3PL Warehousing and Distribution -Important Distinctions

The highly entrepreneurial third party logistics sector is at times difficult to discipline to all the many legal requirements which may be involved in any particular logistics project. I have had more than one client assume they could make a contract with a shipper of product for the purpose of distributing such product; and, then assume nothing more might be required of them than simply renting a warehouse facility and start storing and shipping such product without the impact of any regulation or unusual contract considerations.

Nothing could be further from reality. This becomes even more the case when a 3PL is attempting to serve as a warehouse operator, or when a warehouse operator is attempting to operate as a 3PL by the further assumption of the responsibility for facilitating transportation of goods from the warehouse to destination.

I. Warehouse Operations as a Logistics Project.

Operating a warehouse has several significant legal requirements and mutual obligations to be understood and documented, when receiving goods from a shipper or depositor to a warehouse facility, with the remaining function of distribution of product from such a facility.

A. Clearly Defining the Relationship.

Without a clearly drawn master agreement, the law might construe the 3PL in such a project to be any number of regulated entities, while the parties might each misunderstand the role of the other, leading to different conclusions and financial impact.

When a shipper turns custody of goods to the 3PL, with the understanding that the 3PL will hold those goods and ultimately get them to a destination directed by the shipper, the 3PL, without careful documentation of the relationship, can immediately take on the role of one of a number of perhaps unintended and unlicensed providers of service.

1.Freight Forwarder. Should the 3PL take on the responsibility of receiving container loads of bulk freight, breaking those loads down for storage, and then re-assembling all such loads for distribution out of the 3PL’s warehouse, without a carefully drafted master service agreement, the 3PL may have assumed a role the law will perceive as a freight forwarder. A freight forwarder is statutorily defined as:

A person holding itself out to the general public (other than as a pipeline, rail, motor or water carrier) to provide transportation of property for compensation and in the ordinary course of its business —

(A) Assembles and consolidates, or provides for assembling and consolidating, shipments and performs or provides for break-bulk and distribution operations of the shipments;

(B) Assumes responsibility for the transportation from the place of receipt to the place of destination; and

(C) Uses for any part of the transportation a carrier subject to jurisdiction under this subtitle. 49 U.S.C. §13102

In the most efficient construct of such a logistics project, the 3PL does not want to be construed to be a freight forwarder, which requires licensing, and assuming the liabilities of a carrier. Nor does the 3PL want to assume the role and responsibilities of a motor or rail carrier, both of which require the assumption of far more potential liabilities than wanted or needed by the 3PL.

However, if the master services agreement between the shipper and 3PL is not properly drafted, the 3PL may very well have assumed all such duties and liabilities…and most likely without proper insurance or other indemnity protection.

2. Warehouseman. The 3PL who wants to realize the potential profits of serving the shipper in a full service logistics role, will want to fashion a deal construct and master service agreement which allows them to receive the shipper’s product, warehouse for a time and then operate the distribution of the product in a manner that further realizes transportation revenue to ultimate destination.

To do so properly, the 3PL will want to clearly specify their role as a warehouseman in a manner that protects the 3PL, while maintaining custody of the shipper’s product, and allows the 3PL to determine optimum transportation modes for the shipper’s product to final destination (be that shipper’s further distribution centers or final customer destination). This strategy requires the 3PL to first properly protect the duties and responsibilities of their role as a warehouseman, and then understand and properly construct their role in arranging all transportation of product to destination.

a. Fundamental Protections and Limitations as a Warehouseman – Space here does not allow for a full consideration of all provisions of a proper warehouse service agreement, which at the very least includes, pricing; payment terms; ancillary services they will offer, along with applicable accessorial charges; exclusivity (including penalties for violation); assessments for services such as repair of defective packaging and costs associated with failed deliveries; volume and time commitments (including penalties for violation); credit terms; insurance; the independent contractor relationship between the parties; indemnification; limitation of liability; general lien provisions; arbitration and jurisdiction clauses; and the time length of the contract’s applicability.

However, mention should be made of some of the most crucial issues which are most often overlooked or completely mismanaged without proper counsel. One of the most difficult of these is getting the 3PL client to realize that they must properly occupy at least two functions that are well defined in the law. The first of these is that of a warehouseman as defined by the law (meaning far more than a 3PL who happens to have a lease on a warehouse).

Article Seven of the Uniform Commercial Code (“UCC-7”), adopted now by all 50 states, with few state-by-state modifications, spells out many affirmative requirements for properly documenting and operating a warehouse. Other than some of the usual elements of a warehousing agreement mentioned above, some of the more crucial issues often overlooked or mismanaged are:

b. Warehouse Receipts – While the requirements for proper content and issuance of warehouse receipts are fully covered within UCC-7-201 et seq., the failure of 3PLs and other warehousemen to properly administer such requirements is perhaps the most often repeated deficiency of warehouse operations. These documents are crucial at least for some of the following reasons;

• UCC-7-202 holds warehousemen liable for any resulting damages if they don’t issue warehouse receipts containing certain stated provisions.
• Pursuant to UCC-7-209, the warehouse receipt defines the existence, nature, and extent of a warehouseman’s lien. And without the issuance of such a receipt the warehouseman may not generally claim a lien of the goods received from the shipper for any protective reason, to include credit and payment issues, damage claims, improper shipping instructions, etc.
• While UCC-7-209 does not allow the assertion of a lien on other than goods on hand and only for charges on those particular goods, the warehouseman may contract for a “general lien” within the language of the warehouse receipt, which would allow for the assertion of lien of goods in possession having to do with charges on other goods.

3. Limitation of Liability – UCC-7-204 allows the warehouseman to limit their liability if such limitations are properly drafted within the master agreement and the warehouse receipt.

4. Mandatory Requirement for a Broker’s License – After the 3PL as warehouseman has properly documented their role as the warehouseman they must then fully distinguish themselves in their role as manager of the transportation services for all distribution of product from the warehouse to destination. Many 3PLs, acting as warehousemen, make the mistake of assuming they may manage these duties without further authority, which they clearly may not do. If the warehouseman is facilitating the transportation of goods from the warehouse to destination for compensation, they must qualify by license as a property broker. This is mandated by the statutory definition of a “Broker”.

 Broker. — The term “broker” means a person, other than a motor carrier or an employee or agent of a motor carrier, that as a principal or agent sells, offers for sale, negotiates for, or holds itself out by solicitation, advertisement, or otherwise as selling, providing, or arranging for, transportation by motor carrier for compensation. 49 U.S.C. §13102

With this statutory definition clearly encompassing the role of the 3PL in managing the transportation from warehouse to destination, there is a clear requirement that the 3PL have such licensed authority. This duty is made even more imposing by the fairly recently adopted MAP-21, 49 U.S.C. 14916, which imposed severe financial penalties for operating such transportation functions without licensed broker authority.

Serving in the role of a property broker on behalf of the shipper requires proper definition of that role within the master service agreement, and proper drafting and management of the broker/carrier relationship with appropriate broker/carrier agreements. Without such broker/carrier agreements the 3PL may incur unintended liabilities for loss and damage claims, and personal injury, without appropriate indemnity protection.

II. Conclusion. When a 3PL takes on the logistics project of managing warehousing and distribution, they must do so with awareness that they are undertaking several functions which are now regulated and covered by statutory requirments. With this understanding they must carefully document their role in a manner to optimize the intended relationship between them and their shipping customer, while fully complying with several aspects of more recently developed logistics law.

This can only be properly accomplished by a full analysis of the intended operations with their counsel, followed by properly drafted comprehensive documents to achieve such objectives within the many distinctions required by the current statutory and common law requirements for 3PLs operating as warehousemen and brokers of transportation.