FIELD WAREHOUSING – A LEGAL APPRAISAL

Field Warehousing is essentially a method whereby a company’s trading assets can be used as security for a loan because of the control over those assets taken by a field warehousing company on behalf of the lender. The practice of Field Warehousing, although well established in the United States and Europe, is relatively new to developing or emerging countries.

This legal appraisal explains the purpose and advantages of its use and how the Scheme operates in practice and has been prepared by our solicitors and approved by Counsel. In addition, the agreements which we would normally recommend for use in connection with Field Warehousing have been similarly prepared and approved. These include, in particular, a Field Warehousing Storage Agreement between borrower, lender and ACE which provides for ACE’s control over the assets secured.

The forms of agreement referred to above are all available on request to potential clients.

The aim of this appraisal is to examine the concept of Field Warehousing as a means of giving security to a lender: to explain how it takes effect under common law: and to highlight the essential requirements of Field Warehousing and to suggest ways in which potential difficulties may be overcome or minimized. For convenience the lender is referred to throughout as The Bank, the borrower as The Customer, and ACE as The Custodian of the Goods.

A. Common Law and Field Warehousing

The basic ingredient of Field Warehousing is the pledge. This is a form of security as well known in all common law countries, although rarely subject of codification.

Furthermore, the pledge to a bank of goods deposited in a warehouse to secure a loan is well established under English law: Dublin City Distillery (Great Brunswick Street Dublin) v. Doherty (1914) A.C. 823. Such an arrangement may take place in the following manner. The borrower deposits his goods in an independent warehouse: he then enters into an agreement pledging them to the lender as security for a loan. Having done so, he then signs a delivery order directing the warehouse keeper to hold the goods to the order of the lender. The delivery order is then given to the warehouse keeper: the latter issues a new receipt in the lender’s name before the advance is granted. As soon as the warehouse keepers thus “attorns” to the lender (that is, acknowledges to the lender that he holds the goods on his behalf) the goods are in law within the constructive possession of the lender and the pledge is complete.

The essential legal steps to create a pledge over goods held by a third party are:

• An agreement on the part of the borrower to pledge the goods in favor of the lender to secure the loan;
• The deposit of the goods with the third party, if they are not already in his possession;
• The acknowledgement by the third party to the lender that he holds the goods solely on his behalf.

B. Field Warehousing and Storage Agreement – How it Works

• ACE takes a lease or an under-lease from the Customer of that part of his premises where the goods to be pledged are normally stored.
• ACE deploys his staff will be stationed at the warehouse which access must be totally unencumbered.
• The Field Warehouse is conspicuously signposted to show that it and its contents are in the possession of ACE.
• As raw materials or finished goods are placed in the warehouse ACE takes possession of them and gives a receipt to the Customer. ACE receives written instruction from the Customer to hold the goods to the order of the Bank. ACE must also issue its receipt to the Bank in order to attorn to the Bank and thereby perfect the pledge.
• On receipt of the documents from ACE the Bank advances money to the Customer.
• Release should only be effected by ACE on receipt of a delivery order executed by or on behalf of the Bank. ACE should then supervise withdrawal of the goods released and report to the Bank. (When the Customer wishes the release of goods it will in practice either repay the Bank or replace the goods to be released with other goods in order to obtain the Bank’s consent to the release.)
• All the necessary ingredients described above are thus to be found in Field Warehousing.