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Bailment

Previous: Introduction to personal property law

What is bailment?

According to Pollock and Wright in 1888, bailment describes the situation in which one person owns property and another agrees to hold the property physically with the promise to return the property on the instructions of the first. The owner is known as the bailor, and the person who holds the goods is known as the bailee.

For bailment to exist, the bailee must acquire possession, preventing the car park owner in Ashby v Tolhurst [1937] from acquiring claiming to the the bailee of cars parking in his car park. Any transfer of possession to or from the bailee requires the bailee’s consent, according to East West Corp v DKBS 1912 [2003], but not the bailor’s consent, according to The Pioneer Container [1994].

A bailee will be obliged to return goods bailed to him in their original form unless substituted, as in Wincanton Ltd v P&O Trans European Ltd [2001] (warehouse pallets substituted), or the bailor became a tenant in common of a bulk, as in Mercer v Craven Grain Storage Co [1994].

Liability of bailees

There is some debate over whether a claim can be made ‘in bailment’, against a bailee, or whether claims against bailees can only be made in tort or contract law.

It was the old approach of Coggs v Bernard (1703) to categorise bailment into many different types, each with their own rules on liability. The newer approach taken in Highland v RR Low (Luxury Coaches) Ltd [1962] was to require (ordinary) negligence to claim in non-gratuitous bailment, and gross negligence to claim against gratuitous bailees. Today’s approach, taken in Yearworth v North Bristol NHS Trust [2009] is to require all bailees to take reasonable care of goods in their possession, but to factor in any gratuity in assessing a claim.

Where goods are lost or damaged at the hands of a bailee, that bailee will have committed a deviation, a higher level of wrongdoing giving rise to a strict liability claim by the bailor. In Mitchell v Ealing LBC [1979], a squatter had such a claim against an insurer after his property was placed in storage and lost. Gibhaud v Great Eastern Railway Co [1921] prevents the contractual exclusion of claims for deviation.

Sub-bailment

Unlike substitutional bailment, which will terminate any previous bailment agreement, sub-bailment is the process by which a bailee bails goods to a third party sub-bailee, and ownership is still retained by the bailor. Where not authorised, a bailee will be liable to a bailor for damage caused as a result of any sub-bailment, according to Edwards v Newline & Co [1950], irrespective of whether the bailee can recover from the sub-bailee. Ministerial acts will not be classed as sub-bailment.

If sub-bailment is authorised, a bailor will be able to sue a sub-bailee. Terms protecting a bailee will not also confer protection on a sub-bailee unless those terms were consented to by the bailor. In the Pioneer Container [1994], sub-bailment was consented to on any terms, therefore a sub-bailee was entitled to the protection of a jurisdiction clause agreed between the bailee and sub-bailee. Lotus Cars v Southampton Cargo Handling [2000] distinguished The Pioneer Container [1994] as the sub-bailees ‘spoke for themselves’, preventing them from taking the benefit of an exclusion clause favouring the bailee. It is usually the case that any exclusion clause favouring the bailee (between bailor and bailee) will also protect the sub-bailee as a ‘himalaya clause’.

Bailment based transactions

Bailment is widely used in the commercial world. Here are a few examples.

Not loans

Where ownership is transferred, whether in money or otherwise, the transaction will not be classed as a bailment transaction.

Finance agreements

Finance agreements are the prime example of bailment transactions.

Finance leases

There is no contemplation of ownership being transferred in finance leases, where property is loaned in return for instalments. During these transactions, goods leased are only bailed, even though at the end of the lease period, the property leased will be close to worthless.

Operating leases

An operating lease, similar to a finance lease, is only ever a bailment transaction. Operating leases are granted over property which will be leased several times before it becomes worthless.

Conditional sale agreements

Conditional sale agreements, where property is loaned in return for the payment of instalments, followed by the automatic transfer of ownership upon the payment of the final instalment, involves bailment until ownership is transferred.

Hire-purchase agreements

A hire purchase agreement is a contract of hire (instalments paid), with the option given to the ‘purchaser’ to purchase ownership of the property at the end of the hire period, for a nominal sum. There is no transfer of ownership, just bailment, until the option is exercised at the affirmation (election) of the purchaser.

The concept of hire-purchase was developed to avoid certain legislative restrictions. As money is not loaned, the (now repealed) Money Lenders’ Act formalities could be avoided. As hire-purchase is not a mortgage, the Bills of Sale Act formalities (or Companies Act 2006 formalities and registration requirements) can be avoided. Finally, hire purchase is not an agreement to sell. This is significant as if a purchaser in an agreement to sell sells property on, that property cannot be recovered by the seller. A conditional sale agreement is an agreement to sell, and confirmed in Lee v Butler [1893], and so does not avoid this issue. Helby v Matthews [1895] confirmed that hire-purchase agreements do not create an agreement to sell, allowing bailors (only potential sellers) to recover goods bailed but sold on.

There are a number of further points to note about hire-purchase agreements:

  • Under the Hire Purchase Act 1964 bailors of cars may not recover cars sold whilst bailed
  • Forthright Finance v Carlyle Finance p1997] – a negative option is a conditional sale agreement, even if labelled as a hire-purchase agreement
  • Close Asset Finance v Care Graphics Machinery [2000] – the substance of a hire-purchase agreement can be irrelevant – a £2m hire agreement over 7 year with a £50 option price is still a hire-purchase agreement
  • As hire-purchase agreements do not immediately transfer ownership of goods (unlike a normal transfer or conditional sale), the implied terms in the Sale of Goods Act 1979 and Unfair Contract Terms Act 1999 are inapplicable. There are equivalent terms implied under the Supply of Goods (Implied Terms) Act 1973 and s 6 of the Unfair Contract Terms Act 1999

Rights of bailees

If a bailee sells goods on, he is usually in breach of contract and will have denied the bailor’s property rights, so will have also converted the bailed goods. In the context of a finance agreement, any damages will be reduced to reflect the instalments already paid (towards the ownership value of goods).

Where a bailee fails to pay instalments, equity may vary the contractual obligations between bailor and bailee to provide relief against a bailee forfeiting the agreement made:

  • Cukurova Finance International v Alfa Telecom Turkey (No 3) [2013] – relief prevented a Russian financier from seizing the security provided under a loan where the financier’s ulterior motive for the loan was to take control of the security (a controlling interest in Alfa Telecom)
  • The Scaptrade [1983] – to relief against the right to determine a time charter party
  • BICC Plc v Burndy Corp [1985] – relief applies equally to real and personal property where proprietary rights are at stake
  • Transag Haulage v Leyland DAF Finance Plc [1994] – relief granted for 7 days against where lorries were effectively paid for under hire-purchase agreements but the bailor went into receivership, preventing an unfair windfall to the receivers
  • Shiloh Spinners v Harding [1973] – relief will only be granted in exceptional circumstances where a default on payments was wilful
  • On Demand Information v Michael Gerson (Finance) Ltd [2011] – possession is enough to allow relief from forfeiture
  • Celestial Aviation v Paramount Airways [2010] – relief will only be granted on finance leases, not operating leases

Next: Torts protecting property

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