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6 top tips for entering into warehousing agreements

warehousing agreementsThe need for warehousing in the UK is rapidly increasing.

Therefore there are more warehousing agreements being signed, by people who may not know what they are entering into

The reasons for increase in warehousing are numerous and include:

  • Rising consumer demand for fast/next-day-delivery services – Suppliers need to have their goods located at a greater number of warehousing sites across the country, in order to address the issue of quick “last mile” delivery;
  • COVID-19 – Warehouses need to implement social distancing measures, which leaves less space for the storage of goods;
  • A continued increase in e-commerce sales – This has prompted a need for extra warehouse space to store sufficient quantities of goods to meet demand.

The temptation for those businesses who require warehousing space might be to sign on the dotted line as soon as possible, but there are a few key issues which they should consider before entering into such agreements.

1. Liability

The customer will expect the warehousing provider to accept some liability for the goods whilst they are in the warehouse, on the basis that the goods are in its control and possession.

Aside from agreeing an overall general cap on both parties’ liability under the contract, the parties should consider placing a specific cap on the warehousing provider’s liability for loss of or damage to the goods – this is often expressed as an amount per tonne in the warehousing industry. The value of the goods in comparison to their weight will therefore need to be carefully considered when calculating an appropriate liability cap.

The warehousing provider will want to reduce the scope and extent of its liability as much as possible; after all, the UK Warehousing Association terms (under which many warehousing providers operate) only require providers to accept liability for up to £100 per tonne.

The warehousing provider will often argue that, whilst it can accept liability for loss or damage to the goods caused by its negligence, it has little to no control over theft, fires, floods and other such events that may damage the goods whilst they are in the warehouse. Often, its proposed solution is for these risks to be covered by the customer obtaining insurance.

2. Insurance

Insurance is intrinsically linked to the issue of liability. The warehousing provider is likely to have a basic insurance policy in place in respect of goods stored in its warehouse, but this is unlikely to offer sufficient cover for a customer. It should be something to discuss when entering into any warehousing agreements.

The warehousing provider will probably take the view that it is the customer’s responsibility to arrange additional insurance if they want additional contractual protection in respect of the goods. It will then be up to the parties to negotiate whether the customer bears the full cost of any such insurance provisions or whether the warehousing provider will contribute towards these.

Even where the warehousing provider agrees to accept liability for additional types of loss or damage and/or a higher cap on its liability, this will often be on the condition that the customer pays the warehousing provider’s insurance premiums for such additional cover.

The customer then faces the predicament of either:

  • Ensuring the warehousing provider accepts a greater share of the risk under the contract, at the cost of having to pay the warehousing provider’s insurance premiums (over which it has little control); or
  • Accepting a greater share of risk under the contract itself, but at least being able to have control over the cost of any additional insurance it needs to obtain, and any future claims made under such policies.

Ultimately, the final agreement will depend on the negotiating power of both parties.

3. Charges

The customer will want certainty over the charges of any warehousing agreements and will likely push for a “per-unit” charge which remains fixed throughout the term of the contract.

Contrastingly, the warehousing provider will want the right to increase the charges. The customer can seek control this by:

  • Limiting how often the warehousing provider can increase the charges;
  • Stating that any increase must be in line with RPI; and/or
  • Having a right to terminate if it is not prepared to agree to the new charges.

If the customer agrees that the warehousing provider can increase the charges, then it may seek to offset the additional cost by introducing benchmarking provisions into the contract. Such provisions would allow the warehousing provider’s charges to be compared against market rates and, if found to be significantly higher than other warehousing providers, the charges can be reduced to reflect the industry standard more accurately.

The parties may also wish to discuss whether the customer will agree to maintaining a minimum level of stock in the warehouse each month, which will ensure that the warehousing provider has a guaranteed minimum source of income under the contract. Of course, if a customer’s warehousing requirements are seasonal or subject to change, it is less likely to agree to such a provision.

4. Term & termination

The parties will need to consider how long the contract is going to last for and what termination rights each party shall have within that period.

If the term is to be a long one, the parties should consider whether break clauses need to be inserted allowing the parties to walk away if the contract is no longer commercially viable.

Where the term comes to an end, the contract should specify whether it will continue to apply or terminate and, if the latter, what extension rights (if any) will be available to the parties.

Turning to the issue of termination rights, the customer is likely to want a right to terminate for convenience, particularly if it is appointing the warehousing provider on an exclusive basis. What period of notice it will be required to give in order to exercise such termination rights will be a point of discussion between the parties. Whilst the customer may wish to be able to terminate as quickly as possible, it should stop to consider how much time it would need to appoint a new warehousing provider and transfer its goods to a new location.

The warehousing provider will require a right to terminate for non-payment of the charges, although the customer will want the opportunity to remedy such non-payment before the right to terminate arises.

The warehousing provider will also want to limit those instances where the customer can terminate for cause, for example, material breach, service level failure and insolvency.

5. Implementation & exit

Implementation and exit are opposite sides of the same coin and deserve some consideration.

Before the start of the contract, the parties should discuss how the warehousing services will be transitioned from the customer’s own storage facilities or those of its incumbent warehousing provider to the new warehousing provider. A plan should be drawn up allocating responsibilities and costs between the parties, together with a timeline of when milestones will be met.

Consideration should also be given as to whether any staff from the customer and/or the incumbent warehousing provider will transfer to the new warehousing provider by way of TUPE and who bears the risk in this.

Similarly, on exit, there should be a plan in place for the customer to take the warehousing services back in-house or transition them to a new provider. The customer may also require continuation of some of the services by the warehousing provider during any exit period. Again, the parties should consider whether any staff will transfer to the customer and/or the new provider by virtue of TUPE and who will bear the risk in this.

6. Storage conditions

The customer will want to ensure the contract imposes sufficient obligations on the warehousing provider to store the goods safely and securely. This may require the customer to issue specific storage instructions depending on the nature of the goods, for example, in terms of temperature, humidity and/or weight tolerance where the goods are being stacked.

In the event of any agreements being terminated and/or the warehousing provider suffers any form of insolvency event, the customer will want to be able to enter the warehouse and retake possession of their goods.

With this in mind, the customer should also require the warehousing provider to store its goods separately from third party goods and ensure that the goods remain clearly labelled as those of the customer.

Please get in touch if you need any advice on contracts governing warehousing arrangements or if you would like to discuss any elements of your existing agreements.

Patrick McCallum is a Commercial Contract Lawyer with Wright Hassall. Patrick helps clients with their commercial contracts in both a business-to-business and business-to-consumer context.