Available to IARW Warehouse Members, this article contains some useful discussion and suggestions to make the Terms and Conditions, printed on the reverse side of the Non-Negotiable Warehouse Receipt, enforceable in a court of law. View the Warehouse Standard Legal Documents page.
A recent federal trial court decision drives home the importance of clearly identifying the operative storage agreement between you and your customer. In that case, a public refrigerated warehouse, not an IARW member, was sued for over $13 million for odor and flavor contamination to just over 8 million pounds of frozen cheese. The customer claimed that the value of the cheese was over $1.60 per pound while the warehouse operator, contesting damages and liability, asserted that, if it was liable, its liability was limited to a maximum of $1.6 million based upon the $0.20 per pound limitation provision in its non-negotiable warehouse receipt.
One of the issues the court was asked to decide was whether the limitation of liability provision in the warehouse operator’s warehouse receipt was enforceable. In considering that issue, the court reviewed the facts relating to the parties’ relationship. According to the court record, a sales representative of the warehouse initially met with the customer in late 1987 or early 1988 to discuss the customer’s need for freezer storage for its cheese products. The sales representative followed that meeting up with a letter in January, 1988 quoting storage and handling rates and enclosing a copy of the warehouse operator’s tariff. The tariff contained a limitation of liability provision limiting the warehouse operator’s liability to a maximum of $0.50 per pound unless the customer declared a higher value and paid additional charges. Those late 1987, early 1988 discussions did not result in any business relationship between the warehouse and customer.
In 1992, the parties renewed discussions regarding storage of the customer’s cheese. After the discussions, the customer’s Director of Product Management sent a letter to the warehouse dated February 11, 1992 summarizing the relevant terms of the business relationship to which the parties had agreed including the storage temperature, storage and handling rates, outbound shipping requirements, racked storage requirements and other issues. The customer’s letter began, “This letter will outline the key items involved in storing our frozen product at your facility. This does not cover everything in detail as standard warehousing procedures are assumed to be followed as well”. The warehouse did not respond to the customer’s letter and, shortly after receiving it, the warehouse began receiving product for storage and continued to store product for the customer, off and on, through the date of the discovery of the alleged contamination, November 2001.
Each time the warehouse received cheese for storage for the customer, it issued the customer the warehouse operator’s standard non-negotiable warehouse receipt which clearly stated on both the front and reverse sides that the warehouse operator’s liability would not exceed $0.20 per pound unless an excess value was declared by the storer at the time the goods are stored.
Warehouse legal expert John Horvath discusses whether the limitation of liability provision in the warehouse operator’s warehouse receipt is enforceable. During the course of litigation, the warehouse operator filed a motion asking the court to declare, among other things, that, if it was found liable for the odor/flavor contamination to the cheese, its liability would be limited to approximately $1.6 million in accordance with the $0.20 per pound limitation of liability provision in its warehouse receipt rather than the $13 million claimed by the customer. The customer asserted, in opposition, that the limitation of liability provision was not one of the essential terms of the parties’ agreement memorialized in the customer’s letter of February 11, 1992. The warehouse argued alternatively that the warehouse receipt terms and conditions, rather than the February 11, 1992 letter, was the operative agreement between the parties and that, if the February 11, 1992 letter was the agreement, the warehouse receipt limitation of liability provision fell within the “standard warehousing procedures” provision of that agreement.
In denying summary judgment on the limitation of liability issue, the court found that the phrase “standard warehousing procedures” was ambiguous and also found that each of the parties submitted evidence that supported its position and, therefore, the issue regarding the enforceability of the limitation of liability had to be decided by the jury. The case settled before trial under the terms of a confidential settlement agreement, so we will not know whether the jury would have found the limitation of liability provision to be enforceable.
Generally, courts are reluctant to enforce warehouse limitations of liability unless it is clear that the customer either agreed to the limitation or the circumstances clearly show agreement by the customer’s actions or inaction. If your storage agreement with your customer is your non-negotiable warehouse receipt, you should take appropriate steps to ensure that its terms and conditions will be enforceable, rather than run the risk of a judge or jury declaring that it is not.
When quoting rates to a prospective new customer, it is recommended that you use the IARW contract and rate quotation form, both front and back sides, which are available elsewhere in this manual (sections 4.3 and 4.4). If you do not use the contract and rate quotation form, you should send your prospective customer a letter setting forth the rates and the characteristics of the product upon which your rates are based, and state that you will issue your standard non-negotiable warehouse receipt for all products you receive from the customer for storage, handling and other services, and that the terms and conditions on the front and back sides of your warehouse receipt shall constitute the agreement between your company and your customer. Additionally, you should enclose a voided copy of your non-negotiable warehouse receipt with your letter. In the event you receive a written communication from your customer attempting to confirm terms and conditions of storage different from those on your warehouse receipt, make sure you respond to such communications in writing, clearly stating that the terms and conditions of your non-negotiable warehouse receipt are the terms and conditions of storage. It is always best to clarify the basis of your relationship before any issues arise.
As to existing customers, it is good practice to periodically remind them, by letter or email, that, as a public warehouse operator, you are held to a reasonable care standard and are only liable for loss or damage to customers’ goods that results from your failure to exercise reasonable care, that they have the obligation to insure their own goods and, if you are liable for loss or damage to the customers’ goods, your liability is limited in accordance with the terms and conditions of your non-negotiable warehouse receipt. Reminding your customers of these realities before a loss occurs gives them an opportunity to properly protect themselves in the event of a loss and should reduce the potential for friction in your relationship with your customers after a loss. A sample letter template has been provided elsewhere in this manual (section 1.12). Make sure that a copy of the letter is kept on file as a record of the communication.
Originally published in the Guide to Effective Warehouse Administration, 2010