News regarding contract disputes often catches my eye, for two reasons. First, there are often lessons to be learned, and second, they can be “easy” lessons when the dispute is happening to someone else and we get to stand on the sidelines and watch other companies duke it out. Sort of like watching a fight in the schoolyard, between the parents.
It was with more than a passing interest then that I noticed the November 2010 newsletter of Toronto-based law firm Fernandes Hearn LLP, and its headline “Warehousers Beware! B.C. Court Disallows Standard Terms and Conditions”. And with good reason since any time industry-approved “standard terms and conditions”, be it for bills of lading, warehousing agreements, etc., become the subject of legal disputes, people in our industry (should) take notice.
The case referenced in Fernandes Hearn’s newsletter involved a recent BC court decision regarding a dispute between Kruger Products Limited (formerly Scott Paper Limited) (the “storer”) and First Choice Logistics Inc (the “warehouser”). Kruger stored paper products in a 200,000 sq ft warehouse in New Westminster, BC operated by First Choice. A fire, originating in a forklift, destroyed the building along with Kruger’s stored inventory, resulting in a claim against the warehouse operator for $16,000,000.00 (yes, that’s $16 million dollars!).
At this point you might think that a claim based on a warehouse fire, that all parties acknowledged originated in a forklift operating in the building, resulting in total loss of the facility and the customer’s inventory, would be settled in a fairly straightforward fashion (i.e. as an insurance claim). In fact, what followed is an insightful exercise in litigation for supply chain practitioners involving warehousing issues at (common) law, contracting standards, insurance/indemnification, standard industry liability terms and conditions, and relationships (actual and perceived) between storers, warehousers, contractors and sub-contractors.
These details are explained at length in The Honourable Mr. Justice Burnyeat’s 74-page ruling on this case, available on the Canadian Legal Information Institute (CANLII) web site at www.canlii.org (search Docket no. L032139). Following the many twists and turns of this case, the reader is taken on an intriguing journey that makes reference to agreements between the parties, the Canadian Standard Contract Terms and Conditions for Merchandise Warehousemen, the Warehouse Receipts Act of BC, the Occupiers Liability Act, the Negligence Act, the Sale of Goods Act, and numerous case references surrounding legal precedents on bailments (defined as: The transfer of possession of something (by the bailor) to another person (called the bailee) for some temporary purpose (e.g. repair or storage) after which the property is either returned to the bailor or otherwise disposed of in accordance with the contract of bailment, Source: Duhaime.org).
This case presented many issues for disposition. Perhaps of most significance however, succinctly outlined by Mr. Rui Fernandes of Fernandes Hearn LLP in their November newsletter, was the failure of the warehouser to successfully claim exemption from liability under the Canadian Standard Contract Terms and Conditions for Merchandise Warehousemen, to wit (excerpt):
“Liability of Warehouseman – Section 9, (d) Without limiting the generality of the foregoing, it is specifically declared that: i) All goods are stored at the owner’s risk of loss, damage or delay in the delivery caused by or through inaccuracies, obliteration or absence of marks, numbers, address or description, act of God, irresistible force, enemies of the Queen, civil or military authorities, insurrection, riot, strikes, picketing or any other labour trouble, water, steam, sprinkler leakage, floods, rain, wind, storm, fire, …”
Presumably, the presence of the named loss “fire” in this clause was fundamental to the warehouser’s defense, in addition to other clauses contained in a Warehouse Management Agreement negotiated (but not signed) by the parties. In his ruling, Justice Burnyeat stated “a warehouser may limit its liability but not if it lowers the statutory duty of care.” He then cited instances where the warehouser did not fulfill its obligations under the Agreement, along with inconsistencies and conflicts in the Agreement language.
Of equal interest to me was the issue of determining limitation of liability. Section 9, Liability of Warehouseman in the Canadian Standard Contract Terms and Conditions for Merchandise Warehousemen referenced above further states:
“ii) The legal liability of the warehouseman shall be strictly limited to the lesser of the monetary amount of the damage incurred or 100 times the monthly storage rate on any one package or stored unit with the contents (or, in cases where the warehouseman’s charges are calculated for other than actual storage, maximum $50.00 per unit) unless the
owner specifically request a higher limit in writing and declares an excess value, in which case the warehouseman may, at his option, accept liability and assess an additional charge to the monthly storage or other applicable rate.”
As explained by Fernandes Hearn LLP, “First Choice took the position that “unit” was a pallet or lift given how the warehouse dealt with the product. Kruger Products took the position that the “unit” measure was a case given how customers ordered the product. The court found that the limitation amount…was the lesser of the monetary amount of the damage incurred or of twenty five times the monthly storage on any “case” (not pallet or lift).” In other words, the court agreed with Kruger Products that the unit of value to be used in determining limitation of liability would be the “case”, not the “pallet” as put forward by First Choice. In my mind, that’s obviously a salient point for those of us in the service industry.
The Warehouse Management Agreement between the parties was of paramount importance in settling this case, particularly its effect on deciding the “duty of care” obligation promulgated by Kruger under common law, the Warehouse Receipts Act and the Occupiers Act. The importance of a pertinent, congruent Warehouse Management Agreement in a scenario such as this cannot be underestimated, particularly in light of Justice Burnyeat’s closing remarks under the heading of “Limitations by way of Insurance Provisions: (excerpt)  In addition to having the potential effect of impairing the duty of care owed by First to Scott, I am also satisfied that acceding to the submission made by First would make meaningless the indemnification contained in the Warehouse Management Agreement. Any such acceptance of the position advanced by First would have to be in very specific language. That specific language cannot be found in the Warehouse Management Agreement.”
That remark got my attention since it speaks directly to the issue of contracting in (our) industry. As service providers, we frequently write agreements of this nature in an attempt to clearly identify the obligations of the parties, to help resolve disputes, to lay out a path for mediation in the event of disputes, to preserve business relationships, improve performance, and above all else, keep the parties out of court! In this case that clearly did not happen.
I started this blog somewhat facetiously with a schoolyard example, but I certainly take no delight in the misfortune of the two parties involved in this case and the ensuing litigation. In fact as a service provider, I sympathize with both. Warehouse management agreements such as the one described in Kruger Products vs First Choice Logistics are common enough in our industry. Many of us have been involved in drafting similar agreements and are familiar with the pitfalls.
This case is complex, involving many issues at common law as well as issues of contracting, and as such the information herein is presented for reference and general information only, and is not intended to represent a legal opinion, position or advice. I would certainly recommend that those of you with an interest in this subject matter read further into the issues surrounding the case. This wasn’t an “easy” lesson for those involved, but its certainly one the rest of us, both sellers and purchasers of warehousing services, should take note of.
Mr. Rui Fernandes perhaps put it best in his closing remarks in the November newsletter: “The moral of the story is that, if you are a warehouser and you want to limit your liability in any way you should have a well drafted signed warehouse agreement that does not have any conflicting language.” I couldn’t agree more.
Posted by: Laurie Turnbull, CITT, P.MM – Supply Chain Consultant, Cole International