Chapter 1 Legal Foundations McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 1

Legal Foundations

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter Overview

• How legal issues impact business planning and strategy.

• The foundations, definitions, and scope of various primary and secondary sources of law.

• Classifications of law.

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“THEORY to PRACTICE”The Melvin Text 2-Step System

• Step 1: developing insight by understanding legal fundamentals

• Step 2: learning to apply legal theories in practice

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Law – What is It?

• Law is a body of rules of action or conduct prescribed by controlling authority, and having legal binding force.

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Purposes of Law

• System of order that defines crimes and levies punishment for violations

• System for resolving disputes by providing a basis for deciding the legal interests and rights of the parties

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Jurisprudence

The philosophy behind the law:

• Legal realism (most widely used in U.S.)

• Natural law

• Positive law

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“Legal Environment” of Business

• Law serves as an important catalyst for commerce by promoting good faith dealing among merchants and consumers.

• Law also provides some degree of reliability that can be considered in business planning and commercial transactions.

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Role of Counsel

• Managers often work closely with a business attorney.

• This often results in reduced costs, and limitation of risk and liability.

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Primary Sources of Law

• Constitutional law

• Statutory law

• Common law

• Administrative law

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Constitutional Law

• Establishes important legal principles

• Not designed to specifically resolve every legal issue or case

• May require “interpretation” by courts

• Exists at state and federal levels

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Statutory Law

• Created by a legislative body

• Approved or disapproved by the

executive branch

(i.e., governor or president)

• Also known as “codes”

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Common Law

• Made by appellate courts

• Based on the fundamentals of

previous cases that had similar facts

• Also known as “case” law

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Administrative Law

• Source of law that regulates the exercise of authority by government agencies

• Also known as “regulations”

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Secondary Sources of Law

• Secondary sources have no independent authority, nor are they legally binding.

• Include the Restatements of the Law and sets of model statutes

• Example: Uniform Commercial Code

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Restatements of the Law

• Collections of uniform legal principles in a specific area of law that are designed to reduce the complexity of judicial decisions.

• Common examples of widely used restatements include torts and contracts.

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Uniform Model Statutes

• Drafted by legal experts, in hopes that they will be used or adopted by state legislatures to provide uniformity in laws between the states.

• Examples: UCC, RUPA, MBCA

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Categories of Law

• Broad categories based on classifications related to a particular legal function or a right afforded by law

• Helpful in understanding “big picture” of our legal system

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Criminal Law versus Civil Law

• Civil laws are designed to compensate parties for losses as a result of another’s conduct.

• Criminal laws are a protection of society, and the violation of criminal laws results in penalties to the violator such as fines or imprisonment.

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Substantive Law vs Procedural Law

• Substantive laws provide individuals with rights and create certain duties.

• Procedural laws provide a structure and set out rules for pursuing substantive rights.

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Public Law vs Private Law

• Public laws are those derived from some government entity.

• Private laws are recognized as binding between two parties even though no specific statute or regulation provides for the rights of the parties.

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Law vs Equity

• We use the terms law and equity when describing the appropriate measure of judicial action intended to compensate an injured party in a civil lawsuit.

• These measures are known as legal or equitable remedies.

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Types of Remedies

• Remedies at law generally take the form of money damages.

• Equitable remedies or relief generally includes an injunction or restraining order (a judicial order requiring a party to cease a certain activity, or perhaps to take a specific action).

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Important Equitable Maximums

• These maxims have been developed by early American courts.

• Broad statements of rules that are based on notions of fairness and justice in applying the law.

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Equity Aids the Vigilant

• The law favors those who exercise vigilance in pursuing their claims and disfavors those who rest on their legal rights by failing to act to protect their rights in a reasonable period of time.

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Substance over Form

• When applying the law, courts look to the intent of parties involved and adhere to a standard of good faith and fair play instead of applying the letter of the law in a way that would violate fundamental principles of fairness and consistency.

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Clean Hands Doctrine

• Courts are guided in their decisions not only by the letter of the law, but also on the basis that one seeking the aid of a court must come to the court with clean hands that are unstained by bad faith, misrepresentations, or deceit.

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Kauffman-Harmon v. Kauffman 36 P. 3d 408 (Sup. Ct., Mont. 2001)

• “The doctrine of clean hands provides that parties must not expect relief in equity, unless they come into court with clean hands.”

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Case Precedent

• Once an appellate court has decided a particular case, the decision becomes a case precedent.

• Precedent is usually only binding within the jurisdiction of the court setting the precedent.

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Stare Decisis

• The doctrine of stare decisis, one of the most important concepts in American law, is the principle that similar cases with similar facts and issues should have the same judicial outcome.

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Advantages of Stare Decisis

• Allows individuals and business to have some degree of confidence that the law will remain reasonably consistent.

• Requires all lower courts, such as a trial court, to follow the case precedent so that any similar case would be decided according to the precedent.

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Flagiello v. Pennsylvania Hospital 208 A2d 193 (PA 1965)

• “Stare decisis channels the law. It erects lighthouses and [flies] the signals of safety…but the principle of stare decisis does not demand that we follow precedents which shipwreck justice.”

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learning outcome checklist

• 1 - 1 Understand the broad definition and origins of law.

• 1-2 List and explain the purposes of law.

• 1-3 Explain the importance and benefits of legal awareness for business owners and managers in creating strategy and adding value to a company.

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learning outcome checklist

• 1-4 Articulate the role of counsel in legal decision making in a business context.

• 1-5 Recognize, explain, and give examples of sources of American law.

• 1-6 Differentiate between the concepts of law and equity.

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learning outcome checklist

• 1-7 Understand the legal doctrine of stare decisis.

• 1-8 Identify and apply important equitable maxims.

• 1-9 Classify the law into several broad categories.