Courts take a strict approach to force majeure clauses

2 Entertain Video Ltd v Sony DADC Europe Ltd [2020] 

In Covid-19 times, a recent decision from the Technology and Construction Court relating to the 2011 London riots is a useful reminder of the restrictive way in which force majeure and limitation clauses are interpreted by the courts and needs to be noted by all suppliers of goods and services. In 2 Entertain Video v Sony DADC, the claimant had a large number of CDs and DVDs stored in the defendant’s warehouse, which was destroyed in August 2011 when a large mob broke in, setting fire and destroying it with petrol bombs. The claimant was seeking damages for loss of profits, business interruption and increased working costs.
In the relevant contract between the parties, there was a force majeure clause that protected the parties from breaches or delays “caused by circumstances beyond the reasonable control of the party affected including…riot, civil commotion, malicious damage”. There was also a standard limitation clause that stated that neither party would be liable for “any indirect or consequential loss or damage”.

Despite the express wording that riot could be a force majeure event and that neither party was liable for consequential loss, suppliers might be surprised that the court decided most issues in favour of the Claimant. The key decisions included:

  • Force majeure clause – the Defendant was unable to rely on this clause to avoid liability due to the fact that expert evidence showed that the Defendant had failed to take reasonable steps to protect the warehouse from break-ins or fires and that it had been within the reasonable power of the Defendant to do so; accordingly, it was liable for negligence/breach of contract and could not rely upon the force majeure clause;
  • Attempted Exclusion of indirect and consequential loss – again, the court held that this term could not protect the Defendant against the specific losses claimed as they were types of loss that would naturally flow from the breach and so were direct rather than indirect or consequential – the cap did not cover the loss claimed;
  • Aggregate cap on liability – by contrast, the £5m cap on aggregate liability was agreed by the parties to be effective so that the total damages awarded to the claimant were limited to this sum, plus interest. Always ensure that your limitation clause has an aggregate cap.

Key lessons of the case

  1. Force majeure clauses are scrutinised closely by the courts – the Defendant could not rely upon this clause to avoid liability as the court decided that the specific events that had taken place were not outside its reasonable control – the decision is particularly striking given that the Defendant had followed advice from security consultants and leaves open how far a party will need to go to show that a force majeure event occurred;
  2. Indirect and consequential loss have a special meaning from a legal viewpoint – as has been repeated by many High Court and Court of Appeal decisions, indirect and consequential loss is any loss which is not the natural consequence of a breach and may only be recovered where the Defendant is aware of special circumstances meaning that such loss may arise in practice; businesses need to be aware that the courts’ approach means that many types of financial losses, including loss of profits, will be direct losses and so recoverable;
  3. Cap on aggregate liability – this was the only contractual point which went in favour of the Defendant and it is a good practical reminder of the need to have a limitation clause which limits losses by reference to a single claim and also has an overall aggregate cap to cover all claims; this can be particularly useful given that, in practice, many types of financial loss will not excluded as being indirect or consequential loss.