Bailment on Terms

It has been a while since I last blogged. Currently I am working on a paper analysing the law of bailments, specifically ‘bailment on terms’. Here I sketch my argument for those interested.

In the law of contract, if A contracts with B and consents to B sub-contracting the performance of the contract to C, there is no contractual obligations owed between A and C. Privity requires consideration to have moved from the promisee to establish privity. Here, consideration has only moved from B for the promises made to A and C. Therefore, A cannot sue C in contract for the performance of the contract. A can overcome this by suing C in tort. However C could not enforce the terms the contract was performed on against A. This places the court in a dilemma. Courts do not want parties avoiding their consensual obligations on a technicality but at the same time are unwilling to introduce exceptions to privity.

A solution lies in the law of bailments through the rule known as bailment on terms. A bailment exists where a bailee voluntarily assumes responsibility for the bailor’s property. The rule stipulates that terms of a contract may be relied upon between A and C to the extent that A consents to B sub-contracting the work to C on terms or to the extent the terms agreed between A and B intend to benefit C. This is a simple solution to the doctrine of privity.

My paper challenges the descriptive and prescriptive reasons for the rule. It argues they do not justify the operation of the rule. This analysis is done within the analytical framework of contextual and conceptual legal categories. It argues that if bailments is a contextual legal category then the descriptive and prescriptive reasons do not justify its operation. If it is a conceptual category then the generic conception of the event that gives rise to liability does not prescribe any distinct or independent justification for why terms should be binding on consent alone. It is argued the rule is simply a thinly veiled attempt to introduce a new normative perspective of contract law that contractual obligations can be binding on consent alone, similar to civil systems. This paper does not challenge the normative appeal of that argument and remains neutral on the question as to whether consideration  should be required. The more modest contribution this paper seeks to make here is that by introducing an alternative normative position this undermines the general primacy of private ordering in English law, the rule of law, and legal certainty. 

The paper begins by introducing the analytical framework. The law divides between contextual and conceptual legal categories. Conceptual categories are based on generic conceptions of events that gives rise to rights. For example, the law of contract is based on the generic conception of a promise, tort on wrongdoing and so on. Contextual categories make up the whole body of law relating to a particular topic i.e. company law or family law. The reoccurrence of conceptual categories of law in different contexts does not threaten their independence. The conceptual rules are applied in different contexts. For example, for a trust to arise the three certainties must be satisfied. Therefore, in securities law, sales law, and local government, for example, for a trust to arise the subject material of the trust must be sufficiently identifiable. 

From this I infer the following framework to assess whether reasons for a rule can justify its operation. The first three depend on a rule being part of a contextual category of law. To justify a rule it must align with the conceptual categories of law. For example, in securities law, an issuer is not contractually liable to investors when securities issues are purchased through an intermediary. The intermediary is the co-contractor with the issuer. Any other conclusion would violate the law of contract’s conceptual rule. 

In situations where the conceptual category is not the master, the prescriptive reasoning for an exception or special rule in a particular context must be sufficiently cogent to extend beyond shallow appeals to justice. If not, it undermines the rule of law and legal certainty. The law would not apply equally to all and it begs the question as to why ‘justice’ prevails in one context but not another. Thus, when securities law does not require certainty of subject matter to establish a trust or financial law does not require consideration from a beneficiary to honour credits opened in their favour by an applicant, clear contextual reasoning has been provided that confines the special rule to the context that poses no immediate risk to the general conceptual rule. However, when the House of Lords allowed beneficiaries of a will to recover in tort upon an expectation interest, this flouted the conceptual rule that it was generally not permitted without delineating what was special about the context of wills. It opens the door to lawyers to test the limits of this new found freedom in other contexts, including commercial law where expectation interests could be highly profitable. 

If neither the descriptive or prescriptive reasons can justify the rule then one may conclude that the rule is wrong if it is part of a contextual category. For example, the High Court held those who set up a company to perpetuate a fraud could be liable for the company’s contractual obligations but could not enforce it. Both the Court of Appeal and Supreme Court swiftly disapproved holding there was no justification for such a ruling that violates contract’s conceptual rules.

Despite this, an alternative explanation for a rule is not that it is bad law but it forms part of the irreducible core of an independent and distinct conceptual category of law. For example, the law of restitution is independent from the law of contract. Money conditionally paid to a seller can be recovered from a seller without having to prove contract and breach. The generic conception of unjust enrichment gives rise to rights independent of those arising out of contract. 

Therefore, for the rule it comes down to this. If bailments is a contextual category of law the descriptive reasons for the rule must align with the conceptual categories of law. If not, the prescriptive reasons must either be sufficiently cogent to justify a special rule in this context or demonstrate why the generic conception of a voluntary assumption of responsibility for another’s property means terms can be binding on consent alone.

The next step then is to identify what those reasons were. They were:

1) consent is sufficient. Drawing an analogy with liens and proclaiming bailments are a branch of the law of property

2) precedent for the rule in Elder, Dempster

3) lacuna in law without an exception 

4) bailments is a conceptual category of law and justice demands the rule be applied.

Taking each briefly in turn. Consent cannot be sufficient. The lien is a false analogy because it does not arise from consent but the operation of law, nor is the lien a personal right. Second, consent cannot be the basis of the rule if bailments is a branch of the law of property because its principles say you cannot create new types of property rights on consent alone. The reasoning is paradoxical.

Second, Elder, Dempster offers only casuistic reasoning, amounting to one line that bailment might have been the reason for what the court held. The House of Lords have subsequently held bailment on terms was not the ratio of the case.

Third, the prescriptive reason for the rule fails because there is no lacuna. The rule simply states an objection to what the law is. Contract law and property law do not recognise third party rights for personal terms. Thus notional appeals to justice are insufficiently cogent reasons to justify why the context of a bailment means a special rule should exist.

Finally this equally applies to the claim bailment is a conceptual category of law. The rule duplicates contractual liability. It offers nothing distinct. This subverts private ordering. Parties have deliberately structured their relationship to avoid contractual liability. The court cannot then duplicate contractual liability where they agreed there should be none. It is problematic as it may encourage free riding. Why should C bother to try to contract with A for the protection and negotiate a price if the court will give that protection for free? It also undermines the rule of law. Why is a bailment or tangibles treated differently from intangibles such as securities. If it is just for a bailee to rely on terms against a non-contracting bailor then why not a non-contracting investor against an issuer. This also undermines legal certainty. We should avoid dogmatism when it comes to legal certainty but within reason. Flouting conceptual rules because it is just to do so risks their entire collapse. 

Therefore my conclusion is the rule should not be retained.