England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM COLCHESTER COUNTY COURT
HIS HONOUR JUDGE PETER DEDMAN

		Royal Courts of Justice Strand, London, WC2A 2LL Thursday 15th February 2001

LORD JUSTICE DYSON :

1. This is an appeal from the decision of Judge Peter Dedman of 8 September 2000, whereby he gave judgment in favour of P&O Trans European Limited ("P&O") and awarded damages in the sum of £35,986.08 for breach of duty owed by Wincanton Ltd ("Wincanton") as bailee.

The facts

2. P&O has at all material times carried on the business of warehousing at its premises at Middlemarch Business Park, Coventry. Harvard International Ltd is part of the Alba group of companies. I shall refer to it as "Alba". From time to time, P&O stored large quantities of Alba's goods in its warehouse pursuant to a contract dated 24^th April 1996. Wincanton is a road haulier. From about April or May 1997, Alba engaged Wincanton to carry its goods from P&O's warehouse and deliver them to its (Alba's) customers. There were, therefore, contracts between P&O and Alba, and between Alba and Wincanton. It is common ground that there was no contract between P&O and Wincanton.
3. To facilitate the handling of the Alba goods, they would usually be transported and stored on wooden pallets. There were at least two types of pallet in use in P&O's warehouse. One was a white pallet supplied by Alba which is of no relevance to the present claim. The other was a blue pallet. The blue pallets were owned by Chep UK Ltd ("Cheps"), a GKN company, and they were hired out to P&O. Cheps hired out these blue pallets to various companies, and not just to P&O. Once a blue pallet was put into general circulation, there was no means of identifying the warehouse from which it had emanated: it was identifiable as a Cheps pallet, but no more than that.
4. P&O adopted the Cheps system of pallet exchange notes for the purpose of keeping track of the blue pallets. This involved the following: when the haulier's driver collected a consignment of goods from the warehouse, the number of pallets being despatched would be identified on the pallet exchange note and signed for by the driver. If pallets were returned, these would also be recorded on the note. There was no evidence that these were the same pallets as had been delivered on that occasion. There was a column headed "owed" for any shortfall. If pallets were retained by the customer, Wincanton would complete the pallet exchange note at the customer's premises and obtain a signature from the customer evidencing its receipt of the pallets.
5. Initially, the pallets used on the Alba contract were the white pallets. But from about May 1997 many of the Alba deliveries that were effected from the P&O warehouse were on blue pallets, and were subject to the pallet exchange note system. By about September 1997, P&O was complaining to Wincanton that many of its blue pallets were not being returned. A meeting took place on 10 September between Mr Summerhayes of P&O and Mr Prescott of Wincanton, and an agreement was reached that the pallets owing to P&O would be returned "on a regular basis in an effort to reduce the overall balance down to a more manageable level". As at 19 September, the balance outstanding was said by P&O to be 2225 pallets. Although there was something of an improvement in the rate of return of blue pallets, by February 1999, P&O was claiming a shortfall of 2847 pallets.
6. The judge accepted the evidence and arguments of P&O, and awarded damages on the basis of a breach of duty owed by Wincanton as bailee in respect of a failure to return 2847 pallets.

The judgment

7. The judge said that "perhaps the situation prevailing here slots most neatly into the description of commodatum or gratuitous loan….the goods to be delivered are perched on the pallets which everyone knows will be reused for the same purpose once the goods delivered have been off-loaded". He drew attention to the fact that a transaction may still qualify as a bailment although the identity of the goods is to be altered by the bailee, as where grapes are delivered to be pressed into wine or corn to be ground into flour. He referred to New Zealand authority to the effect that a bailment does not necessarily involve an obligation on the part of the bailee to deliver back to the bailor the very thing bailed. Turning to the facts of this case, he accepted the submission on behalf of P&O that it was "entitled to accept the reality of the matter in being prepared to accept that they will receive similar though not identical pallets back". Wincanton operated the Cheps system (i.e. the pallet exchange notes) and was therefore "aware of the nature of the transaction from the word go and certainly by August 1997". Accordingly, there was a bailment of the pallets to Wincanton, and it did not end by the simple delivery of the pallets to Alba's customers. There was a continuing duty on Wincanton to look after the pallets. As to the nature of that duty, he held that it was "to take proper care of the chattel, to use it for the purpose for which it was lent and to return it at the appointed time (or if no time or venue is appointed to do what is reasonable) and restore it in a proper condition and he must show the utmost diligence being liable for even slight neglect (see Palmer at p 665)". He concluded that Wincanton had failed to satisfy him that its duties were discharged "to the high standard required by the law of bailment".

Was there a bailment at all?

8. The primary submission advanced by Professor Palmer on behalf of Wincanton is that at no stage was there a relationship of bailor/bailee between P&O and Wincanton. He founded this submission on two grounds. First, P&O had no interest in the blue pallets, since it did not have an immediate right to possession of them. He sought to base this argument primarily on the submission that the terms of its contract with P&O gave Cheps a superior right to possession of the pallets. This point was not argued in the court below, and Mr Rivalland was given very short notice that Wincanton would seek to argue it on appeal. It became clear that the resolution of this point would require a careful consideration of authorities which were not before the court, so that an adjournment would be necessary. In those circumstances, we ruled that it was too late to advance the argument.
9. The second basis on which Professor Palmer contends that there was no bailment of the blue pallets at all is that Wincanton was not voluntarily in possession of them. It is said that when collections from the Middlemarch warehouse began, Wincanton was unaware of P&O's interest in the pallets, and had no reason not to assume that they belonged to Alba. Professor Palmer submits, therefore, that Wincanton did not owe the duty of a bailee to P&O. He drew our attention to passage in the speech of Lord Goff in The Pioneer Container [1994] 2 AC 324, 342C:

"They incline to the opinion that a sub-bailee can only be said for these purposes to have voluntarily taken into his possession the goods of another if he has sufficient notice that a person other than the bailee is interested in the goods so that it can properly be said that (in addition to his duties to the bailee) he has, by taking the goods into his custody, assumed towards that other person the responsibility for the goods which is characteristic of a bailee."

10. But immediately before being carried by Wincanton to the premises of Alba's customers, these pallets were in the possession of P&O. Wincanton knew that P&O was party to the Cheps scheme. In my judgment, that was sufficient to put Wincanton on notice that P&O had an interest in the pallets which was at least that of a bailee. So far as I am aware, this submission by Professor Palmer was not made to the judge, and in my view there is no evidential basis for it.
11. I am in no doubt that Wincanton was bailee of the pallets until they were delivered to the customers. If one of Wincanton's drivers had sold a pallet instead of delivering it to a customer, there could be no doubt that Wincanton would be liable as a bailee to P&O. The basis of that liability would be that the pallet (to which P&O had a present right to possession) was in the possession of Wincanton, and that it had not delivered the pallet in accordance with P&O's instructions.

Was the bailment ended when the pallets were delivered to Alba's customers?

12. This was the main issue that was argued on the appeal. In the ordinary case, a bailee's duties do not cease until he has redelivered the goods to the bailor or to any other person to whom he has agreed to redeliver them. This "ordinary case" may not apply if the parties have by contract agreed or have otherwise shown that they intend that the bailment should be terminated in some other way.
13. As Professor Palmer points out at pages 1282 ff of his book "Bailment" (2^nd edition), there are a number of categories of what he calls "constructive" or "extended" bailment. Thus there is sub-bailment, which occurs when the bailee of goods transfers possession to a third party for a limited period or for a specific purpose, on the understanding (express or implied) that his own position as bailee is to persist throughout the subsidiary disposition. "A sub-bailee is one to whom actual possession of goods is transferred by someone who is not himself the owner of the goods but has a present right to possession of them as bailee of the owner": per Lord Diplock in China Pacific SA v Food Corporation of India [1982] AC 939, 959. A second category is bailment by attornment. This includes the substitution of one bailee for another, and the withdrawal of an antecedent bailee from his relationship with the bailor. An example of this given by Professor Palmer is where a bailor instructs his original bailee to deliver the goods to a third person, on the understanding that the principal bailee's responsibility shall determine from the moment he relinquishes possession. A third category is what Professor Palmer calls the "springing or substitutional bailment". This occurs where a secondary bailee takes possession of goods with the consent of the principal bailor, but without entering into a contract with him, and without any attornment. If the intermediate bailee remains responsible for the goods while they are in the possession of the secondary bailee, then the transaction is one of sub-bailment. But the terms of the arrangement may be that the intermediate bailee will be exonerated once he has handed over the goods. In determining whether the bailment is a "springing" bailment or a sub-bailment, the primary question is whether the bailor and sub-bailee intend that the latter's duties should continue to be owed through the subsequent bailment.
14. I have mentioned this analysis of the different types of "constructive" or "extended" bailment because the critical question is always whether the parties agreed or intended (expressly or impliedly) that the obligations of the intermediate bailee should continue after he has parted with possession to a third party. In the case of the sub-bailee, such an intention is imputed to the parties because the intermediate bailee retains a present right to possession of the goods as bailee of the owner. Where there is a bailment by attornment, the position is otherwise because the understanding and intention of the parties is that there will be a substitution of a new bailee for the original bailee: in other words, the original bailee will simply drop out of the picture. It will be a question of fact whether the bailor and principal bailee intend that the latter's duties should continue to be owed through the subsequent bailment. Professor Palmer suggests that one significant element in establishing whether there is such an intention is the complexion of the subsequent bailment, and the proposed manner of its determination. If, for instance, the parties have agreed that when the second bailment ends, the goods shall be restored to the bailor via the first bailee, who shall resume possession for that purpose, it may often be inferred that their relationship is one of sub-bailment and that the first bailee remains liable throughout. If on the other hand, redelivery is to be effected through some other medium, it may be easier to infer that the first bailee's responsibilities do not extend beyond the period of his possession.
15. The judge came to the conclusion that the subsequent bailment of the pallets to the retailers was a sub-bailment, and that the obligations of Wincanton continued. He seems to have accepted that the bailment came to an end in relation to the goods that were transported to the retailers upon delivery, but not so as regards the pallets on which the goods were carried. As for the pallets, the judge was heavily influenced by the fact that Wincanton was at all material times aware of, and participated in, the Cheps system. For that reason, he found that it was intended that Wincanton should return to P&O similar, if not identical, pallets to those that it had delivered to the retailers.
16. Mr Rivalland seeks to support the reasoning of the judge. He submits that it was intended by P&O and Wincanton, by virtue of their participation in the Cheps scheme, that Wincanton would not part with possession of pallets to an Alba customer unless (a) it retrieved an equivalent number of pallets from the customer, or (b) it obtained the customer's acknowledgement on the Cheps pallet exchange note that it had taken possession of the pallets from Wincanton. It was intended that it would be a sufficient discharge of Wincanton's duty as bailee to produce to P&O pallets equivalent in number to those delivered to the customer, or a receipt note signed by the customer.
17. Professor Palmer submits that what he characterises as the "floating, peripatetic and interchangeable" nature of the pallets militates against a bailment. In particular, he points to the following features of the arrangement between the parties:

(a) P&O did not demand that the blue pallets originally delivered by it to Wincanton for the purpose of delivering Alba's goods should be retained and returned by Wincanton following the delivery of the goods to the retailers;

(b) P&O did not demand that, where the original pallets were left with a retailer, the same number of blue pallets should be collected by Wincanton from the retailer;

(c) P&O did not demand that blue pallets obtained by Wincanton in exchange or substitution for original pallets delivered to retailers should be returned by Wincanton to P&O;

(d) P&O must have accepted the possibility that Wincanton would come into simultaneous possession of identical and indistinguishable blue pallets hired to Cheps operators other then P&O.

18. I cannot accept the submission of Mr Rivalland. It is common ground that, following delivery of the pallets to the customers, it was not intended that Wincanton should continue to have an immediate right to possession of those pallets. There was no expectation, still less any requirement made by P&O, that Wincanton should retrieve the very pallets on which the deliveries had been effected to the Alba customers. Was there a common intention that Wincanton should continue to have the duties of a bailee after delivery of the pallets until an equivalent number of pallets was returned to P&O or Wincanton had obtained the customer's acknowledgement of receipt on the pallet exchange note? In my view, the mere participation in the Cheps scheme was not sufficient to justify the finding of such an intention. The scheme (in which Wincanton participated as a volunteer) was intended to assist P&O to keep track of and retrieve pallets which it had hired from Cheps. In my view, it is not possible to infer from this bare fact that it was intended that Wincanton would continue to be liable for the pallets after it had parted with possession of them to the customers, and that this liability would be discharged only in one or other of the two circumstances suggested by Mr Rivalland.
19. It was of course open to P&O and Wincanton to make a contract that would govern the carriage of Alba's goods from the warehouse to the premises of the various Alba customers. That contract could have required Wincanton to retrieve the pallets straightaway and return them to P&O. It could have given Wincanton the option of returning the original pallets or replacements, or of obtaining receipts from the customers. There are no doubt many other possibilities. But the essence of bailment is that the bailed property should be returned to the bailor or applied in accordance with his instructions when the bailment terminates. It should be returned in its original form, or where it is agreed that it should be altered, in its altered form: see Palmer page 135. On the face of it, therefore, it is difficult to see how, in the absence of a contractual obligation to do so, Wincanton could be under a duty as bailee to return equivalent pallets or obtain acknowledgement of receipt from the customers.
20. Mr Rivalland submits, however, that this is to take too narrow and rigid a view of the duties of a bailee. He points out that the gratuitous loan of consumables does not fit into the traditional analysis of the essence of bailment, and yet the law imposes on a borrower of a consumable the obligation to return something equivalent to what he has borrowed. This is mutuum. The law is summarised in 2 Halsbury's Laws of England (4^th edition reissue) paragraph 1834:

"Gratuitous quasi-bailment, or mutuum, is the loan of something which is not to be returned in specie, but which is to be replaced by something similar and equivalent. The contract of mutuum differs from that of gratuitous loan for use, or commodatum, in that in the latter a bare possession of the chattel lent, as distinguished from the property in it, vests in the borrower, the general property in it still remaining in the lender; whereas in mutuum that property in the chattel passes from the lender to the borrower.

a) Mutuum is confined to chattels which are intended to be consumed and which are capable of being estimated by number, weight, or measure, such as money, corn, or wine. A familiar example is a housewife borrowing a packet of sugar from a neighbour.

b) The essence of the transaction in the case of such loans is not that the borrower should return to the lender the identical chattels lent, for such specific return would ordinarily render the loan valueless, but that upon demand or at a fixed date the lender should receive from the borrower an equivalent quantity of goods of similar quality."

21. Mr Rivilland accepts that the present case is not one of mutuum, because the pallets are not consumables. He nevertheless submits that the same principles should apply. I do not agree. In mutuum, the obligation to restore an equivalent of that which has been lent arises out of the agreement between borrower and lender. It is understood between the parties that the original goods cannot be restored to the lender, since the very purpose of the loan is to enable the borrower to consume the goods. But since there has been a loan and not a gift or a sale, it is agreed or understood that the obligation of the borrower is not to restore the original goods, but to deliver to the borrower equivalent replacements. In order to give effect to the transaction, the parties must necessarily have agreed that the restoration of an equivalent would discharge the obligations of the borrower. There is no other way: to insist on the return of the original would defeat and make a nonsense of the loan.
22. But in the case of goods which are not consumables, such as the pallets in this case, these considerations do not apply. I see no reason to extend the scope of the special case of mutuum to non-consumables. No authority has been cited to us which states that, where a person (A), who has possession of non-consumable goods, parts with possession to a third person (B), with the consent of the person (C) who has the immediate right to possession, A is liable to C to restore the original or replacement goods to him.. As I have already said, P&O and Wincanton could have agreed on a number of different ways of discharging Wincanton's obligations upon the delivery of the pallets to the premises of the customers. But they chose not to do so.
23. The judge referred to the decision of the New Zealand Supreme Court Hamilton in Harding v Commissioner of Inland Revenue [1977] 1 NZLR 337 (which in turn applied a dictum in of Turner J in Motor Mart Ltd v Webb [1958] NZLR 773,781) as support for the proposition that a bailment does not necessarily entail that the bailee is under an obligation to redeliver to the bailor the thing bailed. As Professor Palmer points out, both of these cases were ones where the relationship of the parties was governed by contract. They are, therefore, of very limited value in the present context. In my judgment, these authorities cannot be relied on to undermine the well-established principle that, save in exceptional cases such as mutuum, the obligation of a bailee is to restore to the bailee the subject matter of the bailment in its original form, or, where it has been agreed that it may be altered, in its altered form.
24. In my view, P&O seeks in this litigation to impose a duty on Wincanton which could only have been imposed by contract. It is surprising, having regard to the scale and duration of the dealings between these two companies, that their relationship was not made the subject of a contract. But I do not consider that P&O can make good this omission by stretching the boundaries of bailment to unacceptable limits. I would therefore allow the appeal.

Other points

25. Professor Palmer makes other criticisms of the judgment. In particular, he submits that the judge misdirected himself when he held that the duty on Wincanton was to show "the utmost diligence being liable for even slight neglect". The judge referred to page 665 of Palmer. The basis of this part of the judgment is the judge's conclusion that this was a case of commodatum, or gratuitous loan. There are two points here. First, I do not agree that this was a case of commodatum. A gratuitous loan is a "bailment where the chattel is lent by its owner to the bailee for the express purpose of conferring a benefit upon the bailee, without any corresponding advantage to its owner": Halsbury's Laws Volume 2 paragraph 1829. In my judgment, this bailment was of advantage to both parties. The pallets were undoubtedly of value to Wincanton for the purposes of transporting the goods to the premises of the customers. But it must also have been of commercial benefit to P&O that the goods were stored in the warehouse and transported from it on suitable pallets. It was in the commercial interest of P&O in its dealings with Alba to ensure that the goods were properly stored and transported. It follows that if Wincanton was not a gratuitous bailee, its duty was the ordinary duty of a bailee, namely to take reasonable care of the goods, and not to do any intentional act inconsistent with the bailor's rights to them: see Morris v CW Martin Sons Ltd [1966] 1 QB 716, 726,732,738.
26. Professor Palmer submits in the alternative that, even if this was a case of commodatum, the judge pitched the standard of care owed by Wincanton too high. The stringent standard of care found by the judge derives from the observations of Lord Holt in Coggs v Bernard [1703] 2 Ld Raym 909. Professor Palmer submits that the lesser standard expected of a non-gratuitous bailee is more appropriate. Since the point was not fully argued, and it is unnecessary to reach a conclusion on it, I prefer to express no opinion on this.
27. But, in my view, the judge did impose too high a standard of care on Wincanton. He was wrong to hold that Wincanton had to show the utmost diligence being liable for even the "slightest neglect". Furthermore, he did not identify the acts or omissions of Wincanton which constituted the neglect. He did say that Wincanton demonstrated a "rather reckless attitude" to the "understandable objection" of P&O. But it is unclear what the judge considered Wincanton did or failed to do which caused the loss of the pallets. It is for this reason that I do not feel able to decide whether, if it had owed the normal duty of a bailee after delivery to the customers, Wincanton would have been in breach of it. Accordingly, I would also allow this appeal on the ground that, if Wincanton did owe the duty of a bailee after delivery to the customers, the judge misdirected himself as to the requisite standard of care.

Conclusion

28. For the two reasons that I have sought to explain, I would allow this appeal.

SIR RONALD WATERHOUSE:

29. I agree that this appeal should be allowed for the reasons stated by Lord Justice Dyson.
30. In my judgment it is clear that, once the Alba goods had been delivered on blue pallets from the Respondent's warehouse to a customer, any sub-bailment of those specific pallets to the Appellant ended and none of them would be retrieved by the Appellant on the occasion of that delivery. Any blue pallets received by the Appellant on that occasion from the customer or on any other occasion from any customer would not be identifiable as, and would not necessarily be, pallets that had been sub-bailed earlier by the Respondent to the Appellant or even delivered otherwise to the customer on behalf of the Respondent. In these circumstances, despite the attractive arguments advanced by Counsel for the Respondent, I am unable to accept that any fresh or revived bailment in respect of pallets received by the Appellant from a customer can be inferred in favour of the Respondent as bailor or sub-bailor. As Lord Justice Dyson has said, any obligation in respect of those pallets or any continuing obligation generally to account in respect of blue pallets could only have been imposed by an appropriate contract, probably requiring several parties, and the law of bailment should not be extended artificially to fill the gap.

LORD JUSTICE TUCKEY:

31. I agree that the appeal should be allowed for the reasons given in both judgments.
ORDER: Appeal allowed with costs to be subject to detailed assessment, summarily assessed at £13,211.50 payable within 14 days. (Order does not form part of approved Judgment)