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1-1
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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pop
QUIZpop
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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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pop
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QUIZ
What is the rule of law?What is the rule of law?
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think
TANKthink
TANKthink
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
pop
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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
1-45
Legal System & Corporate Governance
Corporation – legal person Ownership – shareholders Resource control
Board of directors Managers
Corporate governance – rules protecting owners’ property interest