The operation and applicability of the law of bailment can be overlooked in the course of commercial relationships. The recent case of Petroleo Brasiliero v E.N.E. Kos 1 Limited is a timely example of how the historical principles of bailment remain highly relevant today and how the law on bailment is still developing.
Recap
A bailment relationship occurs when goods are transferred to another party for a specific purpose on condition that the goods are returned to the owner, dealt with according to the owner's instructions or kept until the goods are reclaimed. Ownership of the goods never changes; the only variable being the party that has possession of the goods.
Where a bailment relationship exists, certain duties are imposed on both parties.
Common examples of bailment include where goods are supplied subject to a retention of title clause, goods are supplied to a company for delivery to another party or a customer pays for goods and requests that they pick them up later.
How do you establish a bailment?
Bailment arises usually where there is an agreed contract which obliges or requires one party to have control of the other party's goods for a particular purpose or for a limited period of time. The party who is in receipt of the goods must demonstrate that the recipient consents to holding the goods in order to establish a bailment.
However, bailment may also occur informally, for example, where one party makes a promise on taking possession of goods and as such could be held liable for that promise. The claim against them would not however be brought in contract, but in tort.
An involuntary bailment can also arise where a person, without their consent, finds themselves in possession of goods belonging to another party (for instance, where an owner of goods sends these goods to another party who does not request that these goods are sent). An involuntary baliee is not a true bailee in that they do not voluntarily consent to holding the goods (and as such they do not therefore owe duties to the same extent as a voluntary bailee) although an involuntary bailee may still owe a duty of care. When assessing the standard of care required, the court is likely to consider the nature and value of the goods, the circumstances in which they have been deposited, the facilities at the defendant's disposal, the readiness with which the goods could have been returned to the owner and the conduct of the owner (if known to the involuntary bailee).
Despite the ease in which one can be subject to a bailment, many are not aware of the obligations imposed on the parties. Failure to comply with one's obligations could result in a claim by the other party for breach of contract or in tort.
What does this mean for the parties?
The recipient of goods subject to bailment is usually under a duty to:
- take reasonable care of the goods;
- ensure that they comply with their agreed/contracted task;
- not go beyond the terms of the bailment;
- not deny the owner's title; and
- assume responsibility for any actions of their employees or agents who carry out any duties with regard to the bailment
Should the person holding the goods fail to comply with any of the obligations above and the goods are then damaged or destroyed, the person holding the goods could be liable for that damage or loss unless he can prove that either the damage or loss was not due to his breach of duty. The only exception to this rule provides that the recipient of the goods does not owe a duty to insure the goods against hazards which extend outside his remit.
In return, the owner of the goods has a common law duty to:
- pay for the services carried out;
- collect the goods at the appointed time (or within a reasonable time);
- answer for the safety and suitability of the goods; and
- indemnify the recipient for his costs in preserving the goods against extraordinary hazards.
If payment is not forthcoming then it is permitted that the holder retains the goods until he is in receipt of payment. In fact, the holder of the goods is entitled to ask to be compensated in the event that he improves the value of the goods.
Petroleo Brasiliero SA v ENE Kos 1 Limited
This case demonstrates how extensive the concept of bailment has become.
The case concerned the rights of an owner of a time-chartered ship. The owner of the ship had withdrawn the charter for non-payment of the proposed hire by the charterer (the charterer's cargo had already been loaded at this point). The Court had to decide whether the owner had a right to remuneration from the charterer whilst awaiting the unloading of the cargo.
The Supreme Court ruled that the owners could recover fees due to a bailment relationship. The Court found it irrelevant that the owners had themselves created the non-contractual bailment by terminating the charter. This termination had in effect created a bailment relationship by default which the Court decided rendered the charterer liable for a sum at market rate to the owner of the ship for holding the cargo.
Best practice
You should be aware of any obligations that may arise under the law of bailment as bailment situations exist in a wide range of commercial relationships.
- It is also important you understand your potential obligations in respect of another party's goods and your rights when others look after your own goods. Importantly, you should take reasonable care of goods left in your possession whether there voluntarily or otherwise.
- Bailment obligations can be expressly amended in carefully worded contracts. To succeed in amending the obligations the contract should set out each parties' obligations and the consequences of failing to comply with their obligations.
- If goods are in transit, consideration should also be given to what should happen to the goods in the event that the goods have to be diverted or held in a location other than the agreed destination. Failure to comply with the contractual obligations could result in a breach of contract claim.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
