Legal Environment of Business
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17e-PPT-Ch01r.pptxMcGraw-Hill
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The Legal & Regulatory Environment of Business 17e
Chapter 1
Law as a Foundation for Business
Pagnattaro Cahoy Magid Reed Shedd
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Learning Objectives
To understand that laws and regulations are fundamental foundations for business
To explain that property in the law refers not to something that is owned but to the right of ownership itself, which gives incentive for wealth creation
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Our objectives in this chapter are:
To understand that laws and regulations are fundamental foundations for business.
To grasp that property refers to the right of ownership itself.
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Learning Objectives
To analyze why stare decisis is different in common law nations than in civil law nations
To classify what legal sources lawyers turn to in answering legal questions from their clients and the hierarchy of those sources
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Our objectives in this chapter are:
To explain why stare decisis is different in common-law nations than in civil law nations.
To appreciate the legal sources available to lawyers.
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Law and Regulations are Fundamental Foundations for Business
Companies in the U.S. must:
Be aware of the legal and regulatory landscape
Take steps to ensure full compliance with the law to avoid civil and criminal liability
Lawyers play a positive role in corporate boards
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Knowledge of law and regulations helps to identify problematic situations that can result in liability and enables to make informed decisions.
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Law
Rules established by the state and backed up by enforcement
Formal social force
Adequate enforcement institutions are necessary to maintain order in society
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Law is the most significant social force, it holds together diverse peoples of different backgrounds.
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Rule of Law
Laws are generally and equally applicable
Applies to all members of society
Rule-of-law nations adopt laws supporting the private market
Judges play a vital role in maintaining the rule of law
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Under the rule of law, laws are made generally and equally applicable—applying to lawmakers as well as to the rest of society. Lawmakers who excessively favor special interests can be held accountable. Almost all wealthy countries embrace the rule of law.
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Food for Thought…
All wealthy countries embrace the rule of law
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Article 6 of the Treaty on European Union, called the Maastricht Treaty, states the EU is founded on the rule of law. There are no countries with strong, diverse economies that do not have the rule of law.
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What is the rule of law?
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Answer: Laws that are generally and equally applicable to all.
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Were you impacted by the law
on the way to class today?
Yes
No
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Answer: A. How?
Property (Ownership)
Legal right that allows a person to exclude others from his/her resources
Types of ownership fences
Public property
Private property
Common property
Exclusionary right of property provides a basis for the private market and modern business
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Public property are resources owned by the government, private property is owned by an individual, and common property are resources that are owned by more than one individual.
The law of property enables individuals and business organizations to possess, use, and transfer their private resources. Property is a right of ownership that recognizes a party’s private, exclusive rights in resources. It is the legal right to exclude or keep others from interfering with something.
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Property in its Broadest Sense
Central concept of Western legal systems
Includes ownership of individual constitutional and human rights
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Scholars believe that the modern understanding of human rights began with the concept of property. For constitutional framers, property protected both physical resources, and human rights like freedom of speech, freedom of religion, and freedom from unreasonable intrusion by the government.
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Figure 1.1 - Wheel of Property
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All areas of law radiate from the broad concepts of a property system.
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Jurisprudence
Jurisprudence
Philosophies that explain origin of law, and its justification.
Natural Law
Positive Law
Historical School
Sociological
Legal Realism
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Several different schools of legal philosophy seek to help in understanding the origin and role of law in society. The philosophy of natural law emphasizes on universal moral principles, while positive law focuses on commands of the state backed by force and punishments. The historical school of legal philosophy emphasizes historically tested principles, while sociological jurisprudence keys in on evolving principles to meet the needs of society. Finally, legal realism examines what police, administrators, prosecutors, and judges do while they enforce, interpret, and apply laws.
Classification of Law
Common Law and Civil Law
Public and Private law
Civil Law and Criminal Law
Substantive Law and Procedural Law
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Basic classifications of the law exist, demonstrating substantive differences in the purposes met by the law. We’ll look at these classifications more in the following slides.
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Common Law and Civil Law
Common Law
Emphasizes the role of judges in determining the meaning of laws
Civil Law
Relies on legislation than judicial decisions for law
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The United Kingdom, the United States, Canada, Jamaica, India, Nigeria, New Zealand, and a few other countries follow common law. World’s nations not colonized by England generally observe civil law legal systems.
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Public and Private Law
Public Law: Includes matters that involve the regulation of society
Constitutional law
Administrative law
Criminal law
Private Law: Covers legal problems and issues that concern private resource relationships
Property law
Contract law
Tort law
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In public law, a government official represents the society and is responsible for seeking justice to achieve the ends of society in issues. Public law can be classified into constitutional law (interpretation and application of federal or state constitutions), administrative law (covers legal principles that apply to government agencies, bureaus, and commissions), and criminal law (specifies various offenses against the proper order of the state).
Private law includes property law (recognition of exclusive right in tangible and intangible resources), contract law (rules of how owners transfer resources by exchanging them), and tort law (rules for compensation when an owner’s legal boundaries are wrongfully crossed by another).
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Civil Law and Criminal Law
Civil cases
Include suits for breach of contract or tort cases
Involve request for damages or appropriate relief
Criminal cases
A government representative attempts to prove the wrong committed against society
Result in punishment
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Further classification within any legal system is the distinction between civil law and criminal law. Civil law (which is different from the civil law legal system) addresses private rights between persons and criminal law addresses wrongs to society as a whole.
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Substantive Law and Procedural Law
Substantive law
Defines the legal relationship of people with other people or with the state
Procedural law
Method and means by which substantive law is made and administered
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Rules of law governing the creation or enforcement of a contractual promise are substantive in nature. Substantive rules of law define rights and duties, procedural rules of law provide the machinery for enforcing those rights and duties.
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Sources of Law
Federal Law
State Law
Judicial Decisions or Case Law
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The sources form a hierarchy of law. If a lower source of law conflicts with a higher source of law, it is legally void.
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Federal Law
Constitution
Legislation
Administrative law or regulation
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In the hierarchy of federal law, any law that conflicts with the Constitution is said to be void and has no legal effect. This is followed by legislation (laws passed by Congress, referred to as acts or statutes). Administrative law or regulation made by federal agencies is given importance as well.
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State Law
State Constitution
Statutes or Acts
Regulatory law of state administrative agencies
Ordinances
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The hierarchy of law in state level starts with the state constitution, followed by statutes and acts adopted by the state legislature, below which is the regulatory law of the state administrative agencies. Ordinances (law within counties and cities) form the lowest part of the hierarchy.
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Judicial Decisions or Case Law
Interpret the constitutional, legislative, and regulatory laws
Opinions: Decisions made by judges on legal issues
Become precedents for future cases involving similar facts and legal issues
Citation: Enables to locate the case in a library or computer databases
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Attorneys must consult the decisions of judges as a source of law.
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Judicial Decisions or Case Law
Advantages
Stare decisis
Judges follow precedents whenever possible
Ensures certainty and predictability in the law
Specifies the boundaries of property-based legal system
Disadvantages
Volume of cases
Conflicting precedents
Distinction between the holding and dicta
Increases the difficulty of determining the precedent
Rejection of precedent
Conflicts of law
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Stare decisis helped people become secure in their right of property. The disadvantages of case law includes the volume of cases, conflicting precedents, distinction between the holding (precise information) and dicta (everything else said by the court), rejection of precedent due to constitutional relativity (idea that courts should understand the meaning of the Constitution relative to the times in which they interpret it), and variations of conflicts of law rules.
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Hierarchy of Sources of Law
U.S. Constitution and Amendments
Statutes of Congress
Federal Administration Regulation
State Constitutions
State Statutes
State Administrative Regulation
Local Ordinances
Case Law
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Each higher source of law prevails over every lower source of law in the hierarchy.
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Legal Sanctions
Methods used by law enforcement officials and courts to encourage or force compliance with the obedience to the law
Remedy: Right of an individual to take another person’s resources as that person failed to meet the requirements of the law
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Sanctions are a form of punishment for violating the law. Threat of sanctions results in compliance with the requirements of law. The taking of an owner’s resources may be for the benefit of society generally, to punish someone, or for the benefit of another person, as an award of damages.
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Sanctions for Criminal Conduct
Crime
Public wrong against society
Punishments
Death
Imprisonment
Fine
Removal
Disqualification
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Purpose of punishment is to protect the public and to deter persons from wrongful conduct. Punishments could be in the form of death, imprisonment, fine, removal from office, or disqualification from holding any office and from voting.
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Sanctions for Breach of Contract
Breach of contract
Failure to perform contractual promise
Remedies
Damages (Money)
Compensatory
Consequential
Specific Performance
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Breach of contract involves the failure to meet promises made under agreement and enforcement. Attempts to focus on remedying the failure to perform under the agreement through compensatory damages (awarded to make a plaintiff whole in an economic sense.) The court may award consequential damages when the breaching party knew or had reason to know that circumstances existed that would cause the other party to suffer additional losses if the contract were breached. It’s also possible the court could rescind or cancel the contract. The remedy of an injured party may be a decree of specific performance (an order by the court commanding the other party actually to perform a bargain as agreed).
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Tortious Conduct
Tort
Civil Wrong (other than breach of contract)
Intentional
Negligence
Strict liability
Remedies
Compensatory Damages (Money)
Punitive Damages (Exemplary Damages)
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Tort includes civil wrong involving improper crossing of property boundaries. The law divides torts into intentional torts (require the plaintiff to prove the defendant intended to cross the boundaries protecting the plaintiff), negligence (requires the plaintiff to show that the defendant caused injury through unreasonable behaviour), and strict liability (requires the plaintiff only to prove that the defendant injured something proper to the plaintiff). The sanctions for such conduct is money damages and punitive damages (civil punishment for intentional or extremely negligent wrongdoing).
Sanctions for Violating Statutes and Regulations
Similar to those imposed for criminal conduct, breach of contract, or tortious conduct
Statutes impose a fine for a violation and authorized damages to injured parties
Help define boundaries and protect people from the boundary infringements of others
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Sanctions imposed for violating statutes or administrative agency regulations are an important part of enforcing the property-based legal system.
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Would you be comfortable to enter
into a business deal if you knew
that the contract could not be
adequately enforced?
Yes
No
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Without enforcement, there can be little confidence that the contract could be performed.
Corporations
Businesses Chartered by the State to do business as “legal persons”.
Owned by Shareholders
Board of Directors run the business
Managers are in charge of day-to-day business operations
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Specific Sense of Corporate Governance
Corporate Governance: Legal relationship between corporate agents and the shareholders of the corporation
Value of corporations will be destroyed when managers abuse their control of resources for personal benefits
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Corporate governance rules protect the property interest that the owners have in corporations.
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General Sense of Corporate Governance
Corporate Governance applies to legal relationships that businesses have with customers and society
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In general sense, corporate governance includes the legal property relations that large businesses have with each other, with their customers, and with society. Lack of adequate corporate governance allowed risky practices that led to the recent economic recession.
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