by George A Wowk

What are we to make of the Year 2000 bug and the associated hysteria? Has the risk of catastrophe been overblown by lawyers, computer specialists and other consultants in order to create business in the same way infomercials play on our deepest insecurities?

The federal government of Canada is taking the Year 2000 bug seriously. They expect to spend nearly two billion dollars upgrading their computer systems so that they will be compliant. They also plan on deploying nearly 20,000 troops to aid humanitarian efforts and to assist law enforcement agencies. This deployment is expected to cost 386 million dollars. The RCMP has banned vacation for all its members for the two and one half month period starting December 27, 1999. At the fringe of our society, some individuals are hoarding supplies in remote mountain bunkers as a precaution against wide-spread civil unrest, starvation and looting.

While some individuals are going to extremes to protect themselves, it is quite likely that some businesses and other organizations will fail because they do not properly address the Year 2000 bug. The consequences of a sudden failure of a business can be significant: investors will lose their investment, employees will lose their jobs, customers will lose a supplier and suppliers will lose a customer.

A company’s directors and officers are ultimately responsible for the stewardship of their company. At common law, they owe a fiduciary duty to the company to act in the company’s best interests. In addition, the BC Company Act (sections 118 and 135) provides that every director and officer “must act honestly and in good faith and in the best interests of the company, and exercise the care, diligence and skill of a reasonably prudent person”. Given the significant amount of press that the Year 2000 problem has generated, all directors and officers will be expected to understand the seriousness of the issue and to have taken an active role in ensuring that the company’s Year 2000 problems have been assessed and addressed.

The obligations of directors and officers include developing detailed plans, ensuring that skilled personnel are available to assess and fix problems, that financial and other resources are available and that milestones are being met. Moreover, it is important that each of these steps be well documented to evidence the diligence undertaken.

The assessment of computer systems includes assessing the likelihood that a given system will fail, the cost and time to fix the system and the effect on the organization if that system does fail. This last item may be determined, in part, by reviewing contracts that the company has with its trading partners to determine the consequences of a failure to meet obligations due to a system failure. This will help identify systems which are critical to an organization and, therefore, the systems which should be given priority. Even if the company expects to fix its critical systems, directors and officers should consider developing contingency plans in case a system fails in any event.

Companies should also assess exposure to tort liability and implied warranty obligations. This is particularly true of companies which produce products that contain systems which may fail.

Even if an organization fixes its computer systems it may still fail because other organizations fail due to their own Year 2000 problems. For example, a supplier may be unable to deliver a critical part or a significant customer may fail to pay for products which have been delivered. These possibilities will need to be assessed and, if necessary, contingency plans developed. To address these contingencies a company could, for example, stockpile supplies or take steps to diversify its customer base.

George A Wowk practises corporate and commercial law at Norton Stewart. He can be reached on the Internet at george@wowk.com.

This article was published in the February 1999 issue of BarTalk. © 1999 The Canadian Bar Association. All rights reserved.