IT switches on to ADR

`Millennium meltdown' could lead to IT companies exploring mediation rather than traditional legal action, writes Grania Langdon-Down

In the US, lawyers are predicting that the "millennium meltdown" - the threat that computer systems could fail disastrously at the turn of the century because they cannot cope with the change to 2000 - will spawn litigation running into billions of dollars.

Experts here, however, believe that there is likely to be a more cautious response which could see ADR (alternative dispute resolution) coming into its own.

Unravelling complex questions of liability for rectifying the problem now and dealing with any catastrophes afterwards will prove costly and time consuming, given that the problem is not limited to computer systems. It also includes any internal micro-processor used in anything from a fax to air-conditioning systems, lifts, traffic lights, industrial machinery, satellites and weapons systems.

Adam Taylor is a partner specialising in information technology and intellectual property matters at the City law firm Withers. He said: "It is unlikely that there would be anything like a proportionate amount of litigation here. It is far easier for individual shareholders to sue directors in the States, for example, although directors here could be sued by their company for not facing up to year 2000 problems.

"Another factor likely to dampen down litigation is whether a company has mitigated against potential losses. Even if it has a good case against a supplier, a court could decide that the crash would not have happened if the company had got its act together sooner and so reduce the amount of damages it receives."

He said that some litigation was inevitable but he did not believe it would be the "huge bonanza" that some experts were predicting.

"There is already a trend to use ADR in IT cases because of the complexity of the issues involved and it may well come into its own as a result of year 2000 cases. Indeed, the courts have already made it clear that they are keen to see a greater role for ADR generally.

"It is something we encourage clients to think carefully about if they are involved in a dispute over their IT contract. It is cheaper, quicker and can mean commercial relationships survive instead of being damaged in the inevitable blood-letting that follows heavyweight litigation."

Cerys Wyn Davies, who also specialises in IT and IP matters, said many IT contracts already fall apart because the supplier does not deliver the system or provide the developments that the user believes he has promised. However, few reach court because of the huge costs which are involved.

Ms Wyn Davies, a partner in Pinsent Curtis' Birmingham office, said: "In one case, a client decided to fold a business rather than litigate.

"With year 2000 cases, people might be nervous of testing out their claims in court but, once some precedents have been set, the gates will open.

"How quickly you put your head above the parapet is likely to depend on how big a player you are. ADR, on the other hand, could minimise the costs involved and really become an attractive option."

Court action in many complex IT cases can run well into six figures, and even as high as seven figures in extreme cases, with the risk of picking up the other side's costs if you lose.

The mediation fees charged by CEDR, the London-based Centre for Dispute Resolution, on the other hand, depend on the value of the claim. It charges pounds 1,000 per party per day for claims between pounds 250,000 and pounds 500,000, plus preparation time, capped at five hours, and expenses, pounds 2,000 a day for claims between pounds 5m and pounds 10m.

CEDR was set up in 1990 as a non-profit-making organisation backed by the CBI. It deals with up to 15 cases a month with claims ranging from pounds 8,000 to pounds 50m. About 90 per cent of the cases settle.

While the process itself is not binding and is held without prejudice so that nothing can be used in any subsequent court action, once the agreement is written down and signed it becomes binding in contract.

CEDR's chief executive, Professor Karl Mackie, said they were working on a framework for dealing with year 2000 disputes in consultation with the Computing Services and Software Association (CSSA).

"There will inevitably be many 1egal questions about when liability occurred, for example, and without a structured approach the issues will have to be tested on a case by case basis, which will make the process quite protracted.

"The question is - can one broker a framework in which to place disputes so they can be managed more efficiently? Otherwise it could be a shambles," he warned.

Rob Wirszycz, CSSA's director-general, commented: "Mediation is more appropriate than litigation in most IT disputes because of the difficulty of defining what you want from an IT system.

"There is inevitably going to be a great deal of litigation and attempted litigation over the millennium issue, but it is an area where ADR could assist.

"Group mediation would be almost like a pre-emptive strike between IT suppliers and their customers. But when we broached this at a recent meeting with suppliers, the idea went down like a lead balloon. Everyone is worried about creating precedents and they are frightened that merely being in such negotiations ahead of any potential dispute could prejudice future actions by making it look like they are conceding something."

However, once litigation started, he believed that suppliers would turn to the idea of group mediation.

"I think it will come but probably not until next year. There is still a lot of mileage to go on this issue.

"One of the things we are going to be promoting is the use of ADR clauses in any millennium service work that suppliers are carrying out."

Amidst warnings that rectifying the "millennium bug" could cost more than pounds 30bn in the UK alone, Ms Wyn Davies said companies had to assess their legal position now because the six-year time limit for breach of contract actions may be nearly exhausted if it can be successfully argued that the clock started ticking from the date of installation, not when damage was actually incurred.

"We are at the stage now when many companies are either negotiating deals on upgrades or considering initiating action to claim compensation from suppliers," she said.

Lawyers working on millennium issues have also to look beyond just the potential cost to clients if their computer system fails. There is the possibility of knock-on liability if they then cannot meet a deadline.

Other areas include sales and supply of goods and services legislation, intellectual property in the licensing of software, copyright issues, insurance law, liability of directors, health and safety legislation if equipment fails and an employee is injured or killed, environmental legislation if a year 2000 failure such as an oil leak causes pollution, and even employment law to retain IT staff as the scramble for experienced programmers hots up.

Lawyers themselves could face claims if, for example, they do not now ask proper questions when advising clients on acquisitions and the target company proves to have serious year 2000 problems.

"Legal risk management must be the name of the game now," Mr Taylor said