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Essentials of
BUSINESS LAW
and the Legal Environment
THIRTEENTH EDITION
Richard A. Mann Barry S. Roberts

The University of North Carolina at Chapel Hill The University of North Carolina at Chapel Hill
Member of the North Carolina Bar Member of the North Carolina and Pennsylvania Bars
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Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Essentials of Business Law and the Legal © 2019, 2016 Cengage Learning®
Environment, Thirteenth Edition
Richard A. Mann and Barry S. Roberts Unless otherwise noted, all content is © Cengage
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Print Number: 01 Print Year: 2017
About the Authors
RICHARD A. MANN received a B.S. in mathematics from the University of North

Carolina at Chapel Hill and a J.D. from Yale Law School. He is professor emeritus of
Business Law at the Kenan-Flagler Business School, University of North Carolina
at Chapel Hill, and is past president of the Southeastern Regional Business Law
Association. He is a member of Who’s Who in America, Who’s Who in American Law,
and the North Carolina Bar (inactive).
Professor Mann has written extensively on a number of legal topics, including
bankruptcy, sales, secured transactions, real property, insurance law, and business
associations. He has received the American Business Law Journal’s award both for the
best article and for the best comment and has served as a reviewer and staff editor for
the publication. Professor Mann is a coauthor of Smith and Roberson’s Business Law
(seventeenth edition), as well as Business Law and the Regulation of Business (twelfth
edition) and Contemporary Business Law.
BARRY S. ROBERTS received a B.S. in business administration from Pennsylvania

State University, a J.D. from the University of Pennsylvania, and an LL.M. from Harvard
Law School. He served as a judicial clerk for the Pennsylvania Supreme Court prior to
practicing law in Pittsburgh. Barry Roberts is professor emeritus of business law at the
Kenan-Flagler Business School, University of North Carolina at Chapel Hill, and is a
member of Who’s Who in American Law and the North Carolina and Pennsylvania
Bars (inactive).
Professor Roberts has written numerous articles on such topics as antitrust,
products liability, constitutional law, banking law, employment law, and business
associations. He has been a reviewer and staff editor for the American Business Law
Journal. He is a coauthor of Smith and Roberson’s Business Law (seventeenth edition), as
well as Business Law and the Regulation of Business (twelfth edition) and Contemporary
Business Law.
iii
Contents in Brief
Part I Part I V
Introduction to Law and Ethics 1 Sales 331
1 Introduction to Law 2 19 Introduction to Sales and Leases 332

2 Business Ethics 13 20 Performance 351
21 Transfer of Title and Risk of Loss 370
22 Product Liability: Warranties and Strict Liability 385
Part I I
The Legal Environment of Business 43 23 Sales Remedies 409
3 Civil Dispute Resolution 44 Part V

4 Constitutional Law 68 Negotiable Instruments 431
5 Administrative Law 88 24 Form and Content 432
6 Criminal Law 104 25 Transfer and Holder in Due Course 448
7 Intentional Torts 121 26 Liability of Parties 476
8 Negligence and Strict Liability 139 27 Bank Deposits, Collections, and Funds Transfers 494
Part V I
Part I I I
Agency 517
Contracts 161
28 Relationship of Principal and Agent 518
9 Introduction to Contracts 162
10 Mutual Assent 177 29 Relationship with Third Parties 537
11 Conduct Invalidating Assent 196
Part V I I
12 Consideration 213
Business Associations 561
13 Illegal Bargains 230
14 Contractual Capacity 245 30 Formation and Internal Relations of General
15 Contracts in Writing 258 Partnerships 562
16 Third Parties to Contracts 281 31 Operation and Dissolution of General Partnerships 587
17 Performance, Breach, and Discharge 298 32 Limited Partnerships and Limited Liability
Companies 611
18 Contract Remedies 313
iv
Contents in Brief v
33 Nature and Formation of Corporations 634 45 Environmental Law 925

34 Financial Structure of Corporations 656 46 International Business Law 946
35 Management Structure of Corporations 675
36 Fundamental Changes of Corporations 704 Part X
Property 965
Part V I I I
47 Introduction to Property, Property Insurance,
Debtor and Creditor Relations 723 Bailments, and Documents of Title 966
37 Secured Transactions and Suretyship 724 48 Interests in Real Property 993
38 Bankruptcy 757 49 Transfer and Control of Real Property 1011
50 Trusts and Wills 1026
Part I X
Regulation of Business 789 APPENDICES
39 Securities Regulation 790 A The Constitution of the United States
40 Intellectual Property 827 of America A-2
41 Employment Law 847 B Uniform Commercial Code (Selected
42 Antitrust 872 Provisions) B-1
43 Accountants’ Legal Liability 891 C Dictionary of Legal Terms C-1
44 Consumer Protection 902 INDEX I-1
Contents
Part I: Introduction To Law And Ethics 1 Concept Review: Subject Matter Jurisdiction 51
Jurisdiction over the Parties 51
Chapter 1: Introduction to Law 2
Civil Dispute Resolution 53
Nature of Law 2
Civil Procedure 53
Classification of Law 4
Alternative Dispute Resolution 59
Concept Review: Comparison of Civil and Criminal Law 5
Concept Review: Comparison of Court Adjudication,
Sources of Law 6 Arbitration, and Mediation/Conciliation 60
Concept Review: Comparison of Law and Equity 8 Business Law in Action 62
Going Global: What is the WTO? 10 Going Global: What about international dispute resolution? 63
Legal Analysis 10
Chapter 4: Constitutional Law 68
Applying the Law: Introduction to Law 11
Basic Principles 69
Chapter 2: Business Ethics 13 Powers of Government 72
Limitations on Government 76
Law Versus Ethics 14
Concept Review: Limitations on Government 77
Ethical Theories 14
Ethical Dilemma: Who Is Responsible for Commercial Speech? 83
Ethical Standards in Business 17
Ethical Responsibilities of Business 18 Chapter 5: Administrative Law 88
Business Ethics Cases 24 Operation of Administrative Agencies 89
Pharmakon Drug Company 24 Concept Review: Administrative Rulemaking 93
Mykon’s Dilemma 26 Limits on Administrative Agencies 95
Oliver Winery, Inc. 31 Ethical Dilemma: Should the Terminally Ill Be Asked to Await
JLM, Inc. 33 FDA Approval of Last-Chance Treatments? 100
Sword Technology, Inc. 35 Chapter 6: Criminal Law 104
Vulcan, Inc. 38 Nature of Crimes 105
Concept Review: Degrees of Mental Fault 106
Part II:The Legal Environment of Classification 106
Business 43 White-Collar Crime 107
Crimes Against Business 110
Chapter 3: Civil Dispute Resolution 44 Applying the Law: Criminal Law 111
The Court System 44 Going Global: What about international bribery? 114
The Federal Courts 44 Defenses to Crimes 115
State Courts 46 Criminal Procedure 115
Jurisdiction 47 Concept Review: Constitutional Protection for the Criminal
Subject Matter Jurisdiction 48 Defendant 117
vi
Contents vii
Chapter 7: Intentional Torts 121 Fraud 199

Harm to the Person 124 Nonfraudulent Misrepresentation 204
Harm to the Right of Dignity 126 Mistake 204
Business Law in Action 128 Concept Review: Misrepresentation 204
Concept Review: Privacy 131 Applying the Law: Conduct Invalidating Assent 205
Harm to Property 131 Concept Review: Conduct Invalidating Assent 207
Harm to Economic Interests 132 Chapter 12: Consideration 213
Concept Review: Intentional Torts 134 Legal Sufficiency 213
Ethical Dilemma: What May One Do to Attract Clients Concept Review: Consideration in Unilateral and Bilateral
from a Previous Employer? 134 Contracts 215
Chapter 8: Negligence and Strict Liability 139 Bargained-for Exchange 220
Negligence 140 Contracts Without Consideration 221
Breach of Duty of Care 140 Business Law in Action 225
Factual Cause 147 Ethical Dilemma: Should a Spouse’s Promise Be Legally
Scope of Liability (Proximate Cause) 148 Binding? 225
Harm 150 Chapter 13: Illegal Bargains 230
Defenses to Negligence 150 Violations of Statutes 230
Strict Liability 153 Violations of Public Policy 233
Activities Giving Rise to Strict Liability 153 Business Law in Action 239
Ethical Dilemma: What Are the Obligations of a Bartender Effect of Illegality 240
to His Patrons? 156 Ethical Dilemma: When Is a Bargain Too Hard? 241
Defenses to Strict Liability 156
Chapter 14: Contractual Capacity 245
Minors 245
Part III: Contracts 161
Business Law in Action 248
Chapter 9: Introduction to Contracts 162 Incompetent Persons 252
Development of the Law of Contracts 162 Intoxicated Persons 252
Going Global: What about international contracts? 164 Ethical Dilemma: Should a Merchant Sell to One Who Lacks
Definition of Contract 165 Capacity? 254
Requirements of a Contract 165 Chapter 15: Contracts in Writing 258
Classification of Contracts 167 Statute of Frauds 258
Promissory Estoppel 169 Contracts Within the Statute of Frauds 259
Quasi Contracts or Restitution 171 Going Global: What about electronic commerce and electronic
Concept Review: Contracts, Promissory Estoppel, and Quasi signatures in international contracts? 260
Contracts (Restitution) 171 Concept Review: The Statute of Frauds 267
Business Law in Action 172 Compliance with the Statute of Frauds 267
Chapter 10: Mutual Assent 177
Effect of Noncompliance 269
Offer 178
Parol Evidence Rule 270
Essentials of an Offer 178
The Rule 270
Duration of Offers 182
Situations to Which the Rule Does
Applying the Law: Mutual Assent 184 Not Apply 272
Acceptance of Offer 187 Supplemental Evidence 273
Communication of Acceptance 187 Interpretation of Contracts 274
Variant Acceptances 190
Ethical Dilemma: What’s (Wrong) in a Contract? 275
Concept Review: Offer and Acceptance 191
Chapter 16: Third Parties to Contracts 281
Business Law In Action 191
Assignment of Rights 281
Chapter 11: Conduct Invalidating Assent 196 Delegation of Duties 287
Duress 196 Applying the Law: Third Parties to Contracts 290
Undue Influence 198 Third-Party Beneficiary Contracts 290
viii Contents
Chapter 17: Performance, Breach, and Discharge 298 Strict Product Liability in Tort 393
Conditions 298 Concept Review: Warranties 394
Discharge by Performance 301 Requirements Under Second Restatement of Torts 394
Discharge by Breach 301 Obstacles to Recovery Under Second Restatement 398
Applying the Law: Performance, Breach, and Discharge 302 Business Law in Action 400
Discharge by Agreement of the Parties 304 Restatement (Third) of Torts: Products Liability 401
Discharge by Operation of Law 305 Concept Review: Product Liability 402
Ethical Dilemma: When Should a Company Order a Product
Chapter 18: Contract Remedies 313
Recall? 403
Monetary Damages 314
Business Law in Action 315 Chapter 23: Sales Remedies 409
Remedies in Equity 319 Remedies of the Seller 410
Restitution 321 Concept Review: Remedies of the Seller 415
Limitations on Remedies 323 Remedies of the Buyer 415
Remedies for Misrepresentation 325 Applying the Law: Sales Remedies 416
Concept Review: Remedies of the Buyer 421
Contractual Provisions Affecting Remedies 421
Part IV: Sales 331
Chapter 19: Introduction to Sales and Leases 332

Part V: Negotiable Instruments 431
Nature of Sales and Leases 333
Definitions 333 Chapter 24: Form and Content 432
Going Global: What law governs international sales? 335 Concept Review: Use of Negotiable Instruments 433
Fundamental Principles of Article 2 and Article 2A 336 Negotiability 433
Formation of Sales and Lease Contracts 339 Types of Negotiable Instruments 434
Manifestation of Mutual Assent 339 Formal Requirements of Negotiable Instruments 436
Consideration 343
Form of the Contract 344
Chapter 25: Transfer and Holder in Due Course 448
Transfer 448
Negotiation 448
Concept Review: Contract Law Compared with Law of Sales 346
Indorsements 453
Ethical Dilemma: What Constitutes Unconscionability
in a Business? 346 Concept Review: Indorsements 457
Applying the Law: Transfer of Negotiable Instruments 457
Chapter 20: Performance 351 Holder in Due Course 458
Performance by the Seller 351 Requirements of a Holder in Due Course 458
Performance by the Buyer 356 Holder in Due Course Status 463
Obligations of Both Parties 360 The Preferred Position of a Holder in Due Course 465
Going Global: What about letters of credit? 362 Limitations upon Holder in Due Course Rights 470
Ethical Dilemma: Should a Buyer Refuse to Perform a Contract Ethical Dilemma: What Responsibility Does a Holder Have
Because a Legal Product May Be Unsafe? 365 in Negotiating Commercial Paper? 471
Chapter 21: Transfer of Title and Risk of Loss 370 Chapter 26: Liability of Parties 476
Transfer of Title 370 Contractual Liability 476
Risk of Loss 375 Signature 477
Bulk Sales 379 Liability of Primary Parties 479
Ethical Dilemma: Who Should Bear the Loss? 381 Liability of Secondary Parties 480
Chapter 22: Product Liability: Warranties and Strict Concept Review: Contractual Liability 483
Liability 385 Business Law in Action 484
Warranties 386 Termination of Liability 484
Types of Warranties 386 Liability Based on Warranty 485
Obstacles to Warranty Actions 390 Warranties on Transfer 485
Contents ix
Warranties on Presentment 487 Forms of Business Associations 564

Ethical Dilemma: Who Gets to Pass the Buck on a Forged Concept Review: General Partnership, Limited Partnership,
Indorsement? 489 Limited Liability Company, and Corporation 566
Going Global: What about multinational enterprises? 567
Chapter 27: Bank Deposits, Collections, and Funds
Transfers 494 Formation of General Partnerships 567
Bank Deposits and Collections 494 Nature of Partnership 567

Collection of Items 495 Formation of a Partnership 568
Relationships Among Partners 575
Going Global: What about letters of credit? 496
Duties Among Partners 575
Relationship Between Payor Bank and Its Customer 500
Rights Among Partners 578
Electronic Funds Transfer 505
Types of Electronic Funds Transfer 505 Concept Review: Partnership Property Compared with Partner’s
Interest 580
Ethical Dilemma: When Is an Opportunity a Partnership
Consumer Funds Transfers 507 Opportunity? 582
Wholesale Funds Transfers 509
Concept Review: Parties to a Funds Transfer 512 Chapter 31: Operation and Dissolution of General
Ethical Dilemma: Can Embezzlement Ever Be a Loan? 512 Partnerships 587
Relationship of Partnership and Partners with
Third Parties 587
Part VI: Agency 517 Contracts of Partnership 588
Chapter 28: Relationship of Principal and Agent 518 Business Law in Action 591
Nature of Agency 519 Torts and Crimes of Partnership 591
Creation of Agency 521 Notice to a Partner 592
Duties of Agent to Principal 523 Liability of Incoming Partner 593
Duties of Principal to Agent 527 Dissociation and Dissolution of General
Partnerships Under the RUPA 594
Termination of Agency 528
Dissociation 594
Applying the Law: Relationship of Principal and Agent 531
Dissolution 595
Ethical Dilemma: Is Medicaid Designed to Protect
Inheritances? 532 Concept Review: Dissociation and Dissolution Under
the RUPA 598
Chapter 29: Relationship with Third Parties 537 Dissociation Without Dissolution 600
Relationship of Principal and Third Persons 537 Dissolution of General Partnerships Under
Contract Liability of Principal 538 the UPA 602
Business Law in Action 540 Dissolution 603

Winding Up 603
Continuation After Dissolution 604
Tort Liability of Principal 547
Criminal Liability of Principal 551 Ethical Dilemma: What Duty of Disclosure Is Owed to Incoming
Partners? 605
Relationship of Agent and Third Persons 551
Contract Liability of Agent 552
Chapter 32: Limited Partnerships and Limited Liability
Tort Liability of Agent 555 Companies 611
Rights of Agent Against Third Person 555 Limited Partnerships 611
Ethical Dilemma: When Should an Agent’s Power to Bind His Concept Review: Comparison of General and Limited
Principal Terminate? 555 Partners 617
Limited Liability Companies 618
Part VII: Business Associations 561 Applying the Law: Limited Partnerships and Limited Liability
Companies 622
Chapter 30: Formation and Internal Relations of Concept Review: Comparison of Member-Managed and
General Partnerships 562 Manager-Managed LLCs 623
Choosing a Business Association 562 Other Unincorporated Business Associations 627
Factors Affecting the Choice 563 Concept Review: Liability Limitations in LLPs 628
x Contents
Chapter 33: Nature and Formation Officers 691

of Corporations 634 Duties of Directors and Officers 692
Nature of Corporations 635 Business Law in Action 698
Corporate Attributes 635 Ethical Dilemma: Whom Does a Director Represent?
Classification of Corporations 636 What Are a Director’s Duties? 699
Chapter 36: Fundamental Changes of
Business Law in Action 640 Corporations 704
Formation of a Corporation 641 Amendments to the Articles of Incorporation 704
Organizing the Corporation 641 Combinations 705
Formalities of Incorporation 643 Dissolution 714
Recognition or Disregard of Concept Review: Fundamental Changes under the
Corporateness 644 RMBCA 715
Concept Review: Comparison of Articles of Incorporation Ethical Dilemma: What Rights Do Minority Shareholders
and Bylaws 644 Have? 718
Defective Incorporation 645
Piercing the Corporate Veil 647
Corporate Powers 649 Part VIII: Debtor and Creditor
Sources of Corporate Powers 649 Relations 723
Ultra Vires Acts 649
Chapter 37: Secured Transactions and Suretyship 724
Liability for Torts and Crimes 650
Secured Transactions in Personal Property 725
Chapter 34: Financial Structure of Corporations 656 Essentials of Secured Transactions 725
Going Global: What about foreign investment? 657 Classification of Collateral 726
Debt Securities 657 Attachment 728
Authority to Issue Debt Securities 657 Perfection 731
Types of Debt Securities 657 Concept Review: Applicable Method of Perfection 735
Business Law in Action 659 Concept Review: Requisites for Enforceability of Security
Equity Securities 660 Interests 735
Issuance of Shares 660 Priorities Among Competing Interests 735
Classes of Shares 663 Concept Review: Priorities 740
Concept Review: Debt and Equity Securities 664 Default 740
Dividends and Other Distributions 665 Business Law in Action 741
Types of Dividends and Other Distributions 665 Suretyship 743
Legal Restrictions on Dividends and Other Distributions 666 Nature and Formation 743
Applying the Law: Financial Structure of Corporations 667 Duties of Surety 745
Declaration and Payment of Distributions 669 Rights of Surety 746
Liability for Improper Dividends and Distributions 670 Defenses of Surety and Principal Debtor 747
Concept Review: Liability for Improper Distributions 671 Ethical Dilemma: What Price Is “Reasonable” in Terms
of Repossession? 750
Chapter 35: Management Structure of
Corporations 675 Chapter 38: Bankruptcy 757
Corporate Governance 675 Federal Bankruptcy Law 758
Role of Shareholders 678 Going Global: What about transnational bankruptcies? 759
Voting Rights of Shareholders 678 Case Administration—Chapter 3 759
Concept Review: Concentrations of Voting Power 682 Creditors, the Debtor, and the Estate—Chapter 5 761
Enforcement Rights of Shareholders 682 Liquidation—Chapter 7 768
Role of Directors and Officers 686 Applying the Law: Bankruptcy 770
Function of the Board of Directors 687 Reorganization—Chapter 11 772
Election and Tenure of Directors 689 Adjustment of Debts of Individuals—Chapter 13 776
Exercise of Directors’ Functions 690 Concept Review: Comparison of Bankruptcy Proceedings 780
Contents xi
Creditors’ Rights and Debtors’ Relief Outside of Concept Review: Federal Employment Discrimination Laws 861
Bankruptcy 781 Ethical Dilemma: What (Unwritten) Right to a Job Does an
Creditors’ Rights 781 Employee Have? 866
Debtors’ Relief 781
Chapter 42: Antitrust 872
Ethical Dilemma: For a Company Contemplating Bankruptcy,
When Is Disclosure the Best Policy? 783 Sherman Antitrust Act 872
Going Global: Do the antitrust laws apply outside the United
States? 874
Part IX: Regulation of Business 789 Concept Review: Restraints of Trade Under Sherman Act 879
Chapter 39: Securities Regulation 790 Clayton Act 881
The Securities Act of 1933 792 Robinson-Patman Act 884
Definition of a Security 792 Federal Trade Commission Act 886
Registration of Securities 794 Ethical Dilemma: When Is an Agreement
Anticompetitive? 887
Exempt Securities 796
Exempt Transactions for Issuers 796 Chapter 43: Accountants’ Legal Liability 891
Exempt Transactions for Nonissuers 801 Common Law 891
Concept Review: Exempt Transactions for Issuers Under the Federal Securities Law 895
1933 Act 802 Applying the Law: Accountants’ Legal Liability 896
Liability 803
Concept Review: Accountants’ Liability Under Federal Securities
The Securities Exchange Act of 1934 806 Law 897
Disclosure 807
Chapter 44: Consumer Protection 902
Concept Review: Disclosure Under the 1934 Act 811
State and Federal Consumer Protection Agencies 903
Consumer Purchases 908
Liability 812
Concept Review: Consumer Rescission Rights 910
Going Global: What about international securities
regulation? 818 Consumer Credit Transactions 910
Concept Review: Civil Liability Under the 1933 and 1934 Business Law in Action 917
Acts 820 Creditors’ Remedies 917
Ethical Dilemma: What Information May a Corporate Ethical Dilemma: Should Some Be Protected from High-Pressure
Employee Disclose? 821 Sales? 919
Chapter 40: Intellectual Property 827 Chapter 45: Environmental Law 925
Trade Secrets 827 Common Law Actions for Environmental
Trade Symbols 830 Damage 925
Trade Names 834 Nuisance 925

Copyrights 835 Trespass to Land 926
Patents 839 Strict Liability for Abnormally Dangerous Activities 926
Problems Common to Private Causes of Action 927
Going Global: How is intellectual property protected
internationally? 841 Federal Regulation of the Environment 927
Concept Review: Intellectual Property 841 The National Environmental Policy Act 927
Ethical Dilemma: Who Holds the Copyright on Lecture The Clean Air Act 928
Notes? 842 The Clean Water Act 932
Hazardous Substances 935
Chapter 41: Employment Law 847
Concept Review: Major Federal Environmental Statutes 940
Labor Law 847
International Protection of the Ozone Layer 940
Concept Review: Unfair Labor Practices 849
Ethical Dilemma: Distant Concerns 941
Employment Discrimination Law 849
Business Law in Action 859 Chapter 46: International Business Law 946
Employee Protection 860 The International Environment 946
Going Global: Do Federal antidiscrimination laws apply outside Jurisdiction over Actions of Foreign Governments 949
the United States? 861 Transacting Business Abroad 951
xii Contents
Business Law in Action 954 Chapter 49: Transfer and Control of Real Property 1011
Forms of Multinational Enterprises 959 Transfer of Real Property 1011
Ethical Dilemma: Who May Seek Economic Shelter Under U.S. Contract of Sale 1012
Trade Law? 961 Deeds 1013
Secured Transactions 1014
Part X: Property 965 Adverse Possession 1016
Public and Private Controls 1016
Chapter 47: Introduction to Property, Property Zoning 1017
Insurance, Bailments, and Documents Eminent Domain 1018
of Title 966
Private Restrictions on Land Use 1020
Introduction to Property and Personal
Property 966 Ethical Dilemma: Where Should Cities House the
Disadvantaged? 1021
Kinds of Property 967
Concept Review: Kinds of Property 967 Chapter 50: Trusts and Wills 1026
Transfer of Title to Personal Property 970 Trusts 1026
Property Insurance 973 Types of Trusts 1026
Fire and Property Insurance 973 Creation of Trusts 1029
Business Law in Action 975 Termination of a Trust 1031
Nature of Insurance Contracts 975 Concept Review: Allocation of Principal and Income 1032
Bailments and Documents of Title 978 Decedent’s Estates 1032
Bailments 978 Wills 1032
Concept Review: Duties in a Bailment 981 Business Law in Action 1036
Documents of Title 983 Intestate Succession 1037
Ethical Dilemma: Who Is Responsible for the Operation Administration of Estates 1038
of Rental Property? 986 Ethical Dilemma: When Should Life Support Cease? 1038
Chapter 48: Interests in Real Property 993
Freehold Estates 993 Appendices
Concept Review: Freehold Estates 995
Appendix A: The Constitution
Leasehold Estates 996
of the United States of America A-2
Concurrent Ownership 1002
Concept Review: Rights of Concurrent Appendix B: Uniform Commercial Code
Owners 1003 (Selected Provisions) B-1
Nonpossessory Interests 1004
Appendix C: Dictionary of Legal Terms C-1
Applying the Law: Interests in Real
Property 1006 Index I-1
Table of Cases
Cases shown in red are new to this edition. Catamount Slate Products, Inc. v. Sheldon 179
Chapa v. Traciers & Associates 741
Christy v. Pilkinton 306
A Coastal Leasing Corporation v. T-Bar S Corporation 422
A.E. Robinson Oil Co., Inc. v. County Forest Products, Inc. 554 Cohen v. Mirage Resorts, Inc. 713
Alcoa Concrete & Masonry v. Stalker Bros. 231 Commerce & Industry Insurance Company v. Bayer
Aldana v. Colonial Palms Plaza, Inc. 285 Corporation 342
Alexander v. FedEx Ground Package System, Inc. 520 Conklin Farm v. Leibowitz 593
Alpert v. 28 Williams St. Corp. 710 Connes v. Molalla Transport System, Inc. 548
Alzado v. Blinder, Robinson & Company, Inc. 613 Conway v. Cutler Group, Inc. 1013
American Manufacturing Mutual Insurance Company v. Tison Cooke v. Fresh Express Foods Corporation, Inc. 716
Hog Market, Inc. 748 Cooperative Centrale Raiffeisen-Boerenleenbank B.A. v.
American Needle, Inc. v. National Football League 875 Bailey 443
Anderson v. McOskar Enterprises, Inc. 236 Coopers & Lybrand v. Fox 641
Any Kind Checks Cashed, Inc. v. Talcott 461 Cox Enterprises, Inc. v. Pension Benefit Guaranty
Arrowhead School District No. 75, Park County, Montana, v. Corporation 668
Klyap 316
Association for Molecular Pathology v. Myriad Genetics, Inc. 840
D
B Dahan v. Weiss 268
Davis v. Watson Brothers Plumbing, Inc. 480
Bagley v. Mt. Bachelor, Inc. 237 Denney v. Reppert 218
Beam v. Stewart 696 Department of Revenue of Kentucky, et al. v. Davis 74
Belden, Inc. v. American Electronic Components, Inc. 387 Detroit Lions, Inc. v. Argovitz 526
Berardi v. Meadowbrook Mall Company 197 DiLorenzo v. Valve & Primer Corporation 223
Berg v. Traylor 247 DIRECTV, Inc. v. Imburgia 61
Bigelow-Sanford, Inc. v. Gunny Corp. 418 Dixon, Laukitis and Downing v. Busey Bank 497
Border State Bank of Greenbush v. Bagley Livestock DJ Coleman, Inc. v. Nufarm Americas, Inc. 337
Exchange, Inc. 729 Dodge v. Ford Motor Co. 670
Borton v. Forest Hills Country Club 1004 Donahue v. Rodd Electrotype Co., Inc. 687
Bouton v. Byers 170 Drake Mfg. Co., Inc. v. Polyflow, Inc. 637
Brehm v. Eisner 693 Dunnam v. Burns 233
Brentwood Academy v. Tennessee Secondary School Athletic
Association 71
Brown v. Board of Education of Topeka 82 E
Brown v. Entertainment Merchants Association 77 Eastman Kodak Co. v. Image Technical Services, Inc. 879
Bulova Watch Company, Inc. v. K. Hattori & Co. 960 Ed Nowogroski Insurance, Inc. v. Rucker 829
Burlington Northern & Santa Fe Railway Company v. White 850 Edmonson v. Leesville Concrete Company, Inc. 56
Burningham v. Westgate Resorts, Ltd. 206 Enea v. The Superior Court of Monterey County 577
Environmental Protection Agency v. EME Homer City
C
Generation, L. P. 929
Cappo v. Suda 1021 Ernst & Ernst v. Hochfelder 896
Carter v. Tokai Financial Services, Inc. 334 Estate of Countryman v. Farmers Coop. Ass’n 624
xiii
xiv Table of Cases
F Kimbrell’s of Sanford, Inc. v. KPS, Inc. 734

King v. VeriFone Holdings, Inc. 683
F. Hoffmann-La Roche Ltd v. Empagran S.A. 955
Kirtsaeng v. John Wiley & Sons, Inc. 836
Faragher v. City of Boca Raton 855
Klein v. Pyrodyne Corporation 154
FCC v. Fox Television Stations, Inc. 97
Korzenik v. Supreme Radio, Inc. 460
Federal Ins. Co. v. Winters 289
Ferrell v. Mikula 125
First State Bank of Sinai v. Hyland 253 L
Fox v. Mountain West Electric, Inc. 167
Frank B. Hall & Co., Inc. v. Buck 127 Leegin Creative Leather Products, Inc. v. PSKS, Inc. 877
Freeman v. Quicken Loans, Inc. 915 Lefkowitz v. Great Minneapolis Surplus Store, Inc. 181
FTC v. Wyndham Worldwide Corp. 904 Leibling, P.C. v. Mellon PSFS (NJ) National Association 501
Furlong v. Alpha Chi Omega Sorority 358 Louisiana v. Hamed 113
Love v. Hardee’s Food Systems, Inc. 146
G
M
Gaddy v. Douglass 530
Galler v. Galler 681 Mackay v. Four Rivers Packing Co. 264
Greene v. Boddie-Noell Enterprises, Inc. 397 Madison Square Garden Corp., Ill. v. Carnera 321
Mark Line Industries, Inc. v. Murillo Modular Group, Ltd. 477
H Maroun v. Wyreless Systems, Inc. 202
Martin v. Melland’s Inc. 379
Hadfield v. Gilchrist 979 Matrixx Initiatives, Inc. v. Siracusano 814
Hadley v. Baxendale 317 Mayo Foundation for Medical Education and Research v.
Hamilton v. Lanning 778 United States 91
Harris v. Looney 646 McDowell Welding & Pipefitting, Inc. v. United States
Harris v. Viegelahn 777 Gypsum Co. 304
Heinrich v. Titus-Will Sales, Inc. 374 Merritt v. Craig 324
Heritage Bank v. Bruha 439 Metropolitan Life Insurance Company v. RJR Nabisco, Inc. 658
Herron v. Barnard 968 Michael Silvestri v. Optus Software, Inc. 299
Hessler v. Crystal Lake Chrysler-Plymouth, Inc. 363 Midwest Hatchery v. Doorenbos Poultry 423
Hochster v. De La Tour 303 Miller v. McDonald’s Corporation 522
Home Rentals Corp. v. Curtis 999 Mims v. Arrow Financial Services, LLC 49
Hospital Corp. of America v. FTC 883 Mirvish v. Mott 971
Household Credit Services, Inc. v. Pfennig 912 Montana Food, LLC v. Todosijevic 620
Husky International Electronics, Inc., v. Ritz 765 Moore v. Kitsmiller 152
Morrison v. National Australia Bank Ltd. 956
I Moulton Cavity & Mold Inc. v. Lyn-Flex Ind. 354
In Re KeyTronics 572 Mountain Peaks Financial Services, Inc. v. Roth-Steffen 286
In Re L. B. Trucking, Inc. 389 Murphy v. BDO Seidman, LLP 893
In re Magness 284
In re The Score Board, Inc. 249 N
In the Matter of 1545 Ocean Ave., LLC 625
In the Matter of the Estate of Rowe 1030 NationsBank of Virginia, N.A. v. Barnes 441
Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC 648 Neugebauer v. Neugebauer 198
New England Rock Services, Inc. v. Empire Paving, Inc. 218
Northern Corporation v. Chugach Electrical Association 307
J
Jasdip Properties SC, LLC v. Estate of Richardson 172
O
Jasper v. H. Nizam, Inc. 862
Jenkins v. Eckerd Corporation 271 OBB Personenverkehr AG v. Sachs 950
Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA 918 Omnicare, Inc. v. Laborers District Council Construction
Industry Pension Fund 804
O’Neil v. Crane Co. 395
K Osprey L.L.C. v. Kelly-Moore Paint Co., Inc. 188
Kalas v. Cook 266
Keeney v. Keeney 1028 P
Kelo v. City of New London 1018
Kelso v. Bayer Corporation 396 Palsgraf v. Long Island Railroad Co. 149
Kenco Homes, Inc. v. Williams 412 Palumbo v. Nikirk 155
Keser v. Chagnon 251 Parker v. Twentieth Century-Fox Film Corp. 318
Table of Cases xv
Parker v. Twentieth Century-Fox Film Corp. 55 T

Parlato v. Equitable Life Assurance Society of the
Texaco, Inc. v. Pennzoil, Co. 132
United States 544
The Hyatt Corporation v. Palm Beach National Bank 450
Payroll Advance, Inc. v. Yates 234
Thomas v. Lloyd 574
Perez v. Mortgage Bankers Ass’n. 92
Thor Properties v. Willspring Holdings, LLC 185
Petition of Kinsman Transit Co. 149
Travelers Indemnity Co. v. Stedman 488
Philip Morris USA v. Williams 122
Triffin v. Cigna Insurance Co. 465
Pittsley v. Houser 335
Tucker v. Hayford 1000
Prestenbach v. Collins 320
Prine v. Blanton 1033
U
R Union Planters Bank, National Association v. Rogers 504
RadLAX Gateway Hotel, LLC v. Amalgamated Bank 775 United States v. Bestfoods 938
Ray v. Alad Corporation 706 United States v. E. I. du Pont de Nemours & Co. 880
Reed v. King 203
Ricci v. Destefano 853
V
RNR Investments Limited Partnership v. Peoples First
Community Bank 590 Vance v. Ball State University 851
Robertson v. Jacobs Cattle Co. 596 Vanegas v. American Energy Services 216
Robinson v. Durham 373
Rosewood Care Center, Inc., v. Caterpillar, Inc. 262
Rubin v. Yellow Cab Company 550 W
Ryan v. Friesenhahn 142 Waddell v. L.V.R.V. Inc. 359
Wal-Mart Stores, Inc. v. Samara Brothers, Inc. 832
S Warnick v. Warnick 601
Watson Coatings, Inc. v. American Express Travel Related
Sackett v. Environmental Protection Agency 96 Services, Inc. 464
Salman v. United States 816 Whatley v. Estate of McDougal 1035
Schoenberger v. Chicago Transit Authority 546 White v. Samsung Electronics 129
Schreiber v. Burlington Northern, Inc. 819 Williamson v. Mazda Motor of America, Inc. 69
Securities and Exchange Commission v. Edwards 793 Windows, Inc. v. Jordan Panel Systems Corp. 377
Seigel v. Merrill Lynch, Pierce, Fenner & Smith, Inc. 502 Womco, Inc. v. Navistar International Corporation 391
Shaw v. United States 108 Wood v. Pavlin 1003
Shawnee Telecom Resources, Inc. v. Brown 712 World-Wide Volkswagen Corp. v. Woodson 51
Sherrod v. Kidd 182 Wyler v. Feuer 616
Soldano v. O’Daniels 144
South Florida Water Management District v. Miccosukee Tribe of
Indians 933 Y
Speelman v. Pascal 283
Young v. United Parcel Service, Inc. 858
State of Qatar v. First American Bank of Virginia 454
State of South Dakota v. Morse 111
Steinberg v. Chicago Medical School 166 Z
Stine v. Stewart 292
Strougo v. Bassini 685 Zelnick v. Adams 250
Table of Figures
Figure 1-1 Law and Morals 4 Figure 10-2 Mutual Assent 189
Figure 1-2 Classification of Law 4 Figure 12-1 Modification of a Preexisting Contract 219
Figure 1-3 Hierarchy of Law 7 Figure 12-2 Consideration 224
Figure 2-1 Kohlberg’s Stages of Moral Development 17 Figure 14-1 Incapacity: Minors, Nonadjudicated
Figure 2-2 The Stakeholder Model 21 Incompetents, and Intoxicated Persons 253
Figure 2-3 Pharmakon Employment 25 Figure 15-1 Parol Evidence Rule 273
Figure 2-4 Pharmakon Affirmative Action Program 26 Figure 17-1 Discharge of Contracts 308
Figure 2-5 Mykon R&D Expenditures 28 Figure 18-1 Contract Remedies 323
Figure 2-6 Global Summary of the AIDS Epidemic in Figure 19-1 Battle of the Forms 341
2015 29 Figure 20-1 Tender of Performance by the Seller 354
Figure 2-7 Regional Statistics for HIV and AIDS End Figure 20-2 Performance by the Buyer 361
of 2015 29 Figure 21-1 Void Title 373
Figure 2-8 Stock Price of Vulcan, Inc. 40 Figure 21-2 Voidable Title 373
Figure 2-9 Average Daily Volume of Vulcan, Inc., Stock Figure 21-3 Passage of Risk of Loss in Absence of
for Week 40 Breach 380
Figure 2-10 Purchases of Vulcan Stock by Selected Figure 24-1 Order to Pay: Draft or Check 435
Executives 41 Figure 24-2 Draft 435
Figure 3-1 Federal Judicial System 45 Figure 24-3 Check 436
Figure 3-2 Circuit Courts of the United States 46 Figure 24-4 Promise to Pay: Promissory Note or
Figure 3-3 State Court System 47 Certificate of Deposit 436
Figure 3-4 Federal and State Jurisdiction 50 Figure 24-5 Note 437
Figure 3-5 Stare Decisis in the Dual Court System 50 Figure 24-6 Certificate of Deposit 437
Figure 3-6 Jurisdiction 52 Figure 25-1 Bearer Paper 449
Figure 3-7 Stages in Civil Procedure 59 Figure 25-2 Negotiation of Bearer and Order Paper 450
Figure 4-1 Separation of Powers: Checks and Balances 71 Figure 25-3 Stolen Order Paper 451
Figure 4-2 Powers of Government 76 Figure 25-4 Placement of Indorsement 456
Figure 5-1 Limits on Administrative Agencies 95 Figure 25-5 Rights of Transferees 459
Figure 7-1 Intent 124 Figure 25-6 Effects of Alterations 468
Figure 8-1 Negligence and Negligence Per Se 142 Figure 25-7 Alteration 469
Figure 8-2 Defenses to a Negligence Action 151 Figure 25-8 Availability of Defenses Against Holders
Figure 9-1 Law Governing Contracts 164 and Holders in Due Course 469
Figure 9-2 Contractual and Noncontractual Promises Figure 25-9 Rights of Holder in Due Course Under the
165 Federal Trade Commission Rule 470
Figure 9-3 Validity of Agreements 166 Figure 26-1 Liability on Transfer 486
Figure 10-1 Duration of Revocable Offers 187 Figure 26-2 Liability Based on Warranty 489
xvi
Table of Figures xvii
Figure 27-1 Bank Collections 496 Figure 37-1 Fundamental Rights of Secured Party
Figure 27-2 Credit Transaction 511 and Debtor 726
Figure 28-1 Duties of Principal and Agent 527 Figure 37-2 Suretyship Relationship 744
Figure 29-1 Contract Liability of Disclosed Principal Figure 37-3 Assumption of Mortgage 745
538 Figure 37-4 Defenses of Surety and Principal Debtor 747
Figure 29-2 Contract Liability of Unidentified Principal Figure 38-1 Collection and Distribution of the Debtor’s
539 Estate 771
Figure 29-3 Contract Liability of Undisclosed Principal Figure 39-1 Registration and Exemptions Under the
540 1933 Act 797
Figure 29-4 Tort Liability 547 Figure 39-2 Registration and Liability Provisions
Figure 30-1 Business Entities 563 of the 1933 Act 806
Figure 30-2 Tests for Existence of a Partnership 571 Figure 39-3 Applicability of the 1934 Act 807
Figure 31-1 Contract Liability 588 Figure 39-4 Parties Forbidden to Trade on Inside
Information 815
Figure 31-2 Tort Liability 592
Figure 41-1 Charges Filed with the EEOC in 2010–2016
Figure 33-1 Promoters’ Preincorporation Contracts
860
Made in the Corporation’s Name 642
Figure 42-1 Sherman Act Violations Yielding a Corporate
Figure 34-1 Issuance of Shares 662
Fine of $300 Million or More 873
Figure 34-2 Key Concepts in Legal Restrictions upon
Figure 42-2 Meeting Competition Defense 886
Distributions 666
Figure 43-1 Accountants’ Liability to Third Parties
Figure 35-1 Management Structure of Corporations:
for Negligent Misrepresentation 893
The Statutory Model 677
Figure 44-1 Magnuson-Moss Warranty Act 909
Figure 35-2 Management Structure of Typical Closely
Held Corporation 677 Figure 48-1 Assignment Compared with Sublease 998
Figure 35-3 Management Structure of Typical Publicly Figure 49-1 Fundamental Rights of Mortgagor
Held Corporation 677 and Mortgagee 1015
Figure 35-4 Shareholder Suits 685 Figure 49-2 Eminent Domain 1019
Figure 36-1 Purchase of Shares 708 Figure 50-1 Trusts 1027
Figure 50-2 Per Stirpes and Per Capita 1037
Preface
The Tradition Continues

The thirteenth edition of Essentials of Business Law and the Legal Environment continues the tra-
dition of accuracy, comprehensiveness, and authoritativeness associated with its earlier editions.
This text covers the fundamentally important statutory, administrative, and case law that affects
business in a succinct, nontechnical but authoritative manner and provides depth sufficient to
ensure easy comprehension by students.
Topical Coverage
This text is designed for use in business law and legal environment of business courses generally
offered in universities, colleges, and schools of business and management. Because of its broad and
deep coverage, this text may be readily adapted to specially designed courses in business law or the
legal environment of business by assigning and emphasizing different combinations of chapters.
Uniform Certified Public Accountant Examination

Preparation
As updated effective January 1, 2018, the Uniform CPA Examination is composed of four sec-
tions: Auditing and Attestation (AUD), Business Environment and Concepts (BEC), Financial
Accounting and Reporting (FAR), and Regulation (REG). This textbook covers material included
in Area II (Business Law) of the Regulation section of the CPA Exam. See the inside back cover of
this text for a listing of the CPA exam topics covered in this text as well as the chapters covering
each topic.
In general, Area II of the REG section blueprint covers several topics of Business Law,
including the following:
• K nowledge and understanding of the legal implications of business transactions, particularly as
they relate to accounting, auditing and financial reporting
• Areas of agency, contracts, debtor–creditor relationships, government regulation of business, and
business structure
• The Uniform Commercial Code under the topics of contracts and debtor creditor relationships
• Nontax-related business structure content
• Federal and widely adopted uniform state laws and references as identified in [the following]
References
• Revised Model Business Corporation Act
• Revised Uniform Limited Partnership Act
• Revised Uniform Partnership Act
• Securities Act of 1933
• Securities Exchange Act of 1934
• Uniform Commercial Code
• Current textbooks covering business law
xviii
Preface xix
More specifically, Area II of the REG section blueprint includes the following topics, which
are covered in this textbook:
II Business Law
A. Agency
1. Authority of agents and principals
2. Duties and liabilities of agents and principals
B. Contracts
1. Formation
2. Performance
3. Discharge, breach, and remedies
C. Debtor–Creditor Relationships
1. Rights, duties, and liabilities of debtors, creditors, and guarantors
2. Bankruptcy and insolvency
3. Secured transactions
D. Government Regulation of Business
1. Federal securities regulation
2. Other federal laws and regulations
E. Business Structure
1. Selection and formation of business entity and related operation and termination
2. Rights, duties, legal obligations, and authority of owners and management
For more information, visit www.cpa-exam.org.
Business Ethics Emphasis

The text highlights how ethics applies to business. The Business Ethics case studies in Chapter 2
require students to make the value trade-offs that confront business people in their professional
lives. (We gratefully acknowledge the assistance of James Leis in writing the Mykon’s Dilemma
case.) Two-thirds of the chapters also contain an Ethical Dilemma, which presents a managerial
situation involving ethical issues. A series of questions leads students to explore the ethical dimen-
sions of each situation. We wish to acknowledge and thank the following professors for their con-
tributions in preparing the Ethical Dilemmas: Sandra K. Miller, professor of accounting, taxation,
and business law, Widener University, and Gregory P. Cermignano, associate professor of account-
ing and business law, Widener University. In addition, to provide further application of ethics in
different business contexts, an ethics question follows many cases. These questions are designed to
encourage students to consider the ethical dimensions of the facts in the case or of the legal issue
invoked by the facts.
New to This Edition

Updated and Expanded Coverage
The new edition has been extensively updated and includes coverage of
• The new Restatement (Third) of Torts: Liability for Economic Harm in Chapters 7, 8, 11, 18,
and 43
• Low-profit limited liability companies (L3Cs) in Chapter 32
• Benefit corporations in Chapter 33
• The 2016 Revised Model Business Corporation Act in Chapters 33–36
• The U.S. Securities and Exchange Commission’s new Regulation A+, Regulation Crowdfund-
ing, and intrastate exemptions as well as the 2017 amendments to Rules 147 and 504 in Chap-
ter 39
• The Defend Trades Secrets Act of 2016 and the 2016 amendments to the Economic Espionage
Act in Chapter 40
• The 2016 amendments to the Toxic Substances Control Act in Chapter 45
xx Preface
Additional End-of-Chapter Questions and Case Problems

Almost all chapters include one or more additional new end-of-chapter questions and/or case
problems.
New Cases
More than thirty recent legal cases are new to this edition (see Table of Cases). The new cases
include recent U.S. Supreme Court decisions such as DIRECTV, Inc. v. Imburgia; Perez v. Mortgage
Bankers Ass’n.; Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund;
Husky International Electronics, Inc., v. Ritz; Harris v. Viegelahn; Young v. United Parcel Service,
Inc.; OBB Personenverkehr Ag v. Sachs.; Republic of Argentina v. NML Capital, Ltd.; Shaw v. United
States; and Salmon v. United States.
Coverage of Recent U.S. Supreme Court Decisions

The Constitutional Law chapter (Chapter 4) discusses recent U.S. Supreme Court decisions in
cases challenging the constitutionality of (1) a federal statute restricting how much money an
individual donor may contribute in total to all candidates or committees during a political cycle
and (2) states’ refusal to license a marriage between two people of the same sex or to recognize
a marriage between two people of the same sex when their marriage was lawfully licensed and
performed out of state. The Administrative Law chapter (Chapter 5) discusses the Supreme Court
case making the Patient Protection and Affordable Care Act’s tax credits available in those states
that have a Federal Exchange. The Bankruptcy Law chapter (Chapter 38) discusses the Supreme
Court decision holding that in Chapter 11 cases, including structured dismissal cases, a bank-
ruptcy court cannot confirm a plan that contains distributions that violate the priority rules over
the objection of an impaired creditor class. The Intellectual Property chapter (Chapter 40) covers
Supreme Court cases involving the patent exhaustion doctrine and the disparagement clause of the
Lanham Act. The Employment Law chapter (Chapter 41) covers the Supreme Court case holding
that in disparate-treatment claims, an employer may not make an applicant’s religious practice,
confirmed or otherwise, a factor in employment decisions.
Key Features
Summarized Cases
Relevant, carefully selected, and interesting cases illustrate how key principles of business law are
applied in the United States. The facts, decisions, and opinions for all the cases are carefully sum-
marized for clarity. Each case is followed by an interpretation, which explains the significance of
the case and how it relates to the textual material. We have retained the landmark cases from the
prior edition. In addition, we have added more than thirty recent cases, including a number of U.S.
Supreme Court cases.
Case Critical Thinking Questions

Each case is also followed by a critical thinking question to encourage students to examine the
legal policy or reasoning behind the legal principle of the case or to apply it in a real-world context.
Ample Illustrations
We have incorporated more than 220 visually engaging, classroom-tested figures, tables, diagrams,
concept reviews, and chapter summaries. The figures, tables, and diagrams help students concep-
tualize the many abstract concepts in the law. The Concept Reviews not only summarize prior dis-
cussions but also indicate relationships between different legal rules. Moreover, each chapter ends
with a summary in the form of an annotated outline of the entire chapter, including key terms.
Applying the Law

The “Applying the Law” feature provides a systematic legal analysis of a realistic situation that
focuses on a single concept presented in the chapter. It begins with the facts of a hypothetical
case, followed by an identification of the broad legal issue presented by those facts. We then
state the rule—or applicable legal principles, including definitions, which aid in resolving the
Preface xxi
legal issue—and apply it to the facts. Finally, we state a legal conclusion or decision in the case.
The Applying the Law feature appears in fourteen chapters. We wish to acknowledge and thank
Professor Ann Olazábal, University of Miami, for her contribution in preparing this feature.
Business Law in Action

The “Business Law in Action” scenarios illustrate the application of legal concepts in the chap-
ter to business situations that commonly arise. This feature provides students meaningful insights
into how managers currently apply the law within common workplace situations. There are twen-
ty-seven scenarios in all. We wish to acknowledge and thank Professor Ann Olazábal, University
of Miami, for her contribution in preparing this feature.
Practical Advice
Each chapter has a number of statements that illustrate how legal concepts covered in the chapter
can be applied to common business situations.
Going Global
A “Going Global” feature appears in fifteen chapters (Chapters 1, 3, 6, 9, 15, 19, 20, 27, 30, 34, 38,
39, 40, 41, and 42), thus integrating international business law content throughout the text. This
feature enables students to consider the international aspects of legal issues as they are covered.
The International Business Law chapter (Chapter 46) has been retained in its entirety.
Chapter Outcomes
Each chapter begins with a list of learning objectives for students.
Enhanced Readability
To improve readability throughout the text, all unnecessary “legalese” has been eliminated, while
necessary legal terms have been printed in boldface and clearly defined, explained, and illustrated.
Definitions of essential legal terms and legal concepts also appear in the margins. Each chapter
is carefully organized with sufficient levels of subordination to enhance the accessibility of the
material. The text is enriched by numerous illustrative hypothetical and case examples that help
students relate material to real-life experiences.
Classroom-Proven End-of-Chapter Materials

Classroom-proven questions and case problems appear at the end of chapters to test students’
understanding of major concepts. We have used the questions (based on hypothetical situations)
and the case problems (taken from reported court decisions) in our own classrooms and consider
them excellent stimulants to classroom discussion. Students, in turn, have found the questions and
case problems helpful in enabling them to apply the basic rules of law to factual situations.
Taking Sides
Each chapter—except Chapters 1 and 2—has an end-of-chapter feature that requires students to
apply critical thinking skills to a case-based fact situation. Students are asked to identify the rel-
evant legal rules and develop arguments for both parties to the dispute. In addition, students are
asked to explain how they think a court would resolve the dispute.
Pedagogical Benefits
Classroom use and study of this book should provide students with the following benefits and
skills:
1. Perception and appreciation of the scope, extent, and importance of the law.
2. Basic knowledge of the fundamental concepts, principles, and rules of law that apply to busi-
ness transactions.
3. Knowledge of the function and operation of courts and government administrative agencies.
4. Ability to recognize the potential legal problems that may arise in a doubtful or complicated
situation and the necessity of consulting a lawyer and obtaining competent professional legal
advice.
5. Development of analytical skills and reasoning power.
xxii Preface
Additional Course Tools

MindTap
MindTap is a personalized teaching experience with relevant assignments that guide students to
analyze, apply, and improve thinking, allowing instructors to measure skills and outcomes with
ease. Teaching becomes personalized through a pre-built Learning Path designed with key student
objectives and the instructor syllabus in mind. Applicable reading, multimedia, and activities
within the learning path intuitively guide students up the levels of learning to (1) Prepare,
(2) Engage, (3) Apply, and (4) Analyze business law content. These activities are organized in a
logical progression to help elevate learning, promote critical-thinking skills, and produce better
outcomes.
This customizable online course gives instructors the ability to add their own content in the
Learning Path as well as modify authoritative Cengage content and learning tools using apps that
integrate seamlessly with Learning Management Systems (LMS). Analytics and reports provide a
snapshot of class progress, time in course, engagement, and completion rates.
Instructor’s Resources
Instructors can access these resources by going to login.cengage.com, logging in with a faculty
account username and password, and searching ISBN 9781337555180.
• The Instructor’s Manual prepared by Richard A. Mann, Barry S. Roberts, and Beth D. Woods
contains chapter outlines; teaching notes; answers to the Questions, Case Problems, and Tak-
ing Sides; and part openers that provide suggested research and outside activities for students.
• PowerPoint® Slides clarify course content and guide student note-taking during lectures.
• The Test Bank contains thousands of true/false, multiple-choice, and essay questions. The
questions vary in levels of difficulty and meet a full range of tagging requirements so that
instructors can tailor their testing to meet their specific needs.
• Cengage Testing Powered by Cognero is a flexible, online system that allows you to
• author, edit, and manage test bank content from multiple Cengage solutions
• create multiple test versions in an instant
• deliver tests from your Learning Management Systems (LMS), your classroom, or wherever
you want
Acknowledgments
We express our gratitude to the following professors for their helpful comments:
Michael E. Adighibe, Cheyney University; Martha Agee, Baylor University; Jessica Allen,
Suffolk Community College; Terence Baird, Antelope Valley College; Keith A. Beebe, SUNY-
Cobleskill; Dawn Bennett-Alexander, University of Northern Florida; Janie Blankenship, DelMar
College; George S. Bohler, Embry-Riddle University; Joyce Boland-DeVito, St. John’s University;
Steven W. Bostian, Caston College; Norman E. Bradshaw, Alvin Community College; Donald R.
Brenner, American University; Carroll Burrell, San Jacinto College; Jane Campbell, Jackson Com-
munity College; Stephanie Campbell, Mineral Area College; Vic Daniels, Tallahassee Commu-
nity College; Ed Dash, Pierce Junior College; Joseph P. Davey, Hartnell College; David L. Davis,
Tallahassee Community College; Sandra Defebaugh, Eastern Michigan University; Theodore M.
Dinges, Longview Community College; Vernon P. Dorweiler, Michigan Technological University;
Dora J. L. Dye, City College of San Francisco; Steve Easter, Mineral Area College; Robert Ek, Sem-
inole Community College; Tony Enerva, Lakeland Community College; Karla Harbin Fox, Uni-
versity of Connecticut; Edward J. Gac, University of Colorado; George P. Generas, Jr., University
of Hartford; Allan M. Gerson, Palm Beach Community College; J. P. Giovacchini, Western Nevada
College; Thomson Glover, Murray State University; Douglas C. Gordon, Arapahoe Community
College; Suzanne Gradisher, University of Akron; A. James Granito, Youngstown State Univer-
sity; Deborah C. Hanks, Cardinal Stritch University; E. Sharon Hayenga, Minneapolis Commu-
nity College; James E. Holloway, East Carolina University; H. Daniel Holt, Southeastern Illinois
College; Trevor Howell, Belmont College; Gregory M. Huckabee, University of South Dakota;
Dan Huss, Miami University; Robert Inama, Ricks College; Keith Kasper, University of Vermont;
Preface xxiii
Michael A. Katz, Delaware State University; Julia S. Kennedy, University of St. Francis; George
Kepner, Hartwick College; Edward M. Kissling, Ocean County College; Blake LeCrone, Baylor
University; Daniel A. Levin, University of Colorado–Boulder; David Ludwich, Belmont College;
Sarah H. Ludwig, Mary Baldwin College; Bradley Lutz, Hillsborough Community College; R ichard
Lynn, Belmont College; John F. Mastriani, El Paso Community College; Marian Matthews, Central
New Mexico Community College; Kyle McFatter, McNeese State University; James Miles, Anoka-
Ramsey C ommunity College; Scott E. Miller, CPA, J.D., Gannon University; David J. Moser,
Belmont University; Andre Nelson, Montgomery College; John H. Neu, Whittier College; Brennan
Neville, Bellevue University; L. K. O’Drudy, Jr., University of Virginia; Michael J. O’Hara, Univer-
sity of Nebraska; Dinah Payne, University of New Orleans; Mary Ellen Perri, SUNY-Farmingdale;
Todd B. Piller, SUNY-Cobleskill; Richard W. Post, College of the Desert; LeGene Quesenberry,
Clarion University; Roger E. Reinsch, Emporia State University; Darlington C. Richards, M organ
State University; M. Rose, Macomb County Community College; Herbert Rossman, Drexel Uni-
versity; Sylvia Samuels, Skyline College; Donald E. Sanders, Southwest Texas State University;
Susan Schoeffler, Central Piedmont Community College; John E. H. Sherry, Cornell University;
Caroline W. Smith, College of Central Florida; Owen T. Smith, Long Island University; Michael E.
Sommerville, St. Mary’s College; Dan Spielmann, University of Wisconsin-Green Bay; Art Stelly,
Baylor University; Larry Stephens, Gulf Coast College; Stanley H. Stone, Valencia Community
College-East Campus; Mary Torma, Lorain County Community College; Patricia S. Tulin, Central
Connecticut State University; Robert J. Votta, Pierce Junior College; Edward C. Wachter, Jr., Point
Park College; Pamela Poole Weber, Seminole Community College; Hugh Wilkoff, Cerritos Col-
lege; and Kim Wong, Central New Mexico Community College.
We express our thanks and appreciation to Debra Corvey for administrative assistance. For
their support, we extend our thanks to Karlene Fogelin Knebel and Joanne Erwick Roberts. And
we are grateful to Vicky True-Baker and Amanda White of Cengage for their invaluable assistance
and cooperation in connection with the preparation of this text.
This text is dedicated to our children Lilli-Marie Knebel Mann, Justin Erwick Roberts, and
Matthew Charles Roberts.
Richard A. Mann
Barry S. Roberts
Pa r t I
Introduction to Law
and Ethics
Chapter 1
Introduction to Law 2
Chapter 2
Business Ethics 13
Introduction to Law
C HAPTER 1
C h a p t e r O u t co m e s
The life of the law has not been logic; it After reading and studying this chapter, you should be able to:
has been experience.
1. Identify and describe the basic functions of law.
Oliver Wendell Holmes
The Common Law (1881) 2. Distinguish between (a) law and justice and (b) law and morals.
3. Distinguish between (a) substantive and procedural law, (b) public and private law, and (c) civil
and criminal law.
4. Identify and describe the sources of law.
5. Explain the principle of stare decisis.
L
aw concerns the relations between individuals as such relations affect the social and eco-
nomic order. It is both the product of civilization and the means by which civilization
is maintained. As such, law reflects the social, economic, political, religious, and moral
philosophy of society.
Law is an instrument of social control. Its function is to regulate, within certain limitations,
human conduct and human relations. Accordingly, the laws of the United States affect the life of
every U.S. citizen. At the same time, the laws of each state influence the life of each of its citizens
and the lives of many noncitizens as well. The rights and duties of all individuals, as well as the
safety and security of all people and their property, depend on the law.
The law is pervasive. It permits, forbids, or regulates practically every human activity and
affects all persons either directly or indirectly. Law is, in part, prohibitory: certain acts must not be
committed. For example, one must not steal; one must not murder. Law is also partly mandatory:
certain acts must be done or be done in a prescribed way. Thus, taxes must be paid; corporations
must make and file certain reports with state or federal authorities; traffic must keep to the right.
Finally, law is permissive: certain acts may be done. For instance, one may or may not enter into a
contract; one may or may not dispose of one’s estate by will.
Because the areas of law are so highly interrelated, you will find it helpful to begin the study of
the different areas of business law by first considering the nature, classification, and sources of law.
This will enable you not only to understand each specific area of law better but also to understand
its relationship to other areas of law.
Nature of Law [1-1]

The law has evolved slowly, and it will continue to change. It is not a pure science based on
unchanging and universal truths. Rather, it results from a continuous striving to develop a work-
able set of rules that balance the individual and group rights of a society.
CHAPTER 1 Introduction to Law 3
Definition of law Definition of Law [1-1a]

“a rule of civil conduct
Scholars and citizens in general often ask a fundamental but difficult question regarding law: what
prescribed by the supreme
is it? Numerous philosophers and jurists (legal scholars) have attempted to define it. American
power in a state, commanding
jurists and Supreme Court Justices Oliver Wendell Holmes and Benjamin Cardozo defined law
what is right, and prohibiting
as predictions of the way in which a court will decide specific legal questions. The English jurist
what is wrong” (William
William Blackstone, on the other hand, defined law as “a rule of civil conduct prescribed by the
Blackstone)
supreme power in a state, commanding what is right, and prohibiting what is wrong.”
Because of its great complexity, many legal scholars have attempted to explain the law by
outlining its essential characteristics. Roscoe Pound, a distinguished American jurist and former
dean of the Harvard Law School, described law as having multiple meanings:
First we may mean the legal order, that is, the régime of ordering human activities and relations
through systematic application of the force of politically organized society, or through social p
ressure
in such a society backed by such force. We use the term “law” in this sense when we speak of “respect
for law” or for the “end of law.”
Second we may mean the aggregate of laws or legal precepts; the body of authoritative grounds
of judicial and administrative action established in such a society. We may mean the body of received
and established materials on which judicial and administrative determinations proceed. We use the
term in this sense when we speak of “systems of law” or of “justice according to law.”
Third we may mean what Justice Cardozo has happily styled “the judicial process.” We may
mean the process of determining controversies, whether as it actually takes place, or as the public, the
jurists, and the practitioners in the courts hold it ought to take place.
Functions of Law [1-1b]

Functions of law At a general level, the primary function of law is to maintain stability in the social, political,
to maintain stability in the and economic system while simultaneously permitting change. The law accomplishes this basic
social, political, and economic function by performing a number of specific functions, among them dispute resolution, protection
system through dispute reso- of property, and preservation of the state.
lution, protection of property, Disputes, which arise inevitably in any modern society, may involve criminal matters, such
and the preservation of the as theft, or noncriminal matters, such as an automobile accident. Because disputes threaten social
state, while simultaneously stability, the law has established an elaborate and evolving set of rules to resolve them. In addition,
permitting ordered change the legal system has instituted societal remedies, usually administered by the courts, in place of
private remedies such as revenge.
A second crucial function of law is to protect the private ownership of property and to assist
in the making of voluntary agreements (called contracts) regarding exchanges of property and
services. Accordingly, a significant portion of law, as well as this text, involves property and its
disposition, including the law of property, contracts, sales, commercial paper, and business
associations.
A third essential function of the law is preservation of the state. In our system, law ensures
that changes in political structure and leadership are brought about by political action, such as
elections, legislation, and referenda, rather than by revolution, sedition, and rebellion.
Laws and morals Law and Morals [1-1c]

are different but overlapping: Although moral concepts greatly influence the law, morals and law are not the same. You might
law provides sanctions while think of them as two intersecting circles (see Figure 1-1). The area common to both circles includes
morals do not the vast body of ideas that are both moral and legal. For instance, “Thou shall not kill” and “Thou
shall not steal” are both moral precepts and legal constraints.
On the other hand, the part of the legal circle that does not intersect the morality c ircle
includes many rules of law that are completely unrelated to morals, such as the rules stating
that you must drive on the right side of the road and that you must register before you can vote.
Likewise, the part of the morality circle that does not intersect the legal circle includes moral
precepts not enforced by legal sanctions, such as the idea that you should not silently stand by and
watch a blind man walk off a cliff or that you should provide food to a starving child.
4 Part I Introduction to Law and Ethics
Figure 1-1 Law and Morals
Law Morals
“You must drive “Thou shalt “You should not
on the right side not kill.” silently stand by and
of the road.” watch a blind man
walk off a cliff.”
Law and Justice [1-1d]

Law and justice Law and justice represent separate and distinct concepts. Without law, however, there can be no
are separate and distinct justice. Although defining justice is at least as difficult as defining law, justice generally may be
concepts; justice is the fair, defined as the fair, equitable, and impartial treatment of the competing interests and desires of
equitable, and impartial individuals and groups with due regard for the common good.
treatment of competing On the other hand, law is no guarantee of justice. Some of history’s most monstrous acts have
interests with due regard for been committed pursuant to “law.” Examples include the actions of Nazi Germany during the
the common good 1930s and 1940s and the actions of the South African government under apartheid from 1948
until 1994. Totalitarian societies often have shaped formal legal systems around the atrocities they
have sanctioned.
Classification of Law [1-2]

Because the subject is vast, classifying the law into categories is helpful. Though a number of cate-
Right gories are possible, the most useful ones are (1) substantive and procedural, (2) public and private,
legal capacity to require and (3) civil and criminal. See Figure 1-2, which illustrates a classification of law.
another person to perform Basic to understanding these classifications are the terms right and duty. A right is the capac-
or refrain from performing ity of a person, with the aid of the law, to require another person or persons to perform, or to
an act refrain from performing, a certain act. Thus, if Alice sells and delivers goods to Bob for the agreed
Figure 1-2 Classification of Law
Constitutional Law
Public Law Criminal Law
Administrative Law
Substantive Law
Torts
Contracts
Law Private Law Sales
Commercial Paper
Agency
Partnerships
Procedural Law Corporations
Property
Duty price of $500 payable at a certain date, Alice is capable, with the aid of the courts, of enforcing the
legal obligation requiring a payment by Bob of the $500. A duty is the obligation the law imposes upon a person to perform,
person to perform or refrain or to refrain from performing, a certain act. Duty and right are correlatives: no right can rest upon
from performing an act one person without a corresponding duty resting upon some other person, or in some cases upon
Substantive law all other persons.
the basic law creating rights
and duties
Substantive and Procedural Law [1-2a]
Substantive law creates, defines, and regulates legal rights and duties. Thus, the rules of contract
Procedural law
law that determine a binding contract are rules of substantive law. On the other hand, procedural
rules for enforcing
law sets forth the rules for enforcing those rights that exist by reason of the substantive law. Thus,
substantive law
procedural law defines the method by which to obtain a remedy in court.
Public law
the law dealing with the Public and Private Law [1-2b]
relationship between Public law is the branch of substantive law that deals with the government’s rights and powers and
government and individuals its relationship to individuals or groups. Public law consists of constitutional, administrative, and
Private law criminal law. Private law is that part of substantive law governing individuals and legal entities
the law involving (such as corporations) in their relationships with one another. Business law is primarily private
relationships among law.
individuals and legal entities
Civil and Criminal Law [1-2c]
Civil law
The civil law defines duties, the violation of which constitutes a wrong against the party injured
the law dealing with the
by the violation. In contrast, the criminal law establishes duties, the violation of which is a wrong
rights and duties of
against the whole community. Civil law is a part of private law, whereas criminal law is a part of
individuals among
public law. (The term civil law should be distinguished from the concept of a civil law system,
themselves
which is discussed later in this chapter.) In a civil action the injured party sues to recover compen-
Criminal law sation for the damage and injury sustained as a result of the defendant’s wrongful conduct. The
the law that involves party bringing a civil action (the plaintiff) has the burden of proof, which the plaintiff must sus-
offenses against the entire tain by a preponderance (greater weight) of the evidence. The purpose of the civil law is to compen-
community sate the injured party, not, as in the case of criminal law, to punish the wrongdoer. The principal
Sue forms of relief the civil law affords are a judgment for money damages and a decree ordering the
to begin a lawsuit in a court defendant to perform a specified act or to desist from specified conduct.
A crime is any act prohibited or omission required by public law in the interest of protecting
Defendant
the public and made punishable by the government in a judicial proceeding brought (prosecuted)
the person against whom a
by it. The government must prove criminal guilt beyond a reasonable doubt, which is a signifi-
legal action is brought
cantly higher burden of proof than that required in a civil action. Crimes are prohibited and pun-
Plaintiff ished on the grounds of public policy, which may include the safeguarding of government, human
the person who initiates a life, or private property. Additional purposes of criminal law include deterrence and rehabilitation.
civil suit See Concept Review 1-1 for a comparison of civil and criminal law.
Prosecute
to bring a criminal proceeding
CONCEPT REVIEW 1-1
Comparison of Civil and Criminal Law

Civil Law Criminal Law
Commencement of Action Aggrieved individual (plaintiff ) sues State or federal government prosecutes
Purpose Compensation Punishment
Deterrence Deterrence
Rehabilitation
Preservation of peace
Burden of Proof Preponderance of the evidence Beyond a reasonable doubt
Principal Sanctions Monetary damages Capital punishment

Equitable remedies Imprisonment
Fines
Sources of Law [1-3]

The sources of law in the U.S. legal system are the federal and state constitutions, federal treaties,
interstate compacts, federal and state statutes and executive orders, the ordinances of countless
local municipal governments, the rules and regulations of federal and state administrative agen-
cies, and an ever-increasing volume of reported federal and state court decisions.
The supreme law of the land is the U.S. Constitution, which provides in turn that federal
statutes and treaties shall be paramount to state constitutions and statutes. Federal legislation is
of great significance as a source of law. Other federal actions having the force of law are executive
orders by the President and rules and regulations set by federal administrative officials, agencies,
and commissions. The federal courts also contribute considerably to the body of law in the United
States.
The same pattern exists in every state. The paramount law of each state is contained in its
written constitution. (Although a state constitution cannot deprive citizens of federal constitu-
tional rights, it can guarantee rights beyond those provided in the U.S. Constitution.) State con-
stitutions tend to be more specific than the U.S. Constitution and, generally, have been amended
more frequently. Subordinate to the state constitution are the statutes enacted by the state’s legis-
lature and the case law developed by its judiciary. Likewise, rules and regulations of state admin-
istrative agencies have the force of law, as do executive orders issued by the governors of most
states. In addition, cities, towns, and villages have limited legislative powers to pass ordinances and
resolutions within their respective municipal areas. See Figure 1-3, which illustrates this hierarchy.
Constitutional Law [1-3a]

Constitution A constitution—the fundamental law of a particular level of government—establishes the gov-
fundamental law of a ernmental structure and allocates power among governmental levels, thereby defining political
government establishing its relationships. One of the fundamental principles on which our government is founded is that of
powers and limitations separation of powers. As incorporated into the U.S. Constitution, this means that government
consists of three distinct and independent branches—the federal judiciary, the Congress, and the
Judicial review
executive branch.
authority of the courts to
A constitution also restricts the powers of government and specifies the rights and liberties
determine the constitutional-
of the people. For example, the Constitution of the United States not only specifically states what
ity of legislative and executive
rights and authority are vested in the national government but also specifically enumerates c ertain
acts
rights and liberties of the people. Moreover, the Ninth Amendment to the U.S. Constitution makes
Common law system it clear that this enumeration of rights does not in any way deny or limit other rights that the
body of law originating in people retain.
England and derived from All other law in the United States is subordinate to the federal Constitution. No law, federal
judicial decisions or state, is valid if it violates the federal Constitution. Under the principle of judicial review, the
Adversary system Supreme Court of the United States determines the constitutionality of all laws.
system in which opposing
parties initiate and present Judicial Law [1-3b]
their cases The U.S. legal system, a common law system like the system first developed in England, relies
heavily on the judiciary as a source of law and on the adversary system for settling disputes. In an
Civil law system
adversary system, the parties, not the court, must initiate and conduct litigation. This approach
body of law derived from
is based on the belief that the truth is more likely to emerge from the investigation and presenta-
Roman law and based upon
tion of evidence by two opposing parties, both motivated by self-interest, than from judicial inves-
comprehensive legislative
tigation motivated only by official duty. In addition to the United States and England, the common
enactments
law system is used in other English-speaking countries, including Canada and Australia.
Inquisitorial system In distinct contrast to the common law system are civil law systems, which are based on
system in which the judi- Roman law. Civil law systems depend on comprehensive legislative enactments (called codes)
ciary initiates, conducts, and and an inquisitorial system of determining disputes. In the inquisitorial system, the judiciary
decides cases initiates litigation, investigates pertinent facts, and conducts the presentation of evidence. The civil
law system prevails in most of Europe, Scotland, the state of Louisiana, the province of Quebec,
Latin America, and parts of Africa and Asia.
Common Law The courts in common law systems have developed a body of law that
serves as precedent for determining later controversies. In this sense, common law, also called case
law or judge-made law, is distinguished from other sources of law, such as legislation and admin-
istrative rulings.
Figure 1-3 Hierarchy of Law
U.S. Constitution
Treaties Federal Statutes
Federal
Administrative Law
Federal
Common Law
State
Constitution
State
Statutes
State
Administrative Law
State
Common Law
To evolve in a stable and predictable manner, the common law has developed by application
Stare decisis of stare decisis (“to stand by the decisions”). Under the principle of stare decisis, courts adhere
principle that courts should to and rely on rules of law that they or superior courts relied on and applied in prior similar deci-
apply rules decided in prior sions. Judicial decisions thus have two uses: (1) to determine with finality the case currently being
cases in deciding substantially decided and (2) to indicate how the court will decide similar cases in the future. Stare decisis does
similar cases not, however, preclude courts from correcting erroneous decisions or from choosing among con-
flicting precedents. Thus, the doctrine allows sufficient flexibility for the common law to change.
The strength of the common law is its ability to adapt to change without losing its sense of
direction.
Equity As the common law developed in England, it became overly rigid and beset with tech-
nicalities. As a consequence, in many cases no remedies were provided because the judges insisted
that a claim must fall within one of the recognized forms of action. Moreover, courts of common
law could provide only limited remedies; the principal type of relief obtainable was a monetary
judgment. Consequently, individuals who could not obtain adequate relief from monetary awards
began to petition the king directly for justice. He, in turn, came to delegate these petitions to his
chancellor.
Gradually, there evolved what was in effect a new and supplementary system of needed judi-
cial relief for those who could not receive adequate remedies through the common law. This new
Equity system, called equity, was administered by a court of chancery presided over by the chancellor.
body of law based upon The chancellor, deciding cases on “equity and good conscience,” regularly provided relief where
principles distinct from common law judges had refused to act or where the remedy at law was inadequate. Thus, there
common law and providing grew up, side by side, two systems of law administered by different tribunals, the common law
remedies not available at law courts and the courts of equity.
An important difference between common law and equity is that the chancellor could issue a
Decree decree, or order, compelling a defendant to do, or refrain from doing, a specified act. A defendant
decision of a court of equity who did not comply with this order could be held in contempt of court and punished by fine or
imprisonment. This power of compulsion available in a court of equity opened the door to many
needed remedies not available in a court of common law.
Courts of equity in some cases recognized rights that were enforceable at common law, but
they provided more effective remedies. For example, in a court of equity, for breach of a land con-
Specific performance tract the buyer could obtain a decree of specific performance commanding the defendant seller
decree ordering a party to to perform his part of the contract by transferring title to the land. Another powerful and effective
perform a contractual duty remedy available only in the courts of equity was the injunction, a court order requiring a party to
Injunction do or refrain from doing a specified act. Another remedy not available elsewhere was reformation,
decree ordering a party to where, upon the ground of mutual mistake, an action could be brought to reform or change the
do or refrain from doing a language of a written agreement to conform to the actual intention of the contracting parties. An
specified act action for rescission of a contract, which allowed a party to invalidate a contract under certain
circumstances, was another remedy.
Reformation Although courts of equity provided remedies not available in courts of law, they granted such
equitable remedy rewriting remedies only at their discretion, not as a matter of right. This discretion was exercised according
a contract to conform with to the general legal principles, or maxims, formulated by equity courts over the years.
the original intent of the In nearly every jurisdiction in the United States, courts of common law and equity have
contracting parties merged into a single court that administers both systems of law. Vestiges of the old division
Rescission remain, however. For example, the right to a trial by jury applies only to actions at law, but not,
an equitable remedy under federal law and in almost every state, to suits filed in equity.
invalidating a contract See Concept Review 1-2 for a comparison of law and equity.
Maxim
a general legal principle Restatements of Law The common law of the United States results from the independent
decisions of the state and federal courts. The rapid increase in the number of decisions by these
courts led to the establishment of the American Law Institute (ALI) in 1923. The ALI is composed
of a distinguished group of lawyers, judges, and law professors who set out to prepare
an orderly restatement of the general common law of the United States, including in that term
not only the law developed solely by judicial decision, but also the law that has grown from the
application by the courts of statutes that were generally enacted and were in force for many years.
CONCEPT REVIEW 1-2
Comparison of Law and Equity

Law Equity
Availability Generally Discretionary: if remedy at law is inadequate
Precedents Stare decisis Equitable maxims
Jury If either party demands None, in federal and almost all states
Decree of specific performance, injunction, reformation,

Remedies Judgment for monetary damages
rescission
Currently the ALI is made up of more than 4,300 lawyers, judges, and law professors.
Regarded as the authoritative statement of the common law of the United States, the Restate-
ments cover many important areas of the common law, including torts, contracts, agency,
property, and trusts. Although not law in themselves, they are highly persuasive, and courts
frequently have used them to support their opinions. Because they provide a concise and clear
statement of much of the common law, relevant portions of the Restatements are relied on fre-
quently in this book.
Legislative Law [1-3c]

Since the end of the nineteenth century, legislation has become the primary source of new law
and ordered social change in the United States. The annual volume of legislative law is enormous.
Justice Felix Frankfurter’s remarks to the New York City Bar in 1947 are even more appropriate in
the twenty-first century:
Inevitably the work of the Supreme Court reflects the great shift in the center of gravity of
law-making. Broadly speaking, the number of cases disposed of by opinions has not changed from
term to term. But even as late as 1875 more than 40 percent of the controversies before the Court
were common-law litigation, fifty years later only 5 percent, while today cases not resting on statutes
are reduced almost to zero. It is therefore accurate to say that courts have ceased to be the primary
makers of law in the sense in which they “legislated” the common law. It is certainly true of the
Supreme Court that almost every case has a statute at its heart or close to it.
This emphasis on legislative or statutory law has occurred because common law, which
develops evolutionarily and haphazardly, is not well suited for making drastic or comprehensive
changes. Moreover, while courts tend to be hesitant about overruling prior decisions, legislatures
commonly repeal prior enactments. In addition, legislatures may choose the issues they wish to
address, whereas courts may deal only with those issues presented by actual cases. As a result,
legislatures are better equipped to make the dramatic, sweeping, and relatively rapid changes in the
law that technological, social, and economic innovations compel.
While some business law topics, such as contracts, agency, property, and trusts, still are
governed principally by the common law, most areas of commercial law, including partnerships,
corporations, sales, commercial paper, secured transactions, insurance, securities regulation,
antitrust, and bankruptcy, have become largely statutory. Because most states enacted their own
statutes dealing with these branches of commercial law, a great diversity developed among the
states and hampered the conduct of commerce on a national scale. The increased need for greater
uniformity led to the development of a number of proposed uniform laws that would reduce the
conflicts among state laws.
The most successful example is the Uniform Commercial Code (UCC), which was pre-
pared 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
(NCCUSL). All fifty states (although Louisiana has adopted only Articles 1, 3, 4, 5, 7, and 8), the
District of Columbia, and the Virgin Islands have adopted the UCC.
The ULC has drafted more than three hundred uniform laws, including the Uniform
Partnership Act, the Uniform Limited Partnership Act, and the Uniform Probate Code. The ALI
has developed a number of model statutory formulations, including the Model Code of Evidence,
the Model Penal Code, and a Model Land Development Code. In addition, the American Bar
Association has promulgated the Model Business Corporation Act.
Treaty Treaties A treaty is an agreement between or among independent nations. The U.S.
an agreement between or onstitution authorizes the President to enter into treaties with the advice and consent of the Sen-
C
among independent nations ate, “providing two thirds of the Senators present concur.”
Treaties may be entered into only by the federal government, not by the states. A treaty signed
by the President and approved by the Senate has the legal force of a federal statute. Accordingly, a
federal treaty may supersede a prior federal statute, while a federal statute may supersede a prior
treaty. Like statutes, treaties are subordinate to the federal Constitution and subject to judicial
review.
Going Global
What is the WTO?
Nations have entered into bilateral and 1, 1995, and has at least 164 members, antidumping restrictions (the prohibition
multilateral treaties to facilitate and reg- including the United States, accounting against selling goods for less than their fair
ulate trade and to protect their national for more than 97 percent of world trade. market value), subsidies, and import fees.
interests. Probably the most important (Approximately twenty-two countries are The WTO administers trade agreements,
multilateral trade treaty is the General observers and are seeking membership.) acts as a forum for trade negotiations,
Agreement on Tariffs and Trade (GATT), Its basic purpose is to facilitate the flow handles trade disputes, monitors national
which the World Trade Organization (WTO) of trade by establishing agreements on trade policies, and provides technical
replaced as an international organization. potential trade barriers, such as import assistance and training for developing
The WTO officially commenced on January quotas, customs, export regulations, countries.
Executive Orders In addition to the executive functions, the President of the United
Executive order States also has authority to issue laws, which are called executive orders. This authority typically
legislation issued by the derives from specific delegation by federal legislation. An executive order may amend, revoke, or
President or a governor supersede a prior executive order. An example of an executive order is the one issued by President
Johnson in 1965 prohibiting d iscrimination by federal contractors on the basis of race, color, sex,
religion, or national origin in employment on any work the contractor performed during the
period of the federal contract.
The governors of most states enjoy comparable authority to issue executive orders.
Administrative Law [1-3d]

Administrative law Administrative law is the branch of public law that is created by administrative agencies in the
law dealing with the form of rules, regulations, orders, and decisions to carry out the regulatory powers and duties of
establishment, duties, and those agencies. It also deals with controversies arising among individuals and these public officials
powers of agencies in and agencies. Administrative functions and activities concern general matters of public health,
the executive branch of safety, and welfare, including the establishment and maintenance of military forces, police, citizen-
government ship and naturalization, taxation, environmental protection, and the regulation of transportation,
interstate highways, waterways, television, radio, and trade and commerce.
Because of the increasing complexity of the nation’s social, economic, and industrial life, the
scope of administrative law has expanded enormously. In 1952 Justice Jackson stated, “the rise of
administrative bodies has been the most significant legal trend of the last century, and perhaps
more values today are affected by their decisions than by those of all the courts, review of admin-
istrative decisions apart.” This is evidenced by the great increase in the number and activities of
federal government boards, commissions, and other agencies. Certainly, agencies create more legal
rules and decide more controversies than all the legislatures and courts combined.
Legal Analysis [1-4]

Decisions in state trial courts generally are not reported or published. The precedent a trial
court sets is not sufficiently weighty to warrant permanent reporting. Except in New York and
a few other states where selected opinions of trial courts are published, decisions in trial courts
are simply filed in the office of the clerk of the court, where they are available for public inspec-
tion. D
ecisions of state courts of appeals are published in consecutively numbered volumes called
“reports.” In most states, court decisions are found in the official state reports of that state. In
addition, state reports are published by West Publishing Company in a regional reporter called
the National Reporter System, composed of the following: Atlantic (A., A.2d, or A.3d); South
Eastern (S.E. or S.E.2d); South Western (S.W., S.W.2d, or S.W.3d); New York Supplement (N.Y.S.
or N.Y.S.2d); North W estern (N.W. or N.W.2d); North Eastern (N.E. or N.E.2d); Southern
(So., So.2d, or So.3d); Pacific (P., P.2d, or P.3d); and California Reporter (Cal.Rptr., Cal.Rptr.2d,
or Cal.Rptr.3d). At least twenty states no longer publish official reports and have designated a
commercial reporter as the authoritative source of state case law.
After they are published, these opinions, or “cases,” are referred to (“cited”) by giving (1) the
name of the case; (2) the volume, name, and page of the official state report, if any, in which it is
published; (3) the volume, name, and page of the particular set and series of the National Reporter
System; and (4) the volume, name, and page of any other selected case series. For instance,
Lefkowitz v. Great Minneapolis Surplus Store, Inc., 251 Minn. 188, 86 N.W.2d 689 (1957), indicates
that the opinion in this case may be found in Volume 251 of the official Minnesota Reports at page
188 and in Volume 86 of the North Western Reporter, Second Series, at page 689, and that the
opinion was delivered in 1957.
The decisions of courts in the federal system are found in a number of reports. U.S. District
Court opinions appear in the Federal Supplement (F.Supp. or F.Supp.2d). Decisions of the U.S. Court
of Appeals are found in the Federal Reporter (Fed., F.2d, or F.3d), and the U.S. Supreme Court’s
opinions are published in the U.S. Supreme Court Reports (U.S.), Supreme Court Reporter (S.Ct.),
and Lawyers Edition (L.Ed.). 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 is reported. Each circuit has
established rules determining which decisions are published.
In reading the title of a case, such as “Jones v. Brown,” the “v.” or “vs.” means versus or against.
In the trial court, Jones is the plaintiff, the person who filed the suit, and Brown is the d efendant,
the person against whom the suit was brought. When the case is appealed, some, but not all, courts
Appellant of appeals or appellate courts place the name of the party who appeals, or the appellant, first,
party who appeals so that “Jones v. Brown” in the trial court becomes, if Brown loses and hence becomes the appel-
lant, “Brown v. Jones” in the appellate court. Therefore, it is not always possible to determine from
the title itself who was the plaintiff and who was the defendant. You must carefully read the facts
of each case and clearly identify each party in your mind to understand the discussion by the
appellate court. In a criminal case the caption in the trial court will first designate the prosecuting
government unit and then will indicate the defendant, as in “State v. Jones” or “Commonwealth v.
Brown.”
The study of reported cases requires an understanding and application of legal analysis.
Normally, the reported opinion in a case sets forth (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 to the issues; (2) the issues of law or fact; (3) the legal principles
involved; (4) the application of these principles; and (5) the decision.
You can and should use this same legal analysis when learning the substantive concepts
presented in this text and applying them to the end-of-chapter questions and case problems. By
way of example, in a number of chapters throughout the text, we have included a boxed feature
called “Applying the Law,” which provides a systematic legal analysis of a single concept learned in
the chapter. This feature begins with the facts of a hypothetical case, followed by an identification
A p p ly in g t h e L a w
Introduction to Law
Facts Jackson bought a new car and Rule of Law A gift is the transfer of be demonstrated. It is evident from their
planned to sell his old one for about $2,500. ownership of property from one person telephone conversation that Jackson did
But before he did so, he happened to to another without anything in return. The intend at that point to give the car to Trina.
receive a call from his cousin, Trina, who person making the gift is called the donor, It is equally apparent from his conduct
had just graduated from college. Among and the person receiving it is known as the that he later changed his mind, because
other things, Trina told Jackson she needed donee. A valid gift requires (1) the donor’s he sold it to someone else the next day.
a car but did not have much money. Feeling present intent to transfer the property and Consequently, he did not deliver the car to
generous, Jackson told Trina he would give (2) delivery of the property. Trina.
her his old car. But the next day a coworker Application In this case, Jackson is Conclusion Because the donor did not
offered Jackson $3,500 for his old car, and the would-be donor and Trina is the deliver the property to the donee, legally
Jackson sold it to the coworker. would-be donee. To find that Jackson had no gift was made. Jackson was free to sell
Issue Did Jackson have the right to sell already made a gift of the car to Trina, the car.
his car to the coworker, or legally had he both Jackson’s intent to give it to her and
already made a gift of it to Trina? delivery of the car to Trina would need to
of the broad legal issue presented by those facts. We then state the rule of law—the applicable legal
principles, including definitions, which aid in resolving the legal issue—and apply it to the facts.
Finally, we state a legal conclusion, or decision in the case. An example of this type of legal analysis
appears on the previous page.
Chapter Summary
Nature of Law Definition of Law “a rule of civil conduct prescribed by the supreme power in a state, commanding what is
right, and prohibiting what is wrong” (William Blackstone)
Functions of Law to maintain stability in the social, political, and economic system through dispute reso-
lution, protection of property, and the preservation of the state, while simultaneously permitting ordered
change
Laws and Morals are different but overlapping; law provides sanctions while morals do not
Law and Justice are separate and distinct concepts; justice is the fair, equitable, and impartial treatment of
competing interests with due regard for the common good
Classification of Law Substantive and Procedural
• Substantive Law law creating rights and duties
• Procedural Law rules for enforcing substantive law
Public and Private
• Public Law law dealing with the relationship between government and individuals
• Private Law law governing the relationships among individuals and legal entities
Civil and Criminal
• Civil Law law dealing with rights and duties, the violation of which constitutes a wrong against an indi-
vidual or other legal entity
• Criminal Law law establishing duties that, if violated, constitute a wrong against the entire community
Sources of Law Constitutional Law fundamental law of a government establishing its powers and limitations
Judicial Law
• Common Law body of law developed by the courts that serves as precedent for determination of later
controversies
• Equity body of law based upon principles distinct from common law and providing remedies not avail-
able at law
Legislative Law statutes adopted by legislative bodies
• Treaties agreements between or among independent nations
• Executive Orders laws issued by the President or by the governor of a state
Administrative Law law created by administrative agencies in the form of rules, regulations, orders, and
decisions to carry out the regulatory powers and duties of those agencies
Business Ethics
CHAPTER 2
C hapter O u tco m e s
Our characters are the result of our After reading and studying this chapter, you should be able to:
conduct.
1. Describe the difference between law and ethics.
Aristotle
Nicomachean Ethics (c. 335 bce) 2. Compare the various ethical theories.
3. Describe cost-benefit analysis and explain when it should be used and when it should be avoided.
4. Explain Kohlberg’s stages of moral development.
5. Explain the ethical responsibilities of business.
B
usiness ethics is a subset of ethics: no special set of ethical principles applies only to the
world of business. Immoral acts are immoral, whether or not a businessperson has com-
mitted them. In the last few years, countless business wrongs, such as insider trading,
fraudulent earnings statements and other accounting misconduct, price-fixing, conceal-
ment of dangerous defects in products, reckless lending and improper foreclosures in the hous-
ing market, and bribery, have been reported almost daily. Companies such as Enron, WorldCom,
Adelphia, Parmalat, Arthur Andersen, and Global Crossing have violated the law, and some of
these firms no longer exist as a result of these ethical lapses. In 2004, Martha Stewart was con-
victed of obstructing justice and lying to investigators about a stock sale. More recently, Bernie
Madoff perpetrated the largest Ponzi scheme in history with an estimated loss of $20 billion in
principal and approximately $65 billion in paper losses. In May 2011, Galleon Group (a hedge
fund) billionaire Raj Rajaratnam was found guilty of fourteen counts of conspiracy and securities
fraud. In 2013, large international banks faced a widening scandal—and substantial fines—over
attempts to rig benchmark interest rates, including the London Interbank Offered Rate (LIBOR).
Ethics Ethics can be defined broadly as the study of what is right or good for human beings.
study of what is right or good It attempts to determine what people ought to do, or what goals they should pursue. Business
for human beings ethics, as a branch of applied ethics, is the study and determination of what is right and good in
Business ethics
business settings. Business ethics seeks to understand the moral issues that arise from business
study of what is right and
practices, institutions, and decision making, and their relationship to generalized human values.
good in a business setting;
Unlike legal analyses, analyses of ethics have no central authority, such as courts or legislatures,
includes the moral issues that
upon which to rely, nor do they follow clear-cut universal standards. Nonetheless, despite these
arise from business practices,
inherent limitations, it still may be possible to make meaningful ethical judgments. To improve
institutions, and decision
ethical decision making, it is important to understand how others have approached the task.
making
Some examples of the many business ethics questions may clarify the definition of business
ethics. In the employment relationship, countless ethical issues arise regarding the safety and com-
pensation of workers, their civil rights (such as equal treatment, privacy, and freedom from sexual
13
harassment), and the legitimacy of whistle-blowing. In the relationship between business and its
customers, ethical issues permeate marketing techniques, product safety, and consumer protection.
The relationship between business and its owners bristles with ethical questions involving corpo-
rate governance, shareholder voting, and management’s duties to the shareholders. The relationship
among competing businesses involves numerous ethical matters, including fair competition and the
effects of collusion. The interaction between business and society at large presents additional e thical
dimensions: pollution of the physical environment, commitment to the community’s economic and
social infrastructure, and depletion of natural resources. Not only do all of these issues recur at
the international level, but additional ones present themselves, such as bribery of foreign officials,
exploitation of developing countries, and conflicts among differing cultures and value systems.
In resolving the ethical issues raised by business conduct, it is helpful to use a seeing-knowing-
doing model. First, the decision maker should see (identify) the ethical issues involved in the pro-
posed conduct, including the ethical implications of the various available options. Second, the
decision maker should know (resolve) what to do by choosing the best option. Finally, the decision
maker should do (implement) the chosen option by developing and implementing strategies.
This chapter first surveys the most prominent ethical theories (the knowing part of the deci-
sion, on which the great majority of philosophers and ethicists have focused). The chapter then
examines ethical standards in business and the ethical responsibilities of business. It concludes
with five ethical business cases, which give the student the opportunity to apply the seeing-
knowing-doing model. The student (1) identifies the ethical issues presented in these cases;
(2) resolves these issues by using one of the ethical theories described in the chapter, some other
ethical theory, or a combination of the theories; and (3) develops strategies for implementing the
ethical resolution.
Law Versus Ethics [2-1]

As discussed in Chapter 1, moral concepts strongly affect the law, but law and morality are not
the same. Although it is tempting to say “if it’s legal, it’s moral,” such a proposition is generally
too simplistic. For example, it would seem gravely immoral to stand by silently while a blind man
walks off a cliff if one could prevent the fall by shouting a warning, even though one would not be
legally obligated to do so. Similarly, moral questions arise concerning “legal” business practices,
such as failing to fulfill a promise that is not legally binding; exporting products banned in the
United States to developing countries where they are not prohibited; or slaughtering baby seals for
fur coats. The mere fact that these practices are legal does not prevent them from being challenged
on moral grounds.
Just as it is possible for legal acts to be immoral, it is equally possible for illegal acts to seem
morally preferable to following the law. For example, it is the moral conviction of the great major-
ity of people that those who sheltered Jews in violation of Nazi edicts during World War II and
those who committed acts of civil disobedience in the 1950s and 1960s to challenge segregation
laws in the United States were acting properly and that the laws themselves were immoral.
Ethical Theories [2-2]

Philosophers have sought for centuries to develop dependable and universal methods for making
ethical judgments. In earlier times, some thinkers analogized the discovery of ethical principles
with the derivation of mathematical proofs. They asserted that people could discover fundamental
ethical rules by applying careful reasoning a priori. (A priori reasoning is based on theory rather
than experimentation and deductively draws conclusions from cause to effect and from general-
izations to particular instances.) In more recent times, many philosophers have concluded that
although careful reasoning and deep thought assist substantially in moral reasoning, experience
reveals that the complexities of the world defeat most attempts to fashion precise, a priori guide-
lines. Nevertheless, a review of the most significant ethical theories can aid the analysis of business
ethics issues.
Ethical fundamentalism
individuals look to a central Ethical Fundamentalism [2-2a]
authority or set of rules to Under ethical fundamentalism, or absolutism, individuals look to a central authority or set of
guide them in ethical decision rules to guide them in ethical decision making. Some look to the Bible; others look to the Koran,
making or to the writings of Karl Marx, or to any number of living or deceased prophets. The essential
CHAPTER 2 Business Ethics 15
characteristic of this approach is a reliance on a central repository of wisdom. In some cases, such
reliance is total. In others, followers of a religion or a spiritual leader may believe that all members
of the group are obligated to assess moral dilemmas independently, according to each person’s
understanding of the dictates of the fundamental principles.
Ethical Relativism [2-2b]

Ethical relativism Ethical relativism is a doctrine asserting that actions must be judged by what individuals feel is right
actions must be judged by or wrong for themselves. It holds that when any two individuals or cultures differ regarding the moral-
what individuals subjectively ity of a particular issue or action, they are both correct because morality is relative. However, although
feel is right or wrong for ethical relativism promotes open-mindedness and tolerance, it has limitations. If each person’s actions
themselves are always correct for that person, then his behavior is, by definition, moral and therefore exempt from
criticism. Once a person concludes that criticizing or punishing behavior in some cases is appropriate,
he abandons ethical relativism and faces the task of developing a broader ethical methodology.
Although bearing a surface resemblance to ethical relativism, situational ethics actually differs
Situational ethics substantially. Situational ethics holds that developing precise guidelines for effectively navigating
judging a person’s actions by ethical dilemmas is difficult because real-life decision making is so complex. To judge the morality
first putting oneself in the of someone’s behavior, the person judging must actually put herself in the other person’s shoes to
actor’s situation understand what motivated the other to choose a particular course of action. Situational ethics,
however, does not cede the ultimate judgment of the propriety of an action to the actor; rather, it
insists that, prior to evaluation, a person’s decision or act be viewed from the actor’s perspective.
Utilitarianism [2-2c]
Utilitarianism Utilitarianism is a doctrine that assesses good and evil in terms of the consequences of actions.
moral actions are those that Those actions that produce the greatest net pleasure compared with net pain are better in a moral
produce the greatest net sense than those that produce less net pleasure. As Jeremy Bentham, one of the most influential
pleasure compared with net proponents of utilitarianism, proclaimed, a good or moral act is one that results in “the greatest
pain happiness for the greatest number.”
Act utilitarianism The two major forms of utilitarianism are act utilitarianism and rule utilitarianism. Act util-
each separate act must itarianism assesses each separate act according to whether it maximizes pleasure over pain. For
be assessed according example, if telling a lie in a particular situation produces more overall pleasure than pain, then
to whether it maximizes an act utilitarian would support lying as the moral thing to do. Rule utilitarians, disturbed by the
pleasure over pain unpredictability of act utilitarianism and its potential for abuse, follow a different approach. Rule
utilitarianism holds that general rules must be established and followed even though, in some
Rule utilitarianism instances, following rules may produce less overall pleasure than not following them. It applies
supports rules that on utilitarian principles in developing rules; thus, it supports rules that on balance produce the
balance produce the greatest satisfaction. Determining whether telling a lie in a given instance would produce greater
greatest good pleasure than telling the truth is less important to the rule utilitarian than deciding whether a
general practice of lying would maximize society’s pleasure. If lying would not maximize pleasure
generally, then one should follow a rule of not lying even though on occasion telling a lie would
produce greater pleasure than would telling the truth.
Utilitarian notions underlie cost-benefit analysis, an analytical tool used by many business
Cost-benefit analysis and government managers today. Cost-benefit analysis first quantifies in monetary terms and
quantifies in monetary terms then compares the direct and indirect costs and benefits of program alternatives for meeting a
the benefits and costs of specified objective. Cost-benefit analysis seeks the greatest economic efficiency according to the
alternatives underlying notion that, given two potential acts, the act achieving the greatest output at the least
cost promotes the greatest marginal happiness over the less-efficient act, other things being equal.
The chief criticism of utilitarianism is that in some important instances it ignores justice. A
number of situations would maximize the pleasure of the majority at great social cost to a minority.
Another major criticism of utilitarianism is that measuring pleasure and pain in the fashion its
supporters advocate is extremely difficult, if not impossible.
Deontology [2-2d]
Deontology Deontological theories (from the Greek word deon, meaning duty or obligation) address the prac-
holds that actions must be tical problems of utilitarianism by holding that certain underlying principles are right or wrong
judged by their motives and regardless of any pleasure or pain calculations. Believing that actions cannot be measured simply
means as well as their results by their results but rather must be judged by means and motives as well, deontologists judge the
morality of acts not so much by their consequences but by the motives that lead to them. A person
not only must achieve just results but also must employ the proper means.
The eighteenth-century philosopher Immanuel Kant proffered the best-known deontological

theory. Under Kant’s categorical imperative, for an action to be moral it (1) must potentially be a
universal law that could be applied consistently and (2) must respect the autonomy and rationality
of all human beings and not treat them as an expedient. That is, one should not do anything that
he or she would not have everyone do in a similar situation. For example, you should not lie to
colleagues unless you support the right of all colleagues to lie to one another. Similarly, you should
not cheat others unless you advocate everyone’s right to cheat. We apply Kantian reasoning when
we challenge someone’s behavior by asking: what if everybody acted that way?
Under Kant’s approach, it would be improper to assert a principle to which one claimed per-
sonal exception, such as insisting that it was acceptable for you to cheat but not for anyone else
to do so. This principle could not be universalized because everyone would then insist on similar
rules from which only they were exempt.
Kant’s philosophy also rejects notions of the end justifying the means. To Kant, every person
is an end in himself or herself. Each person deserves respect simply because of his or her human-
ity. Thus, any sacrifice of a person for the greater good of society would be unacceptable to Kant.
In many respects, Kant’s categorical imperative is a variation of the Golden Rule; and, like the
Golden Rule, the categorical imperative appeals to the individual’s self-centeredness.
As does every theory, Kantian ethics has its critics. Just as deontologists criticize utilitarians
for excessive pragmatism and flexible moral guidelines, utilitarians and others criticize deontolo-
gists for rigidity and excessive formalism. For example, if one inflexibly adopts as a rule to tell the
truth, one ignores situations in which lying might well be justified. A person hiding a terrified wife
from her angry, abusive husband would seem to be acting morally by falsely denying that the wife
is at the person’s house. Yet a deontologist, feeling bound to tell the truth, might ignore the conse-
quences of truthfulness, tell the husband where his wife is, and create the possibility of a terrible
tragedy. Another criticism of deontological theories is that the proper course may be difficult to
determine when values or assumptions conflict.
Social Ethics Theories [2-2e]

Social ethical theories Social ethics theories assert that special obligations arise from the social nature of human beings.
focus on a person’s Such theories focus not only on each person’s obligations to other members of society but also on the
obligations to other individual’s rights and obligations within the society. For example, social egalitarians believe
members in society and on that society should provide each person with equal amounts of goods and services regardless of
the individual’s rights and the contribution each makes to increase society’s wealth.
obligations Two other ethics theories have received widespread attention in recent years. One is the the-
Social egalitarians ory of distributive justice proposed by Harvard philosopher John Rawls, which seeks to analyze
believe that society should the type of society that people in a “natural state” would establish if they could not determine in
provide all members with advance whether they would be talented, rich, healthy, or ambitious, relative to other members of
equal amounts of goods and society. According to distributive justice, the society contemplated through this “veil of ignorance”
services irrespective of their is the one that should be developed because it considers the needs and rights of all its members.
relative contributions Rawls did not argue that such a society would be strictly egalitarian and that it would unfairly
penalize those who turned out to be the most talented and ambitious. Instead, Rawls suggested
Distributive justice that such a society would stress equality of opportunity, not of results. On the other hand, Rawls
stresses equality of stressed that society would pay heed to the least advantaged to ensure that they did not suffer
opportunity rather than of unduly and that they enjoyed society’s benefits. To Rawls, society must be premised on justice.
results Everyone is entitled to his or her fair share in society, a fairness all must work to guarantee.
In contrast to Rawls, another Harvard philosopher, Robert Nozick, stressed liberty, not
Libertarians justice, as the most important obligation that society owes its members. Libertarians stress market
stress market outcomes as outcomes as the basis for distributing society’s rewards. Only to the extent that one meets market
the basis for distributing demands does one deserve society’s benefits. Libertarians oppose social interference in the lives
society’s rewards of those who do not violate the rules of the marketplace; that is, in the lives of those who do not
cheat others and who disclose honestly the nature of their transactions with others. The fact that
some end up with fortunes while others accumulate little simply proves that some can play in the
market effectively while others cannot. To libertarians, this is not unjust. What is unjust to them
is any attempt by society to take wealth earned by citizens and distribute it to those who did not
earn it.
These theories and others (e.g., Marxism) judge society in moral terms by its organization and
by the way in which it distributes goods and services. They demonstrate the difficulty of ethical
decision making in the context of a social organization: behavior that is consistently ethical from
individual to individual may not necessarily produce a just society.
Other Theories [2-2f]

The preceding theories do not exhaust the possible approaches to evaluating ethical behavior; sev-
Intuitionism eral other theories also deserve mention. Intuitionism holds that a rational person possesses inher-
a rational person possesses ent powers to assess the correctness of actions. Though an individual may refine and strengthen
inherent powers to assess the these powers, they are just as basic to humanity as our instincts for survival and self-defense. Just
correctness of actions as some people are better artists or musicians, some people have more insight into ethical behavior
Good person philosophy than others. Consistent with intuitionism is the good person philosophy, which declares that if
holds that individuals seek individuals wish to act morally, they should seek out and emulate those who always seem to know
out and emulate good role the right choice in any given situation and who always seem to do the right thing. One variation
models of these ethical approaches is the Television Test, which directs us to imagine that every ethical
decision we make is being broadcast on nationwide television. An appropriate decision is one we
would be comfortable broadcasting on national television for all to witness.
Ethical Standards in Business [2-3]

In this section, we explore the application of the theories of ethical behavior to the world of
business.
Choosing an Ethical System [2-3a]

In their efforts to resolve the moral dilemmas facing humankind, philosophers and other think-
ers have struggled for years to refine the various systems previously discussed. All of the systems
are limited, however, in terms of applicability and tend to produce unacceptable prescriptions for
action in some circumstances. But to say that each system has limits is not to say it is useless. On
the contrary, a number of these systems provide insight into ethical decision making and help us
formulate issues and resolve moral dilemmas. Furthermore, concluding that moral standards are
difficult to articulate and that moral boundaries are imprecise is not the same as concluding that
moral standards are unnecessary or nonexistent.
Research by the noted psychologist Lawrence Kohlberg provides some insight into ethical
decision making and lends credibility to the notion that moral growth, like physical growth, is part
of the human condition. Kohlberg observed that people progress through sequential stages of
moral development according to two major variables: age and reasoning. During the first level—
the preconventional level—a child’s conduct is a reaction to the fear of punishment and, later, to the
pleasure of reward. Although people who operate at this level may behave in a moral manner,
they do so without understanding why their behavior is moral. The rules are imposed upon them.
During adolescence—Kohlberg’s conventional level—people conform their behavior to meet the
expectations of groups, such as family, peers, and eventually society. The motivation for confor-
mity is loyalty, affection, and trust. Most adults operate at this level. According to Kohlberg, some
reach the third level—the postconventional level—at which they accept and conform to moral
principles because they understand why the principles are right and binding. At this level, moral
principles are voluntarily internalized, not externally imposed. Moreover, individuals at this stage
develop their own universal ethical principles and may even question the laws and values that
society and others have adopted. (See Figure 2-1 for Kohlberg’s stages of moral development).
Kohlberg believed that not all people reach the third or even the second stage. He therefore
argued that essential to the study of ethics was the exploration of ways to help people achieve the
advanced stage of postconventional thought. Other psychologists assert that individuals do not
pass sequentially from stage to stage but rather function in all three stages simultaneously.
Figure 2-1 Kohlberg’s Stages of Moral Development

Levels Perspective Justification
Preconventional (Childhood) Self Punishment/Reward

Conventional (Adolescent) Group Group Norms
Postconventional (Adult) Universal Moral Principles
Whatever the source of our ethical approach, we cannot avoid facing moral dilemmas that
challenge us to recognize and do the right thing. Moreover, for those who plan business careers,
such dilemmas necessarily will have implications for many others—employees, shareholders, sup-
pliers, customers, and society at large.
Corporations as moral Corporations as Moral Agents [2-3b]

agents Because corporations are not persons but rather artificial entities created by the state, whether
because a corporation is a they can or should be held morally accountable is difficult to determine. Though, clearly, indi-
statutory entity, it is difficult viduals within corporations can be held morally responsible, the corporate entity presents unique
to resolve whether it should problems.
be morally accountable Commentators are divided on the issue. Some insist that only people can engage in behavior
that can be judged in moral terms. Opponents of this view concede that corporations are not per-
sons in any literal sense but insist that the attributes of responsibility inherent in corporations are
sufficient to justify judging corporate behavior from a moral perspective.
Ethical Responsibilities of Business [2-4]

Many people assert that the only responsibility of business is to maximize profit and that this obli-
gation overrides any ethical or social responsibility. Although our economic system of modified
capitalism is based on the pursuit of self-interest, it also contains components to check this moti-
vation of greed. Our system always has recognized the need for some form of regulation, whether
by the “invisible hand” of competition, the self-regulation of business, or government regulation.
Regulation of Business [2-4a]

As explained and justified by Adam Smith in The Wealth of Nations (1776), the capitalistic sys-
tem is composed of six “institutions”: economic motivation, private productive property, free
enterprise, free markets, competition, and limited government. As long as all these constituent
institutions continue to exist and operate in balance, the factors of production—land, capital, and
labor—combine to produce an efficient allocation of resources for individual consumers and for
the economy as a whole. To achieve this outcome, however, Smith’s model requires that a number
of conditions be satisfied: “standardized products, numerous firms in markets, each firm with a
small share and unable by its actions alone to exert significant influence over price, no barriers to
entry, and output carried to the point where each seller’s marginal cost equals the going market
price.” E. Singer, Antitrust Economics and Legal Analysis.
History has demonstrated that the actual operation of the economy has satisfied almost none
of these assumptions. More specifically, the actual competitive process falls considerably short of
the assumptions of the classic economic model of perfect competition:
Competitive industries are never perfectly competitive in this sense. Many of the resources they
employ cannot be shifted to other employments without substantial cost and delay. The allocation
of those resources, as between industries or as to relative proportions within a single industry, is
unlikely to have been made in a way that affords the best possible expenditure of economic effort.
Information is incomplete, motivation confused, and decision therefore ill informed and often
unwise. V ariations in efficiency are not directly reflected in variations of profit. Success is derived
in large part from competitive selling efforts, which in the aggregate may be wasteful, and from
differentiation of products, which may be undertaken partly by methods designed to impair the
opportunity of the buyer to compare quality and price.
C. Edwards, Maintaining Competition
In addition to capitalism’s failure to allocate resources efficiently, it cannot be relied on to

Regulation of business achieve all of the social and public policy objectives a pluralistic democracy requires. For exam-
government regulation ple, the free enterprise model simply does not address equitable distribution of wealth, national
is necessary because all defense, conservation of natural resources, full employment, stability in economic cycles, pro-
the conditions for perfect tection against economic dislocations, health and safety, social security, and other important
competition have not been social and economic goals. Increased regulation of business has occurred not only to preserve
satisfied and free competition the competitive process in our economic system but also to achieve social goals extrinsic to the
cannot by itself achieve other efficient allocation of resources, the “invisible hand” and self-regulation by business having
social goals failed to bring about these desired results. Such intervention attempts (1) to regulate both “legal”
monopolies, such as those conferred by law through copyrights, patents, and trade symbols, and
“natural” monopolies, such as utilities, transportation, and communications; (2) to preserve
competition by correcting imperfections in the market system; (3) to protect specific groups,
especially labor and agriculture, from marketplace failures; and (4) to promote other social goals.
Successful government regulation involves a delicate balance between regulations that attempt to
preserve competition and those that attempt to advance other social objectives. The latter should
not undermine the basic competitive processes that provide an efficient allocation of economic
resources.
Corporate governance Corporate Governance [2-4b]

vast amounts of wealth In addition to the broad demands of maintaining a competitive and fair marketplace, another
and power have become factor demanding the ethical and social responsibility of business is the sheer size and power of
concentrated in a small individual corporations. The five thousand largest U.S. firms currently produce more than half of
number of corporations, the nation’s gross national product.
which in turn are controlled In a classic study published in 1932, Adolf Berle and Gardiner Means concluded that great
by a small group of people, amounts of economic power had been concentrated in a relatively few large corporations, that
and it is argued that they the ownership of these corporations had become widely dispersed, and that the shareholders had
therefore have a responsibility become far removed from active participation in management. Since their original study, these
to undertake projects to trends have continued steadily. The five hundred to one thousand large publicly held corporations
benefit society own the great bulk of the industrial wealth of the United States. Moreover, these corporations are
controlled by a small group of corporate officers.
Historically, the boards of many publicly held corporations consisted mainly or entirely of
inside directors (corporate officers who also serve on the board of directors). During the past two
decades, however, as a result of regulations by the U.S. Securities and Exchange Commission and
the stock exchanges, the number and influence of outside directors have increased substantially.
Now the boards of the great majority of publicly held corporations consist primarily of outside
directors, and these corporations have audit committees consisting entirely of outside directors.
Nevertheless, a number of instances of corporate misconduct have been revealed in the first years
of this century. In response to these business scandals—involving companies such as Enron,
WorldCom, Global Crossing, Adelphia, and Arthur Andersen—in 2002 Congress passed the
Sarbanes-Oxley Act. This legislation seeks to prevent these types of scandals by increasing
corporate responsibility through the imposition of additional corporate governance requirements
on publicly held corporations. (This statute is discussed further in Chapters 6, 35, 39, and 43.)
Moreover, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) was enacted, representing the most significant change to U.S. financial regulation
since the New Deal. Its purposes include improving accountability and transparency in the financial
system, protecting consumers from abusive financial services practices, and improving corporate
governance in publicly held companies. (The Dodd-Frank Act is discussed further in Chapters 27,
34, 35, 36, 39, 44, and 49.) These developments raise a large number of social, policy, and ethical
issues about the governance of large, publicly owned corporations. Many observers insist that com-
panies playing such an important economic role should have a responsibility to undertake projects
that benefit society in ways that go beyond mere financial efficiency in producing goods and ser-
vices. In some instances, the idea of corporate obligations comes from industrialists themselves.
Arguments Against Social Responsibility [2-4c]

A number of arguments oppose business involvement in socially responsible activities: profitabil-
ity, unfairness, accountability, and expertise.
Profitability Profitability As Milton Friedman and others have argued, businesses are artificial entities
the business of business established to permit people to engage in profit-making, not social, activities. Without profits, they
should be to return as assert, there is little reason for a corporation to exist and no real way to measure the effective-
much money as possible to ness of corporate activities. Businesses are not organized to engage in social activities; they are
shareholders structured to produce goods and services for which they receive money. Their social obligation
is to return as much of this money as possible to their direct stakeholders. In a free market with
significant competition, the selfish pursuits of corporations will lead to maximizing output, mini-
mizing costs, and establishing fair prices. All other concerns distract companies and interfere with
achieving these goals.
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THE FOUR FEARS OF OUR GENERAL
SOUVENIRS of CHILDHOOD
Adapted from the French by Adele Bacon.
THE SECOND FEAR.
The battle on the mountain had passed off much better than we
had dared to hope, and, although we had not found our enemies as
sound asleep as we had desired, our early morning attack had
never-the-less completely surprised them. We managed to seize
their recent position on the plateau with scarcely any loss. This
position, although a very exposed one, was worth a great deal more,
from the strategist’s point of view, than the valley in which we were
encamped the night before. Besides, in making war, it is always
desirable to occupy those places voluntarily selected and defended
by an opponent.
Our work, however, was by no means over; another sort of effort
lay before us.
Our foes, driven from their position on the heights, had succeeded
in forming another; and were strongly entrenched on the lower
extremity of the same plateau, from the loftier end of which we had
so lately dislodged them.
With a considerable amount of adroitness, they had succeeded in
placing a little river, called the Oued-el-Kebir, between our camp and
their own. We were compelled therefore to cross this river, in order to
force them to move farther on, and abandon to us the territory that
we both coveted.
We had resolved, once our morning’s work was over, to enjoy a
much needed repose on our hardly earned mountain; but, towards
noon, everybody was on foot, excepting several badly wounded
soldiers, and the little group of officers, who had chatted together
near the General’s tent the preceding evening, were invited to drink
a cup of coffee with him in the most picturesque smoking room that I
have ever seen, although the picturesque quality is by no means
rare in Algeria.
It was an enclosure walled in by rocks in the shape of heaps of
large pennies, arranged side by side, so as to form an amphitheatre,
the slope of which permitted us to see, by the aid of our glasses, the
new field on which we were soon to operate.
The country, which was beautiful so far as the scenery was
concerned, presented no insolvable military problems; it was
wooded, but not impenetrable.
We would of course have much preferred not to be separated from
the place of attack by a long, serpentine strip of water, which,
swollen by the recent melting of the snow, added materially to the
defence of our adversaries. It goes without saying that we
possessed neither artillery to protect our passage nor boats to effect
it. In pursuits such as now occupied us, a train of artillery could only
be an encumbrance, and the river which flowed sometimes in a
valley, and sometimes between high, steep banks, made it almost a
certainty that we should get a thorough wetting before we reached
the other side. We knew that the General had sent the necessary
men to measure the depth of that barrier of water, and to see if we
should have the good luck to find a place for fording it. In default of
this, we should be forced to make use of our temporary bridges, but
we did not wish to count absolutely on them. In making war, one can
usually tell best what to do on the spur of the moment. While waiting
for the necessary information to be brought in for making such
preparations as were possible, and for the night to come, fully half a
day must elapse. The General had thought that crossing at night was
less dangerous. Little Jacques, grown up, had no longer a horror of
shadows, and even liked to utilize them. When we had considered,
found great fault with, and speculated upon the meditated
expedition, we returned to our conversation of the preceding night.
The General had had the imprudence to speak to us of two
stories; we had heard one; what about the other?
Captain Robert,—the officer with whom the General sometimes
quarrelled, perhaps because he felt that he had an especial partiality
for him,—being slyly urged on by the rest of us, had the indiscretion
to ask him for it.
“Oh, as to that one, my children, you must not insist,” said the
General. “It is only a story of childhood, which has none of the
qualities which made the other acceptable to grown men. I have no
taste for failures,—you will cause me to be guilty of one.”
“General,” replied the obstinate captain, “you have just called us
your children, therefore a child’s story is quite suitable for us. It will
rejuvenate us. Children are amused by everything, you know, and if
by chance your second tale is a trifle more gay than the first, very
well,—we shall enjoy it.”
“Gay!” responded the General, “I don’t know about that. However,
it is not a tragedy. But you shall see. You wish it,—so here goes!”
“Perhaps all of you here are not fond of the water,” began the
General, casting a significant glance at the river which had
preoccupied our thoughts.
“That depends on circumstances,” responded the captain; “water
is very good, but there are times when one would rather do without
it.”
“Water, mingled with too many gun-shots, and after a difficult
march, might prove unhealthy,” interrupted a hoarse voice, that of
the doctor. “I should not recommend it as a remedy for my cold, but
the water of your story, General,—for I suppose by your
commencement your history is going to be a wet one,—will perhaps
do me good.”
“Good!” said the General, “here is the doctor who imagines I am
going to give him a tonic. But so long as you have wished for it
doctor, you must drink it. But no more interruptions:—I have already
forgotten where I was.”
“General,” replied the doctor, “you have just said ‘every one here is
perhaps not fond of water;’ and you were not contradicted.”
“Thanks!” said the General. “And silence in the ranks; I will
recommence.”
“Every one here does not like the water I said, very well, when I
was little it seems I was of that same opinion. I didn’t like water. Let
us understand each other fully as to the importance which you
should attach to my repugnance to this fluid, during these first years
of my life. I accepted water in many ways: I loved it sugared, and
even with a little orange flavor, but I hated it cold on my face in
winter, and only allowed myself to be washed willingly when it was
warm. I liked, too, to stand on a bridge, and watch the water flowing
underneath, and by a strange contradiction, I even enjoyed going on
it, in a boat—with papa. But I should have had a horrible fear to fall
in the water, or have it go suddenly over my head. To be frank, I
believe I should have been frightened to have it up to my ankles,
otherwise than in a foot bath. But then, one is not born perfect.
“This fear of the water was the despair of my father. He, like a
practical man, thought my love of boats and navigation, and my
horror of all actual contact with it, were contradictory if not
incompatible traits; that the liking for it on the one hand and the
dislike of it on the other argued as complete an absence of logic in
the brain of his little son as in his physical and moral organisms. He
was right. Aunt Marie and my mother were guilty of the sugared and
warm water, but my antipathy for it, otherwise than in these forms,
seemed to be a fundamental part of my nature.
“‘There is a reform for you to make in my absence,’ said my father
to his wife and his sister-in-law. ‘If I don’t find it accomplished when I
return, I agree in any way that you may find best, you will force me to
intervene myself, with a method perhaps a little brusque, but of
which I have more than once seen the efficacy.
“‘Understand that if I have to throw Jacques into the water like a
little dog, to teach him to save himself, I shall do it over and over
again, until he finds it agreeable, until he conquers his fright, and
learns to swim. Jacques pretends he wishes to become a sailor, like
his father, but I shall not allow him to become one of those sailors,—
and there are such,—who are actually afraid of the water.’”
“‘Afraid of the water? The child is not afraid of it,’ said mamma.
“‘It is only the cold which he dislikes,’ added my aunt.
“‘Really! And you can suggest no other remedy than to heat the
brooks and the rivers, the lakes and the seas, expressly for our little
darling? That would be, according to your ideas, a reform more
easily carried out than the correction of his fear of cold water!’
“‘Correction! Correction!’ replied aunt Marie impatiently. ‘One can
not “correct” one’s nervous system at will, my dear brother, one has
to cure it as one can. There are certain organisms which must be left
to correct themselves, with age. Our Jacques is brave in many ways,
as you well know; he has really only one fear,—that of contact with
cold water. Well, that will pass in time, as he grows older.’
“‘Time! time!’ returned my father, ‘time passes, but not our defects,
when, instead of correcting them, we leave them alone, or envelop
them in cotton. Sister Marie, do not change my boy into a little girl.’
“‘Your son,’ responded aunt Marie, ‘is as yet neither a boy nor a
girl: he is an angel, and you ought to be glad of it.’
“‘Glad!’ replied my father. ‘I can tell you about that better on my
return. However, I reserve the right of trying to find a young sailor in
your angel, some fine morning. I will not take you unawares. I have
warned both you and my wife. When I come back, I will take your
little Jacques with me in a boat, and whether he knows how to swim
or not, I will make him brave, in spite of himself.’
“This conversation made my aunt and my mother tremble.
Although they were apparently against me, they were really on my
side. They tried to encourage me, telling me I should be a sailor first,
and a brave one,—an admiral soon after. This delighted me. ‘What a
pity, though,’ I said to myself, ‘that water is so cold and wet, and that
one can not walk on it without sinking. Why should it be so?’”
“The moment has come, to speak to you of my uncle, my father’s

brother. This brother, who was older than my father by about ten
years, was a retired officer. What a wonderful man he was too! It
seems to me that I had known only great and heroic people, in my
childhood. It was hardly possible to turn out badly, in the midst of
such fine beings. What is good in me, I owe altogether to them. My
uncle had traveled extensively. He had taken part in all the
campaigns of the first Republic, and of the First Empire, and had
brought back from them a love of flowers which you may explain as
best you can. He loved the land as much as my father loved the sea,
but only for the purpose of covering it with flowers. He possessed a
charmingly situated property, on the outskirts of the town, where he
cultivated, with excessive care, a magnificent collection of roses,
celebrated throughout the entire horticultural world. This collection
contained more than four thousand varieties: I repeat, four thousand,
catalogued, numbered, each with a name and a history. Certain
people pretend to tell them apart at a glance, but I must say it was
easier to confound them in an equal degree of admiration. I should
have felt unjust in preferring one to another, and I admitted a
difference in them only in their colors. My father called his brother’s
place ‘the Garden of Roses.’ The Garden of Roses was for me the
only serious rival of the court of aunt Marie’s hospital, and do you
know why? Not because it was sweeter smelling, and richer in
flowers than any place I have ever seen elsewhere; not because I
always brought back beautiful bouquets for my mother, for aunt
Marie and for her chapel; not because it was bordered on one entire
side by a pretty little river, but because upon that river my uncle
Antoine, out of honor for his brother, the sailor, kept a small, but very
attractive looking, boat. In this boat, which appeared immense to me,
my father used to take me on short voyages, not in the water, but on
the water, which frightened me so much. When I was navigating on
the little stream, how many times have I imagined that I was on the
ocean, en route for America, India, the North Pole, or the Island of
Robinson Crusoe.
“At the time of which I speak, my father, after a year passed upon
the seas of China, returned to spend a three months’ holiday with us.
I felt that I must make the most of it. The year before, I had been
delighted to go with him on many little expeditions, both by land and
water. But this year, alas! I expected little pleasure on the latter. One
of the first questions he asked was whether I was still afraid of my
old enemy. I was obliged to confess that I still felt the same in regard
to it.
“‘What! But how old are you?’
“Brother,’ said aunt Marie, ‘he was just six years old when you left
us.’
“‘But according to that your pupil is now seven.’
“‘Yes, papa, seven,’ said I. ‘I am getting to be a big boy.’
“‘Big! Yes, that is possible. But the larger you are, my poor
Jacques, the less excuse you have for not knowing how to swim, for
having fear of the water.’
“‘He has tried,’ interposed my aunt. ‘I had uncle Antoine’s
gardener, who is an excellent swimmer, give him a lesson in the
river, but he came out so blue with cold that I dared not let him go
back again. Although he neither cried nor complained, I am certain
he would have died in less than five minutes.’
“‘You believe that, perhaps, my poor dear sister,’ replied my father.
‘It is, however, an experience which he will have to repeat. But I warn
Jacques that in the meantime, or until he is able to swim, at least a
few feet, there will no longer be a boat for him at the “Garden of
Roses.” The St. Jacques (which was the name given in my honor to
my uncle’s boat)—the St. Jacques must remain at anchor.’
“This was terrible, but it was irrevocable. It never entered my head
to try to make my father alter his decision.
“Then he said to me, ‘My boy, you love boats, but hate the water;
when you have rendered two such contrary propositions a little more
harmonious, when you are no longer afraid of wetting your precious
little skin, you may voyage all you like in uncle Antoine’s boat. Until
then, do not dream of doing so. One should never go in a boat
unless one is capable of taking care of one’s self in case of
accident.’
“The following morning we went to see uncle Antoine.
“My father and I at length set out. It was good to have him back, to
hold his hand, and our disagreement upon one point had not
seriously troubled our friendly relations. When we arrived, we found
uncle Antoine, who occasionally suffered from the gout, incapable of
taking a step in the garden. My father offered to give him his revenge
for the game of chess which he had gained from him the year before,
—the day previous to his departure.
“‘As for you, Jacques,’ said uncle Antoine, ‘as you have no gout,
run away, pick my cherries, eat my strawberries, look at my roses,
go and see your chickens and rabbits and feed them for me. You
would perhaps do well to take along a book, your ‘Swiss Family
Robinson,’ go and read it in the hammock. Take a nap, if that
pleases you, but whatever you do, be good. When one is not
watched, there is a double duty and a double merit in being good.’
“‘I will add,’ put in my father, ‘that you may go in the path by the
edge of the water, and you will do well to watch attentively what goes
on in the river. Flowing water is an instructive spectacle for a boy like
you.’
“‘Instructive?’ queried my uncle.
“‘Full of information,’ answered my father. ‘It is in the water that the
fishes swim. It is in the water also that Jacques will have to swim
very shortly,—like a fish.’
“‘Like a fish?’ said my uncle. ‘Then you will have to give him fins.’
“‘One doesn’t need fins to swim with,’ replied my father. ‘Frogs do
not have them, yet they manage to swim beautifully. If Jacques will
examine those which he disturbs when he approaches the bank, if
he studies the way they keep their heads out of the water in order to
breathe, and the art with which they manage their arms and legs, in
directing themselves about in that beautiful fresh water which so
frightens your nephew, he will receive from these little animals a
swimming lesson superior to any that your gardener can give him.’
“‘That is very true’, uncle Antoine replied. ‘Go, Jacques,—go take
your lesson. It has never before occurred to me what services my
frogs could render you.’
“I was about to start, when my father stopped me with a gesture.
“‘You understand, do you not Jacques, exactly what you are

permitted to do? I have still, however, to tell you what you must not
do: you are not to set foot upon the St. Jacques; this is forbidden
until I tell you otherwise. Do you understand?’
“‘Yes, father, I understand, but⸺’
“‘There isn’t any “but,”’ replied my father.
“Uncle Antoine threw me a compassionate look. However, this
look was only meant to say: ‘I am sorry, Jacques, but your father has
spoken. I have nothing to say.’
“I did, one after another, the things which were authorized. I ate
some cherries, I picked some strawberries, gave grain to the
chickens, and cabbage-leaves to our rabbits. I re-read, lying in the
hammock, two chapters of my ‘Swiss Family Robinson,’ but, far from
making me sleepy, this book awoke in me a longing for adventure. I
then directed my steps towards the river. I had, however, the wisdom
not to go in the direction of the boat,—that is to say, in the direction
of temptation. I regarded the flowing water curiously, and found real
pleasure in doing so. My uncle’s river was not one of those lazy
streams of which the movement is imperceptible. How could it rest
mute between its borders, when it was forced to carry its fresh water
past the lands of a hundred owners, which, from the right and the
left, cried to it—‘Wet us,’ ‘Refresh us,’ ‘We are dying of thirst.’
“It certainly was a spectacle well worth seeing, this continuous flow
of clear water over a bed of golden sand, dotted here and there with
flexible green plants, which, swaying with every movement of the
tide make such charming little retreats for the fish. The minnows and
gudgeon glided like shadows between the few large stones which
took the place of reefs on this miniature coast. Their goings and
comings amused me very much, and I made up my mind that some
day one could apply to me as to them the proverb, ‘Happy as a fish
in the water.’ All this would have been perfect, if little by little I had
not approached the spot where, under the boughs and between the
roots of an enormous willow, my uncle had anchored the famous St.
Jacques. Desiring not to disobey my father. I had made up my mind
not to look at the St. Jacques, not to take a step towards it; this was
prudent, but it was ordained that I should break my word that day.
Reasons for doing so were not lacking: first—the portion of the walk
by the water where I intended to stay being in the hot sun, I had not
seen a single frog; the hot herbage did not suit them.
“To take my swimming lesson it was necessary to go to the side
where the boat was moored. Only under the willows, and in the
damp grass which surrounded the Bay St. Jacques, could I hope to
find them. Second—as my father was anxious that I should study
how frogs swam, I had made a mistake in keeping away from the
only place where I stood some chance of finding them. I knew well
that there alone could they always be seen. Besides, going near the
St. Jacques was not the same thing as going on the St. Jacques.
Third—it is not difficult to refrain from getting into a boat, even when
one has a great desire to do so. So I pushed aside the long
branches of the great willow which hung down to the ground, and
found myself in the presence of the St. Jacques. What a beautiful
boat she was! Since I had last seen her my uncle had had her
repainted. Her new costume of mingled red and white suited her
marvelously; her mast,—there was a mast,—painted also, was even
more beautiful than one of those lovely paper wind-mills that one’s
parents never buy one. Her pennant had also been renewed. It was
certainly for my father’s return that uncle Antoine had gone to the
expense of this brilliant toilette. The hull hardly stirred. Its
imperceptible balancings on the water resembled the quiet breathing
of a sleeping person. Under the transparent veil of the drooping
branches of the weeping willow, no breath could reach it. The St.
Jacques had the air of a little potentate in repose, under a canopy of
verdure. If papa had not forbidden me to get in the little boat, it would
have been delightful to read my ‘Swiss Family Robinson’ out upon
the water. Sitting in the bow, leaning against the mast, one might
imagine one’s self on an island. But then, that which is forbidden one
can not prevent from being forbidden.”
“I tried at first to think of nothing but frogs. But, as if on purpose,
not one showed himself. I was sure they were hiding in the shadow
of the boat. I went up quite close to the St. Jacques, and still nothing
jumped into the water. Decidedly, and in spite of all my good
intentions, I was not to take my swimming lesson that day. But what
were those three green spots that I saw down there on the white
edge of the boat? They were,—yes, they were three frogs taking a
nap at their ease, as if the St. Jacques belonged to them.
“One could not tolerate a thing of that sort. I stepped gently over
the edge of the boat to chase away the trespassers. Paf, paf, paf,
with a single hop, each of them made one of those famous dives of
which my father had spoken. Now or never was the moment to ask
them for a lesson. I did not fail to do so. I was lost in admiration of
their talent. Papa was right; a frog swims to perfection. It swims so
correctly and elegantly that by its vigorous, regular movements, one
understands clearly what one ought to do if one happened to be in
its place. This sort of lesson, illustrated by an example, shows one
much better what movements to make than when the gardener holds
you under the stomach, and shouts you don’t know what in your
ears. If father should throw me into the water, I should think of the
frogs: I should do as they did, and I should certainly swim.
“What a beautiful boat she was!”
Drawn by Clinton Peters.
“I had reached this point in my resolutions, when the sound of

something heavy falling suddenly into the water made me raise my
head. The noise was followed by a cry, and this cry by five or six
others.
“That which made the noise was something which looked like a big
blue package, which was squirming and beating the water frequently,
across by the opposite bank.
“I looked with all my eyes, and was filled with horror in recognizing
the little boy—still in dresses—of the gardener across the stream
whom I had sometimes seen from the bank. The poor little one—I
should be more correct in saying the poor big one—had evidently
escaped from his mother, and had taken advantage of the occasion
to come alone to the river, and turning a summersault by mistake,
was now in danger of drowning. He was not exactly happy. He cried
like a little madman in the instants when his crimson face emerged
from the water, and, by a sort of instinct, beat the water with both
hands and feet.
“I noticed that his skirts held him up temporarily, but that could not
last long. I began to cry in my turn, and call,—‘Papa! uncle!’—but the
sound of my voice could not reach so far, and I felt that there must
be something better to do than cry. I said to myself that one must go
into the river to rescue the poor child. Yes, but in order to do that, it
was necessary to wet one’s self in the cold water, which was
particularly disagreeable to me, as you already know, and what was
worse, they would see, afterwards, by my wet clothes that I had
disobeyed, that I had not stayed in the path, but had broken my
word; that was the most terrible part. In a couple of seconds all views
of the situation flashed through my mind. Should I try to save the
gardener’s little boy? Then I must disobey. An idea came to me
which struck me as brilliant. I would take off my shoes, my stockings
and my trousers, and leave them in the boat; the water evidently was
not very deep, because I could see the bottom; I was quite large and
by rolling my shirt up under my vest, I thought I could go. In a
moment this was done. In another moment, and without stumbling, I
had descended into the water, which, alas! was far from, warm. But
that was not all. I had miscalculated the depth of the water and my
height, and, when I had taken two or three steps towards the child,
who still cried, I saw that if I went any farther I should wet my shirt
and my vest. That seemed to me impossible to do. I took one step
back toward the boat. The thought did not occur to me that I should
have undressed completely at first, and that I might do it even now.
Yes, I very nearly left the child to drown, for the sake of not wetting
the clothes which I still wore (which, it is true, were new ones) and of
not having to admit afterwards, that I had disobeyed.
“My hesitation did not last long. ‘Father will forgive me.’ I said to
myself, when he knows all about it, ‘and giving myself up altogether
to the sentiment of a duty which I felt was superior to all others, I
succeeded, scarcely knowing how, in crossing the river, in reaching
the little boy, who had already stopped crying, in pulling his head out
of the water first, and then, with infinite pains, in seating him on the
first step of a worm-eaten stair-case which mounted the sloping
river-bank, towards his father’s garden.
“No one appeared; no answer came to my cries. There were still
four steps to mount, to reach the garden: I finally contrived to climb
them with my burden. Once there, I laid the child down among the
cabbages. From violet, he had become quite pale, and much
frightened, I ran towards his parents’ house.”
VI.
“Then I found the little one’s mother, whom I knew by sight.
“She was a large, healthy-looking woman, and, as I rushed into
her presence, was working at her spinning-wheel, singing
meanwhile. When she saw me suddenly appear, scarcely half
clothed, and soaking wet, she was seized with a fit of anger, and
before in my trouble I could manage to explain myself, boxed me
vigorously on both ears.
“It was the first time in my life I had received such treatment.
Furious at this proceeding, I threw myself on her, calling her every
name I could think of, and holding her by the skirt, I cried to her that
out among the cabbages there lay a little boy who might be dead.
“The good woman, astonished, began to imagine from the little I
was able to tell her, that she had been too quick; she concluded to
follow me. I feared I was taking her to a dead child, all was so quiet
over in the cabbage garden. But I was wrong. The little fellow I had
pulled out of the water was in better condition than I. We found him
sitting tranquilly in his wet garments, his arm resting carelessly on a
fine large cabbage. Without saying a word, he was staring straight in
front of him. But at the sight of his mother he suddenly recovered his
voice, and commenced bellowing even louder than he had done
when he was paddling in the river. Why should he cry? I thought it
stupid to cry just when help had arrived. He was, however, not so far
wrong, poor, fat little fellow: he was a little man who had already
experienced many things in life; he knew well what awaited him. To
tell the truth, he knew that his mother’s first action, in moments of
excitement, was at once quick and varied.
“Seeing him in good condition, but wet from head to foot, mother
Brazon lifted him up by one arm, and pulling up his frock,
administered a spanking which considerably augmented the
loudness of the little boy’s shrieks. I was indignant. It appears that I
was wrong. I have since heard it said that, medicinally, the maternal
treatment was admirably suited to the occasion. Is that true, doctor?”
“Quite true,” answered the doctor, laughing.
“With all this going on, I was scarcely contented; on the one hand,
I was beginning to shiver with cold, and on the other, for the first time
in my life, I found myself with strangers far away from the remainder
of my clothes, and I had a terrible fear lest Madame Brazon should
profit by the occasion to administer to me (otherwise than on my
ears) the same treatment she had so recently applied to her own
son, and which the doctor, no doubt, would have approved. But
these two exercises had been sufficient to calm the good woman.
“We had no sooner entered the house than she proved herself a
loving mother to little Auguste, and very kind to me. Quick as a wink
she undressed us both entirely, and bundled us both, in spite of our
resistance, between the white sheets of her big bed.
“Three minutes later she made us each drink a glass of sugared
wine—very hot—which put Auguste in an extremely jubilant frame of
mind. I could not share it. The worst was perhaps over. All was
finished on our side of the river, but that which was soon going to
pass on the other side began to occupy my mind. I thought
alternately of papa, of mamma, of my uncle, of my wet clothes, of the
two boxes on my ears, of the boat, and of aunt Marie. All this was
very complicated for a childish brain, already confused. Little
Auguste, searching for a warm place, had curled up in my arms and
gone to sleep. Scarcely knowing it, I followed his example, and
became unconscious in the middle of my sad reflections. It seems
they let us sleep nearly two hours. When I awoke and found myself
in that room and in that bed, and felt the head of a chubby little boy
on my shoulder, I was, at first, much astonished. I opened my eyes
without daring to move. But soon my memory returned, I
remembered everything, and cried, ‘Papa! papa!’
“‘Present!’ replied my father. He had been there by my bedside,—
my dear father,—for one hour, and my darling mother was there also.
Aunt Sister Marie had been unable to leave, or she would have been
there, too.
“Madame Brazon, it appears, had at length succeeded in
recognizing in the small gentleman so scantily clad, whose ears she
had so lately boxed, the little boy she had often seen in the garden
across the river, and to explain the enigma, she had sent a neighbor
to uncle Antoine’s. It had suddenly interrupted the game of chess.
My father arrived soon after, bringing with him my uncle’s doctor. The
doctor, after looking at the pretty picture we made in Madame
Brazon’s bed, had said, ‘Let them sleep.’
“While waiting for us to wake up, father had sent to town for dry
clothes; my mother had brought them herself. When I was dressed,
my father took me between his knees and said to me:
“‘Tell me everything.’
“I gave him, in fewer words than I have just used, an exact
account of what had happened. My father listened to me. I saw
clearly that he was not angry. At one moment, however, I saw him
grow pale; it was when he realized from my explanations that to go
and undrown little Auguste (this was the word I used, and it has been
so well remembered by all the family that I have not forgotten it), it
was, I say, when he understood that I must certainly have crossed
the river to reach the child.
“‘It is incomprehensible!’ said he to mamma and the doctor. ‘The
middle of the river is every where at least five or six feet deep. What
did he do?’
“‘Papa,’ said I, ‘I did as I saw the frogs do.’
“‘But then, my child, you swam.’
“‘I do not know, papa; perhaps—’
“‘Did the water go over your head?’
“‘No, papa, surely not.’
“‘You got no water in your mouth while you were going across to
rescue little Auguste? You did not go altogether under water?’
“‘No, papa; no papa.’
“‘Very well, my wife,’ said my father to my mother, ‘that proves that
when one has to swim, one can swim. Jacques swam, because
occupied with something besides his fear of water, he thought only of
the end he wished to attain. I am sure that he is now cured of his
former fright, and that with a few good lessons he will become a
good swimmer. And to be a good swimmer is very useful: it enables
one to save one’s self as well as others. Without this baby, Madame
Brazon, without his courage and sang-froid, your child would have
been lost.’
“‘My God!’ she cried. ‘And I thanked him with two blows!’
“‘Yes, papa,—two hard ones!’
“‘Madame Brazon,’ said my father, ‘kiss my son on the two cheeks
that you treated so roughly. There is nothing like a kiss to repair an
injury. When one is kissed, all wounds are cured.’”
VII.
“My story,” continued the General, “should not give the idea to
children, or to grown persons either, that it is always wise to make an
abrupt debut in the art of swimming, but it shows that the movements
by the aid of which a man swims are as natural to him as to most
animals, and that if suddenly forced to do so, he has no fear of
wetting himself, and can, by not losing his head, and by thinking of
frogs, cross a little river in safety.
“If you have to make the effort to-night, remember this, and help
one another. To leave a comrade behind is not a creditable
proceeding. Many a time have I congratulated myself that I pulled
little Brazon out of the water.”
“Brazon! Brazon! General?” said the doctor. “But I have known
someone of that name in the army,—a lieutenant-colonel, a strong,
brave fellow. Wait! It was he whose arm I cut off after our expedition
against the Beni-Raten. He was forced to retire—brave fellow!—after
that. I shall always remember what he said to me when the operation
was over: ‘Thanks, doctor. I regret my arm, but don’t regret the
occasion that made me lose it.’”
“And did he tell you,” said the General, “what that occasion was?”
“Faith! no!” responded the doctor, “he needed sleep too badly.”
“Very well, I will tell you,” continued the General, in a voice full of
feeling. “I had had my horse killed under me and my leg broken. I
should have been left to the mercy of the Kabyles, but he rescued
me, took me on his shoulders, carried me to a place of safety, and
only when this was done, discovered that during the trip a ball had
shattered his elbow. Brazon lost his arm in saving my life.
“The story I have just told you made us good friends. Uncle
Antoine became interested in him, my father also: we were educated
together, and have had more or less the same career. Poor Brazon!
When he retired, he returned to ⸺ and lives in what used to be his
father’s garden, opposite uncle Antoine’s ‘Garden of Roses.’
“Since then we have joined the two properties by a bridge, under
which a boat can pass. When I retire, in my turn, I shall not have to
swim to go and see my dear Auguste.”
VIII.
“General,” said the young captain, “will you permit me to ask you
one question? Did not your family spoil you a trifle after this
incident?”
“Oh, yes!” replied the General. “I did not lack attention. Aunt Marie
and my mother both kissed me. My uncle declared I was a fine little
fellow, and Madame Brazon, about two weeks later, sent me the very
biggest pumpkin in her garden. She had found out that I adored
pumpkin soup.”

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Essentials of Business Law and the

Legal Environment - eBook PDF

Richard A. Mann Barry S. Roberts

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Content Developer: Amanda White

Project Manager: Reba Frederics Library of Congress Control Number: 2017955929

Cover Image: iStockPhoto.com/DNY59 ISBN: 978-1-337-55518-0

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RICHARD A. MANN received a B.S. in mathematics from the University of North

BARRY S. ROBERTS received a B.S. in business administration from Pennsylvania

1 Introduction to Law 2 19 Introduction to Sales and Leases 332

3 Civil Dispute Resolution 44 Part V

33 Nature and Formation of Corporations 634 45 Environmental Law 925

Chapter 7: Intentional Torts 121 Fraud 199

Chapter 19: Introduction to Sales and Leases 332

Warranties on Presentment 487 Forms of Business Associations 564

Bank Deposits and Collections 494 Nature of Partnership 567

Business Law in Action 540 Dissolution 603

Chapter 33: Nature and Formation Officers 691

Trade Names 834 Nuisance 925

F Kimbrell’s of Sanford, Inc. v. KPS, Inc. 734

Parker v. Twentieth Century-Fox Film Corp. 55 T

The Tradition Continues

Uniform Certified Public Accountant Examination

Business Ethics Emphasis

New to This Edition

Additional End-of-Chapter Questions and Case Problems

Coverage of Recent U.S. Supreme Court Decisions

Case Critical Thinking Questions

Applying the Law

Business Law in Action

Classroom-Proven End-of-Chapter Materials

Additional Course Tools

Nature of Law [1-1]

Definition of law Definition of Law [1-1a]

Functions of Law [1-1b]

Laws and morals Law and Morals [1-1c]

Figure 1-1 Law and Morals

Law and Justice [1-1d]

Classification of Law [1-2]

Figure 1-2 Classification of Law

CONCEPT REVIEW 1-1

Comparison of Civil and Criminal Law

Burden of Proof Preponderance of the evidence Beyond a reasonable doubt

Principal Sanctions Monetary damages Capital punishment

Sources of Law [1-3]

Constitutional Law [1-3a]

Figure 1-3 Hierarchy of Law

Treaties Federal Statutes

CONCEPT REVIEW 1-2

Comparison of Law and Equity

Availability Generally Discretionary: if remedy at law is inadequate

Precedents Stare decisis Equitable maxims

Decree of specific performance, injunction, reformation,

Legislative Law [1-3c]

Administrative Law [1-3d]

Legal Analysis [1-4]

Law Versus Ethics [2-1]

Ethical Theories [2-2]