Commercial Law for Accountants

Sources of law:

Primary source: Commercial Code

Statute law: Companies Act and the Competition Act
Foreign law: UK law for insurance. Malta does not have a written law for insurance.
Usages of Trade: It has always been done like this and therefore, it is law.
Order of application
1. Commercial law
2. Usages of trade
3. Civil law
The commercial code is a branch of the Civil Law. It includes contracts and obligations. Unless
they differ they are not in the Civil law. Why is it relevant to know whether it is a commercial
of civil matter? Commercial law applies to traders and acts of trade- the commercial sector.
Traders are persons (including companies) that trade. A commercial act is the buying and
selling of goods, taking out insurance and leasing.
Three principals have an effect on the result. Commercial cases will be decided by a reward
of a financial compensation.
1. Automatic interest: In commercial cases, interest runs from the date the best came
into effect. When the debt drags on for a long time, it is significant. When budgeting
for cash projections, commercial interest needs to be considered. In civil cases
however, interest begins to run on the amount from the date of judgement or from
when the judicial letter is sent from the courts.

2. No time to remedy: If you have failed to perform commercial obligations, the court
should not give you time to remedy. In civil law, you are allowed. Ex: An individual
rents a garage and fails to pay rent. If in the meantime he pays up, the property will
remain in his hands. However, in commercial law, if lease was not paid in time, the
court should order the removal because time is of the essence. Therefore, the law is
more rigorous towards traders so they do what they are supposed to in a timely
manner.

3. Joint and several liability: Under commercial law, debtors are assumed to have joint
and several liabilities. Debtors, if more than two persons, are jointly involved to the
creditor who can sue them for the full amount severally. Therefore they are
individually liable for the whole debt. In commercial law, you can sue some of the
persons and they will chase the debts to pay up. In civil law however, one has to be
clear, either from the contract or situation, that various debtors are jointly liable. In
 civil law, debtors are liable only to their extent of the involvement in the civil matter-
just responsible for their own actions.

Define a trader:
A trader is a person, who by profession exercises acts of trade in his own name and includes
any commercial partnership.
Person: Therefore a trader can be either a physical person or a legal person. Legal person
include companies and legal entities established by law, such as the Malta Enterprise,
associations, NGOs, committees and trade unions. Unlike Criminal Law, where companies
cannot be prosecuted, but its directors, in commercial law any person can be a trader.
By profession: A trader can only be a trader if he exercises acts of trade on a regular basis, to
earn a profit or a living. Therefore, there is an intention to make profit. This is ones daily
work.
Own name: A trader can act on behalf of someone else as an agent or they can work through
an agent. If the person is acting on behalf of someone else, it is not this person than has to
answer for the debt, but the company/3rd party that he is acting for, who will be considered
as the traders. For example, the directors of a company are acting on behalf of the company
and therefore, they are not the traders, but the company is. If the person is not using his own
name to make acts of trade, he shall not be considered a trade and he cannot be sued.
However, this does not exclude the situation where this person is acting beyond his capacity
as an agent, by committing fraud or signing on behalf of a company when it was not aware of
this. In this case, it is the directors that will be sued and not the company. A person must
know its capacity of taking on obligations. Traders must therefore, act on their own name.
Commercial partnership: Persons can be a commercial partnership, such as, limited liability
companies (ltd) of public limited companies. This is to emphasise that persons can also be
companies.
The position of Directors or Managers:
Companies have a separate and distinct personality but they act through their managers and
directors. Between the company and the shareholders or directors there is the corporate veil.
The company is a person that took on a contract and it is distinct from its shareholders. The
company is liable for all its assets if it is not a limited liability company. Shareholders capital
is limited in a Public limited company, that is, they are liable towards the company for what
they still have left to pay. Therefore, the company is completely liable for debts and there is
a carrier between the liabilities of a company and those that make it up.
However, this corporate veil is not impenetrable. It can be lifted in particular situations. Ex:
Andrew Borg Cardona vs Fino: the defendants were directors, and the case was to establish
their responsibility for wrongful and fraudulent trades. They were found personally
responsible for the debts of the company and therefore, the corporate veil was pierced.
Directors and Managers responsibilities:
Although the company is the trader, individuals that manage the company are also liable for
some debts if they did not perform their responsibilities. The directors and managers of a
company are responsible to pay Financial Services tax and Social Security and to ensure that
healthy and safety and EIRA (Employment and Industrial Relations Act) regulations are
complied with. They also have to make sure that returns and payments such as VAT and
company tax are made.
Ex: Seabank hotel: An employee death because of lack of health and safety standards and the
directors were prosecuted. Although the directors were not directly involved, they were also
rendered potentially liable. Unless completely confident that all compliances are properly
covered, the directors are liable. Therefore, the directors have to prove that they took the
necessary steps to comply to avoid being found criminally, as well as civilly liable.
Acts of trade
Generally, the motive of making profit is the definition of an act of trade, whether or not
profit is actually made.
Acts of trade include:
i. - Any purchase of moveable effects for the object of reselling or letting them, whether
in their natural state or after being worked or manufactured. Ex: wholesale to sell
retail, denim to make jeans.
- Any sale or lease of movable effects, in their natural state or after being worked or
manufactured; when the purchase of this object was made with the object of reselling
or letting such effects. Ex: purchase of 200 burgers to sell at Uni. It is the intent to sell
that makes it an act of trade.

ii. Any banking transaction: Banking transactions are not an act of trade; commercial
loans. However, it is the corporate side, such as setting up a bank that is an act of
trade.

iii. Any transaction relating to bills of exchange: A bill of exchange is a written,

unconditional order by one party (the drawer) to another (the drawee) to pay a certain
sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of
goods and/or services received. When a bill of exchange is drawn up for the payment
of a ship by a company, it is an act of trade. However, it is drawn up to buy a personal
car, it is not an act of trade.

iv. Any time-bargain in securities

v. Any transaction relating to commercial partnerships or to shares in such partnerships:

Trading on the stock exchange, in the hope of earning a living is not an act of trade.
However, a stock broker, who does this as his full time job, is carrying out acts of trade.
 vi. Any transaction relating to vessels and navigation: Ex: Virtu. These vessels are bought
to transport goods over long distances with the aim of earning a profit

vii. Any undertaking relating to supplies, manufacture, construction, carriage, insurance,

deposits, public entertainment and advertising: This includes the creation of the
infrastructure to give a services. Ex: Mc Donalds setting up to sell burgers is an act of
trade.

viii. Any purchase and any resale of immoveable property, when made with the object of
commercial speculation, and any building enterprise. Ex: renting a flat is not an act of
trade. However, if you do it with the objective of making money, it is trading. It is the
motive that matters.

ix. Any transaction ancillary to or connected with any of the above acts: Anything you do
that is part of a commercial enterprise is an act of trade. Ex: renting a warehouse to
store good before they are resold is an act of trade. However, renting the same
warehouse to store furniture is not an act of trade.

Obligations arising from collision of vessels, assistance or salvage in case of wreck, stranding
or abandonment, from jettison or average are likewise commercial matters. Maritime
transport was very important before aeroplanes. Large volumes of goods are more
economical to transport by sea however. The maritime court was part of the commercial
court.
Every act of a trader shall be deemed to be an act of trade, unless from the act itself it appears
that it is extraneous to trade. For example, if a trader buys a house for his own family, it is not
an act of trade. Acts that are person are extraneous to trade and fall under the Civil law, not
Commercial law.
Any person capable of contracting, may trade, unless the law precludes him from carrying on
trade. Before, women were not allowed to sign contracts without the signatures of the
husband. Now, a married person needs to have the permission of the other party to enter
into a contract.
Minors
For a person to be a trader he has to be of legal capacity, therefore, he must have at least 18
years of age. This is because one has to know what he is doing to be able to contract. However,
people under 18 but over 16 years of age can trade if authorised by a parent by means of a
public deed registered in the Civil Court or where both parents are dead, interdicted or
absent, has been authorised by the judge of the Civil Court. Therefore, the minor will have to
be emancipated to carry out acts of trade.
Late payments in commercial transactions
Commercial transactions: Transaction between undertakings or between undertakings and
public authorities which lead to the delivery of goods or the provision of services for
remuneration.
Late payment: a payment that is not made on the date agreed upon in the contract or
according to law, and on the fulfilment of the conditions laid down under the law. The late
payments directive recognises that parties may agree that the title may remain with the seller
until the price is paid.
Legal interest for late payment: this means simple interest for late payment at a rate which
is equal to the sum of the reference rate and at least 8%. The directive recognises that goods
have to be delivered as specified, all the conditions have to be met. If not the buyer is not
obliged to pay 8%. If the trader is late to pay, he is subject to the late payment directive and
interest will start running automatically.
There is an automatic right to interest, and the law also contemplates credit periods and
periods for verification. The creditor may proceed to claim and seek interest without the need
to remind the debtor of the amount due. There are also provisions which do not permit the
exclusion of certain effects of the law, such an excluding interest by deeming them grossly
unfair.
Parties may agree that title remains with the seller until the full price is paid. It is important
to establish when ownership starts to know when the risk passes from the seller to the buyer.
Ex: cross-border transactions: If the goods are stolen, the court has to establish who the
owner was at the time of the theft, to know who should pay for the damage. Also, it has to
know where they got stolen.
The limits of competition
These are areas that are specific and specialised and relate to the relationship between the
trader and the consumer and to the strength of dominant traders in the market. Therefore,
we are not talking about the Competition Act or issues of anti-trust or concentrations in the
market. The competition mechanisms that traders use have to checked, as when traders are
protected against each other, customers are being protected indirectly.
Competition between traders:
This is the way in which traders compete against each other, balancing mutual rights and
interests.
1. Trade and other marks:
Traders shall not make use of any name, mark or distinction device capable of creating
confusion with any other name, mark or distinctive device lawfully used by others, even
though such other registered name, mark or distinctive device be not registered in terms of
the Trademarks Act. Traders cannot make use of any firm name or fictitious name capable of
misleading others as to the real important of the firm (Ex: Microsoft Malta LTD).
The trademark (logo) might not actually cause confusion, but it might be capable of causing
confusion with a prior user. Ex: St Joseph Pharmacy in Naxxar and Lija have the same name
but they are not causing confusion.
The intellectual property legislation considered the means of registering logos in your name.
The prior user has to protect his logo that he brought to the marker. Ex: M logo was used to
market the Tanti McDonalds. The court concluded that this is capable of creating confusion
with prior users. Ex: 123 powder is made of 3 ingredients and marketed in a blue packet.
Another trader made a product caller 123 powder with similar packaging that was capable of
creating confusion because of its popular name. Therefore, it was taken off the market.
2. Traders shall not engage in any comparative advertising:
Comparisons are only permitted only when the following conditions are met:

Comparisons must not be misleading

Comparisons have to be made between goods or services meeting the same needs or
intended for the same purposes.
The advertisement must objectively compare one or more material, relevant,
verifiable and representative features of those goods and services, which may include
price. For example, show testing: this type of cleaner can clean this type of stain better
than that other kind.
Comparative advertisements must not discredit or denigrate the trademarks, trade
names, other distinguishing marks, goods, services or circumstances of a competitor.
For products with a designation of origin, products must be of the same designation
to be compared.
Traders must not take unfair advantage of the reputation of a trade mark, trade name
or other distinguishing marks of a competitor or of the designation of origin of
competing products.
Comparative advertisement must not present goods and services as imitations or
replicas of goods and services bearing a protected trade mark or trade name. Knock-
and-copies.
It must not create confusion among traders, between the advertiser and a competitor
or between the advertisers trademarks, trade names, other distinguishing marks,
goods and services of a competitor.
Any comparison referring to a special offer shall indicate in a clear and unequivocal
way the date of which the offer ends or, that the offer is subject to the availability of
the goods and services, and if it has not yet begun, the period in which it shall apply.
Ex: Heinecken: probably the best beer in the world. This is not degrading other brands.
Therefore is you are going to compare, do it objectively, fairly and verify attributes.
3. Nature of goods:
Traders shall not make use of any false indication of origin of the goods. Ex: Italian silk cannot
be marketed as so if it was produced in Malta- do not use a false origin.
 4. Knocking Copy:
Traders shall not, for the purpose of competition, spread news capable of prejudicing the
business or trade carried on by other persons. A newspaper reporting that a good is faulty is
not illegal because they are not traders. Reporting the news will not breach the commercial
code. However, traders spreading news on social media about a good is a breach as it is
CAPABLE to prejudice the business of those people producing that good.
Moreover, they shall not make use of honours, patents, medals, prizes or other distinctions
to which they have no claim or which have been obtained for some other branch of business
or trade. Ex: Hopleaf is the best lager but it is not a lager. You cannot put a prize on the beer
if it has not actually won it. This is not allowed to protect the honest trader.
5. Employees:
Traders shall not suborn (corrupt) persons employed in the trade or business carried on by a
competitor for the object of knowing or exploiting his customers. One of the ways a trader
would try to corrupt the employees of a competitor is by offering to employ them. However,
this is not allowed as it can be considered industrial espionage.
A trader shall not, in the exercise of his trade or business, issue certificate of honesty or
competency contrary to the facts as known to him and capable of imposing upon the good
faith of others. Commercial law assumers that traders are entitle to rely on good faith of
other. A trader cannot issue certificates of honesty or competence if he know that the person
broke the law. Therefore, before issue such a certificate a trader must be sure that the person
is really an honest and capable person.
Consequences:
Any trader who contravenes any of the prohibitions, shall, at the choice of the injured trader,
be liable either to an action for damages and interest or to a penalty. The injured trader may,
further, demand that everything done contrary to the said prohibitions be destroyed or that
any other remedy be applied capable, according to circumstances, of removing the act
constituting the unlawful competition.
For example: counterfeit goods are usually destroyed if discovered, to protect the trademark
and trade name of the originals, and to stop people from producing counterfeit goods.
Ex: if a certificate of honesty got someone employed and he was not actually an honest
person, the person that issued it will be penalised.
Any action for damages and interest brought under this article shall be governed by the rules
of the civil law.
The penalty, however, shall be fixed by the Court at the suit of the injured trader, and shall
not be less than 10Lm or more than 500Lm, having regard to the seriousness of the fact, to
its continuance, to the malice of the offending part and to all other particular circumstances
of each case. Such penalty shall be paid to the injured party in settlement of all his claims for
damages and interest.
What is a contract?
A contract constitutes the law between the parties. For example, between those that provide
services and those that consume them. Once a contract is entered into, it must be respected.
In commercial contracts (B2B) the Court is supposed to give even more strength to the
contract: time to perform should not be granted and interest runs automatically.
The contract, especially in business to business contracts, will be given the strength of law if
litigated. Time is of the essence, There should be a timeframe in a contract and if the debtor
delays, he shall not be given any benefit as interest runs automatically, unless the parties
agreed differently of course. Ex: performance times: interest free as long as debtor is not
more than 3 months late in paying. What parties agree overrides the law as the contract is
the law between the two parties.
The formation of a contract:
A contract is entered into between two or more parties. Generally, sales contracts are
between two parties: the buyer and the seller. In commercial deals, the parties are rarely in
the same room: a contract may be validly entered into by fax, email or even just verbally.
The intention of parties is identical; the parties know and accept that they entered into an
agreement. If one person thinks that it is a lease but in fact it is a sale, there is no agreement
and the contract has not come into effect.
Unless its a transfer of property, there is no need for the contract to be in writing. The two
sides must establish the terms and conditions of a transaction that both recognise to be
binding. Most traders insist that things are put in writing. It a contract is not written, in a court
of law it will ultimately be the word of one trader against anothers. It is important to have
good evidence of the contract as the judge cannot believe what is not written down on a piece
of paper that is signed by both parties.
When does a deal become a contract?
A deal is often preceded by a period of negotiation: the offer/counter-offer/discussion
stage. The deal is closed and a contract is established when the will of the parties is
identical: once a final offer is accepted. It is a matter of evidence as to whether a contract has
been entered into when there is no actual document with signatures on it: this is why it is
important transactions are concluded more formally.
When does negotiation become an agreement? When the deal is perfected by both sides,
there is an agreement. The actual point in time that the agreement is reached is important
because of the risk inherent in the ownership of the goods. Whose are the goods while they
are in transit? If they are lost, who will suffer the loss? To answer all these questions easily,
an exact point in time where ownership is passed on to the other party has to be established
in the contract.
When a vessel is bought and sold, the registry will not only enter the date but also the time
so that if this vessel is lost at sea before it arrives at the buyer, or if it had a mortgage on it,
the owner has the right for some proceeds. Putting a mortgage on the asset before sale
defrauds the buyer and the lender as it is not yours anymore. A contract comes into effect
when the parties establish hat it came into effect.
The actual point in time
Under Maltese law, a contract is perfected when the parties become aware of each others
intention to be bound. Other systems of law rely on the date of transmission of the
acceptance by the acceptor or the date of receipt of the acceptance by the offeror.
Once the contract is perfected, there is no going back, though of course there may be legal or
contractual terms which allow withdrawal, such as a cooling off period or conditional terms.
Unless there has been a change in the agreement, the contract is in place. You cannot fail to
pay me and I cannot fail to supply the goods. Once the contract is entered into, not honouring
it will be illegal.
In back to back contracts, there is a causal link between my failure to abide with the contract
and your failure to supply goods to the government, for example. The seller can negotiate to
not pay consequential damages but normally this might be part of the contract. Therefore, it
is important to read the contract as the seller might be capping the losses. Ex: up to 100% of
the fees paid.
In B2B transactions, the level of damages is given effect by the courts unless there was a
fraudulent negotiation. Ex: a clause in fine print. If you can prove that a prudent business
would have made the same mistake, then it is fraud. People who commit fraud cannot expect
the protection of the law, which is why the directors of a company are deemed liable for
everything if they committed fraud.
The consequences of breaking a contract are damages that have to be paid to the injured
traders. If the result of dishonouring the contract is that goods were not supplied to the
government, the penalty that is incurred by the seller should also be paid in damages. The
injured party should also be compensated for the lost profit and consequential damages such
as being blacklisted by government which results in a loss of future income.
Passing of title and/or risk
Once the contract is perfected, title in the goods and the risk inherent in ownership passes
from seller to buyer. This is no dependent on payment of the price: payment may be, an in
commercial matters it often is, agreed for a different point in time and the parties must
regulate the position especially when the goods are in transit.
The responsibility to pay for transport and insurance should be regulated by the parties too.
Basic contract types: Who will pay for what?
CIF: Cost insurance freight (price includes the price, transport and costs of shipping in a
container). Cost, insurance and freight (CIF) is a trade term requiring the seller to arrange for
the carriage of goods by sea to a port of destination, and provide the buyer with the
documents necessary to obtain the goods from the carrier. It is important to establish the
practical information such as where the goods are coming from, how the freight covers you
and when the goods actually become yours.
FOB: Free on Board: the price invoiced or quoted by a seller includes all charges up to placing
the goods on board a ship at the port of departure specified by the buyer. The seller is
responsible to deliver the goods up to the ships rail.
C&F: cost and freight only. The price includes only these and insurance is the buyers
responsibility.
Factory Gate (Seller): the buyer is to collect from the seller. The price is just for the goods.
Therefore, insurance and risk is the responsibility of the buyer.
Landed (country/port): the goods are transported to buyers home port. Price includes freight
but not necessarily insurance. The seller is the owner until they land in Malta, at which point,
the risk will be passed on to the buyer.
Delivered to buyer: The goods are transported to the buyers premises. The price does not
necessarily include insurance.
Many contract contain terms by reference.
Contract terms by reference:
Often, certain chunks of the law are inserted by reference only. In Bills of Lading (ships) or
Airway Bills (the contracts for the carriage of the goods) for example, the Hague Convention
is referred to or the ICC Arbitration Rules. In commercial law, there are a series of
international agreements which establish the limits of liabilities, how a liability is determined
and how disputes are spelt out. By referencing them in the contract, these terms and
conditions can regulate the contract too.
These terms take effect as if they were written in the contract directly and it is the
responsibility of the parties to know what they are accepting. In B2B matters, traders are
assumed to know what they are doing and that they read the small print. Traders have to
make sure that they are not limiting the value of the claim if the goods are dropped. The
Hague Convention terms may need to be adjusted where the goods are of high value.
ICC: International Chamber of Commerce. This is an arbitration clause that can be included in
contracts just in case the dispute may need to be arbitrated. A private court is faster and
cheaper. The rules of the arbitration procedure, such are the language and location are
established in this clause. If a contract might lead to litigation, the ICC needs to be adjusted if
you dont want the arbitration to be in a different country.
Choice of law/ jurisdiction
It is open to the parties, generally speaking to choose what system of law to apply to their
contract by indication of the country and to give a particular judicial system or systems
exclusive or joint jurisdiction. Usually it is the stronger party that will impose the system of
law that they are most familiar with and the jurisdiction of the place that is the most
intimidating to the weak party.
Specific contract terms may refer to a system of law. May need to seek the council of English
lawyers if that system was the one chosen in the contract. This is because code based laws
dont necessarily have the same laws as English law. The English law is judge-made; common
law is interpreted by the Courts. The Court will judge depending on the system of law chosen.
If there is exclusive jurisdiction, the court in Malta will not have the jurisdiction and you will
have to use the English Courts. However, it is expensive to use the English courts and
therefore, the buyer would be less eager to go to Court.
The parties may choose to establish an exclusive arbitration clause instead of taking a dispute
to the Court. This is faster and cheaper to do.
Checklist: Who/What/Where/When/How?
All legal principles are subservient to the relevant contract terms being established.
What is being sold?
By whom to who?
Where will it be collected or delivered?
When will the buyer own it? Who suffered the loss when it is lost?
When and how does the buyer have to pay the price?
Who?
Especially when concluding contracts at a distance it is important for the identity of the parties
to be clearly established. This is even more important when the seller is not necessarily the
producer of the goods or even the owner at the time of sale: is the seller acting for someone
else and is the authority to act in this capacity valid?
It may be that the person by whom they are selling is not legal. The supplier might not have
done due diligence if the company is owned by a company. Identities of parties needs to be
established.
Who is the buyer and who exactly is the seller?
Is the seller authorised or capable to sell these goods?
Are the goods available for delivery by that person?
The buyer must also be authorised and capable to buy the goods and financially able
to pay the price. If there is a doubt about payment, there must be a guarantee.
If both sides are able to buy and sell and they know who the other party is, this question is
being answered. The more complex the transaction, the more likely that there is fraud. Ex:
Phishing.
What?
What is being sold by the seller and bought by the buyer? The consignment has to be
clearly identified to certify that it is correct.
Will there be identifying marks on the packing or on the goods themselves? What level
of packaging is required? Are the individual packers or boxes labelled?
 Will purchases actually be made by separate purchase order later or is the whole order
catered for in the contract? Is this one batch or separate transactions, and what
amount is being delivered?
Are the quantities clearing established and what about the quality issues? Who will
store it and make sure that it works?
Where?
Where do the goods originate? This is important to know as you may not be allowed
to buy from that country. Is it fair trade?
Where will the seller make them available or where will the buyer receive them? Port
or factory?
Where will the risk of ownership pass to the buyer? En route/upon reception/when
dispatched?
Where may the buyer make use of the goods? Are they allowed to make use of the
goods in China? Are you allowed to sell goods to particular countries?
When?
When will the goods be made? When the goods are made is important for food stuff,
medicines and goods with a short shelf life. Ex: Windows 7 or 10, what ar the specs?
When will the seller make them available?
When will the buyer be obliged to take delivery?
When does payment have to be made? Sold on credit/cash on delivery or dispatch?
How?
How will the parties further regulate their relationship? Ex: Arbitration clause, choice
of law.
What credit terms are allowed?
Is interest being charged? From when?
Are there penalty clauses for late delivery or bad quality? Can you change the goods
if they are no up to quality?
Will the seller be obliged to take the goods back in certain circumstances? Can the
buyer change his mind in a cooling off period?
The contract must be able to answer all the above questions to be able to stand up in court.
Credit instruments
Not all sales are made for cash. In B2B transaction this is hardly ever the case. Documents
confirm credit and give security to the seller that the price will be paid. This paperwork has to
be in place before sale to confirm credit and have security. The seller and buyer must
determine when credit is granted and for what period of time; this depends on their
bargaining power. Such documents include:
Letters of Credit: a letter issued by a bank to another bank (typically in a different country) to
serve as a guarantee for payments made to a specified person under specified conditions. The
parties establish the terms and the bank issues it.
Bills of Exchange: A bill of exchange is a non-interest-bearing written order used primarily in
international trade that binds one party to pay a fixed sum of money to another party at a
predetermined future date. They can be drawn by individuals or banks and are generally
transferable by endorsements. Once endorsed, the bill is cashable by any holder. The bill
may specify that payment is due on demand, or at a specific future date. Like a check, a bill
of exchange usually involves a buyer, a seller, and each persons bank.
Bank Guarantees: a promise from a bank that the liabilities of a debtor will be met in the
event that you fail to fulfil your contractual obligations. A letter of credit is an obligation taken
on by a bank to make a payment once certain criteria are met. On the other hand, a bank
guarantee guarantees a sum of money to a beneficiary. However, the sum is only paid if the
opposing party does not fulfil the stipulated obligations under the contract.
Ex: bank guarantees can be used to free up a garnishee order; a garnishee order is a court
order requiring the employer to withhold part of the wages owed to a particular employee
(the debtor) and pay the amount instead to that employee's creditor or the court in
satisfaction of a debt which is due. Until the case is decided, the person can make a bank
guarantee and the court will release the garnishee.
Performance Bonds: a bond issued by a bank or other financial institution, guaranteeing the
fulfilment of a particular contract. This is therefore, a document by the bank in favour of the
seller to ensure that he will sell the goods or issue a service. Ex: If there is no performance
bonds, the winner of a tender may not do his job and the government will lose its money and
have to ask someone else. The winner of the tender should therefore, draw up a performance
bond to guarantee the sale.
Invoice factoring: a business sells its accounts receivable (invoices) to a third party (a financial
services institution, a bank) at a discount. A business will sometimes factor its receivable
assets to meet its present and immediate cash needs, or to remove the hassle of running after
debtors. The bank will then turn back to the trade to pay the difference that was not paid.
If appropriate, the seller can protect credit by reserving ownership of the goods until payment
is made or guaranteed. If the goods were sold to a buyer and he didnt pay for them, the seller
cannot demand them back unless he reserved their ownership until full payment was made.
Consumer contracts
Much of what was said before relates to B2B contracts. Significant volumes of sales in
commercial operations are made to individuals who are not themselves traders. In cases like
these there is greater protection for the individual: the Court will allow time to pay and
interest will not run automatically.
Warranties are laid down by law and the consumer has the right to seek compensation from
the person who sold the goods and not necessarily from the manufacturer or importer.
Consumers get credit too: hire purchase, lease with buy back.
When giving credit to a married individual, it is important to have the consent of the spouse.
If a person is in the community of acquest, he cannot be given credit unless the spouse gives
consent as his assets are co-owned. Initially this was introduced to protect the wife but now
it protects both parties equally.
Such consent should be given in writing and if a power of attorney is used, the original should
be seen. If the person signing the consent is not present, ensure that the power of attorney
is correct because a signature is easy to fake.
Other contract terms to be included: a statement of the APR (Annual Percentage Rate), the
refunds due on early repayment (interest) , what restrictions on repossession apply when
there is failure to repay and the cooling-off period (customer may return goods without
penalty when they change their minds) that may apply at law. These terms should be
expressed clearly.
Bills of exchange
Bills of exchange are instruments of credit that have an autonomous existence, free from the
underlying transaction. They consist in an instruction to pay, accepted by the person making
the instruction, in favour of another person. Generally, the person instructing and the person
accepting to pay is the same person.
The instruction is to be executed ad literam and promptly in the place and amount noted
for payment. No defence other than fraud or issues relating to contractual validity of the Bill
itself may be raised. The Bill is transferable by endorsement. Liability for Bill is as shown on
the Bill itself and cannot be assumed.
Bills of exchange are similar to cheques as they an order to my bank to pay the amount to you
on a certain date. Bills of exchange are interpreted literally, it is a standalone document; it is
enforced on the basis of the information that is on its face. For example, if you listed you
name only, it is you that is responsible to pay. If you honoured a bill of exchange, you should
make sure that the other person tears it, if unless you want him to ask for another payment.
If it is not destroyed, it means that the debt has not yet been paid.
A bill of exchange is only avoidable if it is faulty in the way in which it was drawn up or if there
was fraud. This is because parties are assumed to know what they signed. Therefore, for a
person to make a bill of exchange, he should be over 18 years old, not interdicted and not
mentally disabled. A bill of exchange can be bought or sold and the closer to the date of
maturity, the lower the risk, and the more expensive it is to buy.
It is irrelevant whether the goods for which you have to pay were stolen or faulty, if there is
a bill of exchange you have to pay the amount on the bill. Since this document stands alone,
court cases are fast tracked as there is nothing more to say if the amount as not been paid
yet. The only thing that might defend the late payer is the form of the bill of exchange, that
is, if it was drawn incorrectly (no date/person) or if there was fraud in the transaction (fraud
corrupts everything).
Companies can also sign a bill of exchange. However, the person signing on the behalf of the
borrower should be empowered to sign and make it clear that he is signing on behalf of the
company. If legitimate, the bill of exchange works against the entity. If not, the person has
personal responsibility. Ex: If a manager is not empowered to sign and he does so anyways,
he is liable.
Bills of exchange are transferable by endorsement, that is, if signed on the back they can be
used to pay someone else. Bills of exchange are cash when they mature buy commercial
entities can transfer them before too buy selling them to financial institutions who will
discount the amount depending on the date of the maturity (risk). Ex: Sell bill of exchange of
10000 for 9000 to help the cash flow.
If the bill of exchange is not used or honoured, the holder of the bill has the right of recourse
(enforce) against the person who passed it to him, as well as the original person. Unless both
sides agreed, both are responsible. The chain of liability moves until the original debtor is
found. However, if the debtor does not have any money, it is useless taking him to Court as
he has no means of paying you. The debt is as valuable as the person undertaking the
obligation, which is why before selling the goods you should make sure that the buyer can
pay for them. This is called doing your due diligence.
Like cash, it is the signifier of value; no physical document, no money.
Insurance law
There is no written law relating to the concept of insurance itself. The only law relates to the
organisation of the insurance market. Insurance as a concept originated from Lloyds Coffee
House in the City of London, where merchants united to cover their own losses.
The basic concept has developed into a sophisticated industry, with ancillary skills, such as
financial planning, actuarial analyses (mathematicians) and loss adjusting. Also, risk
management and loss investigation becoming areas of expertise of their own. Usually only
large claims will be investigated; aircraft crashes, ship, buildings etc. Since the insurance
market has money to invest, it needs people specialised in that area too. Insurance companies
created a whole area of skills and concepts that did not exist prior.
The underlying concepts of insurance are:

That it is a contract of the utmost good faith

That it is a contract of indemnity (as opposed to a bet)
That it is a contract like all others, with two parties: the insured (the client) and the
insurer.
The contract is one of the utmost good faith (uberrimae fidei) and both parties are entitled
to rely on the assumption that each is acting in accordance with his obligations in this regard.
The client has to disclose all material facts the he knew or ought to have known, such as the
nature of the goods, the risk inherent in them and any historical issues that are material. All
contracts are made in good faith, but in insurance, this goes beyond. Therefore, the client has
to disclose all relevant things, even if he is not specifically asked about them. Ex: the client
should know whether his goods will be protected in transit; tell insurance company so that
he pays a higher price if they are not protected.
Insurance law was conceived in London when transhipment was at the beginning. Before,
trade was much localised, so the risks were low. However, transporting goods on ships is
riskier as they are more likely to be destroyed if the ship sinks, or if they are stolen by pirates.
Therefore, entrepreneurs decided to protect their commercial interest and to restore the
person who suffers the loss to the state he was before that loss. This is called reintegration.
The concepts were developed by case law; English law was developed by judges. A decision
in a higher court binds lower courts because of the binding precedent. In Malta, judges can
differ from courts; the persuasive system. Law is one of the area where binding precedent
had a large effect.
The main idea behind insurance is that money is put in a pot and if something happens to
someone, they can draw from it. The amount of money that has to be put in the pot depends
on the likelihood of the risk happening, therefore, on probability. Some of the money in the
pot goes as profit. However, Lloyds insurance is composed of a number of names who invest
in it but do so by becoming fully liable for the losses that it will cover. The syndicate of Lloyds
(a group of individuals or organizations combined to promote some common interest), will
offer insurance for damages to buildings from earthquakes, however, it is hits, the syndicate
might go down if the damages are too high. Catastrophic events are not predictable, but every
event has a number for probability. The actuarial will establish the liability of something
happening and how much it costs to restore you.
The premium depends on the likelihood of the even happening. Ex: What is the cargo? Is there
enough security? Are the containers locked? Where will it pass from? If cargo worth 3000 is
transported on a donkey, the risk of it being stolen is very high and its not worth insuring
them as the premium would be as high as the value of the goods.
An insurance broker is an agent that acts in the interest of the client. He is a specialist that
will guide you on what information should be given to the insurance company and which risks
should be covered.
Indemnity
This is a contract that gives rise to indemnification if the risk happens. The idea is not to get
a prize if something goes wrong but to be re-integrated into your position prior to the risk
happening. You can therefore be deemed to be your own insurer if you under-insure, but
over-insurance will get you no advantage.
This is what distinguishes insurance from betting, apart from the fact that in most jurisdictions
simple betting debts are not legally enforceable. The risk must not be a certainty, and you
get no more than you lose (leaving aside new for old and life insurance, where particular
considerations apply) Ex: somebody will win the match for sure, however, you can insure
against a game being cancelled to cover the revenue if the match is not played. It the risk is
certain, then it is a bet.
Ex: If goods are stolen already, you cannot insure against the event. In a bet you will not need
to be restored to the original position, and therefore, there is no insurable interest. Insurance
restored you to the prior situation (insurable interest), whilst a bet will get you money if
something happens.
For life and injury insurance, re-integration is not possible of course, however the risk will be
indemnified by giving a monetary compensation to the wife that is enough for her to live the
rest of her life without her husband. Insurance compensation will be calculated on how much
life is worth-this is impossible. Also, if insured new-for-old, you will get a new object back in
return for the old vehicle being stolen. Of course, a higher premium will have to be paid to
get back the full price of the vehicle.
If you undervalue the car, the insurance company will assume that you are insuring yourself.
If the value of your car is really 10000 but u say its 5000, the insurance company will only
pay you half. It is important to make claims that reflect reality and to act as if you are not
insured to minimise the loss. However, if you need to jettison to save human life on a sinking
boat, this does not mean that you did not minimise the loss as human life is valued. If you
over value the car, you will be paid based on the actual value of the car.
To have insurance---premium----risk----all material information is needed.
Disclosure
The insured party (the client) is obliged to disclose all material facts, both that he actually
knew and that he ought to have known. If there is fraud, the contract will be void and
damages might be claimed. Risk factors are anything which might be material, such as the
nature of the goods, the health of the client, type of transport and the location.
To take out insurance, the risk must actually be likely to happen. Ex: goods are unlikely to
freeze in Malta. Risks: fire, theft, accidental damage. The premium will go up or down
depending on the circumstances and you cannot force an insurance company to insure your
motorbike if the risk is too high- If no insurance is taken out, you cannot ride it then.
Obligations of parties
The client: He is to disclose all facts and pay the premium. If this is done, there is nothing that
prevents credit from being given. If the premium is not paid, he is not covered. However, he
can be granted credit and establish a date and time to pay to still be covered. The insured
party is obliged to minimise costs and to act as if not insured.
The insurer: To indemnify the client if and when the risk occurs. There needs to be uncertainty
for there to be a risk and to be indemnified.