New Law Revises Standard of Liability

New Law Revises Standard of Liability

For Non-Delivery of Goods By A Warehouseman

DeOrchis & Parners, LLP

The New York Legislature recently passed an amendment to the law governing the burden of proof for establishing a warehouseman’s liability for the unexplained loss of bailed goods.

Section 7-204 of the New York Uniform Commercial Code governsthe contractual limitation of liability between the bailor and warehousemanwhen the warehouseman fails to deliver bailed goods when requested.

U.C.C. § 7-204 (2) allows the bailor and warehouseman to contractually agree on a damages limitfor the warehouseman’s liability in case of loss or damage.The only exception to the contractuallyagreed-upon limit on liability is when the warehouseman converts the bailed goods to his own use.A warehouseman faces unlimited liability (that is typically not insurable) in cases of conversion.Conversion is generally defined as “the wrongful possession or disposition of another’s property as if it were ones own.” Black’s Law Dictionary144 (2nd pocket ed. 2001).

On August 16, 2007, the New York State Assembly passed Bill Number A-6571A, which amended section 7-204 of the New York Uniform Commercial Code. The amendments provide that where a bailor is a merchant, the bailor has the burden of establishing that the warehouseman has converted goods to his own use.Merely establishing that the warehouseman failed to deliver the goods does not establish a prima facie case of conversion.

UCC § 2-104 defines“merchant” as“a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.” New York has a broad definition of “merchant” which includes “almost every person in business.” A person is a “merchant” if they are so experienced and knowledgeable under the circumstances that they should be charged with the more substantial burden imposed upon a merchant.National Microsales Corp. v. Chase Manhattan Bank, N.A., No. 88 Civ. 8437, 1989 U.S. Dist. LEXIS 12189 (S.D.N.Y. Oct. 13, 1989).

However, the bill is very limited in scope and does not apply to non-merchant bailors (i.e., consumers or other non-commercial parties); or to goods that are used or bought for use primarily for the personal, family, or household purposes of the bailor. In such cases, the burden is on the warehouseman toprovide sufficient evidence to prove that its failure to return the property is not a result of its conversion of that property to its own use; and the bailor need only prove that they delivered the property to the warehouse and the warehouse failed to return the property upon a proper demand. See ICC Metals, Inc. v. Municipal Warehouse Co., 50 N.Y.2d 657 (1980).

In shifting the burden of proof back to the merchant bailor, the amendment is meant to encourage commercial parties to designate New York law as governing their contracts, encourage the establishment of warehouses in New York, and reduce the costs of business for warehouseman by placing the burden on the bailor to prove conversion before subjecting the warehouseman to unlimited liability.