Showing posts with label warehouse. Show all posts
Showing posts with label warehouse. Show all posts

Saturday, March 12, 2016

A Case for Setting Standards

            In our discussion of Article 1, it was noted that the Uniform Commercial Code embodies freedom of contract as an underlying principle.  Section 1-302 is a codification of this basic principle. Section 1-302(1a) states as follows:
(a)  Except as otherwise provided in subsection (b) or elsewhere in [the Uniform Commercial Code], the effect of provisions of [the Uniform Commercial Code] may be varied by agreement.
The limits of the abilities of the parties regarding freedom of contract, as well as some of the specific freedoms granted are noted in section 1-302(b)
(b) The obligations of good faith, diligence, reasonableness, and care prescribed by [the Uniform Commercial Code] may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable.
            It is my belief that parties should set standards for good faith, diligence, reasonableness and care whenever contracts are being drafted. Setting these standards removes the question from the jury or the court as to the actual legal question and restricts inquiry to the question of whether or not the fact standards set by the parties have been met and whether or not the standards set are manifestly unreasonable.  An excellent example of the importance of setting standards can be found under Article 7 in connection with the storage of goods.
Section 7-204 deals with the duties of a warehouse to exercise care with respect to goods it has stored.  Subsection (a) to Section 7-204 states as follows:
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.
It is seen that the warehouse must exercise the level of care which a ‘reasonably careful person’ would exercise under similar circumstances.  This of course, is a standard and used frequently in many areas of law. 
            What is or is not consistent with the standard enunciated however, can be dramatically different than what one might reasonably believe would meet that standard.  This is illustrated in United States Borax and Chemical Company v. Blackhawk Warehousing and Leasing Company 586 S.W. 2d 248 (Ark. CA, 1979). Borax involved the storage of goods consisting of agricultural chemicals owned by U.S. Borax pursuant to a warehousing agreement between the parties. In early 1977 goods belonging to Borax were stolen from Blackhawk. The goods in question consisted of 288 five gallon cans of a product known as Cobex.  The court described the burglary as follows:
The burglars entered the building by ripping open one of the side panels. Then chemicals which had been stored next to the wall were pulled outside to allow entry into the building. After entry a padlock and chain were cut to allow a door to be opened. A forklift truck was "hot wired" since it was locked. Then it was used by burglars to move a sailboat blocking the path to appellant's stored chemicals. Other chemicals in the way were shoved aside, and the cans of appellant's stored chemicals were taken from the premises. The loss sustained by the plaintiff amounted to $23,658.28 and suit was brought for that amount.  at 833-834
Defendant was granted a directed verdict by the trial court, and Borax appealed, stating that defendant was negligent in not providing the following specific security measures:
(a) In failing to provide watchmen inside the facility;
(b) In failing to have any burglar alarms or similar systems installed in the warehouse;
(c) In failing to provide roving patrols outside of the building;
(d) In failing to place palletized storage directly against the inside wall at the point of access as was done against other walls to prohibit any attempt to enter from the outside;
(e) In failing to provide other adequate security measures which would have prevented the break-in and subsequent loss to the plaintiff;
(f) In failing to be put on notice that extra security measures were needed after a previous break-in occurred at the warehouse approximately 7 months before the loss was sustained by the plaintiff. at 836
            The court discussed the security procedures in effect in the context of general negligence standards.  In quoting Arkansas case law, the court states the question as follows:
The failure to do something which a person of ordinary prudence would do under the circumstances, or the doing of something that a person of ordinary prudence would not do under the circumstances.  at 836-837
The court  reversed the trial court’s decision concluding that the question of reasonable care should have gone to the jury. 
            As a result of the agreement between the parties, the determination of reasonable care was placed in the hands of the court.  This worked out favorably for Borax, but the warehouse could have avoided the whole problem by simply stating the security measures being taken; selecting standards which are not ‘manifestly unreasonable; and then proving that those standards were met.  I am not an expert in warehouse security procedures, but it is clear that the burglary in question required considerable effort to succeed.  It may be that the suggestions made by Borax have merit, but it may also be that Blackhawk had adequate security in place.  If Blackhawk had properly drafted the warehouse receipt, the problem could have been avoided.
            The same rationale applies to every written contract.  Parties who set the standards of conduct to govern their transaction eliminate the problems which Blackhawk Leasing had to deal with in the Borax case.  In presenting this approach to the other party, it should be emphasized that everyone benefits from the certainty of setting standards.

Friday, February 26, 2016

Documents of Title: Shipment Under Reservation

The sale of goods often involves the commercial movement of goods by carrier and sometimes the subsequent storage of those goods.  Article 7 of the UCC- Documents of Title- governs the shipment of storage of goods under the Uniform Commercial Code.  At the outset, it must be pointed out that shipments of interstate transactions are governed by the Federal Bill of Lading Act 49 U.S.C.801 et. seq., and the storage of agricultural commodities may be governed by the United States Warehouse Act 7 U.S.C. 241.

A major distinction between these two acts is that the FBLA is a mandatory act, governing shipments in interstate commerce, while the USWA is a voluntary licensing statute in which a warehouse can apply for approval by the Secretary of Agriculture. 

The purpose of the posts relating to the movement and storage of goods will be confined the Uniform Commercial Code; however, given the statistic provided by the Farm Bureau Agency that 47% of all warehouse space in the United States falls within its purview, anyone involved in matters involving the storage of commodities should definitely investigate the applicability of the USWA to a particular transaction.  With respect to other goods which may be stored, Article 7 will control.

The following is an excerpt from The Uniform Commercial Code Made Easy and is designed as a general introduction to bills of lading including the delivery of goods under a bill of lading.  Special emphasis is given to the concept of a ‘shipment under reservation’ which is governed by Section 2-505.

V.    DELIVERY OF GOODS

(A)  Bill of Lading
(B)  Person Entitled to Take Possession of Goods;
          Person Entitled Under the Document.

(A) Bill of Lading[1]
When the carrier receives the boats it will issue  a document known as a bill of lading.   This document will acknowledge the carrier’s possession of the boats, and in addition will contain a contract for delivery of the boats. In such a situation, the carrier is called a bailee.[2] The person from whom the carrier receives the goods is called the consignor,[3] here, Royal. Since the contract calls for delivery to the order of Royal, Royal would also be the consignee.[4]

                                                 Form of Document of Title

A document of title can take one of two forms. It can be negotiable or non negotiable. Section 7-104 specifies when a document is negotiable or non-negotiable:

  • (a)  Except as otherwise provided in subsection (c) a  document of title is negotiable if by its terms the goods are to be delivered to bearer or to the order of a named person;

(b)  A document of title other than one described in subsection (a) is non-negotiable.
(c)  A document of title is non-negotiable if, at the time it is issued, the document has a conspicuous legend, however expressed, that it is non-negotiable.

In the instant situation, the goods are to be delivered to the order of a named person, Royal. Thus, the form of the bill of lading falls squarely within Section 7-104(a). As is obvious from the quoted definition, whether or not a bill of lading [or any document of title] is negotiable or non-negotiable is simply a matter of form. To the extent that the bill of lading does not have the proper form, it is non-negotiable.[5] The distinction between negotiable and non-negotiable documents pervades all of Article 7. In fact, the last sentence to the first paragraph of the comments to Section 7-104 states as follows:

The distinction between negotiable and non-negotiable documents in this section makes the most important sub-classification employed in this article....
There are many reasons under Article 7 as to why this is so; it is, however, beyond the scope of this memorandum to discuss all of these. In the instant situation, the question for our purposes is: how does procurement of a negotiable bill of lading to the order of Royal reserve a security interest in Royal?  That is, how does Royal’s procurement of a negotiable bill of lading to its order secure payment or performance of an obligation, per Section 1-201(b)(35). The simple straightforward answer is that the carrier would be required to deliver the boats only to Royal, inasmuch as Royal would be the holder of the negotiable document (bill of lading),  and delivery to anyone else would be unlawful. Again, some further analysis is required to illustrate how this works under Article 7.

(B) Person Entitled to Possession of the Goods; Person Entitled under the Document

The first relevant section in dealing with this question is Section 7-403(a) which reads in pertinent part as follows:

The bailee shall deliver the goods to a person entitled under the document of title if the person complies with subsections (b) [dealing with bailee’s lien] and (c) [surrender or notation of deliveries on document of title]....

As previously noted, the bailee in the instant situation would be the carrier, who, per Section 7-403(a) noted above, must deliver to a “person entitled under a document,” which is defined under Section 7-102(a)(9) ) as follows:

Person entitled under the document means the holder, in the case of a negotiable document of title, or the person to which delivery of the goods is to be made by the terms of, or pursuant to written instructions in a record under, a nonnegotiable document of title.

As indicated, since a negotiable bill would be used here, the “person entitled under the document” would be the holder of that document. Holder is defined under Section 1-201(b)(21)(B) as ‘the person in possession of a negotiable tangible document of title if the goods are deliverable to bearer or to the order of the person in possession’. Thus, as long as Royal maintains possession of the negotiable document of title issued to its order, Royal is the person entitled under the document as the holder of the negotiable document. Should the carrier deliver to anyone other than the holder, it would be an improper delivery for which the carrier would be liable.  The carrier knows this and will only deliver to Royal or the subsequent holder of the document. Royal doesn’t want the boats; it simply wants to maintain possession of the bill of lading until it gets paid.

The next series of posts will roughly track the statutory provisions discussed in the memorandum above as it relates to bills of lading.  Warehouse receipts will be covered thereafter.  



 





          [1] “Bill of Lading” means a document evidencing the receipt of goods for shipment issued by a person engaged in the business of transporting or forwarding goods.... Section 1-201(b)(6).
A bill of lading is a document of title under Section 1-201(b)(16). That section states as follows:
“Document of title” includes dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which in the regular course of business or financing is treated as adequately evidencing that the person or possession of it is entitled to receive, hold and dispose of the document and the goods it covers. To be a document of title a document must purport to be issued by or addressed to a bailee and purport to cover goods in the bailee’s possession which are either identified or are fungible portions of an identified mass.
The use of documents in commercial transactions is extremely important and will be discussed in some detail in this book. For now it should simply be borne in mind that in many situations the document is treated as the equivalent of the goods it covers and that transfer of the document or rights thereunder will generally be equivalent to a transfer of the goods so covered.
[2] “Bailee” means the person who by … bill of lading or other document of title acknowledges possession of goods and contracts to deliver them. Section 7-102(a)(1).
[3] “Consignor” means the person named in a bill as the person from whom the goods have been received for shipment. Section 7-102(a)(4).
[4] “Consignee” means the person named in a bill to whom or to whose order the bill promises delivery. Section 7-102(a)(3).
[5] Section 7-104(c) previously quoted, states as follows:
(c) A document of title is nonnegotiable if, at the time it is issued, the document has a conspicuous legend, however expressed, that it is nonnegotiable.
This provision is contained in the newest amendments to Article 7 and is absent under Section 7-104. The amendment is logical insofar as it indicates a clear intent of the issuer, and presumably the consignor, that the document be treated as nonnegotiable. The importance of negotiability will be seen shortly in Doug’s memorandum.