Tuesday, November 25, 2008

Bailment (2)

If a deposit in a cheque account is a bailment, then the bank could not record the cash as an asset on its balance sheet. It could not use the cash for its own purposes.

During the 19th century, the British Law Lords ruled that a demand deposit is not a bailment. This decision has since between adopted by courts all over the world.

In a case in 1811, Sir William Grant ruled that money paid into a bank is not a bailment, but a loan. The banker is not a bailee, but a debtor (Carr v Carr). In a subsequent case, he said, “The money paid into a banker immediately becomes a part of his general assets and he is merely a creditor for the amount" (Devayne v Noble).

Lord Cottenham summed up the early decisions in Foley v. Hill and Others.

Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it . . . . The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal....
According to modern law, a bank deposit is not a bailment, so the bank is entitled to record the deposit as an asset on its balance sheet.

I doubt that this is understood by most bank depositors.

1 comment:

Gene Redlin said...

I don't really understand this.

I'm trying.