What Is Bailment?
Bailment, in common law, describes the contractual transfer of assets or property from a bailor, who temporarily relinquishes possession but not ownership, to a bailee. Bailment describes a legal relationship where physical possession of personal property, or a chattel, is transferred from one person to another person who subsequently has possession of the property but not total ownership.
In finance, Bailment applies to the legitimate transfer of securities, such as shares of stock, from one owner to another for the purpose of short selling. Here the short seller borrows shares on margin in order to sell them - however, the short seller does not own those borrowed shares.
How Bailment Works
Bailment arises when property is given to someone for safekeeping, and is a legal course 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.
In a bailment, the bailor is generally not entitled to use the property while it is in possession of the bailee. This distinguishes bailment from leasing, where ownership remains with the lessor, but the lessee is allowed to use the property. Leaving your car with a valet is a common form of bailment, while parking in an unattended garage is a lease or a license of a parking space, as the garage cannot show intent to possess the car. A leased apartment is another example, where a tenant possesses and uses their apartment but does not own it.
In finance, a bailor can designate a bailee to supervise an investment portfolio until the bailor can or wishes to resume the duties of managing the portfolio. Other forms of bailment include holding collateral against a secured loan, warehousing and self-storage and the shipping of goods.
- Bailment, in common law, describes the contractual transfer of assets or property from a bailor, who temporarily relinquishes possession but not ownership, to a bailee.
- To create a bailment, the bailee must both intend to possess, and actually physically possess, the bailable chattel.
- In finance, short-sellers borrow shares to sell using a bailment mechanism.
Types of Bailment
According to LegalMatch.com, there are three different types of bailments:
- A Bailment that Benefits Both the Bailor and Bailee: An example of this would be parking your car in a paid parking lot. You would get the benefit of parking your car and the owner of the lot would get the benefit of the fee that is paid. A bailee can face liability for damaging the bailed items if they were negligent.
- A Bailment that Only Benefits the Bailor: This is referred to as a gratuitous bailment. Free valet service would be an example of this because the valet service (bailee) would not be receiving compensation for parking your car. A bailee can face liability for damaging the bailed items if they have been grossly negligent or acted in bad faith.
- A Bailment that Only Benefits the Bailee: A common example of this would be checking out a book or movie from the library. You would be the bailee in this situation because you would be taking the book or movie. The library (bailor) would receive no benefit from loaning out the book, but would still expect it to be returned at the end of the rental period. In this scenario, a bailee can face liability for basically any damage done to the bailed item. This is the highest standard of care required out of the three categories.