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Bailment in contractual disputes

Our commercial dispute resolution lawyers regularly consider a variety of potential legal remedies as part of complex commercial contract disputes; the note below provides an introduction to some key points on “bailment”, which is a powerful, but not frequently highlighted, legal remedy.

Bailment can have wide commercial applicability, and often helps parties recover money in disputes relating to technology, engineering, machinery and hardware disputes where one party takes temporary possession of another’s physical goods, and the goods are subsequently damaged, stolen or lost.

Situated opposite the Royal Courts of Justice and a short distance from the Technology and Construction Court in London, Saunders Law is well positioned and suited to deal with disputes involving technology, engineering, and complex machinery.


Bailment is rarely addressed in commercial litigation disputes, yet it has potentially very wide applicability across all types of commercial and personal dealings involving goods, and can be a powerful cause of action.

The article below provides an introduction to bailment, gives examples when it can commonly arise, and tips on how to try and limit risk and disputes.

Bailment can often apply in particular to services or repairs of complex machinery, technology and engineering plant, hardware disputes, perishable goods, food, livestock and artwork, as well as many other high value goods.

Implied duty of care to goods

An action under bailment is powerful as it can imply a duty of care on parties who deal with goods, where no other right of action may otherwise exist. Bailment can operate outside of contract, tort, and statute, or alongside them. Bailment often arises via accidental circumstances, as well as by intention.

Bailment can impose a duty of care between the owner of the goods and someone who has temporary possession of them, even if that duty is not expressly outlined or agreed on.

Bailment can arise where another party unexpectedly comes into possession or opts to deal with another’s goods, even if the true owner’s identity is not known.

Bailment can arise where one party finds goods belonging to another, and is required to take reasonable steps to find the owner and return goods to them, but fails to do so.

Risk to companies / directors

Companies with rogue employees who abuse customer’s possessions, can become vicariously liable to compensate the owner of goods for any wrongdoings committed by their employees under bailment, and directors should ensure there are proper monitoring processes, policies, exclusions of liability and insurance in place.

Under bailment, the bailee (the party with temporary possession) becomes effectively an insurer of the goods for the bailor (the owner) and may have to compensate the owner if the bailee’s careless conduct causes damage to, or loss of, goods.

The burden of proof often works in the owner’s favour. If the owner can prove as a matter of fact that they have lost or had their goods damaged whilst a third party was possession of them, the onus can fall automatically onto the third party to prove that they did not breach their duty in looking after goods; if they cannot disprove this beyond reasonable doubt, they may be held automatically liable.

What are requirements for bailment?

Possession

In summary, bailment occurs where one party takes possession of another’s goods, usually for a short period but it can be longer term, where ownership of the goods does not transfer, but stays with the original owner.

Under bailmet, goods are normally given to or left with the other party by the owner for a temporary specific purpose, and should subsequently be returned to the owner upon payment or some other predetermined condition. This arrangement is surprisingly common in commercial arrangements, but is not often labelled as bailment.

The party that owns the goods is known as the bailor; the party which has temporary possession is the bailee.

Sub-bailment

The bailee can further bail the owner’s goods to a third party, who may become a sub-bailee. This is called a chain of bailment. Chain of bailments can be complex, and the owner can potentially change during the course of bailment, as can the bailee. The goods themselves might change.

Voluntary possession

A key aspect for bailment to be established, is that the party who takes possession of the goods, needs to have some awareness that they are in possession of the goods. Possession is often transferred voluntarily, but possession of goods can arise accidentally, or be implied through conduct, if the bailee fails to reasonably check whether they are in possession or not.

Someone who initially refuses to take possession of goods voluntarily, but opts to keep hold of them, or fails to inform the owner they have them, could be held to have taken possession voluntarily by inaction.

Assuming responsibility

If a party rejects voluntary possession of the goods, but assumes the duty of returning them to the true owner, and the goods don’t make it back to the owner, they may become liable to compensate the owner for loss. If the goods are given to someone claiming to be the owner, but who isn’t, liability can still arise.

If someone takes responsibility for goods that belong to an unknown third party, out of kindness or compassion, but the goods are damaged or perish, the good Samaritan may still be held liable to the owner.

The courts will look to the circumstances and what is reasonable on a case by case basis.

Common examples of commercial bailment

Hire agreements: when the owner of complex machinery or hardware leases it to someone else for a defined period, the lease permits temporary possession of the goods, but title to the goods (ownership) is not intended to pass in law. The goods are returned to the owner either upon expiry of the lease or in default of payment. Duties of bailment can arise. In financial matters, express terms or implied statutory duties, which may be at odds with bailment, usually take priority, so early advice is sensible.

Repair services: an expert repairer of machinery or hardware, takes temporary possession of equipment to perform a particular task, but return the goods to the owner upon payment. The repairer likely owes a duty of care to the owner under bailment. If the goods are damaged or lost, the repairer may be liable, unless they expressly waive liability in writing.

Storage or transport: a company which agrees to transport or store high value perishable goods, such as chemicals, crops or livestock, owes a duty of care that it will not cause the goods to become unreasonably destroyed or damaged. Keeping the goods in good repair may require active steps, such as maintaining humidity, food or medication. Absent exclusion of liability in contract, and if no other insurance is in place, the transport company or storage company may become liable to the owner if goods are lost or destroyed due to carelessness.

Auctioneers: Where an auctioneer takes possession of valuable artwork, or a physical manifestation of something intangible, and is tasked with selling it to a third party, it may become a bailee for the owner until legal title passes to the buyer. If the artwork is destroyed whilst in their possession or lost, the auctioneer may be liable under bailment to the owner.

Common examples of bailment in personal situations

Loss of money: If a party loses a roll of banknotes and another party finds them on the street, the finder of money may be held to owe a proactive duty to the owner to take reasonable steps to find them under bailment. Under bailment, someone who finds goods, should take reasonable steps to find and return them. This may include a need to hand money into the police. If a party fails to do so, and the true owner finds out and finds out, this could constitute breach of bailment, or potentially conversion or theft, depending on the circumstances.

Dry cleaning: When someone takes an expensive item of clothing to the drycleaners, the drycleaners take temporary possession of clothes with a view to cleaning them, and likely owe a duty under bailment to the owner not to damage it, absent contractual exclusion of liability. If the drycleaners subcontracts aspects of cleaning to a third party or offsite, this may constitute a chain of bailment, and may not lessen the dry cleaner’s liability to the owner.

Car repair: A mechanic tasked with fixing a valuable sportscar, may become liable to compensate the owner if during their possession, the car is stolen, and the mechanic is found to have allowed the theft to occur negligently or recklessly, for example if they kept the keys in the ignition whilst parking it on a public street, whilst unattended.

Cat: If a beloved family pet runs away, and some neighbours find the cat in their garden and opt to take it in and look after it, the finders owe a reasonable duty of care both to look after the cat if they take it in, and take reasonable steps to find its original owner, or could be liable to the true owner under bailment or conversion.

Overlap with other legal areas

Due to the everyday occurrence of bailment, it has the potential to overlap and interplay with other causes of action in law, and regard should be had as to which type of claim is most likely to succeed, or which cause of action may provide more favourable remedies.

Breach of Contract

Bailment can overlap with or contradict express terms of contract: there could already be a written agreement between the parties setting out express terms and limits liability for damage to goods, which could limit action in bailment. Early advice is sensible to see which applies.

Bailment can be very useful, where there is no binding contract.

If another party has taken possession of goods under a defective contract which is unenforceable, and that party damages the goods, then the owner may be able to bring a claim under bailment for breach of duty, despite the defective contract.

Emergencies

If someone takes property off someone’s land to prevent it being damaged from fire, that party likely owes a duty of care to the owner to look after and return the goods to the owner, even if they don’t know who they are. If the goods are subsequently damaged, bailment can allow compensation. Bailment may establish a duty of care which would otherwise be impossible to establish.

Duties of the Police

Bailment can apply to public authorities potentially, for example, the police may owe duties under bailment for property handed into them as lost, belonging to another, or if they seize property belonging to another temporarily; if the police cause the goods to be lost or damaged whilst in their care, they may become liable to compensate the owner.

Actions in Tort

Bailment stands alone as a unique type of legal action, and does not easily fit into established legal categories. It is not technically a tort, and has developed under common law (case law). It may follow then that someone who breaches duties of bailment, may also be liable under tort and criminal law.

Common types of torts which interact with bailment are:

Trespass to goods

If someone physically interferes with an owner’s possession of goods, this may constitute an offence in tort of trespass to goods. If someone moves goods from a public place to a locked or fenced off area, which only they have access to, and prevents the owner having access, this could be trespass to goods.

Conversion

If someone comes into possession of someone’s goods unexpectedly or voluntarily, but then fails to take steps to reunite the goods with the owner, or refuses to return the items to the true owner, or consumes the goods, or sells them (in short interferes with the owner’s right to ownership) that may be conversion.

Criminal offences

Theft

If a person dishonestly appropriates goods belonging to another with the intention permanently to deprive the owner of them, that may constitute theft.

If a thief takes someone else’s property and destroys it, but says they thought it was theirs, and it is difficult to disprove it, that might cause the criminal offence of theft to fail, but the owner could still potentially bring a civil claim for breach of duty under bailment.

Blackmail

If a person finds goods they know belong to another, contacts the owner, but refuses to return goods unless they receive payment (where there is no justification for them to do so (other than for example under a previous offer of a reward)), that could amount to a criminal offence of blackmail.

Potential defences to bailment

Bailment arises frequently in day to day commercial activity, but establishing a claim under bailmant, can prove tricky in practice: there are various hurdles, and not every situation where another party deals with another’s goods might constitute bailment.  A duty of care to look after goods may not necessarily arise. Each case turns on its own facts, and early advice is sensible.

Brief contact

For example, if a party is only very briefly in contact with someone else’s goods, i.e. a few seconds, that may be insufficient to satisfy possession and duties under bailment may not arise.

Intangible property

Whether goods qualify as being capable of bailment can be a matter of interpretation. Bailment most commonly applies to tangible goods. The law is less clear on intangible goods or property, such as debts, intellectual property rights and electronic money; however there is potential scope for bailment to apply to intangible goods, especially when they can be represented in some physical form. This may be an developing area of law in the future, for example with Bitcoin.

Unaware of possession

If the party in possession of the goods is not aware that they have them (and cannot be reasonably found to have known or checked whether they have them) bailment may not be established, as voluntary possession may not be established.

If a party rejects possession of the goods, and the third party opts to leave them outside that party’s premises on the street without that party’s knowledge, and they are stolen, the third party may become liable.

No breach of duty

If property is lost or destroyed whilst in the possession of the bailee, but the loss cannot be linked to the bailee’s breach of duty to the owner, then there may not be a cause of action in bailment.

No need to deliver goods

The bailee does not necessarily need to redeliver the goods to the owner, and actively restore physical possession to the owner, but may only need to make them available for collection by the owner. If the owner fails to collect goods in good time, the owner may be held to have effectively abandoned goods.

Reasonable notice given

If the bailee makes reasonable attempts to contact the bailor in writing, to state they should collect goods or they will be destroyed, this may mitigate the bailee’s liability if the owner doesn’t collect them, and the bailee subsequently destroy them.

Reverse duties of bailment

If the owner lends goods to another party for a fixed term of 12 months, and during that 12 months the other party (the bailee) gives them temporarily back to the original owner for a lesser period (say for 1 month part way through the 12 month term) and if the owner loses the goods during that 1 month period, the owner may bizarrely be liable to the bailee for breach of bailment, even though the owner technically still own the goods (the interplay can be complex!).

Dealings were reasonable

What is “reasonable care” is a subjective test and may vary depending on the nature of the goods. For example someone who comes into possession of rotting meat by chance, which belongs to someone else, which already appears to have spoilt, and which is causing their business harm (eg putting off customers), may potentially be excused if they make some effort to look for the owner, but dispose of the rotting meat after a short while. However, if the goods are cheese that is naturally pungent, but not spoilt, and these are thrown away quickly without trying to find the owner, this may be breach of bailment.

Owner’s liability to bailee

The burden of proof in bailment against the party with temporary possession of goods can appear to be one sided. However, there are potential circumstances in which the owner  of goods (bailor) can also be financially liable to the bailee.

The owner of goods can be liable to the bailee to ensure the goods are not likely to cause the bailee any unreasonable harm. If the goods do cause the bailee harm whilst in their possession, the bailor may be liable for any damage to the bailee.

If the bailee incurs expenses which were always likely to be necessary to keep the goods in repair, the bailee may potentially be able to charge the bailor for reasonable expenses incurred. Any contractual agreement to the contrary however, would likely take precedence.

If the owner is unjustly enriched during the course of bailment, at the expense of the bailee, the bailor may be held liable to compensate the bailee.

Right of lien

A bailee may be entitled to retain possession of goods until agreed payment is made: for example if the bailee repairs machinery on agreed terms, but is not paid, they may potentially be able to retain possession of the machinery until they are paid, and allege some form of lien. However, during this period, the bailee would not be able to dispose of or sell the goods without the owner’s approval, as that might amount to conversion.

Liens are regularly exercised by lawyers over client’s files until payment of fees has been attended to, and is a legitimate position.

Lessening risk of bailment claims

Bailment has wide commercial and personal implications and can create liabilities for any party who takes another party’s goods into possession temporarily, where legal title has not passed in law. A duty of care can be imposed even outside of formal contracts and whether or not the owner is aware of what has happened to its goods.

Take care of goods

A party can help protect against claims in bailment, by taking reasonable care of the goods, and taking insurance to protect against claims. Insurance is sensible, as the party in possession may become the “insurer” of the goods to the owner and remain liable whether or not they actually have formal “insurance”.

Stick to agreed terms

Conditions of bailment should be met: If a party outlines they will keep the goods in a particular place, or says expressly they will look after goods in a particular way, and then fail to do so, this may constitute breach of bailment, whereas keeping to agreed terms can mitigate issues.

Don’t assume responsibility

Don’t assume liability for goods if there is no requirement / expectation for you to; if someone asks you to look after high value or high risk goods in emergency for someone else, it may not be sensible to agree (there may not be any obligation to), as you may become liable if the goods get damaged whilst in your care.

Monitor employees

Directors and managers should monitor how employees deal with client’s goods whilst they are in company possession as the company can become liable for damage. The company may have a subsequent claim against the employee, but could remain liable to the owner in the first instance.

Take care with subcontracting

Bailment often arises in commercial arrangements involving repair work or subcontracting of services on complex machinery and technology. It can help to avoid deliberately exaggerating or misrepresenting expertise and ability, as this can come back to bite if it is false and causes damage, not only in bailment, but in fraud. If work is subcontracted, the goods and work should be carefully quality checked prior to being reunited with their owner, as the middle man will likely remain liable.

Limit liability in writing

If your business deals habitually with repairing or servicing other party’s high value goods, ensure you have strong commercial terms which limit liability so far as possible, and bring the terms sufficiently to the owner’s attention. Oral limits can difficult to prove in a dispute, so keep a paper trail.

Get insurance

Liability insurance may assist; doing so may prevent expense litigation later on.

If you are affected by any of the issues around bailment above or have a dispute, please get in touch to see how we can assist.


At Saunders Law, we’re dedicated litigators with vast experience assisting clients to resolve their commercial disputes. We’re well known for our high-value work and excellent client satisfaction.

For a free, no-obligation initial discussion of how we may be able to help, please contact us on 020 3811 7417 or make an enquiry online.

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