Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

Learning outcomes

By the end of this lesson, learners should be able to:

1. Discuss the definition history and sources of Commercial Law

2. Critically analyse the philosophical foundations of Commercial Law
3. Explain the function of Commercial Law
4. Explain the link between Commercial Law to the Law of Contract

Content

There is no universally accepted definition of commercial law. Some examples of definitions:

“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 trade and business”.
It is the special rules which apply to contracts for the sale of goods and such contracts as are
auxiliary thereto, namely contracts for the carriage of and insurance of goods and contracts the
main purpose of which is to finance the carrying out of contracts of sale.
~H.W. Disney, The Elements of Commercial Law (1931), p1
According to Prof. Sir Roy Goode, commercial law is that branch of law, which is concerned with
rights and duties arising from the supply of goods and services in the way of trade.
~Goode on Commercial Law, 2010 p 8
It represents the totality of the laws response to mercantile disputes. It encompasses rules, statutory
provisions of whatever kind and from whatever source which bear on the private law rights and
obligations of parties to a commercial transaction.
~Goode, Commercial Law in the Next Millenium p 8-9
There is general agreement that by its nature commercial law is a subject of wide compass. It
embraces many different areas of law. It draws for its sustenance on all the great streams of law
that together make up the corpus of English jurisprudence, with the law of contract at its core.
~Goode on Commercial Law
What comes out clearly in these definitions is that Commercial Law is of a merchantile nature. It
is the Law of Commerce. It is concerned with commercial transactions: transactions in which both
parties deal with each other in the course of business. It is a subject with a wide corpus. It is a
pragmatic and responsive subject which looks to facilitate the commercial practice of the business
community. It is not a static subject. The subject continues to expand to accommodate emerging
areas like those of modern technology. We cannot, therefore, provide an exhaustive definition of
Commercial Law.
Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

Does commercial Law therefore exist?

Due to the hybrid nature of the subject, many people have often asked whether there really exists
a subject like commercial law. Many have queried whether commercial law is not merely a label
that is used for collection of many laws and therefore has no home of its own. It has been said that
in reality commercial law is no more than an agglomeration of distinct subjects (contracts, sale of
goods, banking) etc., boundaries of which may overlap but which otherwise share little in common
except the underlying foundations of the law of contract. Referring to distinct areas of the law
under one subject creates a problem for practitioners and students especially because the scope of
commercial law is not defined. It is not clear what spheres of commercial activity are included in
the subject
It is possible to get to a point of consensus and the difference in definition may not be as
fundamental. Thus, Goode in his latest edition agrees that Commercial Law is the totality of the
laws response to the needs and practices of the mercantile community. It is characterised by those
principles, rules and statutory provisions which are concerned with upholding and protecting the
acceptable customs and practices of merchants. This commonality in these specific subjects
justifies grouping them together as commercial law. E.g. in the US, these subjects are codified to
a Uniform Commercial Code.
Using the definitions provided here, Commercial Law has four fundamental characteristics: it is
based on transactions, not on institutions; it is concerned primarily with dealings between
merchants, in the broad sense of professionals as opposed to consumers; it is centred on contract
and on the usages of the market; and it is concerned with a large mass of transactions in which
each participant is a regular player, so that the transactions are typical and in large measure
repetitive and lend themselves to a substantial measure of standardised treatment.
Types of transactions covered in Commercial Law
a) The contract of sale, with its associated contracts of carriage, warehousing, insurance, and
finance
b) Equipment leasing
c) Receivable financing
d) Payment systems
e) Personal property security
f) Rights to investment securities
g) Modern technology, especially the teletransmission of trade and financial data and new
dealings in money, commodities and securities
h) Guarantees, commercial agency, banking transactions
The function of Commercial Law
In Kum v Wah Tat Bank Ltd [1971] 1 Lloyd’s Rep 439, Lord Devlin stated as follows: “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 might think outdated.
The common law is not bureaucratic”. The function of Commercial Law is therefore to facilitate
Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

commercial transaction, that is, transactions between parties dealing with each other in the course
of business.
Parties that are involved in commercial transactions, that is, business people, have special needs.
First, they demand that their agreements be upheld. Secondly, they require the decisions of courts
on commercial issues be predictable so that they know where they stand. Thirdly, they need the
law to be flexible enough to take account of their latest business practices. Fourthly, they want
their disputes resolved quickly, inexpensively and effectively. Both in its substance and in its
procedure, Commercial Law attempts to facilitate commercial transactions by endeavouring to
meet these special needs of the business community.
Judges therefore adopt a non-interventionist approach with regard to commercial contracts. The
judges work on the assumption that there is equality of bargaining power between commercial
men. This assumption underpins the two basic principles of commercial law: freedom of contract
and sanctity of contract. The late Professor Schmitthoff wrote that “…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…” The will theory sees
contracts as representations of the will of the people and therefore worth of recognition as such.
The theory asserts the value of individual judgment, volition, and the liberal principle of individual
self-determination. The most referenced legal opinion in the area of freedom of contract is Sir
George Jesse’s decision in Printing and Numerical Registering Co v Sampson (1875) 19 Eq 462
where he ruled that competent men and women of age shall have the liberty to contract and that
courts of justice shall enforce contracts when such contracts are entered into freely. In Photo
Production Ltd v Securicor Ltd [1980] AC 827 at 848 Lord Diplock held that contracting parties
are at liberty to decide the terms that they want to abide by and that this was basic principle of the
common law of contract. Brennan J later established in Baltic Shipping Co v Dillon (1993) 176
CLR 344 at 369 that a contract enables parties to create rights and obligations that will govern
their contract.
With regard to the predictability of legal decisions on commercial issues, courts have held that
there is need for certainty in those decisions. For example, in Vallejo v Wheeler (1774) 1 Cowp
143, Lord Mansfield said “in all mercantile transactions the great object should be certainty; and
therefore, it is of more consequence that a rule be certain, than whether the rule is established one
way or the other. Because speculators in traders then know what ground to go upon.
The historical development of Commercial Law
Modern commercial law has its roots in the lex mercatoria (law of merchant) of the Middle Ages.
Lex mercatoria is the Latin expression for a body of trading principles used by merchants
throughout Europe in the medieval period. Literally, it means “merchant law”. It evolved as a
system of custom and practice, which was enforced through a system of merchant courts along the
main trade routes. It functioned as the international law of commerce. It emphasized contractual
Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

freedom, alienability of property, while shunning legal technicalities and deciding cases ex aequo
et bono.

The notion of lex mercatoria is not new. Some say that it has its precursor in the Roman jus
gentium, the body of law that regulated the economic relations between foreigners and Roman
citizens. Others go further back in time and trace the origins of the lex mercatoria in the Ancient
Egypt or in the Greek and Phoenician sea trade of the Old Ages. In any case, it is in the Law
Merchant of the Middle Ages where the historical roots of the lex mercatoria can truly be found.
The flourishing of international economic relations in Western Europe at the beginning of the 11th
century caused the formation of the ‘Law Merchant’, a cosmopolitan mercantile law based upon
customs and applied to cross-border disputes by the market tribunals of the various European trade
centres. This law resulted from the effort of the medieval trade community to overcome the
obsolete rules of feudal and Roman law which could not respond to the needs of the new
international commerce. Merchants created a superior law, which constituted a solid legal basis
for the great expansion of commerce in the Middle Ages. For almost 800 years, uniform rules of
law, those of the law merchant were applied throughout Western Europe among traders.

Many of the laws of the lex mercatoria were established to evade inconvenient rules of common
law. An example in this regard is that a man could not give what he himself has not. In other words,
a man who has no title to goods cannot give title. Hence, when a person buys an object, for him to
be sure that he is the rightful owner of the title, he had to enquire into the title of that thing back to
its remote possessors, to make sure that no one in the chain of title had obtained it by fraud.
However, as per the laws of lex mercatoria, commercial business “cannot be carried on if we have
to enquire into the title of everybody who comes to us with the documents of title.” The Law
merchant established certain documents or choses in action which were transferable by delivery
and endorsement or by delivery so that the holder could sue in his own name and which passed
good title to the transferee who took them in good faith, notwithstanding the transferor had no title.
They could be sued on by their holder in his own name and were not affected by previous lack of
title. This instrument was the original negotiable instrument. Hence, it can be rightly said that the
law of negotiable instruments is founded mostly upon the laws of lex mercatoria.

With the rise of nationalism and the codification period of the 19th century the ‘law merchant’ was
incorporated into the municipal laws of each country. These laws blended with the national laws
Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

and thus lost its uniform character. When the states took over International trade, the new
mercantile laws were applied to regulate international relations.

However, the development of international trade after World War II showed some of the defects
of the traditional regulation of international contracts. The complexity of the private international
law and obsolete character of domestic laws did not rectify these flaws. The supremacy of national
law in international economic relations began to be questioned. It was then the present traders
started adopting alternative solutions to avoid the application of national law to their transactions.
By means of standard clauses, self-regulatory contracts, trade usages and by recourse to
international commercial arbitration, traders were creating their own regulatory framework
independently from national law, which can be called the new lex mercatoria

Incorporation of the lex mercatoria into common law

In the 15th an d16th centuries, most of the business of the merchant courts was taken over by the
Court of Admiralty, which continued to recognise the lex mercatoria, but in the 17th century, the
commercial jurisdiction of the Admiralty Court was itself taken over by the common law courts.
This was mainly due to the work of Sir Edward Coke. As the merchant courts were by then defunct,
the common law courts captured most of the nation’s mercantile litigation. In an attempt to keep
that business, the common law courts adopted some of the rules of lex mercatoria. But it was not
until the 17th and 18th centuries that the lex mercatoria was fully incorporated into the common
law. This was largely done through the work of Sir John Holt (Chief Justice of England from 1689
to 1710) and Lord Mansfield (Chief Justice of England from 1756 to 1788). Holt CJ was
responsible for important developments in the law relating to negotiable instruments, bailment and
agency, but was too conservative in his outlook to complete the process of incorporation of the lex
mercatoria into common law.it was left to Lord Mansfield to complete this task and earn himself
the accolade of ‘founder if the commercial law of this country’ 9 (see Lickbarrow v Mason (1787)
2 Term Rep 63 at 73, per Buller J).

The late Professor Schmitthoff wrote: “…the reform which Lord Mansfield carried out when
sitting with his special jurymen at Guildhall in London was ostensibly aimed at the simplification
of commercial procedure but was, in fact, much more: its purpose was the creation of a body of
substantive commercial law, logical, just, modern in character and at the same time in harmony
with the principles of the common law. It was due to Lord Mansfield’s genius that the
Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

harmonisation of commercial custom and the common law was carried out with an almost
complete understanding of the requirements of the commercial community and the fundamental
principles of the old law and that marriage of ideas proved acceptable to both merchants and
lawyers…”

After being incorporated into common law, a need arose to codify commercial law. Certain areas
of commercial law were therefore codified into statutes. They include the Bills of Exchange Act
of 1882, Sale of Goods Act 1893, and the Marine Insurance Act 1906. Other countries across the
globe also enacted their own laws to govern commercial transactions. In Kenya we have several
laws governing these transactions, most of which were “copy-pasted” from English laws. They
include: Sale of Goods Act Cap 31, Law of Contract Act, Hire Purchase Act Cap 503, and the
Chattels Transfer Act, among others.

Essence of lex mercatoria

The medieval law merchant (MLM), i.e. lex mercatoria, , which appeared between the eleventh
and twelfth centuries, comprised a relatively comprehensive, relatively efficient, legal regime for
trade beyond ‘local’ borders. This legal system was operated by traders and their agents. The
functional logic of the MLM is straightforward: it enabled merchants to escape conflicts between
various local customs and rules, and to avoid submitting to the authority of judges attached to pre-
existing jurisdictions (the courts of feudal manors, city states, local gilds, the Church). By the close
of the twelfth century, the MLM governed virtually all long-distance trade in Europe and, through
middlemen and their codes of conduct, at critical points along the great Mediterranean and Eastern
trading routes.

The MLM regime was ‘voluntarily produced, voluntarily adjudicated, and voluntarily enforced’.
The regime embodied certain constitutive principles, including: good faith (promises made must
be kept); reciprocity, non-discrimination between ‘foreigners’ and ‘locals’ at the site of exchange;
third-party dispute settlement; and conflict resolution favouring equity settlements. In practice, the
MLM required traders to use contracts, which were gradually standardized, and to settle their
disputes in courts staffed by other merchants (experts, not generalists). Traders and their merchant
judges placed a premium on quick judgments, and de-emphasized adversarial procedure. The
function of dispute resolution was not so much to declare a ‘winner,’ or punish a ‘loser,’ but to
Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

resuscitate the contractual agreement and to cajole the parties to get on with their business, using
norms of ‘fairness,’ as between the parties.

The effectiveness of the MLM depended critically on reputation effects, and the fear of being
ostracized from the trading community. As Milgrom and colleagues (1990) have it, the crucial
problem facing medieval long-range trade was the ‘costliness of generating and communicating
information’ about the histories of potential trading partners. The MLM performed as a kind of
information clearing-house about trading relations, making of reputations a transferable good, or
‘bond,’ within the community of traders. Third-party dispute resolution reinforced this ‘reputation
system’. Because the results of the merchant judge’s decisions were recorded, traders’ past
compliance with decisions could be monitored. The institutional setting supplied by the MLM
created the conditions necessary for constructing stable conditions favouring exchange in the
absence of a coercive state apparatus, by making promises self-enforcing and by placing future
contracting in the shadow of the law. Those who lost reputation lost trading partners and access to
the MLM.

The philosophy of commercial law

Eight principles can be used to explain commercial law:

Party autonomy

Businessmen should be free to make their own law, as it involves entering contracts.

Predictability

Judicial decisions on commercial transactions should be predictable.

Flexibility

Commercial law should be flexible enough to accommodate new practices and developments.

Good faith

In provision of information and dispute resolution, among other areas of commercial law.

The encouragement of self-help

Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

Acceleration clauses can be invoked, contracts can be terminated or rescinded, goods repossessed,
liens and rights of contractual self-help exercised, receivers and managers appointed, and securities
realised, without any need for judicial approval

The facilitation of security aspects

Security can be taken in the form of assets, tangible or intangible, usually with little or no formality.
It can cover present or future property, without the need for specific description, and it can secure
present or future indebtedness. The creditor has the option of security by possession, ownership
(mortgage) or mere charge.

The protection of vested rights

There is a general feeling that an owner should not lose his property without fault.

The protection of innocent third parties

Innocent buyers should be protected against proprietary rights of which they have no notice in
order to ensure the free flow of goods in the stream of trade.

The concepts of commercial law

The concept of a market

As one would expect in a body of law concerned with dealings among merchants, the concept of
a market is central to commercial law. By market is not necessarily meant a physical market but a
mechanism for bringing together substantial numbers of participants who deal in commodities,
securities or money and who make a market by acting as buyers and sellers of good and services.
Commercial law is influenced by markets in several ways. • Firstly the parties dealing in a market
are deemed to contract with reference to its established and reasonable customs and usages. • The
market price is also taken as the reference point in computing damages against a seller who fails
to deliver or a buyer who fails to accept the subject matter of the contract.

The importance of customs or usages or a trade of locality

Commercial courts will recognize established customs or usages such as those of a particular
locality where circumstances indicate that the parties were contracting by reference to the custom
or usage (may happen where there is no contract in writing or where a contract is ambiguous).
Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

The importance of a course of dealing

Since traders are often concerned in continuous and consistent course of dealing with the each
other, it is taken for granted that the usual terms apply whether or not spelled out in the contract.
Terms implied by a course of dealing are thus a fruitful source of implication into commercial
contracts

The concept of negotiability

This concept derives from the old law merchant and is a characteristic of commercial law. It
concerns the development of documents of title and negotiable instruments and securities, the
delivery of which, together with all necessary endorsements passes constructive possession or legal
title to the underlying rights. It should however be noted that with time there is the possibility of
decline of the use of negotiable instruments and securities as electronic funds transfers and other
forms of paperless transfers of security come in.

The enforceability of abstract payment undertakings

General contract law requires a promise not made under seal to be supported by consideration if it
is to be enforceable. But all kinds of legal magic can be worked by mercantile usage. It is generally
accepted that certain types of payment undertaking become binding when communicated to the
beneficiary despite the absence of any consideration or any act of reliance on the part of the
beneficiary. For example, the obligations of a bank issuing a documentary credit, a standby credit
and a performance bond or guarantee. These contracts do not involve an offer, acceptance and no
consideration.

Sources of commercial law

Contracts

The law of contract lies at the heart of commercial law. In the world of commerce goods and
services are supplied pursuant to terms of contracts made between businessmen. Some contracts
will be standard form contracts while others arise from negotiation. Often times commercial courts
will be called upon to construe the terms of commercial contracts. Over the years there has been a
shift from strict construction of commercial instruments to what is now referred to as commercial
construction of such documents.
Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

Custom and Usage

A custom is a rule which has obtained the force of law in a particular locality and a usage is the
settled practice of a particular trade or profession. Thus, the custom of merchants has always been
a fruitful source of law. A court may therefore admit evidence of a trade custom or usage to imply
a term into a Commercial contract or as an aid to construction of the contract. The custom or usage
should thus be one, which the court will recognize. In Cunliffe-Owen vs Teather and Greenwood
[1967] I WLR 1421 the Learned Judge pointed out that usage as a practice that the court will
recognize is a question of fact and law. The practice must be certain in that it is clearly established,
it must be notorious in the sense that it is well known in the market in which it is alleged to exist
and it must be reasonable. It must not be unlawful.

National Legislation Statutes

They are an important source of commercial law. They also play an important role in the regulation
of commercial transaction. Although most statutes are aimed at giving effect to the free will of the
parties, some statutes are designed to promote social and economic policies of the state rather than
the free will of individuals e.g. Restrictive Trade and Monopolies Act.

International Conventions, Model Laws, Uniform Rules and Uniform Trade Terms
International conventions

They have the force of law under 2010 constitution if ratified. Egs of international conventions:
Vienna Convention on contacts for the International Sale of Goods, UN Convention on
International Bills of Exchange. A model law has no legal force as such. It only provides a model
which a state can adopt in whole or in part. e.g. The Model Law on Bankruptcy which the
Insolvency Bill borrows from largely.

Equity

Since time immemorial, commercial lawyers resisted the use of principles of equity in commercial
law and argued that equity had no place in world of commerce. They argued that equity would be
inconsistent with the practice of speed and certainty, which are essential requirements for the
orderly conduct of business affairs. With the growth and development of commercial law however,
equity has slowly found its way and been embraced as a part of commercial law. E.g. Concepts of
Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

fiduciary duty, this is because much commerce today is based on trust; the relationships are likely
to be relationship of trust and confidence. With the growth and development of commercial law
however, equity has slowly found its way and been embraced as a part of commercial law. E.g.
Concepts of fiduciary duty, this is because much commerce today is based on trust; the
relationships are likely to be relationship of trust and confidence. Secondly, there has never been
a greater need to impose on those who engage in commerce the high standards of conduct which
equity demands. The common law insists on honesty, diligence and the due performance of
contractual obligations. But equity exerts higher standards than those of marketplace; loyalty,
fidelity, integrity, respect for confidentiality, and the disinterested discharge of obligations of trust
and confidence. The place of equity in Kenyan commercial law. In Henry Mbugua vs Patrick
Gachie Kigo, HCCC 652/2004, the court stated that “…Equity is the business of this court. And
equity will be readily administered where a party’s rights are being compromised and violated by
a thoughtless party moved by nothing but cupidity and breaches of trust. This court will dispense
equity in favour of the plaintiff, and it will be dispensed by building upon such foundation of legal
rights as would be found to exist…”

Summary

This lesson has introduced the Law of Commerce, a wide area of the Law whose importance to
commercial activities students must appreciate. Students have noted that this subject covers several
other subjects, so that at some point a question can be asked as to whether Commercial Law is a
subject or an amalgam of subjects dealing with the regulation of the commercial environment.
students must therefore be ready to read widely. Reading materials will be suggested at the end of
every lesson. The course outline also has a comprehensive list of cases and other reading materials
that students are advised to refer to.

Activity

Thinking ahead, expectations, the practical nature of Commercial Law

Revision questions

Test your understanding of this topic by answering the following questions:

Introduction to Commercial Law: MKUSoL Lectures by Augustus Mutemi

1. According to Prof. Sir Roy Goode, commercial law is that branch of law, which is
concerned with rights and duties arising from the supply of goods and services in the way
of trade. Do you agree with Goode? To what extent? Isn’t this too broad a definition? What
would you suggest are a more pinpointed definition of Commercial Law?
2. Having learnt about the function and philosophy of Commercial Law, do you think that the
subject is worth studying? Don’t you think that traders should just be allowed to define
their own sphere of interactions and be left to solve their own disputes without being
subjected to the law?