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The Most Common Legal Documents in Commercial Transactions

Posted by Ryan M. Newburn | Feb 15, 2021 | 2 Comments

What is a Commercial Transaction?

A commercial transaction is an interaction between parties in which the parties exchange goods or services for payment. In short, commercial transactions are business deals.

Many forms of commercial transactions exist, spanning from one-off transactions, such as sales, to ongoing agreements involving investing or receiving investments in a business. They can occur on a large or small scale. They might occur between consumers and companies, between multiple businesses, between government entities and businesses, or even between internal departments within a company. They can involve the exchange of materials, products, services, or intangible property.

Despite variations in details, with each transaction having unique requirements and peculiarities, all commercial transactions share one commonality: they serve to transmit economic value in exchange for a payment of counter value.

Commercial transactions are the heart of doing any kind of business—every business will participate in a commercial transaction at some point, if not daily. Because commercial transactions are so prevalent and central to businesses, they naturally are regulated by many laws. Such laws spell out both the buyer's and seller's rights and obligations. These laws also provide repercussions and solutions if one party breaches or cannot fulfill any of its obligations. Many documents can keep your business aligned with the laws and ensure a smooth process.

Relevant Laws Surrounding Commercial Transaction

Laws for commercial transactions cover a wide range of business activities. There is no federal law governing transactions; however, each of the fifty states in the United States has adopted a comprehensive set of rules and procedures known as the Uniform Commercial Code (UCC). The UCC serves as a model for each state's commercial codes.

Before the UCC, many commercial laws were created, such as:

  • The Uniform Negotiable Instruments Law
  • The Uniform Sales Act and Uniform Warehouse Receipts Act
  • The Uniform Bills of Lading Act and Uniform Stock Transfer Act
  • The Uniform Conditional Sales Act.

The Uniform Commercial Code was the product of all these commercial laws put together into one comprehensive statute. The purpose of the UCC was to harmonize commercial transaction laws across all of the United States, the District of Columbia, and the United States territories.

The UCC addressed two business-related problems in the United States:

  1. Uniformity of law across all states – Although there may be slight local variations, all states comply with the same general business laws, allowing for interstate business transactions.
  2. The complex legal requirements of transacting business – The UCC contains nine articles addressing the different aspects of commercial transactions, namely:
  • Sales and leases: the sale of goods and leases of personal property
  • Negotiable instruments: drafts (like checks) that represent a promise to pay a sum of money
  • Bank deposits and collections: rules for check processing, automated inter-bank collections, fund transfers
  • Letters of credit: a bank or other financial institutions issue these
  • Bulk sales: includes auctions and liquidations of assets
  • Documents of title: includes warehouse receipts, bills of lading
  • Investment securities: the system of holding securities through intermediaries
  • Secured transactions: exchanges that involve the granting of credit secured by personal property

Why Documents are Important for Commercial Transactions

Businesses use contractual documents such as purchase orders ("POs"), invoices, letters of confirmation, shipping documents to define which laws apply and limit each business's risks. These documents are also important to ensure the transaction complies with all of the relevant laws.

Ensuring that both parties complete all required trade documents is essential to a successful transaction. Incorrect or inadequate paperwork can delay a transaction or lead to issues with prompt payment or quality. The government requires particular documents during transportation, while the commercial contract will specify which other documents the transaction will require.

Documents are essential for all types of commercial transactions for various reasons. We break down the common types of commercial transactions and why documents are crucial for commercial transactions below.

Between Businesses

When transactions are between merchants, the parties use contracts to grant various freedoms to govern the relationship and the law's applicability. The UCC applies if the exchanging parties do not set their own personalized rules in contractual documents. If businesses developed their terms in a contract, that contract supersedes the UCC.

The fact that a contract can supersede the UCC makes it worthwhile for businesses to be thorough when writing commercial contracts to control the transaction on their own terms. It is also critical to note that if a transaction is worth more than $500, the UCC requires the buyer and seller to have a sales contract set in writing.

From Business to Consumers

Transactions from a business directly to the public are subject to much stricter government regulation, with consumer protection laws. These laws ensure the quality of materials in products, prevent unethical practices, among other rules. It is vital to keep documents comprehensive and accurate to stay compliant and protect your business.

International Commercial Transactions

International trade has many commercial document requirements. Not only does international trade deal with factors surrounding the shipping distance between parties, but it also involves separate governments/court systems. If anything goes wrong during international transactions, the legal procedure to remedy the problem can become very arduous. You would need to work with a foreign government and a foreign law system, which makes keeping accurate, consistent written documents and procedures essential for foreign trade to avoid complex legal issues across countries.

Common Commercial Documents

Commercial documents are written records of commercial transactions describing various aspects of those transactions. The following are some of the most common documents businesses use during commercial transactions.

Sales Contract

Also known as the sale of goods contract, sales agreement, or purchase agreement.

A sales contract is a legally binding agreement between the buyer and seller that outlines a transaction's terms, including all the details. It can map out an organized, cost-effective, and equitable system for each party's duties and detail how they will resolve disputes. Both parties typically prepare this document in concert. As mentioned earlier, in the United States, the UCC requires any commercial transaction worth more than $500 to have a sales contract set in writing.

Proforma Invoice

The seller creates a proforma invoice to inform an interested buyer who has not yet purchased their goods or services, rates, pricing, and other details. A proforma invoice provides information about the sale and typically includes product descriptions, types and quantities of goods, the estimated price of goods or services, terms of delivery, and an expiration date of the invoice. It provides a cost estimate of the sale, and the terms are subject to change.

A proforma invoice is not a confirmation and is not legally binding. The buyer must issue the official purchase order.

Purchase Order

The buyer creates a purchase order (PO) to request an order of goods or services. A purchase order is a legally binding document when the seller accepts it. POs are beneficial for both the buyer and the seller because it holds both parties to meet their obligations—it protects the seller if the buyer refuses to pay, and it covers the buyer if the seller doesn't deliver the items at the agreed costs within the agreed timeframe. 

A purchase order is considered a commercial document. This means that it is an official confirmation of a sale. On the other hand, a proforma invoice is a quote from a sale, not a confirmation. That's why the terms in a proforma invoice are still subject to change, while a purchase order is a legally binding agreement.

Commercial Invoice

The seller issues a commercial invoice to the buyer after the goods have been delivered or shipped. The commercial invoice is the primary document that will provide details about the exact quantity of goods shipped and the price. A commercial invoice also acts as a formal request for payment of all items sold under the sales contract and is used by governments to determine taxes and duties.

Commercial invoices are significant for international shipping because companies often use them to clear Customs. The buyer will need to have a commercial invoice from the seller for foreign exchange purposes.

Packing List

Also known as packaging slip, shipping slip, order slip, bill of parcel.

The seller typically prepares this to use when exporting. An export packing list is a detailed documentation required for shipping that documents the shipped products' description, quantity, weight, dimensions, and carton count. It should also include the seller, buyer, date of shipment, and invoice number. The information must match everything on the commercial invoice, as it is used for all international transactions to clear U.S. customs.

Bill of Lading

A bill of lading (BOL) is a contract used in commercial shipping. It acts as a 1) receipt for services between the owner of the goods and the carrier, 2) a contract for the parties, 3) a title document. The seller needs to provide the bill to export goods both domestically and internationally, and the buyer needs to show a bill of lading as proof of ownership to take possession of the goods from the carrier. There are a few different types of BOLs, including:

  • Straight BOL
  • Order BOL
  • Negotiable BOL
  • Claused BOL
  • Electronic BOL

Certificates of origin.

Many countries require a certificate of origin for international transactions. The seller should issue a certificate of origin, and it must be signed and sealed by a local chamber of commerce. It certifies the country where the imported goods were mined, manufactured, or assembled. Businesses can also use the certificate of origin to reduce taxes and duties if the importing and exporting countries have a trade agreement.

International Documents

As mentioned before, international trade, in particular, requires a lot of documentation. Some of the commercial documents discussed above are specific to international transactions. Below is a more comprehensive list of documents required for international trade. It is worth noting that many of these documents shown below are universally needed, even for local transactions.

  • Commercial documents
    • Request for quotation
    • Quotation
    • Pro forma invoice
    • Terms and conditions of sale
    • Purchase order
    • Order acceptance and confirmation
    • Sales contract
    • Commercial invoice
  • Banking documents
    • Application for letter of credit
    • Letter of credit
    • Advice of letter of credit
    • Drafts (drawn on a bank for payment)
  • Transportation and insurance documents
    • Packing List
    • Bill of Lading
    • Shipper's Letter of Instructions
    • Delivery Order and Freight Release
    • Airwaybill
    • Certificate of Origin
    • Customs Invoice
    • Consular Invoice
    • Rebilling Invoice
    • Inspection Certificate

How these documents help you

These documents are the most cost-effective method of protection available that a business has for commercial transactions in the United States.

Commercial documents are helpful and convenient for businesses. They are essential for record-keeping, and they help you keep the order of your stock and budget. They also provide sales evidence that discourages fraud and exploitation. These documents also protect your business's integrity.

Commercial documents also ward against a lot of economic harm that can come. Fines for export violations reach up to $1 million per violation in criminal cases, and penalties from administrative cases can exceed $250,000, according to the U.S. Department of Commerce's Bureau of Industry and Security (BIS).

Aside from fines, clear documentation can save you an immense amount of money and time in the case of a dispute. Some of these disputes can include whether goods were delivered on time, whether the product meets the agreed-upon specification, or if either party violated a warranty. Parties can take disputes to court through litigation, which can be an extremely costly process that can take years. There are cases where victory in court ends up costing more than the benefits rewarded. Merely answering the first complaint filed to a court may cost more than the money used to create and print basic commercial documents. 

If your transaction has a clear paper trail with accurate documents, the entire process can be private, take only months, and cost much less. It encourages disputes to be resolved amicably and outside of court.

Drafting and using correct documents from the beginning of the transaction process allows businesses to avoid the expensive litigation system and create a more efficient private dispute resolution procedure.

Contact us now to learn more

If you are a business that is just starting or often engages in commercial transactions, it is important to have an experienced legal team in your corner. Contact our team here at Newburn Law to learn how we can help you.

About the Author

Ryan M. Newburn

Ryan Newburn is a business and legal expert trusted by Executive Teams and Boards of Directors to apply sound business principals to solve legal and financial problems. Ryan's practice focuses on mergers and acquisitions, financings, corporate formations and corporate governance in a broad range of industries including energy, distribution services, healthcare, medical devices, and technology. Leveraging his formal business training and years of practical experience, including as an executive at public and private companies, Ryan has advised hundreds of companies in dozens of industries of unique legal and financial issues.

Comments

Deanna Lynne Reply

Posted Jun 10, 2021 at 10:02:32

It made sense when you said that incorrect paperwork can lead to delays and issues with transaction promptness and quality. According to my knowledge, it’s a good idea to work with a corporate attorney to reduce the likelihood of these errors occurring. You should look for a corporate attorney who has experience working with similarly-sized companies. https://cealegal.com/corporate-and-commerical-law

Ryan M. Newburn Reply

Posted Aug 10, 2021 at 12:52:49

Hi Deanna,

Completely agree with that! Thanks for the comment.

Best,
Ryan

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