Force majeure clauses and Covid-19 - Part 2
Our recent legal update on force majeure clauses and Covid-19 focused on how force majeure clauses can be used if your business, or the business of a customer or supplier, is affected by the current pandemic. In that article we discussed the circumstances in which a force majeure clause can be relied upon for relief and emphasised that force majeure events are typically extraordinary events including war, strikes, acts of God, terrorist attacks, building collapses or pandemics.
In a recent case, Entertain Video Limited & Ors v Sony DADC Europe Limited EWHC 972 (TCC), the High Court has reiterated that a typical force majeure clause can be relied upon only in narrow and exceptional circumstances and, in particular, may not provide relief if the parties have not taken all reasonable steps to guard themselves against the issue in question.
In this case, Sony DADC Europe Limited (“Sony”) provided logistic services to Entertain Video Limited (“Entertain Video”), including storage of circa £40 million of stock at a Sony warehouse in North London. The warehouse was looted and burned down on the night of 8 August 2011 by a gang of rioters and the warehouse and all its contents were destroyed.
Entertain Video received some compensation for the value of their lost stock following a successful claim by Sony’s Insurers under the Riot Damages Act 1886, but sought additional damages from Sony, alleging that the loss of their goods by Sony was a breach of their agreement. Sony defended the claim on the basis that the particular force majeure provisions of the parties’ contract absolved them of liability, as the fire and riot were unforeseeable and could not have been prevented.
The Court was required to make factual findings as to the adequacy of the security and fire protection arrangements at the warehouse.
Whilst the riots and fire were themselves unforeseeable and although the clause expressly relieved Sony of its obligations to perform its contract in ‘circumstances beyond [its] reasonable control….including but not limited to…riot’, the Court found that the damage was within Sony’s control. Sony failed to put in place reasonable fire and security measures, including secure fire exit doors providing resistance to forcible access or a sprinkler system which would activate in the event of fire. In view of these failings, it was held that the primary cause of damage was negligence on Sony’s part, rather than the riot, and the force majeure provisions would not excuse Sony from liability.
What can be learnt from the approach taken by the Court?
This case is a topical and important reminder that a force majeure clause may not protect the party seeking to rely on it if reasonable steps could have been taken to avoid the risks contemplated by the clause. This may be the case even if the language of the clause anticipates the circumstances in which the loss took place – for example, “riot” or “epidemic”.
As the impact of the current pandemic continues to affect businesses across the globe it’s very likely that “force majeure” cases will continue to come before the courts. We will keep you updated as these cases are reported, but it’s interesting to see that courts are not only considering carefully the wording of each force majeure clause but also the conduct of the party seeking to rely on it. If, regardless of the wording of the force majeure clause, the party seeking to rely on it has failed to take reasonable steps to limit the impact that a force majeure event would have on its business, then the courts may not give that party relief from its contractual obligations.
If you want more advice on force majeure clauses, or how the current crisis may affect your relationship with suppliers or customers, we’re here to help. Please contact Ian Lindley.
With thanks to Victoria Jackson, corporate trainee, who helped research this update.
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