How do bailments work?
Bailment is 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 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.
How Bailments Work
When one person accepts custody of items knowing that they belong to another, bailment results. As a result of the bailment, the bailee takes on responsibility for the items and is responsible for any damage that occurs.
Types of Bailment
Section 3 of the Australian Consumer Law and Fair Trading Act 2012 enumerates the types of bailment:
- bailment for reward,
- bailment in the course of business,
- gratuitous bailment,
- involuntary bailment and
Bailment for Reward
Bailments for reward occur when the bailment agreement benefits both parties equally. For instance, when you give the mechanic custody of your car for servicing, both you and the technician profit from the arrangement. You receive value in the form of a maintained car, and the technician receives value in the form of payment.
Bailments in the Course of Business
Bailments can occur in a variety of situations in the course of business. For instance, during storage, transpiration, lease or reparation of goods by a third party. The bailee, in the course of business, has a duty to take reasonable care of the bailed property and return it to the bailor upon the fulfilment of the purpose. The bailee cannot use the property while it is in their possession.
Gratuitous bailment is a type of bailment in which the bailee receives no compensation. In a gratuitous bailment, the bailor transfers possession of property to the bailee on the basis that no compensation is to be paid. The bailment is for the exclusive benefit of the bailor. Examples of gratuitous bailment include borrowing a friend’s car or loaning a jacket to someone.
Involuntary bailments arise in either two of the following situations:
- where a party sends goods to a person without his knowledge or request; and
- where a party delivers goods to a carrier wrongly addressed and the carrier finds the goods on his or her hands when the addressee refuses to accept delivery.
Here, the involuntary bailee is under no liability for the safe custody of the unsolicited chattel. If it is lost or damaged accidentally or even through negligence he cannot be held responsible to the sender. In other words, the law absolves him of culpability if he chooses to do nothing. Of course, he will be held accountable if he purposefully harms or destroys the chattel.
A sub-bailment is created when the original bailee transfers the goods to another party, known as the sub-bailee. The sub-bailee accepts liability for the commodities by voluntarily taking them into its custody while being aware that they belong to someone other than the bailee.
Duties and Liabilities of the Bailor and Bailee
|Bailor||• Duty to warn of dangers associated with the goods. |
• Duty not to interfere with the bailee’s lawful possession of the goods.
|• If the bailor fails to disclose such problems, the damage to the goods or the loss incurred by the bailee will be the bailor’s responsibility.|
• The bailor is also responsible for covering the bailee’s unusual costs related to the bailment.
• The bailor is obligated to reimburse the bailee for any expenses incurred as a result of the goods’ defective title.
|Bailee||• Duty to take care of the goods.|
• Duty not to use or misuse the goods outside the terms of the bailment.
• Duty to retain possession of the goods.
• Duty to redeliver goods to the bailor or deliver them to a third party as directed by the bailor at the end of the bailment.
|• The bailee may be held liable for any loss, damage, or destruction of the goods that occurs while they are in possession of the goods unless they can prove that the loss, damage, or destruction was not due to any fault or negligence on their part|
• Unauthorised use of the goods that is not in accordance with the conditions of the bailment
When Is a Bailment a PPS Lease Under the PPSA?
The Personal Property Securities Act 2009 (PPSA) governs the creation and registration of security interests in personal property. It establishes a national system for managing personal property as security and the Personal Property Securities Register (PPSR) administers it.
Bailment is a concept that is wider than a lease but the ‘PPS lease’ covers it for situations where the bailor is regularly engaged in bailment transactions, and where the bailee gives value for the bailment.
A PPS lease includes a lease or bailment arrangement where:
- the lessor or bailor is regularly engaged in the business of leasing or bailing
- the agreement is for:
- a term of more than two years
- a term of up to two years that has automatic or optional renewals that can or will exceed two years
- an indefinite term but the lessee or bailee has had continuous possession of the goods for at least two years.
- the bailee provides value, that is, some kind of payment.
Thus, bailments can be a security interest in two ways:
- standard security interest – The PPSA defines a security interest as an interest in personal property created by a transaction that, in essence, ensures the payment or execution of an obligation, regardless of the transaction’s structure or the party holding legal ownership of the asset.
- a PPS lease.
Talk to a Contract Lawyer
If you are part of a bailment contract in Australia, it is important to have a contract lawyer review the contract before you sign it. Our contract lawyers at JB Solicitors can ensure that the contract is fair and that we protect your rights and interests.
Here are some examples of situations where you might need to hire a contract lawyer for a bailment contract in Australia:
- You are leasing commercial space to a tenant and you need a lease agreement drafted.
- You are hiring a contractor to perform work on your property and you need a contract in place to protect your interests.
- You are storing goods in a warehouse and you need a storage agreement in place to ensure that parties properly care for goods and return it to you safely.
- You are renting a car and you need to review the rental agreement before you sign it.
If you are in a similar situation and a breach occurs, contact us today for a consultation.