Cargo isn’t always in transit. During various parts of the process, it’s holed up in warehouses awaiting successive intermodal legs of transit, or laid away pending orders from owners as to where they want it sent. If transportation and logistics may be collectively defined as global inventory management, then warehousing and distribution constitute almost as large and significant a part of the process as does movement by land, sea or air. The evolution of transportation and logistics, with the establishment and implementation of deregulation, has trended toward integration of the components parts.
With increasing frequency, this is accomplished via a single company’s ownership of brokerage/forwarding/transportation/storage/customs/ancillary service divisions, or by way of integration through multi-service contracts that utilize a series of third-party providers. Such dynamics lead to efficiency, convenience and corporate profits, but like so many other aspects of transportation and logistics, they also produce confusion about law and legal implications, as well as the necessity of revised documentation practices. Federal and state laws governing the different transportation modes with respect to regulation and licensing, cargo liability, financial responsibility requirements, taxation and other subjects address similar concerns and are aimed at similar goals, but in many respects, that law is just different enough to mislead or confound industry players, and unfortunately, sometimes lawyers and judges. Problems frequently arise when industry tries to combine the steps into a single transaction subject to a single contract and/or multi-application shipping documents.
Volumes have been written about the law of warehousing, and only a bit less to its application to distribution logistics contracts. This four-part article addresses in summary fashion legal concepts which govern warehousing, with attention to factors which contrast with transportation law. It focuses on warehousing contracts as part of the logistics aspect of distribution relationships, and how provisions of law governing this sector mesh, or sometimes collide, with statutes and interpretative case law applicable to transportation. It begins with a general review of legal concepts governing warehousing, and expands to application of warehousing law to distribution logistics contracts, including the difficulties encountered when preferences for operational practices disregard the realities of applicable law.
Legal principles governing storage aren’t quite as old as those pertinent to transportation, but many concepts are similar and rooted in the same antiquity as aspects of maritime law. A primary difference between the laws of warehousing and interstate water and surface transportation is that the former, by and large, isn’t governed by a federal statute or international treaty with preemptive effect over state and common law, unless the parties contract otherwise.1 Rather, the bailment relationship created by a warehousing contract is founded on commercial law principles that are codified within state statutes, largely through adoption of provisions of Article Seven of the Uniform Commercial Code (“UCC-7”).2
This usually is with state-specific modifications. In reading the following, one should bear in mind that UCC-7 in and of itself isn’t the law of any jurisdiction. One must become familiar with the particulars of a given jurisdiction with regard to any point this section addresses. For that reason, this analysis in this paper is conceptual, and by way of background with respect to statutory provisions which might differ in a relevant jurisdiction.
UCC-7 is the longest and most detailed UCC section. It’s also among the most stable, having seen very little amendment since its promulgation.3 Moreover, individual state treatment of its terms has been comparatively uniform in statutory application and judicial interpretation. Per its title, it broadly covers “Documents of Title,” which include the related and often integrated subcategories of warehouse receipts and bills of lading pertinent to intrastate transportation. While UCC-7 terms usually are preempted by federal law during interstate and international transit,4 state commercial law governs most aspects of distribution logistics arrangements.
At the heart of the bailment relationship created by logistics customer’s tender of property to a warehouseman for storage is the warehouse receipt.5 No UCC-7 provision actually mandates issuance of a warehouse receipt, although some state statutes require it (in some jurisdictions it’s actually a crime not to). However, UCC-7-202 holds warehousemen liable for any resulting damages if they don’t issue warehouse receipts containing certain stated provisions, and UCC-7-209 requires issuance of a warehouse receipt for a warehouseman to enforce its rights against its customer and third-party members of the public. As implied by UCC-7-202, the warehouse receipt is a receipt; a document of title; a memorialization of the storage terms, including storage fees; commercial negotiable paper, i.e., the stored property’s “alter ego” for documentation purposes; and an opportunity for the parties to it to state specific terms not necessarily imposed by law. It must designate whether the warehouseman will release the stored property to the bearer, a named person, or to order, and is the warehouseman’s opportunity to limit its liability and to impose parameters on claims. Put simply to those more accustomed to the transportation industry, it’s the bill of lading’s analog.
One significant difference between statutes governing interstate/international carriage and UCC-7 regards liability for lost/damaged/destroyed property. Unlike the near strict liability regimes imposed by federal statutes on surface and water carriers,6 UCC-7-204 holds:
A warehouse liable for damages for loss of or injury to the goods caused by its failure to exercise care with regard to the goods that a reasonably careful person would exercise under similar circumstances. However, unless otherwise agreed, the warehouse is not liable for damages that could not have been avoided by the exercise of that care.
The clause “under similar circumstances” has been interpreted to raise the bar slightly from that imposed by ordinary tort law, i.e., by increasing the level of duty from that owed by “the reasonably prudent person” to that of “the reasonably prudent warehouseman.”7 However, it’s nothing like the “ping pong” shifting burdens of proof COGSA and Carmack create, one which a plaintiff shipper initially satisfies merely by showing good order and condition on tender; short, destroyed or damaged order and condition on delivery; and damages. UCC-7 still contemplates a tort-based analysis of liability.
However, UCC-7-204 contains mechanisms for warehousemen to limit their liability in ways substantially similar to those COGSA and Carmack allow:
(b) Damages may be limited by a term in the warehouse receipt or storage agreement limiting the amount of liability in case of loss or damage beyond which the warehouse is not liable. Such a limitation is not effective with respect to the warehouse’s liability for conversion to its own use. The warehouse’s liability, on request of the bailor in a record at the time of signing such storage agreement or within a reasonable time after receipt of the warehouse receipt, may be increased on part or all of the goods covered by the storage agreement or the warehouse receipt. In this event, increased rates may be charged based on an increased valuation of the goods.
Just as other liability regimes require carriers to offer shippers an opportunity to opt for full liability in a warehouse receipt (or incorporated terms and conditions, master contract, etc.), so does this UCC-7 provision require that bailors be able to require full liability subject to typically higher storage rates.
Extension of Carrier Liability Regimes to Warehousemen
It’s long been the practice of ocean carriers, through standardized Himalaya and Paramount Clauses in their bills of lading, to extend the rights they enjoy under the U.S. Carriage of Goods by Sea Act (COGSA) to their subcontracting service providers.8 These include limitation of liability for lost/damaged freight. The theory is that subs of ocean carriers operate under the same contractual terms as do the carriers, as the latter have entered into global service agreements with their shipper customers.
In most circumstances, this extension of the ocean carrier liability regime applies to transit in storage, as opposed to the commercial distribution storage described below. Still, when ocean transportation is involved, one should always be on the lookout for arguments that COGSA, and not a state’s adopted version of UCC-7, applies.
Protection of Warehousemen
UCC-7 contains two lengthy provisions specifically directed at protecting warehousemen’s commercial interests, albeit within certain defined parameters.
The first, and one frequently of concern to warehouse contract parties, is the warehouseman’s lien under UCC-7-209. The warehouse receipt defines the existence, nature and extent of a warehouseman’s lien. 9 Per this provision, “charges for storage or transportation, including demurrage and terminal charges, insurance, labor, or other charges, present or future, in relation to the goods, and for expenses necessary for preservation of the goods or reasonably incurred in their sale pursuant to law.” However, the lien in this regard is “on the goods covered by a warehouse receipt or storage agreement or on the proceeds thereof in [the warehouseman’s] possession.” Thus, the lien is premised on issuance of a valid warehouse receipt,10 and is possessory only, meaning it’s extinguished when the warehouseman releases the stored property.11
Per the statute, however, a warehouseman can’t simply enforce a lien on any item of property that happens to be in its possession whenever a payment dispute arises. For example, if a warehouseman releases to its owner or designated deliveree Unit 1 of goods without receiving payment, and later receives for storage Unit 2 of goods from the same customer, the warehouseman cannot refuse to release Unit 2 based on nonpayment of fees due for Unit 1. However, warehousemen are free to insist that their customers contractually agree to a “general lien” or “cross lien” by which a lien arises on any property in the warehouseman’s possession at any time. Customers obligated to their own contract partners often resist general liens, and as is the case with most any other negotiated contract term, their success in doing so usually is directly proportionate to the volume of their business.
While “[a] warehouse receipt need not be in any particular form” (UCC-7-202(a)), one containing specified terms must be issued for a statutory warehouse lien to arise. As discussed below, many providers offering ranges of services issue “bills of lading” which they intend to provide multipurpose functions, including documentation of the warehousing aspect of the relationship. This practice often proves adequate in the event of dispute, but at a minimum, it can be confusing and require additional effort to explain to adverse attorneys or judges new to the concept. Moreover, provisions required in bills of lading, and terms and conditions included in them per industry practice, aren’t identical to, and can be at odds with, those for warehouse receipts. Descriptions of cargo, as well as its packaging and inventory designations, often change between storage and transportation; storage charges usually aren’t stated in a bill of lading (although most state statutes require written documentation of them); and bills of lading may omit any reference to warehousing law. It might be a business convenience to service providers to use a single form and, with proper attention, a single form might adequately document both shipper/carrier and bailor/bailee storage relationships. However, the notion that a bill of lading “is good enough” generally should be discouraged.
Foreclosure on a warehouseman’s lien, followed by sale of property at auction, is the subject of UCC-7-210. States impose various obligations on warehousemen regarding advertising and notice of sales they intend to undertake. In any event, all parties claiming an interest in the property must be notified, and given time to pay the warehouseman’s properly claimed charges to satisfy the lien. This provision allows a warehouseman to sell only an amount of seized property adequate to obtain funds sufficient to pay its owner’s debt, and the sale must be undertaken in a “commercially reasonable” fashion. Any balance between the net sales price and sums due to the warehouseman must be refunded to the property’s owner. A purchaser at such a warehouseman’s foreclosure sale takes title to the property free and clear of third-party claims.
The second UCC-7 provision aimed at qualified protection of warehousemen’s commercial interests, UCC-7-206, provides a right to terminate a storage at the warehouseman’s option. If a warehouseman reasonably believes stored goods in its possession may have been abandoned, or are subject to deterioration or harmful effects to the facility or other stored property, it may justifiably wish to end the storage as soon as commercially feasible. UCC-7-206 empowers a warehouseman in such circumstances to demand that its customer remove the stored property after payment of all outstanding charges subject to most terms and conditions applicable to the warehouseman’s lien rights. If the warehouseman didn’t have notice of “a quality or condition of the goods” at the time of deposit which render them “a hazard to other property, the warehouse facilities, or other persons,” the warehouseman can actually sell such goods without notice.
Certain UCC-7 provisions extend to rights of purchasers for value of warehouse receipts as against warehousemen and other claimants. For example, UCC-7-203, entitled “Liability for Nonreceipt of Misdescription,” goes a step farther than federal statutes pertinent to transportation by relieving warehousemen from liability for losses if they specifically disavow knowledge of whether goods documented by a warehouse receipt conform to the property description, or if the holder of a warehouse receipt after purchasing it has notice of the misdescription. Under UCC-7-205, buyers in due course of stored goods take them free and clear from warehousemen who themselves deal in the same commodity without regard to the latter’s rights under a warehouse receipt.
Per UCC-7-601, a warehouseman is liable to a property owner if it delivers freight to a person who doesn’t have a document of title (i.e., a warehouse receipt) and doesn’t have rights to the property, and for conversion if it does so in bad faith. To guard against a finding of bad faith, a warehouseman must obtain security from the undocumented property claimant for twice the property’s value, and hold it for one year. UCC-7-603 contemplates an interpleader proceeding if two or more persons claim title to property.12
Again, the collective industry of transportation and logistics has evolved over the past twenty years. The on-scene presence of one-stop shop service providers has been promoted by intermodalization; deregulation; liberalization of regulatory restrictions on intermediaries of all modes of transportation (with the exception, perhaps, of aviation); and business trends toward company mergers and consolidations. Multi-level service offerings are easier to promote from the business perspective, and are attractive from the consumer perspective for similar economic and operational reasons.
Like so many other aspects of intermodal service contracting, storage and distribution documentation is similar to procedures used in the various transportation modes, but differs in ways apt to cause confusion and problems. This is particularly true when service providers assume that the corner-cutting convenience of multi-functioning documentation suffices, as is described above with regard to warehouse receipt issuance. Industry participants should be urged to bear in mind the critical differences between transportation and warehousing documentation, including law governing both, in their business operations.
Commercial aspects of storage and distribution services contracting
Analysis of the plethora of contractual commercial topics and their issues arising in distribution logistics is outside this paper’s scope. Typically, providers of distribution logistics services wish to document pricing; payment terms; ancillary services they will offer, along with applicable accessorial charges; exclusivity (including penalties for violation); assessments for services such as repair of defective packaging and costs associated with failed deliveries; volume and time commitments (including penalties for violation); credit terms; insurance; the independent contractor relationship between the parties; indemnification for employment related claims; force majeure; limitation of liability; general lien provisions; arbitration and jurisdiction clauses; and the time length of the contract’s applicability.
These terms can and should be well documented in a contract that is incorporated by reference into individually issued warehouse receipts and bills of lading where drayage and other transportation services are included. However, care should be given to legal implications of these outside transportation and warehousing law. Some states require a good deal of specificity to exclusivity provisions, as they view them with disfavor as a restraint on free trade. Employment law, including classification of entities and their employees as independent contractors, varies from state to state. Credit requirements can also be the subject of state and federal guidelines.
With some significant exceptions mostly pertinent to security regulations, aspects of international ocean carriage, and customs clearance, the terms of distribution services agreements may be established by parties to them. Liability and lien issues, duties of care, and service obligations, among others, can be negotiated outside of what state and federal statutes provide as a default. In that environment, supply, demand, capacities and volume commitments can and should drive party obligations to each other at least as much as what statutes (many of which desperately need updating) contain. Negotiators of these agreements and their lawyers should always bear this in mind.
The economic models of warehousing and transportation also differ in ways that can complicate parties’ understandings of applicable law, and therefore application of their legal rights. Warehouse operations that perform comprehensive distribution services, i.e., the receipt, processing, storage, inventorying, palletization, packaging, and often drayage of goods, view themselves as full-service providers that perform systematic, ongoing functions as part of the supply chain process. The storage component of these economics usually isn’t the most lucrative, and often is provided at or below cost based on a customer’s warehouse space needs. This is in contemplation of fees that will be charged for the numerous ancillary services incident to distribution logistics. Service contracts documenting these services frequently are complex, and set various rates according to volumes of stored goods, exclusivity, time commitments, and services provided.
Take, for example, a storage and distribution arrangement whereby a service provider will provide drayage of a commodity, say, bags of flour, from port to its warehouse; inspect and repair damaged units, and undertake other quality control; palletize it; inventory it with digital identifiers; store it until issuance of delivery orders; package and process it for delivery by surface carriage; comply with state and federal regulatory requirements pertinent to foodstuffs; and either provide or broker onward transportation to the customer’s consignee.
In its proposed contract, a service provider might state a storage charge in terms of time units of property – individual bags of flour or pallets containing them – which are situated in their facilities, with a new charge accruing on periodic bases. For example, the provider might state a charge of $5.00/month per pallet, with a new $5.00 charge accruing the first of each month. By that methodology, a pallet would create the first $5.00 charge whether it’s in the warehouse one or thirty days. For this reason, customers often vie for shorter chargeable time units, especially if their product moves quickly in and out of storage. Each ancillary service generates additional charges, such that the more attention a product requires, the more profitable it is to the logistics provider. This usually renders shorter accrual periods more enticing to service providers. Penalties can be imposed, or discounts awarded, based on volumes and other factors, such as whether pallets are stackable, and uncontemplated storage times.
Warehouse Liens and Receipts
A logistics provider may believe that a warehouseman’s liens arises comprehensively based on nonpayment for any service it provides regardless of how any service is documented. As demonstrated above, that’s not true, at least not as a matter of UCC-7. For example, a distribution service provider whose warehouse receipts and other documentation don’t spell out how volumes impact pricing can be precluded from asserting a warehouseman’s lien (and thereby seizing freight to leverage payment) based on an assertion that unpaid freight charges are due. If the storage charge methodology isn’t spelled out concisely in a warehouse receipt or incorporated storage agreement (including the fact that unmet volumes will result in a penalty), then the customer’s refusal to pay retroactively higher rates will not give rise to a lien.
Some providers view themselves primarily as transportation companies, and include terms in their standardized contracts that frame liability, claims processes, rates and other provisions exclusively in terms of surface or water carrier liability regimes and industry practice pertinent to them. This can be confusing at best, and unenforceable at worst.
To the extent parties contractually agree to general liens, it’s at least questionable whether and how the statutory overlay applies. A general lien on cargo unrelated to a payment dispute is outside UCC-7’s contemplation. Like all UCC provisions, UCC-7 is a manifestation of common law principles aimed at promoting free trade within parameters defined to protect the interests of parties, especially innocent ones. A purchaser for value and holder of a validly negotiated warehouse receipt might find itself unable to retrieve its property without paying storage or other charges the original bailor was responsible for.
Again, per UCC-7-202, a “warehouse receipt need not be in any form.” However, documentation containing terms a logistics service provider might wish to enforce should be issued for each item of property tendered to it. The documentation format shouldn’t suggest that its application is limited to one aspect of services offered, like a “bill of lading” might be interpreted. It’s typically most efficient to have general terms stated in a contract which is incorporated by reference in documents issued individually for each lot of tendered property. Effective warehouse receipts may be issued electronically.
Logistics customers which have contractual obligations to their own customers frequently wish to avoid the potential peril of a warehouseman’s general lien which could shut down their entire distribution chain based on a storage charge dispute with a warehouseman. Such customers also are often obligated to financial institutions not to encumber their transient cargo, which might be pledged as security for inventory financing. This presents a dilemma for logistics providers which hold their warehouseman’s lien security as sacred.
A solution logistics providers sometimes agree to, usually with reluctance and out of concern for preserving a business relationship, is to subordinate their lien rights to those of the secured lender. This approach leaves the warehouseman’s lien intact as against the rest of the world, subject to it reaching agreement with the lender in the event of dispute with their common customer. In doing so, the warehouseman inherently becomes aware of a third-party entity which might later claim an interest in stored property regardless of any failure of payment from the customer to the warehouseman, i.e., if the customer is alleged to have breached a financing loan. In that instance, the warehouseman may be faced with two entities claiming title to the property, and potential liability in the event it releases property to the one ultimately adjudged not entitled to it.
This is another example of a circumstance which might necessitate an interpleader action by the warehouseman against its customer and the financial institution for a court determination of the property’s rightful owner. To protect itself in such circumstances, warehousemen might require a term in the subordination agreement that customer and financial institution be jointly and severally liable for attorneys’ fees it incurs by any interpleader action.
Risk allocation is directly related to determinations about insurance in logistics contracts. Just as with transportation relationships and contracts, a provider typically will want to charge higher service fees if the customer insists on full liability. However, the higher rates might be comparable to, or lower than, first-party insurance coverage the customer would thereby avoid. But then the customer might have to incur the expense, effort and time delay of demonstrating the warehouseman’s fault and liability in order to recover its loss. Conversely, the savings a logistics customer enjoys by agreeing to limited warehouseman liability might free up funds to purchase that first-party insurance coverage, allowing the customer the comfort of knowing it’s covered regardless of warehouseman fault. But then, some insurers might charge higher premiums for coverage of inventory the logistics of which are managed by an entity which is essentially subrogation proof.13 When the parties specifically intend to avoid being the subject of an insurer’s subrogation action, they should consider having the non-subscribing entity named as an additional insured.
When insurance procurement is a condition contractually imposed on a party to a distribution logistics contract, the parties should include a mechanism by which the coverage is confirmed on an ongoing basis. This might be a requirement that the insurer notify the non-subscribing party of any pending cancellation.
As the transportation and logistics industry becomes more integrated, and its relationships more often memorialized by combined documentation, it becomes increasingly important for industry participants and their counsel to bear in mind the sometimes subtle distinctions between state warehousing law, and its state and federal counterparts governing transportation. In an industry in which timing, convenience and efficiency are critical, players can tend to oversimplify, or go a bit too far in the direction of time-saving, cost-cutting measures in matters which are unlikely ever to be at issue. Multi-service, distribution logistics contracts are a prime example of an environment which should receive this careful attention.
1 See discussion below regarding extension of carrier liability regimes to warehousemen.
2 Enacted in 1952, the UCC is the largest of a series of uniform statements of law drafted by legal scholars under the auspices of the National Conference of Commissioners on Uniform State Laws and the American Law Institute. In and of itself, the UCC isn’t law, but exists as a proposed codification of national law aimed an creating uniformity within the states. Individual states have adopted the UCC with their own modifications, and implemented it within their own statutory codes. Certain federal statutes, such as the Uniform Warehouse Receipts Act of 1906 and the Uniform Bills of Lading Act of 1909, were included as provisions of Article Seven.
3 UCC-7 was revised in 2003 primarily to address contemporary practices regarding electronic storage documentation.
4 While an analysis of UCC-7’s bill of lading terms are outside this paper’s scope, federal and state bill of lading statutory provisions are generally similar in wording and application.
5 Note that this is not the case for storage in transit, i.e., when cargo is situated in storage facilities temporarily awaiting transloading or a change in carriers. In those instances, bills of lading typically continue to govern the shipper/carrier relationship
6 See Block, “A Comparison of the Fundamentals of the Carmack and COGSA Liability Regimes,” available at http://www.foster.com/pdf/Block-Carmack-COGSA-Comparison.pdf.
7 See, e.g., Coats & Clark, Inc. v. Gay, 755 F.2d 1506, 1508 (11th Cir. 1985); Citizens Bank & Trust Co. v. SLT Warehouse Co., 368 F.Supp. 1042, 1045 (Dist. Ga. 1974); and Herring v. Springbrook Packing Co. Co-op., 208 Or. 191, 200, 299 P.2d 604, 608 (1956).
8 See Block, “Who’s an ocean carrier’s “agent” for purposes of extension of COGSA to land-based service providers?” available at http://www.forwarderlaw.com/library/view.php?article_id=612.
9 Other documents, such as master service agreements and standard terms and conditions, may be incorporated into warehouse receipts by reference.
10 “The issuance of a warehouse receipt, then, can be viewed as a condition precedent to the existence of a specific lien.” 3 White & Summers, Uniform Commercial Code § 28-6 (4th ed.) (citing cases).
11 See, e.g., Matter of McDonald, 224 B.R. 862, 868 (Bkrtcy.S.D.Ga.,1998); Import Systems Intern., Inc. v. Houston Central Industries, 752 F.Supp. 745, 747 (S.D. Tex. 1990); and In re APC Const., Inc., 112 B.R. 89, 95 (Bkrtcy.D.Vt. 1990).
12 Interpleader actions and authorized and explained by Federal Rule of Civil Procedure 22 and analogous state statutes, along with applicable local rules.
13 Industry practice shows that this actually isn’t the norm. Insurers have proven to be less attentive to their subrogation rights than to risk assessments and property values in fixing premiums. Still, especially with long-term and larger volume contracts, the absence of subrogation rights has been a consideration in insurance costs.
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