An Introduction to the Commercial Law of Scotland

Commercial law encompasses a broad and diverse array of principles which govern the commercial relationships and transactions into which a legal person may enter. The field can be divided into two distinct parts - company law and the law relating to commercial contracts.

Company Law

Incorporation and the Corporate Form

To begin with, it is necessary to understand the different types of business organisation which exist in Scots law. The most crucial distinction is between the partnership and the company, both of which are business associations of two or more individuals in pursuit of a common objective, but only the latter of which is identified as a completely separate legal person.

Setting up a company entails drafting a constitution and gaining a ‘certificate of incorporation’ from the Registrar of Companies. This process, known as incorporation, yields definite advantages for members of a business association, notably the opportunity to enjoy limited liability for the company’s debts and obligations, and increased access to external sources of revenue through the sale of shares. Nevertheless, companies are not without disadvantages - formality, publicity and expense are all higher than they are in a partnership.

Companies can be classified according to various criteria. First, the Companies Act 1985 accommodates companies with or without share capital, and whose members subscribe with or without limited liability, hence the distinction between limited and unlimited companies. Second, companies can be either private (‘ltd’) or public (‘plc’). Only the latter are able to sell shares and debentures to the public, but the former are at least free from minimum requirements of capital and membership.

The principle of corporate personality, which applies to all companies, states that "the company at law is a different person altogether from the subscribers to the memorandum". It allows a company to buy and sell, sue and be sued, commit crimes and enter contracts in its own right, protecting its members behind a ‘veil of incorporation’. Generally speaking, this ‘veil’ will only be lifted where individuals have attempted to evade personal liability in a deceptive or fraudulent manner.

The constitution of the company, meanwhile, regulates its objects, status and internal affairs, through the memorandum and articles of association. In relation to company contracts, the ultra vires doctrine establishes an onus on the company and its directors to remain within the stated purposes of it objects clause. Since third parties now enjoy increased protection under amended company legislation, liability for losses resulting from ultra vires contracts falls squarely on companies and their agents.

Shares and Shareholders

Except in those few companies limited by guarantee, shares constitute the capital of the company. A company can divide its shares into separate classes and attach different rights, which usually relate to voting or dividend entitlements, to each class. Variation of the rights of a particular class necessitates support from a sizeable majority of shareholders from the class in question. Shareholders’ meetings provide an important forum for such decision-making, as well as a chance for members to raise concerns or voice opinions regarding the management of the company.

When a minority of shareholders comes into conflict with the main body corporate, the common law rule for dispute resolution is that any wrong is committed not against the individual, but against the company. Exceptionally, though, an aggrieved member can take personal action where fraud or unfair prejudicial conduct against the minority is alleged.

Directors

The director occupies a central position in the working of a company. Procedures for appointment and removal of directors are managerial issues which are normally contained in the articles of association.

Directors’ duties impose fairly far-reaching expectations; the director must at all times act honestly and in good faith in the best interests of the company, strive towards a proper purpose, and is obliged to meet the standard of skill and care expected of a company director. There are, however, various ways in which a director can avoid censure for breach of duties, including ratification of his actions, and discretionary relief under statute.

 

Commercial Contracts

Sale of Goods

Contracts for the sale of goods are perhaps the most important of the commercial transactions. Scots law regulating such contracts is identical to that in other parts of the United Kingdom by virtue of the harmonisation achieved in the Sale of Goods Act 1979. Both parties to contracts for the sale of goods are under certain standard obligations, and in most cases it is possible for them to agree upon other rights and duties for either party in addition or instead.

Consumer Protection

In order to reflect the difference in bargaining power between individual consumers and businesses, the legislator has intervened to provide protection to the consumer in three particular areas: contracts for the sale of goods, consumer credit, and unfair terms in consumer contracts.

In each case, the protections stem from statutory provisions and are bolstered by the underpinning principles of good faith and fairness.

Insurance

Insurance is a means by which legal persons can secure themselves against loss, accident and personal injury. The contractual relationship between the insurer and the insured depends on there being an element of uncertainty as to whether or when an event will transpire. If, or when, the event insured against does occur, an honest insured party who has paid all due premiums usually receives financial indemnity to the value of his resultant loss.

Bills of Exchange

A bill of exchange is a written promise from one person to pay another person, most commonly in the form of a cheque. The law permits bills to be endorsed and transferred by the original drawee, and thereafter onward to as many further buyers as are willing to purchase the ‘debt’ in good faith.

Rather than adopt the normal principles of property law, under which a stolen bill and forged endorsement would leave a subsequent buyer without any rights to cash in or sell the bill himself, bills of exchange are protected by the concept of negotiability. An innocent buyer acquires full ownership of even a stolen and forged bill, providing that he bought it in good faith and for value.

Commercial Security

In commercial terms, the principle forms of security can be defined broadly as undertakings from the debtor to the creditor that a particular obligation will be fulfilled. As an alternative, where a principal debt already exists, a contract may be formed between the creditor and a third party establishing a cautionary obligation - a guarantee from the third party that the debtor’s obligations to the creditor will be fulfilled.

Agency

In an agency relationship, the principal endows the agent with the authority to conduct negotiations and conclude obligations on his behalf. The appointment of an agent usually occurs by virtue of a contract, but the law can, in certain situations, deem agency to exist between two individuals whose relationship is not based on any written agreement.

Personal Insolvency

A debtor who is absolutely unable to pay his debts will usually have his belongings valued, their monetary worth distributed among his creditors, and ultimately face bankruptcy. Scots law has developed a process known as ‘sequestration’ to formalise the transfer in ownership of the debtor’s goods, as well as their eventual sale. The debtor’s property passes through the hands of both an interim trustee and a permanent trustee, before being sold to ensure that creditors receive at least part payment for the debts they are owed.