THE LEGAL ENVIRONMENT OF BUSINESS

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Martin Luther King Jr.
There are just laws and there are unjust laws. I
would be the first to advocate obeying just laws.
One has not only a legal but moral responsibility to
obey just laws. Conversely, one has a moral
responsibility to disobey unjust laws. I would agree
with Saint Augustine that “An unjust law is no law
at all.”
Applied Business Law
UNIT ONE: THE LEGAL
ENVIRONMENT OF BUSINESS
WHY IS THIS IMPORTANT?
A friend who is an A-student has offered to write your
paper, which is worth 25% of your grade, for $50. You
need the course to graduate because you only have a
low C average. You hate writing, do it very poorly, and
know others have had good results submitting this
student’s papers as their own.
Will you pay the money and submit the paper or submit
your own paper and pray for a good result?
This unit will help you learn how to act ethically when facing
dilemmas in your business and personal life. This is
important because the decisions you make will affect your
own future and those of stakeholders of the organizations that
employ you.
 Definition of the legal environment of business
 Sources of law
 Classifications of law
 International dimensions of the legal environment of
business
Why study the legal environment of law?
 It develops critical thinking skills.
 It helps to establish legal literacy.
 It develops an understanding that the law is dynamic
not static.
 It deals with real-world problems.
 It is interdisciplinary.
Top Ten Reasons for Studying the Legal
Environment of Business
1. Becoming aware of the rules of doing business.
2. Familiarizing yourself with the legal limits on business
freedom.
3. Forming an alertness to potential misconduct of
competitors.
4. Appreciating the limits of entrepreneurship.
5. Being able to communicate with your lawyer.
6. Making you a more fully informed citizen.
7. Developing an employment-related skill.
8. Exploring the fascinating complexity of business decisions.
9. Providing a heightened awareness of business ethics.
10. Opening your eyes to the excitement of the law and
business.
Definition of the Legal Environment of
Business
 It develops critical thinking skills.
 The study of legal reasoning, critical thinking skills, ethical
norms, and schools of ethical thought that interact with the law.
 The study of the legal process and our present legal system, as
well as alternative dispute resolution systems.
 The study of the administrative law process and the role of
businesspeople in that process.
 The study of selected areas of public and private law, consumer
law, and environmental law.
 The examination of the international dimensions of the legal
environment of law.
Where to Find the Law
Level of
Government
Legislative
Law
Executive
Orders
FEDERAL
• United States Code
(U.S.C.)
• United States Code
Annotated (U.S.C.A.)
• United States Statutes
at Large (Stat.)
• Title 3 of the
Code of Federal
Regulations
• Codification of
Presidential
Proclamations
and Executive
Orders
STATE
LOCAL
Common
Law/Judicial
Interpretations
Administrative
Regulations
• United States Reports (U.S.)
• Supreme Court Reporter (S.
Ct.)
• Federal Reporter (F., F.2d)
• Federal Supplement (F.
Supp.)
• Federal agency reports (titled
by agency; e.g., F.C.C.
Reports)
• Regional reporters
• State reporters
• Code of Federal
Regulations (C.F.R.)
• Federal Register
(Fed. Reg.)
• State code or state
statutes (e.g., Ohio
Revised Code
Annotated, Baldwin’s)
• Regional reporters
• State reporters
• State administrative
code or state
administrative
regulations
• Municipal ordinances
• Varies; often difficult to find.
Many municipalities do not
publish case decisions but do
preserve them on microfilm.
Interested parties usually
must contact the clerk’s
office at the local courthouse.
• Municipality
administrative
regulations
Ch. 2-8
Global Aspects of the Legal Environment
of Business
Summary: Variables that have an impact on
business decision making:
 Legal
 Financial
 Economic
 Legal
Checkpoint
10
 Why do we need to study
Business ?
the Legal Environment of
Assignment will be graded!
11
Instructions: Please open a new document in your Google folder
that you already shared with me. and complete assignment. Name
your new document “THE LEGAL ENVIRONMENT OF
BUSINESS “. Font: Arial, 14.
Answers for each question should be 7 sentences or more.
After completing your individual work, work with another student to
compare your answers.
1. Think of a person who did something morally wrong, at least to your
way of thinking. What was it? Explain to a friend of yours—or a
classmate—why you think it was wrong. Does your friend agree? Why
or why not? What is the basic principle that forms the basis for your
judgment that it was wrong?
1. Think of a person who did something morally right, at least to
your way of thinking. (This is not a matter of finding something
they did well, like efficiently changing
a tire, but something
12
good.) What was it? Explain to a friend of yours—or a
classmate—why you think it was right. Does your friend agree?
Why or why not? What is the basic principle that forms the basis
for your judgment that it was right?
2. Think of an action by a business organization (sole proprietor,
partnership, or corporation) that was legal but still strikes you as
wrong. What was it? Why do you think It was wrong?
3. Think of an act by an individual or a corporation that is
ethical but not legal. Compare your answer with those of your
classmates: were you more likely to find an example from
individual action or corporate action? Do you have any thoughts
as to why?
Judicial Branch
Definition: is comprised of the federal courts and
most state courts.
Landmark case: Marbury v. Madison
1. Judicial Review – the power to determine whether
a statute is constitutional was given to the courts
in this case.
2. Case law precedents
Executive Branch
Definition: is composed of the President,
President’s staff and the cabinet (heads of the
executive departments).
 Treaty
Making
 Executive
Orders
Administrative Agencies
Congress delegates authority to these
agencies to make rules governing the conduct
of business and labor in certain areas.
Examples of Federal Regulatory Agencies:
 SEC
 FTC
 OSHA
 EEOC
Ch. 2-15
© 2009 Pearson Education, Inc.
publishing as Prentice Hall
Classifications of Law
Case Law
results from judicial
interpretations of
constitutions and statutes.
Statutory Law
made by the legislative
branch of government.
Criminal Law
Civil Law
composed of federal and
state statutes prohibiting
wrongful conduct ranging
from murder to fraud.
governs litigation between
two private parties.
Ch. 2-16
© 2009 Pearson Education, Inc.
publishing as Prentice Hall
Classifications of Law
Public Law
Private Law
deals with the relationship of deals with the enforcement
government to individual
of private duties.
citizens.
Substantive
Procedural
creates and regulates legal
rights
sets out the rules for
enforcing the legal rights.
It is the “ Process”.
Cyber law - is not a new type of law. It applies the traditional categories of law to a
new form of communication (online).
Hypothetical
Tommy McCartney is a sixteen-year-old high school student. He has worked
18
forty hours per week at the local convenience
store over the last year, and
has diligently saved $6,000 for the purchase of his first car.
While visiting a local car dealership, Tommy finds the “car of his dreams,” a
used yellow Camaro. Tommy walks into the dealership, announces to the
dealership owner that he is “ready to buy,” negotiates $6,000 as the purchase
price, and leaves the dealership a proud car owner.
Over the course of the next six months, Tommy drives the Camaro eight
thousand miles, wears the tires thin, dents the left front fender, and regrets his
purchase. He realizes that in two short years college will beckon, and he
knows that his parents cannot afford to pay for his higher education. In short,
he wants his money back.
On a Saturday morning, Tommy returns to the car dealership, walks into the
sales office, and hands the keys to the seller, asking for the return of his $6,000.
The dealer chuckles, and then his look turns stern, saying “Son, I don’t owe
you anything. You’ve just learned a lesson in the ‘School of Hard Knocks.’
The car is still yours, and the money is still mine!”
Who will prevail? Is it legal and/or ethical to allow Tommy to escape his
contractual obligations?
Capacity
 Contractual Capacity.
 The legal ability to enter into a contractual
relationship.
19
 Legality.
 The agreement must not call for the performance of
any act that is criminal, tortious, or otherwise opposed
to public policy.
 Minors
Capacity of Minors
20
 Contracts with minors are voidable
 Can disaffirm the contract after reaching the age
of majority

Entire contract only, not part
 Exception

Contract for necessaries

Food, clothing, shelter, basic medical
 Ratification

Once minor reaches age of majority, they can legally affirm
the contract
 Parents generally not liable for their minor children
Intoxication
21
 Lack of contractual capacity at the time
the contract is being made.
 Contract can be either voidable or valid.

Courts look at objective indications to determine if
contract is voidable.
 If voidable:
 Person has the option to disaffirm, or
 Person may ratify the contract expressly or
impliedly.
Mental Incompetence
22
 Void.
 If a person has been adjudged mentally incompetent by a
court of law and a guardian has been appointed.
 Voidable.
 If the person does not know he or she is entering into the
contract or lacks the mental capacity to comprehend its
nature, purpose, and consequences.
 Valid.
 If person is able to understand the nature and effect of
entering into a contract yet lack capacity to engage in
other activities.
 Lucid Interval.
Legality
23
 A contract to do something prohibited by
federal or state statutory law is illegal and
therefore void (never existed).


Contract that calls for for a tortious act.
Contract that calls for an act contrary to public policy.
Restraints of trade – covenant not to compete
 Adhesion Contracts

 Licensing statutes
 People in certain fields must have a license to legally
enter into an agreement to perform the service.
Hypothetical
 For Greta Harrington and her husband Robert, it was love at first sight. The two
were married for 52 years until cancer24took her husband at the age of 84.
Greta is currently 83 years old, and her marriage produced three offspring:
Samuel, 50 years old; Katherine, 45 years old; and Benjamin, 40 years old. In
his will, Robert left all of his financial interests, a considerable sum valued at $5
million, entirely to his wife; in his will, he also expressed love and affection for
his three children, as well as the desire that Greta devise the remainder of the
couple’s estate to their children, in equal portions, upon her death.
Greta has recently been “keeping company” with Gary Watson, a twicedivorced, 65-year-old bachelor with a reputation for “womanizing.” While
visiting her mother one weekend, Katherine is shocked to see a fully-executed
will on the desk in the living room, devising all of her mother’s estate to Gary
Watson. She immediately calls Samuel and Benjamin, schedules an
emergency “sibling meeting” for Sunday, and wonders what to do about her
mother’s ill-advised decision. She has noticed in recent months that her
mother is often forgetful, frequently calls her “Sharon” (her aunt’s name,) and
often confuses the days of the week.
Do the children have any legal rights in terms of successfully invalidating Greta
Harrington’s will? From a legal and/or ethical standpoint, should a mother
(even of adult children) be allowed to “disinherit” her offspring?
Genuineness of Assent
25
 Contract may be unenforceable if the
parties have not genuinely assented to
its terms by:
 Mistakes.
 Misrepresentation.
 Undue
 Duress.
Influence.
Mistakes
26
 Only a Mistake of Fact allows a contract to
be canceled. Mistake of Value is
enforceable.
 Bilateral (Mutual) Mistakes can be
rescinded by either party if all three
elements are met:



Basic assumption about the subject matter of the
contract
Material effect on the agreement
Adverse effect on a party who did not agree to
bear the risk of mistake at the time of the
agreement – “as is”
Mistakes
27
 Unilateral Mistakes cannot be canceled
unless:


If other party to the contract knows or should have
known that a mistake of fact was made.
If mistake was due to mathematical mistake in
addition, summation, subtraction, division, or
multiplication and was made inadvertently and
without gross negligence.
Fraudulent Misrepresentation
28
 Contract Voidable
by Innocent Party.
 Elements:
 Misrepresentation of Material Fact.
 Intent to Deceive (Scienter).
 Reliance on Misrepresentation.
 Injury to the Innocent Party.
Nonfraudulent Misrepresentation
29
 Innocent Misrepresentation.
 Negligent Misrepresentation.
 Is treated as fraudulent misrepresentation,
even though the misrepresentation was not
purposeful.
Undue Influence
30
 Contract is Voidable.
 Confidential or Fiduciary Relationship.
 Relationship of dependence.
 Influence or Persuasion.
 Weak party talked into doing something not beneficial to
him or herself.
 Presumption of Undue Influence.
Duress
31
 Forcing a party to enter into a contract under
fear or threat makes the contract voidable.
 Threatened act must be wrongful or illegal.
 Exceptions:


Threat to exercise legal rights (criminal or civil suit).
Economic.
Duress
32
 One party threatens physical harm or extortion to
gain consent to contract
 One party threatens to file criminal lawsuit unless
consent given to terms of contract
 One party threatens to file frivolous civil lawsuit
unless consent given to terms of contract
 One party threatens the other’s economic
interests (although in many jurisdictions, recovery
based on economic duress/pressure rarely
granted)
Adhesion Contracts and Unconscionability
 Adhesion Contracts.
33
 Preprinted contract in which the adhering
party has no opportunity to negotiate the
terms of the contract.
 Unconscionability.
 One sided bargains in which one party has
substantially superior bargaining power and
can dictate the terms of the contract.
“Standard-form.”
 “Take-it-or-leave-it” adhesion contracts.

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