From the hire of company cars to the shipping of goods, the term ‘bailment’ encapsulates one of the most common forms of legal relationship for those operating a business. Bailment is also a term which is often unfamiliar even to those who are unwittingly subject to its rules, that is, until a dispute arises.
At its most basic, bailment is a legal relationship which arises in circumstances where one person is in possession of goods belonging to another. The goods must be tangible items such as cars, cargo and equipment, so this does not relate to intangible assets such as debts or intellectual property rights.
In order for such a relationship to arise, a person (the bailee) must voluntarily and consensually take possession of movable goods from the bailor, who retains ownership.
A typical example would be where a car hire company delivers one of its vehicles to a specialist mechanic for repair. The mechanic receives the vehicle from the car hire company so that the repairs can be carried out. It is expected that the mechanic will receive payment for the services provided, but ownership of the vehicle will remain with the car hire company at all times.
Another example may be where a manufacturing business allows a shipping company to collect goods from a distribution centre so that those goods can be delivered to a customer. Although ownership of the goods would never pass to the shipping company, they would be entitled to payment for the provision of their services. In return, the manufacturing business would have certain expectations as to how those goods are treated while in transit. These expectations are reflected in the law governing bailment.
These two examples demonstrate the numerous circumstances in which a bailment relationship can be implied.
Once you have entered into a relationship which involves bailment, it is important to understand the obligations on both sides in order to avoid a dispute and to protect the business if a dispute should arise.
If you are the owner of the goods, the car hire company or the manufacturing company in the scenarios above, you must:
- Pay for the services provided by the company in possession of your goods, if such terms have been agreed;
- Take back possession of the goods when agreed, or within a reasonable period of time; and
- Be responsible for any harm caused by any defect in the goods, for example, if the manufacturer’s shipment in the scenario above is found to be contaminated and causes an employee of the shipping company to fall ill from handling the goods, the manufacturer could be found to be in breach of its bailment obligations.
For the company in possession of the goods, the mechanic or the shipping company, they must:
- Act reasonably in taking care of the goods;
- Perform the task for which the goods were initially supplied; and
- Make the goods available for collection by the owner at the requisite time.
These terms are implied by the law but can be varied by contract or statute. If a dispute does arise, you should consult a dispute resolution solicitor to establish the position and the full range of obligations affecting your business.