As consumers continue to shift purchasing and consumption habits in the aftermath of the pandemic, manufacturers are increasingly reliant on third-party logistics and warehousing to ensure their products timely reach the market. With this increasing need to use third-party warehouses, manufacturers and distributors should take moment to refresh their understanding of warehousing law and liability.
What You Need to Know
- Supply chain disruptions exacerbated by the COVID pandemic have manufacturers rethinking pure reliance on just-in-time delivery systems and considering retaining more "buffer stock".
- The shift in demand from fresh to frozen foods by consumers and restaurants have accelerated demand for warehouse storage space.
- With this increasing need to use third-party warehouses, manufacturers and distributors should take moment to refresh their understanding of warehousing law and liability.
As consumers continue to shift purchasing and consumption habits in the aftermath of the pandemic, manufacturers are increasingly reliant on third-party logistics and warehousing to ensure their products timely reach the market. The supply chain disruptions exacerbated by the COVID pandemic have manufacturers rethinking pure reliance on just-in-time delivery systems and considering retaining more "buffer stock' to avoid supply chain disruptions and resultant lost sales. In certain sectors, such as cold storage warehousing, shift in demand from fresh to frozen foods by consumers and restaurants in the wake of the pandemic have accelerated demand for warehouse storage space. With this increasing need to use third-party warehouses, manufacturers and distributors should take moment to refresh their understanding of warehousing law and liability.
Warehouse Receipts
In the warehousing industry, the warehouse receipt is ubiquitous to almost every transaction. As a result, they are often overlooked or taken for granted. Yet, they play an instrumental role in protecting the warehouse from liability and affirming the rules and procedures of the storage engagement. Before simply accepting a warehouse receipt, customers should familiarize themselves with purpose of a warehouse receipt and the implications of receiving one.
The Uniform Commercial Code (UCC) sets forth the scope of warehouse liability and the procedures for a warehouse to establish liability protections. In general, a warehouse is only liable for damages that arise from a failure to exercise the standard of care that a reasonable person would exercise in similar circumstances. If damages could not be avoided by the exercise of this duty of care, the warehouse will not be liable for such damages. This duty of care standard establishes the framework against which warehouse liability is determined.
The UCC permits a warehouse to limit its liability further by including in a warehouse receipt or a storage agreement language limiting liability to a specific amount per item stored or by a value per unit of weight beyond which the warehouse would have no additional liability. Unless the parties negotiate a custom amount, the most common standard in the warehousing industry is 50 cents per pound. Often, this limitation is significantly lower than the actual value of the stored goods. As a result, a customer will bear much of the risk and cost if the goods are damaged while in a warehouse.
This liability limitation is vital for the warehouse to attain sufficient and affordable insurance coverage. In most cases, insurance companies are unable or unwilling to provide a warehouse with a policy offering full value coverage for stored goods. Warehouse insurance policies often are limited in scope and amount of coverage. Cargo owners are expected to retain their own coverage for the value of goods stored at a warehouse facility. If a customer is storing goods that have a significantly higher value than the amounts available under a warehouse receipt, the customer may wish to request that the warehouse obtain a rider to its policy to allow for increased insurance coverages. The warehouse will usually require the customer to pay for the costs of this additional coverage.
While the UCC does not require a warehouse receipt or storage agreement, a warehouse that fails to issue one containing liability limitations risks exposure to increased liability. If a warehouse receipt is issued, the UCC does require the inclusion of certain information and states that the warehouse is liable for damages caused by its omission. The items include location of the warehouse, issuance date, identification codes, the storage and handling charges, description of goods, and the signature of the warehouse or its agent.
Warehouse receipts are either negotiable or non-negotiable. If a warehouse receipt is negotiable, it does not specify who will receive the goods from the warehouse, so a warehouse will deliver the stored goods to the bearer of the warehouse receipt. This allows warehouse receipts to act as collateral for loans without special accommodations. If a borrower defaults on a loan, the lender can use a warehouse receipt to take possession and sell the goods to cover the proceeds of the loan. A non-negotiable warehouse receipt specifies the recipient of the goods and requires an endorsement to be able to transfer to another party.
Warehouse Liens
Without a proper warehouse receipt or storage agreement, a warehouse cannot secure an enforceable lien against the stored goods. Mere possession of a customer's goods does not automatically grant a warehouse lien. The warehouse lien protects the warehouse's interest in the charges and expenses for storage or transportation, including the expenses to sell the goods subject to the lien.
Under the UCC, a warehouse can impose either a specific lien or a general lien. For a specific lien, the warehouse places a lien on a specific set of goods while those goods remain in the custody of the warehouse. Once the warehouse releases these goods, the specific lien expires and is no longer enforceable. If the warehouse holds other customer goods or receives subsequent customer goods, it cannot enforce the specific lien against those other goods to recovery amounts owed for the original goods.
When a general lien is included in the warehouse receipt, the lien applies not only to the goods specified in a warehouse receipt but also against any other goods held by the warehouse. The general lien will allow the warehouse to recover for charges for the goods in the custody of the warehouse and for those where the warehouse not longer possess the goods. While the specific lien has limited value, the general lien offers the warehouse a much broader opportunity to recover unpaid expenses. Customers should make sure to fully understand the nature of the lien before accepting the warehouse receipt.
A warehouse lien is presumed to be specific, so a warehouse must include general lien language into its warehouse receipt and/or its storage agreement to have an enforceable general lien. The warehouse must be careful when it has a storage agreement containing lien language and also issues a warehouse receipt with lien language. These provisions must be consistent to avoid a conflict that could result the loss or inability to enforce the lien. A general warehouse lien will protect the warehouse if a customer files for bankruptcy. Also, if the customer sells the goods subject to the lien to a third party, the warehouse lien will survive the sale of those goods to a third party in most cases.
An enforceable warehouse lien is key to protecting the warehouse's interests. Under the UCC, a warehouse can enforce its lien through the sale of the goods subject to the lien. To avail itself of the right to recovery through foreclosure on the lien, the warehouse will be required to notify all parties that may have an interest in the goods with a detailed notification, a demand for payment within a specified time period, and a statement that, if the amounts owed to the warehouse remain unpaid, the goods will be advertised for sale and sold at auction. The sale of goods must be made in a commercially reasonable manner, and the warehouse must not sell more goods than is necessary to recoup the amounts it is owed.
Both a warehouse and a customer should pay careful attention to the impact of warehouse liens. A warehouse will want to seek the broadest lien coverage it can get, while a customer storing goods will want to limit the impact of this lien. In addition, a customer can inadvertently violate the terms of its loan agreements with lenders if it accepts a warehouse lien without notifying its lenders. Often, a customer's lenders will demand the warehouse subordinate its lien to the liens of the lenders. Although a warehouse lien can be waiver or subordinated, the warehouse may be unwilling to risk diluting its rights to seek recovery. A customer may need to work together with its lenders and the warehouse to achieve an acceptable result for all parties.
Originally published by Law.com.
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