warehouseman’s liability for cargo claims: defenses and ... · applicable law and standard of...

Warehouseman’s Liability for Cargo Claims: Defenses and Strategies

Presented by:Scott W. McMickle

McMickle, Kurey & Branch, LLP200 South Main St.

Alpharetta, Ga [email protected]

678-824-7878TRUCKING INDUSTRY DEFENSE ASSOCIATION

3601 EAST JOPPA ROAD| BALTIMORE, MD 21234| T 866-856-7960| F 410-931-8111WWW.TIDA.ORG

mailto:[email protected]

Applicable Law and Standard of Care

Most states have adopted UCC provisions regarding warehousing contracts as opposed to the common law on bailment.

UCC Section 7-204 states: A warehouse is liable for damagesfor loss of or injury to the goods caused by its failure toexercise care with regard to the goods that a reasonablycareful person would exercise under similar circumstances.Unless otherwise agreed, the warehouse is not liable fordamages that could not have been avoided by the exerciseof that care.


Can a warehouseman be a carrier and bear strict Carmack liability?

The Carmack Amendment provides the following definition for “transportation”:

(A) services related to that movement, including arranging for, receipt, …. storage, handling, packing, unpacking, and interchange of passengers and property.


If carrier provides warehousing service in transit, Carmack applies. In other words, if warehousing service is incidental to motor carrier’s services, then Carmack will apply to warehouseman/carrier.

PNH v. Hullquist, 843 F.2d 846 (1st Cir. 1988)


Can a carrier be a warehouseman? When?

What are implications on liability of carrier/warehouseman?

Carmack vs. Negligence

Standard Defenses In Warehouse Cases

Act of God – Warehouse operator cannot control forces of nature Exception – Not absolute defense if warehouse

operator had notice of impending loss. E.g., warehouse located along a river in an area

prone to flooding from hurricanes, and the ground floor has been flooded previously causing damage to stored goods.

Standard of Care Cannot Be Waived

– Warehouseman cannot eliminate the standard of care by contract with the customer.

– UCC Section 7-202 (3): A warehouse may insert in its receipt any terms that are not contrary to [the Uniform Commercial Code] and do not impair its obligation of delivery under Section 7-403 or its duty of care under Section 7-204. Any contrary provision is ineffective.

Standard of Care Cannot Be Waived

Warehouseman cannot eliminate the standard of care by contract with the customer.

Watch out for warehouse receipts slightly changing negligence standard, particularly if limitation of liability is tied to standard of care

e.g. “intentional failure to exercise ordinary care”

Standard of Care Can Be Increased

– A warehouseman can increase his liability beyond the standard of care provided by the UCC.

– What is impact upon coverage of warehouseman’s voluntary assumption of liability?

Standard of Care If No Warehouse Receipt Issued

7-204 liability is not limited to situations where warehouse receipts were issued, but instead provides in general that "[a] warehouseman is liable for damages for loss of or injury to the goods caused by his failure to exercise such care in regard to them as a reasonably careful man would exercise under like circumstances . . . ." Ga. Ports Auth. v. Servac Int'l, 202 Ga. App. 777, 779 (Ga. Ct. App. 1992).

Duty/ Standard of Care Owed To Third Parties Under Warehouse Contract?

Cargill v. Boag Cold Storage Warehouse, 71 F.3d 545 (6th

Cir. 1995).

• Cargill sells premium turkeys to distributors who store turkeys at Boag’s cold storage warehouse.

• Evidence indicates that warehouse allowed the turkeys to thaw and then re-froze the turkeys and sent out to distributors customers (retail stores) without notice to anyone

Duty/ Standard of Care Owed To Third Parties Under Warehouse Contract?

Cargill v. Boag Cold Storage, 71 F.3d 545 (6th Cir. 1995).

• Cargill’s quality control department issues recalls throughout Michigan for all premium turkeys 2 weeks before Thanksgiving.

• Cargill has significant losses in form of payments to customers for turkeys, costs of recall, additional storage costs, future lost sales, etc.

• Boag had issued warehouse receipts to distributors that stored turkeys with Boag (distributors were actual owners of turkeys at that point) with limitations of liability

Cargill v. Boag Cold Storage Warehouse

What are legal issues presented?

1. Duty owed by Boag to someone other than customers (distributors)?

2. Cargill subject to limitation of liability in Boag’s warehouse receipt?


Where damage to third party such as Cargill is readily foreseeable if contractual obligation is breached, then tort liability to third party is present.

e.g. – manufacturer’s failure to repair vehicle that is repaired improperly and causes accident injuring third party.

.


Court said that it was obvious to Boag that the reputation of Cargill, the manufacturer, would be damaged and that Cargill would incur mitigation costs such as recall costs.

“Boag gambled with the public’s health and integrity of Cargill’s brand name, and, accordingly, it is not unreasonable that the gambler should pay the consequences.”


What would happen if facts changed and Boag was interstate motor carrier that allowed load of turkeys to thaw in transit and re-froze turkeys similarly to Boag?

Would Carmack Preemption prevent Cargill’s claim for injured reputation and attorney’s fees against Boag as a carrier? Probably not, bad facts make bad law.


Boag’s limitation of liability in warehouse receipt apply to Cargill’s claim?

Court recognized principle in Mitsui v. Hudson Tank, 790 F.2d 226, 231 (2nd Cir. 1986) that buyer of cargo did not have rights beyond those of the seller that was the storer of the goods and accepted a warehouse receipt with a limitation of liability.


Nevertheless, the Court concluded that Cargill was not subject to limitation of liability in warehouse agreement because: (1) Cargill was owed duties beyond those owed to

storers under warehouse contract since Cargill was in the class of foreseeable plaintiffs to whom a duty of care beyond the warehouse receipt was owed.

Question – What if Cargill was actual storer?


The Court also concluded that Cargill was not subject to limitation of liability in warehouse agreement because:

(2) Cargill not in privity of contract with Boag and was not suing under contract/warehouse receipt


Trial result: Cargill asked jury for $2.86mm and jury gave $860,000.

Question – Boag’s insurer obligated to pay judgment under warehouseman’s legal liability policy?

Notice of Claim Provisions In Warehouse Contracts

UCC 7-204(3): The agreement between the warehouseman and the customer may contain reasonable provisions as to the time and manner of presenting claims, such as requiring that proof of loss be submitted within a fixed period after the loss has occurred.

Notice of Claim Provisions In Warehouse Contracts

– 60 day notice provisions “have been routinely enforced by the courts.” Butler Mfg. Co. v. AmeriCold Corp., 23 U.C.C. Rep. Serv. 2d 197 (D. Kan. 1993).

– Question – Constructive notice enough?

Suit Filing LimitationsIn Warehouse Contracts

– The agreement between the customer and the warehouseman may also fix the time in which an action may be brought against the warehouseman.

– Even if this limitation reduces the time within which to bring suit to less than what is allowed by the statute of limitations, the time limitation is enforceable. Time limitation provisions in warehouse contracts are enforceable if reasonable.


9 month suit filing limitations from date of actual or constructive notice is regularly enforced. Butler Mfg. Co. v. AmeriCold Corp., 23 U.C.C. Rep. Serv. 2d 197 (D. Kan. 1993).

Question - What if goods are embargoed preventing storer from retrieving goods?


The mere fact that [the customer] was aware there was a fire and that its goods had been embargoed is not sufficient to start the running of the limitations period…the court finds that the letters relied on by defendants do nothing to notify [the customer] that its goods have been damaged, giving rise to a need to file an action.

Butler Mfg. Co. v. AmeriCold Corp., 23 U.C.C. Rep. Serv. 2d 197 (D. Kan. 1993).

Solution – Tell customer that goods damaged?

Oral Agreements Modify Warehouse Receipt?

Many storers claim that warehouseman orally agreed to provide specialized services.

Most warehouse receipts have integration clauses that eliminate oral agreements.

Limitations of Liability

UCC Section 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.

Sophisticated Storers Held To High Standard

In contract, sophisticated parties like [storer] are held to higher standards than members of the general public. See, e.g., Caterpillar Overseas, S.A. v. Marine Transp. Inc., 900 F.2d 714, 719 (4th Cir. 1990).

Coutinho & Ferrostaal Inc. v. M/V Fed. Rhine, 799 F. Supp. 2d 550, 554 (D. Md. 2011).

Limitations of Liability

What about failure to deliver warehouse receipt when goods delivered?

….[d]elivery and receipt are presumed if the material is properly mailed and the sender can show that it mails the document in question as part of its ordinary business practices. Benner v. Nationwide Mut. Ins. Co., 93 F.3d 1228, 1234 (4th Cir. 1996) (citations omitted).


Limitations of LiabilityWhat about missing pages of Warehouse receipt?

[t]he first page of the warehouse receipt indicates that the receipt continues on after the first page…. Accordingly, even if the storer did not receive more than the first page of the warehouse receipt, courts nevertheless "often [hold] that the missing terms are incorporated by reference, or that the signee should have inquired about their absence.“


Sophisticated Storers Held To High Standard (sometimes)

Allowing parties to limit their liability eliminate[s] to a great extent uncertainty as to who bears the risk of loss in a warehouse storage situation, thus enabling the parties to bargain their contract terms based on this knowledge. Accordingly, in Maryland, limited liability clauses carry a presumption of validity.


Sophisticated Storers Held To High Standard (sometimes)

Limitations of liability are construed against the warehouseman and must expressly set forth limitations of liability.

See generally, Abend v. Haberman, 119 N.Y.S.2d 488 (N.Y. App. Div. 1953).


Notice to storer of limitation of liability via newsletter or reference to website is helpful.



In the context of common carriers, evidence of first party insurance in favor of storer is evidence that storer accepted limitation of liability.

Read-Rite Corp. v. Burlington Air Express, Lt., 186 F.3d 1190 (9th Cir. 1999).

Certificates of Insurance

UCC Section 7-204(2) contemplates an express limitation of liability in a warehouse receipt or storage agreement. A certificate of insurance does not meet the statutory requirement of a warehouse receipt, is not a storage agreement within the contemplation of section 7-204(s), and does not expressly limit the warehouseman’s liability. Levy v. Narrod Moving Services, Inc., 458 N.E. 2d 189 (Ill. App. Ct. 1983).

Avoiding Limitation of Liability

Parties’ course of dealing with regard to handling of OS&D claims may impact limitation of liability when major loss occurs.

Non-waiver clauses in warehouse contracts can be waived. See, e.g., Smith v. General Finance, 255 S.E.2d 14 (Ga. 1979).

Voiding Limitation of Liability

In some states, gross negligence allows the customer to obviate the limitation of liability and collect the full amount of the damages.

Fowler v. One Seguin Art Center, 617 S.W.2d 763 (Tex. Civ. App. 1981).


3. Gross Negligence (Slight Diligence)

In general, slight diligence or care is that degree of care which persons of common sense, however inattentive they may be, use under the same or similar circumstances. (Applied to the preservation of property, slight diligence or care means that degree of care which persons of common sense, however inattentive they may be, take of their own property.) The absence of slight care is termed gross negligence. O.C.G.A. §51-1-4


Questions of negligence and diligence and of cause and proximate cause and whose negligence constituted the proximate cause of the plaintiff's injuries are, except in plain, palpable and indisputable cases, solely for the jury, and the courts will decline to decide such questions unless reasonable minds cannot differ as to the conclusions to be reached.

Monitronics Int'l, Inc. v. Veasley, 746 S.E.2d 793, 801 (Ga. Ct. App. 2013)

Waiver of Subrogation In Warehouse Receipt

Where the contract requires the customer to obtain insurance and add the warehouseman as an additional insured, then a waiver of subrogation represents a permissible risk shifting procedure as opposed to an impermissible elimination of the warehouseman’s duty of care. See Anchor Cas. Co. v. Robertson Transport Co., 389 S.W. 2d 135 (Tex. App. 1965); General Cigar Co. v. Lancaster Leaf Co., 323 F. Supp. 931 (D. Md. 1971).


We have held that "waivers of subrogation are encouraged by the law and serve important social goals: encouraging parties to anticipate risks and to procure insurance covering those risks, thereby avoiding future litigation, and facilitating and preserving economic relations and activity."

Reliance Nat'l Indem. v. Knowles Indus. Servs., Corp., 868 A.2d 220, 225-26 (Me. 2005).


The rule [that gross negligence voids a limitation of liability] exists for exculpatory clauses to ensure that "a party injured by another's gross negligence will be able to recover its losses." In cases involving waivers of subrogation, however, there is no risk that an injured party will be left uncompensated, and it is irrelevant to the injured party whether it is compensated by the grossly negligent party or an insurer.

Reliance Nat'l Indem. v. Knowles Indus. Servs., Corp., 868 A.2d 220, 226 (Me. 2005).


A waiver of subrogation in a warehousing contract may be considered to be an improper provision that impairs the warehouseman’s duty of care set forth in 7-204.


However, there may be an argument that where the contract requires the customer to obtain insurance and add the warehouseman as an additional insured, then a waiver of subrogation represents a permissible risk shifting procedure as opposed to an impermissible elimination of the warehouseman’s duty of care. See Anchor Cas. Co. v. Robertson Transport Co., 389 S.W. 2d 135 (Tex. App.—Corpus Christi 1965, writ ref’d n.r.e.); General Cigar Co. v. Lancaster Leaf Tobacco Co., 323 F. Supp. 931 (D. Md. 1971); Hearst Magazines, etc. v Cuneo Eastern Press, Inc., 293 F. Supp. 824 (D.C. Penn. 1968).

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Burden of Proof in Warehouse Cases

§ 11-7-403. Obligation of bailee to deliver; excuse

(a) A bailee shall deliver the goods to a person entitled under a document of title if the person complies with subsections (b) and (c) of this Code section, unless and to the extent that the bailee establishes any of the following:

(2) Damage to or delay, loss, or destruction of the goods for which the bailee is not liable;

(6) Release, satisfaction, or any other personal defense against the claimant; or

(7) Any other lawful excuse.

Burden of Proof in Warehouse Cases

Claimants also rely upon doctrine of Res Ipsa Loquiter:

1. Loss of type that does not typically occur in absence of negligence

2. Other responsible parties/causes can be eliminated

1. Negligence is of type within scope of Defendant’s duty (all negligence of Defendant triggers liability under UCC)

Damages Recoverable

As reasoned in White & Summers, "[a] plaintiff may sustain two kinds of damage [to goods stored by a warehouseman]: direct damage in the form of loss or injury to the goods themselves and consequential damage, such as lost profits.

A recovery limited by the language of section 7-204 (1) to merely [the market value of plaintiff's goods] would not always make the plaintiff whole.“

Ga. Ports Auth. v. Servac Int'l, 202 Ga. App. 777, 779 (Ga. Ct. App. 1992).

What Issue Most Often Creates Disputes Regarding Application of the Market

Value Rule?

Manufacturing Price, Wholesale Price, or Retail Price?

Duty to mitigate?

If lost profits allowed, is it gross profit or net profit?

Handling Warehouse Claim

Having team of experts ready to analyze cause of loss is critical:

Cause/origin expert

Fire suppression expert

Mitigation expert

Claim avoidance, focusing claim on third party (e.g. building owner) or subrogation prospects greatly enhanced.

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