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Overcoming limitation of liability clauses in commercial warehouse storage contracts. (Coverage Analysis).

Contained within the boilerplate language of most, if not all, commercial warehouse storage agreements is a clause limiting liability for damage to the customer's goods. The ability of a warehouseman to limit his liability has its basis in public policy: absent the limitation, storage costs would be excessively high, as the warehouses would be required to carry perhaps hundreds of millions of dollars of liability insurance, depending on the nature of goods stored.

In most jurisdictions, the statutory basis for the warehousemen's ability to limit his liability is contained within that states version of the Uniform Commercial Code. UCC [section]7-204 provides that:

(1) 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 but unless otherwise agreed he is not liable for damages which could not have been avoided by the exercise of such care.

(2) 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, and setting forth a specific liability per article or item, or value per unit of weight, beyond which the warehouseman shall not be liable; provided, however, that such liability may on written request of the bailor at the time of signing such storage agreement or within a reasonable time after receipt of the warehouse receipt be increased on part or all of the goods thereunder, in which event increased rates may be charged based on such increased valuation, but that no such increase shall be permitted contrary to a lawful limitation of liability contained in the warehouseman's tariff, if any. No such limitation is effective with respect to the warehouseman's liability for conversion to his own use.

Thus, the code specifically carves out an exception to limited liability in circumstances in which the warehouseman has converted the goods to his own use. Issues do arise, however, as to what type of conduct constitutes conversion. Moreover, in situations where damage or loss cannot be attributed to theft by the warehousemen, the customer faces a more difficult obstacle. In order to overcome the limitation in such cases, counsel will need to consider other arguments, or face the prospect of recovering only a fraction of his client's losses.

Conversion

The UCC specifically states that a limitation of liability is unenforceable with respect to the warehouseman's liability for conversion of goods. Under most states' laws, conversion occurs whenever a distinct act of dominion is wrongfully exerted over the personal property of another, and which is inconsistent with the owner's rights. The most obvious example of conversion is theft of stored goods by the warehousemen. However, other acts of dominion, such as intentional damage, may constitute conversion.

In cases of damaged goods, the warehouseman may contend that there has not been a conversion because conversions are limited to a failure to deliver the goods upon demand. Misdelivery to a third party may also constitute conversion as it involves an intentional dispossession. Issues also may arise as to whether intent to convert need be shown on the part of the warehouseman. Some courts require proof of an intentional Misappropriation to establish a prima facie case of conversion.

In other jurisdictions, however, conversion includes the unexplained disappearance of the goods. In Lembaga Enterprises, Inc. v. Cace Trucking & Warehouse, Inc. (320 N.J.Super. 501, 507, 727 A.2d 1026 [1999]), the New Jersey Appellate Division, interpreting New Jersey's version of UCC [section]7-204, noted that either intentional or negligent acts can give rise to conversion, and that the intent of the bailee does not play a part in an action for conversion. Thus, in circumstances where goods are delivered to the warehouse in good order and condition, but are somehow damaged while in storage due to unknown causes, some states, such as New Jersey, will presume a conversion of the goods.

Conversion may also include a warehouseman's exercising unreasonable dominion and control over the goods. If it can be proven that the warehouseman was aware that goods were being damaged while in his care, his failure to advise the customer of the damage as it was known to be occurring may amount to a conversion. For example, if a warehouseman knew that fruit was spoiling due to elevated temperatures in the warehouse, but instead of informing the customer, moved the rotting fruit to a different freezer or cleaned up leaking juice or other signs of spoilage, this conduct may establish a conversion.

Evidence of conduct more egregious than simple negligence may enable the customer to pierce the shield of the contractual limitation language. Willful and wanton misconduct is generally defined as the commission of a wrongful act with reckless indifference to the consequences when the actor knew, or should have known, that injury was likely to result.

Although most states' versions of UCC [section]7-204 specifically exclude conversion from the limitation provision they are silent as to what other types of conduct may vitiate the limitation. Other provisions in the UCC provide some insight. Under UCC [section]1-103, where the code does not address the issue of whether a warehouseman can invoke the limitation of liability provision when stored goods are damaged by his gross negligence or willful and wanton misconduct, the common law determines whether the limitation provisions in the warehouse receipts are legally enforceable.

This analysis was used by the United States District Court for the District of Kansas in Butler Manufacturing Co., et al. v. Americold 835 E Supp. 1274 (D. Kan. 1993). In Butler, the warehouse receipt at issue purported to limit liability for damages for which the warehouseman was "legally liable." The court noted that Article 7 of the UCC does not speak to such a limitation directly, but Kansas Code provides that, unless displaced by particular provisions of the UCC, the common law controls. The court determined that state law prohibits the enforcement of limitation provisions where damages result from gross negligence or willful misconduct in performing a service for another for hire. The court then concluded that the limitation language in a warehouseman's receipt would not serve to limit damages under circumstances in which the warehouse was grossly negligent or committed acts of willful misconduct. It is the law in many jurisdictions that an attempted exemption from liability for future intentional tort or willful act or gross negligence is void.

In a case involving losses resulting from the spoilage of meat in a meat freezer, the Louisiana Court of Appeals ruled that if the plaintiff could prove a willful disregard of contractual duties, the contractual limit of liability is unenforceable. In Carriage Meat Co., Inc. v. Honeywell, Inc., 442 So.2d 796 (La. App. 4th Cir. 1983), the defendant agreed to install and monitor a temperature monitoring system in the plaintiff's meat freezer. The contents of the freezer spoiled when the freezer ceased operating over a weekend. The defendant failed to alert the plaintiff that an alarm in the freezer had been triggered, indicating a breakdown. The contract exculpated the defendant from liability for any losses, even if due to the defendant's negligent performance or failure to perform an obligation under the contract. The court determined that a willful failure to monitor the system or a deliberate disregard of a contractual duty would not be consistent with the type of service contemplated by the contract, and t hat liability would likely be imposed irrespective of the exculpatory clause.

Fraud Implications

Although a reasonable contractual limitation of a warehouseman's liability is valid, such a limitation does not preclude liability for fraud or a violation of public policy. A nondisclosure of a fact is the equivalent of misrepresentation if disclosure would correct a mistake of the other party as to a basic assumption, and nondisclosure amounts to a lack of good faith and fair dealing, according to Restatement (Second) of Contracts, [section]l61.

In some cases, the warehouseman's nondisclosure of known, latent risks may constitute a breach of the implied duty of good faith and fair dealing. Moreover, because disclosure of the problems at the warehouse would correct the customer's reasonable assumption that the warehouseman would be able to store the goods safely, concealment of latent facility problems may constitute a material misrepresentation of implied fact that the warehouseman could properly and safely store the customer's goods. As a result, the limitation of liability provision contained in the warehouse receipt may be unenforceable if the produce should subsequently spoil due to inadequate refrigeration capacity.

An action for fraud may be either legal or equitable, depending upon the remedy sought. Legal fraud consists of a material misrepresentation with the intention that the other party rely on that fact to its detriment. Equitable fraud is the appropriate theory where the plaintiff is seeking rescission of the contract, or avoidance of an inequitable contract. A plaintiff seeking to prove that a misrepresentation constituted only equitable fraud does not need to establish the knowledge and intent elements. Because rescission of a contract is an equitable remedy, only the elements of equitable fraud need to be proven by the plaintiff in his effort to avoid a damage limitation clause.

The terms and conditions contained in the warehouse receipt may specify how goods must be stored. In many cases, custom or course of dealing dictates that the product will remain in its original location until called for by the customer. There is, theoretically, little chance that the product will be damaged sitting in one place, and the customer is aware of the location of his goods at all times. As a result, many warehouse receipts provide that the warehouseman must give notice to the customer in the event his goods are to be moved within the warehouse after being placed in a storage location.

When damage occurs to the storage facility or the goods themselves, however, the warehouseman may move the goods without notice to the customer. This may be done to salvage the goods, or in some cases, to hide the damage to the goods by redistributing the damaged product or by removing the goods from areas of the warehouse where damage has occurred. Failure to provide written notice of movement to the customer as required by the terms of the warehouse receipt may constitute a breach of the contract, precluding the warehouseman from seeking refuge in the contractual provisions purporting to limit its liability.

Contract law principles dictate that such a breach must be shown to be material in order to void the contractual limitation. When damage has occurred without notice to the customer, however, the customer can assert that the breach was material because, if the warehouseman had complied with his obligations, the customer may have either discovered the damage earlier or taken steps to salvage the goods. Compliance with the notice provision could have allowed the customer to mitigate losses and the warehouseman's noncompliance arguably exacerbated the damages.

Public Policy Considerations

A reasonable contractual limitation of a warehouseman's liability is valid under the UCC, but only in the absence of fraud or a violation of public policy. Moreover, the terms of an agreement between parties to a bailment need not be enforced if offensive to law. As a matter of public policy, a reckless or deceitful warehouseman should not be permitted to evade responsibility for his misconduct by hiding behind the limitation of damages.

Moreover, although UCC [section]-204 allows a warehouseman to limit his liability by setting forth "a specific liability per article or item, or value per unit of weight," casually drafted limitation clauses may provide remedies in terms other than those specified in the code, such as 50 times the monthly storage charges, or other non-compliant terms. An argument can be made that, as the law disfavors limitations of liability, warehouse receipt limitations that do not strictly conform to the statutory language are void.

Reasonable limitation of liability clauses in commercial warehouse storage contracts will be upheld in most cases. In order to obtain a more favorable recovery than is provided by the warehouse receipt, the customer will need to devise creative arguments and engage in a detailed investigation of the cause and circumstances of the loss.

In attempting to overcome an exculpatory clause, discovery of business records and other internal warehouse documents may be critical in making the required showing of recklessness. These documents may include internal memoranda documenting problems or concerns with equipment, security, or structural integrity of warehouse buildings. Such documents may reveal that the warehouseman knew that damage to the goods would likely result. In every case, however, it is critical to creatively analyze the warehouse receipt and the circumstances of the loss if one is to have a realistic hope for a full recovery.

Geoffrey Veith, Frederick Blakelock, and Paul Rowe, are partner and associates, respectively, at Hecker Brown Sherry and Johnson, a civil litigation firm based in Philadelphia.
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Author:Veith, Geoffrey; Blakelock, Frederick; Rowe, Paul
Publication:Claims
Date:Oct 1, 2002
Words:2161
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