AN INTRODUCTION TO COMMERCIAL LAW

Denning Law School

THE NATURE OF COMMERCIAL LAW

What is commercial law?

Writers on the subject have put forward various definitions of their own. These include the following:

‘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 (1931))

Sir Roy Goode 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’.

It is understood that the Commercial law is largely concerned with sale of goods.

The American Uniform Commercial Code (UCC) covers a wide range of commercial activity: sales;
leases; negotiable instruments; bank deposits and collections; wholesale wire transfers; letters of credit;
bulk transfers and bulk sales; warehouse receipts, bills of lading and other documents of title; investment
securities; secured transactions. The UCC has been a great success in the USA. The UCC was drafted by
Professor Llewellyn. His desire to avoid unnecessary theorization and keep the UCC as close to business
reality as possible has made the UCC extremely workable.

Does Commercial Law really exist?

It is sometimes argued that commercial law consists of no more than a collection of distinct subjects (e.g.
agency, sales, negotiable instruments, security) each possessing its own rules but with no common thread
of principle running through them. If this is true, ‘commercial law’ is merely a label which is useful for
gathering together diverse material with no obvious home of its own, so as to aid exposition on a lecture
course or in a textbook, or for the better organization of the business of the courts. On the other hand, if
there are common principles running through the law’s response to those spheres of commercial activity
which falls within the ambit of ‘commercial law’, the subject gains its existence of its own. Professor
Goode and Sealy & Hooley firmly believes that such unifying principles do exist. However such unifying
principles are not easy to identify.

The Functions of Commercial Law

Since commercial law is developed for businessmen, we need to identify their needs. Businessmen have
special needs which includes the following needs. The commercial law, both in its substance and
procedure attempts to facilitate commercial transactions by endeavoring to meet these special needs of the
business community.

1. They demand their agreements are upheld;

The courts have adopted a non-interventionist approach with regards to the commercial contracts.
The judges work on the assumption that there is equality of bargaining power between
commercial men. This assumption underpins two basic principles of commercial law: freedom of

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 AN INTRODUCTION TO COMMERCIAL LAW
Denning Law School
Huzaifa Muqadam
Commercial Law
© February 2020

contract and sanctity of contract. Professor Schmitthoff states: The basis of commercial law is the
contractual principle of autonomy of the parties will. Subject to the ultimate reservation of public
policy, the parties are free to arrange their affairs as they like.

2. They require that decisions of the courts on the commercial issues to be predictable so that they
know where they stand;

One of the key principles of the common law is the doctrine of certainty. The courts have
consistently promoted considerations of ‘certainty’ in the sense of predictability of outcome over
those of fairness and justice. In Vallejo v. Wheeler (1774), Lord Mansfield said “In all
merchantile transactions, the great object should be certainty; and therefore it is of more
consequence that a rule be certain, than whether a rule is established one way or the other.
Because speculator in trade know what ground to go upon”. More recently, in the case of
Mardorf Peach & Co. v. Atica Sea Carriers Corporation of Liberia (1977), Lord Salmon said
that “certainty is of primary importance in all commercial transactions”

Lord Devlin in Kum v Wat Tat Bank Ltd stated ‘the function of the commercial law is to allow,
so far as it can, commercial men to do business in the way they want to do it and not to require
them to stick to forms that they may think to be outmoded. The common law is not
bureaucratic.’ This non-intervention is justified on the basis that it promotes certainty. Courts
should only intervene if the contract terms are so restrictive or oppressive that it offends against
public interest.

However, freedom of contract cannot be absolute. The courts have tended to adopt a non-
interventionist approach on the assumption that there is equality of bargaining power between the
contracting parties. It is questionable whether this assumption is as valid today, particularly in the
light of the increased use of standard terms of business and the rise of monopolies in which
dominated by certain groups. Nevertheless, to the extent that the law is not concerned with the
fairness of outcome, commercial law reflects the principles of freedom of contract. Certain
authors suggest that assumption may be less than reliable today, at least as far as the consumer
buyer is concerned. However, ‘pure’ commercial contracts are often excluded from such
legislation, for example the Consumer Credit Act 2006 has no application to contracts with
companies or where business lending to an individual exceeds £25,000 and the UCTA 1977 does
not apply to, for example, international supply of goods nor insurance contracts.

However, certainty in law may lead to transactions occurred in bad faith or ‘unfair transactions’
to be upheld and thus the law, as its basic ethos dictates, should promote fairness. However, the
principal objections to general standards of good faith and fair dealing is that they threaten the
values of certainty, predictability and consistency to which English contract law is classically
committed. Currently, for example, a party can exercise his rights to terminate his contract for
breach even though it causes him no loss and even if his sole motive is to escape the
consequences of a bad bargain (Arcos v. Ronaasen). There are valid arguments for keeping good
faith out of commercial transactions, for example, the uncertain scope of the concept would make
it difficult to predict outcome of legal disputes, something valued by the commercial community
but it seems that standards of fair dealing are increasingly being introduced into English Law,
partly because of the harmonisation of commercial law in the European Union. For example, the
Unfair Contracts Terms in Consumer Contracts Regulations 1999 (UCTCCR 1999) and the recent

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Denning Law School
Huzaifa Muqadam
Commercial Law
© February 2020

Consumer Credit Act 2006, where extortionate credit bargain is replaced entirely by an ‘unfair
relationship test’.

3. They need the law to be flexible enough to take account of their latest business practices;

This need has been met by judicial recognition of mercantile custom and usage. Courts take
mercantile custom and usage into account when interpreting commercial contract. As commercial
people find new ways of doing business, the law needs to adapt to and accommodate these
changing commercial practices. For example, with the new technology being used in business, the
special problems of e-commerce are factors influencing the development of Commercial law.
However, not every trade custom and usage will be recognized by the courts. The presence of a
well drafted contract usually leaves a little scope for reference to customs and usage.

Where the courts are unable to take into account the mercantile practice which leads to frustration
of operation of commercial transactions, Parliament has intervened to provide a remedy for the
situation. For example, Carriage of Goods by Sea Act, 1992 avoids the problem of privity of
contract by allowing the buyer, the sub-buyer or the consignee of the goods (who is the lawful
holder of the bill of lading (or certain other documents commonly used in sea transport)) to sue
the carrier on the contract of carriage.

Even where Parliament has intervened, the Parliament has also sought to respond to and
accommodate the needs of the commercial community. For example, whenever the reform is
proposed, extensive consultation with the commercial community usually takes place before
reform proposal is tabled for example, the Sale of Goods (Amendment) Act 1995 and Consumer
Rights Act 2015.

4. They want their disputes to be resolved quickly, inexpensively and effectively.

This need is met to a greater degree by the practice and procedures of the Commercial Court and
the availability of the commercial arbitration. The Commercial Courts are flexible and operate
with minimum formality.

Further, the Arbitration Act, 1996 reflects a positive move towards providing fair, speedy and
cost effective resolution of disputes by an impartial tribunal. Further, in order to increase the
reliance on the arbitration, the Arbitration Act makes the arbitral award binding upon the parties
and with limited routes of appeal.

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 AN INTRODUCTION TO COMMERCIAL LAW
Denning Law School
Huzaifa Muqadam
Commercial Law
© February 2020

THE HISTORICAL DEVELOPMENT OF COMMERCIAL LAW

(a) The lex mercatoria

The modern commercial law has its roots in the lex mercatoria (the merchants’ code) of the
Middle Ages. The lex mercatoria derived its authority from voluntary acceptance by the
merchants whose conduct it sought to regulate. This, in fact, suited their needs and emphasized
freedom of contract and freedom of alienability of movable property. Some of the most important
features of modern commercial law were developed based on lex mercatoria such as the bill of
exchange, the charterparty and the bill of lading, the concepts of assignability and negotiability,
the acceptance of stoppage in transit etc.

(b) Incorporation of the lex mercatoria into the common law

In the 15th and 16th century, most of the business of the merchant courts was taken over by the
Court of Admiralty, which continued to recognize the lex mercatoria. In the seventeenth century,
however, the commercial jurisdiction of the Admiralty Court was taken over by the common law
courts. After merchant courts having been defunct, the common law courts captured most of the
nation’s mercantile litigation. But it was not until the late seventeenth and eighteenth centuries
that the lex mercatoria was fully incorporated into the common law. This was mainly done
through the work of LCJ Sir John Holt despite certain repellences over the complete
incorporation of lex mercatoria into the common law.

(c) The age of commercial codification

The development of commercial law through the common law led to a complex, and sometimes
conflicting, mass of case law. There was a call in the nineteenth century for codification of law to
have a widespread rationale, but it was restricted to certain specific segments of commercial law.
It, albeit resulted in drafting of Bill of Exchange Act, 1882; the Sale of Goods Act, 1893 and the
Marine Insurance Act, 1906 by Sir Mackenzie Chalmers and the Partnership Act, 1890 by Sir
Frederick Pollock.

(d) The rise of consumerism

The next great era of change came with the development of the welfare state after the Second
World War. During this period, there has been a move away from the principles of freedom and
sanctity of contract which had dominated Victorian1 thinking towards those of social
responsibility and the protection of the economically weaker against the economically stronger.
This change is reflected in the expansion of consumer protection legislation. It is essential to get
some idea of the relationship between consumer law and commercial law. Some see consumer
law as an application of general commercial law principles in a specific context. Whereas,
commercial law is concerned with transactions in which both parties deal with each other in the
course of business, consumer law is primarily concerned with transactions between ordinary
individuals and those who provide goods and services on a commercial basis. Whereas,

1 Victorian thinking refers to the ideologies and thought process prevalent during the reign of Queen Victoria from
1837-1901

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 AN INTRODUCTION TO COMMERCIAL LAW
Denning Law School
Huzaifa Muqadam
Commercial Law
© February 2020

commercial law is based on the premise that businessmen are of roughly equal bargaining power,
consumer law assumes that the consumer and business enterprise are economically unequal.
Whilst commercial law is happy for businessmen to regulate their own affairs through mercantile
usage2, usage plays only usage of the market in which the business provider of goods or services
deals, e.g. ‘a man who employs a banker is bound by the usage of bankers’ Hare v Henty (1861).
These fundamental differences in philosophy mean that whereas commercial law is non-
interventionist and essentially pragmatic in nature, consumer law intrudes into contracts made
between consumer and business supplier and is essentially an instrument of social policy.

It is certainly true to say that the legislature and courts have kept consumer law and international
trade law separate, e.g. the statutory control of exemption clauses under the Unfair Contract
Terms Act, 1977 does not apply to contracts of insurance, contracts of marine salvage or towage,
charterparties, contracts for the carriage of goods by sea, and international supply contracts.

Consumer protection law3 has developed into a subject worthy of study in its own right.

(e) A new lex mercatoria?

There has been work of bodies such as the Hague Conference on Private International law, the
International Institute for the Unification of Private Law and the International Chamber of
Commerce. Harmonisation has been achieved through a variety of mechanism, conventions,
model laws, uniform rules, codification of custom and usage or of trade terms, and model
contracts. Some scholars have argued that uncodified international trade usage constitutes a new
lex mercatoria.

2 The term usage refers to a uniform practice or course of conduct followed in certain lines of business or
professions that is relied upon by the parties to a contractual transaction.

3 Consumer Rights Act 2015 is pinnacle of consumer protection legislations. The 2015 Act consolidates the Unfair
Contract Terms Act, 1977, Unfair Terms in Consumer Contracts Regulations 1999, Sale of Goods Act, 1979 and
Supply of Goods and Services Act, 1982.