legal treatment of commercial transaction

Commercial law is the breach of law which is concerned with rights and duties arising from the supply of goods and services in the way of trade.

The underlying motif that marks out the legal treatment of commercial transaction is a recognition of the need to protect the free flow of trade and to avoid as far as possible the application of rules that will operate to the disadvantage of the bona fide purchaser in the ordinary course of business.

As has been mentioned , the lex mercatoria was international rather than English and when the courts of common law, under the direction of coke cj, began to displace the merchant courts in the early part of the seventeenth century , they did not adopt the lex mercatoria as a corpus of law for disputes between merchants but, through borrowing certain of its rules , continued in the main to apply the principles of common law with which they were familiar, while making gradual adjustments designed to satisfy the merchant that he could get as good a service from them as he had previously enjoyed from his own courts . But the approach was unsystematic and some of the deviations from the law merchant were unfortunate. the moulding of the diffuse collections of rules into a coherent body of commercial law was largely the work of lord Mansfield , who is rightly considered the founder of English commercial law , building upon the earlier labour of holt cj, who had laid the foundations of law relating to negotiable instruments, bailment and agency, lord Mansfield proceeded to reduce the vast mass of case law on commercial disputes to an ordered structure, combining a mastery of the common law with a profound knowledge of foreign legal systems and a deep insight into the methods and usages of the mercantile world.

Commercial law is the concerned with commercial translation – that is to say, transactions which both parties deal with each other in the courses of business . Although the sale and supply of goods is usually the main type of commercial transaction, other contracts for the provision of services in a business context are also important types of commercial transactions.

International commercial law is the part of commercial law which is concerned primarily with commercial transactions entered into between parties with a cross border or international elements- for example, where the goods are to shipped from one country to another, or the provision of insurance services is offered by the insurer for the protection of good being moved from one country to another.

Commercial law is an expression incapable of strict definition, but it is used to comprehend all that portion of the law of England which is more especially concerned with commerce, trade and business. (hw Disney the elements of commercial law 1993) p1

The object of commerce is to deal in merchandise and if we adopt this criterion, commercial law can be defined as the special rules which apply to contract for sale of goods and to such contracts as are ancillary thereto, namely, contracts for the carriage and insurance of goods and contracts the main purpose of which is to finance the carrying out of contracts of sale. ( hc gutteridge , contract and commercial law , (1935) 51 lqr 117)

Professor sir Roy Goode, the leading academic commercial lawyer in the country, has described commercial law as ‘that branch of law which is concerned with rights and duties arising from the supply of goods and services in the way of trade,

Commercial law is the law of commerce. it is concerned with commercial transaction , ie transactions in which both parties deal with each other in the course of business . the essence of a commercial contract caught by the act can be gleaned from s2(1) which provide that the act ‘applies to a contract for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business , other than an excepted contract, the paradigm commercial transaction is the sale and supply of goods by one merchant to another . however , there are many other types of commercial transaction , eg contracts for carriage of goods , contracts for the insurance of goods , contract for the finance of sale transaction, equipment leasing agreements, receivables financing arrangements and so on.

Commercial law is pragmatic and responsive subject which looks to facilitate the commercial practices of the business community. As those practices change and develop, often to accommodate new technology, the contents of commercial law may change and develop with them. A rigid definition of the scope of the subject would only inhibit this process .

I shall treat commercial law as the body of law which governs commercial transaction , that is, agreements and arrangements between professionals for the provision and acquisition of goods, services and facilities in the way of trade. Commercial law as thus defined possesses four characteristics. It is based on transactions not on institutes, it is concerned primarily with dealings between merchants, in the broad sense of professionals as opposed to consumers, it is centred on contract and on the usages of the market , and it is concerned with a large mass of transactions in which each participant is a regular player, so that the transactions are typical and in large measure repetitive and lend themselves to a substantial measure of standardised treatment.


It has been said that modern commercial law has its roots in the lex mercatoria or the law merchant of the middle ages. In middle ages, traders who travelled from place to place selling and buying goods had their disputes settled by special local courts –such as the courts of the fairs and boroughs, and the staple courts, where the judge and jury were merchants themselves. These merchant courts would decide cases quickly and apply the lex mercatori as opposed to the local law. It was during this time that some of the most important areas of modern commercial law took root—the law on bills of exchange, bills of lading, charterparties etc. The lex mercatoria was an international law of commerce –it was based largely on the general / common customs and practices of merchants. In England, in the 15th – 16th centuries, most of the business of the merchant courts was taken over by the court of admiralty and the 17th century, the court of admiralty was itself taken over by the common law courts. The common law courts ensured that some principles of the lex mercatoria were retained for the commercial litigation—by the 18th century, through the work of sir john Holt (Chief Justice 1689-1710) and Lord Mansfield (Chief Justice 1756-1788). Holt CJ was largely responsible for the developments in the law on negotiable instruments, bailment and agency.

Over the 17th and 18th centuries, the Lex Mercatoria was gradually incorporated into the national laws of the different regions in Europe. Lex Mercatoria soon lost its international character. However, in the second half of the 20th century, it started to regain its international flavour in the light of the work undertaken by international bodies such as the Hague conference on Private International Law, The International Institute For The Unification Of Private Law (UNIDROIT), the UN Commission On Uniform Trade Law (UNCITRAL), The International Chamber Of Commerce (ICC), The Council Of Europe and The EC. Like the World Intellectual Property Organization (WIPO) is obviously an agency with a brief for a special and increasingly autonomous breach of commercial law .The United Nations Economic Commissions For Europe has in the past contributed to the harmonization of commercial law aimed at facilitating trade between the former Eastern bloc and the west.

Key concepts in English commercial law

The concept of a market—As one would expect in a body of law concerned with dealings among merchants, the concept of a market is central to commercial law. By this is meant not necessarily a physical market in which traders strike bargains in praesenti on the floor of the market but a mechanism for bringing together substantial numbers of participants who deal in commodities, securities or money and who make a market by acting both as buyers and as sellers at prices determined by supply and demand. With the advent of telecommunication physical markets are steadily giving way to markets established by computer networks in which the participants are linked to each other and to a central system operated by the relevant exchange for striking bargains and displaying market prices. Commercial law is influenced by the concept of a market in many ways. Parties dealing in a market are deemed to contract with reference to its established and reasonable customs and usages, which can have the effect of giving a special meaning to ordinary words , of importing rights and obligation not normally implied, of permitting tolerances in performance which would not be accepted in the general law of contract and of expanding or restricting remedies for a shortfall in performance , as where a small deficiency in quantity or quality is compensatable by an allowance against the price , to the exclusion of the remedy of termination of the contract. The market price is taken as the reference point in computing damages against a seller who fails to deliver or a buyer who fails to accept the subject –matter of the contract, and a party who reduces his loss by a subsequent sale at a higher price or a subsequent purchase at a lower prices is not normally required to bring this saving into account, contrary to the normal contract rules as to mitigation of damages.

The problem for commercial law is to define the manner in which a usage of the market is to be established, a matter that can be of great difficulty but on which much may turn.

The concept of a course of dealings- since traders are often concerned in a continuous and consistent course of dealing with each other , it is taken for granted that the usual terms apply, whether or not spelled out in the contract. Terms implied by a course of dealing are thus a fruitful source of implication into commercial contracts.

The concept of negotiability

A key feature of commercial law is its recognition of the need for the ready marketability of commercial assets , in particular goods, money obligations and securities . hence the development of documents of title and negotiable instruments and securities, the delivery of which (with any necessary indorsement ) passes constructive possession (good)or legal title (instruments and securities )to the underlying rights. hence also the rule, confined to negotiable instruments, that a holder in due course acquires a title free from equities and defects in the title of his transferor. The concept of negotiability derives from the old law merchant and is a particular characteristic of commercial law. Its importance in facilitating dealings with goods in transit and with negotiable securities may be expected to decline as systems evolve for the paperless transfer of good and securities , an evolution which the draftsman of a commercial code will have to ready to accommodate . the same is true of negotiable instruments payable at sight or on demand , since these are payment documents rather than credit instruments and in relative terms are gradually giving way to electronic funds transfer. By contrast, term instruments may be expected to retain their vigour, since there seems no reasonable prospect of devising a commercially viable system for replicating electronically the negotiability of a paper document. ‘’ The documentary credit and the demand guarantee do not fit into the traditional rules governing formation of contracts. In mercantile usage they take effect from the moment of issue, and are therefore not dependent for their validity on acceptance, consideration or reliance by the beneficiary. They are best regarded as a modern form of specialty, an abstract payment undertaking binding solely by virtue of its issue’’. Roy goode, adstract payment undertaking and the rules of the icc , 39 st. Louis U.L.J. 725(731).

The importance of customs or usages of trade or locality- even without a market a court will recognize established customs or usages , such as those a particular trade or locality, where the circumstances indicate that the parties were contracting by reference to the customs or usages . The enforceability of abstract payment undertakings is an important example to which I shall allude in more detail shortly.

The concept of abstract payment undertakings –

General contract law requires a promise not made under seal to be supported by consideration if it is to be enforceable. But all kinds of legal magic can be worked by mercantile usage. It is generally accepted—though to this day there are no English decisions directly on the point—that certain types of payment undertaking become binding when communicated to the beneficiary, despite the absence of any consideration or any act of reliance on the part of the beneficiary. I refer in particular to the obligations of a bank issuing a documentary credit, a standby credit and a performance bond or guarantee. The contracts engendered by such undertakings are of a peculiar kind, since they are neither unilateral nor bilateral in the ordinary sense, they involve no acceptance of an offer and no consideration. Exactly what types of payment undertaking will be so enforced remains a matter of conjecture. Is this privileged status confined to undertakings by bank? And if so, which types of undertaking? The answer apparently lies in mercantile custom and usage, a force so powerful that it can sweep aside without argument what is generally considered to be a basic principle of contract law.

The concept of good faith—in English law, as most law students wold have been instructed, there is no general principal of good faith . a party can exercise aa right to terminate a contract for bench even though it causes him no loss and his sole motive is to escape the consequences of a bad bargain, and a party able to perform a contract without need of the other party,s cooperation can proceed with performance despite the other party,s insistence that the contract should not be performed , and even when hat party no larger ha an interest in the performance, and then claim payment of the contract sum. gfy

When commercial people deal with each other , they usually do so in a spirit of trust and confidence. As Bowen LJ put it in Sanders Bros v Maclean and Co (1883) 11 QBD 327 at 343:

‘ credit, not distrust , is the basis of commercial dealing; mercantile genius consists principally in knowing whom to trust and with whom to deal, and commercial intercourse and communication is no more based on the supposition of frud than it is on the supposition of forgery,

As Bingham LJ stated in Interfoto Picture Library LTD v Stiletto Visual Programmes LTD (1988) 1 All ER 348 at 352-353:

‘ in many civil law system, and perhaps in the most legal system outside the common law world , the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith . this does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is most aptly conveyed by such metaphorical colloquialisms as “playing fair" , “coming clean" or “putting one’s cards face upwards on the table". It is in essence a principle of fair and open dealing…….

English law has, characteristically, committed itself to no such overriding principle , but has developed piecemeal solutions in response to demonstrated problems of unfairness. Many examples could be given . thus equity has intervened to strike down unconscionable bargains. Parliament has stepped into regulate the imposition of exemption clauses and the form of certain hire- purchase agreements. The common law also has made its contribution , by holding that certain classes of contract require the utmost good faith, by treating as irrevocable what purport to be agreed estimates of damage but are in truth a disguised penalty for breach , and in many other ways".

The reluctance of English courts to recognize a duty to negotiate in good faith or to interfere with bargains freely made is an aspect of a general mistrust of what are perceived to be over-broad principle not susceptible to clear or consistent application. Thus in contrast to continental and anercian legal systems, English law does not posses any general requirement of good faith . a duty of good faith is owned in particular situations or relationships. For example, a person seeking to displace another’s title or obtain priority over an earlier security interest must show that he himself took in good faith; an agent or other fiduciary owes a duty of good faith to his principle or other counterparty to the fiduciary relationship ; good faith is required in contracts of insurance and other contracts characterized as uberimmae 95 goode commercial law

First, what do we mean by good faith ? The concept seems impossible to define with any degree of precision. Good faith means different things in different jurisdictions and within different legal traditions. Secondly, the uncertain scope of the concept would make it difficult to predict the outcome of legal disputes, something valued by the commercial community. Thirdly, a general concept of good faith seems unnecessary when there are a number of alternative mechanisms already available to the courts to regulate the conduct of negotiations and the performance of contracts.

Part b

A company BETA LTD. In London England , made a contract to buy a synthetic fuel oil from Alpha oil, a production company , in u.k , the contract is governed by English law , according to contract beta ltd will take delivery in September, but in July the price of fuel oil were increases greatly on the global market . so the beta ltd emailed alpha oil contains with the offers to pay with additional 5% on the purchase price if alpha ia able to deliver on time .