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The Year 2000 Problem - Guidelines for Value Added Resellers By David M. Nadler and Edward W. Kirsch The Year 2000 Problem threatens to unleash a barrage of litigation to determine who will bear the burgeoning costs of the Year 2000 remediation effort and the costs of Year-2000 induced business interruptions. Litigation costs are widely expected to exceed $1 trillion. Every member of the production and distribution chain including Value-Added Resellers ("VARs") will be ensnared in these lawsuits as plaintiffs’ attorneys seek to recover from the deepest pocket. In the first Year 2000 lawsuit, for example, the plaintiff, Produce Palace International, a grocer, sued the manufacturer and All-American Cash Register, the distributor of its purchasing and inventory control system, after the system crashed 105 times while processing credit cards with expiration dates in the next millenium. Fortunately, there are measures that VARs can undertake to minimize their legal exposure. The Year 2000 Problem can be traced to the early days of computing, when memory and data storage were very expensive. To conserve these limited resources, computer programmers decided to use just two digits in date fields to identify calendar years. In the year 2000 many computer programs will recognize the year "00" as 1900 rather than 2000 as intended. This error may cause systems to process incorrect data or simply shut down. VARs Are Particularly Vulnerable To Breach Of Warranty Actions VARs, consultants, and system integrators are especially vulnerable to breach of warranty suits arising from Year-2000 system failures because they often warrant the performance of the components they do not control as well as the systems they recommend. Customers can sue VARs under breach of express or implied warranty theories. Under the Uniform Commercial Code ("U.C.C.") a warranty need not be identified as such. Any promise or description relating to goods sold, whether in a contract document, advertisement, letter, or other correspondence can create an express warranty that the goods conform to the promise or description. Careless or over-broad language, therefore, can give rise to unintended express warranties. Whether such language constitutes an express warranty is often a jury question which enhances a plaintiff’s settlement leverage by avoiding defeat on summary judgment. Although few VARs made explicit Year 2000 warranties prior to 1996, many have warranted aspects of performance for an extended period or entered into maintenance agreements that span the millenium change that can be construed as warranting Year 2000 compliance.The U.C.C also recognizes implied warranties. Implied warranties arise by operation of law rather than through seller statements or conduct. The implied warranty of merchantability provides that the goods "are fit for the ordinary purposes for which such goods are used." Non-Year 2000 compliant hardware and software could be construed to contain a latent defect resulting in a breach of the implied warranty of merchantability. The implied warranty of fitness for a particular purpose arises where a seller knows the buyer’s particular requirements and the buyer is relying on the sellers’ skill in selecting suitable goods. This warranty is of particular concern to VARs and systems integrators, who design systems, integrate systems and select components. VARs should routinely disclaim both of these implied warranties in their standard contracts and maintenance agreements. VARs should conduct a legal audit and modify their standard contracts and long-term maintenance agreements prior to renewal. A prudent approach is to pass along only the warranty provided by the manufacturer. A VAR should limit its warranty to the custom software it provides. VARs should disclaim liability for consequential damages including lost profits and business interruption damages, and expressly provide an exclusive remedy of repair or replacement of the defective software or product, or return of the purchase price. Contract clauses limiting damages and providing a limited remedy are generally upheld unless they are deemed unconscionable or fail of their essential purpose. The statute of limitations for sale of goods contracts, typically four years from tender of delivery, will also bar many breach of warranty claims. Incorporating alternate dispute resolution (ADR) clauses or the "English Rule" - which requires the loser to pay all legal expenses - into contracts may deter frivolous lawsuits.VARs will likely be the target of tort suits alleging fraud, negligence or malpractice. In general, courts are not receptive to plaintiff’s efforts to dodge contractual limitations on liability and warranty by pursuing a tort action. The economic loss rule in many jurisdictions, for example, limits buyers to contract damages where there is no injury to person or property other than the product itself. To date, courts have uniformly rejected claims of computer programming malpractice. The stakes are high and time is short. VARs must conduct a legal review of their existing contracts and maintenance agreements to determine their vulnerability to Year-2000 lawsuits and implement modifications to reduce their exposure. ----------------------------------- Dave Nadler is a partner at the Law firm of Dickstein Shapiro Morin & Oshinsky LLP. For more information on the Year 2000 Legal Strategies Team, please contact David M. Nadler at (202) 828-2281 or NadlerD@dsmo.com.
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