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The Double Whammy - Year 2000 and EMULawrence Phillips, Tarlo-Lyons Law Firm, London Most businesses have begun the long process of reviewing their internal IT system for Year 2000 compliance and planning the repair or replacement of non-compliant systems. During this time, these businesses will also have to consider amending some of their systems to cope with the advent of the single European currency. This article examines some of the technical hurdles that may be faced during this transition, which could give rise to costly legal liability. In addition to the political considerations, a transition to European Monetary Union (EMU) within Europe will create a significant challenge for business in general, and for banks and financial institutions in particular. During the negotiations on the Maastricht Treaty, the UK obtained an option to decide whether or not it will participate in the single currency. However, even if EMU commences and the UK decides not to participate, businesses which trade with companies in states which are participating will find it necessary to modify their systems to enable them to cope with the new currency, the Euro. The current EMU timetable consists of a three-phase process. The first phase, in 1998, will see the creation of the European Central Bank and determination of the exchange rate policy between the participating countries. The second phase commences on 1 January 1999. During the following three years, the exchange rates of the participating countries will be fixed and the Euro will become a currency. On 1 January 2002, the third phase begins and the Euro will replace the former currencies and will be the only legal tender in the participating countries. If EMU proceeds, the Euro will become legal tender in 1999. Therefore before that date, systems need to be either modified or developed. Unfortunately, the timing is such that the same companies will also be reviewing and amending their IT systems to ensure Year 2000 compliance. Whilst there is an initial attraction in dealing with both issues simultaneously the approach is fraught with difficulties. The Year 2000 problem is a technical task involving the modification of code, and replacement of non-compliant firmware or computer chips, whereas, EMU is a business challenge requiring increased functionality. To modify systems for EMU will require input from the users to identify the problem areas and consider the business solutions for these. Put succinctly, the Year 2000 is an IT issue affecting business; the Euro is a business issue affecting IT and since the two problems are fundamentally different, managing them both in one project will be very difficult. There is of course one important exception, when dealing with the supply of software from a third party - it is important to consider the impact of the Euro and the Year 2000 simultaneously. The level of resources that will need to be committed to meet Year 2000 compliance and develop systems capable of dealing with the Euro will be high and a company, X Co. Ltd, may decide the best approach is to outsource some of this work to third parties. Indeed, some companies will have expertise in modifying such systems. However, X Co. Ltd will have to review its particular business requirements to ensure these are addressed. This identifies the first legal issue that will need to be addressed. It will be necessary to review the terms and conditions contained in the outsourcing agreement. A supplier will want to limit its overall liability and will seek to exclude certain warranties and indemnities. X Co. Ltd will want these warranties and indemnities in respect of the quality of the work and timely completion. The latter would be particularly important as it is likely the supplier, because of their expertise, will be inundated with potential work. While the source code of software may be held in escrow, the terms of the escrow agreement may restrict access to the software by the company or any third party. Throughout the second phase of EMU there will be two legal currencies in each participating state. Therefore, systems will have to cope with the problems that this may cause which include the inconsistent use of the Euro/national currency, and the requirement to produce financial reports in both the Euro and the national currency. Employers and managers should also note that having two possible currencies makes data entry errors more likely due to users entering the right amount, but as the wrong currency. Such errors could be very hard to spot, and could give rise to legal liability either for non-payment, or in negligence if the error was within a financial institution. During this period, organisations may only have had their major and key systems modified to deal with the Euro, but will still be modifying their remaining systems. A suitable interface between the two will need to be developed. If the UK participates in EMU, one of the main obstacles facing retailers during the transition period will be the requirement for their electronic point of sale systems to be able to cope with both currencies, and also to correctly interpret the bar codes on products. A considerable investment will be necessary to replace existing equipment, particularly as in many cases the software is embedded firmware on computer chips. One of the main technical problems that will be encountered when preparing systems for the Euro will be coping with "rounding" errors. Such errors may not be financially significant, but could cause administrative problems since an information system may not be able to match the payment to the sum outstanding, and even if it were able to do so, a correcting entry would need to be manually entered to reconcile the account. If the rounding error was not corrected, then it is quite possible that credit control systems would start chasing customers for amounts it considers are still outstanding, and may even instruct a Collection Agency, or issue proceedings to recover the rounding error outstanding. These errors could affect the credibility of the organisation's accounts. It is imperative that historical data be fully accessible by new systems without corruption of the data. Businesses will need to use this historical data for making decisions about the future and stakeholders in the business will also rely on the accuracy of the information. This is another area where liability could arise if a bad investment decision or incorrect business plan resulted. A specific warranty should be negotiated. The modifications necessary for a successful transition to systems able to deal with the Euro are complex and the project must be clearly defined and prioritised. There are a number of important considerations that need to be dealt with, particularly the level of resources, and whether any modification work is to be outsourced. Organisations must plan how they will deal with the Euro issue given the resource commitments necessary for Year 2000 compliance. Lawrence Phillips is a partner and head of the IT & Telecommunications Law Unit specialising in all aspects of IT commercial activities including software licensing and development. This article can be found on http://www.tarlo-lyons.com
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