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Force Majeure Clause May Be Unreliable If Circumstances Are Within Reasonable Control

on Thursday, 09 July 2020.

Force majeure clauses have risen from ignored boilerplate clauses to top of the agenda due to coronavirus (COVID-19). The High Court has ruled against a party looking to rely on a force majeure clause...

... despite the express mentioning of the actual type of event (riot) within the clause.

The Contract

In the case of 2 Entertain Video Ltd v Sony DADC, the parties entered into a contract for Sony to provide warehousing and logistics services for 2EV's home entertainment business. Sony was storing a large amount of stock. During the 2011 London riots, rioters launched petrol bombs and the warehouse including all the contents burned down. Sony's insurers paid out £40m for the stock that was lost. 2EV also claimed for its loss of profits.

What Did the Contract Say?

There were two relevant provisions:

One was for force majeure, providing the following: "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 industrial action (at either party), fire, flood, wars, armed conflict, terrorist act, riot, civil commotion, malicious damage, explosion, unavailability of fuel, pandemic or governmental or other regulatory action."

There was also an exclusion of liability for loss of profits, as follows: "Neither party shall be liable under this Agreement in connection with the supply of or failure to supply the Logistics Services for any indirect or consequential loss or damage including (to the extent only that such are indirect or consequential loss or damage only) but not limited to loss of profits, loss of sales, loss of revenue, damage to reputation, loss or waste of management or staff time or interruption of business."

Coronavirus Legal Advice

Why Did the High Court Rule Against Sony?

Firstly, the High Court ruled that Sony was not excused by the force majeure clause. The Court agreed that the riots were unforeseen and unprecedented. However, the risk of intruders was foreseeable - unauthorised entry had been attempted and/or achieved during incidents that had occurred prior to the riot. The risk of arson was, or should have been, foreseen. Sony had engaged a security consultant, but had not taken enough steps to guard against the risks of arson and damage. Therefore, although the clause had specifically mentioned "riot" and "malicious damage", this was not beyond its reasonable control. It could and should have taken additional steps to guard against this threat and so did not benefit from the exclusion of events beyond its reasonable control.

On the loss of profit claims, this only excluded consequential losses including loss of profits, etc. It is well established that there are two types of contractual losses - direct and indirect/consequential. The loss of profits claimed by 2EV were not consequential losses but were naturally flowing from the breach and so were deemed to be direct. Therefore, these types of direct loss of profits were not excluded by the exclusion clause.

Protect Yourself Against Risks

There is a lot of talk about force majeure clauses right now in light of the coronavirus pandemic. Force majeure clauses can help but they are not a panacea. Parties must still take steps that are within their reasonable control. The clause only would have helped for anything that went beyond its reasonable control. Additional security measures ought to have been taken and they were within its reasonable control.

In addition, if a party wants to exclude liability for loss of profits or other types of loss, it is important to consider whether both direct and indirect losses should be excluded to some extent. Otherwise, as here, where this point was not covered widely enough, an attempt to exclude liability for loss of profits may not work.

The key is to have a contract that has been drafted by someone who can consider the legal implications and ensure that you are covered for what you intend.

If you would like help with drafting commercial contracts to protect you against risks from something going wrong, please contact Paul Gershlick in our Commercial team on 07795 570 072, or complete the form below.

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