We recently considered the use of force majeure clauses in contracts where the effects of Covid-19 or the rules imposed by Government due to Covid-19 prevented performance of contract obligations.
In some cases, contracts have been temporarily suspended until the obligations can be resumed and in others, contracts have been terminated early using the rights granted under a force majeure clause.
At the same time as many countries are beginning to lift restrictions, particularly across Europe, there has been a new outbreak in Beijing with restrictions on travel in and out of the city being strictly controlled. If there is a second wave of Covid-19, will companies be able to rely on the same or equivalent force majeure provisions in their contracts?
Recent case law demonstrates that force majeure clauses will only be upheld in exceptional circumstances. In the case of 2 Entertain Video Ltd v Sony DADC Europe Ltd [2020] EWHC 972 (TCC), Sony provided logistics services to the claimants including storage and distribution facilities at a warehouse it owned. At the time of the event leading to the claim, stock with a sales value in the region of £40million was stored at the warehouse. During riots in August 2011, the warehouse was broken into and set on fire, causing total destruction of the warehouse and stock. It was common ground that the riots were unforeseen and unprecedented.
The force majeure clause in the contract was as follows:
"14.1 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.”
However, the defendant’s attempt to rely on the force majeure clause failed. Whilst the clause provided that neither party would be liable for breach "caused by circumstances beyond the reasonable control of the party affected including … fire …", the judge found that, on the facts of the case, the warehouse operator had failed to take reasonable care to secure the warehouse and that the risks of intruders and arson were foreseeable and that damage to the stock and warehouse were foreseeable consequences of those risks. The defendant should therefore have taken reasonable security measures to prevent access by intruders and reasonable fire prevention measures which would have suppressed the fire and likely prevented the destruction of the warehouse. As such, the fire was not a circumstance beyond the party's “reasonable control”.
This case again highlights the point that interpretation of a force majeure clause is specific to the circumstances of the case. In addition, this case is an early warning to companies in the UK to consider what plans can be put in place now to reduce the potential impact of any further lock downs (whether at a national or local level) and any other measures that could be implemented should a second wave occur later in the year as such events are unlikely to be regarded as foreseeable.
We should also consider the wider scope of this case in relation to Brexit. The Government has announced that there will be no further extension to the transition period and therefore any measures that can be taken to deal with the changes brought about by Brexit including for example, the imposition of tariffs and border controls, should be taken at the earliest opportunity.
If you have any questions regarding force majeure or any other matters relating to commercial contracts, please do not hesitate to contact Victoria Trigwell or a member of our commercial team.
