Commercial Law

This article will provide an overview of commercial law. The article will explain the basic subjects that are the building blocks of commercial law. These subjects include sales, secured transactions and negotiable instruments. In addition, this article also explains common issues that are covered by commercial law, such as consumer credit protections, debt collection practices and creditors' rights. Other important factors that are central to commercial law are introduced, including warranties, remedies for breach of contract and transport and delivery requirements. Finally, the article describes how commercial law provides important regulations in business activities that are central to the dynamic and global marketplace today, including leasing agreements, construction contracts and import and export regulations. Commercial law has developed out of merchant trading routes and customs dating back to the Middle Ages. Yet today, in the United States, commercial law is largely governed by the provisions and requirements covering all aspects of commerce that are set out in the Uniform Commercial Code and that have been adopted by most states. This article explains some of the most important aspects of commercial law that affect many common business transactions today.

Keywords Bailments; Chattel-Paper; Collateral; Consumer Sales; Electronic Funds Transfer; Inventory; Pledge; Secured Lending

Business Law > Commercial Law

Overview

Commercial law relates to those branches of the law that deal with or affect commercial and business activities. These areas generally include contract law, agency law, the law of sales, the law of negotiable instruments and labor law. Much of modern commercial law, particularly as it relates to the law of sales, negotiable instruments and contract negotiation, traces back to the trade customs that were routinely used by merchants and traders from the Middle Ages to resolve commercial disputes. These trade customs were later recognized by merchant courts, which were then assimilated into English and American common law traditions.

For many matters relating to routine commercial transactions, merchants and businesses follow the laws set forth in the Uniform Commercial Code ("UCC"). In 1952, the United States grouped many laws pertaining to commercial transactions into a generic body of law that could be used by all states to regulate all aspects of commercial formation, business dealings and dispute resolution. To date, 49 states have adopted the UCC, with Louisiana only using portions of it. The UCC is a compilation of rules that apply to all aspects of commercial transactions, from contract formation and default, to shipping and delivery requirements, to credit transactions and bankruptcy. The following sections provide a more in-depth explanation of the basic concepts in commercial law.

Basic Concepts in Commercial Law

At its core, commerce involves the production, distribution and sales of goods and services. As markets transformed from producers and consumers involved in local trade to companies and financial institutions dealing in interstate and even international commerce, a broader range of laws were needed to facilitate and regulate this growth. Even more, the uses of credit and money substitutes (such as checks and promissory notes) also grew, and thus the bodies of law that govern secured transactions and negotiable instruments developed in response. The following sections explain the fundamental legal principles that form the basis of sales, secured transactions and negotiable instruments.

Sales

Sales are the most common of all commercial transactions. Sales may consist of a cash transaction, a sales contract, a purchase made with a credit or debit card or even an ad hoc contract that is quickly drawn up on a napkin. Article 2 of the UCC governs the sale of goods. The UCC defines a sale as the transfer of title to goods from seller to buyer for a price. The price can be money, other goods, real estate or services. Goods are essentially defined as movable, tangible, personal property. For example, the sale of an automobile, sofa or necklace is considered a sale of goods. The UCC requires that all sales contracts be performed in good faith, which means merchants must act with honesty and candor in their business dealings with consumers and must observe reasonable commercial standards in dealing with other merchants. A court may refuse to enforce all or any part of a contract that it finds to be unconscionable, either because of unfairness in the bargaining process or because the terms of the contract are grossly unfair or oppressive.

Article 2 of the UCC regulates every phase of a transaction for the sale of goods and provides remedies for problems that may arise. Prior to the adoption of the UCC, sales contracts were governed by the common law of contracts. However, the common law of contracts did not adequately address the specialized transactions that are routine in the sales of goods. Thus, while many of the principles of the common law of contracts are reflected in the UCC, there are important differences. One such difference lies in the acceptance of an offer. Under the common law of contracts, an acceptance must objectively manifest intent to contract. Under the UCC, a contract for the sale of goods may be formed in any manner sufficient to show agreement, including conduct by both parties that recognizes the existence of a contract, even without an explicit expression of acceptance.

Another difference is that at common law, an acceptance that added qualifications or conditions or in any way varied from the terms of the original offer was treated as a rejection and counteroffer. This principle came to be known as the "mirror image rule." The UCC, however, will recognize the existence of a contract even if the acceptance contains additional or different terms from those of the offer, provided that the acceptance reveals intent to contract and is not expressly conditioned on the original offeror agreeing to additional or different terms. As a result, many common law counteroffers that would have been considered rejections and counteroffers are converted into acceptances under the UCC.

A final difference between the common law of contracts and the unique provisions of Article 2 regarding the sale of goods relates to the shipment of nonconforming goods, or items that do not exactly match the descriptions of the items requested. If goods are shipped in response to an offer to purchase the goods, and the items shipped do not exactly match the request, at common law, acceptance of an offer by performing the offeror's request was only valid if the acceptance matched the request. Under the UCC, the shipment of nonconforming goods operates both as an acceptance of the offer that creates a binding agreement, and a breach of the agreement if there is no time left by which the seller could send the exact requested items and still meet the buyer's deadline. If the time specified for delivery in the contract has not yet arrived, the seller may still notify the buyer that the shipment was an accommodation rather than an acceptance, and in this case the shipment becomes a counteroffer that the buyer may accept or reject. If the buyer accepts the shipment after being notified of the accommodation, the buyer is presumed to have accepted the seller's terms through conduct, and the existence of a binding contract is recognized. If the buyer does not accept the accommodation, the seller may still send conforming goods within the contract time without being in breach of the contract.

Secured Transactions

Secured transactions arise when one party borrows money from a bank, individual or other lending institution to purchase goods on credit. Lenders generally require more than just a promise to repay the money in order to extend credit to the borrower. The law of secured transactions governs the security agreements that are formed between a lender and borrower, and the collateral interests that secure the loan by acting as security for the borrower's obligation to repay the loan.

A security agreement is an agreement that the lender may retake the collateral that secures a loan should the borrower default on the loan. Lenders prefer that borrowers simply repay the loans they have borrowed in full. However, because lenders realize that financial hardships can arise, the lender takes a security interest in the property to serve as a protection against its losses in the event of a borrower's default. In other words, if the borrower goes bankrupt, the lender may take possession of the specified security property and resell the property to recoup the losses it sustained from the borrower's default.

In general, the law of secured transactions is a form of contract law. Like sales, secured transactions are governed by state law, but most states have adopted the UCC. Article 9 of the UCC deals specifically with secured transactions. In order for a secured transaction to be effective, the creditor must take certain steps to attach and perfect its security interest in the collateral. First, the creditor must attach the security interest. When a debtor has signed a security agreement that reasonably identifies the collateral, given value and acquired rights in the collateral, attachment of the security interest is complete and becomes enforceable against the debtor with respect to the collateral described in the security agreement.

However, attachment generally does not provide the creditor with rights against third parties who might also have an interest in the same collateral. If the secured party wants to protect the collateral against claims to the property of other creditors or third parties, the secured party must perfect the security interest in the collateral. A security interest may be perfected when a secured party files a financing statement in the appropriate public office or takes possession of the collateral. Some security interests are automatically perfected when they attach to particular collateral. Thus, once all of the applicable steps required for perfection are taken, the security interest is perfected.

Perfection basically serves as a form of notice that the creditor has a security interest in the collateral, and because of this notice, the creditor's rights in the collateral are superior to certain third parties who might also have an interest in the same collateral, depending on the priority of the creditors. Because perfection involves filing a public notice, other creditors and interested parties are considered to be constructively informed of the creditor's interest in the collateral and the priority of the creditor's claims against all other interested parties. Creditors who fail to attach and perfect their security interests or who do so improperly risk the priority of their claims to the collateral in the event a borrower defaults on his credit obligations.

Negotiable Instruments

A negotiable instrument is a check, promissory note, bill of exchange, security or other document that represents money that is to be transferred to another person. The UCC defines negotiable instruments as signed documents that readily transfer money and that provide a promise to pay the bearer a sum of money at a future date or on demand. If the instrument does not meet these requirements, it is nonnegotiable and is treated as a simple contract rather than as a negotiable instrument. If an instrument is incomplete because the party omitted a necessary element, such as the amount payable or the designation of the payee, the instrument is not negotiable until it is completed. If an instrument is ambiguous, such as if it is unclear whether the instrument is a draft or a note, the UCC allows the holder to treat it as either one and present it for payment to the drawee. However, certain rules of construction apply in that handwritten changes overrule typewritten or printed words and words overrule figures unless the words are unclear. In a valid negotiable instrument, the money is transferred through delivery following an endorsement of the instrument, such as when the instrument is signed.

In general, there are two types of instruments. The first is called a draft. A draft is a document that orders the payment of money, such as a check. A check has three parties to it: one person, known as the drawer, writes a check ordering the drawee, such as a bank, to pay a certain sum of money to a third person, the payee. The second type of negotiable instrument is a note, such as a promissory note. A note is a promise to pay a sum of money.

The law of negotiable instruments is generally governed by state law. However, Article 3 of the UCC, which deals solely with negotiable instruments, has been adopted by most states and sets out uniform requirements and provisions that regulate the exchange of negotiable instruments. In general, the law of negotiable instruments is similar to contract law. However, a negotiable instrument may be distinguished from an ordinary contract by the fact that a negotiable instrument can be drafted in a way that makes it transferable to other parties, whereas a contract is generally an agreement between two persons who are bound to one another according to the terms of their contract.

Common Issues in Commercial Law

Commercial law covers many issues that commonly arise in commercial dealings. These issues include matters that relate to credit transactions and to the consumer credit laws that have been enacted to protect consumers in such transactions. Also, when borrowers default on their credit obligations, commercial law regulates permissible debt collection practices. Finally, commercial law includes provisions that outline the rights of various types of creditors to a debtor's assets in the event of a default or bankruptcy. The following sections will discuss these issues in more detail.

Consumer Credit Laws

Credit allows lenders to extend money to people who promise to repay in the money in the future, so that they can make substantial purchases today. Credit is vital to our commerce system. It is used everyday by businesses and consumers. Today, consumer credit laws provide consumers with many protections regarding credit transactions. Before these laws were enacted, creditors sometimes took harsh or draconian measures to collect the unpaid portion of any debt they were owed by borrowers. In addition, creditors sometimes charged usurious interest rates that made repayment almost impossible. To combat these practices, consumer protection laws in the United States regulate the information creditors must provide to borrowers before extending credit and limit the tactics that creditors may use to collect overdue payments. While all states have enacted their own form of consumer protection regulations, the following statutes have been enacted at the federal level. Thus, creditors and borrowers in all states are bound by these statutes, even if individual states have not enacted additional consumer protection legislation.

The Equal Credit Opportunity Act

The Equal Credit Opportunity Act ("ECOA") forbids lenders and other creditors from discrimination in regards to credit terms based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs. Under the ECOA, a lender can consider legitimate factors such as earnings, savings and credit records when making a credit decision. An applicant must be notified within 30 days after completion of the application whether or not the loan has been approved. If credit is denied, notice of the denial must be provided to the applicant in writing and must explain the specific reasons for the denial of credit or advise the applicant of his right to request an explanation. Any reasons for denial that are disclosed must relate to the factors actually considered, and the creditor must disclose the specific reasons for any adverse action.

The Fair Credit Reporting Act

The Fair Credit Reporting Act ("FCRA") regulates the disclosure of consumer credit reports by credit reporting agencies. It requires that credit agencies investigate disputed items in consumer credit reports and establish procedures for correcting mistakes in a credit record. The purpose of the FCRA is to protect consumers from erroneous information appearing on their credit reports that may have a negative impact on their ability to obtain credit or to obtain credit at favorable terms. The FCRA gives consumers the right to view a copy of their credit report whenever a credit application they submit is rejected. Credit agencies must advise consumers within 30 days of the application rejection of their right to receive a free written copy of their complete credit report file. If a consumer views her file and notices an inaccuracy, she can ask the credit agency to correct or delete the inaccurate portion. If the credit agency refuses, the consumer may write a 100-word statement describing her own perspective regarding the inaccuracy. This statement will then become a part of future credit reports.

The Truth in Lending Act

The Truth in Lending Act, a provision of the Consumer Credit Protection Act, requires lenders to provide certain information so that consumers can understand the terms of the loan and can use the information to shop for the best credit terms. The Truth in Lending Act requires creditors to disclose to consumers, in writing and before any agreement is signed, both the finance charge and the annual percentage rate of the finance charge in a credit sale or loan. In addition, lenders must provide information regarding any annual fees, payment due dates, amount of any late fees, minimum payment required, the length of the grace period and the name and contact information for the company providing the credit.

Debt Collection

If a borrower fails to meet his credit obligations, any of his creditors may commence a lawsuit and obtain a judgment against him for his remaining obligation. In addition, a creditor may pursue other avenues to collect the balance of the debt, such as repossessing any collateral used as security, foreclosing on collateral used as security and garnishing the debtor's wages. However, in attempting to collect such debts, creditors must remain within the bounds of any state and/or federal debt collection laws to which they are subject.

Fair Debt Collection Practices Act

At the federal level, the Fair Debt Collection Practices Act forbids abusive debt collection practices. It outlaws debtor harassment and regulates third party collectors, such as collection agencies, debt collection offices of original creditors and lawyers who are hired by creditor agencies to help collect overdue bills. While original creditors are not regulated by the Act, their practices are regulated by similar state laws. The Fair Debt Collection Practices Act requires that collection agencies begin any debt collection communications with an introductory letter that lists the amount of debt, the name of the original creditor, the period of time in which the debtor may dispute the debt and the obligation of the collection agency to send the debtor verification of the debt if the debt is disputed.

The Fair Credit Billing Act

The Fair Credit Billing Act is a federal law that gives borrowers the right to question and dispute an inaccurate or incomplete bill from a creditor. Under the Fair Credit Billing Act, a borrower must dispute a bill by notifying the creditor of the inaccuracy within 60 days after the bill was mailed. The notice should contain the consumer's name and account number, a statement of the consumer's belief that the bill contains an error and a description of the portion of the bill that the consumer believes to be erroneous. The creditor must acknowledge the notice within 30 days of receipt. The creditor then has 90 days to correct the billing error or explain in writing why the bill is correct. In addition, a creditor may not take any action to collect the amount in dispute or report the amount in dispute to a credit rating agency while the billing dispute is unresolved.

Creditors' Rights

The UCC gives certain types of creditor's priority over other creditors, and the priority of each creditor is based on the nature of the contract the creditor had with the debtor and the relationship between the creditor and debtor. Each classification of creditor is entitled to enforce the repayment provisions to which it is entitled, based on its status and priority.

The first type of creditor is a secured creditor. A secured creditor has secured an interest in certain goods or personal property of the debtor. Generally, the first secured creditor to perfect the security interest has priority in payment over all other types of creditors, at least with respect to repayment from its collateral. This senior status provides secured creditors with a greater degree of assurance that their claim to the collateral or the debtor's assets will be satisfied.

A second type of creditor is an equipment lessor. Many companies prefer to rent or finance the equipment they will need rather than using their existing capital to make substantial investments in various types of equipment. If a company becomes bankrupt and the payments remaining on a lease equal the entire economic value of the equipment, the lease may be recharacterized as a finance lease because the company has effectively purchased the equipment. If the lease is recharacterized as a finance lease, the lessor will be treated as an unsecured creditor rather than the owner of the equipment. Because of this, equipment lessors may choose to protect their status as secured creditors by taking a security interest in the equipment and filing the financing statement to perfect the security interest.

Finally, the claims of employees for wages, salary and vacation or paid leave are generally treated as unsecured claims. Unsecured creditors are those with no specific security interest in any collateral but with a general claim against the debtor for repayment. However, employees are given a priority claim for a portion of their total claim so that they will be paid the priority claims after secured creditors but before unsecured creditors. Individual states have also enacted legislation that provides employees with additional rights and assistance in collecting the wages due them by a bankrupt employer.

Factors Affecting Commercial Law

Today, the maze of laws that regulate all aspects of commerce and trade require that businesses and merchants pay close attention to the quality of the goods that they produce. Article 2 of the UCC sets out warranties that any seller of goods must provide to protect buyers from harmful or ineffective products. Also, even if sellers have complied with the warranty requirements to guarantee their product, they may still face certain requirements and risks relating to the transport and delivery of their products. Finally, buyers and sellers who fail to fulfill the terms of their contractual or warranty obligations, or who act in detrimental or unethical ways, face judicial remedies that may include monetary and nonmonetary damages. The following sections explain these factors affecting commercial law in more detail.

Warranties

Article 2 of the UCC sets out four types of warranties that any seller of goods must provide: the implied warranty of title, the implied warranty of merchantability, the implied warranty of fitness and express warranty. These warrants protect consumers from purchasing defective or harmful products or goods that have security interests or other encumbrances clouding their title.

The implied warranty of title requires any seller of goods to warrant that the title of the goods to be sold or transferred is good. This means that there are no liens or encumbrances on the title of which the buyer is aware. This warranty arises automatically by operation of law. If the buyer is later forced to defend the title against a suit that alleges a claim to the title, the buyer has a claim against the seller for breach of warranty of title, even if the buyer wins the lawsuit.

In any sale by a merchant who regularly deals in any specific type of goods, the goods are covered by an implied warranty of merchantability, which provides assurances that the goods are "fit for sale." The implied warranty of merchantability also arises by operation of law, and ensures that the goods are fit for the ordinary purposes for which such goods are normally sold.

If a buyer wants to purchase certain goods for a unique or particular purpose and seeks the seller's skill or judgment in selecting the goods and then relies on the seller's recommendation in purchasing the goods, there is an implied warranty of fitness that the goods will be suitable for the purpose the buyer specified at the time the contract was created, if the seller knew that the buyer would rely on her recommendation. This element of reliance is a critical component of this warranty. The buyer must have relied on the seller's judgment or guidance in purchasing the goods. If the buyer merely supplies specifications to the seller for the purchase of goods, there is no reliance and thus no breach of the warranty, even if the seller was aware of the purpose for which the buyer intended to use the goods.

A seller of goods can also create an express warranty. According to the UCC, an express warranty is created when a seller makes an affirmative statement of fact relating to the goods and the statement becomes part of the basis of the bargain. For instance, if a seller of furniture says, "This chair is the most beautiful chair in the world," this statement is referred to as "puffing" in that it is a sales technique that does not provide a valid factual basis for purchasing the chair. However, if the seller says, "This chair is made out of cherry wood," such a statement creates an express warranty that the chair is indeed manufactured from cherry wood. In addition, any description of the goods that is made as part of the basis of the bargain creates a warranty that the goods will conform to the description. Finally, any sample or model that is made a part of the basis of the bargain creates a warranty that the remaining goods are the same as the sample or model.

In addition to these warranties, the UCC requires that buyers and sellers act in "good faith" in all sales transactions. "Good faith" can be defined as the duty to make an honest and sincere effort to fulfill obligations under the contract and to avoid any fraud or misrepresentation that would result in an unfair bargain.

Transport & Delivery

A contract may lack specific instructions regarding the time, place or method of delivery and still be valid. This is because delivery instructions are generally not considered an essential item for the proper formation of a contract. However, the UCC makes certain provisions that merchants may use as default rules to fill in any missing transport or delivery terms in a contract. For instance, if the time for delivery is not specified in the contract, the UCC states that the time for shipment or delivery is a reasonable time. What is reasonable depends on the circumstances. As an example, assume the Smith Corporation agrees to sell 5,000 turkeys and 10,000 pumpkin pies to Jim's Grocery Stores. The contract does not state a delivery date. As the goods are likely of a seasonal nature for Thanksgiving celebrations, a reasonable delivery date would most likely be mid to late November.

If the contract calls for successive performances but does not provide a cutoff date for when the contract terminates, it is valid for a reasonable time but may be terminated at any time by either party upon reasonable notice. If the contract does not specify whether the delivery of the goods is to be in one shipment or several deliveries, the goods must be shipped in a single delivery and payment is due at the time of delivery.

Also, if a contract fails to specify a place for delivery, the UCC makes the seller's place of business, or if she has no place of business, then the seller's residence as the appropriate place for delivery of goods. If the contract is for the sale of specific goods, which the parties know are located at some place other than the seller's place of business or residence, then the place where the goods are located is the place for delivery.

When contracting, merchants frequently use mercantile terms as an abbreviated means of stating the delivery duties of the seller. For instance, the term FOB, which means free on board a carrier such as a truck or train, and FAS, which indicates free alongside a ship, are frequently used terms that are recognized by the UCC. These terms also allocate the risk of loss between the seller and the buyer. When the contract states "FOB Houston" and the seller is in Houston, the contract is known as an origin contract. An origin contract requires that the seller has the expense and risk only of putting the goods into the possession of a carrier, making a proper contract with the carrier for the transportation of the goods and notifying the buyer of the shipment and providing any documents necessary for the buyer to obtain possession of the goods upon delivery.

If the contract states "FOB Houston" and the seller is in Detroit while the buyer is in Houston, this is a destination contract and the seller pays the freight and also bears the risk of loss. In addition to transporting the goods to Houston at his own risk and expense, the seller must tender them to the buyer in Houston. The UCC requires the seller to hold conforming goods at the buyer's disposition and give the buyer reasonable notification in order to enable him to take delivery. The tender must be at a reasonable hour and the goods must be available for a reasonable period of time. Contracts are presumed to be origin contracts unless the contract very clearly requires the seller to deliver the goods to a named destination.

Remedies

When a breach of contract occurs, remedies can be monetary, or if monetary compensation would not be adequate, they can take the form of a specific performance or an injunction. If one party breaches a contract, the non-breaching party is usually entitled to monetary damages. Damages can take one of three forms: expectation damages, reliance damages and restitution. Expectation damages compensate the plaintiff for the amount she lost as a result of the defendant's breach of contract. In other words, the damages put the plaintiff in the position she would have been in if the contract had not been breached. For instance, suppose that Martin agrees to provide Mary with the materials she will need to make 200 lamp shades for Monique. Monique needs all 200 lamp shades to be ready for the grand opening of her boutique and Monique agrees to pay Mary $2,000 when Mary delivers the completed lamp shades. Mary agrees to pay Martin $1,000 for the materials and she sets the date for Martin to deliver the materials two months before she must deliver the lamp shades to Monique, which gives her plenty of time to complete the order. Under these circumstances, Mary is expecting to net a $1,000 profit from the sale of the lamp shades. If Martin fails to deliver the materials, then he will be liable for expectation damages in the amount of $1,000, or the amount required to put Mary in the position she would have been in had Martin completed the job and she sold the lamp shades. Mary has a duty to mitigate the damages to Martin if at all possible, but Martin is still liable to Mary for expectation damages stemming from his breach of the contract.

Reliance damages compensate the plaintiff for any expenditures they make in reliance on a contract that is later breached, such as when one party purchases the items necessary to complete a project, only for the other party to later cancel the project. While expectation damages put the plaintiff in the position he would have enjoyed had the contract been completed, reliance damages return the plaintiff to the position that he was in before the contract was formed. Restitution is similar to reliance damages. However, reliance damages are measured based on what the plaintiff has lost; restitution is based on what both parties have gained from a transaction and puts both parties back in the same position they were in before the contract as formed.

A non-breaching party to a contract is required to make reasonable efforts to minimize damages in the event of a breach. This is called mitigation of damages. Thus, in the example above, if Martin fails to deliver the materials for the lamp shades in accordance with the contract, Mary must try to obtain the necessary materials elsewhere. She may not simply let the contract lapse and then sue Martin for the loss of her profit on the sale of the lamp shades.

Two other types of monetary damages are consequential damages and liquidated damages. Consequential damages are damages that the plaintiff is entitled to as compensation for losses that occur as a foreseeable result of a breach, and can include harm resulting from the loss of future business. If liquidated damages are provided for in a contract that has been breached, the liquidated damages provision will specify a set figure that the breaching party will pay the injured party in the event of a breach. The figure should be the parties' best estimate of what their expectation damages would be. If the specified amount exceeds this reasonable estimate, the court may consider it a form of punishment, which is not permissible under contract law, and refuse to enforce the liquidated damages provision.

In addition to monetary damages, courts may also use its discretionary, equitable powers to grant non-monetary equitable damages in the event of the breach of a contract. When monetary damages are neither appropriate nor suitable, the court may grant specific performance, which is a court order directing the defendant to do exactly what was promised. Specific performance is used if the item involved in the contract was unique, as in artwork or real property, or if the calculation of monetary damages would likely be difficult to do accurately, making it unfair to do so. Courts may also grant injunctions, which are court orders to do something or to refrain from doing something. Finally, in some situations where enforcing the contract would be unfair, such as in the event of a serious mistake or misrepresentation, the court may rescind or cancel the contract and order restitution.

Applications

Commercial Law in the Modern World

The world of commerce and industry is more vibrant than ever. Today, businesses and consumers enter into a wide range of contracts, leases and other arrangements. For instance, businesses routinely lease equipment to defray the significant expenses that are involved in getting started as an enterprise. Even established businesses lease equipment for the lower cost and flexibility of this option. Businesses and merchants also enter into construction contracts to build new offices and facilities to support their growth. Some businesses even develop into the international market. Brokers offer specialized services to help businesses obtain the necessary financing to import and export all types of goods. Commercial law plays a role in every one of these transactions. The following sections explain these arrangements in more detail.

Leasing

Many businesses today opt to lease equipment to minimize the upfront costs of getting established as a new enterprise. Travelers also frequently lease vehicles for short vacations or business trips when purchasing a new vehicle would be impractical. A lease is a contract between a lessor and a lessee. Thus, leases are subject to many of the same provisions that cover contract law. However, some areas where leases are frequently used, such as apartment rentals, are covered by a more specialized body of law. Landlord-tenant law includes many additional protections that are not included in the UCC or common law contract provisions. The leasing of goods is regulated by Article 2A of the UCC. Like Article 2, it has been adopted in most states.

The equipment leasing industry today has grown exponentially into a multibillion dollar industry. Equipment leasing is essentially a loan, in which the lender purchases equipment and then "rents" it to businesses for a monthly or quarterly rate, and for a specified number of months. Purchasers of equipment tend to be finance companies, banks or even leasing subsidiaries of the equipment manufacturer. At the end of the lease, the business may purchase the equipment for its fair market value (or a fixed or predetermined amount), continue leasing, lease new equipment or return it. Most users of industrial equipment lease rather than purchase their equipment.

There are a number of reasons for the increasing interest in equipment leasing. First, because equipment leases are often made for short periods of time, the equipment reverts back to the ownership of the lessor while it likely retains significant commercial value. Thus, the equipment can be leased again to other businesses. Second, equipment leases allow businesses to continually update their technology without having to repeatedly invest in new equipment. Many leases are created for short periods of time and once the lease has expired, businesses can simply lease a newer version of the needed equipment. Also, some leases include provisions that allow businesses to substitute newer equipment, sometimes at an increased rate, even during the life of their current lease. Finally, equipment leases allow businesses to try various types of equipment or technology for short periods of time to decide which equipment best suits the needs of the business. This way, if businesses do decide to later purchase equipment, they are able to make an informed decision.

Construction Contracts

The construction industry has become increasingly complex as many different industries are involved in large and even small or mid-sized projects. In even basic construction contracts, many different types of professionals will be involved, including excavators, carpenters, plumbers, electricians, roofers and painters. Further, these crews will purchase and lease equipment and supplies from companies such as equipment rental companies, lumberyards, pipe and fitting suppliers, hardware wholesalers and window manufacturers. Construction contracts are unique in that they involve both the sales of goods and materials as well as the performance of manual labor. Thus, construction projects differ from sales in that most sales are completed in a single transaction that may take only minutes, while the completion of a construction project may involve a significant period of time between the time that plans are finalized for a project and work begins, and the day that the project is finally complete.

In addition, construction projects cannot necessarily be completed exactly on the date agreed upon in the original plans. Construction crews are forced to deal with many variable factors that they cannot control, such as timely deliveries of supplies, clear weather, certain soil conditions, the adequacy of materials and the absence of specification changes to the original project plans. Further, the structure of oversight over construction projects also complicates the construction process. In a typical construction project, the prime contractor is the contractor who agrees to complete the project according to the owner's specifications. To complete the project, the prime contractor engages subcontractors, who may hire still other subcontractors to perform portions of the work. Because subcontractors may work on multiple projects at the same time, any delay on one project may result in delays on other projects. For instance, painters hired by a subcontractor may be forced to delay their start date on one project due to prior construction delays on the previous project, and because of this, the painters may be delayed in reporting to their next project.

Because of these unique conditions, construction contracts must be drafted so that their terms are reasonable for all parties that will be bound by it. Generally, when prime contractors bid on any project, they factor delays and fluctuating costs into their final bid. Experienced contractors have learned to get a good sense of the construction business and are often better able to project any complications in the construction process that would delay the completion of a project, including any rises in the cost of materials and labor shortages. Once prime contractors have submitted their bids and the owner accepts a bid, a contract is formed. Once a contract is formed, the prime contractor must ensure that the work is done according to the project specifications while the owner must pay close attention to ensure that the contract provisions are being met. Owners must generally catch mistakes early in order for the work to be redone. Courts have historically refused to force contractors to redo work that has been completed if it would entail significant cost, such as ripping apart a building to replace one brand of pipe with another. However, an owner can still sue for damages for any loss in value due to work that was not performed according to the project specifications.

In addition to overseeing the projects, owners must make periodic payments to the contractors. Most construction companies do not have sufficient reserves of assets to finance entire construction projects upfront while only being paid once the work has been completed. Thus, construction companies are entitled to periodic payments as the work is work is being done. Many provisions set out by the UCC and common law contract requirements offer protections to owners, contractors and subcontractors to ensure that the contracting process is conducted fairly and in good faith, while providing remedies for any party's breach of the contract specification.

Imports & Exports

For many years, financing for imports and exports in the United States was conducted largely from a few major seaports and financial banking centers. For instance, until the last several decades, only a handful of New York banks issued almost all of the commercial letters of credit in the United States and the city doubled as the nerve center of international banking in the U.S. In recent years, while New York City retains a central role in the international trade markets, many regional banks have become prominent participants in the export and import industry.

Commercial law plays an important role in the importing and exporting of goods. For instance, exporters facilitate the international flow of goods by setting up transactions where the exporter buys products from a U.S. manufacturer or distributor finds a foreign buyer and arranges for the financing and transport of the goods overseas. In cases such as this, exporters generally arrange for some form of financing to purchase the goods and transport the items before they are resold abroad. For instance, most of the transactions involving goods being imported into the United States are supported by a commercial letter of credit. To finance these transactions, a credit issuer such as the buyer's commercial bank, issues a letter of credit in favor of the foreign seller. The letter of credit instructs the issuing bank to honor the seller's drafts if they are accompanied by certain title documents and financial instruments. Usually, the documents required by a commercial letter of credit include a commercial invoice, title documents such as a negotiable bill of lading and any certificates of origin and forms showing proof of insurance and inspection. The foreign seller compiles the necessary documents, ships the goods, forwards the documents to the issuer and generally receives payment while the goods are still being transported to their final destination.

Just as exporters are subject to commercial law when they arrange for financing the export of goods abroad, importers also act as brokers by purchasing goods overseas at a favorable cost and then arranging for the transport of the products to the United States for distribution and sale. In these transactions, brokers typically require financing because the cost of the goods and any transportation and importation fees must be paid before the items may be brought to the U.S. To acquire the necessary financing, brokers obtain a letter of credit from a lender, who issues the letter of credit in favor of the seller and takes a security interest in the goods. Lenders often use a bill of lading to effect a security interest in imported products. The security interest provides some reassurance to the lender to mitigate the risk of loss, but the security interest is generally trumped by a bona fide purchaser who pays value for the goods. Thus, once a customer pays for the products and the goods are shipped out to fill the order, the lender's security interest in the goods is extinguished. Because of this risk, banks carefully vet the brokers they deal with, and only offer financing to those brokers who have developed a solid reputation.

Conclusion

Commercial law is a body of law that encompasses many different areas of law, including the law of contracts, secured transactions, negotiable instruments, sales, creditors' rights and even bankruptcy. Many of these areas are governed by various articles within the Uniform Commercial Code. In addition, states have also enacted additional legislation to regulate most areas of commerce and trade. As a result, business and merchants must pay close attention to the state and federal laws to which they are subject, in every jurisdiction in which they do business. However, while the laws, statutes and regulations that encompass the field of commercial law are numerous, they are based largely on the equitable principles of good faith and fair business dealings. There are protections and remedies within the body of commercial law for businesses and merchants that are harmed economically when parties with whom they do business, such as suppliers and distributors, fail to fulfill their contractual obligations. Commercial law also provides for product warranties and monetary and nonmonetary remedies for consumers who are injured or harmed by defective products in an effort to safeguard the quality of consumer goods. In addition, commercial law includes regulations that govern the entire transaction process, from credit applications to bankruptcy proceedings, to ensure that those processes are done fairly and impartially.

Terms & Concepts

Arbitrage: The practice of buying in one market and selling in another.

Bailee: One who takes possession of goods and holds or transports them for another.

Bailor: One who delivers goods to a bailee for storage, transport, services or other purposes.

Bill of Lading: A document of title issued by a carrier evidencing a contract of carriage of the good and setting out delivery terms.

Chattel: Item of personal property.

Check: A negotiable instrument, or a draft drawn upon a bank and payable on demand, signed by the maker or drawer, containing an unconditional promise to pay a sum certain in money to the order of the payee.

Consumer: Any party that uses up (rather than resells) services, raw materials or products.

Delivery Terms: Terms in a sales contract that specify the place, time and manner of delivery of goods or services.

Document of Title: Document issued by or to a bailee involving the carriage or storage of goods.

General Export License: A U.S. export license that covers all exports except those covered by a validated export license.

Insolvency: The inability to pay debts in the ordinary course of business as they become due: also, when total liabilities exceed total value of assets.

Perfection: The art of rendering a security interest superior to any subsequently acquired judicial lien so that notice is given to any interested third parties of the interest in the property.

Repurchase Agreement: A security agreement disguised as a sale with an obligation on the part of the seller to repurchase the property that is the subject of the sale.

Security Interest: The interest in personal property granted a lender by a borrower in the security agreement, and that is created by agreement rather than an operation of law.

Unsecured Creditor: Sellers or lenders that extend credit to a buyer or borrower without taking a security interest in any property or who attempt to take an interest in the property but fail to follow the rules of the Uniform Commercial Code and thus fail to effect a security interest.

Validated Export License: Government grant of authority to a specified exporter to export specified goods.

Warranties: In secured lending, representations by the borrower as to facts usually relating to its financial or legal status.

Bibliography

Bedell, D. (2007). Regulators close in on private equity. Global Finance, 21, 6. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24419048&site=ehost-live

Bonney, J. (2007). A bad idea that won't die. Journal of Commerce (15307557), 8, 6. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24392426&site=ehost-live

Corriel, M. (2013). Up for grabs: A workable system for the unilateral acquisition of chattels. University of Pennsylvania Law Review, 161, 807-860. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=86040752&site=ehost-live

DeMasi, K. (2007). Tried and trusted. Lawyer, 2, 36-37. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24014621&site=ehost-live

Gordon, S. & Hafer, C. (2007). Corporate influence and the regulatory mandate. Journal of Politics, 69, 300-319. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24669648&site=ehost-live

Inderst, R. & Mueller, H. (2007). A lender-based theory of collateral. Journal of Financial Economics, 84, 826-859. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24971848&site=ehost-live

Livingston, M. (2011). Bewitched, bothered and bewildered: The courts and revised Article 9 of the Uniform Commercial Code ten years later. Depaul Business & Commercial Law Journal, 9, 169-214. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=60435205&site=ehost-live

Martin, J.S., Hakes, R.A., & Friedman, S.E. (2013). The Uniform Commercial Code survey: Introduction. Business Lawyer, 68, 1171-1172. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=91583617&site=ehost-live

Scarborough, M. (2006). Commercial firms and ILCs: No new affiliations. Community Banker,15, 16. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23327761&site=ehost-live

Shuster, W. (2007). Small businesses might have big headaches. JCK, 178, 106-110. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24005165&site=ehost-live

Venditto, M. (2007). Creditors' committees. Business Credit,109, 6-8. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24955175&site=ehost-live

Suggested Reading

Cherry, B. (2007). The telecommunications economy and regulation as coevolving complex adaptive systems: Implications for federalism. Federal Communications Law Journal,59, 369-402. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25076473&site=ehost-live

Kalay, A., Singhal, R. & Tashjian, E. (2007). Is chapter 11 costly? Journal of Financial Economics,84, 772-796. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24971846&site=ehost-live

Seidenberg, S. (2007). Strange new world. ABA Journal, 93, 48-54. Retrieved May 29, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23760471&site=ehost-live