Commercial Law Chapter One Introduction Commercial law is

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Commercial Law Chapter One

Commercial Law Chapter One

Introduction • Commercial law is a dynamic and exciting area of law. It has

Introduction • Commercial law is a dynamic and exciting area of law. It has been flexible in order to keep pace with the rapid changes in business and with the globalization of markets. At the same time, it has been certain in order to assist in the growth and development required in commerce.

 • Commercial law is a subject that is difficult to define. In fact,

• Commercial law is a subject that is difficult to define. In fact, there has never been a universally acceptable definition for this aspect of law. Business dictionary defines commercial law as “legal rules that • 1) determine rights and duties of the parties engaged in commerce • 2 governs disputes arising out of ordinary transaction of the buyer and seller • 3 settles with issues concerned with banking insurance etc”.

 • One thing is however clear. This is that it encompasses the laws

• One thing is however clear. This is that it encompasses the laws that apply to business which include most importantly the law of contract and other aspects of law like law of business organizations or company law, agency, and sale of goods, banking, intellectual property, competition law, taxation law and insurance.

 • This course, Law of Commercial Transaction does not cover all of these

• This course, Law of Commercial Transaction does not cover all of these subjects. Its main objective is to look at certain areas in order to acquire an understanding of themes, principles and practices of commercial law. The areas covered in the course are law of business organizations sale of goods.

Sources • • • Sharea Constitution Statute Law. Judicial Decisions. Customs and Usage.

Sources • • • Sharea Constitution Statute Law. Judicial Decisions. Customs and Usage.

Commercial law and related laws • Difference Between Commercial Law and Business Law •

Commercial law and related laws • Difference Between Commercial Law and Business Law • The difference between commercial law and business law is that • the commercial law governs how corporations are administered and managed, • while business law comprises different practice areas associated with business; such as employment, tax, contract, and transaction law. Commercial law can thus be considered a subset of business law. It covers the formation and administration of business entities including sole proprietorships, limited liability companies (LLCs), partnerships, and corporations.

 • Business law details the ways in which all workers are affected by

• Business law details the ways in which all workers are affected by employment law, including aspects of employment such as hiring and firing and maintaining a fairly managed and safe workplace. Businesses that do not follow these regulations can be sued.

 • Product defects and delivery delays are also covered by business law. Most

• Product defects and delivery delays are also covered by business law. Most guidelines in this area govern interactions between a business and a third party such as a customer, vendor, or supplier. This includes terms and conditions, reselling, and licensing. Intangible items are also covered by business law.

 • Business laws are set by both state and federal governments. The latter

• Business laws are set by both state and federal governments. The latter controls safety and security in the workplace as well as stock purchase guidelines. States then make additional laws as needed.

Tax law • Tax laws are the legal rules and procedures governing how federal,

Tax law • Tax laws are the legal rules and procedures governing how federal, state and local governments calculate the tax you owe. The laws cover income, corporate, excise, luxury, estate and property taxes, to name just a few. • Tax law is also an important part of business law. This discipline includes the advantages and obligations associated with different types of business entities

Corporate law • Corporate law is the body of law governing the rights, relations,

Corporate law • Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and busine sses. It refers to the legal practice relating to, or theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

 • Corporate law tends to be more concerned with goods and services in

• Corporate law tends to be more concerned with goods and services in the market. Many legal issues stem from elements of corporate law. Business laws have a broader legal influence and are more commonly used.

 • Corporate law is created and administered by the Uniform Commercial Unit (UCU),

• Corporate law is created and administered by the Uniform Commercial Unit (UCU), which controls the sale and purchase of goods in the U. S. Most states use this document as a guide for their own laws, although most areas are substantially modified.

 • Corporate law and company law: • Corporate law is a part of

• Corporate law and company law: • Corporate law is a part of the broader Companies law. It is the study of how shareholders, directors, employees, credi tors, and other stakeholders, such as consumers, the community and the environment, interact with one another under the internal rules of the firm (or law of business associations).

 • Other types of business associations can include partnerships, or trusts (like a

• Other types of business associations can include partnerships, or trusts (like a pension fund) or companies limited by guarantee (like some universities or charities). Corporate law is about big business with separate legal personality, with limited or unlimited liability for its members or shareholders. It deals with the firms that are incorporated or registered under the corporate or company law of a sovereign state or their subnational states.

Banking Law • Banking and finance law are closely related to corporate and business

Banking Law • Banking and finance law are closely related to corporate and business law and cover activities such as payment instruments and credit. For most financial issues, both banking and finance play a role. These laws determine who gets money when a check bounces and in other situations where one party must be reimbursed for losses

 • Finance law comprises regulations for the financial industry and its lenders, banks,

• Finance law comprises regulations for the financial industry and its lenders, banks, and institutes. These laws govern financial transactions and vehicles. For example, they ensure that you are able to collect collateral if you provide a loan that is defaulted upon by the borrower. Mortgages and securities agreements are covered under finance law.

Bankruptcy Law • Definition • Bankruptcy is a legal procedure initiated by an individual

Bankruptcy Law • Definition • Bankruptcy is a legal procedure initiated by an individual or a business that cannot pay their debts and seeks to have the debts discharged or reorganized by the courts. The three most common types of bankruptcy proceedings are • individual petitions, • business reorganization and rehabilitation petitions, • and wage earner's plans.

competition law • Competition law is the body of legislation intended to prevent market

competition law • Competition law is the body of legislation intended to prevent market distortion caused by anti-competitive practices on the part of businesses. In the United States, Canada and the European Union, competition law is also known as antitrust law.

 • The purpose of competition law is ensuring a fair marketplace for consumers

• The purpose of competition law is ensuring a fair marketplace for consumers and producers by prohibiting unethical practices designed to garner greater market share than what could be realized through honest competition. The effects of anti-competitive practices include not just difficulty for smaller companies entering or succeeding in a market, but also higher consumer prices, poorer service and less innovation.

Business organizations • In a free market economy, business organizations are a familiar part

Business organizations • In a free market economy, business organizations are a familiar part of everyday life. Business organizations run the supermarkets from which we buy our foods and clothes; they supply the water, gas, and petroleum products we depend on; they publish the books and newspapers we read. We deal with

 • them so often as consumers of their products and services that the

• them so often as consumers of their products and services that the image which the phrase “business organizations” brings to mind is usually of entity concerned with marketing and collecting payments for products and services which they have offered. It is necessary to go behind this image to get to the entities which are the subject of the Law of Business Organizations.

 • Most, if not all, of the business organizations with which lawyers are

• Most, if not all, of the business organizations with which lawyers are concerned are legal entities which have firm-names and head office; they can acquire rights and incur liabilities, and can sue and be sued under their firm names. Business organizations, from a legal viewpoint, are undertakings with more than one member, having assets distinct from the private assets of the members and a formal system of management, which may or may not include members of the organization.

Definition of Business Organization? • Business organization as “any organization arising out of a

Definition of Business Organization? • Business organization as “any organization arising out of a partnership agreement. ” A partnership agreement, is “a contract where by two or more persons who intend to join together and to cooperate undertake to bring together contribution for the purpose of carrying out activities of an economic nature and of participating in the profits and losses arising out there or , if any. ”

 • A business organization is a contractual relationship of two or more persons

• A business organization is a contractual relationship of two or more persons who undertake to bring in contribution with a view to carrying out an economic activity. It is an essential character of a business organization that it should have a profit motive, this being the feature which distinguishes it from an association.

Distinguishing Between Business Organizations and Associations • Association is defined in different legal systems

Distinguishing Between Business Organizations and Associations • Association is defined in different legal systems as “ a grouping formed between two or more persons with a view to obtaining a result other than the securing or sharing of profits. “ What transpires from this definition is the most important distinctive feature of associations, namely profit.

 • If profit is considered to be the underlying motive for the formation

• If profit is considered to be the underlying motive for the formation of a certain organization, then it is said to be a business organization. Associations are always formed for non-profit purposes. Examples are charitable organizations, religious groups, literary clubs, local and international NGOS, etc.

 • Associations are expressly prohibited from engaging in any of the commercial activities.

• Associations are expressly prohibited from engaging in any of the commercial activities. “ A question may be raised in connection with this ban. Assume that a not-for profit association is formed and it eventually engages in profit-seeking activities.

 • Sufficiently, this would serve as a ground for dissolution of the association

• Sufficiently, this would serve as a ground for dissolution of the association by court, on motion of its board of management, or onefifth of the associates, or of the office of associations of the Ministry of Justice.

Cooperative Societies • Cooperative society is generally adopted by groups of individuals who wish

Cooperative Societies • Cooperative society is generally adopted by groups of individuals who wish to pool their resources to gain some advantage in the marketplace. Consumer purchasing cooperatives are formed to obtain lower prices through quantity discounts. Seller marketing cooperatives are formed to control the market and thereby obtain higher sales prices from consumers.

Cooperative Societies shall have one or more of the following objectives • to solve

Cooperative Societies shall have one or more of the following objectives • to solve problems collectively which members cannot individually achieve; • to achieve a better result by coordinating their knowledge, wealth and labor; • to promote self-reliance among members; • to collectively, withstand solve economic problems;

 • to improve the living standards of members by reducing production and service

• to improve the living standards of members by reducing production and service costs by providing input or service at a minimum cost or finding a better price to their products or services; • to expand the mechanism by which technical knowledge could be put into practice; • to develop and promote savings and credit services; • to minimize and reduce the individual impact of risks and uncertainties;

Classification of Business Organizations • Partnerships and Companies • Partnerships. A partnership is an

Classification of Business Organizations • Partnerships and Companies • Partnerships. A partnership is an aggregate or collection of individual members. Thus, in a partnership firm, of paramount importance is personality of the individual partner. This is so, because incapacity, death, or serious disagreement between partners may result in dissolution of the partnership firm.

 • Insofar as intimate personal collaboration is expected of each partner, only persons

• Insofar as intimate personal collaboration is expected of each partner, only persons who know each other very closely may enter into a partnership agreement giving rise to a partnership firm. Consequently, partnerships are suitable for small business involving a relationship of mutual trust and confidence.

 • The partners are agents for each other. Therefore, they are normally jointly

• The partners are agents for each other. Therefore, they are normally jointly and severally liable for the acts of each other and the liability of each partner to third parties is unlimited, although they are liable to contribute to each other’s liability and entitled to claim to an indemnity from the partner at fault.

 • With respect to its length of existence the partnership firm, in the

• With respect to its length of existence the partnership firm, in the absence of a contract to the contrary, comes to an end when a partner dies or becomes insolvent. Hence, the length of existence of the partnership firm is generally considered as contingent.

 • Finally, a partner cannot transfer or assign his interest in the firm

• Finally, a partner cannot transfer or assign his interest in the firm to an outsider or third party and make the transferee or assignee a partner without the consent of all the other partners. In other words, a partner can transfer his share in the firm, but the assignee does not thereby become a partner and is merely entitled to the assigning partner’s share of the profits.

 • Companies. A company is an aggregate or collection of shares or capital.

• Companies. A company is an aggregate or collection of shares or capital. As a result, of capital importance is legal personality of the company. • The company has perpetual succession. As a result, death or insolvency of a shareholder does not affect its existence.

 • With respect to transfer of shares, shares in a company are freely

• With respect to transfer of shares, shares in a company are freely transferable unless the company’s articles of association otherwise provides. Thus, a shareholder can transfer his share and ordinarily the transferee becomes a member.

 • Members of a company are not entitled to take part directly in

• Members of a company are not entitled to take part directly in the management of the company unless they become directors. That is to say, a shareholder of a company acting in his individual capacity cannot bind the firm by his acts. A company is managed by a board of directors, general manager, shareholders‟ meetings, and auditors.

 • Forms of Business Organizations • Though the main classification is between partnerships

• Forms of Business Organizations • Though the main classification is between partnerships and companies, partnerships can be further broken down into four legal forms: ordinary partnership, joint venture, general partnership, and limited partnership. Companies comprise of two legal forms, namely, Share Company and private limited company. Totally, there are six legal forms of business organizations

 • • • Ordinary partnership Joint venture General partnership Limited partnership Share company

• • • Ordinary partnership Joint venture General partnership Limited partnership Share company Private limited company

 • Formation • A Partnership agreement is a contract • The partnership agreement

• Formation • A Partnership agreement is a contract • The partnership agreement is a contract concluded between at least two persons who wish to carry on an enterprise in an organized manner. Thus, the partnership agreement, being a contract, is subject to the Civil Code provisions governing contracts in general.

 • Two or more persons, physical or juristic, can be parties • The

• Two or more persons, physical or juristic, can be parties • The minimum requirement of two persons is true for all business organizations except the share company, for which there must be at least five. The automatic effect of the operation of the rule on the minimum number of persons who can enter into the partnership agreement is the exclusion of sole proprietorships from the Law of Business organizations. Put differently, one person cannot form a business organization by himself.

 • On the other hand, a question arises as to the maximum number

• On the other hand, a question arises as to the maximum number of persons who can be members of a business organization. There is no general limit on the maximum membership size of business organizations, except in the private limited company where it is fixed at fifty.

 • (iii)Intent to Join Together and Cooperate • For a partnership agreement to

• (iii)Intent to Join Together and Cooperate • For a partnership agreement to be valid, the parties to it must have had the intention “to join together and to cooperate. ” In effect, this is to mean that the parties to the partnership agreement acted in the way they did with a view to forming a business organization.

 • In addition, they must have intended to collaborate on an equal footing

• In addition, they must have intended to collaborate on an equal footing though they all need not intend to participate in the management and control of the business organization. The degree of collaboration expected from members varies from one form of business organization to another.

 • Contributions • The parties must undertake to bring in contributions in order

• Contributions • The parties must undertake to bring in contributions in order that a contract subsists as a valid partnership agreement. Contributions can be made in cash, kind, or services. In all business organizations, except in a share company or private limited company, they should be made in cash or kind.

 • Capital contribution includes intangible property. Cases in point are copyrights, utility models,

• Capital contribution includes intangible property. Cases in point are copyrights, utility models, patents, trademarks, service marks, and trade secrets, including debts owed to and the use of property belonging to the contributor.

 • For the purpose of carrying out economic activities • The objective of

• For the purpose of carrying out economic activities • The objective of the parties to a valid partnership agreement must be to engage in economic activities.

 • Participating in the profits and losses arising out thereof • Every party

• Participating in the profits and losses arising out thereof • Every party to the partnership agreement must have the intention to share in the profits and losses. Profits and losses will be distributed between the members in the proportion stipulated in the partnership agreement. In the absence of such stipulation, every partner shall have an equal share in the profits and losses, irrespective of his contribution.

 • Publicity • A further formality requirement imposed on the parties to a

• Publicity • A further formality requirement imposed on the parties to a valid partnership agreement is publicity • Publicity consisted in cumulative fulfillment of • (a) Publication of notice, • (b) Deposit of documents, and registration in the commercial register

 • i. Legal Personality and its Attribute • As far as the law

• i. Legal Personality and its Attribute • As far as the law is concerned, it is not only human beings who count as persons. In some cases, the law creates artificial persons, such as bodies corporate under public law, associations, cooperative societies, and business organizations, which are dealt with legally as if they were people; this is called having legal personality. Only when an entity has legal

 • Capacity. • The fundamental importance of legal personality is that an entity

• Capacity. • The fundamental importance of legal personality is that an entity with legal personality is capable to exercise juridical acts. • (b)Firm name. • Another attribute of a legal person is name. The name of a business organization, firmname, is chosen by the members

 • Head Office. • The head office of a business organization is the

• Head Office. • The head office of a business organization is the place where its principal organs of administration and management are situated and the company is registered. The legal effects of the place of its head office are the same as those of residence for the physical person. The significance of the location of its head office figures prominently in procedural matters in particular in relation to judicial jurisdiction and service of process. Moreover, it determines nationality of the business organization under consideration

 • Nationality: • The general principle concerning bodies corporate whose head offices are

• Nationality: • The general principle concerning bodies corporate whose head offices are situate abroad is that they have such nationality as is registered by the laws of that country. Consequently, a legal person with its head office in Somali is presumably of Somali nationality