Ireland: Year 2000 Computer Failure

Legal Issues from an Irish perspective
Last Updated: 7 June 1999

By now many Irish businesses and governmental agencies are aware of the Y2K computer date problem. Although most people are mindful of the potentially drastic practical implications which their business or organisation may experience, many have failed to address the myriad of legal issues which will arise as a result of a Y2K computer failure. Throughout this short article we intend to explain the initiatives which have been undertaken in Ireland to address the problem in industry and business sectors and we also aim to set out the main legal issues which arise together with the applicable law in this jurisdiction.

Certain industry sectors will most definitely find themselves embroiled in legal difficulties if they choose to ignore the legal implications arising from Y2K computer failure. For this reason representative and supervisory bodies of some of the sectors likely to be affected, namely financial institutions and insurance companies, have taken concrete steps to examine the legal position and make recommendations to their members regarding changes to current practices.

In other business and industry sectors the need for a legal analysis of the situation may not be as obvious and accordingly important legal issues are being overlooked in the rush to ensure that matters of a technical nature are in order.

Notwithstanding that a particular enterprise may succeed in obtaining Y2K compliance for their own systems, equipment or products it is essential that legal measures are put in place in order to protect such enterprises from indirect damage caused as a result of the non-compliance of third parties with whom they conduct business.

As part of the Irish Government initiatives in this field, the Department of Enterprise, Trade and Employment has launched an on-going campaign on behalf of the Government to raise awareness of this problem and to provide guidelines to businesses.

A brochure published by this department in May 1998 emphasises the practical problems which businesses may be facing and it sets out guidelines for businesses for the successful completion of Y2K compliance projects.

Notwithstanding the practical business emphasis of this awareness campaign certain legal issues such as the potential breach of contracts from the inability to meet delivery deadlines together with the issue of directors’ duties and responsibilities in respect of running their businesses, are also addressed. As part of this campaign the Department of Enterprise, Trade and Employment have also consulted with representatives of banks, the stock exchange, credit unions and the accountancy professsion in order that these professionals can raise awareness of the practical issues among their clients and customers.

The Irish government also have a separate Y2K compliance initiative in relation to the internal workings of the various governmental departments. At present a central inter-departmental Y2K committee is responsible for monitoring the Y2K compliance progress of individual governmental departments. Within each Department there is also a committee which monitors and reports on the Y2K compliance progress of the various public bodies under their control. Furthermore in 1996 the Centre for Management Organisation and Development of the Department of Finance released a comprehensive Y2K compliance clause for inclusion in all procurement exercises and requests for tender by government departments and offices.

The insurance sector is one of the few sectors which by virtue of the very nature of their business must take not only practical but also legal steps to deal with Y2K computer failure issues. The insurance industry in Ireland is taking the view that as the Y2K problem is a foreseeable certainty and as insurance covers against risks rather than certainties, direct damage caused to equipment as a result of Y2K computer failure will not be covered by policies. It has however been acknowledged by the Insurance industry that indirect damage resulting from Y2K problems may be covered. A spokeswoman for the Irish Insurance Federation recently stated that from now on customers are being alerted of this approach in policy renewal documents.

In recent policy renewals many insurers have introduced express exclusion clauses under commercial property liability and other policies to specifically exclude damage and loss arising directly from policy holders’ failure to become Y2K compliant. In the brochure published by the Department of Enterprise and Employment referred to above a statement from the Irish Insurance Federation says "it is probable that even without such exclusions, most policies do not cover the Year 2000 risk. However, even if not strictly speaking necessary, such exclusions would serve a useful purpose by drawing the attention of policy holders to the absence of cover". The statement also goes on to say that insurers may decide to offer protection for Y2K problems where the policy holder in question has taken all the appropriate steps to achieve Y2K compliance.

Another area where the Y2K date problem will impact greatly is in the financial sector and in particular the banking sector. The Central Bank of Ireland have been involved in discussions with banks, building societies and all other credit institutions which they supervise in this regard. The Central Bank is also involved in an active supervision programme of the technical audits and compliance projects of the relevant institutions.

Given the concern of lending institutions in respect of borrowers’ businesses which rely on the date processing capabilities of computer systems, lenders are asking credit applicants if they are Y2K compliant. Those businesses which are unable to demonstrate and substantiate their Y2K compliance may experience difficulty in obtaining or renewing credit facilities. One of the main difficulties which will no doubt give rise to legal issues in the area of banking is that as a result of Y2K computer failure, computers may not correctly process and validate payments which have in fact been made and also many computer systems may experience difficulties in making payments resulting in defaults occurring in relation to loan repayments.

An issue which is particularly important to credit institutions and finance houses is the application of the Consumer Credit Act, 1995. Under the terms of this Act there are some instances when the Sale of Goods and Supply of Services Act 1980 will apply to a finance house providing finance in respect of a hire purchase agreement. This would be the case for example in respect of a vehicle let under a hire purchase agreement where a credit institution is involved in the financing. In this case there would be certain implied warranties from the finance house to the borrower in relation to the condition of the vehicle. One further issue which should be borne in mind by credit institutions and finance houses is that under the Consumer Credit Act 1995 it is not possible to insist on a warranty from a consumer. This may have implications for institutions advancing credit in situations where they would normally seek a warranty that the borrower’s business or equipment as the case may be, is Y2K compliant.

In the area of general company and commercial law we envisage that many Y2K related problems will give rise to legal difficulties. The Y2K computer date problem has the potential to affect every type of business from corner street shops to international finance houses and for this reason it is essential that all companies and commercial undertakings address the issue. Clearly the first matter to be attended to is the carrying out of a technical audit in order to ascertain whether business equipment and systems are Y2K compliant. In the event that they are not it would be advisable to undertake the necessary steps to ensure that before the end of 1999 this objective will be achieved. As most businesses are part of a business chain including banks, finance houses, customers and suppliers it would be prudent for any business to obtain warranties or guarantees in respect of Y2K compliance from others in their business chain. A reckless approach to this problem by one business could have serious consequences for a related business. Many Irish businesses are mindful of their reliance on the compliance of other businesses in relation to the Y2K issue and for this reason it is now becoming commonplace for businesses to request their legal advisors to draft letters seeking the necessary warranties and guarantees.

One area of particular concern is the implications of the Sale of Goods and Supply of Services Act, 1980. This Act also relates to hire purchase agreements and accordingly covers a wide range of business activities. Section 14(2) of the Sale of Goods and Supply of Services Act, 1980 states that where the seller sells goods in the course of its business there is an implied condition that the goods supplied under the contract are of merchantable quality. This clause would be applicable to the sale of any products which contain microprocessing chips which may be subject to computer failure on the advent of Y2K. There is an exception to this condition if a buyer examines the goods before the contract is made as regards defects which an examination ought to have revealed. The difficulty with many products is that the fact that they are not Y2K compliant will not be revealed in any normal examination by a buyer.

A further section of this Act provides that regarding the sale of motor vehicles there is an implied warranty in such contracts to the effect that at the time of delivery of the vehicle it is free from any defect which would render it dangerous to the public. In light of the foregoing it is clear that all businesses involved in the sale of goods or supply of services will clearly need to obtain guarantees or warranties from their suppliers or manufacturers, regarding the Y2K compliance status of the goods in question.

There is further concern among the business community that directors and officers of companies may be found liable for damages caused by Y2K non-compliance. This situation may arise where it can be proved that directors or officers have failed to fulfil their fiduciary duties and the common law duties of care owed by them. In the event that a company was to experience severe problems and loss as a result of the failure of directors or officers of the company in this regard it is possible that the company, its shareholders, customers or suppliers may have a cause of action against the directors and officers of the companies. It is difficult to envisage how an Irish Court would address this issue and the approach to be taken remains to be seen.

The above discussion should provide an overview of the approach of some business sectors in Ireland together with a brief outline of the legal issues of this phenomenon from an Irish legal perspective. Notwithstanding that most of the awareness campaigns to date have concentrated on the practical implications of the problem it is clear that many businesses are becoming necessarily more conscious of the legal implications and the possible losses arising. Although it may be too late to remedy some of the technical problems it is still possible for businesses to minimise losses by taking the appropriate legal steps. Clearly this will not eliminate all difficulties however it should be seen as an additional precautionary measure which will provide a degree of protection from indirect losses.

This article was intended to provide general guidelines. Specialist advice should be sought about specific facts.

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