Commercial and Business Law

Chapter 2
Commercial Activity and Trader
Commercial Activity and Trader.

• Competitors • Consumers

Traders
(individuals Commercial
& Activities
Companies)

CC Commercial
Membership Registration

• Regulators • Law &

Regulations
Commercial Law and Commercial Activity:

Commercial law is that branch of private law concerned primarily

with the supply of goods or other services and businesses
provided by merchants for profit.
From this definition, we have some elements:
1. Business activities such as supply of goods or other
services; and
2. Merchants:
Commercial Law and Commercial Activity:

Commercial Law regulates all aspects of business, such

as: advertising, marketing, operation of corporations,
competition, bankruptcy, industrial property, banking,
contracts and trade in general.
These acts require both Rapidity, Credit and
Creditability
Characteristics of Commercial Activity:

Rapidity:
1. Commercial life is based on rapidity and this is due to
the nature of the operations of commercial activity and
its purpose is the speed of circulation of funds because
there are goods that are perishable and instable prices
need to be quickly concluded.
2. Disputes of commercial acts are resolved quicker than
other civil disputes, for example, commercial2 papers
disputes.
41 61 1
Characteristics of Commercial Activity:

Credit and Creditability:

1. All operations in business life need to be performed by trust and
credit, which means that traders receive commodities now and
pay in the future.
2.Commercial law protects the right of traders by applying strict
provisions.
3. For example, bankruptcy law liquidates the properties of those
who cannot pay the credit and compensates creditors.
4. Also, the law of commercial papers enforces payers to pay on
time and its litigation can be made as soon as the next day of the
due date.
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 The Scope of Commercial Law:

For the purpose of identify the scope of application of the rules of

commercial law, jurisprudence decided two approaches (theories).
1.Objective Approach (Theory):
Soft
The basis of determining the scope of application of commercial
law is the commercial acts. So, the condition is the activity itself,
not the person who practices it.

not
1.Subjective Approach (Theory):
The basis for determining the scope of the commercial law is the
trader. The condition is the identity of the trader himself, who
engages in trade.
The Saudi regulator considers both approaches as a basis for
determining the scope of commercial law.
 Approaches of Understanding Commercial
Law and Commercial Activity:

Objective (Material) Approach: Commercial Acts:

• This refers to the assumption that the Commercial Law regulates the
commercial acts whether are or not traders who intervene on them.
• These are objective circumstances, which has nothing to do with the
subjects who practice the act, so they are designated as objective
commercial acts. They can be practiced by any individual, trader or
not.
• For example, Faisal who is a professor, buys a classic car for resale.
He´s practicing an objective commercial act because the buy-resell
agreement is provided in the law. If David was a trader, the situation
will be exactly the same.
 Approaches of Understanding Commercial
Law and Commercial Activity:

Subjective (Personal) Approach: Acts of Traders:

• This refers to the assumption that the Commercial Law regulates
acts of commerce "all contracts and obligations of traders who are
not of civil nature“.
• It is therefore those acts that are commercial because they are
practiced by a trader on his own activity. Hence, they are called
subjective acts due to the subject who practices them, which gives
them commerciality.
• For example, if I apply for a loan to buy a house the act is
commercial for the bank but not for me; But if a trader asks for a
loan to buy goods for his company, the act is commercial for both
parties.
 Commercial Law and Commercial Activity:
Case Studies

"Ahmad", holder of a commercial establishment that is dedicated

to the sale of mobile phones. He acquired two mobile phones, the
first with the intention of using at the service of his company, and
the second with the intention to offer to a friend. Qualify, in a
commercial point of view, the purchase of the two phones.
On the first purchase, we are facing a subjective commercial act because
it is practiced by a trader in his own activity, which gives it
commerciality. However, the second purchase will not be a subjective
act even if practiced by a trader if it is exclusively of civil nature, if it is
not related to their commercial activity so it is merely civil, non-
commercial because it has nothing to do with the business activities of
"Ahmad".
 Commercial Law and Commercial Activity:
Case Studies

Badr is a farmer who sold a plot of land that he owned and where he
practiced his agricultural activity, to Creem who will use it as a
parking facility for the trucks of his transportation industry.
Is "Badr" a trader?
The Saudi Commercial law, excludes agriculture activities or any sale of its
products or and property made by farmers from being commercial. So
“Badr” is not a trader because he doesn´t practice commercial activities.
Is "Creem" a trader?
Traders could be commercial partnership companies, or any individual
person (natural person), who has legal capacity and practices regularly in
his own name for profit any commercial act. In this case the transport
activity is commercial, so (Careem) is a trader.
Sources of Saudi Commercial Law
 Sources of Saudi Commercial Law :

Islamic Law:
Islamic law is considered the common law for all
Muslims. It is the origin and source of all acts of any
kind and all natural as well as legal persons are subject
to it.
 Sources of Saudi Commercial Law :

Legislation:
Legislative texts in Saudi regulations are the legal source of Saudi
Commercial Law. They contain special legal provisions
developed by the regulatory authority to regulate certain legal
commercial relations. Among the most prominent of these
systems is the Commercial Court Law. There is another set of
regulations that have been amended or supplemented by the
Commercial Court Law: Commercial Registration Law,
Trademark Law, Patent Law, commercial paper Law, commercial
Anti-Fraud Law.
 Sources of Saudi Commercial Law :

Commercial Customs: slob

Most of codified laws are derived from the customs that have become
obligatory over years. For example:

The basis of the assumption of solidarity between debtors in

commercial debt if they are many.

Commercial customs are always considered by judges as they are not

in conflict with the law.
 Sources of Saudi Commercial Law :

Judicial decisions:
– Judicial decisions are considered to be interpretative of the law.
– They are of particular importance in the scope of commercial
law for filling the gaps in the legislation and making it more in
line with the developments of commercial life.
 Sources of Saudi Commercial Law :

International Law:
Several international conventions have been concluded and
accordingly some model laws have been drafted in order to
establish norms in specific areas:
Examples:
1. Vienna Convention on the International Sale of 1970 and
International Transport.
2. Decisions made by International Chamber of Commerce.
3. The United Nations Commission on International Trade Law
 Importance of Distinguishing between
Commercial Law and Civil Law

1. Commercial Jurisdiction
2. Proof of evidence
3. Solidarity
4. Period of grace
5. Bankruptcy
6. Notification
 Importance of Distinguishing between
Commercial Law and Civil Law

Commercial Jurisdiction:
Commercial Jurisdiction refers to that there are certain courts that
deal with the commercial disputes. In the Saudi Judiciary system,
commercial disputes are settled in Commercial Courts, Quasi-
Judicial Committees, and by the Alternative Dispute Resolution
methods.
 Importance of Distinguishing between
Commercial Law and Civil Law:

Proof of evidence:
According to commercial law, commercial acts can be
proved by all means of proof without waiting for the
requirement of writing. Proof of commercial acts may be
proven by any evidence, such as commercial books,
invoices, and other trade correspondences, but NOT by
testimony of witnesses anymore. Why?
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Importance of Distinguishing between 4
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Commercial Law and Civil Law: a
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Solidarity:
In Civil acts, solidarity of debtors is not required unless the
contract states that.
In commercial acts, where the acts made for the purpose of
profit, solidarity by default is assumed among the debtors or
any one of them. This is because the principle of solidarity in
the obligations of trade is assumed even if not included in
the contract, so the creditor has the right to refer to anyone of
these debtors and demand his debt with no right for them to
claim that the debt is divided among them.
 Importance of Distinguishing between
Commercial Law and Civil Law:

Period of grace:
In civil debts judges may give debtors extra time (period of
grace) to pay the debt later.
In the case of commercial debts, which results from business
activities, the judge does not have the right to give debtors
such time to pay creditors.
Because in commerce, usually, traders need liquidity in order
to move up the business. So, it is important for debtors to
pay on time.
 Importance of Distinguishing between
Commercial Law and Civil Law:

Bankruptcy:
Bankruptcy law is a legal system applied to merchants when
they fail to pay their debts. It holds their assets and stops their
ability to manage and control the business. It appoints an
administrator to take over the money of the bankrupt
company and repays the debtors. This process applies to all
those who enjoy the merchant's status. Bankruptcy is
practiced under two conditions:
1.It is done on a merchant who is practicing commerce;
2.The process should be done professionally.
 Importance of Distinguishing between
Commercial Law and Civil Law:

Notification:
The general rule in many of countries states that: the basis in
civil debts, is to give the debtor an official written notice
registered at post recorders or notaries, while the basis in
commercial debts, that there is no need for the written notice,
and it is enough to give an oral notification or by telephone
or via email, fax or by any other tool.
The practice of such action in Saudi Arabia is that there is no
obligation for creditors to notify their debtors in order to
claim debts in front of court. This is applicable in both civil
and commercial debts.
 Commercial Activity by Nature:

Commercial Activity could be practice by its nature, through two

means:
1. Single Commercial Activities: (even if practiced once. This
includes):
A. Purchasing Goods for Reselling;
B. Commercial Papers;
C. Banking Transactions & Money Exchange;
D. Brokerage;
E. Maritime Commercial Activities.
1. Profession of Commercial Activities (Enterprise):
 Commercial Activity by Nature:
1- Purchasing Goods for Reselling

1. Single Commercial Activities: (even if practiced once. This

includes):

Provisions:
I if
A. Purchasing Goods for Reselling;
I
• Purchasing the goods, not possessing the goods by other means
such as inheritance, agriculture, intellectual production,
practitioners.
• They must be commodities not real estate, such as lands and
buildings.
• Initial intention of reselling (or renting). This intention can be
proved by all means of evidence.
 Iiii Commercial Activity by Nature:
Ñ 2- Commercial Papers
Prg S
61,1
B. Commercial Papers (Negotiable Instruments).
1. Bill of Exchange. (Always commercial)
Written draft by a party (maker or drawer) ordering another
(payer) to pay a certain amount to a third party (payee).
2. Promissory Note. (only if related to commercial activity)
Written promise by a person (promisor) promising to pay on
demand a specific amount of money, called "principal”, to another
(promisee), what they owe them.
ing 3. Check. (only if related to commercial activity)
Is s a draft of a particular account in a bank, in which the drawer,
the person who has the account and signs the check, directs the bank
to immediately pay a certain amount to the payee.
 Commercial Activity by Nature:
2- Commercial Papers

The Commercial Papers (Negotiable Instruments):

• Commercial Papers is defined as a transferable, signed
document that promises to pay the bearer a sum of money at a
future date.
Commercial Papers are used:
• To be means of making payment.
• To be means of credit.
• To make future payments.
• To avoid cash risks.
 The Commercial Papers : Example

A trader X -a book publisher- sold books to a trader Y -bookstore- for the

mount of SR 20,000 on three months credit.
X may send an order to be signed by Y to pay the amount on the date
agreed. This written document signed by Y shows his acceptance of the
order.
X can hold the document with him for three months and on the due date
can collect the money from Y.
X can use this document for another transaction, for example, after one
month he can buy goods with the same amount from Z and pass him the
document by instructing Y to pay the money to Z on time.
Now Z becomes the owner of this document, and he can claim the money
from Y on the due date. This process can continue till the end of three
months.
 Commercial Activity by Nature:
2- Commercial Papers

General aspects of Commercial Papers :

• The subject matter of the negotiable instrument is an exact
sum of money.
6915411 if
(can we consider stock shares and debentures Commercial
Papers? Keep in mind the amount, and due date).
• Commercial Papers are payable on (short-term) due date.
• Each type of Commercial Papers should be formed and
written in a certain way as decided by the law.
• The Commercial Paper should include all information
required by the law.
 Commercial Activity by Nature:
2- Commercial Papers

General aspects of Commercial Papers :

• Each signature on the paper is independent, which means if
the maker or drawer has a mistake in his capacity to sign, this
will not affect the right of the payee.
• Commercial Papers are dealt with ‘good faith’. That means
a barrier can ask all signatories or any of them to pay his right
on the Commercial Paper.
• A litigation can be made as soon as the next day of the due
date.
 HIIIII In
Commercial Activity by Nature:
3- Banking Transactions & Money Exchange

C.Banking Transactions & Money Exchange.

Banking Transactions includes:
Opening accounts, accepting deposits, renting safes, transactions
relating to securities, collecting commercial papers’ value,
banking guarantees…
Money Exchange includes:
Exchanging local with foreign currencies either hand to hand or
through transferring.
 Commercial Activity by Nature:
3- Banking Transactions & Money Exchange

“Banks have become a financial marketplaces, offering services in cash

management, investment advice and brokerage, and business financing”.
As a result, the relationship between businesses and banks is a complex
one.
Banking Agreement:
The banking agreement sets out the rights and obligations of a bank
and the customer. Its purpose is to specify who has authority to issue
instructions to the bank on behalf of the customer and to allocate the risk
of loss associated from difficulties with verifying the customer’s
authority and carrying out the customer’s instructions and sets out
service charges.
In Islamic Banking, Islamic law imposes additional duties on both
parties to a banking contract.
 Commercial Activity by Nature:
3- Banking Transactions & Money Exchange

Duties of a Bank Duties of the customer

Providing account information to the Providing documentation as to who
customer. is authorised to give instructions to
the bank.
Maintaning security of customer Keeping authorisation secret
affairs.
Providing safeguard on electronic Notifying the bank of suspicious
communications. problems.
 Commercial Activity by Nature:
3- Banking Transactions & Money Exchange

• A bank is a financial institution that serves as a financial

intermediary.
• A commercial bank accepts deposits and pools those funds to
provide credit, either directly by lending, or indirectly by
investing through the capital markets.
• Conventional Commercial banking is based on a pure
financial intermediation model, whereby banks mainly borrow
from savers and then lend to enterprises or individuals. They
make their profit from the margin between the borrowing and
lending rates of interest. The most important feature of
Conventional banking is that the principal amount of the
‘deposit’ is guaranteed.
 Commercial Activity by Nature:
3- Banking Transactions & Money Exchange

• Central Banks circulate money on behalf of governments and

acts as its monetary authority by implementing monetary
policy, which regulates the supply of money.
 Commercial Activity by Nature:
3- Banking Transactions & Money Exchange

What are Banking Activities ?

According to article 1 of BANKING CONTROL LAW
l "Banking Business" means the business of receiving
money on current or fixed deposit account, opening of
current accounts, opening of letters of credit, issuance of
letters of guarantee, payment and collection of cheques,
payment orders, promissory notes and similar other
papers of value, discounting of bills, bills of exchange and
other commercial papers, foreign exchange
transactions and other banking business.
 Commercial Activity by Nature:
3- Banking Transactions & Money Exchange

The main principles of Islamic Banking and finance include:

1. The prohibition of taking or receiving interest (Riba);
2. Capital should have a social and ethical purpose not just pure
return;
3. Investments in businesses dealing with alcohol, gambling, drugs or
anything else that the Shari’ah considers unlawful are prohibited;
4. A prohibition of uncertainty “Gharar” about the subject-matter and
terms of contracts.
5. The prohibition of selling something that one does not own.
6. Profit and loss sharing is an essential element in banking
operations.
 Commercial Activity by Nature:
4- Brokerage; Commercial Agencies.

D. Brokerage; Commercial Agencies.

– “Commission agent is a trader who engages in trade for, and on
behalf of someone else, so he transacts on his name or his
entity’s name for the account of his client”
– Agency stands for: Middleman; Intermediary.
– There are two types of agencies:
1. Commission Agency
2. Contract Agency
 Commercial Activity by Nature:
4- Brokerage; Commercial Agencies.

D. Brokerage; Commercial Agencies.

It is a business that arranges contracting between a buyer and
seller for a commission (a percentage of the sales price, or a set
fee).
It is considered a commercial activity by all means,
– Even if it is practiced by a broker for one time only.
– Whether if it is the broker’s profession or not.
– Whether if the broker is a trader or a normal person.
– Whether if it is done on commercial or civil transaction.
– The identity of other parties (seller and buyer), depends on
actual identity and the transaction: commercial or civil.
 Commercial Activity by Nature:
5- Maritime Commercial Activities:

E. Maritime Commercial Activities.

All activities relating to maritime are considered commercial
including:
– Building, repairing, selling, purchasing, renting and hiring.
– Employment contracts for a ship crew.
– All other contracts, such as loan, mortgages and insurance
contracts.
– All the above are commercial in respect to the ship owner, but
the other party depends on his identity.
 tolex
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Commercial Activity by Nature:
2- Profession of Commercial Activities:

2. Profession of Commercial Activities (Enterprise):

– Enterprise is an organizational entity established to produce, exchange or
trading on commodities or services.
– Civil transactions such as agriculture, intellectual production and
practitioners could be considered commercial if transacted in a way of
enterprise.
Enterprise has two conditions:
I. Professionalism: is an occupation, a practice, or a vocation requiring
mastery of a complex set of knowledge and skills through organizational
body.
II. Speculation: is a process of buying and selling in the hope that the value of
what you buy will increase and that it can then be sold at a higher price in
order to make a profit
 Commercial Activity by Nature:
2- Profession of Commercial Activities:

Types of Enterprises:
1. Industrial Enterprises: where raw material is transformed to goods.
2. Goods & Services Supply: where goods or services are frequently
provided.
3. Commission Agency: where an agent buys or sells goods on behalf of
his principal in return of a fee.
4. Transportation Enterprises: where transportation services are
provided.
5. General Services Enterprises: where general services are provided to
the public by authorized firms in return of a fee.
6. Auction Enterprises: a public sale of a property to the highest bidder.
7. Building Construction: where a contractor provides materials and/or
workforce.
 two 5161
Relatively Commercial Activity:

– Some acts, which in their nature are civil acts, could take
the commercial status if they are practiced by a merchant
and related to the affairs of his business.
– The Saudi law does not refer to this issue, but according to
Saudi Judicial practice, all such cases will be resolved by
commercial courts.
– So, all acts performed by a merchant to serve his
commercial purposes are also commercial in the eyes of the
law.
– For example, all furniture, such as offices, computers,
printers are considered to be commercial transaction as they
sever the commercial acts of the merchant.
 Relatively Commercial Activity:
Conditions:

In order to consider civil acts as commercial acts. There

should be two conditions:
1- These acts must be practiced by a merchant
(trader).
Because the civil acts will take the identity of a trader.
2- These acts must relate to the trader's trade (his
core business).
In order for a civil act to be considered commercial, it
must be directly linked to the merchant's trade and to the
merchant's practice of this act.
 Mixed Commercial Activity:

Mixed commercial acts are those acts that are considered

commercial to one party and civilian to the other.
Example:
If a civilian opens a bank account, then this act is civilian for him
and commercial for the bank.
If a trader opens a bank account, then this act is relatively
commercial act for him and commercial for the bank.
 Merchant (Trader):

Definition of Trader:

A Trader is a businessman who trades in commodities in order

to earn a profit.
In Saudi Law:
A Trader is:
“Anyone who practice a commercial activity and takes it his
1
profession”. (Art. 1, Commercial Code or Commercial
Court Law).
 Merchant (Trader):

Requirements of Trader Identity:

1. Profession of Commercial Activities: Trader should practice
commerce frequently as his profession, not by chance.
2. Independency of Trader: Trader should work for his own to
acquire profit,1 otherwise he is an employee.
3. Commercial Capacity (eligibility): Trader should have the
capacity to practice commerce, such as a legal age and legal
residency.
Merchant (Trader): iii IT
A
Merchants can be:

A wholesale merchant operates in the chain between

producer and retail merchant.
A retail merchant or retailer, sells commodities to
consumers (including businesses). (A shop owner is a
retail merchant).
 awl 6.6
Duties of a Merchant:

1. Commercial Books: (The Law of Commercial Books):

l General Daybook.
l Inventory Book (for annual financial reports).
l General Ledger (Transactions of similar trade).
2. Commercial Registration: (The Law of Commercial
Register)
3. Chamber of Commerce Registration: (Commercial
Facilities).
4. Compliance with law and regulation: (by default).
 26
Commercial Registration:

– Commercial Registration is a mean by which a legal and

financial standing of a trader, or a company can be clarified.
– It is a mean by which the government can count and control
commercial activities.
– The Source of Commercial Registration is found in the Law of
Commercial Register.
– Who is required to register?
• Individual traders as defined by the law:
• Companies: All companies operating in the kingdom, civil
or commercial, Saudi or foreign.
The Chamber of Commerce & Industry:

Definition:
– It is defined by the law as “a non-profit association that
represents and promote its members ‘businessmen’ and operates
to protect and develop their interests”.
– It has three main responsibilities:
1. Economic responsibilities by supporting the State to achieve the
development and economic stability.
2. Social responsibilities by participating in the development of the
community, such as supporting scientific, educational and social
programs.
3. Voluntary responsibilities by supporting charitable activities.
 oh
Registration in the Chamber of Commerce &
Industry:

In accordance with the provisions of Article 4 of the Chamber of

Commerce and Industry Law:
Each merchant or manufacturer registered in the Commercial Register
shall be committed to participate in the Chamber of Commerce and
Industry in which the main office is located.
Therefore, the registration in the Chamber is required to be the
main centre of the activity of the merchant.
Also, article 5 of the Commercial Registration Law stipulates:
All members registered in the Commercial Register must provide with
the Commercial Registry Office within thirty days from the date of
registration, a certificate of participation in the Chamber of Commerce
and Industry.
 Questions?

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