluation of the company's financial situation. Finally, companies have a general obligation to disclose information to The Banking Insurance and Securities Commission of Norway for circumstances that implies a large risk for the running of the business. The EEC-Council Directive on Investment Services is implemented through the Act.

If companies fail to disclose important information, they can be suspended from the Oslo Stock Exchange, and forced to pay penalties or forced to repay profit.

The content of this article is intended to provide a general guide to the subject matter. Several other issues should be taken into consideration in connection with acquisitions in Norway. Specialist advice should be sought about your specific circumstances.

Advokatfirmaet Selmer & Co. Da., Law Firm, Oslo, Norway. +47 22 42 64 90 (telephone), +47 22 33 63 10 (telefacsimile), selmlaw@aft.sn.no (e-mail).