This month, Governor Owens signed into law two important bills addressing the Year 2000 computer problem. House Bill 1295, the "Year 2000 Liability Act of 1999" ("Liability Act"), provides businesses with a "safe harbor" to avoid liability arising from Year 2000 computing failures. Senate Bill 170, the "Year 2000 Citizens' Protection Act" ("Protection Act") establishes a temporary affirmative defense for individuals who are unable to satisfy obligations due to Year 2000 computing failures.
The Liability Act contains three key elements — (1) it limits businesses' liability in Year 2000 cases to the plaintiff's actual damages; (2) it establishes a "best efforts" defense for businesses that have taken seven specified steps to avoid Year 2000 failures; and (3) it fully immunizes corporate officers and directors whose companies have taken the seven steps. The "Year 2000 Liability Act" will take effect on July 1.
The most significant feature of the Liability Act is its establishment of a Year 2000 "safe harbor." All companies that do business in Colorado should forthwith ensure that they have already taken, or will take, the seven measures specified in the Act:
Inventory all critical electronic computing devices used by the business that may experience Year 2000 failures; Identify all critical systems necessary to conduct the business' operations; Identify the potential for Year 2000 failures associated with all critical electronic computing devices in relationship to the business purposes of the business; Prepare and implement a reasonable remediation plan for, or replace, the electronic computing device to avert the potential for a Year 2000 failure; Comply with any and all industry-related regulations or requirements related to the Year 2000 date change; Conduct tests on the business' critical systems and other electronic computing devices for Year 2000 compatibility; and Develop contingency plans in the event of electronic device failures.
A business that has taken these steps, and that has "made reasonable and timely efforts to identify the potential" for Year 2000 failures, and to correct or to avert them, is deemed to have used its "best efforts" to avoid Year 2000 failures, and, therefore, "shall have no liability for damages arising out of a Year 2000 claim." (Emphasis added.) The Liability Act is somewhat ambiguous on this point, however. The Liability Act states that, while a business may be found liable based upon a Year 2000 failure, its members, directors, officers, or employees are fully immunized from liability for claims relating to Year 2000 failures, so long as their business made "reasonable efforts to correct or otherwise avert such failures and has attempted to correct or otherwise avert such failures" by taking the seven specified steps. It remains unclear as to the circumstances under which a corporate officer would receive the full protection of the Liability Act, but his or business would not be so protected, when the business took the seven steps.
Although the Liability Act applies to contract claims, as well as to other civil actions, it does not vary or alter any contract terms that address Year 2000 issues. Nonetheless, the Act dramatically changes contract law in Colorado by creating a new, "best efforts" defense in breach of contract actions, where the underlying contract is silent on breaches caused by Year 2000 failures. Until now, "best efforts" defenses were inapplicable to contract disputes that did not involve government contracts, or agreements that specifically limited the obligor's performance to its "best efforts." Under the Liability Act, an obligor that fails to perform under a contract may escape liability by proving that its breach was attributable to a Year 2000 failure, and that it took the seven steps specified in the Liability Act. Contracting parties concerned that an obligor's performance may be impaired by Year 2000 failures should consider overriding the Act by specifying in their contracts that Year 2000 failures will not excuse the obligor's nonperformance.
The Protection Act provides individuals with a Year 2000 affirmative defense that would allow them to delay litigation against them for 30 days. An individual can only take advantage of the Protection Act, however, if he or she would have been able to satisfy the obligation but for the Year 2000 problem, and was not in default prior to the Year 2000 problem. The dismissal of a claim under the Protection Act delays, but does not bar, the reassertion of the underlying claim. If an individual successfully establishes a Year 2000 affirmative defense, then the claimant must wait 31 days before filing a new action against the individual. The Protection Act tolls all applicable statutes of limitations for 45 days following the dismissal of a claim under the Protection Act.
The Protection Act, however, is vague as to the procedure that courts are to follow when a defendant raises a Year 2000 affirmative defense. Although the Protection Act refers to dismissal of claims, it does not authorize courts to dismiss actions based solely on the assertion of a Year 2000 affirmative defense. The Protection Act would significantly drive up litigation expenses if it were read literally to require dismissals only after the defendant had "established" a Year 2000 affirmative defense, as such dismissals could only occur following the filing of a motion for summary judgment or a trial. If so, a creditor whose claim were dismissed on Year 2000 grounds would be forced to commence a new case after having made a significant investment of time and money in the prior action. Although the statute is intended to give a defendant only 31 days in which to delay litigation, in practice, it will result in significantly longer delays for creditors. Creditors therefore should take steps, prior to initiating litigation, to determine whether a defendant is likely to raise a Year 2000 affirmative defense.
Portions of the Liability Act and the Protection Act may become moot, however, if one of the five major Year 2000 bills currently pending in Congress becomes law. We are closely tracking these bills, and can provide you with updates on them, if you wish.
For more information, please contact:
| Lino S. Lipinsky de Orlov - | Denver - (303-634-4000) |