Y2K Legal Risks

Y2K is not just (or even primarily) a technical issue. Rather it is a major business problem. Even in the unlikely event that your company has already solved all of its internal Y2K problems, it is still exposed to significant supply-chain risks. These include the risk of disruption caused by Y2K problems at key utilities, such as electricity and water.

These issues are so significant for the business community that the Trinidad & Tobago Chamber of Commerce recently hosted a Y2K session focusing entirely on the state of preparedness of the utilities. One of the more interesting aspects of this exercise was that it provided a clear illustration of the importance of Y2K supply-chain issues. During that session:

• WASA was confident that its ability to deliver water would not be affected by internal Y2K problems, but stressed its reliance on the supply of electricity to do so;
• Powergen expressed confidence in its own internal Y2K preparedness, but pointed out that it relied on T&TEC to meet its contractual obligation to supply it with the natural gas needed to generate electricity;
• T&TEC responded by expressing similar confidence about its own preparedness, but pointed out that it had to rely on NGC for the gas it was obliged to supply to Powergen; and
• NGC in turn expressed confidence about its own position, but emphasised its reliance on the offshore producers.

Ultimately, legal principles will determine who will be responsible for any losses caused by Y2K-related disruptions in the supply-chain. In many countries the fears of Y2K related litigation are so great that there have been significant efforts to create new laws which specifically address Y2K risks. In Trinidad & Tobago there are no laws specifically designed for Y2K. However, our laws will allocate the risks of Y2K losses between parties in the supply-chain, based primarily on an analysis of their respective contractual obligations (whether expressed or implied) and on general legal principles which impose liability for negligent actions and misrepresentations.

The range of legal issues that can arise in relation to Y2K is broad. However, some of the issues that you probably need to consider in your own business environment include:

• Legal duties in connection with health and safety matters which could be compromised by a Year 2000 failure;
• Contractual rights and obligations in relation to customers and suppliers, including (but not limited to) suppliers of computer-related products and services;
• Communications with third parties, including customers and suppliers, about Year 2000 issues and the steps available to manage the risks associated with such communication;
• Steps (including indemnities, insurance and the use of unanimous shareholders' agreements) that can be taken to protect directors and officers from personal liabilities;
• Cover (if any) under policies of insurance and any exceptions and limitations which may apply;
• The right to modify software used in your business, and any limitations on doing so as a result of third party intellectual property rights; and
• The possibility of managing Year 2000 related expenditure in the most tax effective manner.

One of the overriding duties imposed on all directors and officers under the new Trinidad & Tobago Companies Legislation is to "exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances". A failure by a director or officer to live up to this standard exposes him to personal liability. But what are the "circumstances" which will affect how a Court will decide what the hypothetical "reasonably prudent" person would do to manage the risks posed by Y2K? This involves management undertaking an assessment of the seriousness of the Y2K threat and of the particular areas in which Y2K creates the greatest hazard in their own particular business environment.

Certainly, responsible managers must develop an understanding of the legal duties and risks of liability that arise in connection with Y2K. They must also have at least a general appreciation of the range of techniques that can be used to manage these risks. Armed with such knowledge, you will be in a position to take a proactive approach to avoiding, or at least minimising, these risks. Ideally, you will do so as part of your overall Y2K contingency plan. If you do so, in the event of a Y2K failure (either internally in your own business or externally at one of your key business partners) the risks of legal liability and loss can be reduced considerably.

Even though there are only about 6 months left before the Year 2000, by exercising leadership and taking appropriate action now, you can still significantly reduce and contain the risk of Y2K-related liability and loss.

With time rapidly running out, it is now critical to act in a tightly focussed manner to manage any remaining legal risks. Indeed, I do not believe that it is possible to be too tightly focused in your effort to tackle Y2K over the next 6 months. Companies should therefore err on the side of devoting their resources to those specific and (hopefully) limited areas of risks where they simply cannot afford to fail. In my next article, I will provide a definition of such "mission-critical failures" and other suggestions that may help you to establish clear and narrow priorities and to stick to them.

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.