What is Commercial Law?
Commercial law or business law is the body of law that applies to the rights, relations, and conduct of persons and businesses engaged in commerce, merchandising, sales and trade. It governs issues like sales of goods and services, security interests, negotiable instruments, principal and agent relationships, leases, contracts and much more.
Because various legal issues may be included or excluded from the subject of commercial law depending upon how expansively it is defined, it may be more helpful to consider the matter in terms of timing. Commercial law covers legal issues that arise prior to the initiation of a lawsuit. By contrast, once a lawsuit is filed, the same issues are more properly characterised as litigation. Thus, commercial law attorneys help their clients negotiate and enter into business deals. Litigation attorneys help their clients defend their interests in court when deals go bad.
Elements of a Contract
The ability to form contracts represents the foundation of modern commercial law. Without contracts, sellers and buyers would be unable to enter into transactions, as they would have no guarantee that the other side will honour its half of the bargain. That is not to say that contracts are based on the goodwill or trustworthiness of parties in the marketplace. Rather, contracts are based on a system of rules for forming agreements that, if followed, allows parties to rest assured that the terms of their agreements will be enforced by the legal system if necessary.
Contracts are formed when the following three elements are present: an offer, an acceptance, and consideration. For an offer to be valid, specific rules must be followed. The offer must be made to an identified party, and it must set forth definite and certain terms. The offer must also demonstrate a present intent to enter into an agreement. Similarly, the other party must properly accept the offer in order for a contract to be formed. In most situations, a valid acceptance must mirror the offer. A purported acceptance that adds new terms to the deal will not count. Instead, it will be treated only as a counteroffer.
The final element required to form a contract is known as consideration. Consideration refers to a bargained-for exchange. It means that the person who promises to do something must receive a benefit in return. Otherwise, the promise is merely gratuitous, and there is no contract. For example, if the owner of a lawnmower promises to lend it to a neighbour, no contract exists and the owner can later refuse. But if the neighbour pays the owner $10 in consideration for the right to borrow the lawnmower, a contract has been formed and the owner must honour it.
Third Party Contract Issues
In today’s complex marketplace it is not unusual for a contract to affect the rights of a third party – that is, someone other than the parties who created the contract. This can create a number of legal issues. Consider the example of a bank who lends money to a borrower. After making the loan, the bank sells its right to collect the loan to another company. Is the borrower obligated to pay the company, even though the borrower never contracted with them directly? And if the borrower fails to pay, can the company turn around and sue the bank for breach of contract? Commercial law provides answers to these and other such questions involving third parties.
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