Latest case of force majeure offers lessons for businesses affected by COVID-19

What was the case about?

The case is 2 Entertain Video and Others v Sony DADC Europe. Sony stored 2 Entertain's media equipment in a warehouse. During the riots of summer 2011, intruders broke into the warehouse and started a fire which led to the destruction of the equipment. 2 Entertain sued Sony for the damage to its equipment. One of the issues in the case was whether Sony could rely on the force majeure clause in its contract with 2 Entertain. The clause included the following wording:

"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..."

The judge determined that a break-in at the warehouse was foreseeable and could have been prevented by Sony by means of better building security. On this basis, this was not an event of force majeure under the contract because the failure to prevent the damage by fire was not "caused by circumstances beyond [Sony's] reasonable control". Sony could not have prevented the riot itself from occurring but this is not what mattered because it was not the riot that directly caused the damage. What caused the damage was the break-in and arson, which could have been prevented by Sony. Sony was therefore precluded from relying on the force majeure clause.

Parallels with COVID-19

Many force majeure clauses are limited to events beyond the control of the parties. Where this is the case, like it was in 2 Entertain v Sony, the party seeking to be excused from performance must establish that the effect that the pandemic had on its ability to perform the contract was beyond its control. It's not enough to say that the pandemic was beyond its control –anymore than it was sufficient for Sony to say that the riot was beyond its control.

Take the following example:

Party A fails to supply goods to a customer, having shut its factory and stopped all production. It would have been possible to keep the factory operational and comply with the UK social distancing laws, but Party A decided not to put the workforce at risk of catching the virus.

Party B might argue that the force majeure clause does not apply because it was Party A's decision to close the factory that caused the default and it was not reasonable to stop production in circumstances where the factory could have continued to operate within the law and government guidelines. That being the case, Party A would be in breach of contract and liable to pay damages to compensate Party B for non-delivery.

Mitigation

Even where the list of events in the force majeure includes 'pandemic', similar issues will still arise in relation to parties' obligations to make reasonable efforts to mitigate the effect of a trigger event on performance.

This can be shown using a different example:

Party A is a small software developer and is late in delivering a solution to Party B due to the software programmer working on the project falling victim to COVID-19. The force majeure clause started with this wording:

"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 a pandemic…"

Is Party A in breach of contract or can it rely on the force majeure clause?

Assuming Party A would have delivered on time had it not been for the programmer falling ill, the answer will depend on whether it was possible to replace the programmer. Because the force majeure event is not linked to the parties' control, it is not open to Party B to argue that Party A could have prevented this failure of performance, for example by having another programmer available to finish the job. However, once the key worker fell ill, it would have been incumbent on Party A to take all reasonable steps to mitigate the damage/lateness and to this extent Party A's actions will be subject to scrutiny from this point in time.

Lessons to be learned

The exact wording of force majeure clauses is crucial and will determine whether or not, in relation to a particular contract, there is an event of force majeure. The general rule is that the force majeure event described in the contract must have occurred and moreover directly and wholly caused the failure to perform the contract in order for performance to be excused under a force majeure clause. Do not assume that just because the pandemic has set in train a series of events that has led to a contract not being performed, that failure of performance is excused and there is no breach of contract.