FIFTEENTH EDITION
The
Legal & Regulatory
Environment of Business
Chapter 1—
Law as the
Foundation of Business
REED
McGraw-Hill/Irwin
SHEDD
PAGNATTARO
MOREHEAD
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
1-1
“The United States is a nation of law.”
John Adams
1-2
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.”
1-3
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.
1-4
Why Nations are Weak or Strong?
 Dependency theory
 Natural resources- exploitation
 Education & technology
 Climate
 Modern private market
 Law & legal system
1-5
Law’s Role
Religion
Customs
Economics
One of the social forces
that hold society together.
Law
Law is most significant because it
can bind together diverse groups.
1-6
Law-Definition
LAW
Rules
Created
by State
Enforceable
1-7
Importance of Enforcement
‘Without adequate enforcement,
the certainty and trust necessary to
make complex,
long-term business
transactions are absent.’
1-8
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
1-9
Food for Thought…
Almost all wealthy countries
embrace the rule of law.
1-10
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.
1-11
pop pop pop
QUIZQUIZQUIZ
Climate can lead to nations being
either weak or strong.
a.True
b.False
1-12
pop pop pop
QUIZQUIZQUIZ
What is the rule of law?
1-13
think think think
TANK TANK TANK
Were you
impacted by the law on the way to
class today?
a. Yes
b. No
1-14
Property
Property
means
The legal right to
exclude or keep
others from
interfering.
Ownership
Private,
exclusive
rights in
resources.
1-15
Property is a type of legal fence
that keeps others out by
announcing private ownership
and enforcing it.
1-16
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.
1-17
Property - Broad Sense
Property is the central
concept underlying
Western legal
systems.
1-18
Property - Broad Sense
1-19
Property - Broad Sense
‘ Private property
‘ Property in its
begins with the
right we have in
ourselves and in
our efforts and
actions.’
larger and juster
meaning …
embraces
everything to
which a man may
attach value and
have a right.’
John Locke
James Madison 1-20
Property - Broad Sense
Social prosperity
and wealth of
nations
Secret to
lies in
adequate
foundations
Implementing
legal system
Property law
1-21
Jurisprudence
Natural Law
Jurisprudence
Philosophies that
explain origin,
justification,
meaning, and
essence of law.
Positive Law
Historical School
Sociological
Legal Realism
1-22
Classifications Of Law - Overview
 Civil Law – Common Law
 Public Law – Private Law
 Civil Law – Criminal Law
 Substantive Law – Procedural Law
1-23
Civil Law – Common Law
Classification
Two Major Legal Systems
Civil Law
Common Law
Law based on
statutory codification
of law.
Law based on
written judicial
decisions that
establish precedent.
Romano-Germanic
Anglo-American
1-24
Civil Law – Common Law
Classification
Examples
United Kingdom
Canada
Jamaica
New Zealand
United States
Common Law
Law based on
written judicial
decisions that
establish precedent.
Anglo-American
India
1-25
Civil Law – Common Law
Classification
Examples
Civil Law
Law based on
statutory codification
of law.
Romano-Germanic
Continental Europe
Latin America
Japan
Former
French colonies
Spain
1-26
Public Law – Private Law
Classification
Public Law
Private Law
Law dealing with
regulation of society.
Law dealing with
issues that concern
private resource
relationships.
•Constitutional Law
•Property Law
•Administrative Law
•Contract Law
•Criminal Law
•Tort Law
1-27
Internet Law




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?
1-28
Civil Law – Criminal Law
Classification
Civil Law
Criminal Law
Law dealing with
private rights
between people.
Law dealing with
offenses against
society at large.
•Torts & contracts
•Prosecuted by gov’t
•Damages
•Results in
Punishment
•No punishment
1-29
Substantive Law – Procedural Law
Classification
Substantive Law
Procedural Law
The part of the law
creating, defining,
and regulating
rights, duties, and
powers.
The What
The part of the law
telling the
methods/means for
having rights or
duties enforced.
The How
1-30
Sources of Law
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
Judicial Decisions
or Case Law
Rule or order by federal, state, or
local regulatory agencies.
Decisions by courts that interpret
and enforce laws or the common
law.
1-31
Sources of Law
Constitutions
Constitutions
Legislation
• Set forth fundamental rights
• Describe and empower
government
• Set forth limitations on power
•U.S. Constitution and
individual state
constitutions.
Laws by Congress or state legislature and local
– Federal
ordinances.
•Hierarchy
constitution is supreme.
Administrative
Regulation
Judicial Decisions
or Case Law
Rule or order by federal, state, or local regulatory
agencies.
•See Article VI.
Decisions by courts that interpret and enforce
laws or the common law.
1-32
Sources of Law
Constitutions
• Set forth fundamental rights
• Describe and empower
government
• Set forth limitations
power
•Federal
LawonPreempts
•Uniformity
State
•States Adopt Single Law
Legislation
Legislation
Administrative
Regulation
Judicial Decisions
or Case Law
Laws by Congress or state legislature and local
Interpretation
ordinances.
•General Language
•Courts
InterpretRule or order Must
by federal,
state, or local regulatory
agencies.
Statutory Construction
Decisions by courts that interpret and enforce
laws or the common law.
1-33
Sources of Law
• Set forth fundamental rights
• Describe and empower
government
• Set forth limitations on power
Constitutions
•Rules of governmental
body charged with
implementing law.
Legislation
Laws by Congress or state legislature and local
ordinances.
•Consumer Product Safety
•EPA
Commission.
Admin.
Rules and Regulations
Administrative
Rule or order by federal, state, or local regulatory
agencies.
•Allow government to
Regulation
work
Decisions
bymore
courts thateffectively
Judicial Decisions laws or the common law.interpret and enforce
– bodies with expertise.
or Case Law
1-34
Sources of Law
Constitutions
• Set forth fundamental rights
• Describe and empower
government
–
• Set forth limitations on power
•Opinions
Reasons
•Precedents – Similar
Legislation
Administrative
Regulation
Judicial Decisions
Judicial
Decisions or
Case Law
Laws•Facts
by Congress or state legislature and local
•Legal Issues
ordinances.
•Stare
Decisis
Rule or order by federal, state, or local regulatory
•Precedent
agencies.
and Dicta
•Conflict of Laws
Decisions by courts that interpret and enforce
laws or the common law.
1-35
Sources of Law Hierarchy
 U.S. Constitution
 Federal Legislation
 Federal Administrative Regulation
 State Constitutions
 State Legislation
 State Administrative Regulation
 Local Ordinances
 Case law
1-36
Case Law
Advantages
 Stare Decisis


Judges follow
precedents.
Gives certainty &
predictability.
—
Disadvantages
 Volume of cases
 Conflicting
precedents
 Conflicts of law
1-37
Legal Sanctions
 Encourage/force compliance
 Punishment & prevention
 Benefit of society
 Punish someone
 Benefit of another - remedy
1-38
Criminal Conduct
Crime
Punishment
•Public wrong
•Court punishes on
behalf of society
•Death
•Imprisonment
•Fine
•Removal
•Disqualification
1-39
Breach Of Contract
Remedies
•Damages (Money)
•Compensatory
Breach of
Contract
•Private wrong
•Failure to perform
•Consequential
•Rescission
•Specific performance
1-40
Tortious Conduct
Tort
•Civil wrong (other
than breach of
contract)
•Intentional
•Negligence
•Strict liability
Remedies
•Compensatory
damages (money)
•Punitive damages
(exemplary damages)
1-41
Violation of Statutes or Regulations
May impose sanctions to accomplish
statutory purposes.
Similar to crimes, torts, and breach of
contract.
1-42
pop pop pop
QUIZQUIZQUIZ
Statutory law comes into
existence through
a. the courts
b. the legislature
1-43
think think think
TANK TANK TANK
Would you be comfortable to enter
into a business deal if you knew that
the contract you signed would not or
could not be adequately enforced?
a. Yes
b. No
1-44
Legal System &
Corporate Governance
 Corporation – legal person
 Ownership – shareholders
 Resource control
 Board of directors
 Managers
 Corporate governance – rules protecting
owners’ property interest
1-45