In this article we look at the key contractual terms typically seen in a warehousing agreement to be executed between the warehouse owner/ third party logistics partner and small business owners.
Small businesses find it economical to lease the required space in a warehouse rather than set up one of its own, or take an entire warehouse on lease. These spaces can be leased both in government or public warehouses. The operator of the warehouse may operate the warehouse on its own or use a third party logistics partner. In the previous article in the series, we looked at the various warehousing models in place in India. In this article we look into the key commercial terms of a warehouse agreement between the operator and user of a warehouse.
Storage space: Leased space in a warehouse is typically calculated in square meters. The operators may require that the user leases a minimum area in the warehouse. Users may intend to use this space for storing their own goods. They may also, subject to the appropriate agreement with the operator, use the space to store goods of third party users under a separate agreement. Under this model, the user (‘primary user’) would lease an area within a warehouse, and divide the space to be given out to small business users (‘secondary user’). In such arrangements, the primary user may require operator’s permission to make appropriate modifications (viz. setting up of shelving space, or specialised storage or handling areas, etc.) within the leased area/ warehouse to cater to the specific requirements of secondary users.
Charges and security deposit: Charges for the use of warehousing facility are usually based on the area leased by the user. Storage in warehouse can be (i) bulk storage/ floor storage, or (ii) rack storage. Warehousing charges are enhanced at the end of each year. Users may also be required to pay handling charges, which is in addition to the warehousing charges. Handling charges cover ordinary labour and machinery involved in receiving the goods at the warehouse, putting goods in storage, and returning goods at the warehouse door. Operators may require the user to pay a certain minimum handling charges for the goods. Warehouses also require users to deposit a pre-estimated sum as an interest-free security deposit. This amount is typically equal to three months of warehousing charges, and is refunded to the user upon its vacation of the warehouse space.
Insurance: The warehouse owner will be responsible for insuring the warehouse structure and the operator for obtaining workmen insurance. Certain contracts may provide a lower limit to the quantum of the insured value. The user will obtain insurance for the goods stored in the warehouse that belong to the user. Warehousing operators are only liable to make good the damages to the user’s goods that are destroyed due to the fault of the operator. In all other aspects, the operator will disclaim all liabilities for any damage to goods. Users must therefore ensure that they have obtained comprehensive insurance over their goods.
Approved load: Operators may limit the load that the user can apply on the warehouse floor. These would depend on the specification of the warehouse and the nature of goods that are sought to be stored. For users who intend to further lease the space to secondary users, this is an important aspect to bear in mind, as racking storage must conform to the approved load. The approved load includes all the structures (e.g. shelving units) and the goods stored on it. The load limitation is to reduce damage to the warehouse floor during storage/ movement of goods.
Permission for storage of goods: The broader challenge for warehouse operators is the limited control they have over the goods that are placed in their warehouses by the users. In order to prevent the storage of hazardous substances, or cross contamination of stored goods, the contract may require the user to declare the goods sought to be stored at the warehouse. Appropriate permissions for storage of such goods may also require to be taken by the users/ operators. Typically contracts put the liability of non-compliance with storage terms, or statutory compliances over the goods, on the user. For its part, users should ensure that they have received all the applicable and necessary approvals, and have adequately informed the operator regarding the nature of goods it proposes to store in the warehouse. Furthermore, the contract may also require the user to provide necessary title documents in respect of the goods it intends to store in the warehouse.
Lien: Contracts will typically provide that operators will have a general lien against all goods stored by the user at the warehouse for all outstanding charges for storage, handling and transportation (including any demurrage and terminal charges), taxes, etc. Contracts may also provide that the lien would be applicable on goods whether currently stored, or to be stored in the future for all charges or expenses, whether related to specific storage of goods or not. This is typical in cases where no security deposit has been sought from the user. However, in the event security deposit has been provided by the user, the user may negotiate to waive off the lien provisions from the contract.
Subletting: Most warehousing contracts for storage of goods by a user will not allow for subletting. However, in the event the space in the warehouse is taken for storage of goods by secondary users the contract must allow for the same. This is typical in the case of contract warehousing wherein the space taken on lease in the warehouse will be further subdivided, and let out to secondary users. The subletting clause must also be accompanied by relevant provisions allowing the primary user to set-up demarcated storage areas for the goods stored by the secondary user. While erecting shelving units is one example, other, more specialised forms of demarcated storage spaces/ containers may also be required to be set-up in the space. These must also be provided in the contract.
Access control: The operator always remains in the overall control over the warehouse. This implies that all access control (i.e. entry and exit of goods and persons to and from the warehouse) remains the solely the responsibility of the operator. Some contracts will therefore include a mysterious disappearance clause in respect of the goods stored. This pertains to inventory shortage/ disappearance of goods from warehouses suffered by the users due to inadequate access control maintained at the warehouse. This provision will not be applicable on products that naturally lose weight upon long-term storage. In the event that the operator is also responsible for the shipment of the goods, then the contract should provide liability on the operator for mis-shipment of goods from the warehouse.
Some contracts will therefore include a mysterious disappearance clause in respect of the goods stored. This pertains to inventory shortage/ disappearance of goods from warehouses suffered by the users due to inadequate access control maintained at the warehouse.
Exclusion of operator liability: Operators will typically disclaim any liability for any damage to or destruction of goods that were not caused due to the fault of the operator. Contracts typically provide that the operator’s duty of care shall be that of a reasonably careful person under like circumstances. However, the operator will be liable if it fails to provide reasonable care in respect of storage of the goods. However, the contract may limit the damages payable to a combination of (i) a fixed amount per unit weight, (ii) the cost price of the goods affected, (iii) a fixed amount per warehouse receipt, or (iv) a fixed amount per occurrence. Users must carefully study the limitation clause to ensure that it stands to be adequately compensated for its goods.
Operators will also exclude their liability for damage to goods occurring due to any force majeure conditions.
Other terms: Warehouses are only operational during fixed hours. Users must confirm that the hours of operations are suitable for it to receive and dispatch goods to and from the warehouse.
Storage areas may require utility connection viz. electricity and water. Operators may provide sub-meters to record the units used by the user, and the same will be billed separately.
Contracts may require that the goods stored by the users are properly marked, packed, labelled and classified according to industry norms. Additionally, contracts may require that the goods be marked with clear handling instructions. This will enable the operator’s handlers at the warehouse to properly handle the goods and ensure no damage is caused to them. Operator may decline to accept goods that do not confirm to packaging or labelling requirements provided under the contract.
Contracts may also entitle the operator to inspect, or have access without prior information, to the space holding the goods. This is predominantly to ensure that the storage of goods do not endanger the safety of other goods stored at the warehouse, or of the personnel working there. Some contracts may provide the operator with the right to remove goods that it deems harmful/ unsafe from the warehouse. However, in such cases, appropriate prior notice must be provided to the users. Although in certain conditions (viz. leakage of fluids, hazardous materials, etc.) the operator may be entitled to remove goods without any prior notice.
This post has been authored by Sayanhya Roy, Principal Associate with inputs from Anirudh Rastogi (anirudh@ikigailaw.com), Managing Partner at Ikigai Law. For more on the topic, please feel free to reach out to us at contact@ikigailaw.com.
Disclaimer: This article is meant for general informational purpose only and is not a substitute for professional legal advice. This article is based on the laws applicable in India as on the date of publication.
