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Business law and its effects on commercial transactions and licensing

November 5, 2021

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This article is authored by Magaonkar Revati, from Dayanand College of Law. This article deals with business law and its effects on commercial transactions and licensing.

Table of Contents

Introduction

The world is growing so fast with so many different kinds of new emerging businesses. It is one of the fields in which an individual can start on his own with sufficient knowledge of what he is going to provide to its customers/consumers, how this is going to attract the customers from different facets and there are so many little things which have to be observed and done clearly. When it comes to business there comes so many transactions including customers, vendors, suppliers, transporters, accountants, several transactions are going on in the day-to-day life of a business.

The most significant question and query that comes across about how to handle these all properly without leaving any spots for legal consequences. There comes the administration of business law which helps in handling the companies, entities’ business fairly. As business is a crucial part of life, it is necessary to have some sort of rules and regulations to control and operate it as well. Therefore, to maintain the discipline, specific business laws have been enforced.

Laws serve the purpose of protecting the consumers as well as the businesses. Any business which doesn’t accept the laws has to face penalties and consequences. Hence, it is necessary to know and be aware of the business laws for running a business. A business owner should know the effects of everything happening in his/her business and the transactions taking place about it. It is important to acknowledge the effects of the law over the transactions of the business and especially the commercial transactions. So here in this article, the detailed information about the business laws and their effects on commercial transactions and licensing are going to be discussed comprehensively.

Business Law

Business law is also known as “Commercial law” and “Mercantile law” which is anything that involves commercial matters. It is often considered a branch of civil law and it deals with both issues of private law and public law. It is a law that regulates corporate contracts, manufacture, hiring of practices, and the sales of consumer goods. Numerous states have adopted civil codes which contain extensive statements of commercial laws. In the United States, commercial law is the province of both the Congress under its power to regulate interstate commerce and the States under its police power.

Business law is a specialization which deals with all legal aspects that are required for running a business organization including the laws of copyright, workplace safety regulations, contractual law, financial law, IPR and taxation, and many more. It encompasses all the laws on how to start, set up a business, and how to run it. It includes all the laws for governing activities like how to set it up, how to manage, run, close the business activities and sell the business to others.

The very first efforts for passing an Act including mercantile/business law in India were made in 1872 bypassing the Indian Contract Act. After this enactment, in a large number, many laws came into force relating to the purview of business law. For instance: Sale of Goods Act, 1930, the Partnership Act, 1932, and the Companies Act, 1955, and many more. The main sources of mercantile law are the English Mercantile Law, Statute Law, Judicial Decisions, and Customs and Usages.

Importance

While discussing why it is important, the main purpose of this law is to maintain order, resolving disputes, establishing generally accepted standards, to protect the rights and liberties of the business and its relation with other businesses, government authorities, and customers.

Universal set of standards

In the earlier days, the consumers had to suffer a lot due to a lack of substantial law which could secure their interest and the money invested in a particular business platform. In an earlier period as there was no such law for maintaining order, rights, liabilities, etc. Business owners used to make their standards by which customers had to suffer just because of the want of owners to earn more money. While establishing the business law many different standards got established which are mandatory to all businesses worldwide.

Maintenance of stability

This law has made a sense of satisfaction within the customers. During the absence of business law, different countries had different laws regarding the dealing of business. It made the business activities hard among the various or two countries, it affected the sellers as well as the customers to make a proper deal. But now due to enforcement of business law, all the countries have the same standard so any deal between buyer and seller is easy to establish. Hence it brings relief to business deals and transactions all over the world.

Lower chances of fraud

Business law itself helps the business owners to be aware of the rights and laws against the other businesses and the individuals and vice-versa. Hence both can use them in case of fraud and misery in business.

Ethical conduct

Business law helps the owners to make better decisions and also to know when one needs to seek legal help. Every business has to follow and maintain ethical conduct but most businesses do not follow these ethics in the desire to earn more profits. Therefore business law makes it mandatory for all businesses to maintain ethical conduct which itself gives benefits to owners by creating a good image of the business in front of buyers or consumers.

Hence business law plays a very vital role and has a very significance for both the business owners and the consumers for protecting their rights and for getting a better service.

Business related laws (Acts)

Employment law

In today’s modern world it is necessary for a company even with one employee to stay updated with current employment laws. Therefore, to keep up with the pace of time and for the welfare of workers, it is important to give workmen compensation or health insurance to any employee if injury or damage is sustained during the work hours or they have faced health issues, or sexual harassment, and so on. There may be various circumstances when a company can face major financial liability for providing compensation to its employees, any other person who has sustained damage or injury due to the negligence of the employer. Hence an employer should always keep an eye on all the actions which are going on within the workplace. Even the smallest things can cause potential harm to the reputation of the business especially if employees are being treated unfairly.

Immigration law

There is a catena of cases where immigration law became a major part while handling the activities in modern businesses. In such businesses, the employees such as full-time, temporary, and special events workers who are from different countries working in India, while such appointments of workers who reside in another country, the employer or owner has to be more careful while appointing such workers. During such times an employer should know and be aware of the immigration law while dealing with foreign laborers. The immigration law refers to the rules and regulations established by the federal government for determining who is allowed to enter a country and for how much period. It also governs the naturalization process for those people who are willing to become citizens of any foreign country.

Sales of consumer goods

The Uniform Commercial Code includes the laws for governing financial transactions which are being carried out in foreign countries. This Code generally deals with all aspects from starting, such as contract, lease, fraud, security of transactions. This Code is complex as being ambitious to consolidate the laws in one place.

Drafting of contracts and negotiations

The contracts help the parties to be assured that they are administering the clause mentioned in the contract on the same level and if they don’t follow the contract they will have to face legal consequences in the future. The contract takes place in transactions such as from making a property lease to selling a product. The attorneys can help in the business by making the businessman sure about the interest being represented while the business entered into a contract.

Antitrust law

The antitrust law helps in being sure that the different businesses in the marketplace are being operated on a level playing field. Various companies use unfair trade practices for growing their share market but sometimes it becomes hard to recognize the unfair behavioral trend in one’s own business or company.

Intellectual property

Many times various companies or businesses need to protect their unique products in the market by patenting them, to keep them different from the other market competition. Elsewhere the others can copy the product on which a company worked hard and this can cause a huge loss to the business. Also, the copyright laws protect the creative work of the business and the business needs to file for protecting the business which is being identified by a different logo.

Tax law

When there is a business there is an income source and when there is an income source, tax law comes into play with the prospect of governing the same. Tax laws are rules and regulations which specify when, how and how much taxes should be paid to local, state, and federal authorities. Hence, tax is a charge applied by the government on the income of an individual, company/corporation, trust, and also on the value of an estate or gifts. There are some other forms of taxes as well, such as consumer sales taxes, use taxes, and real estate taxes, etc. The main objective behind assessing tax is for generating revenue which has to be used for the needs and necessary things for the public at large.

Bankruptcy law

Bankruptcy is a legal term used for a proceeding where a person or business is unable to pay back their outstanding debts. The process of bankruptcy can be initiated by filing a petition generally by the debtor or on behalf of all the creditors (petition on behalf of the creditors is not used most commonly). After the evaluation and measuring of all the assets of debtors, those assets can be used for repaying the amount of outstanding debt.

The legal process of bankruptcy is usually carried out for allowing the individuals or businesses to be free from their debts and also providing an opportunity to creditors to get their repayments. It also allows an individual to start fresh but it depends upon the credit reports for some years and it also makes it difficult to borrow money in the future for that specific individual.

What is a commercial transaction

A commercial transaction means when at least two parties or persons decide to form an agreement for exchanging items having value. Generally, there is money that is used as a consideration while forming a transaction or only in some of the cases where some other type of consideration or remuneration is given in return for goods and services which are going to be transacted. This applies to the transactions such as sales and ongoing agreements where an individual may invest (or receive an investment) into a business. There are different forms of commercial transactions including those which occur between two separate businesses or consumer and business, business and government entities, and between the internal decisions of a company. This transaction can happen on a large as well as small scale, in short, it can be said that commercial transactions are the heart of a business.

For instance: Sale is one of the most common commercial transactions. All the rights of a seller on a particular object get transferred to the buyer in return for the payment of the purchase price or amount. The object which is the subject matter of transfer may be movable or immovable and tangible and intangible.

International commercial transactions

This area includes the basic subjects from the private law of international trade concerning the sale and purchase of goods and services, distribution, agency, share production contracts, and other contracts, and transactions that are accomplished beyond the national boundary. International payments including documentary credits, goods transport law governing international transactions, dispute settlement of international transactions, guarantees, and insurance are the direct subject matter of the international transactions.

Elements of commercial transactions

Today, domestic as well as international commerce has experienced a very huge expansion far more than the earlier dimensions. Due to increasing commercial transactions, the demand for legal certainty has been increased specifically for the transactions relating to across national borders.

Contractual relation

One of the major responses to the practically identical transactions was the standardization of the contracts. The printed standard contracts laid down the provisions which are essential in the eyes of the drafting party. The departure from the printed form could only be negotiated after checking the economic strength of the other party. Individual enterprises, trade associations developed elaborate forms and standard contacts for their members. However, the same tact was used for international transactions. Apart from the standardization of contract practices these uniform conditions also helped for bridging the gap between many other various national rules. The development of uniform statutory rules was another unique character during the 20th century.

Sale of goods

It is one of the most common commercial transactions. In this, all the rights of the seller in a specific product get transferred to the buyer in return for a price. The object transferred may be tangible or intangible and movable or immovable. But not all transfer of goods to another person for any purpose constitutes a sale. Where the goods are only transferred for use only that is known as a lease, safekeeping, or storage (bailment), as a present (gift), in exchange for another good (barter). A sale involves the intention of the seller to permanently transfer the object by receiving a sum of money as a price in return for that object. When the seller makes parting from all the rights over the object in legal language is known as “transfer of ownership” to the buyer.

Sellers and buyers

The obligation of the seller

The seller has three duties, first delivery of goods, second transfer of ownership, and warranty by confirming the specifications of the contract and so on. Sellers should take care that goods are being transferred within time and with proper care at the place mentioned for delivery also in a manner prescribed by the parties. The buyer has a remedy for demanding the damages in case of non-delivery of the product and the damages will be measured according to the difference between the original contract price and the market value when substitute purchase has been done. It covers all the losses that occurred due to the sellers’ nondelivery.

Effects of business law on commercial transactions

After the enactment of business laws, there has been a drastic change in all commercial transactions. Commercial transactions include different business laws such as employment law, antitrust law, bankruptcy law, tax law, consumer protection law, labor law, negotiable instruments law, and many others laws relating to business. As the business includes different concepts it also has different effects of its laws on various commercial transactions. Business law has been beneficial for all businesses. Business law which is also known as mercantile law is concerned about the study of rights and the obligations which arise out of the business transactions between people related to business. Those individuals/mercantile persons carry on the commercial transactions. They may be any individuals, partnership firms, or joint-stock companies. The effects of business law are as follows:

Equality for the customers

Due to the enactment of business law, consumers’ rights are being protected. It helps the consumers from the unfair trade practices and the illegal rules and regulations formed by the sellers. Before the enactment of this law sellers used to violate the rules according to their comfort to fulfill their greed to receive maximum profit which consequently violated the rights of customers. The rights and duties of the customers are protected in the Consumer Protection Act, 2002. It helps the customer in acknowledging their exact rights and also duties towards the society of business. Hence, business law has made a drastic change in the consumer’s world.

Equal protection of rights of sellers

As the business law helped the consumers in protecting their rights, it also had made a legal formation for protecting the businesses and the sellers from their rights being violated. The provisions related to the sale and the seller, mercantile have been given under the Sale of Goods Act, 1930. It has provisions relating to the contract of the transfer of goods or transfer of property in goods for a specific price and there will be a contract of sale between the parties or part-owner and the other. The contract of sale automatically comes into existence as the transaction takes place. Under the contract of sale, the property in the form of goods gets transferred from the seller to the buyer, and that contract is called a contract of sale. But when the transfer of property or property in goods is going to be done in the future then that will be known as an agreement to sell.

Formation of contract

The contract is one of the important aspects of the business transaction. It provides better visibility to meet the duties and for achieving the object as agreed in the agreement between the parties. So the Indian Contract Act, 1872 has provided the most important provisions for commercial transactions. It provides great support in building a good relationship with the consumer or the desired party. Under this Act, important provisions regarding the business transactions have been provided in detail for the equal benefit and concern of parties. Contract management is a strategy being modified for managing contracts legally signed by the customers. It guarantees a standard procedure for business by providing clarity to the requirements of parties. It helps in achieving the desired goals of parties. In case if one of the parties fails to fulfill the expectations and if such failure happens which is called a breach of contract, the party causing such breach has to bear the loss. It is really important to get the contract drafted and ratified by a lawyer. So that parties can be assured about the validity of the contract and to avoid the contract being inevitable due to proof of details given in it, to avoid misunderstanding or misinterpretation.

Uniformization of rules

Business law has made the rules and regulations for all the subjects coming under the business law, uniform for all. So that there should not be any kind of mischief, difference, or misunderstanding between the parties in any kind of transaction. The Uniform Commercial Code (UCC) has been introduced for standardization of a set of laws and regulations for business transactions. This code came into existence because it was being difficult for companies to make transactions across the states due to different state laws. The UCC helps companies in making across-state transactions easy by giving a standard legal and contractual frame for it. The UCC consists of nine types of articles and these articles govern the different kinds of transactions which also include banking and loans.

UCC laws regulate the sale of personal property and other different transactions. When anyone purchases any business or any type of vehicle, In some cases there are chances of taking the buyer’s signature on a UCC-1 statement which states that the title remains in the possession of the lender until the total loan amount is clear.

Penalties for misinterpretation

There are penalties or fines given under different aspects of the business law, such as for breaching any contract, employment agreement, misrepresentation of being insolvent, etc. As the benefits or advantages have been given under business law there are also penalties and fines for breaching any rules or regulations. Such types of penalties have been introduced under business for reducing the illegal activities done in breach of law. For ex. Penalties provided under the Companies Act, 2013 are, as follows:

Section 182 deals with political contributions made more than limits, criminal liability denotes a maximum of six months of imprisonment.
Section 184 deals with failure to disclose interest held by directors in any company/contract/arrangement, etc.

The concept of the licensing

Licensing is a business arrangement where a company permits another company to manufacture its product in return for a specified payment. There are some faster and more profitable ways to grow the business than by licensing patents, trademarks, copyrights, and intellectual property rights to others. Licensing allows you to instantly excel your existing production, distribution, and marketing system for which other companies may have spent decades in the building.

In return for this, the original owner of the business gets revenue in percentage from the products or services being sold under the license of the real or original owner. Licensing fees are an amount paid for a right or ability to use a property or assets which are registered under copyright, patent, trademark, etc. For instance: In today’s world, the top 100 licensing companies have accounted for almost $160 billion in the retail sales of the licensed products out of the total call of almost $192 billion worldwide.

In this tough economic competition, it is becoming more crucial for licensing partners to maintain a healthy competitive environment. For the retail stores, licensed products become a cause for more benefit for attracting customers to their shop. Due to the brand value, the customers pick one store over another, and from the consumer point of view, it is worth spending a specific amount on the products by which they get trending and qualitative products.

For example:

Disney Consumer Products are at the top of the list with a $30 billion value in retail sales.
The Iconix Brand Group is in the top second position with $6.5 billion in retail sales after Warner Bros consumer products with $6 billion in retail sales.
Marvel Entertainment with the $5.7 billion.
Nickelodeon’s sales of $5.5 billion being rounded out of the top five licensors.

The list continues ahead, all the profit earned through licensing shows the earning capacity and the market value of a brand product of the original owner.

Types of licensing agreement

Licensing agreement is a legal contract between the parties in which one party who owns specific Intellectual Property (IP) (Licensor) allows another party (Licensee) to use its IP for which the licensor receives a payment that is known as as as a “Royalty” from the licensee for using the IP.

Patent licensing

Pate n ts include and give protection to science and innovation. By way of patent licensing the patent owner allows another person to use their innovation. By use of patent licensing, owners get the benefit of getting it manufactured and distributed in a wide range. The businesses or the individuals who create the patentable invention usually don’t manufacture and distribute it by themselves, however, they give licenses to another party to do it while getting the royalty payment. It is one of the complexes in maintaining and obtaining licensing.

Trademark licensing

Trademarks are usually used to signify the commercial source such as brand names and logos or slogans. Trademark licensing agreement allows the trademark owner to let others use their IP. For example Clothing, food products, etc.

Copyright licensing

It is an artwork included in the world of IP. It includes the works of visual art such as paintings, movies, songs, etc. Copyrights also have their existence in characters such as “Disney”. It’s generally used for the consumer goods just like the trademark licenses and also for distributorship for musical works, etc.

Trade secret licensing

It is a unique form of IP which is not registered under the government. While patents, copyright, trademarks become more valuable when they are registered under the government. Hence trade secrets are protected through their secrecy. The most popular example of a trade secret is the formula for making coca-cola. This agreement is non-disclosing, as the party receiving such confidential information cannot share or disclose it to anyone.

Effects of business law on licensing

Low chances of fraud

Due to licensing, the chances of fraud have been lowered to quite an extent. Like the products, logo, or characters in the name of business, trade secrets, methods, etc being protected under IPR in the form of patent, trademark, copyright, etc. The chances of illegal use of the name or method or brand are also lowered due to its strict privacy and security rules and regulations and the penalties provided under the law. In only some of the cases, the breach of licensing agreement is considered as a copyright infringement. When a licensee fails to pay the royalties as per the agreement then the copyright owner can declare the licensing agreement as void and has the right to sue in court for damages. If the use of copyright licensing is continued even after it is notified to the licensee after the cancellation of the contract, such an act constitutes infringement.

Selling of products on a large platform

Due to licensing agreements, the products go on a large platform for trading. It provides more options for being known in a large market and the branding of products. The licensor gets profit for the years he has spent in building the product name for its quality, fame, and lovable product in the marketplace. Due to its already earned fame, it becomes easy for retailers to sell or manufacture in a large amount or according to the market need. The customers choose the brand over the other unknown products.

Right to protect originality

The business laws help in protecting the originality of the products and inventions. Intellectual Property Rights help in preventing illegal use and acquisition of creative things, inventions, and different products and goods that belong to a particular individual, organization, institution, etc. IPR provides different provisions including managerial, privacy, and security rules and regulations.

Foreign direct investment

The licensing agreement helps in attracting foreign direct investment due to its quality and branding. Business law helps in international transactions of products such as clothing, goods, etc. Foreign direct investment helps in the growth of the country’s economy. As the difference remains in countries’ intellectual property rights, the investment incentive may also differ from country to country. It is ingrained in international IP agreements license, the right of relaxation in certain conditions.

The imposition of compulsory license has explicitly endorsed international law, hence it is one of the most significant reductions in rights and it also has a great latent impact in impacting both local and foreign investment practices. For instance: In today’s world, the investment in foreign licensing has increased in the medicinal plants and sectors, which is one of the most growing sectors today.

Conclusion

So the business law has the utmost impact on the industrial sector. Its usefulness in different subject matters relating to various sectors of commercial law, growing every day, helps in the evolution of business law. Businesses being one of the widest platforms available for the public at large, need to be updated from time to time. As the different provisions provided in all the parts involved in business law work simultaneously with different benefits. Its effectiveness can be easily seen while administration of various business activities, and eventually it results in the betterment of the business. Hence, it provides and saves the rights of many persons in the whole business world with its vital role.

References

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