Bailment: Definition, How It Works, Types, and When It Ends

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: those that benefit the bailor, the bailee, or both.

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.

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.

Some common applications for bailment include:

• Items held by a dry cleaner
• Valet parking
• Warehousing
• Self-storage
• 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 benefit only the bailee. We’ve outlined some of the most important details about each below.

Bailments That Benefit Both 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 Benefit Only 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 Benefit Only 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, which gets no benefit from the relationship. It does, however, still expect you to 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. Bailments may end prematurely if the property is damaged or destroyed, or when one party in the relationship terminates the agreement in writing.

The Bottom Line

Bailment refers to a legal relationship established when one party (the bailor) temporarily transfers possession of property to another party (the bailee) for a specific purpose, without transferring actual ownership. In business, bailment can occur in a variety of situations, such as when goods are stored, transported, leased, or repaired by a third party. The bailee has a duty to take reasonable care of the bailed property and return it to the bailor once the purpose is fulfilled.

Understanding the concept of bailment and the associated rights and responsibilities is essential for businesses to protect their interests and mitigate potential liabilities.