The Y2K Problem for Charities: Avoiding Legal Liability
by Terrance S. Carter, B.A., LL.B
for
the 1999 ANNUAL
CHURCH & THE LAW SEMINAR
OVERVIEW
A. What are the Basic Y2K Issues?
B. How the Y2K Problem May Impact Charities?
C. The Broader Implications of the Y2K Problem for Charities
D. What is the Exposure to Legal Liability from Y2K?
E. Limitations on Legal Remedies Available for Y2K Problems
F. Reducing Exposure to Legal Liabilities
G. Web Resource Materials on Y2K issues
A. WHAT ARE THE BASIC Y2K ISSUES?
1. ADOPT A CAUTIOUS APPROACH
- Like it or not, the Year 2000 ("Y2K") Problem or the
"Millennium Bug" is difficult to ignore
- Considerable litigation is speculated to result, but no one
knows for sure whether Y2K is more "hype" than "crisis"
- Due diligence requires that charities become aware of the
issues and take appropriate precautions as necessary
- Charities and churches cannot afford to simply do nothing
- Do not panic but be aware and be prepared
2. WHAT IS THE Y2K PROBLEM OR "MILLENNIUM BUG"?
- The Y2K Problem refers to the inability of computers, software
and micro-processors to process date related information beyond
December 31st, 1999
- The Y2K Problem originates from using abbreviated date codes
and allowing for only the last two digits of the year instead of
all four
- When the year changes from 1999 to 2000, technology using two
digits will see a change from 99 to 00 and programs may
misinterpret 00 as 1900 instead of 2000
- The Y2K is also a leap year which many computer applications
may fail to consider
- If systems are not rendered capable of dealing with Y2K, they
may crash or fail to correctly compute information
- The U.S. Government estimates that its Y2K costs alone to be
thirty billion ($30,000,000,000.00) (U.S.) to achieve compliance
3. WHAT DOES Y2K COMPLIANCE MEAN?
- A single definition of Y2K Compliance does not exist
- Compliance should include accurate and timely processing of
date data using both single century and multi century formulas
- Compliance should include years 1999, 2000 and leap year
calculations and recognition
- Compliance should include date and data communication and
transfer capability
- Compliance should include the absence of malfunctions, logical
or mathematical inconsistencies, or operational interruptions due
to any data
B. HOW THE Y2K PROBLEM MAY IMPACT CHARITIES
1. COMPLIANCE DEFICIENCIES
- Failure to maintain records for Revenue Canada under the
Income Tax Act
- Failure to maintain accounting records for the Public Guardian
and Trustee of Ontario under the Charities Accounting Act
(Ontario)
- Failure to maintain donor lists
- Inability to produce charitable receipts to donors
- Inability to maintain financial statements for audit purposes
- Failure to maintain records of charitable trust funds
- Failure to maintain investment records for surplus monies and
charitable trust funds
- Failure to maintain records involving international charitable
activities through third parties, ie, agents, co-joint venture
participants, partners or international projects
2. HARDWARE DEFICIENCIES
- Computers have internal clocks that record the time and date
- Both older models and some newer model computers still record
the years with two digits
- Some computers can be corrected by a change to the basic
input/output system (BIOS)
- Some computers may be too old to be fixed and will need to be
replaced
3. SOFTWARE DEFICIENCIES
- Many computer software may not work properly after the Year
2000
- Vendors should be contacted to see if the software program can
be updated to correct Y2K deficiencies before the Year 2000
- "Detonation method" of testing for Y2K compliance by setting
the computers clock to January 1st, 2000 might result in software
programs shutting down, software licenses expiring, and date
reminders disappearing
- Accounts payable/receivable and payroll software may not
properly work
- Records retention and retrieval system software may not
properly work
4. DATA STORAGE DEFICIENCIES
- Data storage using a two digit format will not work properly
after the Year 2000
- Software is generally available to update data handling
programs but is not fool proof
5. TELECOMMUNICATION DEFICIENCIES
- Telephone switching equipment and voice mail may not work
properly after the Year 2000
- Need to check with manufacturer about the Y2K compliance of
equipment
6. ENVIRONMENTAL SYSTEM DEFICIENCIES
- Vaults, security and safety systems, sprinkler systems, HVAC,
lighting and elevators may not properly function after the Year
2000
C. THE BROADER IMPLICATIONS OF THE Y2K
PROBLEM FOR CHARITIES
[Excerpted in part (with permission) and modified as
necessary from the Canadian Bar Association in "Countdown To 2000 -
The Legal Issues"]
1. OPERATIONAL ISSUES FOR CHARITIES
- Y2K compliance by third parties
- consider what steps should be taken to determine the Y2K
compliance status of third parties, such as suppliers or other
charities involved in joint projects
- Y2K representations and commitment to third parties
- consider what Y2K representations and commitments, if any,
should be provided to third parties or to donors about charitable
activities
- Disclosure obligations and financial statements
- consider what disclosure of Y2K compliance, if any, should be
made in the financial statements of the charity
- consider the extent to which Y2K risks can be insured under an
existing policy, if at all, and what steps should be taken to protect
against or extend coverage
- consider whether steps should be taken to appoint an
appropriate Y2K project management team to address the risks
- consider the implications of the Y2K Problem on staffing and
labour relations
- consider whether to seek advice from outside consultants and
advisors
- Delegation of the Y2K duties
- consider to what extent the board of director’s responsibility
to deal with Y2K Problems can be delegated to a committee of the
board or to outside advisors
- Protection of privilege and confidentiality
- consider what steps should be taken to ensure that the
confidentiality and privilege of Y2K information is preserved
- it may be advisable to use legal counsel to protect Y2K reports
with a solicitor client privilege
2. CONTRACTUAL RIGHTS AND OBLIGATIONS
- Who owns the affected software?
- consider whether the charity owns the software it uses or has
licences for
- Access to software source codes
- consider who can modify a source code for customized software
- Is software warranted to be Y2K compliant?
- consider whether existing software licence agreement,
maintenance support agreements and outsource agreements contain a
warranty stating that the software is Y2K compliant or, if not, will
be modified as necessary
- Does the charity have contractual rights to modify software
itself?
- for licensed software, consider whether the software license
precludes modifications without the prior consent of the software
vendor
- Is software vendor offering assistance?
- consider whether the software vendor is offering assistance to
make the software Y2K compliant and what warranties are being offered
in this regard
- consider whether a charities insurance may cover the cost of
determining a major Y2K Problem under an existing insurance policy
- Protection of outstanding loans
- if the charity has loaned money then consider how it can
protect its rights, and security if the borrower is likely to face
significant risks associated with Y2K
3. MAINTENANCE OF RELIABLE RECORDS FOR EVIDENTIARY PURPOSES
- Will a Y2K Problem compromise the integrity of the records of
a charity to an extent that it will render those records
inadmissable in evidence in future litigation?
- Charities should consider the extent to which an
organization’s inability to defend against or prosecute civil
claims may occur because of a lack of a reliable evidentiary
source
D. WHAT IS THE EXPOSURE TO LEGAL LIABILITY FROM Y2K?
[Excerpted in part (with permission) and modified from the
Canadian Bar Association in its " Countdown To 2000-The Legal
Issues"]
1. STATUTORY SOURCE OF LIABILITY
- Consider the statutory requirements that may be breached by
lack of Y2K compliance
- Income Tax Act and electronic record keeping requirements
- Income Tax Act and requirements in issuance of charitable
donation receipts and records
- Charities Accounting Act (Ontario) and maintenance of
accounting records for charities in Ontario
2. PRIVATE ORGANIZATIONAL LIABILITY
- Consider whether charities are subject to organizational
obligations and duties as members of a national or international
association that may be impacted by Y2K non-compliance
ie, failure to produce regular financial statements and reporting
requirements to a national or international association
3. CONTRACTUAL LIABILITY
- Consider what contractual obligations may be affected by Y2K
Problems
-- i.e., direct or implied contracts to provide goods or
services, technology, or equipment
- Charities should identify the specific contracts and issues
that may result in liability
4. INTELLECTUAL PROPERTY LIABILITY
- Consider whether remedial action undertaken to achieve Y2K
compliance may infringe, breach, contravene or misappropriate
intellectual property rights of others
- ie, the Copyright Act will generally require the consent of
software owners
5. CONFIDENTIALITY LIABILITY
- Consider whether technology and software data that is subject
to confidentiality obligations will be impacted by Y2K Problems
or Y2K Corrections
- Consider whether the disclosure of, or failure to adequately
protect information constitutes a breach of privacy rights, ie,
failure to protect donor lists
6. DIRECTOR AND OFFICER’S LIABILITY
- Directors and officers may be exposed to personal liability
for failure to exercise due diligence in undertaking remedial
steps to avoid Y2K Problems
- Directors and officers may be accountable to their corporate
members, Revenue Canada, and to the Public Guardian and Trustee of
Ontario for breach of fiduciary duties of directors in their roles
as "quasi trustees"
- Directors and officers may be exposed to breach of trust for
improper investment of charitable funds if the income or the
investment is lost through Y2K Problems
7. TORT LIABILITY (ie, Civil Wrongs)
- Negligence claims may result from damages caused by Y2K
problems, ie, damages that were foreseeable
- Claims based on negligent misrepresentation may be brought
against manufacturers of hardware and software as well as service
providers for misstatements about Y2K compliance
- Umbrella organizations may be liable for failure to warm
member charities about potential Y2K Problems based on detrimental
relevance
8. PUBLIC POLICY AND GOVERNMENT LIABILITY
- Municipal, provincial and federal governments may face
liability as a result of their public duty to promote and protect
the public interest arising from Y2K Problems
- infrastructure systems such as transportation,
telecommunications, utilities, etc.
- government services to individual clients, such as income
distribution, licensing, etc.
- regulatory obligations, such as audits, inspections,
commission, etc.
E. LIMITATIONS ON LEGAL REMEDIES AVAILABLE FOR Y2K
PROBLEMS
[Excerpted in part (with permission) and modified as
necessary from the Canadian Bar Association in its " Countdown To
2000-The Legal Issues" ]
1. ARE LEGAL REMEDIES PRACTICAL?
- Determine if a legal action claim will be sufficient to
protect an injured party
- Serious consideration must be given to whether defendants to
an action will be capable of paying damages and whether the
defendants will even exist in the future
- Legal remedies may not always be practical
2. RESTRICTION ON DAMAGES
- Do existing contracts contain restrictions on the amount of
damages that can be received for losses caused by Y2K Problems?
3. REMEDIES OTHER THAN DAMAGES
- If damages are not an appropriate remedy, what other options
are available to an injured party?
- A party may require immediate relief rather than waiting for
prolonged litigation
- Does the injured party have the right to compel a potential
defendant to fix Y2K Problems, ie, through an injunction
4. MITIGATION OF DAMAGES
- Does an injured party have an obligation to mitigate against
damages from Y2K Problems?
5. DISCLOSURE OF Y2K PROBLEM
- Must a charity discloses its knowledge of a Y2K Problem to an
opposite party when the Y2K problem may impact the other party?
6. APPLICABLE LIMITATION PERIOD
- Do limitation periods and/or other considerations restrict how
or by when a legal action can be commenced?
7. ARE THERE LIMITATIONS ON LEGAL LIABILITY
- Contracts may contain specific provisions limiting liability
and establishing conditions that must be met before liability can
be found
- Contracts may also contain certain time limitations in its
representations or warranties
- Contracts may also contain waivers and estoppel that preclude
any liability claims
F. REDUCING EXPOSURE TO LEGAL LIABILITIES
1. MINIMUM STEPS THAT SHOULD BE TAKEN
- Appoint someone in the charity to take charge of Y2K
compliance
- List all hardware, software and automated/electronic equipment
used in operations
- Assess compliance of equipment and systems and get help from a
consultant
- Retain qualified consultants or advisors as necessary
- Identify most critical functions in order to prioritize and
budget for action
- Repair, upgrade and change systems and procedures according to
priorities
- Require information from third party providers about their
system compliance through written confirmation Y2K compliance
letters and checklists as necessary
- Test thoroughly for compliance with respect to all Y2K issues
- Maintain separate electronic or paper backup of records, data
basis and key dates
- Develop a continency plan for the most critical functions of a
charity
- Review insurance contracts, particularly liability coverage,
to see if there is any protection available for insurance under
insurance coverage
- Review the fine print in all contracts to determine exposure
to Y2K liability and possible renegotiate contracts if necessary
- Maintain documentation that demonstrate that "reasonable care"
and "due diligence" was taken by the charity to protect its assets
and to continue to provide required services
- Avoid potentially incriminating correspondence about Y2K
Problems, including e-mail
- Ensure that employees are informed of both Y2K Problems and
what remedial steps are being taken to deal with the problem
- Ensure a consistent approach is taken to deal with the Y2K
Problem and do not panic
2. WHAT DIRECTORS AND OFFICERS CAN DO TO PROTECT THEMSELVES
- Exercise due diligence, which involves discharging duties and
responsibilities with the requisite degree of care, diligence and
skill required by statute and at common law in recognition of the
director’s fiduciary obligations akin to that of a trustee
- Obtain indemnification from the charity or associated
charities for the directors and officers with respect to potential
Y2K liability
- Obtaining liability insurance for directors and officers, if
available, for Y2K liability
3. SPECIAL PROBLEMS INVOLVING AMALGAMATIONS AND MERGERS
- Due diligence involving mergers and/or amalgamation with other
charities requires that careful consideration be given to Y2K
compliance by the amalgamating charity
- Liabilities associated with the Y2K Problem by an amalgamated
charity will become the liability problem of the amalgamating
charity
4. DUE DILIGENCE REQUIRED WITH JOINT PROJECTS WITH OTHER
CHARITIES
- Y2K liability exposure of agents, co-joint venture
participants, or partners of a charity will potentially impact the
liability of the charity
- Potential for liability exposure will often occur in relation
to international charitable activities
- Need to conduct due diligence compliance of Y2K Problems of
other charities
5. CONTRACTING TO CORRECT Y2K PROBLEM
- Define Y2K services and the service provider’s obligations
- clearly describe the scope of the work and the resulting
services to be provided
- clearly define what is meant by Y2K Compliance
- Define project management
- clearly describe the manner in which the Y2K project is to
managed
- Define alternative dispute resolution mechanics
- the contract should provide for the use of alternative dispute
resolution mechanism
- Consents to modify intellectual property rights
- consider what consents are required for the service provider to
modify the software
- Ownership of modifications
- the contract should specify the ownership of the modifications
and provide for appropriate waivers of "moral" rights
- Protecting confidentiality
- the contract should provide appropriate protection for
confidential information
- Representations and warranties
- representations and warranties should be used to identify risk
associated with the performance of the contract
- limitations of liability should reflect the economics of
allocating risks
- Indemnification of charities
- when should each party have an obligation to defend and
indemnify the other party?
G. WEB RESOURCE MATERIALS ON Y2K ISSUES
Year 2000: Sharing CEO
Perspectives and Executive
Summary http://strategis.ic.gc.ca/sos2000
Viewpoint
http://www.conferenceboard.ca
Guidance for Directors-The Millennium
Bug http://www.cica.ca
Year 2000: Risk
Management and Contingency Planning
http://strategis.ic.gc.ca/sos2000
Guidance material from ITAC
http://www.itac.ca
Year 2000: Technology Checklist for
Small Business http://www.cfib.ca
January 1, 2000: Crisis or
Opportunity http://www.conferenceboard.ca
Year 2000 legal
issues http://www.cba.org/abc
DISCLAIMER: This web site does not constitute legal advice
or establish the solicitor/client relationship by way of any
information contained herein. The contents are intended for general
information purposes only and under no circumstances can be relied
upon for legal decision making without first consulting with a lawyer
and obtaining a written opinion concerning the specifics of your
particular situation.