What Is Bailment?
The term bailment refers to a legal relationship between two parties in common law, where assets or property are transferred from a bailor to a bailee. In this relationship, the bailor transfers physical possession of a piece of personal property to the bailee for a certain period of time but retains ownership. There are three different types of bailment, which benefit the bailor, bailee, or both.
Bailments are common in our everyday lives, including in the relationships we have with our banks. Bailments are also common in finance, where the owner of securities transfers them to another party for short selling. Since they are contractual agreements, failure to live up to the terms and conditions of a bailment can lead to legal disputes.
- A bailment involves the contractual transfer of assets or property from a bailor, who temporarily relinquishes possession but not ownership, to a bailee.
- The bailee must intend to and actually physically possess the bailable chattel or asset.
- There are three types of bailments—those that benefit both parties, those that benefit only the bailor, and those that only benefit the bailee.
- Although the burden depends on the type of bailment, the bailee must always treat the bailor's property with a reasonable amount of care.
- Damage or loss to property due to negligence of duty in a bailment can result in legal disputes.
How Bailment Works
A bailment is an agreement in common law that comes into effect when someone entrusts an asset to someone else for safekeeping. As previously noted, the bailor is the owner of the asset and temporarily relinquishes it to the bailee. Although the bailor gives possession to the bailee, the bailor retains legal ownership of the asset. Bailments only start once the property is in the hands of the bailee.
The bailor is generally not entitled to use the property while the bailee holds it. Leaving your car with a valet is a common form of bailment, while parking in an unattended garage is a lease or the license of a parking space, as the garage cannot show intent to possess the car.
Bailment is distinct from leasing, where ownership remains with the lessor but the lessee is allowed to use the property.
Bailments are legal courses of action independent of contract or tort. To create a bailment, the bailee must both intend to possess, and actually physically possess, the bailable chattel. The bailor typically receives a written contract, a receipt, or a chit, which is what you get when you drop your coat off at a coat check. By taking possession of the property, the bailee agrees to guard it using reasonable care. Legal disputes can arise if anything happens to the asset while in the bailee's possession.
As mentioned above, bailments also take place in finance. Bailors have the option to legitimately transfer their securities, such as shares of stock, to others to conduct short sales. The short seller borrows shares on margin to sell them even though the short seller does not own those borrowed shares. Other financial applications for bailment include:
- Designating bailees to temporarily supervise investment portfolios
- Holding collateral against secured loans
- The shipping of goods
Types of Bailment
There are three different types of bailments—those that benefit both parties, those that benefit only the bailor, and those that only benefit the bailee. We've outlined some of the most important details about each below.
Bailments That Benefit Both the Bailor and Bailee
This type of bailment is referred to as a service agreement bailment. For instance, parking your car in a paid parking lot benefits both parties because the bailor is able to park their car in a secure lot while the lot owner is paid for the service. In service bailments, a bailee is liable for any damage that results to the bailed items if they are negligent in their duties.
Bailments That Only Benefits the Bailor
This is referred to as a gratuitous (free) bailment. Free valet service would be an example of this because the valet service (in this case, the bailee) doesn't receive compensation for parking your car. A bailee can face liability for damaging the bailed items if they are grossly negligent or act in bad faith while safeguarding the asset.
Bailments That Only Benefits the Bailee
These bailments are called constructive bailments. Checking a book out of the library is a common example. When you check the book out, you become the bailee while the library is the bailor, who gets no benefit from the relationship. It does, however still expect that you return the book at the end of the rental period.
In this type of bailout, the bailee faces liability for basically any damage to the bailed item. This is the highest standard of care required out of the three categories.
Rights and Liabilities in a Bailment
Bailments come with certain rights for both parties. Bailors can expect that bailees will take care of their assets to the best of their ability using the most reasonable amount of caution. After the relationship ends, bailors can expect to get their property back in its original state. If this isn't possible, bailees must account for any actions that led to damage or loss.
Bailors have the right to end the agreement and to legal recourse, including compensatory damages, if the bailee can't produce the asset when the agreement ends. Bailees, on the other hand, can expect to be compensated for their services, take action against any other parties that damage the asset, or can exercise liens if the bailor doesn't live up to their end of the deal. All of these rights, of course, depend on the nature of the bailment.
The liabilities depend on the type of agreement, as well. In service agreement bailments (where both parties benefit), bailees are required to take reasonable steps to ensure that the asset is well cared for or they may be responsible for damages that result from their negligence.
The burden of responsibility lessens slightly when the bailor is the only one who benefits. In gratuitous bailments, the bailee has a responsible duty of care but is only liable if they are deemed to be grossly negligent in their duties. Constructive bailments, on the other hand, carry the highest standard of care and, therefore, the greatest liability to the bailee. That's because they are the only ones who benefit from this relationship.
When Does a Bailment End?
The most common expiration for a bailment takes place after the asset is transferred back to the bailor by the bailee. For instance, the bailment ends when you pick up your clothes from the dry cleaner's shop.
Some bailments are set for a specific period of time. Common examples are found in the financial industry with certificates of deposit (CDs). An investor deposits a specific amount of money with their financial institution for a specified period of time. At the end of that period, the bank returns the money to the investor, along with any interest promised when the deposit is made.
Bailments may end prematurely if the property is damaged or destroyed, or when one party in the relationship terminates the agreement in writing.
What Is an Extraordinary Bailment?
An extraordinary bailment occurs when bailees are charged with a piece of property under strict liability. Under this type of agreement, a bailee takes complete responsibility for the asset (and the return of it in its original state) regardless of the type of care they agreed to at the onset of the relationship.
What Is a Service Agreement Bailment?
Service agreement bailments benefit both parties in the relationship. The bailor gets the benefit of their asset being safeguarded by the bailee in exchange for payment. Parking your car in a secure lot, renting a safe deposit box, using a paid valet service, or dropping your clothes off at the cleaners are common examples of service agreement bailments.
Why Are Bailments Important?
Bailments allow individuals to transfer possession of their property to someone else for safekeeping. Bailees may have more secure means when it comes to holding assets. This is especially true in the case of banks, which are trusted by their customers to hold and safeguard their money.