Bailment means transferring the possession to some other person to fulfill some predetermined agreement which might require bailee (person to whom possession is given) to do something or vice versa on the exchange of some consideration which is not mandatorily required to exist. Generally, the bailor (owner of the asset) does not enjoy the right to use such bailed assets while they have bailee.
Let us say the person (trader) sometimes sells the shares actually without having the possession of the shares i.e. short sell the shares to earn short term profits thereupon, in this example, it could be seen that the seller sells the shares even without having ownership of the shares. In this transferring the possession of goods sometimes some liabilities are also transferred to the bailee depending upon the type of bailment, for example, when we park our car in parking it is the transfer of possession but not ownership but in case there is some physical damage then the person who has the person i.e. bailee will be responsible for the same.
- The first basic requirement is the agreement which may be written or verbal which should be clear from any ambiguity.
- The possession of goods or assets must have been transferred from one person to another i.e. from bailor to bailee which should have to be returned to bailor after expiration of bailment agreement.
- They should be for some predetermined purpose, for instance, we may give our car to the service center to be serviced.
- The existence of consideration depends upon its type i.e. the monetary presence of consideration is not mandatory.
How Does it Work?
Bailment is an agreement that could be oral or written mutually agreed upon between the person giving possession and the person taking possession which might involve consideration. The bailor transfers the possession to the bailee for any mutually agreed purpose. The bailee fulfills the terms, in the end, the bailee transfers the possession of such bailed asset back to the bailor and the bailor pays certain consideration if agreed upon.
Types of Bailment Contract
#1 – Gratuitous
This type does not include any kind of consideration, in other words, the bailment with no consideration is gratuitous. They may either be for the benefits of bailee or bailor or maybe for both, for instance, parking the car at your friend’s house due to lack of space, giving the car to your friend for use, etc.
#2 – Non-Gratuitous
Similarly, those bailments in which bailee gives some sort of consideration to the bailor are non-gratuitous, they are generally entered into for the sake of earning, for instance, hiring of a motor vehicle from some hiring agency on the agreement of payment of hiring charges.
Examples of Bailment
- Where one person is handing over the keys of his/her car to the car valet service provider.
- When one person parks his car at his friends or some known house.
- When we give our car to our friend to use.
- When we deposit our shoes at the shoe center while visiting any temple, monuments, etc.
- The most common example is availing locker services from banks i.e. banks are the bailee and the person keeping his belongings in such lockers are bailor and they both agreed upon for some consideration i.e. bailor uses the locker and in turn, bailee charges the consideration for providing such services.
- Transferring of possession by the bailor to the bailee.
- Accepting the possession of the assets by bailee from bailor.
- Completion of such mutually agreed terms by both parties.
- Payment of consideration, if any.
- Handing over of possession back to bailor by bailee.
Essentials of Bailment Contract
- It requires at least two parties i.e. one should be bailor and the other is the bailee.
- Under this agreement or contract is mandatory which might be written or verbal as well.
- After the completion of such agreement entered, the bailee must have returned the possession to the bailor.
Difference between Bailment and Consignment
- Under bailment, the transferor of assets is called bailor and the receiver is called bailee on the other hand, in consignment the transferor is called consignor and the receiver is called consignee.
- Under bailment, the ultimate possession and ownership rest with the bailor but on the other hand under consignment, the consignor has the option to sell out such assets that are handed over to the consignee.
- Bailment does not give any right to transfer the ownership to the bailee but under consignment, the consignor may have to transfer the ownership rights as well in case the consignor sold the consigned assets.
- The assets transferred under bailment are for temporary purpose but in case of consignment, the assets might have converted into permanent possession of consignee in case the assets are sold.
The term ‘Bailment’ it broadly means transferring the possession to some other person to fulfill some predetermined agreement which might require bailee to do something or vice versa on the exchange of some consideration which is not mandatorily required to exist. Generally, the bailor does not enjoy the right to use such bailed assets while they have bailee.
This has been a guide to what is Bailment and its meaning. Here we discuss types and examples of bailment contract along with its features and essentials. You can learn more about finance from the following articles –