In banking, apart from accepting deposits and giving loans, banks also provide safe custody and security-related services. When a bank accepts goods or valuables from a customer for a specific purpose and agrees to return them after the purpose is achieved, the relationship between the bank and the customer becomes that of bailor and bailee.
This relationship is governed by the Indian Contract Act, 1872, and is very important for JAIIB and CAIIB exams from a legal and practical banking perspective.
Meaning of Bailment
According to Section 148 of the Indian Contract Act, 1872, a bailment is the delivery of goods by one person to another for some purpose, upon a contract that the goods shall, when the purpose is accomplished, be returned or disposed of in accordance with the directions of the person delivering them.
The person who delivers the goods is called the bailor, and the person to whom the goods are delivered is called the bailee.
In banking transactions:
- Customer = Bailor
- Bank = Bailee
When Does the Bailor–Bailee Relationship Arise in Banking?
A bailor–bailee relationship arises when a bank receives movable goods or valuables from a customer for safe custody or security, and ownership of the goods does not pass to the bank.
Common examples include:
- Jewellery or documents kept in safe custody
- Goods pledged as security for a loan
- Articles kept in bank lockers (with certain limitations)
- Securities deposited for a specific purpose
In these cases, the bank does not become the owner of the goods. It only holds them on behalf of the customer.
Essential Elements of Bailment
For a valid bailment relationship to exist, the following conditions must be satisfied:
- Delivery of goods (actual or constructive)
- Delivery must be for some purpose
- Goods must be returned or disposed of as per directions after the purpose is completed
- Ownership of goods remains with the bailor
These points are often tested in objective questions.
Bank as a Bailee
When a bank acts as a bailee, it is expected to take reasonable care of the goods entrusted to it. The level of care required is the same as a prudent person would take of their own goods under similar circumstances.
The bank is not an insurer of the goods, meaning it is not automatically responsible for loss or damage unless negligence is proved.
Duties of a Bank as a Bailee
The duties of a bank acting as a bailee are clearly laid down under the Indian Contract Act. These duties include:
- To take reasonable care of the goods
- To use the goods only for the agreed purpose
- To not make unauthorised use of the goods
- To not mix bailor’s goods with its own goods
- To return the goods after completion of purpose
If the bank fails to perform these duties, it can be held legally liable.
Rights of a Bank as a Bailee
A bank acting as a bailee also enjoys certain rights, such as:
- Right to deliver goods as per bailor’s directions
- Right to take necessary steps to protect goods in emergencies
- Right to claim necessary expenses incurred for safe custody
- Right to compensation if bailor causes loss due to faulty instructions
These rights help protect the bank while performing its duties.
Bailment in Case of Pledge
A pledge is a special type of bailment where goods are delivered as security for a loan.
In this case:
- Customer = Pledgor
- Bank = Pledgee
The bank has the right to:
- Retain goods until loan, interest, and expenses are paid
- Extraordinary expenses incurred for preservation of goods
- Sell the goods after giving reasonable notice if borrower defaults
This is a very important topic for CAIIB exams.
Bailor–Bailee Relationship in Bank Lockers
In the case of bank lockers, the legal position is slightly different. The bank provides a locker facility, but does not know the contents of the locker. Courts have held that the relationship is not a pure bailment, but the bank still has a duty to ensure reasonable safety and security.
For exam purposes, it is important to remember that:
- Bank is responsible for safety of locker infrastructure
- Bank is not responsible for contents unless negligence is proved
Termination of Bailment
The bailor–bailee relationship comes to an end when:
- The purpose of bailment is completed
- The bailor or bailee dies
- Goods are lost or destroyed
- Bailment is inconsistent with agreed terms
- Bailor demands return of goods (in gratuitous bailment)
Difference Between Bailment and Deposit Account
In bailment:
- Ownership remains with customer
- Bank cannot use the goods
- Goods must be returned in original form
In deposit account:
- Ownership of money passes to bank
- Bank can use the money
- Only equivalent amount is returned
This comparison is frequently asked in exams.