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Chapter 01 - Law as a Foundation for Business
1-1
Chapter 1
Law as a Foundation for Business
Learning Objectives
The purpose of this chapter is to introduce the students to the subject of law and to some
classifications of its subject matter. In addition, it is designed to instill in them respect for the
role of the “rule of law” in the society and that the judicial system is the most important
stabilizing force in society. It should create an awareness that law is a foundation for the private
market and “property” as a legal concept underpins that market and contributes to the maximum
wealth of nations through productivity. This chapter also describes stare decisis, basic sources of
the American law, and sanctions that can be imposed when the law is not followed.
References
Bethell, Tom, The Noblest Triumph (1999).
Bernstein, William J., The First of Plenty. McGraw-Hill (2004).
Driegel, Blandine, The State and the Rule of Law. Princeton U. Press (1995).
Friedman, Lawrence M., American Law, 2d ed. Norton (1998).
Harnett, Bertram, Law, Lawyers and Laymen: Making Sense of the American Legal
System. San Diego: Harcourt Brace Jovanovich (1984).
Helpman, Elhanan, The Mystery of Economic Growth. Belknap Press (2004).
Holmes, The Common Law. Little, Brown and Company (1922).
Kelman, M., A Guide to Critical Legal Studies. Harvard (1988).
Pound, An Introduction to the Philosophy of Law. Yale University Press (1922).
Reed, O. Lee, “Law, the Rule of Law, and Property,” American Business Law Journal, Vol.
38 (2001).
Reed, O. Lee, “Nationbuilding 101: Reductionism in Property, Liberty, and Corporate
Governance,” 36 Vanderbilt Journal of Transitional Law 673 (2003).
The Spirit of the Common Law. Marshall Jones Co. (1921).
Teaching Outline
I. Introduction
A. Why Law and Regulations Are Fundamental Foundations for Business (LO 1-1)
Chapter 01 - Law as a Foundation for Business
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Emphasize:
That by studying the legal and regulatory environment of business, students will gain an
understanding of basic legal vocabulary and gain the ability to identify problematic
situations that could result in liability.
That because of the positive role lawyers can play, they are increasingly being asked to
join corporate boards.
Sidebar 1.1 titled ‘JPMorgan Chase & Co.’s Massive Legal Liability.’
II. Law, the Rule of Law, and Property
A. Law
Emphasize:
The simple definition of law. It can be elaborated by observing that law is a rule-based,
state-enforced formal ordering system with moral elements.
That adequate law and legal institutes promote the certainty and trust necessary for
complex, long-term business arrangements. In an economic sense, they lower the costs
of transacting business.
Additional Matters for Discussion:
Discuss that law formalizes values and traditions and that law is more needed in a large,
heterogeneous modern nation than in a smaller, homogeneous nation. Compare the U.S.
and Japan.
It is not too early in this chapter to ask students whether or not lack of law and strict
regulation facilitated the economic crash and recession that began in 2008.
Ask students to comment on how mistrust of law and lawmakers precipitated the
“Occupy Wall Street” and other “Occupy…” movements that arose in 2011.
B. The Rule of Law
Emphasize:
That under a rule of law, laws are generally and equally applicable.
That lack of the rule of law internationally has produced hundreds of calls for it in the
last several years by business and political leaders. Get students to search for rule-of-
law references in computer databases.
That the complete rule of law is an ideal rather than a fact in even the most democratic
societies.
Additional Matters for Discussion:
Get students to discuss why the managing director of J.P. Morgan and Co. called the
Chapter 01 - Law as a Foundation for Business
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
rule of law “a cornerstone of free trade.”
Ask students why the rule of law tends to produce rules that benefit everyone. Answer:
Because laws apply generally and equally to everyone, the only way lawmakers can
benefit themselves is by benefitting everyone. This answer is theoretical, of course.
Lawmakers are often benefited individually for making laws that favor special interests.
Ask students to imagine how society would be with no laws. What if the governor of
one’s state announced that tomorrow would be no law day and that nothing would be
penalized or enforced, no police would be present and no penalties would result from
anyone’s actions. What would the students do? One is likely to find that after a few
fleeting and whimsical thoughts, they would agree that they would primarily act to
protect their real and personal property.
C. Property (LO 1-2)
Emphasize:
The two meanings of property.
That property is not the resource or thing itself. It is a right (or series of rights).
That the property right gives a major incentive to develop resources.
That the exclusionary right of property provides a basis for the private market and
modern business.
Additional Matters for Discussion:
Ask students to discuss the incentive to grow and prosper and the incentive to innovate
and progress under a system with a right to private property ownership and a communist
system where private ownership of property is greatly diminished for most. Would they
even be in school if accumulation of property rights were not attainable?
D. Property in its Broadest Sense
Emphasize:
How in its broadest sense “property” is the central concept of Western legal systems.
How property can be thought of as the hub of a wheel and the various legal topics
studied in the text as spokes of the wheel. Law and the rule of law provide the unifying
rim of the wheel. (Refer to Figure 1.1)
That for Madison and other constitutional framers, property protected not only physical
resources like land but also human rights like freedom of speech, freedom of religion,
and freedom from unreasonable intrusion by the government.
Additional Matters for Discussion:
Ask students to discuss the statement: “Bill Gates and your professor have equal
Chapter 01 - Law as a Foundation for Business
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
property.” The point is to examine the confusion between “resources” and “property.”
Arguably, although Bill Gates and the student may have vastly different amounts of
resources, he and the student has exactly the same right to these respective resources,
thus the same “property.”
In Federalist Paper 10, Madison wrote: “Property… in its particular application means
that ‘domination which one man claims and exercises over the external things of the
world, in exclusion of every other individual.’ In its larger and juster meaning, it
embraces everything to which a man may attach a value and have a right; and which
leaves to everyone else a like advantage. In the former sense, a man’s land, or
merchandise, or money is called his property. In the latter sense, a man has property in
his opinions and the free communication of them. He has a property of peculiar value in
his religious opinions, and in the profession and practice dictated by them. He has
property very dear to him in the safety and liberty of his person. He has an equal
property in the free use of his faculties and free choice of the objects on which to
employ them. In a word, as a man is said to have a right to his property, he may be
equally said to have a property in his rights.”
Madison’s “larger and juster meaning” of property opens up all sorts of opportunities
for discussion with students. Note that although a system of property is basic to private
business in the modern nation, it does not preclude redistribution of resources for
education, health, and relief of poverty and adversity, etc. Even as the American
revolutionaries maintained “no taxation (of our individual resources) without
representation,” they appreciated the necessity of appropriate taxation (of one’s
resources) with democratic representation.
The importance of the broader sense of private property in the common law grows out
of the Magna Carta. From the 13th through the 18th centuries, the importance of private
property created constitutional tension between the English monarchs and their subjects.
The monarchs often claimed in essence that they owned the nation, its land, and its
produce, yet in opposition to this there was a growing sense that people owned things
privately and could be taxed on this private ownership only through their own
representative consent. Thus, the British colonists in the new world claimed they could
not be taxed without representation. The Sons of liberty, one of the first revolutionary
groups, had as their slogan “Liberty, Property and no Stamps.”
E. Jurisprudence
Emphasize:
The various schools of jurisprudence.
How the various schools of jurisprudence overlap.
That the word jurisprudence also refers to the general body of law interpreted by judges
as opposed to legislation.
Chapter 01 - Law as a Foundation for Business
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
II. Classifications of Law
A. Common Law and Civil Law (LO 1-3)
Emphasize:
That the “common law” countries are those that were colonized by England and take the
legal approach of that nation.
That common law emerged as judge-made law and even today emphasizes the
importance of judges in the legal system.
That civil law relies on the legislation than judicial decisions to determine what the law
is. Under civil law, courts are primarily fact-finding bodies.
B. Public and Private Law
Emphasize:
The distinction between public and private law.
That constitutional law, administrative law, and criminal law are three of the main
sources of public law.
That property law, contract law, and tort law are three of the main types of private law.
C. Civil Law and Criminal Law
Emphasize:
That for administrative purposes, courts usually separate criminal actions from all other
lawsuits.
That civil law as a classification of law is not the same as civil law as discussed
previously as a system of law. The context of the term’s use must be considered when
defining the term.
D. Substantive and Procedural Law
Emphasize:
The distinction between substantive and procedural laws.
That substantive rules of law define rights and duties, while procedural rules of law
provide the machinery for enforcing those rights and duties.
IV. Sources of Law (LO 1-4)
A. Federal Law
Chapter 01 - Law as a Foundation for Business
Emphasize:
That federal law is a very important source of law. It includes the U.S. Constitution,
which is the supreme law of the nation.
That any law, federal or state, that conflicts with the Constitution is said to be void and
has no legal effect.
That next in the hierarchy of federal law comes the legislation passed by Congress, also
called “acts” or “statutes” (collections of legislation, often on the same subject, are
codes).
B. State Law
Emphasize:
The distinction between a statute, a code, and an ordinance.
The benefits of uniform legislation and especially the Uniform Commercial Code.
Additional Matter for Discussion:
The problem of clear, concise, and accurate statutory drafting. Have the students write a
definition for a law prohibiting “conduct unbecoming a student.”
C. Judicial Decisions or Case Law
Emphasize:
How a judicial opinion becomes a precedent and how a case is cited.
The distinction between a holding of a case that establishes precedent and dicta.
Additional Matters for Discussion:
Discuss how in America’s property-based legal system resolving disputes over the
meaning and application of the law is imperative. Judicial decision-making formerly
resolves disputes. Talk about the need to have impartial judges.
Have the students express their views on originalism. Do they think that originalism can
be fair and effective over 200 years after a document was drafted?
Advantages
Emphasize:
The importance of stare decisis.
The advantages of stare decisis.
Disadvantages
Chapter 01 - Law as a Foundation for Business
Emphasize:
That the disadvantages of case law include—volume of cases, conflicting precedents,
dicta, rejection of precedent, and conflicts of law.
The problem of conflict of laws and the attempts at resolution.
D. Sources of Law Hierarchy in Review
Emphasize:
That law comes in a hierarchy.
Law higher in the hierarchy overrules or preempts lower law.
E. Legal Sanctions
Emphasize:
That sanctions are necessary to encourage or force compliance with the law.
That the Fourteenth Amendment mandates that individuals receive due process.
That the right of an individual to take another person’s resources (especially money)
because that person has failed to meet the requirements of the law (e.g., the breach of a
contract) is known as a remedy.
F. Sanctions for Criminal Conduct
Emphasize:
That criminal actions may result in one or more of the five sanctions listed.
That the purposes of sanctions are to protect the public and deter further criminal
conduct.
The distinction between felonies and misdemeanors.
Additional Matters for Discussion:
Draw attention to the fact that as society changes, criminal law changes. Point out that
miscegenation and homosexuality were both once considered crimes.
Have the students debate whether or not certain actions that are now criminal should be.
For example, drug use, alcoholism, gambling, and prostitution.
The growth of “white collar” crime such as income tax evasion, embezzlement, bribery
of foreign officials, computer fraud, and price fixing. Have the students discuss
appropriate punishment for those convicted.
That Chapter 13 will cover criminal law in detail.
G. Sanctions for Breach of Contract
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Emphasize:
The importance of contract law to the business community.
That when one party to a contract fails to do what he or she agreed to do, a breach of
contract occurs.
That the usual remedy for a breach is a suit for dollar damages. These damages, called
compensatory damages, are awarded to make the victim of the breach “whole” in the
economic sense.
That in addition to compensatory damages, breach-of-contract cases may award
consequential damages in some circumstances.
That in some circumstances, the remedy of an injured party may be a decree of specific
performance—an order by the court commanding the other party actually to perform a
bargain as agreed.
Additional Matter for Discussion:
That contracts will be discussed in detail in chapters 8 and 9.
H. Sanctions for Tortious Conduct
Emphasize:
That a tort is a civil wrong other than a breach of contract.
The theory of damages in tort cases.
That there are three types of torts: intentional, negligence, and strict liability.
That punitive damages—also called exemplary damages—are also appropriate when the
tort is intentional or the unreasonable conduct is extremely severe.
Additional Matter for Discussion:
That tort law will be discussed in detail in chapter 10.
I. Sanctions for Violating Statutes and Regulations
Emphasize:
That statutes at both the federal and state levels of government impose a variety of
sanctions for violating the statutes or regulations of administrative agencies adopted to
accomplish statutory purposes.
That most statutes include provisions for the imposition of fines and penalties.
That the sanctions imposed for violating statutes or administrative agency regulations
are an important part of enforcing the property-based legal system.
Additional Matter for Discussion:
