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
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 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 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.
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.
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
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