UK: Y2K Claims

In either case, you may be a user of the product in question or its supplier and you will know that the problem, whether real or hypothetical, is caused by the product’s inability to recognise the year 2000, either at all or as a leap year. Above all, you will be concerned to find out who is to pay for the cost of rectifying the problem, as well as any other costs suffered as a result, and whether any other liability issues need to be borne in mind.

This briefing note is intended to provide an overview of the more fundamental legal considerations that will apply when seeking answers to these questions. More often than not, parties’ rights and obligations will be delimited by a contract: we consider the importance of express and implied terms. In certain circumstances, the law creates rights and obligations where no contract exists: we consider the potential relevance of the law relating to negligence and strict liability. We conclude with a short explanation as to why you must act quickly if you believe you have a problem.

Many contracts, particularly those entered into more recently, will contain express wording to deal with the issue of millennium compliance. A warranty of compliance contained in a licence or contract of sale will leave the supplier liable to the user in the event that non-compliance is established.

Some contracts, however, may include words whose effect is to relieve a supplier of liability for non-compliance, either expressly (on the face of it unlikely in modern contracts at least) or by way of a general exclusion of liability. Any such term will be subject to a test of reasonableness imposed by the Unfair Contract Terms Act 1977 and 1994 Regulations where one party deals as a consumer or where the term forms part of the standard terms of the supplier.

If liability is not excluded in principle by express terms in a contract, its extent will often by capped. For instance, liability may be confined to direct (as opposed to consequential) losses, or to a pre-determined amount which may be dictated by the value of the contract.

In the absence of express terms in a contract which define where responsibility lies in the event of millennium non-compliance, terms implied by statute may assist - if not themselves expressly excluded.

In the case of the sale (or license) of any product, including software if it is supplied in a physical format (eg a CD ROM, or pre-loaded or "embedded" in a separate hardware device), there may be implied one or more of the following terms:

• that the product is of satisfactory quality, broadly defined as being fit for its ordinary purpose having regard to all relevant circumstances;
• where the intended use of the product is made known to the supplier, and where there is reliance on the supplier, that it is fit for that purpose; and
• where the product is sold by reference to a particular description, that it corresponds in all respects to that description.

Where not effectively excluded, one or more of these implied terms might, depending upon the circumstances (not least the date of supply), render a supplier liable in the event of a breakdown of the product by reason of millennium non-compliance.

In the case of the provision of services, there will be implied into the contract of service a term imposing on the provider a duty to perform the service using reasonable skill and care, to be assessed by reference to accepted standards of competence in the relevant field of activity. A contractor engaged in 1999 to devise a proprietary software programme who fails to ensure that it is millennium compliant would be in breach of this term, although a similar failure in 1990 may not put the contractor in breach.

Subject to any express contractual limitation on the amount of its liability, a supplier or contractor will be liable for any loss which was reasonably foreseeable as a consequence of the breach when the contract was entered into provided that such a loss would not be deemed to be too "remote". To the extent that a customer incurs a liability to a third party as a result of having been supplied with a non-compliant product, it might well be able to pass on that liability to the supplier as a foreseeable consequence of its breach of contract.

A supplier of a millennium non-compliant product could equally be liable to a party with whom it has no contractual relationship where that party suffers damage, whether actual or threatened, to its property by reason of the non-compliance. It will need to demonstrate that the supplier was negligent, in other words that a reasonably competent person in the same position would not have allowed the act or omission to happen. The supplier will not be liable to the same party for any purely financial loss suffered by reason of the negligence.

If the third party with whom the supplier has no contractual relationship is an individual and suffers physical injury and/or damage to his property by reason of the non-compliance, the Consumer Protection Act 1987 imposes liability on the supplier without the need to prove negligence. It will be sufficient for the third party to show that the product which was responsible for the injury or damage was defective.

If a company has failed to take appropriate steps to ensure that its products are millennium compliant, and if it can be shown that one or more directors had a responsibility to ensure that appropriate steps were taken and had no valid reason for failing to do so, the directors could incur personal liability to a third party which otherwise has a claim against the company whether for breach of contract or negligence.

A claim for breach of an express or implied contract term must be brought within 6 years of the breach in question, ie the date of supply.

A claim in negligence must be brought within 6 years of the damage being suffered or, if later, where the claiming party could not have known of the non-compliance and its potential claim, 3 years from the date of knowledge.

A claim in relation to personal injury, whether for breach of contract or negligence, and any claim under the Consumer Protection Act 1987, must generally be brought within 3 years of the injury or damage being suffered.

There are a number of areas in which a company or its directors might incur criminal liability by reason of millennium non-compliance. These include:

• under the Trade Descriptions Act 1968 if, for example, a product is wrongly stated to be millennium compliant; and
• under the Health & Safety at Work Act 1974 if, for example, an employee suffers injury as a result of an incident at his employer’s premises which would not have occurred but for a non-compliance problem.

If you have any concerns as to whether you have a claim, or may be exposed to a claim related to millennium non-compliance issues, you should seek detailed advice at the earliest opportunity. Your time for bringing a claim may shortly expire. Damage limitation may be possible. Failing that, should litigation become a real prospect, the new court procedures mean that the well-prepared litigant can obtain significant tactical advantage over an opponent.