Another look at concepts of ‘consequential’ loss and ‘force majeure’
2 Entertain v Sony (High Court) [2020]
‘Consequential loss’ is a legal phrase that has perplexed and mystified lawyers and their clients for many years. Several cases have analysed the meaning of the phrase in order to ascertain whether an entitlement to damages is either restricted or even excluded altogether. This case is the latest example.
The case also looked at the topical principle of ‘force majeure’ in the context of a riot and a resulting fire.
Facts:
Sony provided warehouse storage facilities and distribution services from premises in Enfield, North London to various companies forming part of the BBC in respect of CDs, DVD’s and other ‘home entertainment media’. Back in 2011 at the time of the riots which took place in the UK, a group of youths broke into the warehouse, looted some goods and set fire to the warehouse destroying it and its contents.
The logistics contract in question contained the following provisions:-
Bester alleged that PBS:
4.1 Sony shall provide the following insurance “covering loss, theft, damage to and or destruction of the Client’s Goods and Client’s Materials for their full replacement/reinstatement value while in the charge, care and control of [Sony] with a minimum sum insured limit of ten million pounds sterling (£10,000,000)”;
5.1.3 Sony shall hold the Client’s Materials and Client’s Goods at a secure location at Sony’s risk whilst in its possession until the Client’s Goods are delivered to the Client’s Customers, subject to the limitations set out in clause 10”.
5.3.2 the Services will be performed with due care and skill and in a timely manner by appropriately trained, qualified or experienced individuals…
5.4 Subject to clause 10, Sony shall indemnify the Client against all costs, claims, losses and expenses whatsoever which it is reasonably foreseeable would be incurred by the Client as a direct result of any breach of Sony’s obligations, undertakings and warranties.”
10.1 Sony’s liability for any loss of or damage to Client’s Materials or Client’s Goods shall not exceed their manufacturing replacement cost.
10.3 Neither party shall be liable under this Agreement in connection with the supply of or failure to supply the Services for any indirect or consequential loss or damage including (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.
10.4 Subject to clause 10.5, the aggregate liability of Sony for all breaches of or in relation to its obligations under this Agreement or for any losses or liabilities which are the subject of any indemnity by Sony whether in contract or otherwise, shall not in any event exceed the sum of five million pounds.
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 fire, riot, civil commotion, malicious damage.
At the time of the fire the warehouse was storing items with a retail value in the region of £40 million.
2E made a claim for the loss of the physical stock which it was alleged would cost around £8.5million to remanufacture. Some 8 months after the fire, the two parties and Sony’s insurers entered into a Release Agreement under which all parties acknowledged the claim as being valued at £8.2 million and that sum was paid. The Release Agreement contained a somewhat surprising recital which said “this agreement is restricted to the Customer’s claim for the physical loss or damage to the Stock and nothing is intended to prevent the Customer from recovering damages for consequential or business interruption losses”.
The Customer accepted the payment in full and final settlement of all and any liability Sony may have in respect of the physical loss of or damage to the stock.
Again, somewhat surprisingly, clause 5 of the Release said “the settlement does not apply to any claim that Sony has under clause 5 of the Logistics Agreement (obligations with regard to security and due care and skill etc.) or any claim not directly relating to liability for physical loss of or damage to the stock.”
2E initially claimed £7.4 million but at the trial it accepted that the £5million cap was effective to limit the damages claim.
Decision:
The judge made an interesting comment that British Standards Codes of Practice are not legally binding or conclusive in respect of issues of reasonable skill and care but said that “they reflect the consensus of professional expertise and opinion as to acceptable standards and practice for their stated application. As such they provide strong evidence as to the standard of the competent professional at their date of issue”. They are therefore to be ignored at your peril.
It was held that the fire and resulting loss did not amount to circumstances beyond the reasonable control of Sony and it was not open to Sony to rely on the force majeure clause as a defence. Additional security measures and fire precautions could have been implemented by Sony and they were not prevented from doing so by circumstances beyond their reasonable control.
Sony were held to be in breach by failing to hold the goods in a secure facility and failing to perform the services with due care and skill.
On the replacement cost point the judge said that the words of clause 10.1 were “clear - they mean what they say. Liability for loss of the goods is limited to their manufacturing replacement cost”. However, the judge went on to say that the clause did not preclude other claims based on Sony’s wider breaches in failing to provide the Logistics Services.
On the exclusion of liability for loss of profits and business interruption losses, the judge was critical of the drafting. The judge concluded that “that the loss of profits and business interruption costs [claimed] do not constitute indirect or consequential loss or damage within the meaning of clause 10.3”. That finding is entirely unsurprising and is in line with previous cases. What was more surprising was her statement that her finding was “consistent with, and provide support for, my initial finding based on the plain and natural meaning of the words used”.
Sony argued that the £8.2 million paid in respect of the costs of remanufacturing the stock had effectively exhausted the £5million liability cap. The judge seemed to say that because the Release Agreement did not amount to an acceptance of liability on the part of Sony, it was not open to Sony to rely on the insurance payment as satisfying the liability cap. This seems very strange reasoning although the judge did go on to refer to other clauses of the Release Agreement which seemed to expressly acknowledge the possibility of other claims. Those clauses look very strange indeed if Sony truly believed that the payment exhausted all liability.
Points to Note:
- Excluding liability for loss of profits as a sub-category of indirect or consequential loss is a schoolboy error (at least under English law);
- Services providers who do not want to be found guilty of negligence would be well advised to at least take due account of relevant British standards.
- The mere fact that fire and riots were mentioned in the force majeure clause as examples of FM events does not mean that because a fire / riot were involved a party will necessarily be able to place reliance upon the clause. One must analyse whether the circumstance in question impacted upon the breaches which actually caused the loss or damage.
- Take great care in the drafting of any settlement documentation. If a payment is intended to be in full and final settlement of all claims then settlement documentation should say precisely that.