The recent case of 2 Entertain Video Ltd v Sony DACD Europe Ltd  EWHC 972 (TCC) has put a big question mark over the widely held assumption that financial losses are classed as consequential or indirect losses. In this case, the courts seemed to take a narrow interpretation of what constitutes an indirect/consequential loss and also considered when a force majeure clause is effective. It is worth looking at if you are a client/contractor/consultant who regularly uses these types of clauses.
The claimants were BBC subsidiaries which sold CDs and DVDs. They stored them in a warehouse owned and occupied by the defendant. There was a logistics contract between the parties regarding the storage of the goods. In August 2011, during the civil riots in London, criminals gained access to the warehouse, looted it and set light to it, causing the complete destruction of the building, plant, equipment and stock.
The claimants successfully recovered damages from the defendant for loss of profit and business interruption despite that fact that these losses were seemingly excluded from the contract as indirect/consequential losses. The defendants were also unable to rely on their force majeure clause to escape liability, despite the fact that their premises had been destroyed by fire.
We’ll now have a brief look at how this decision was reached.
The force majeure clause excluded both parties from liability where a failure or delay “is caused by circumstances beyond the reasonable control of the party affected” and included fire, civil commotion and riots in its list of force majeure events.
However, the judge concluded that the force majeure defence was not applicable because the defendants had failed to use reasonable care to adequately secure the warehouse against fire and theft. Also, had they used reasonable security and fire safety precautions, the break-in and destruction by fire would have been prevented. So, these failures to act by the defendant trumped the right to rely on the force majeure clause; the judges concluded the fire was not caused by circumstances beyond the defendant’s reasonable control.
The contract excluded damages for consequential and indirect losses “(to the extent only that such are indirect or consequential loss or damage only) but not limited to loss of profits, loss of sales, loss of revenue, damage to reputation, loss or waste of management or staff time or interruption of business.”
Despite being included in the list of consequential and direct losses, the judge applied the rule held in Hadley v Baxendale that all losses are either direct losses or indirect/consequential losses and considered that the loss of profit and business interruption claims were direct losses, as they flowed naturally from the breach. The clause therefore did not absolve the defendant from liability.
What can we learn from this case?
Do not assume that because you have carved out a limitation, it will be upheld in court. The judge will look at the contract terms, the facts of the particular case and consider what was intended by the parties. This may override what the parties think is written in the contract.
Once again, it shows that clear drafting and a clear understanding of what is required by the parties is vital.
If you have any queries relating to your construction contracts please do not hesitate to get in touch – we have a dedicated Construction Team who would be happy to help.
Anna Britland (firstname.lastname@example.org ~ 01284 717503)
Sarah Western (email@example.com ~ 01284 717434)