What is a Bailment Arrangement?

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Table of Contents

• Definition of Bailment
• Types of Bailment Arrangements
• Difference Between a Bailment and a Lease
• Difference Between a Bailment and a Licence
• Key Takeaways

Bailment is a contractual arrangement that arises both in commercial contracts and in everyday situations. When walking into a restaurant where a waiter offers to store your coat, you are unknowingly entering into a bailment arrangement with the restaurant once you hand over the coat. Similarly, when you leave your car with the mechanic for servicing, you are entering into a bailment agreement with the mechanic.

This article defines bailment and discusses different types of bailment arrangements. Throughout we will be referring to both the bailee, who receives the goods, and the bailor, who leaves the goods.

Definition of Bailment

In a bailment agreement, the bailee voluntarily assumes possession of goods from the bailor for a period with an obligation to return the personal property. The bailee attains control of the assets for that term but is then required to return the goods to the owner afterwards. Although they often acquire both possession and control of the product, the title to the goods does not pass from the bailor to the bailee. The bailor remains the rightful owner of the goods.

When you leave your car with the mechanic, you are giving the mechanic possession and control of your car. After servicing your car, the mechanic will return it to you. Although they control the car and are in possession of the car, it remains yours the entire time. Thus, it is a bailment arrangement.

Types of Bailment Arrangements

There are several types of bailment arrangements, including:

1. gratuitous bailments;
2. bailments for reward; and
3. sub-bailments.  

1. Gratuitous Bailment

Gratuitous bailments occur when one party is not giving anything in exchange for the bailment agreement. This party can be the bailee or the bailor.

For example, when you give your coat to the waiter at a restaurant, you are not paying anything or giving him anything of value in return for safekeeping your coat. Therefore, it is a gratuitous bailment.

2. Bailment for Reward

Bailment for reward occur when both parties are mutually benefitting from the bailment arrangement.

For example, when you leave your car with the mechanic for servicing, both you and the mechanic are benefitting from the transfer in custody of the car. The mechanic is receiving value in the form of payment and you are receiving value in the form of a serviced car.

3. Sub-bailments

Sub-bailments occur when a bailee transfers possession of goods they have been entrusted with to a third party.

For example, you give your broken computer to a repair centre but they do not have the necessary skills to repair it. However, they have an agreement with another store that has the necessary expertise to repair your computer. So, they pass on your computer to the other store. The first computer repair company was already a bailee, but they are then sub-bailing your computer to another bailee, called the sub-bailee.

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Difference Between a Bailment and a Lease

Bailments are distinguishable from leases in two key ways:

1. exclusive possession; and
2. type of property.

Difference Between a Bailment and a Licence

Licence agreements and bailment arrangements differ because licence agreements neither control nor take responsibility for the property transferred between the parties.

For example, when you leave your car in the car park, you do not acquire control over the car park. This is a licence arrangement.

In contrast, when you give your car to a mechanic, they obtain control of your car. This is a bailment arrangement.

Key Takeaways

Bailment arrangements occur when control or possession of personal property is passed from the bailor to the bailee with the expectation that the property will be returned after a period. They form a primary part of many commercial transactions and occur on a daily basis without conscious acknowledgement. Bailment arrangements create a legal relationship that is different to a lease or a licence.

If you have any questions, contact LegalVision’s commercial lawyers on 1300 544 755 or fill out the form on this page.