Behalf of Warehousers or Customers Structuring Indemnity, Insurance, - - PowerPoint PPT Presentation

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Presenting a live 90-minute webinar with interactive Q&A

Drafting Commercial Goods Warehousing Agreements on Behalf of Warehousers or Customers

Structuring Indemnity, Insurance, Limitation of Liability and Other Key Provisions to Minimize Risks and Liability Exposure

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, FEBRUARY 17, 2016

John F . Horvath, Principal, Horvath & Weaver, Chicago Mark D. Kimball, Founder, MDK Law, Bellevue, Wash. Joel F . Murray, MDK Law, Bellevue, Wash.

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Drafting Commercial Goods Warehousing Agreements

• n Behalf of Warehousers or Customers

JOHN F. HORVATH HORVATH & WEAVER, P.C. JHORVATH@HLPC-LAW.COM 312.419.6600

Horvath & Weaver, P.C.

TERM

This Agreement shall become effective beginning February 1, 2016, and shall continue if effect through January 31, 2019 (hereinafter referred to as the “Initial Term”). This Agreement may be renewed by agreement of the parties. Evergreen Provision

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Horvath & Weaver, P.C.

STANDARD OF CARE

Uniform Commercial Code 7-204 (a) A warehouse is 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. 7

Horvath & Weaver, P.C.

Insurance Provisions

Bad Standard of Care Provisions

Company shall be liable for and agrees to indemnify and hold harmless Cargill, its officers, employees, and agents, from and against any and all losses, expenses, damages, demands, and claims (including reasonable attorney's fees) arising out of (i) Company’s performance of services under this Agreement, (ii) injury (including death) or alleged injury to any person, or (iii) damage or alleged damage to any property caused by or resulting from the Company's performance of this Agreement. Warehouseman shall be liable to Customer for all Goods lost, damaged, destroyed or

• therwise rendered unfit for sale while in the care, custody or control of Warehouseman, or

resulting from Warehouseman’s storage or handling of such Goods, provided, however, that Warehouseman shall not be liable if such Goods are lost, damaged, destroyed or otherwise rendered unfit for sale as the sole and direct result of the negligent acts of Customer or its employees, or the inherent vice or defect of the Goods.

8

Horvath & Weaver, P.C.

Proper

COMPANY shall not be liable for any loss or destruction of or damage to GOODS, however caused, unless such loss, destruction

• r damage resulted from COMPANY'S failure to exercise such care

in regard to the GOODS as a reasonably careful person would exercise under like circumstances. COMPANY shall not be liable for any loss or destruction of or damage to GOODS that could not have been avoided by the exercise of such care.

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STANDARD OF CARE Provisions

Horvath & Weaver, P.C.

Limitation of Liability Provision

Customers want full replacement value. UCC 7-204

(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. Why a limitation? Typical Limitation of Liability provisions. No liability for consequential damages.

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Horvath & Weaver, P.C.

Insurance Issues

I.

Types of Insurance

• A. Workers Compensation
• B. Employers Liability
• C. Commercial General Liability
• D. Warehouse Legal Liability
• E. Property

II.

Additional Insured Requirements

• III. Certificates of Insurance

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Horvath & Weaver, P.C.

 Hazardous  Odor issues  Temperature control  Human food products  Warehouse expenses

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Description of the Goods

Horvath & Weaver, P.C.

 Normal in/out handling  Storage  Physical inventory  Cycle count  Other services quoted on request  Capital expenditures

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Description of the Services

Horvath & Weaver, P.C.

UCC 7-204 Reasonable provisions as to the time and manner of presenting claims and commencing actions based on the bailment may be included in the warehouse receipt or storage agreement.

 Claim Filing Provision.  Suit Filing Provision.

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Horvath & Weaver, P.C.

Rates and Charges

I.

Business Characteristics

II.

Annual Adjustment

 CPI  Agreement

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Horvath & Weaver, P.C.

Indemnity Provision

 Mutual  Only as to third party liability

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Horvath & Weaver, P.C.

Exhibits

 SOPs  QA/QC Requirements  Other Customer Manuals

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Horvath & Weaver, P.C.

Transportation Considerations

 Transportation Broker  Shipper’s Agent  Dropped Trailer Liability

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MARK K I MB ALL & JOE L MURRAY MDK LA W WW W . MDK LA W.COM BE LLE VUE , WASHI N G TON

• III. DEALING WITH LIEN

ISSUES

CREATION OF LIEN UNDER ARTICLE 7

• 7-102

Definitions

• 7-103

Relation of Article 7 to Treaty or Statute

• 7-104

Negotiable & Non-negotiable Document

• f Title
• 7-202

Form of Warehouse Receipt; Effect of Omission

• 7-203

Liability for Nonreceipt or Misdescription

• 7-205

Title Under Warehouse Receipt Defeated in Certain Cases

• 7-209

Lien of Warehouse

• 7-210

Enforcement of Warehouse Lien

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NEW YORK VERSION: 7-102

• (1) In this Article, unless the context otherwise requires:
• (a) “Bailee” means the person who by a warehouse receipt, bill of lading or other document of title acknowledges

possession of goods and contracts to deliver them.

• (b) “Consignee” means the person named in a bill to whom or to whose order the bill promises delivery.
• (c) “Consignor” means the person named in a bill as the person from whom the goods have been received for

shipment.

• (d) “Delivery order” means a written order to deliver goods directed to a warehouseman, carrier or other person who in

the ordinary course of business issues warehouse receipts or bills of lading.

• (e) “Document” means document of title as defined in the general definitions in Article 1 (Section 1-201).
• (f) “Goods” means all things which are treated as movable for the purposes of a contract of storage or transportation.
• (g) “Issuer” means a bailee who issues a document except that in relation to an unaccepted delivery order it means

the person who orders the possessor of goods to deliver. Issuer includes any person for whom an agent or employee purports to act in issuing a document if the agent or employee has real or apparent authority to issue documents, notwithstanding that the issuer received no goods or that the goods were misdescribed or that in any other respect the agent or employee violated his instructions.

• (h) “Warehouseman” is a person engaged in the business of storing goods for hire.
• (2) Other definitions applying to this Article or to specified Parts thereof, and the sections in which they appear are:
• “Duly negotiate”. Section 7-501.
• “Person entitled under the document”. Section 7-403(4).
• (3) Definitions in other Articles applying to this Article and the sections in which they appear are:
• “Contract for sale”. Section 2-106.
• “Merchant”. Section 2-104.
• “Overseas”. Section 2-323.
• “Receipt” of goods. Section 2-103.
• (4) In addition Article 1 contains general definitions and principles of construction and interpretation applicable

throughout this Article.

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NEW YORK VERSION: 7-209

• (1) A warehouseman has a lien against the bailor on the goods

covered by a warehouse receipt or on the proceeds thereof in his possession for charges for storage or transportation (including demurrage and terminal charges), insurance, labor, or 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. If the person on whose account the goods are held is liable for like charges or expenses in relation to

• ther goods whenever deposited and it is stated in the receipt

that a lien is claimed for charges and expenses in relation to

• ther goods, the warehouseman also has a lien against him for

such charges and expenses whether or not the other goods have been delivered by the warehouseman. But against a person to whom a negotiable warehouse receipt is duly negotiated a warehouseman's lien is limited to charges in an amount or at a rate specified on the receipt or if no charges are so specified then to a reasonable charge for storage of the goods covered by the receipt subsequent to the date of the receipt.

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• (2) The warehouseman may also reserve a security

interest against the bailor for a maximum amount specified on the receipt for charges other than those specified in subsection (1), such as for money advanced and interest. Such a security interest is governed by the Article on Secured Transactions (Article 9).

• (3) A warehouseman's lien for charges and expenses

under subsection (1) or a security interest under subsection (2) is also effective against any person who so entrusted the bailor with possession of the goods that a pledge of them by him to a good faith purchaser for value would have been valid but is not effective against a person as to whom the document confers no right in the goods covered by it under section 7-503.

• (4) A warehouseman loses his lien on any goods which

he voluntarily delivers or which he unjustifiably refuses to deliver.

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ENFORCEMENT: NEW YORK 7-210

• (1) Except as provided in subsection (2), a warehouseman's lien may be

enforced by public or private sale of the goods in bloc or in parcels, at any time or place and on any terms which are commercially reasonable, after notifying all persons known to claim an interest in the goods. Such notification must include a statement of the amount due, the nature of the proposed sale and the time and place of any public sale, and, unless the goods are perishable or threaten to decline speedily in value, it shall state that any person claiming an interest in the goods is entitled to bring a proceeding under section 7-211 within ten days of the service of the notice if he disputes the validity of the lien or the amount claimed. The fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the warehouseman is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner. If the warehouseman either sells the goods in the usual manner in any recognized market therefor, or if he sells at the price current in such market at the time of his sale, or if he has otherwise sold in conformity with commercially reasonable practices among dealers in the type of goods sold, he has sold in a commercially reasonable manner. A sale of more goods than apparently necessary to be offered to insure satisfaction of the obligation is not commercially reasonable except in cases covered by the preceding sentence.

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• 2) A warehouseman's lien on goods other than goods stored by a merchant in the

course of his business may be enforced only as follows:

• (a) All persons known to claim an interest in the goods must be notified.
• (b) The notification must be delivered in person or sent by registered or certified letter

to the last known address of any person to be notified.

• (c) The notification must include an itemized statement of the claim, a description of

the goods subject to the lien, a demand for payment within a specified time not less than ten days after receipt of the notification, a conspicuous statement that unless the claim is paid within that time the goods will be advertised for sale and sold by auction at a specified time and place, and a statement that any person claiming an interest in the goods is entitled to bring a proceeding under section 7-211 within ten days of the service of the notice if he disputes the validity of the lien or the amount claimed.

• (d) The sale must conform to the terms of the notification.
• (e) The sale must be held at the nearest suitable place to that where the goods are

held or stored.

• (f) After the expiration of the time given in the notification, an advertisement of the

sale must be published once a week for two weeks consecutively in a newspaper of general circulation where the sale is to be held. The advertisement must include a description of the goods, the name of the person on whose account they are being held, and the time and place of the sale. The sale must take place at least fifteen days after the first publication. If there is no newspaper of general circulation where the sale is to be held, the advertisement must be posted at least ten days before the sale in not less than six conspicuous places in the neighborhood of the proposed sale.

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• (3) Before any sale pursuant to this section any person claiming a right in

the goods may pay the amount necessary to satisfy the lien and the reasonable expenses incurred under this section. In that event the goods must not be sold, but must be retained by the warehouseman subject to the terms of the receipt and this Article.

• (4) The warehouseman may buy at any public sale pursuant to this

section.

• (5) A purchaser in good faith of goods sold to enforce a

warehouseman's lien takes the goods free of any rights of persons against whom the lien was valid, despite noncompliance by the warehouseman with the requirements of this section.

• (6) The warehouseman may satisfy his lien from the proceeds of any sale

pursuant to this section but must hold the balance, if any, for delivery on demand to any person to whom he would have been bound to deliver the goods.

• (7) The rights provided by this section shall be in addition to all other rights

allowed by law to a creditor against his debtor.

• (8) Where a lien is on goods stored by a merchant in the course of his

business the lien may be enforced in accordance with either subsection (1) or (2).

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CRITICALLY:

• (9) The warehouseman is liable for damages

caused by failure to comply with the requirements for sale under this section and in case of willful violation is liable for conversion.

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DISCUSSION OF NEW YORK CASE AUTHORITY:

• General Fabrics Co. v. Renco Finishing Corp., 191
• Misc. 2d 148 (2002)(Appellate Term, First

Department)

• E-Z Self Storage, Inc v. Aetna Casualty & Surety Co.,

132 Misc. 2d 357 (1986)

• Young v. Warehouse No. 2, Inc., 143 Misc. 2d 350

(1989)

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• IV. DEMURRAGE ISSUES

29

M A R K K I M B A L L & J O E L M U R R A Y

DEMURRAGE AND DETENTION FEES

"All demurrage charges have a double purpose. One is to secure compensation for the use of the car and of the track which it occupies. The other is to promote car efficiency by providing a deterrent against undue detention."

• Justice Louis Dembitz Brandeis, Turner, Dennis & Lowry Lumber
• Co. v. Chi., M. & S. P. R. Co., 271 U.S. 259, 261, 46 S. Ct. 530, 531,

70 L.Ed. 934, 937 (1926)

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DEFINITION

• Demurrage (fees)
• The detention of a ship by the freighter beyond the time

allowed for loading, unloading, or sailing

• A charge for detaining a ship, freight car, or truck
• Detention (fees)
• The detention of a container, freight car, truck or other

shipping mechanism beyond the time allowed for returning it

• Federal Maritime Commission:
• “Demurrage is a charge for the use of space; detention is a

charge for the use of equipment. Free time is the grace period for which neither of these charges will be incurred. Both are meant to compensate for the use of space and equipment, and to encourage the efficient movement of cargo by importers, exporters, and drayage providers”

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HISTORY/BACKGROUND

• Thousands of years old concept that has been around since

Greek/Roman times, essentially since civilization began trading via ocean shipping

• Economic Aspects
• When a boat/freight car/truck/shipping container is

delayed beyond the time allowed loading/unloading sailing

• r return it is taken out of commercially/economically use
• The fee represents the economic inefficiency created by

the delay in unloading/return

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EFFECTS ON PARTIES SHIPPING GOODS THAT ARE STORED IN WAREHOUSES

• Varies by the party shipping goods
• Different types of parties
• Parties that import goods
• Generally imported via shipping container
• Opportunity arises for demurrage charges to be

incurred if there is delay in removal of container from ship and/or container from container yard after it is removed from ship

• Moving companies
• Wholesale distributors

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CASE STUDY NO. 1

• Client is major importer of plastic bags from China via the

Port(s) of Long Beach and Los Angeles

• Client’s main distribution center is in Los Angeles Area
• Unloads plastic bags directly from container after container

is trucked to warehouse/distribution center in Commerce, California

• Distribution center is located next to rail, allowing for the

possibility of rail transport for distribution

• Has distribution centers located in every region in the United

States

34

CASE STUDY NO. 1

• 2014-2015 West Coast Port Slowdown
• Initiated by International Longshore and Warehouse

Union (ILWU) in July 2014 after expiration of collective bargaining agreement with Pacific Maritime Association

• Results in significant delays in loading and unloading of

containers to and from ships

• Additional delays in transporting containers to truck

gates/yard where they are loaded on to truck and driven to warehouse

• Marine terminal operators collect demurrage charges on

behalf shipping companies as well as themselves

35

CASE STUDY NO. 1

• Marine terminal operators refuse to release containers

unless the party shipping goods or their agents pay the demurrage fees

• Ability to hold the goods “hostage”
• If not paid, goods may be auctioned off
• Client pays hundreds of thousands of dollars for

demurrage fees to both marine terminal operators as well as ocean carriers

• Client does not use a broker for shipping goods
• Instead, contracts with a trucking company for local

transport and ocean carrier directly for the purpose of shipping

36

CASE STUDY NO. 1

• Client does not use a broker for shipping goods
• Instead, contracts with a trucking company for local

transport and ocean carrier directly for the purpose of shipping

• Minimizing liability
• Contract with a ship/freight broker to transport the goods

from China to client’s warehouse in California

• Broker takes on risk of liability for demurrage fees
• California Business and Professions Code Section 22928

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• CAL. BUSINESS AND PROFESSIONS

CODE SECTION 22928

• (a) The Legislature finds and declares that unilateral

termination, suspension, or restriction of equipment interchange rights of an intermodal motor carrier shall not result from intermodal marine terminal actions as specified in subdivision (b).

• (b) An intermodal marine equipment provider or intermodal

marine terminal operator shall not impose per diem, detention, or demurrage charges on an intermodal motor carrier relative to transactions involving cargo shipped by intermodal transport under any of the following circumstances:

38

• CAL. BUSINESS AND PROFESSIONS

CODE SECTION 22928

• (1) When the intermodal marine or terminal truck gate is

closed during posted normal working hours. No per diem, detention, or demurrage charges shall be imposed on a weekend or holiday, or during a labor disruption period, or during any other period involving an act of God or any other planned or unplanned action that closes the truck gate.

• (2) When the intermodal marine terminal decides to divert

equipment without 48 hours' electronic or written notification to the motor carrier.

• (3) When the intermodal marine terminal is assessed a fine

pursuant to Section 40720 of the Health and Safety Code.

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• CAL. BUSINESS AND PROFESSIONS

CODE SECTION 22928

• (4) When the intermodal marine terminal equipment is out of

compliance pursuant to Section 34505.9 of the Vehicle Code

• r the equipment is placed out of service.
• (5) When a loaded container is not available for pickup when

the motor carrier arrives at the intermodal marine terminal. (6) When the intermodal marine terminal is too congested to accept the container and turns away the motor carrier.

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• CAL. BUSINESS AND PROFESSIONS

CODE SECTION 17200 ET SEQ.

• 17200: As used in this chapter, unfair competition shall mean

and include any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 (commencing with Section 17500) of Part 3 of Division 7 of the Business and Professions Code.

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CASE STUDY NO. 2

• Client imports ceramic proppants from China via Seattle for

the purpose of ceramic fracking in the Bakken Formation in North Dakota

• Client operates a warehouse in Williston, North Dakota
• Proppants imported in bags via shipping container, and then

transported via railcar to Williston

• Client coordinates unloading of railcar at what was a fairly

small rail yard and loading dock proximate to the Williston, North Dakota Amtrak station

• Client’s employees manually unload railcar and transport

proppants to warehouse

• Heavy (major rail carrier) traffic on railways to and from

Williston

42

CASE STUDY NO. 2

• Client has been in business for over a decade, and was at the

start of recent boom in shale oil and gas exploration

• Client’s clients include major multinational energy and gas

exploration and services firms

• Until 2014-2015, business is booming for client
• Well documented shale/oil boom in Williston, North Dakota
• Mark Kimball has actually visited Williston, North Dakota (pre oil

boom, albeit)

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CASE STUDY NO. 2

• 2014-2016 decline in oil price
• Client contracts with energy and gas exploration services

company in late 2014 to provide 10,500 tons of ceramic proppants worth approximately $4.5 million dollars

• Client imports proppants
• Energy and gas exploration company only takes possession
• f approximately 25% order; rest of order sits in client’s

warehouse after proppants are transported to Williston

• Energy and gas exploration company refuses to take

possession of or pay for remaining portion of the order, claiming that they rescinded/cancelled order

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CASE STUDY NO. 2

• Energy and gas exploration company knew or should have

known decrease in oil price was coming

• Client begins adding storage charges to its invoices for the

proppants that are sitting in warehouse

• Auction value of proppants declines dramatically
• Best resolution probably would be an auction of proppants

and some kind of a lawsuit against the oil and energy gas exploration services companies to recover damages

• Another case and point example of the lagging nature of

much of the economy

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MAIN ISSUES

• Not promptly unloading containers/railcars/trailers
• Potential for carriers to attempt to impose demurrage even if

fees are not justified

• Additional case where major rail carrier could not produce,

via discovery, justification/evidence of over $200,000.00 of demurrage fees they claimed were due

• Storage fees if product(s) are purchased, but never taken

possession of and/or paid for

• Moving companies: Customers that do not take possession of

their property that is stored

• Auctions of goods usually at a loss

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