The colossal impact of coronavirus on global business is now becoming clear. Of course there are hopeful signs that some businesses may start to recover as some of the ‘lockdown’ restrictions begin to be lifted. But as reports emerge that the UK economy has contracted by 20% it’s clear that most businesses are going to face significant commercial pressure for some time to come. Disputes over contractual obligations are likely to arise, and force majeure clauses will come under particular scrutiny. Here at Nath Solicitors in London we provide specialist advice on commercial disputes and contractual matters to small and medium-sized businesses based in the UK and internationally.
WHAT’S NEEDED TO RELY ON FORCE MAJEURE?
A party to a commercial contract seeking to rely on force majeure provisions must show that an event has occurred that is:
– Unanticipated
– Unforseen
– Beyond the party’s control
– Not due to negligence of the party seeking to rely on force majeure
– Making it impossible for the party claiming force majeure to perform its contractual obligations
We’ve examined force majeure clauses before, explaining when they can be used. We suggested that sometimes one party to a contract may unreasonably attempt to evade its obligations by seeking to rely in this type of contractual term. But a recent case – 2 Entertain Video Ltd v Sony – highlights the limits of force majeure provisions. We discuss the case below. It demonstrates that – even in the context of coronavirus – parties to commercial contracts will not always be able to invoke force majeure when they encounter difficulties in performing their side of an agreement.
2 ENTERTAIN VIDEO V SONY
As the repercussions of coronavirus continue to be felt throughout the world we think 2 Entertain Video Ltd v Sony is a useful reminder of the need for caution when it comes to force majeure provisions. In the case the High Court rejected arguments by Sony that a damaging fire at its warehouse constituted an unforeseeable force majeure event. The full facts were as follows:
Sony (the defendant) and the 2 Entertain Video company (the claimant) were parties to a logistics contract under which the defendant provided extensive storage facilities to the claimant. During the London riots of 2011 the warehouse storing goods belonging to the claimant (valued at £40 million) was set on fire, and they were destroyed. Although the claimant recovered the value of its goods through insurance it sued the defendant for further losses that were not recoverable under the insurance policy. It claimed the defendant had not properly secured the warehouse. The defendant argued that the riots amounted to an unforeseeable force majeure event. The relevant clause in the contract stated:
“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 judge agreed that the fire (and riots) might have been unforeseeable but nevertheless the defendant ought to have had additional measures in place to prevent such a devastating fire. In particular, the High Court noted that
– The defendant hadn’t carried out a security risk assessment of the premises despite two previous security breaches that showed security defects that were easy to resolve
– No evidence was presented that the defendant had carried out a risk assessment for the possibility of an arson attack
These oversights meant that:
– The defendant could have prevented the fire
– The fire was not an event that was beyond the defendant’s control
– The fire was not an event that could justify reliance on the contractual force majeure provisions
Note that the judge made this ruing even though ‘fire’ and ‘riot’ were mentioned specifically in the force majeure clause.
FORCE MAJEURE AND CORONAVIRUS
We believe that coronavirus will enable many organisations to legitimately rely on force majeure to avoid fulfilling contractual terms. However as the 2 Entertain Video case shows, these clauses won’t always provide non-performing parties with a get out: if they could reasonably have acted to avoid the hurdles they say are preventing their performance of the contract, not even coronavirus will help them avoid their contractual obligations.
CONTACT US
We act for small and medium-sized businesses involved in commercial disputes. If you are encountering difficulties in performing commercial contracts or a party with whom you have an agreement has failed to fulfill contractual terms, we can help. Please contact Nath Solicitors on 44 (0) 203 670 5540 or contact the firm online.
