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What 2Entertain v Sony teaches us about logistics contracts

This recently reported case involved a number of important issues that are of great interest to providers of logistics services. It’s also especially eye catching because it deals with the legal consequences of a flagrant act of arson which occurred at Sony’s warehouse in Enfield at the height of the August 2011 London riots.

The warehouse was operated by Sony’s logistics division, the claimants being one of its largest customers – 2Entertain Video, part of BBC Studios. 2Entertain contracted with Sony for storage and distribution services for its catalogue of DVDs and BluRay discs. On 8 August 2011 a group of young men broke into the warehouse and ignited two petrol bombs. The warehouse burned for 10 days causing the complete destruction of the building, plant, equipment and stock with a estimated sales value of £40m. 2E was also deprived of a viable logistics service for much of the rest of that year.

2E claimed against Sony for the replacement value of the lost stock and Sony in turn made a claim in respect of this to its insurers. This resulted in the parties entering into a settlement agreement in February 2012 whereby Sony and its insurers agreed to pay 2E just under £8.3m in respect of the replacement value of the lost stock. This was clearly far short of the sales value and the settlement agreement expressly recognised that this element was not being compensated.

Subsequently 2E instituted legal proceedings against Sony claiming £7.5m for losses arising from the fire. The case revolved around the question as to whether 2E had grounds for making such a claim under the logistics contract and then whether it was excluded by specific limitations contained within it.

Sony undertook to provide the logistics services with due care and skill and in accordance with agreed service levels. It sought to protect itself in clause 10 by the following limitations on liability:

  • Any liability for loss or damage to 2E’s goods would be limited to their manufacturing replacement cost (10.1);
  • Exclusion of liability for any indirect or consequential loss or damage, including loss of profits and business interruption (10.3);
  • Sony’s aggregate liability under the contract was in any event limited to £5m (10.4).

Furthermore, the contract contained a standard force majeure clause stating that neither party would be liable for any failure in performing any of its obligations if due to circumstances beyond its reasonable control including fire and the other usual exclusions (including notably in the current climate, pandemics).

The case raised the following issues:

  • Did Sony fail to take reasonable security and fire precautions at the warehouse in breach of the logistics contract?
  • Was the fire and its consequences covered by the force majeure provision?
  • Were 2E’s losses excluded or limited under clause 10?

Adequacy of precautions

The judge concluded that Sony had failed to take reasonable measures to secure the warehouse and its contents: There was no evidence of any security risk assessment having been carried out, even though two earlier security breaches at the site had put Sony on notice that there were vulnerabilities in its security measures and it would have been relatively straightforward and inexpensive for Sony to have rectified these. These failings were brought into sharp relief by the fact that unauthorised access to the warehouse was gained by a group of youths with a few garden implements in less than one minute.

Similarly the judge found that Sony had failed to take reasonable fire precautions: Again there was no evidence that Sony carried out any risk assessment for arson. Nor did it take advice as to how certain internal modifications to the warehouse might affect the fire risk issue.

But what about the force majeure clause? Did this provide Sony with a get out? No. In view of Sony’s failings in relation to security and fire precautions, the fire and the consequence collapse of the logistics services did not amount to circumstances beyond its reasonable control. Sony was not excused by the force majeure provision.

Thus Sony was in breach of its obligations under the logistics contract: it failed to hold 2E’s goods at a secure location and did not exercise due care and skill in the provision of the logistics services. What then was its liability to 2E? This depended on the interpretation of the limitation of liability provisions, involving a typically technical analysis of those clauses.

Clause 10.1 – liability limited to the replacement cost of the destroyed goods: Was this limitation all- embracing or did it only apply to Sony’s liability for the lost goods themselves? The court opted for the latter interpretation since it was clearly suggested by the form of words used.

Clause 10.3 – exclusion of indirect and consequential loss: Did this prevent 2E’s claims for loss of profits and business interruption? No. Those losses were a direct and natural consequence of the fire so they did not fall within the excluded categories.

Clause 10.4 – limiting Sony’s overall liability to £5m: Did this mean that Sony had no further liability to 2E as it had already received the insurance proceeds? This was a particularly interesting point. The legitimacy of the £5m cap was apparently not challenged by 2E. And yet 2E had already received over £8m in insurance and now sought a further £7.5m. How could this be entertained? There were two Paul Herbert Goodman Derrick LLP[2].jpgreasons for this: Firstly since Sony had been under a specific obligation under the contract to effect insurance in respect of loss or damage to 2E’s goods it was then incumbent upon Sony to pass on the proceeds received from its insurer. Secondly, the terms of payment of the proceeds expressly reserved 2E’s rights to claim for loss of profits and business interruption. Thus reasoned the judge, the insurance payment could not be regarded as counting towards the cap on liability specified in the contract.

The case feels like something of a relic: the 2011 London riots are thankfully now long forgotten, and the subject matter of the claim – DVDs and BluRay discs - are distinctly old hat in today’s streaming world. But the lessons to logistics providers and the reminder of how high the bar is set for them are timeless.

Paul Herbert is a Partner at Goodman Derrick LLP, the London law firm. www.gdlaw.co.uk

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