COVID-19 - unforeseeable events may not constitute “force majeure”
The extreme financial circumstances and uncertainty generated by the COVID-19 pandemic continue to place a severe strain on commercial relationships and supply chains. It is unsurprising that parties turn to mechanisms that may allow them to avoid liability for breaches of contract.
One such mechanism are force majeure clauses which, on their face, entitle parties to terminate contracts or excuse them from performance upon the occurrence of a specified event beyond their control. We have set out the most important aspects of force majeure clauses in a recent Perspectives Article.
New case law
The recent High Court decision in 2 Entertain Video Ltd v Sony DADC Europe Limited  EWHC 972 (TCC) serves as an important reminder of the limits of force majeure clauses. In the decision, Sony sought to rely upon a force majeure defence to a claim that it had failed to secure its premises against fire and break-ins arising out of the London riots of 2011. After construing the relevant contractual provisions, the High Court concluded on the facts that the riots did not give rise to a force majeure defence.
The defendant owned a warehouse and provided storage and distribution facilities to the claimants under a logistics contract. The warehouse and its contents were destroyed during an arson attack as part of the 2011 London riots. The claimants, commercial divisions of BBC Studios, owned the stock - CDs and DVDs with a sales value of approximately £40 million - held in the warehouse at the time of the fire. The claimants were compensated for the value of their lost stock by the defendant’s insurers but commenced proceedings against the defendant to recover additional losses including profits they would have gained from selling the stock.
The claimants alleged breach of contractual duties by the defendant, and common law duties in tort and bailment. The claim was brought on the basis that the defendant had failed to keep the stock in the warehouse secure or to adequately assess the risk of intruders and/or fire.
The defendant relied on, amongst other things, a force majeure clause in its contract with the claimants arguing that the riots were an unforeseeable force majeure event which could not have been prevented by it undertaking reasonable measures.
The High Court was required to make factual findings and assess the expert evidence as to the adequacy of the security and fire protection arrangements at the warehouse. The defendant argued that it had taken advice from external consultants on both security and fire protection for the site. Its position was that it was reasonable for it to rely on the professional advice it had received.
The Court rejected the defendant’s arguments and found that it had failed to take reasonable fire precautions and security measures, which had enabled the break-in and allowed the fire to spread quickly. It held the defendant liable for breach of contract and the loss of goods as bailee, and for the tort of conversion of the goods.
Having determined that the defendant was on its face liable, the Court turned to the contractual clauses relied upon by Sony in its defence. In particular, the force majeure clause relied upon by Sony reads as follows:
"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.”
The defendant argued that the riots causing the fire and destruction of the warehouse were an unforeseeable event which could not have been prevented by reasonable measures and amounted to force majeure. The judge rejected this argument noting that, although the riots and fire were themselves “unforeseen and unprecedented” (and were in fact referred to expressly in the clause as potential force majeure events), the defendant should have taken additional steps to prevent the fire.
In particular, the Court held that had the defendant ensured adequate security measures were in place, the attack on the warehouse would likely have been deterred or delayed and any damage significantly reduced. Since the Court had found on the facts that the defendant, acting reasonably, could and should have prevented the fire, it was held that the fire was not a circumstance beyond the defendant’s reasonable control. Accordingly, the primary cause of damage was negligence on the part of the defendant, rather than the fire itself.
The case raises a highly topical issue as to when a contracting party will be entitled to avail of force majeure clauses and what, if anything, it must do to prepare for force majeure events. It is also a timely reminder that: (i) the position always depends on the terms of the force majeure clause as applied to the facts; and (ii) force majeure clauses will not protect parties that could have reasonably taken action to avoid the type of problem or event set out in the clause, but failed to do so.
Although there is no general requirement under English law that an event must be unforeseeable to give rise to a claim for force majeure relief, the case highlights that it is not enough for parties seeking to be excused from performance to say that the event was unforeseeable and beyond their control. Whilst it is likely that the ongoing COVID-19 crisis will in most cases constitute an unforeseeable event outside of a party's reasonable control, parties must establish that the pandemic’s effect on their ability to perform contractual obligations was beyond their control. Affected parties must continue to take reasonable steps to comply with the terms of contracts which they can still perform and to mitigate the effects of any non-performance as far as possible.