Part One:
The Legal Environment of Business
CONTENTS
Chapter 1 Introduction to Law
Chapter 2 Business Ethics and the Social Responsibility of Business
Chapter 3 Civil Dispute Resolution
Chapter 4 Constitutional Law
Chapter 5 Administrative Law
Chapter 6 Criminal Law
Chapter 7 Intentional Torts
Chapter 8 Negligence and Strict Liability
ETHICS QUESTIONS RAISED IN THIS PART
1. Are all laws moral? Should all laws be moral? How should morality be determined?
2. Are laws always just?
3. Which is more important, morality or justice?
4. Why is there a difference between the treatment of cases brought under civil law and those brought under
criminal law? Should there be a difference?
5. In some cultures being involved in a lawsuit is something about which to be ashamed. Our society has
been criticized for being overly litigious. In fact, we even go on television to sue in “Judge Judy” and
other similar shows. Is our culture “sue-happy?” Should access to the court system be restricted?
6. From an ethical perspective, what obligations does a person who has been harmed by another person or
by a business have to attempt settlement of the matter through negotiation before resorting to a lawsuit?
7. The Bill of Rights was drafted to protect individuals from their own government, not from criminals.
ACTIVITIES AND RESEARCH PROBLEMS
1. Have students draw a diagram of two overlapping circles, with one circle labeled “Moral” and the other
labeled “Legal.” The area of overlap would be both moral and legal. Then list several controversial
topics of current interest (e.g., abortion, capital punishment, marijuana smoking, etc.) for students to
place within an area of the diagram (or outside the circles if it is neither moral nor legal). Can any of
these issues be absolutely determined to be moral or immoral?
2. Are there any laws in our country’s history that have been repealed on the basis of their immorality?
Are there any laws still in existence that should be repealed? Have students discuss their opinions.
3. How does American common law differ from English common law?
4. Have students write a fictitious case involving questionable ethics in a business decision.
5. For a general discussion of law, or preceding the study of criminal law and procedure recruit someone
outside the class to rush in and commit a “crime” such as stealing the professor’s textbook. After the
stranger leaves, have the students write a description of what happened. Then compare the details of
the eyewitnesses and discuss the legal implications of the event.
6. Have students make a list of the key events in their lives, then have them list and discuss laws that
relate to those events.
7. Research the historic legal codes of other civilizations, such as the Hebrews and Babylonians, or of
other societies around the world today, and compare the crimes, punishments, and criminal procedures
Chapter 1
INTRODUCTION TO LAW
A. Nature of Law
1. Definition of Law
2. Functions of Law
3. Legal Sanctions
4. Law and Morals
5. Law and Justice
B. Classification of Law
1. Substantive and Procedural Law
2. Public and Private Law
3. Civil and Criminal Law
C. Sources of Law
1. Constitutional Law
2. Judicial Law
a. Common Law
b. Equity
c. Restatements of Law
3. Legislative Law
a. Treaties
b. Executive Orders
4. Administrative Law
D. Legal Analysis
Cases in This Chapter
Ryan v. Friesenhahn (Given as an example of how to brief a case)
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Identify and describe the basic functions of law.
Distinguish between (a) law and justice and (b) law and morals.
Distinguish between (a) substantive and procedural law, (b) public and private law, and (c)
civil and criminal law.
Identify and describe the sources of law.
Explain the principle of stare decisis.
TEACHING NOTES
Law concerns the relations between and among individuals as those
relations aftect social and economic order. It aftects the rights and duties
of every citizen and many non-citizens.
Law is both prohibitory, meaning certain acts must not be committed, and
mandatory, meaning certain acts must be done, sometimes in a set way.
Additionally, law is permissive: certain acts are allowed, but not required
by the law.
A. NATURE OF LAW
The law is a continuously changing process of developing a workable set of
rules that balance the individual and group rights of an evolving society.
Definition of Law
Legal scholars have de$ned law in various ways, including:
• “predictions of the way that a court will decide speci$c legal
questions”
• “a rule of civil conduct prescribed by the supreme power in a state,
commanding what is right, and prohibiting what is wrong”
*** Chapter Outcome ***
Identify and describe the basic functions of law.
Functions of Law
The functions of law are to maintain stability in the social, political, and
economic system through (1) dispute resolution, (2) protection of property,
and (3) the preservation of the state while at the same time permitting
ordered change.
1. Disputes are inevitable in a complex society and may involve criminal
or non-criminal matters. Law provides rules to resolve disputes and
avoid personal revenge.
2. Law protects ownership of property and allows for agreements
(contracts) to exchange property. (This text deals with many aspects
of this including contracts, sales, commercial paper, and business
associations.)
Legal Sanctions
Sanctions are the means by which the law enforces the decisions of the
court, such as $nes, imprisonment and capital punishment.
*** Chapter Outcome ***
Distinguish between law and morals. Distinguish between law and justice.
Law and Morals
Though law is aftected by morals, law and morality are not the same. Some
actions have no moral implications but have legal sanctions, whereas other
actions have no legal sanctions but do have moral implications. Some
actions have both moral impact and legal sanction.
NOTE: See Figure 1-1: Law and Morals.
Law and Justice
Law and justice are distinct but interrelated concepts.
• Justice may be de$ned as “the fair, equitable, and impartial
treatment of the competing interests and desires of individuals and
groups, with due regard for the common good.”
B. CLASSIFICATION OF LAW
Because the law is vast, it is helpful to organize it into categories such as:
(1) substantive and procedural, (2) public and private, and (3) civil and
criminal.
Basic to understanding these classi$cations are the terms right and duty. A
right is the ability of a person, with the aid of the law, to require another
person to perform or to refrain from performing a certain act. A duty is the
obligation the law imposes upon a person to perform or to refrain from
performing a certain act. Duty and right exist together: a person cannot
have a right without some other person (or all persons) having the
corresponding duty.
NOTE: See textbook Figure 1-2 which outlines the classi#cations of law.
*** Chapter Outcome ***
Distinguish between substantive and procedural law. Distinguish between public and
private law.
Distinguish between civil and criminal law.
Substantive and Procedural Law
Substantive law creates, de$nes, and regulates legal rights and duties.
Procedural law sets forth rules for enforcing those rights that are created by
the substantive law.
Public and Private Law
Public law is the branch of substantive law that deals with the government’s
rights and powers and its relationship to individuals or groups.
Private law is that part of substantive law governing individuals and legal
entities (such as corporations) in their relationships with one another.
Civil and Criminal Law
Civil law de$nes duties and deals with the rights and duties of individuals
among themselves. (It is part of private law.)
NOTE: Civil law is not the same as a civil law system, discussed later in this chapter.
Criminal law establishes duties and involves oftenses against the
community. (It is part of public law.)
The purpose of the civil law is to compensate the injured party (plaintift),
while the purpose of criminal law is to punish the wrongdoer. Typically, the
civil law awards money for damages or an order for the defendant to
NOTE: See textbook Figure 1-3, which compares civil and criminal law.
*** Chapter Outcome ***
Identify and describe the sources of law. Explain the principle of stare decisis.
Distinguish between law and equity.
C. SOURCES OF LAW
• Federal and state constitutions
• Federal treaties (agreements between or among independent
nations)
• Federal and state statutes (laws passed by a legislative body such as
the U.S. Congress or the legislature of a state)
• Executive orders (legislation issued by a President or governor)
• Ordinances of local municipal governments
• Rules and regulations of federal and state administrative agencies
• Federal and state court decisions
NOTE: See Figure 1-3, Hierarchy of Law
Constitutional Law
A constitution sets forth the basic principles by which a government is
guided, as well as the limitations on governmental authority. The U.S.
Constitution is the supreme law of the nation; a state constitution is the
Judicial Law
Case decisions establish precedent in our common law system and must
also be consulted when researching a legal question. In the common law
system, parties to a dispute initiate and conduct litigation (an adversary
system). The principle of stare decisis requires that inferior courts stay
consistent with prior decisions of higher courts on cases with similar facts.
A civil law system, which is less prevalent than common law within the
United States, depends on comprehensive legislative enactments (called
codes) and an inquisitorial system of determining disputes. In the
inquisitorial system, the court, rather than the parties, initiates litigation,
investigates pertinent facts, and conducts the presentation of evidence.
Common Law — a body of law established by previous rulings of courts in
a common law system. These decisions serve as precedents for later cases.
Equity — a supplementary system of judicial relief separate from the
common law, based upon settled rules of fairness, justice and honesty.
Legislative Law
Legislative law consists of statutes passed by legislatures. Statutes may
repeal judge-made law as long as the statute is not unconstitutional.
Today, most new laws come through the legislative branch because they
can choose the issues that need attention while courts can only deal with
issues in the cases brought before them.
The need for uniformity among state statutes led to the codi$cation of large
parts of business law. The most successful example of this eftort is the
Uniform Commercial Code (UCC), prepared under the joint sponsorship
and direction of the ALI and the Uniform Law Commission (ULC), which is
also known as the National Conference of Commissioners on Uniform State
Laws. All $fty states, the District of Columbia, and the Virgin Islands have
adopted the UCC. (Louisiana has adopted only part of the UCC.)
Administrative Law
The branch of public law that governs the powers and procedures of
governmental entities (other than courts and legislatures); often involves
public health, safety and welfare. Administrative law is created by
administrative agencies in the form of rules, regulations, orders, and
decisions to carry out the regulatory powers and duties of those agencies.
D. LEGAL ANALYSIS
While all U.S. Supreme Court decisions are reported, not every case
decided by the U.S. District Courts and the U.S. Courts of Appeals are
reported. Each circuit has established rules determining which decisions are
published. Decisions in state trial courts generally are not published but are
$led in the oEce of the clerk of the court. Decisions of state courts of
that the opinion was delivered in 1957.
Normally, the reported opinion in a case includes:
1. the essential facts, the nature of the action, the parties, what
happened to bring about the controversy, what happened in the
lower court, and what pleadings are material;
2. the issues of law or fact;
3. the legal principles involved;
4. the application of these principles; and the decision.
A serviceable method by which students may analyze and brief cases after
reading and comprehending the opinion is to write a brief containing the
following:
1. the facts of the case
2. the issue or question involved
3. the decision of the court
4. the reasons for the decision
Example of Briefed Case
The following case is printed both in its entirety and in briefed form in the
student’s textbook. It is printed only in briefed form here. The purpose of
including this case is to give an example of how to brief a case.
BRIEF OF CASE 1-1
Ryan v. Friesenhahn
I. Facts: Todd Friesenhahn, son
of Nancy and Frederick
Friesenhahn, held an open
invitation party at his parent’s
home that encouraged guests to
bring their own bottle. Sabrina
Ryan attended the party, became
intoxicated, and was involved in
a fatal accident after she left the
party. Sandra and Stephen Ryan,
condition when she left the party.
The trial court granted summary
judgment for the Friesenhahns.
II. Issue: Is a social host who
serves alcoholic beverages to a
minor liable in negligence for
harm suftered by the minor as a
result of the minor’s intoxication?
IV. Reasons: Accepting the
Ryans’ allegations as true, the
Friesenhahns were aware that
minors possessed and consumed
alcohol on their property and
speci$cally allowed Sabrina to
become intoxicated. The Texas
Alcoholic Beverage Code
provides that a person commits
an oftense if, with criminal
negligence, he “makes available
an alcoholic beverage to a
minor.” A violation of a statute
constitutes negligence per se if
In considering common-law
negligence as a basis for social
host liability, the Texas Supreme
Court has held that there are two
practical reasons for not
imposing a third-party duty on
social hosts who provide alcohol
to adult guests: $rst, the host
cannot reasonably know the
extent of his guests’ alcohol
consumption level; second, the
host cannot reasonably be
expected to control his guests’