Force majeure and circumstances beyond reasonable control
2 Entertain Video Ltd v Sony DADC Europe Ltd [2020] EWHC 972 (TCC)
The questionWhat is the meaning of “circumstances beyond the reasonable control of a party” in a force majeure clause?
The key takeaways
Parties should ensure that they have taken appropriate measures to deal with/mitigate potential risks that would impact the performance of their contractual obligations. If they fail to do so, there is a risk that a force majeure clause may not protect them from liability, particularly if it requires there to be “circumstances beyond the reasonable control of the affected party”.
The background
Sony DADC Europe Ltd (Sony) provided storage and distribution of CDs and DVDs for 2 Entertain Video Ltd (2E) in accordance with a logistics contract between the parties.
During the 2011 London Riots, a group of rioters broke into the warehouse, looted some of the contents and threw petrol bombs at the stock. The CDs and DVDs stored on behalf of 2E were destroyed in the resulting fire.
Sony’s insurers paid a settlement of £8.27m to cover the loss of the stock. 2E subsequently brought a claim against Sony for losses arising from business interruption caused by the destruction of the warehouse (such as loss of sales).
As part of their defence, Sony sought to rely on the following clauses in the logistics contract:
- Clause 14.1: “Neither party shall be liable for its failure or delay in performing any of its obligations hereunder if such failure or delay is caused by circumstances beyond the reasonable control of the party affected including but not limited to… fire ... riot ...”
- Clause 10.3, which excluded liability for indirect or consequential loss in connection with the supply of logistics services
- Clause 10.4, which imposed a £5m cap on Sony’s aggregate liability for all breaches of the logistics contract.
The Court found that Sony had failed to take reasonable measures to secure the warehouse against break-ins and arson which could have prevented the incident. Sony was therefore liable for damages for negligence unless the force majeure or limitation clauses applied.
The Court held that, whilst the riots were unforeseen, the risks of a break-in, arson and a fire were not. Sony’s inability to perform the logistics contract resulted from circumstances which were within its control because it could have taken measures to deal with those potential risks. As such, the breaches of contract were not “beyond the reasonable control” of Sony and the force majeure clause did not apply.
Further, the business interruption losses were not indirect or consequential and therefore were not excluded pursuant to clause 10.3. Finally, the Court found that the £5m cap applied in relation to this claim for business interruption and was not exhausted by insurers’ settlement to the wording of the Discharge and Release Agreement.
Why is this important?
The COVID-19 pandemic has highlighted the importance of force majeure clauses, with many businesses struggling to fulfil their contractual obligations in the unprecedented circumstances.
However, this case makes it clear that force majeure clauses are not “get out of jail free” cards, even if one of the listed events occurs. The effect of such a clause will be considered on a case by case basis, depending on the wording of the clause and the relevant facts.
Any practical tips?
Revisit and consider the scope of your force majeure provisions – should this be limited to “circumstances/events beyond a party’s control” (with specific, non-exclusive examples)? Or should this be a “sweeper” provision, in addition to listed examples of matters that amount to force majeure?
Don’t assume that you can rely on a force majeure clause simply because of the COVID-19 pandemic (or any other event listed in a force majeure clause)! In particular, if your force majeure requires “circumstances beyond your control”, ensure that you have taken the measures to comply with your contractual duties/address potential risks.
Should a potential force majeure event occur, keep records of how and why contractual performance was delayed and any measures that were taken to address/mitigate the impact on contractual performance.