The use of robotics in warehouses has become prevalent in the last few years. With improved software and the rise of artificial intelligence (AI), warehouse automation can handle inventory, shipping, and orders. Robotics can improve accuracy, be cost-effective, and optimize space, which can benefit both the warehouse operator and the customer. While the rise of robotics has changed the way warehousing services are performed, the terms and conditions of warehousing agreements have not always kept pace with the significant changes resulting from these developments.
Accordingly, when entering into a new warehousing agreement, warehouse operators and customers should consider the following issues regarding the use of robotics.
Service Description
The service description explains what the warehousing operator will be providing to the customer. Modifying the service descriptions to add details about the implementation and operation of robotics and being clear on the expectations and requirements helps clarify the parties’ expectations with respect to robotics.
Questions to consider:
- What robotics will be used?
- Who will be responsible for contracting for the robotics?
- Who will be responsible for implementing and maintaining the robotics?
- What tasks will be performed through robotics?
Transfer and Movement of Goods
Warehouse providers typically attempt to add language in an agreement that allows the warehouse operator to move customer goods from one warehouse to another or to another portion of the existing warehouse.
To the extent a customer is selecting the vendor because of the technology it provides, allowing the provider to move that inventory to new warehouses or portions of existing warehouses that cannot house or take advantage of such technology can negate the proposed benefits of such technology. Accordingly, an agreement involving robotics must restrict the provider’s ability to move a customer’s inventory or require that the technology be available at the new location.
Questions to consider:
- If the provider is permitted to move the location of a customer’s inventory, are they also required to move or provide the same technology at the new location?
- Who bears the burden of the expense for any such moves?
Limited Warranty and Standard of Care
Typically, an operator is only liable if they fail to exercise care that a reasonably careful person would exercise under the circumstances. To the extent robotics are being used, the typical standard of care may not be sufficient. At the very least, the parties may wish to consider robotics-specific warranties (functionality, non-infringement, etc.).
Questions to consider:
- Who bears the responsibility for error with respect to the robotics technology?
- Are robot errors treated the same as employee errors?
- Is a software or hardware error considered operator negligence? If not, who is responsible for liability that may result from such errors?
Force Majeure
A force majeure provision forgives liability for both the operator and the customer for acts that are beyond the parties’ control. Although this clause typically includes telecommunication breakdowns and power outages, which could affect robotics, there are other issues that could be considered.
Questions to consider:
- Who is in control of the technology? Is a technology failure beyond the control of the provider?
- Are cloud platform outages used to operate the robotics a force majeure event?
- Are software failures impacting the use of the robotics force majeure events?
Data Ownership and Cybersecurity
While the typical warehouse agreement may not contain robust data and cybersecurity provisions, when working with robotics, it would benefit both the warehouse and customer to consider the importance of these provisions and update their agreements accordingly.
Questions to consider:
- Who owns the inventory data, shipment data, and operational data related to customer products?
- What happens to the data when the agreement ends?
- Who is responsible for implementing processes and controls to ensure that the technology does not get hacked?
- Who has responsibility if it does?
Service Levels
Service level agreements are contracts between the warehouse operator and the customer that define the expected level of service. In addition to traditional warehouse key performance indicators (KPIs), such as inventory accuracy and fulfillment, additional technology KPIs should be added to your agreements where robotics are involved.
Questions to consider:
- What are the uptime commitments for the technology?
- What are the response and resolution times for outages?
- What are the maintenance windows?
Productivity Improvements
If the warehouse provider proposes using robotics to improve efficiency and generate savings, then it should be reflected in the fees to the customer. It is important to consider that there could be increased cost efficiencies over time, and fees remaining at a fixed level may not reflect the amount saved through automation.
Questions to consider:
- What are the underlying productivity improvements that would result in cost savings for the warehouse operator?
- How will efficiencies affect pricing over time?
- Does a customer get the benefit of the efficiencies even if the technology does not perform as promised?
Exit Rights
After the term of the agreement, both the operator and the customer should consider what rights, if any, the customer has to continue using the technology. This can be important if the technology is integrated into the customer’s operations or data. Without an exit plan, it can leave the customer stranded if they are unable to retrieve or use their data.
Questions to consider:
- Who owns the technology at the end of the deal?
- What is the transition period (with timelines and responsibilities)?
- What kind of transition support will be available?
- How will a customer have access to its data if the technology is no longer available?
Insurance
Although the insurance section of a warehouse agreement typically focuses on loss of goods, this could be an opportunity for both the customer and the warehouse operator to consider insurance for the automated machinery. This could include cyber insurance, equipment breakdown insurance, or tech E&O insurance.
Questions to consider:
- Depending on the type of robotics used, what kind of risk could it generate?
- What type of insurance is offered for the type of robotics used?
How We Can Help
Warehouse providers are focused on implementing more automation into their services. It is critical to understand the terms of a warehouse agreement and how the use of robotics could and should affect those terms. Our team advises clients on robotics and warehouse automation matters, including negotiating contractual provisions governing the use of automation, allocating risk, assessing data and cybersecurity, and implementing safeguards that align with the operational objectives and risk tolerance.
Summer associate Diane Nguyen contributed to this blog post.