This article gives an overview of “bailment” in commercial litigation disputes. Although bailment is rarely considered, it is in fact a very common commercial arrangement. A claim in bailment is a powerful tool for owners of goods which are lost, destroyed or stolen whilst in another party’s temporary control. Bailment can impose a duty of care to look after goods even where there is no contractual agreement or if goods are found when lost. In some circumstances bailment can make the party in temporary possession a “strict liability insurer” of the goods if they are lost or destroyed, and may require payment in full to the owner for any loss. The law is complex and taking early legal advice is key.
What is bailment?
“Bailment” can arise in law when one party has temporary possession of another party’s goods, usually for a specific commercial purpose, with a view to eventually returning the goods to the original owner. It usually occurs when goods are given to someone for completing a discrete task or to keep them for an agreed amount of time.
The party who owns the goods is known as the “bailor” and the party in temporary receipt is called the “bailee”.
Bailment is powerful as it can imply obligations to look after goods even where there is no express contract and even when the owner and keeper of the goods don’t know each other.
If the bailee gives the goods to another party, “sub-bailment” can arise, and the new third party can be the bailee to the middle party, who in turn remains bailee to the owner.
Say for example you give your valuable antique oil painting to a restorer to clean. You are the bailor and the restorer is bailee. If the restorer subcontracts aspects of the work to a further specialist, then the specialist may be the sub-bailee, and the bailee to the restorer.
If the specialist damages the painting, they remain liable to the restorer, and the restorer in turn remains liable to you as owner. If the specialist knows who the original owner was, they may even be said to owe a duty direct to the original owner for loss caused.
Knowledge of possession
Bailment usually arises when the party in receipt of the goods has knowledge that the goods aren’t theirs, and consents to having them in their possession. It doesn’t necessarily matter that the original owner knows that they no longer have they goods, or that a specific bailee has them.
Bailment can arise where goods are found by another party; the finder can then assume a duty in law to try and find the original owner, and can remain liable to compensate the owner if the goods are destroyed or lost, even if that owner is currently unknown.
Overlap with contracts
It is likely for bailment situations in commercial dealings, that there may already be an express or implied contract. The contract might include written terms about what will happen to the goods in certain situations and any limits on liability. The agreed terms and conditions may take precedence.
However, where someone in possession of the goods makes an oral representation to the owner that goes beyond the written terms, or if that assurance is not dealt with in writing, they can assume duties in bailment to the owner beyond usual contractual terms.
Say for example, you leave a valuable race horse in a commercial stables to look after and the standard terms say the stables won’t undertake any emergency veterinary care (or are silent on the point), and the owner says in conversation “I’ll make sure to look after your horse, you don’t need to worry,” then a duty of care and liability for the horse may arguably arise in bailment, should emergency veterinary care be necessary, notwithstanding the terms of the contract.
What rights can bailment impose
Bailment can impose duties both on the owner of the goods and the party who has temporary control of them. It can cut both ways.
The owner’s duties could include:
- To pay for services undertaken by the bailee as agreed on (if unnecessary services are done without agreement, then there may be no obligation to pay for them).
- To compensate the bailee in certain circumstances if they suffer loss in looking after the goods.
- To collect goods within a reasonable time after notification or agreement to collect.
The bailee could owe a duty to the owner:
- To take reasonable care of the goods.
- To carry out agreed tasks.
- Not to vary the agreed terms.
- To take responsibility for their employees’ actions if they damage the goods.
- To allow the owner to collect goods provided they have paid. (There is not necessarily a duty to return them physically).
Rights under bailment may be altered or curtailed by existing statutory law which govern goods.
Burden of proof shifts
If bailment arises, and the owner can prove the goods were lost or damaged whist in the care of the bailee, the burden of proof passes from the owner to the keeper of the goods to show there was no breach of their duty of care, or if there was a breach of duty, to show that the loss would have arisen in any event.
Bailment can impose strict insurer liability
It the party who has temporary possession of goods deviates from the agreed terms, then they could become “strictly liable” to the owner for the goods as “insurer” (unless that party could show the loss would have occurred even if they had kept to the original promise).
For example if someone agrees to store goods in specific location, but they put them somewhere else and fire destroys the goods in that new location, but wouldn’t have done in the old one, then the keeper may have to compensate the owner fully, as “insurer”. If the fire destroys the whole building, through no fault of the keeper and it didn’t matter where the goods were kept, a defence may arise.
Common commercial bailment examples
Some common examples of bailment arrangements include (and therefore potentially a duty of care in respect of the goods):
- When auction houses store priceless artwork or antiques for the purpose of auctioning them.
- When a party temporarily looks after a valuable race horse on its own land (but not necessarily if they are simply attending the owner’s land to feed them).
- At the end of a commercial tenancy when the landlord is considering getting rid of tenants’ possessions.
- When a shipping company transports valuable and easily perishable food items, such as caviar or saffron.
- When a garage takes in and repairs a high performance sports car or luxury car.
- A storage or delivery company carries expensive goods, such as diamonds or gold.
- When a high value complex piece of machinery is temporarily stored in a warehouse during transport.
In these situations, if the goods are damaged, destroyed or stolen and the keeper hasn’t looked after them properly, then liability can arise in bailment.
The law of bailment has historically developed in case law based on tangible goods, that is to say goods which are physical.
The law is less clear on intangible goods, such as electronic money, or intellectual property matters.
It may be that bailment is arguable even for intangible goods, where the goods have some form of physical manifestation.
For example bonds can be physical items with an abstract value assigned them. If a bond which grants the bearer £2 million upon presentation is lost or damaged, liability for the full value in bailment may arise.
If intangible computer files with valuable information are contained on a physical USB stick, then duties in bailment about the USB stick could arguably arise.
Overlap with other offences
A claim in bailment may not be the only claim available, and other claims may be easier, for example:
- Breach of contract.
- Breach of fiduciary duty (e.g. a professional / client relationship).
- Conversion (it the goods are wilfully interfered with, in a way inconsistent with the owner’s rights of use and possession).
- Theft (when a party takes goods with the intention of permanently depriving the owner of them).
- Trespass to goods (immediate interference to goods, without necessarily removing them eg locking them up).
If I haven’t been paid, can I: a) refuse to return goods and b) sell them?
If a party undertakes agreed services at cost to the goods whilst in their temporary possession (the bailee), and the owner (bailor) doesn’t pay for the services, then the bailee may be able to retain the goods until payment has been made in full.
However, a bailee cannot sell the goods and take payment to cover the payment, save as with express agreement of the owner. If there is no agreement, then this could amount to conversion, or potentially theft.
It is however possible to serve a statutory notice to dispose of goods under s.12 of the Torts (Interference with Goods) Act 1977 or apply to court for authority to do so.
The situation is different if goods are offered as security for a deal, i.e. a pledge, then sale may be possible.
What can I do to avoid claims
If you regularly take possession of customers’ goods for a limited period, you may be at risk of claims in bailment. There are steps you can take to try and minimise risk in advance, including:
- Have express terms and conditions setting out what actions are agreed, and what liability is excluded.
- Take care not to overpromise things above usual contractual terms and then fail to deliver.
- Take reasonable care of the goods, and do not unnecessarily risk causing damage to them.
- Take reasonable care to secure the goods and make it harder for them to be stolen.
- If you subcontract work, make sure this is covered in terms and conditions, and that you trust and check the work of the subcontractor. Make sure the owner consents to this.
- Serve a statutory notice to dispose of goods under s.12 of the Torts (Interference with Goods) Act 1977 or apply to court for authority to do so.
- Make sure that insurance policies cover the full value of the goods.
- Where possible, if services are at a fixed amount, request payment in advance of the work to avoid debt disputes.
Bailment can be a very powerful tool in commercial disputes, but is also very complex and not all aspects can be covered here. There are many more technical points to consider and legal advice is key.