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Chapter 1— Law as the

Foundation of Business

REED SHEDDREED SHEDD PAGNATTARO PAGNATTARO MOREHEAD MOREHEAD

F I F T E E N T H E D I T I O NF I F T E E N T H E D I T I O N

TheThe Legal & Legal & RegulatoryRegulatory Environment of of BusinessBusiness

McGraw-Hill/IrwinCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights

reserved.

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“The United States is a nation of law.” John Adams

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Introduction

Law, the rule of law, and property

provide a necessary foundation

for successful modern

business and set

maximum conditions for

generating “wealth of nations.”

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Learning Objectives To understand why the legal systems

contribute to making the economies of some nations stronger than others.

To grasp that “property” refers to the right of ownership itself.

To appreciate the legal sources available to lawyers.

To explain why stare decisis is different in common-law nations than in civil law nations.

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Why Nations are Weak or Strong?

Dependency theory Natural resources- exploitation Education & technology Climate Modern private market Law & legal system

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Law’s Role

One of the social forces that hold society together.

Religion Customs

Law

Law is most significant because it can bind together diverse groups.

Economics

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RulesCreated by State

 

Enforceable

 

LAWLAW 

Law-Definition

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Importance of Enforcement

‘Without adequate enforcement,

the certainty and trust necessary to make complex,

long-term business

transactions are absent.’

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Rule Of Law

Laws are made

generally and equally

applicable.

Apply to various

groups in same way

Apply to all or most

members of society

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Almost all wealthy countries

embrace the rule of law.

Food for Thought…

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Rule Of Law Nations

Adopt laws supporting private

marketplace.

Law applies to lawmakers as well as

rest of society.

This is in everyone’s interest.

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QUIZClimate can lead to nations beingClimate can lead to nations beingeither weak or strong.either weak or strong.

a.a.TrueTrueb.b.False False

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What is the rule of law?What is the rule of law?

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think

TANKthink

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TANKWere you Were you

impacted by the law on the way to impacted by the law on the way to class today?class today?

a.a. YesYesb.b. NoNo

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Property

Ownership Property means

Private, exclusive rights in

resources.

The legal right to exclude or keep

others from interfering.

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Property is a type of legal fence

that keeps others out by

announcing private ownership

and enforcing it.

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Property Rights Owners can keep others from interfering

through police and courts.

Provides incentive for development.

Western culture flourish connected to legal recognition of property rights.

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Property - Broad SenseProperty - Broad Sense

Property is the central

concept underlying

Western legal

systems.

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Property - Broad Sense

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Property - Broad Sense

Private property begins with the right we have in ourselves and in our efforts and actions.

Property in its larger and juster

meaning … embraces

everything to which a man may attach value and

have a right.John Locke

James Madison

’

‘ ‘

’

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Social prosperity and wealth of

nations

Secret to lies in

adequate foundations

Implementing legal system

Property law

Property - Broad Sense

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Jurisprudence

Jurisprudence

Philosophies that explain origin, justification,

meaning, and essence of law.

Natural Law

Positive Law

Historical School

Sociological

Legal Realism

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Classifications Of Law - Overview

Civil Law – Common Law

Public Law – Private Law

Civil Law – Criminal Law

Substantive Law – Procedural Law

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Civil Law – Common Law Classification

Civil LawLaw based on

statutory codificationof law.

Common LawLaw based on written judicial decisions that

establish precedent.

Romano-Germanic Anglo-American

Two Major Legal Systems

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Civil Law – Common Law Classification

Examples

Common LawLaw based on written judicial decisions that

establish precedent.

Anglo-American

United Kingdom

Canada

India

Jamaica

New Zealand

United States

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Civil Law – Common Law Classification

Examples

Civil LawLaw based on

statutory codificationof law.

Romano-Germanic

Continental Europe

Latin America

Japan

Former French colonies

Spain

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Public Law – Private Law Classification

Public LawLaw dealing with

regulation of society.

Private LawLaw dealing with

issues that concern private resource

relationships.

•Constitutional Law

•Administrative Law

•Criminal Law

•Property Law

•Contract Law

•Tort Law

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Software creators = property?

Internet binding agreements

Monitor e-mail? Rights to copies of

intellectual property?

Employers & employee discipline?

Regulation of internet?

Interstate commerce?

ISPs liability?

Internet Law

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Civil Law – Criminal Law Classification

Civil Law

Law dealing with private rights

between people.

Criminal Law

Law dealing with offenses against society at large.

•Torts & contracts

•Damages

•No punishment

•Prosecuted by gov’t

•Results in Punishment

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Substantive Law – Procedural Law Classification

Substantive Law

The part of the law creating, defining,

and regulating rights, duties, and

powers.

Procedural Law

The part of the law telling the

methods/means for having rights or duties enforced.

The What The How

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Constitutions • Set forth fundamental rights• Describe and empower government• Set forth limitations on power

Legislation Laws by Congress or state legislature and local ordinances.

Administrative Regulation

Rule or order by federal, state, or local regulatory agencies.

Judicial Decisions or Case Law

Decisions by courts that interpret and enforce laws or the common law.

Sources of Law

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Constitutions • Set forth fundamental rights• Describe and empower government• Set forth limitations on power

Legislation Laws by Congress or state legislature and local ordinances.

Administrative Regulation

Rule or order by federal, state, or local regulatory agencies.

Judicial Decisions or Case Law

Decisions by courts that interpret and enforce laws or the common law.

ConstitutionsConstitutions•U.S. Constitution andU.S. Constitution and individual state individual state constitutions.constitutions.

•Hierarchy Hierarchy – Federal – Federal constitution is supremeconstitution is supreme..

•See Article VI.See Article VI.

Sources of Law

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Constitutions • Set forth fundamental rights• Describe and empower government• Set forth limitations on power

Legislation Laws by Congress or state legislature and local ordinances.

Administrative Regulation

Rule or order by federal, state, or local regulatory agencies.

Judicial Decisions or Case Law

Decisions by courts that interpret and enforce laws or the common law.

LegislationLegislation

•UniformityUniformity•Federal Law Preempts StateFederal Law Preempts State•States Adopt Single LawStates Adopt Single Law

InterpretationInterpretation•General LanguageGeneral Language•Courts Must Interpret- Courts Must Interpret-

Statutory ConstructionStatutory Construction

Sources of Law

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Constitutions • Set forth fundamental rights• Describe and empower government• Set forth limitations on power

Legislation Laws by Congress or state legislature and local ordinances.

Admin. Rules and Regulations Rule or order by federal, state, or local regulatory agencies.

Judicial Decisions or Case Law

Decisions by courts that interpret and enforce laws or the common law.

AdministrativeAdministrativeRegulationRegulation

•Rules of governmental Rules of governmental body charged with body charged with implementing law.implementing law.

•EPAEPA•Consumer Product SafetyConsumer Product Safety Commission.Commission.

•Allow government to Allow government to work more effectivelywork more effectively – – bodies with expertise.bodies with expertise.

Sources of Law

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Constitutions • Set forth fundamental rights• Describe and empower government• Set forth limitations on power

Legislation Laws by Congress or state legislature and local ordinances.

Administrative Regulation

Rule or order by federal, state, or local regulatory agencies.

Judicial Decisions Decisions by courts that interpret and enforce laws or the common law.Judicial Judicial

Decisions or Decisions or Case LawCase Law

•Opinions Opinions –– Reasons Reasons •Precedents – SimilarPrecedents – Similar

•FactsFacts•Legal IssuesLegal Issues

•Stare DecisisStare Decisis•Precedent and DictaPrecedent and Dicta•Conflict of LawsConflict of Laws

Sources of Law

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Sources of Law Hierarchy U.S. Constitution

Federal Legislation

Federal Administrative Regulation

State Constitutions

State Legislation

State Administrative Regulation

Local Ordinances

Case law

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Case Law Advantages — Disadvantages

Stare Decisis Judges follow

precedents. Gives certainty &

predictability.

Volume of cases Conflicting

precedents Conflicts of law

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Legal Sanctions

Encourage/force compliance

Punishment & prevention

Benefit of society

Punish someone

Benefit of another - remedy

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Criminal Conduct

Crime•Public wrong

•Court punishes on behalf of society

Punishment

•Death

•Imprisonment

•Fine

•Removal

•Disqualification

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Breach Of Contract

Breach of Contract

•Private wrong

•Failure to perform

Remedies

•Damages (Money)

•Compensatory

•Consequential

•Rescission

•Specific performance

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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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Violation of Statutes or Regulations

May impose sanctions to accomplish statutory purposes.

Similar to crimes, torts, and breach of contract.

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Statutory law comes into Statutory law comes into existence through existence through

a.a. the courtsthe courtsb.b. the legislaturethe legislature

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think

TANKthink

TANKthink

TANKWould you be comfortable to enterWould you be comfortable to enter

into a business deal if you knew thatinto a business deal if you knew thatthe contract you signed would not orthe contract you signed would not orcould not be adequately enforced?could not be adequately enforced?

a.a. YesYesb.b. NoNo

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Legal System & Corporate Governance

Corporation – legal person Ownership – shareholders Resource control

Board of directors Managers

Corporate governance – rules protecting owners’ property interest