Commercial Law for Accountants

Lecture Notes

© Andrew Borg-Cardona LL.D M.A. (Business Law)

andrewbc@bcgladvocates.com

Sources of Law

• Primary source – Commercial Code• Statute law (e.g. Companies Act,

Competition Act)• Foreign Law (e.g. UK law for insurance)• Usages of Trade

Order of application

• Commercial Law• Usages of trade• Civil Law

To whom does commercial law apply?

• The law applies to traders and acts of trade

• The implications:– Automatic interest– No time to remedy– Joint & several liability– (obsolete: issue to go to Commercial Court)

Define a trader

• A trader is a person who by profession exercises acts of trade in his own name and includes any commercial partnership

– The statement needs to be analysed:-

• Person: may be physical or legal• By profession: implies regularity or profit motive• Own name: can act as agent or through agent• Commercial Partnership: generally Ltd or plc

What are acts of trade?

• Generally defined by a profit motive:

– (a) any purchase of movable effects for the object of reselling or letting them, whether in their natural state or after being worked or manufactured; any sale or lease of movable effects, in their natural state or after being worked or manufactured, when the purchase thereof has been made with the object of re-selling or letting such effects;

Acts of trade (ctd)

– (b) any banking transaction;– (c) any transaction relating to bills of exchange;– (d) any time-bargain in securities;– (e) any transaction relating to commercial

partnerships or to shares in such partnerships;– (f) any transaction relating to vessels and navigation;– (g) any undertaking relating to supplies, manufacture,

construction, carriage, insurance, deposits, public entertainment and advertising

Acts of trade (ctd)

– (h) any purchase and any re-sale of immovable property, when made with the object of commercial speculation, and any building enterprise;

– (i) any transaction ancillary to or connected with any of the above acts.

More on trade

• Obligations arising from collision of vessels, assistance or salvage in case of wreck, stranding or abandonment, from jettison or average are likewise commercial matters.

• Every act of a trader shall be deemed to be an act of trade, unless from the act itself it appears that it is extraneous to trade

• Any person capable of contracting, may trade, unless the law precludes him from carrying on trade.

Minors• A minor who has attained the age of sixteen years, may trade and shall be

deemed to be a major with regard to obligations contracted by him for purposes of trade, if –

– (a) he has previously been authorized to that effect by the parent to whose authority he is subject, by means of a public deed registered in the Civil Court, First Hall or where both parents are dead, interdicted or absent, he has been authorized by the judge of the Civil Court, First Hall; and

– (b) a summary of the deed of authorization or of the decree aforementioned has been published by means of a notice in the Exchange, in the Government Gazette and in another newspaper.

• Minors who are traders authorized as aforesaid can by reason of their trade charge, hypothecate and even alienate their property, without any of the formalities prescribed by the civil law.

The Limits of Competition

• We are not talking about the Competition Act or issues of anti-trust or concentrations in the market.

• These are areas that are specific and specialised and relate to the relationship between the trader and the consumer and to the strength of dominant traders in the market

Competition between Traders

Our topic relates to the manner in which traders compete as against each other, balancing mutual rights and interests

Trade & Other Marks

• Traders shall not make use of any name, mark or distinctive device capable of creating confusion with any other name, mark or distinctive device lawfully used by others, even though such other name, mark or distinctive device be not registered in terms of the Trademarks Act, nor may they make use of any firm name or fictitious name capable of misleading others as to the real importance of the firm.

Nature of Goods

• Traders shall not make use of any false indication of origin of the goods:

– Provided that a designation which according to commercial usage is considered as a common designation, shall not be deemed to be a false indication.

“Knocking Copy”

• Traders shall not, for the purpose of competition, spread news capable of prejudicing the business or trade carried on by other persons.

• Moreover, they shall not make use of honours, patents, medals, prizes or other distinctions to which they have no claim or which have been obtained for some other branch of business or trade.

Employees

• Traders shall not suborn persons employed in the trade or business carried on by a competitor for the object of knowing or exploiting his customers.

• A trader shall not, in the exercise of his trade or business, issue certificates of honesty or competency contrary to the facts as known to him and capable of imposing upon the good faith of others.

Consequences

• Any trader who contravenes any of the prohibitions, shall, at the choice of the injured trader, be liable either to an action for damages and interest or to a penalty. The injured trader may, further, demand that every thing done contrary to the said prohibitions be destroyed, or that any other remedy be applied capable, according to circumstances, of removing the act constituting the unlawful competition.

• Any action for damages and interest brought under this article shall be governed by the rules of the civil law.

• The penalty, however, shall be fixed by the Court at the suit of the injured trader, and shall not be less than ten liri nor more than five hundred liri, having regard to the seriousness of the fact, to its continuance, to the malice of the offending party and to all other particular circumstances of each case. Such penalty shall be paid to the injured trader in settlement of all his claims for damages and interest.

What is a “contract”?

In basic terms, a contract constitutes the law between the parties

Once a contract is entered into, it must be respected

In commercial contracts (B2B) the Court is supposed to give even more strength to the

contract: time to perform should not be granted and interest runs automatically

Formation of a “contract”

A contract is entered into between two or more parties

Generally, sales contracts are between two parties: buyer and seller

In commercial deals, the parties are rarely in the same room: a contract may be validly entered

into by fax, email or even just verbally

When does a deal become a contract?

A “deal” is often preceded by a period of negotiation: the offer/counter-offer/discussion/ stage

The deal is closed and a contract is established when the “will of the parties” is identical: once a final offer is

accepted

It is a matter of evidence as to whether a contract has been entered into when there is no actual document with

signatures on it: this is why important transactions are concluded more formally

The actual point in time

Under Maltese law, a contract is perfected when the parties become aware of each other’s intention to be bound

Other systems of law rely on the date of transmission of the acceptance by the acceptor or the date of receipt of the

acceptance by the offeror

Once the contract is perfected, there is no going back, though of course there may be legal or contractual terms

which allow withdrawal (e.g. cooling off period or conditional terms)

Passing of title and/or risk

Once the contract is perfected, title in the goods and the risk inherent in ownership passes from seller to buyer

This is NOT dependent on payment of price: payment may be – and in commercial matters often is – agreed for a different point in time and the parties must regulate the

position especially when goods are to transit

Responsibility to pay for transport and/or insurance should be regulated by the parties too

Basic Contract TypesCIF – cost insurance freight (price includes all three)

FOB – free on board (delivered to ship’s rail)

C&F – cost and freight only (price includes only these)

Factory Gate (Seller) – Buyer to collect from seller (Price is for goods only)

Landed (Country/Port) – Goods transported to buyer’s home port (Price includes freight but not necessarily insurance)

Delivered to Buyer – Goods transported to buyer’s premises (Price does not necessarily include insurance)

Contract terms by reference

Often, certain chunks of law are inserted by reference only

In Bills of Lading or Airway Bills (the contracts for the carriage of the goods) for example, “the Hague Convention” is referred to or the ICC

Arbitration Rules

These terms take effect as if they were written in the contract directly and it is the responsibility of

the parties to know what they are accepting

Choice of law / jurisdiction

It is open to the parties, generally speaking, to choose what system of law to apply to their contract by indication of the country and to give a particular judicial system or

systems exclusive or joint jurisdiction

The parties may choose to establish an exclusive arbitration clause instead of

taking a dispute to Court

Check-list: Who / What / Where / When / How?

All legal principles and issues are subservient to the relevant contract terms

being established.

What is being sold? By whom to who? Where will it be collected or delivered?

When will the buyer own it? Who suffers when it is lost? When and how does the

buyer have to pay the price?

Who?

Especially when concluding contracts at a distance it is important for the identity of the parties to be

clearly established

This is even more important when the seller is not necessarily the producer of the goods or even

the owner at the time of sale: is the seller acting for someone else and is the authority to act in

this capacity valid?

What?

What is being sold by the seller and bought by the buyer?

Will there be identifying marks on the packing or on the goods themselves?

Will purchases actually be made by separate purchase order later or is the whole order catered for in the

contract?

Are the quantities clearly established and what about quality issues?

Where?

Where do the goods originate?

Where will the seller make them available or where will the buyer receive them?

Where will the risk of ownership pass to the buyer?

Where may the buyer make use of the goods?

When?

When will the goods be made?

When will the seller make them available?

When will the buyer be obliged to take delivery?

When does payment have to be made?

How?

How will the parties further regulate their relationship?

What credit terms are allowed?

Is interest being charged?

Are there penalty clauses for late delivery or bad quality?

Will the seller be obliged to take the goods back in certain circumstances?

Credit Instruments

Not all sales are made for cash – in B2B transactions this is hardly ever the case

Documents confirm credit and give security to seller that price will be paid

Letters of Credit / Bills of Exchange / Bank Guarantees / Performance Bonds

Invoice Factoring

If appropriate protect credit by reserving ownership of the goods until payment is made or guaranteed

Consumer Contracts

Much of what was said before relates to B2B contracts

Significant volumes of sales in commercial operations are made to individuals who are not themselves traders

In cases like these there is greater protection for the individual: the Court will allow time to pay and interest

will not run automatically

Warranties are laid down by law and the consumer has the right to seek compensation from the person who sold the

goods and not necessarily from the manufacturer or importer

Consumer Contracts

When giving credit to a married individual, it is important to have the consent of the spouse

Such consent should be given in writing and if a power of attorney is used, the original should be seen

Other contract terms as to be included, such as a statement of the APR, the refunds due on early

repayment, what restrictions on repossession apply when there is failure to repay and the cooling-off period

that may apply at law

Bills of Exchange

• Bills of exchange are instruments of credit that have an autonomous existence, free from the underlying transaction

• They consist in an instruction to pay, accepted by the person making the instruction, in favour of another person

• Generally, person instructing and person accepting to pay is the same person

Bills of Exchange 2

• The “instruction” is to be executed “ad litteram” and promptly in the place and amount noted for payment

• No defence other than fraud or issues relating to contractual validity of the Bill itself may be raised

• The Bill is transferable by endorsement• Liability for a Bill is as shown on the Bill

itself and cannot be assumed

Insurance Law

• There is no written law relating to the concept of insurance itself, the only law relates to the organisation of the insurance market

• Insurance as a concept originated from Lloyd’s Coffee House in the City of London, where merchants united to cover their own losses

Insurance Law 2

• The basic concept has developed into a sophisticated industry, with ancillary skills, such as financial planning, actuarial analyses and loss adjusting, to say nothing of risk management and loss investigation, becoming areas of expertise in their own right.

Insurance Law 3

• The underlying concepts of insurance are:

• That it is a contract of the utmost good faith

• That it is a contract of indemnity (as opposed to a bet)

• That it is a contract like all others with two parties: the insured (the client) and the insurer

Uberrimae Fide

• The contract is one of the utmost good faith and both parties are entitled to rely on the assumption that each is acting in accordance with his obligations in this regard

• The client has to disclose all material facts that he knew or ought to have known, such as the nature of the goods, the risk inherent in them and any historical issues that are material

Indemnity

• This is a contract that gives rise to indemnification if the risk happens

• The idea is not to get a prize if something goes wrong but to be re-integrated into your position prior to the risk happening

• You can therefore be deemed to be your own insurer if you under-insure, but over-insurance will get you no advantage

Indemnity 2

• This is what distinguishes insurance from betting, apart from the fact that in most jurisdictions simple betting debts are not legally enforceable

• The risk must not be a certainty, and you get no more than you lost (leaving aside “new for old” and life insurance, where particular considerations apply)

Disclosure

• The insured party (the client) is obliged to disclose all material facts, both that he actually knew and that he ought to have known.

• If there is fraud, the contract will be void and damages might be claimed

• Risk factors: anything which might be material: nature of goods, health of client, type of transport, location, for instance

Obligations of Parties

• Client: to disclose facts and pay premium (there is nothing that prevents credit being given)

• Insurer: to indemnify the client if and when the risk occurs.