Bailor And Bailee In Banking: 5 Things To Know

1) Who's who?

In banking law, a customer is considered as the bailor and a banker is considered as the bailee.

2) Dictionary Meaning of the Terms

Oxford dictionaries define the terms as follows:

Bailor: A person or party that entrusts goods to a bailee.

Bailee: A person or party to whom goods are delivered for a purpose, such as custody or repair, without transfer of ownership.

Bailment: An act of delivering goods to a bailee for a particular purpose, without transfer of ownership.

3) Why is the customer - the bailor and the banker - the bailee? Explained.

In case of 'safe custody facility', the bank accepts responsibility of safe custody of the sealed boxes and packets. The banker can open such box only on the duly authorised instructions of that customer.

The legal relationship that arises in case of safe custody/deposit is that of bailment. The customer, who deposits the things in the box for safe custody with the bank, becomes the 'bailor', and the bank becomes the 'bailee'.

Safe custody facility is offered for an agreed period of time for which the customer is willing to keep and make payment of the necessary charges. The bailee (banker) shall return the contents of the sealed safe custody box to the bailor (customer) as soon as the purpose for which bailment was created is over.

Some of the occasions, bankers do not charge fees for safe custody facility for customers who have been associated with them for a long period of time or customers who are maintaining large amount of balance in their accounts or opening fixed deposits, etc. In such cases, the banker becomes a 'gratuitous bailee'. In other cases, where charges is levied, the banker becomes a 'bailee for reward'.

4) Law of bailment in India

The law of bailment is explained in the Section 148 of the Contract Act, 1872, which includes the definitions of "Bailment", "bailor" and "bailee". The contents of Section 148 is reproduced hereunder:—

“A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the "bailor". The person to whom they are delivered is called the "bailee'.

Explanation: If a person already in possession of the goods of another contract to hold them as a bailee, he thereby becomes the bailee, and the owner becomes the bailor of such goods, although they may not have been delivered by way of bailment.”

5) Case law

In United Commercial Bank vs Hem Chandra Sarkar [AIR 1990 AIR 1329], it was held by the Supreme Court of India that: 

"The banker bailee gratuitous or for reward is bound to take the same care of the property entrusted to him as a reasonably prudent and careful man may fairly be expected to take of his own property of the like description. In fact a paid bailee must use the greatest possible care and is expected to employ all precautions in respect of the goods deposited with him. If the property is not delivered to the true owner, the banker cannot avoid his liability in conversion. In the light of these principles the Bank could not avoid the liability to return the goods as agreed upon or to pay an equivalent amount to the plaintiff. Even if we assume that the goods were delivered to a wrong person, the Bank has to own the responsibility to pay the plaintiff.

The liability of banker to customer in such a case is absolute even if no negligence is proved. In Halsbury's Laws of England (supra, para 94), it is stated "where the bank delivers the goods to the wrong person, whereby they are lost to the owner, the liability of the bank is absolute, though there is no element of negligence, as where delivery is obtained by means of an artfully forged order. In law the banker could contract out of this liability, but he would be unlikely to do so in practice."

(UCO Bank was formerly known as United Commercial Bank)

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