COMMERCIAL LAW & PRACTICE NOTES
INTRODUCTION TO COMMERCIAL LAW
Core Terms: Price, Payment, and Delivery
OUTCOMES
1. Research a company operating in a particular market sector and review an annual report to evaluate the
performance of that company. PREP TASK
2. Identify the objectives and concerns of a commercial client, both in the short and the long term.
TASK 1
3. Explain and apply simple terms in a sale of goods contract on price, payment, and delivery, in order to
advise on how to resolve a contractual dispute. TASK 2
UNIT WORKSHOP TASKS
1. Prepare a report on a company operating within the oil industry.
2. Analyse your client’s instructions following an interview with the client to establish its objectives and
concerns.
3. Complete a task on breach of payment and delivery obligations.
SOURCES OF COMMERCIAL LAW IN THE UK
The main sources of commercial law are:
(a) the law of contract;
(b) established custom and usage of the trade;
(c) national legislation;
(d) European Union law; and
(e) international conventions.
Supply Chain
The fundamental concern of a commercial supplier is
how to get his goods to the ultimate consumer in the
most efficient and cost-effective manner.
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One possibility is for a manufacturer (Manufacturer 1) to sell his goods directly to retailers, who will sell on to other
retailers or directly to the end user. This is, however, not the most usual arrangement, and often a ‘middleman’ in the
form of either a distributor (see Manufacturer 2) or an agent (see Manufacturer 3) will be involved.
A manufacturer will also be concerned with producing the goods as efficiently and cheaply as possible. One aspect of the
manufacturing process is the sourcing of the raw materials, goods, services, and utilities necessary to produce the goods
and enable the business to function effectively. (This is referred to as ‘supply chain procurement’.)
Commercial contracts are sometimes classified into two types: ‘upstream’ and ‘downstream’ contracts.
(a) Upstream contracts are typically those which provide the client with the resources needed in order to carry on
his business, for example, contracts for the supply of goods or services to the business, the supply of funds
through loan agreements, permission to manufacture through intellectual property licences and the variety of
contracts that come under the heading ‘overheads’, such as utilities, employees, IT, maintenance, security, etc –
in other words, contracts which require some sort of financial outlay by the business. These are outside the
scope of this book, but a commercial lawyer will need to be aware of their existence.
(b) Downstream contracts are those under which the client passes on and exploits the fruits of his labour, contracts
for the supply of goods and services by the business – in other words, contracts that generate income for the
business. It is these contracts that will be considered in this book.
When acting for a manufacturer, it is important to remember that the client’s objectives, and thus the drafting
considerations, will be very different depending on whether it is buying or selling.
Introduction to Commercial Contracts
Terminology (1.3, p5)
The Supply Chain Supply Chain Procurement:
o The sourcing of the raw materials, goods, services, and utilities necessary to
produce the goods and enable the business to function effectively.
Upstream Contracts:
o Provide the client with the resources needed in order to carry on business i.e.,
contracts which require some sort of financial outlay.
o e.g.,
Supply of goods or services to the business,
The supply of funds (loans).
Permission to manufacture through intellectual property licences.
‘Overheads’, such as utilities, employees, IT, maintenance, security.
o E.g., BP’s Upstream Contracts include oil and natural gas exploration, as well as
“midstream” services such as transportation, storage, and processing.
Downstream Contracts:
o Those under which the client passes on and exploits the fruits of his labour.
o E.g., contracts for the supply of goods and services by the business.
o Generate income for the business.
o E.g., for BP - Fuel refineries and marketing; convenience retail businesses;
lubricant sales; manufacture, sale, and distribution of petrochemicals for use in
consumer products.
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Standard Terms and Conditions
An important consideration for the client will be whether to use standard terms and conditions or individually
negotiated contracts.
In practice, it is very common for a set of terms to be put into a standard contract which a business will use for all
transactions.
Whether the contract between the buyer and seller is based on the seller’s standard terms and conditions or the buyer’s
will depend on the relative bargaining positions of the parties.
The buyer:
(a) will want the goods to be delivered on time, preferably to its own premises; and
(b) will want the seller to be liable for any defects.
The seller:
(a) will want flexibility for late delivery if, for example, it is let down by its own suppliers;
(b) will want the buyer preferably to collect the goods from its factory; and
(c) whilst it might be willing to accept some liability for defects, will not want to be liable for every trivial problem.
The use of standard terms ensures that the final contract suits the needs of whichever party has been able to insist on
their use.
Not all transactions are the same, and standard terms are never going to be suitable for every occasion.
However, they can provide a useful starting point for negotiation, and differences may be resolved without the need for
major revision. Standard terms and conditions have the added advantage of ensuring commercial certainty.
A commercial contract is a long and complex document, and so the cost of drafting individual contracts will be high.
Although some transactions may require individually negotiated contracts to be drafted, generally the parties will want
to avoid incurring these costs for each sale. Such costs would have an impact throughout the supply chain. A seller will
invariably try to pass the additional cost on to a buyer, and this will eventually impact on the ultimate consumer.
In addition, there are practical and administrative considerations in the use of standard terms and conditions. They
create standardised procedures which enable sales or purchasing representatives or junior staff, with proper training
and instruction, to safely use the standard terms and conditions to enter into contracts without having to refer back to
managers or solicitors every time. It is, however, essential that clients understand the need for proper training and
procedures to ensure that staff do not use standard terms inappropriately. One major practical difficulty is the need to
ensure that the terms are properly incorporated into the sales contract, and the so-called ‘battle of the forms’. Staff
must be trained to ensure that their company’s terms are the ones that are incorporated into the contract.
It is important that standard terms and conditions are reviewed regularly to ensure that they take account of any
legislative changes or new case law, and that they reflect any changes in the way that the client does business.
Standard terms and conditions are subject to greater regulation than individually negotiated contracts. Most
importantly, in B2B contracts in the UK, s3 of the Unfair Contracts Terms Act 1977 (UCTA 1977) subjects any exclusion of
liability contained in standard terms to the test of reasonableness.
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