On loan

Boat Show Traps and Pitfalls

Recently at the Sanctuary Cove boat show in Queensland, I saw several signs on vessels similar to, ‘Vessel On Loan By The Owner’. And while on face value this appears to be the act of a good samaritan, by helping out its respective broker or builder, the questions I found myself asking were what are the broader issues, legal responsibilities and requirements for all parties to be protected if it all goes awry. Similarly, it was recently put to me, what are the liabilities and issues that may arise when a vessel is loaned to a prospective purchaser in lieu of their vessel not being launched in time.

The loaning of the vessel is built on trust and there is an implied term that the builder or broker and customer will have the skill and knowledge how to handle and look after the boat in question. This implied term forms part of the common law contract known as a ‘bailment’. Whereby the owner (the bailor) of the boat creates a temporary right when lending the vessel to the borrower (the bailee) for an agreed purpose. In some situations the parties may have drafted terms of an agreement and these are referred to as express terms however, more often than not when it comes to boats for some reason the written word is replaced by the gentleman’s hand shake or should I say gentleperson’s hand shake.

In essence what occurs is the bailee takes possession of the boat while the bailor retains the ownership interest. During the specific period of bailment, the bailee’s interest in the property is superior to that of all others, including the bailor, unless the bailee breaches some term of the agreement.

There are three types of bailments:

(1) for the benefit of the bailor and bailee; a bailment for the mutual benefit of the parties is created when both parties take a benefit such as when a boat is repaired the repairer or the bailee receives a fee in exchange for his or her work while the bailor receives a repaired boat, obviously a pretty common situation.

(2) for the sole benefit of the bailor; where the owner leaves the boat at a marina and the marina operator offers to look after it free of charge.

(3) for the sole benefit of the bailee; this being typically the situations in discussion where the boat builder or broker has taken the benefit of showing the vessel ultimately for making sales. Additionally, a bailment is created when the keys to a boat are given to a person to take the boat for the agreed purpose either to the boat show or for simply for the bailee to use the boat for their enjoyment.

As to defining a bailment, when a boat builder loans a boat to a customer in lieu of their boat not being ready on time, it could be argued that this bailment could fall in any one of the above camps, the question being who takes the benefit? And becomes a significant question in respect to liability as discussed below.

In understanding whether a bailment is created three elements are generally necessary:

Delivery

The boat needs to be delivered to a bailee ultimately allowing actual possession of or control over the boat. The delivery of actual possession of the boat allows the bailee to accomplish their duties without the interference of others. However, control is not necessarily the same as physical custody and could be where the boat owner simply gives the keys of the boat allowing access. The law construes such action as the equivalent of the physical transfer of the item.

Acceptance

A requisite to the creation of a bailment is the express or implied acceptance of possession of or control over the boat by the bailee. That is a person cannot unwittingly become a bailee. As a bailment is a contract, knowledge and acceptance of its terms are essential to its enforcement.

Consideration

Is the exchange of something of value and must be present for a bailment to exist. As long as one party gives up something of value such as their boat, this action is regarded as good consideration. And it is sufficient that the bailor or boat owner/builder suffers loss of use of the property by relinquishing its control to the bailee.

Rights and Liabilities

The duty of care that must be exercised by a bailee varies, depending on the type of bailment.

In a bailment for mutual benefit, the bailee must take reasonable care of the bailed property and may be held liable for any damages incurred from their negligence. When a bailor receives the sole benefit from the bailment, the bailee has a lesser duty to care for the property and is financially responsible only if they have been grossly negligent or have acted in bad faith in taking care of the property. In contrast, where a bailee receives sole benefit they must exercise extraordinary care for the property. In this third scenario the stakes are high for the broker or boat builder or customer who is loaned the boat, not only should there be a written agreement with respect to this scenario, an insurance policy should reflect the required coverage. Additionally, in respect to boat shows the boat show organisers policy needs to respond adequately in this situation.

Termination

A bailment is ended when its purpose has been achieved, when the parties agree that it is terminated, or when the bailed property is destroyed. Therefore, once boat show or loan period finishes, the boat needs to be returned to the bailor or otherwise disposed of pursuant to the bailor’s directions.

Once the purpose of the bailment has been completed, the bailee usually must return the property to the bailor depending upon the terms of the contract. If, through no fault of there own, the return of the property is delayed or for example becomes impossible due a cyclone the bailee will not be held liable for non-delivery on demand this is often referred to as ‘force majeure’ and such a clause should always be contemplated. However, the bailee will be responsible for the Tort of conversion for unjustifiable failure to redeliver the property as well as its unauthorized use where the boat is not returned as agreed. Therefore, the importance of terms such as, delivery times and place are paramount to avoid possible future tensions.

Smooth sailing…

At the end of the day a properly drafted contract will assist in keeping all those involved friends as often the offer of a loaned boat comes on the back of some form of relationship involving trust. Whether it be a boat builder or broker exhibiting borrowed boat or a builder lending a boat to a customer, in essence we are not inventing the wheel, as a bailment was created in every situation. However, whether a written document formed the basis of all these loan situations is questionable. And as they say prevention is better than the cure as it’s the unforeseen issues that need to be discussed between the boat buider, broker/exhibitor, customer and the relevant insurer and possibly a lawyer with the prerequisite knowledge of boats and boat shows.