Journal of Information, Law and Technology

Y2K - Will there be a Litigation Explosion?

John Peysner
Principal Research Fellow, Solicitor
Nottingham Law School
Nottingham Trent University

John.peysner@ntu.ac.uk

This is a refereed article published on: 30 June 1999

Citation: Peysner J, 'Y2K - Will there be a Litigation Explosion?', 1999 (2) The Journal of Information, Law and Technology (JILT). <http://www.law.warwick.ac.uk/jilt/99-2/peysner.html>

Abstract
This article uses the prospect for Y2K litigation as a case study to consider how litigators in the United Kingdom, operating in a new risk managed environment for financing and conducting cases, will react to the challenge of this problem and whether this will trigger a major growth in litigation. It concludes that for a variety of procedural and financial reasons, as well as pro-activity by lawyers in avoiding litigation, any increased activity will not be so significant as to constitute an ‘explosion’.

Keywords: Y2K, litigation, risk management, case theory, conditional fees.

1. Introduction
‘In all the best cowboy movies, it’s when the Indians begin closing in on the wounded cowboys on the prairie that the audience tense on the edge of their seats, cued for the really gory bits in the offing. The real life equivalent is when the lawyers start discussing who is responsible for something. People who didn’t give a monkey before suddenly pick up the scent of blood in the air, sit up and start expressing detailed opinions on whether the baddie will get it in the neck and how long he has got’ (Kelly S, 1997) ‘

Like rapping, personal training and the Internet itself the sport of ‘lawyer bashing’ is one of the many imports from the USA that are shaping our view of society. This new blood sport does not concern itself overmuch with facts but the perception is that lawyers, and in particular litigators, are out of control and are about to bring the economy down around our ears in a welter of writs and claims for exorbitant damages. This article examines that assumption in the light of a case study: the litigation activity anticipated as a result of the Millennium Bug. It considers whether the current arrangements for financing and ordering litigation activity in England and Wales are capable of responding to a major challenge such as YK2.

2. Assumptions
This article does not need to conclude there is a real Y2K problem. This might seem an odd comment but it is fundamental to the way in which modern litigators organise their activities. Conceding that there is a shared perception of a genuine risk created by the Millennium Bug and that the problem is not merely hype then the litigator is called on to perform two functions:

2.1 Risk Management
This involves litigators, often in conjunction with their non contentious colleagues, identifying problems and operating risk management systems to eliminate the risk, manage it or transfer it. This type of activity will take place most frequently in the commercial sphere. Litigators acting for large companies will ‘scope’ the Y2K risk and, acting conservatively, assume that it exists. They will advise that, for example, a failure by their client company to perform an obligation caused by a software problem may cause repercussions down the supply chain with consequent damage claims. That problem may be internal or external to the company, but either scenario may creates a contingent risk. Internally, the company may need to appear to be struggling for compliance as well as hopefully being compliant.

The lawyers will attempt to eliminate or manage the risk by suggesting changes in contract conditions or by inserting exclusion clauses against liability. They will attempt to transfer the risk by testing current insurance cover or suggesting that extended cover be obtained. This may be difficult as the steer offered by the insurance industry is that millennium risks are not insurable being predictable and avoidable (Insurers won’t cover 2000 bug damage, Independent on Sunday, 26th July 1998, page seven) Attempting to avoid cover in this way may be difficult if an accident, for example a fire, is caused partly by a fortuitous event, a lightning strike, but also by an allegedly non-fortuitous occurrence, failure of a computer-controlled fire control system. Insurers are attempting to limit their exposure by taking the same approach as the banks and distributing compliance questionnaires, on this occasion backed up by the insured’s obligation of uberimae fidae. (Barlow Lyde Gilbert, 1998).

Pro-active risk management will be supplemented by the development of dispute resolution strategies.

2.2 Preparing for Dispute Resolution
The millennium problem is an unusual challenge for litigators because, at present, it seems to be a mainly contingent problem. Litigators and courts dislike moot problems and will normally only start preparing for litigation after a triggering event has occurred. (Thus, a drug may be defective but until it produces adverse symptoms it is unlikely to be the subject of court action.)

2.3 Post Millennium Dispute Resolution
To advance our speculations we must make some further assumptions: 

a.	There is a Y2K problem and that software will fail on the fatal date. Further, we can safely assume that not all software will be rectified in time and that real problems will emerge to create damage and initiate disputes at the start of the millennium. 

b.	These problems will create legal liabilities that are capable of being resolved, possibly by litigation, that is proceedings in court. Whilst the title of this article refers to a ‘Litigation Explosion’ this is merely a convenient shorthand for a range of dispute resolution techniques available to the lawyer acting for a client. These techniques include court proceedings - and if the lawyer is advising a defendant the claimant may already have chosen to issue proceedings - but many commercial contracts prescribe arbitration instead of litigation. This may also involve pre and post issue negotiations and Alternative Dispute Resolution methods such as mediation.

The next task is to attempt to delineate the types of disputes that may emerge and to predict which matters will be the subject of lawyer activity and which will be determined in other ways or simply left unresolved. The answer lies in an examination of a complex and evolving matrix between the financing of litigation and the risk management of individual, or groups of cases, which will be the subject of the rest of this article.

3. The New Financial Environment for Dispute Resolution
What motivates litigators? As service providers in a competitive market their ability to operate depends on the level of profitability of the work that they do. In this way they are no different from supermarkets with products to sell: if nobody buys they go out of business. Litigators see themselves as professionals and indeed many exhibit the high levels of integrity and ethics that befit the true professional. However, their prime motivation must be to obtain a level of fee income that allows them to run their firms and earn profits and this is particularly true in the commercial or contractual sphere.

When creating a strategy for millennium claims the litigators first question will be: have I instructions from a client that will lead to a certainty, or acceptable probability, of being paid for my work? The latter part of the question - the probability issue - represents a novel challenge to litigators that is discussed below, after the basic framework for costs in litigation is discussed.

3.1 The Historic Funding Basis of Litigation
The basic rule in litigation is that the loser pays both sides legal costs: ‘costs follow the event’. These ‘party and party’ costs can be less than the ‘solicitor and own client costs’ (conventionally they are normally about two thirds of this figure), the same but never more. This is because of the indemnity principle: the winner cannot recover costs if there is no obligation to pay costs. In this scenario the solicitor acting for a client takes no risk as long as money is received on account and interim bills delivered and paid. The client takes all the risk: paying the other side damages and costs if the case is lost and paying his own solicitor if the case is won but the costs cannot be recovered from the defendant. This was the historic costs system with one breach in the indemnity principle with the introduction of legal aid. (A legally aided client is normally protected against adverse costs consequences by the operation of Section 17 of the Legal Aid Act 1988.)

3.2 The New Basis of Funding Litigation
The potential millennium challenge to litigators coincides with a major shift in litigation funding which involves an increasing shift of risk and reward in litigation from client to lawyer: to so called ‘no win no fee’ litigation. This has created a menu of different fee structures and, in principle, wider access to lawyers’ services:

a.	The normal hourly paid ‘rate for the job’. (Sometimes adjusted to reflect ‘value billing’, in effect a post completion negotiation to determine the quality of work against agreed parameters, which in turn influences the price paid to the lawyer.) This remains the normal system of payment adopted by commercial or institutional clients. It is highly unattractive to private clients because hourly rates tend to be high and the total bill is unpredictable.

b.	A fixed price for a job or series of jobs. Here the risk begins to shift towards the lawyer as if the fixed fee is too low (e.g. the case takes longer than predicted) then the work becomes unprofitable.

c.	Conditional Fees. This arrangement introduced by the Courts and Legal Services Act 1990 allow the lawyer to enter into a fee arrangement whereby the client is charged if the case is won but not charged if it is lost. The indemnity principle in these cases is overruled by the statute. The bait for the lawyer is a ‘success fee’ of up to 100% of normal fees. The Access to Justice Bill, if enacted in full, will extend this arrangement by making the ‘success fee’ recoverable from the defendant.(clause 29) Whilst, the Conditional Fee Agreement protects the client against his own sides costs it does not eliminate adverse costs consequences and therefore is of limited value in high cost claims or for clients of limited means. Some matters will be covered by insurance - either taken out in advance of the problem (legal expense insurance) or after the alleged liability has been triggered (‘After the Event’ insurance). The use of conditional fee arrangements is not limited to private clients, many commercial firms use litigation insurance; but they will receive a significant boost as Legal Aid for individual’s claims is withdrawn over the next year. For the client who could not obtain legal aid, either because they were a company or an individual ineligible on income grounds, these agreements, backed by insurance, are very attractive: whilst the success fee eats into their damages without a conditional fee they might never have been able to issue the case.

d.	Many firms have traditionally ‘speced’ cases, particularly in the fields of trade union backed personal injury or debt collecting. If the case were won then costs would be recovered from the losing party. If lost little or no costs would be recovered from the client or the trade union backer. Acting on a speculation was not lawful and contrary to professional conduct requirements as being in breach of the indemnity principle: there was never an obligation to pay by the client against which to set the party and party costs. However, such arrangements have come out of the closet following Thai Trading v Taylor (1998) which made it lawful and not contrary to public policy to enter into an agreement that the lawyer would charge his usual fee only if the case was won as long as there was no ‘success fee’. This concept will be given statutory force by Section 29 of the Access to Justice Bill which confusingly defines conditional fees widely enough to include both Conditional Fee Agreements and Thai Trading arrangements. The revised Solicitor’s Practice Rule Eight makes lawful contingency fee arrangements permissible. This is wide enough to cover Conditional Fee Agreements and Thai Trading arrangements. Pure contingency fee arrangements, which are widely used in the USA (see Group Actions and Class Actions below) and which involve the lawyer taking a share in damages, remain unlawful.

e.	Another form of agreement, as yet untested in the courts, would allow a client to agree a fee schedule with his lawyer, which reflects the objectives in the case. Thus, obtaining a specified sum of damages within a specified period would allow for the normal rate to be enhanced by a stated percentage: failure to achieve this result would result in the discounts against the usual fee.

The common factor in all these arrangements, which have come to prominence in the last two years, is the sharing of risk by the lawyer; in effect, the lawyer betting on his or her own judgement. If there is to be a post-millennial litigation explosion then, to a significant extent, it will be promoted by these new forms of funding. However, this explosion has two components: lawyers willing to fuel the flames and material to combust. The next sections of this article examines that material and considers what types of potential legal cases will be thrown up by the Y2K problem, what prospects of success do they offer claimants and what, if any, procedural limitations are there to prosecuting these claims?

4. Case Theory
Before examining the types of cases that might emerge post Y2K it is necessary to review the current approach adopted by skilful litigators to their work. A potential litigation explosion will be fuelled by the commencement of claims. This is no longer a simple process of the lawyer waiting in his or her office anticipating instructions. Litigators are becoming increasingly involved in the process of deciding whether action should be taken. This pro-activity takes two forms:

a.	When a lawyer is approached by a client with a prospective case it follows from the discussion above about financing that it is becoming less common for instructions to be on the a simple basis that the lawyer does the case and submits a bill. Increasingly, the billing arrangement will reflect the lawyer’s assessment of the prospects of success and the shifting of risk between lawyer and client.

b.	Lawyers do not always wait for clients. Whilst, aggressive ‘ambulance chasing’ is discouraged, lawyers may now advertise in all mediums for new work. It is implicit that they will seek cases that they can win.

Central to this process is the construction of an early Case Theory for the matter: an analysis of the legal, factual and evidential matrix of the case, which suggests success. Thus, in a tort case the lawyer must pin down the elements of duty, breach and causation to damage, what are the material facts and what evidence is available to support them. Crucially the quality of the evidence, oral, documentary or expert, must be assessed. In a world of hourly fees and relaxed clients the pressure to use a Case Theory approach would be limited to the dictates of professionalism; the economic incentives suggest that lawyers should avoid making an early case assessment. They would be best advised to obfuscate, delay and arrange settlement at the last minute (at the door of the court) to increase their bills (See Zuckerman A.A.S, 1995). In the post-millennial world such clients will be an endangered species as Case Theory becomes a necessity, not an option.

Once claims start attention then switches to the defendants. If all actual or potential defendants fold their cards early and settle then the explosion fizzles out. In fact cases do not resolve so simply for a number of reasons:

a.	There may be an argument between the parties as to the legal position or the facts, which needs to be resolved. Their Case Theories may differ. This seems very likely in an area of emerging jurisprudence such as software litigation.

b.	The defendant may wish to seek a contribution or indemnity from a third party.

c.	The defendant may face a claim that is so huge that early settlement is impossible. As the Americans say the defendant has no choice but to ‘Bet the Ranch’ and fight.

5. A Partial Taxonomy of Cases: Which Problems will lead to Active Disputes?
Applying the broad approach outlined above this article now tentatively ventures into a speculation into two broad area of disputes; Non-Optional Commercial Disputes and Packaged Software and Systems, and goes on to consider which might inspire litigation? The incomplete exercise that follows incorporate three levels of analysis:

a.	The scope for pre-dispute resolution
b.	Practical difficulties
c.	Financing issues and procedural issues

5.1 Non-Optional Commercial Disputes
Modern business methods involve an increasing reliance on IT support and diminishing levels of redundancy: if the computer system breaks down there may well be no alternative method of organising production or communication (does anybody remember how a telex machine works?). The pace of business, particularly in manufacturing, and the whole supply chain is increasingly geared to ‘Just in Time’ requirements that will not tolerate delay. How are companies reacting to the prospect of hardware or software crashes?

Applying the three stage analysis:

a.	With the government’s lead on Action 2000 <http://www.open.gov.uk/bug2000/index.html> and the compliance strategies of banks the message has spread to larger enterprises that they must identify and resolve YK2 problems before they endanger the very existence of the organisation. Their prime objective will be to rectify systems or re-organise the contractual environment that they operate prior to the difficulty. With some exceptions companies do not make money out of litigation but by selling products or services so they will task their lawyers to avoid court action. Litigators are currently involved with their IP and non-contentious colleagues in revising contracts, re-considering insurance cover and checking documentation with a view to avoiding Y2K problems before they happen. Thus, they may be involved in threatening suppliers of software that is allegedly defective but their client’s objective will not be to sue recalcitrant defendants whilst reviewing the smouldering remains of their company but to avoid the problem in the first place.

b.	If litigation is contemplated the immediate difficulty is that the prospective defendant may also be an integral part of the company’s survival strategy. Let us contemplate a software problem in a large tailor made network. It is date sensitive and requires re-programming. Who will be the best organisation to rectify it? Who will be in the best position to identify the problem? In most cases it will be the supplier who has the information to resolve the problem. This appears to be an example of the Prisoners Dilemma: which strategy should be adopted, co-operation or competition? Whilst competition may produce the optimum result (maximum damages) the approach with the highest utility for the prospective claimant is to co-operate rather than dispute with their supplier. (Maximum speed to resolve the dispute with minimum disruption rather than damages and disruption). This is not an uncommon problem in the commercial world and applies generally to the supply chain. It is not good business to fall out with suppliers and customers with whom you wish to have a long-term business relationship. With increasing globalisation of trade practical difficulties in proving fault and establishing evidence to support litigation are multiplied. The United Kingdom seems to lead the world in both worrying about the millennium bug and doing something about it. The author understands that Italian suppliers of computer control machine tools (which may have date sensitive embedded chips) simply do not take the problem, as seriously as in the United Kingdom and neither do the Italian authorities. If this is the case then litigation, or the threat of litigation, may not ameliorate the position; a more subtle and co-operative approach is called for.

c.	The type of litigation that would spring from such disputes is likely to be quite speculative and uncertain. If the Case Theory is in tort then what is the duty of the supplier of tailor made software when the customer has a high level of knowledge; for example, when the procuring officer in the company is computer literate? If the shorthand writing of dates in programmes is a product of pressure to save money (with software charged by the line) who put the pressure on. If there was an expectation that the software would not be in use in the next millennium was this knowledge of potential problems equally shared? If the software designer and procurer did share similar knowledge is the software house solely to blame or is blame also shared resulting in a failure to show liability or suggesting high levels of contributory negligence? Lastly, and most importantly, is the software house sufficiently robust to pay damages and costs if the case is successful? As a sector the industry is volatile with companies springing up and then disappearing overnight with more than a number of ‘men of straw’. Such an uncertain approach will suggest to clients that litigation is likely to be expensive, involving extensive searches in documents and use of experts and lawyers will be reluctant to share the risk, accepting instructions only on an hourly rate.

This analysis suggests that litigation in this area will be the last resort and will only take place if there is no option or as a spin off of supply chain problems where a non compliant element causes difficulties that spread up or down the chain and whose risk has not transferred or eliminated by insurance or altered contractual arrangements.

5.2	Packaged Software and Systems
Much of the hardware and software systems that are ubiquitous in homes and businesses are sold ‘off the peg’. They are relatively inexpensive and to most customers they are ‘black boxes’: completely incomprehensible bits of kit that either work or don’t work in mysterious ways.

Again, applying the three stage analysis:

a.	It is highly unlikely that customers will be in a position to resolve pre-millennium difficulties or to instruct professional advisers to assist them. However, in the private consumer sector suppliers are already attempting to avoid litigation by offering software additions to ‘cure’ the Y2K problem and by raising the advertising profile of their new equipment as being ‘millennium compliant’. No doubt, the large retailers will offer substantial discounts on new equipment to customers whose PCs fail, thus both avoiding disputes and making another tranche of profit.

b.	Individual consumers and small companies are least likely to have the practical wherewithal to resolve the practical problems of proving liability against large retail companies or manufacturers even though, on some Case Theories, the task may seen easier because of the operation of strict liability.

c.	These prospective clients are unattractive to litigators because their ability to pay fees is limited, the quantum of the case may be limited and yet the case may be difficult to litigate. Are their procedural solutions to these problems?

5.3 The Fast Track
The Fast Track system for cases limited to £15,000 or under introduced under the new Civil Procedural Rules might seem ideal for such relatively small matters. It offers a system of procedural rationing with cases proceeding on tramlines towards a trial within 30 weeks. This constrained attitude to litigation would seem to suggest that the costs of the case would be lower than at present and the costs of the trial itself will be fixed. It is also an ideal system for conditional fee litigation, in a suitable case, as it is attractive to litigators who have to invest fewer resources in the case and, therefore, their ‘non win no fee’ speculation is limited. However, the current system of ‘costs following the event’ is retained so the losing claimant, whilst protected against his own solicitor’s costs still has to pay the losers costs. He also has to pay both sides disbursements and in this type of case experts fees may be high. The solution is after the event insurance but in this area of speculative litigation cover may not be obtainable or the premiums may be prohibitive. In many cases both claimants, insurers and lawyers will be frightened by the prospect of taking on multi-national suppliers of computer products who are likely to fight cases hard for fear that one successful case will open the floodgates.

5.4	Group Actions and Class Actions
If the Fast Track cannot solve the problem might a solution be found in grouping cases together thus equalising the position of claimants and defendants and making litigation more attractive to the ‘little guy’? In the USA Y2K litigation is already proceeding in two areas: cash register systems (Neil S, 1998) and in cases concerning medical management software, voice-processing systems, telecommunication applications, ant-virus software and personal finance systems using the class action method. (Bureau of National Affairs Inc., 1998)

The Class action procedure, allied to the legislative, financing and cost system available in the USA, offers a unique environment for pro-active, innovative litigation and is ideally suited to dealing with problems such as consumers and small businesses facing a litigation challenge. Class actions require at least one extant claim which shares common factors of law and facts with others and which is, in itself, representative of others. The court is then asked to certify a class and this may be granted where the common factors predominate over questions affecting only individuals; the defendant has accepted, or refused to accept, the sense of taking a common approach to the litigation and individual cases would carry the risk of inconsistent results. The court then appoints one or more plaintiffs as class representatives with their attorneys. Commonly, such attorneys will be acting under a contingency fee arrangement offering them between 30 and 40% of damages awarded. Damages may be modest in each case, but aggregated together and increased by exemplary or punitive damages (not available in Y2K litigation in the United Kingdom) the potential prize can be very large. Attorneys will advertise for new cases to join the class, financed by contingency fees and, crucially, because ‘costs do not follow the event’ in the US system (apart from relatively minor expenses associated with a trial) the risk to the plaintiff is small and, thus, insurance is unnecessary.

There is no exact comparator within United Kingdom procedures. (See, generally, Mildred M, 1991). The nearest approach is the Group Action, which recognises the advantages of bringing together numerous cases with common characteristics to benefit both the parties and to take pressure of the court list. Group Actions vary in format but commonly they will share common pleadings on generic issues together with ‘bolt on’ additions in individual cases. The cases will be managed by a judge who will give common directions for trial and, normally, the lawyers for the claimants operate through a steering group. Group Actions have been used extensively in the field of personal injury but their track record has been mixed. In cases involving asbestosis, deafness and lung disease against employer claimants have been successful but in pharmaceutical cases (Benzodiazapine), medical devices (Norplant), and, latterly, tobacco results have not been good. The difficulty here is that the generic costs of researching such difficult cases (often involving groundbreaking epidemiology or clinical experts) have to be shared between the claimants and, thus, the financial advantage of joining the group may be limited.

New methods of financing, such as Conditional Fee Agreements, may make such cases attractive to lawyers, but insurance is unlikely to be available to soften the adverse costs consequences of losing. Cases involving Y2K software may not involve such high generic costs, as the compliance problem may be simpler to prove. However, each uninsured individual claimant still faces liability for rateable costs, which remains a major disincentive.

6 Conclusions
There is little doubt that litigation will emerge from the inability of organisations to resolve the Y2K or the costs of rectification work. Surveyors will be sued for failing to spot compliance problems in security systems of buildings; embedded chips in fire alarms will fail and buildings will burn down and intranets will crash with consequential disruption to business, disputes with insurers and customers and much wailing and gnashing of teeth. However, in the view of this author the concept of massive litigation implications arising out of the millennium problem (Zirin J D, 1997) So get ready for some massive litigation’) is unlikely to be realistic, at least on this side of the Atlantic. Pro-active, pre-event legal advice and drafting will tend to mitigate the effects in the commercial world. In the context of retail sales of defective software or hardware the financial and procedural environment in the United Kingdom is unfavourable to mass litigation. The mere existence of problems is not, in itself, sufficient to promote litigation; all the elements - high damages, risk free litigation, active lawyers and user friendly procedures - must be in place before mass litigation starts: the lawyer driven apocalypse suggested by the merchants of hype is unlikely to happen.

Cases
Thai Trading v Taylor [1998] QB 781.

Liebeck v McDonald’s Restaurants, NM, Bernalillo County 2nd Jud Dist Ct, no CV-93-02419, Sept 14, 1994.

References
Bureau of National Affairs Inc. (1998) Year 2000 Law Report, Vol.1, No.6, pp 287-328 and <http://www.bna.com/y2k/>.

Barlow Lyde Gilbert Solicitors (1998) ‘Year 2000’ BLG Insurance Law Quarterly Issue 36.

Day M (1999) ‘Stubbed Out’ The Guardian 27th February and ‘Out of Puff’ Law Society Gazette, 12th March.

Gjertsen L A (1997) ‘2000: the Year of the Lawsuit’ National Underwriter, Vol.101, Issue 30 p6.

Kelly S (1997) ‘Court in the Act’, Computer Weekly, 13th February 1997.

Mildred M (1991) ‘Liability in Tort: Group Actions’ in Miller C J Product Liability and Safety Encyclopaedia Division IIIA, Issue 41 (London: Butterworths).

Neil S (1998) ‘2000 Reasons to Sue; COIs are standing up for their rights on Y2K problems, but they may face liability themselves’, PC Week, Vol.15, No.10, p83.

Peysner J (1999) ‘Focus Groups and Analogue Vignettes: Modelling and Piloting in Civil Procedural Reform’, Civil Justice Quarterly forthcoming.

Zirin J D (1997) ‘Bugs bite and lawyers litigate’, Forbes, Vol.159, No.14, p100.

Zuckerman A A S (1995) ‘Reform in the Shadow of Lawyers’ Interests’ in Zuckerman A.A.S. and Cranston R. Reform of Civil Procedure (Oxford: Clarendon Press).