Bailment on Terms: Developing the argument

I recently wrote about my ongoing project on bailments and the rule of law. Here I will develop the argument. 

A bailment is a voluntary assumption of responsibility for another's property. A bailment relationship may exist between A and C where A contracts with B and A consents that B may sub-contract the work to C. The law of contract says the terms C performs on are not binding on A because no consideration for the promise made by A moved from C. However, bailment on terms is a rule that allows C to rely on the terms they perform on against A when A consents to B sub-contracting the work to C on those terms or A and B consent that C should benefit from those terms.

I argue this is contrary to the rule of law, first because it is a duplication. A duplication is where two rules function to resolve one dispute. To avoid duplication we must be able to rationally distinguish the rule in bailments from the rule in contract. If not, duplication is contrary to the rule of law because the rules are only distinguishable based on the language the court is speaking. That is a discretion, not law. 

Whether bailments on terms can be rationally distinguished from contract depends on whether bailments is a contextual or conceptual category of law. Conceptual categories of law are based on generic conceptions of events that give rise to rights according to the formal rules of the category a dispute falls into. Contextual categories of law bring together all the law on a particular topic, such as medical law or company law. The formal conceptual rules are the tools that function to resolve the dispute the context it arises in. Therefore, if bailments is a contextual category of law, the formal conceptual rules apply to it. If it is a conceptual category of law, its rules are not dependent on other categories. 

Therefore, if bailments is a contextual category of law, if we are to rationally distinguish bailment on terms from contract, it must be performing a function independent of binding consenting parties to terms. Otherwise, there would be two rules functioning to resolve one dispute, and 'bailments' is not a rational reason for distinction, it is the language spoken, a discretion. I explained in my last post why the reasons for the rule cannot place it within the existing conceptual framework, therefore the reason for it to function must be that it is unique to bailments as an independent conceptual category.

If bailments is a conceptual category of law, formally categorising the rule as unique does not overcome the problem of duplication because the reasoning is circular. We cannot rationally distinguish the rule from contract if all we can say is the rule applies where there is a voluntary assumption of responsibility for another's property. That is to reason a consenting third party is bound because there was a bailment and in bailments consenting third parties are bound. Likewise, a bailee is liable because they volunteered and a volunteer is liable because there was a bailment. There is nothing rational here to distinguish why volunteering or consenting means a distinct result is achieved in bailments, only that it is. They are descriptive terms, not substantive reasons for reaching a distinct result. The only difference is the language spoken. 

No doubt consent is a rational reason to bind someone to terms. Therefore, it might be argued that the rule should be followed to promote the rule of law. The precedent it sets becomes an independent, authoritative reason because we can be certain that where there is a bailment consenting third parties are bound and it takes priority over contract. That ensures equality before the law to an acceptable degree, even if bailments is not rationally distinguishable from contract. The passage of time means that to treat the next bailments case differently would result in unequal treatment.

However, if contract rules are under-inclusive relative to its substantive objectives, the way to resolve that is to have an open discussion of when parties should be bound to contractual terms. Instead, by resorting to verbal formulae to bind consenting but non-contracting parties causes a second problem for the rule of law. Because bailments is defined only by its descriptive terms, it is only those descriptive terms that determine the boundaries of bailments. Therefore, they can be lightly manoeuvred whenever a judge, at their discretion, thinks the third party should be bound. 'Bailments', therefore, is an inherently uncertain concept. Stapleton, for example, referred to assumptions of responsibility as "labile", while Atiyah called them "contract". The lack of certainty as to what a bailment is means that to follow the rule would continue to erode the rule of law. There is reduced legal certainty because the parties cannot be sure which language the court will speak, contract or bailments, and there is not equality before the law because the rights and liabilities of the parties will depend on what language the court does choose to speak. 

That discretion being exercised can be evidenced by looking at the facts in the like cases of The Starsin, The Eurymedon, The New York Star, Scruttons, The Rigoletto, and Singer. I shall not go into the details but they evidence that the descriptive term 'continuous possession' is lightly manoeuvred to reach the desired outcome in the cases without rationalising why continuous possession should matter in reaching a distinct outcome to what the formal rules of contract demand. The outcome is that these like cases have been treated differently in an inconsistent and unequal way. If The Eurymedon, The New York Star, and Scruttons were correct in their judgments, The Rigoletto, Singer, and The Starsin were incorrectly decided on the bailments issues.

Therefore, the duplication of the rules matters because if parties cannot be certain when consent to contractual terms is binding, the rule risks foisting contractual liability on to the parties even if they did not intend their consent to sub-contract to be binding with the sub-contractor. That risks redistributing the contractual allocation of risk and undermining their individual liberty. 

In turn, foisting contractual liability, and thus personal rights, onto the parties can reorder established legal rules, such as in secured credit transactions. If courts speak the language of bailments, a creditor's security, and property right, may be treated as inferior to a sub-purchasers personal right to the property. That may be undesirable because a rational response for the increased risk to the creditor is for the creditor to increase the cost of security, or to limit the use of the property bailed over, which is rarely desirable.

Finally, the uncertainty of bailments erodes the rule of law at a principled level. If its boundaries are uncertain, parties can take advantage of that uncertainty by switching between causes of action to avoid limitations of the other. Parties can then win or lose cases without good reason and the law is harder to apply.

The duplication has produced a schism in law, a conceptual incoherence that should be resolved. Maybe consent should be binding, and/or the rule is worth retaining in particular contexts but the way to resolve it is not resort to verbal formulae or semantic tricks because it weakens the rule of law. There should be one rule, not two. 

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.