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TWELFTH EDITION
BUSINESS LAW
and the
REGULATION
of BUSINESS
Richard A . Mann
Professor of Business Law
The University of North Carolina at Chapel Hill
Member of the North Carolina Bar
Barry S . R oberts
Professor of Business Law
The University of North Carolina at Chapel Hill
Member of the North Carolina and Pennsylvania Bars
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
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Business Law and the Regulation of Business, # 2017, 2014 Cengage Learning
12th Edition
WCN: 02-200-203
Richard A. Mann
Barry S. Roberts
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ABOUT THE AUTHORS
Richard A. Mann received a B.S. in mathematics from Barry S. Roberts received a B.S. in business adminis-
the University of North Carolina at Chapel Hill and a J.D. tration from Pennsylvania State University, a J.D. from
from Yale Law School. He is professor emeritus of Busi- the University of Pennsylvania, and an LL.M. from
ness Law at the Kenan-Flagler Business School, University Harvard Law School. He served as a judicial clerk for
of North Carolina at Chapel Hill, and is past president of the Pennsylvania Supreme Court prior to practicing
the Southeastern Regional Business Law Association. He law in Pittsburgh. He is professor of Business Law at
is a member of Who’s Who in America, Who’s Who in the Kenan-Flagler Business School, University of North
American Law, and the North Carolina Bar (inactive). Carolina at Chapel Hill, and is a member of Who’s
Professor Mann has written extensively on a number Who in American Law and the North Carolina and
of legal topics, including bankruptcy, sales, secured Pennsylvania Bars (inactive).
transactions, real property, insurance law, and business Professor Roberts has written numerous articles on
associations. He has received the American Business such topics as antitrust, products liability, constitutional
Law Journal’s award both for the best article and for law, banking law, employment law, and business asso-
the best comment and, in addition, has served as a ciations. He has been a reviewer and staff editor for the
reviewer and staff editor for the publication. Professor American Business Law Journal. He is a co-author of
Mann is a co-author of Smith and Roberson’s Business Smith and Roberson’s Business Law (sixteenth edition),
Law (sixteenth edition), as well as Essentials of Busi- as well as Essentials of Business Law and the Legal
ness Law and the Legal Environment (twelfth edition) Environment (twelfth edition) and Contemporary
and Contemporary Business Law. Business Law.
iii
BRIEF CONTENTS
PART I 20 Performance 407

21 Transfer of Title and Risk of Loss 429
INTRODUCTION TO LAW AND ETHICS 1 22 Product Liability: Warranties and Strict
Liability 446
1 Introduction to Law 2
23 Sales Remedies 475
2 Business Ethics 15
PART II PART V
THE LEGAL ENVIRONMENT OF BUSINESS 45 NEGOTIABLE INSTRUMENTS 499
3 Civil Dispute Resolution 46 24 Form and Content 500
4 Constitutional Law 73 25 Transfer and Holder in Due Course 517
5 Administrative Law 95 26 Liability of Parties 549
6 Criminal Law 113 27 Bank Deposits, Collections, and Funds
7 Intentional Torts 133 Transfers 569
8 Negligence and Strict Liability 155
PART VI
PART III AGENCY 595
CONTRACTS 183 28 Relationship of Principal and Agent 596
9 Introduction to Contracts 184 29 Relationship with Third Parties 619
10 Mutual Assent 202
11 Conduct Invalidating Assent 225
12 Consideration 245
PART VII
13 Illegal Bargains 265 BUSINESS ASSOCIATIONS 647
14 Contractual Capacity 285
15 Contracts in Writing 302 30 Formation and Internal Relations of General
16 Third Parties to Contracts 328 Partnerships 648
17 Performance, Breach, and Discharge 347 31 Operation and Dissolution of General
Partnerships 675
18 Contract Remedies 365
32 Limited Partnerships and Limited Liability
Companies 703
PART IV 33 Nature and Formation of Corporations 728
34 Financial Structure of Corporations 752
SALES 385 35 Management Structure of Corporations 774
19 Introduction to Sales and Leases 386 36 Fundamental Changes of Corporations 808
iv
Brief Contents v
PART VIII APPENDICES

DEBTOR AND CREDITOR RELATIONS 831 Appendix A
37 Secured Transactions and Suretyship 832 The Constitution of the United States
38 Bankruptcy 867 of America A-2
Appendix B
PART IX
Uniform Commercial Code
REGULATION OF BUSINESS 897 (Selected Provisions) B-1
39 Securities Regulation 898
Appendix C
40 Intellectual Property 937
41 Employment Law 960 Dictionary of Legal Terms C-1
42 Antitrust 992
43 Accountants’ Legal Liability 1016 Index I-1
44 Consumer Protection 1029
45 Environmental Law 1054
46 International Business Law 1077
PART X
PROPERTY 1099
47 Introduction to Property, Property Insurance,
Bailments, and Documents of Title 1100
48 Interests in Real Property 1130
49 Transfer and Control of Real Property 1150
50 Trusts and Wills 1168
TABLE OF CONTENTS
PART I Concept Review: Comparison of Court Adjudication,

Arbitration, and Mediation/Conciliation 64
Introduction to Law and Ethics 1 Business Law in Action 66
Going Global: What about international dispute
resolution? 67
1 Introduction to Law 2
Nature of Law 3 4 Constitutional Law 73
Classification of Law 4 Basic Principles 74
Concept Review: Comparison of Civil and Criminal Powers of Government 78
Law 5 Limitations on Government 83
Sources of Law 5 Concept Review: Limitations on Government 83
Concept Review: Comparison of Law and Equity 8 Ethical Dilemma: Who Is Responsible for Commercial
Going Global: What is the WTO? 9 Speech? 90
Legal Analysis 10
Applying the Law: Introduction to Law 13 5 Administrative Law 95
Operation of Administrative Agencies 96
2 Business Ethics 15 Concept Review: Administrative Rulemaking 101
Law Versus Ethics 16 Limits on Administrative Agencies 103
Ethical Theories 16 Ethical Dilemma: Should the Terminally Ill Be Asked
Ethical Standards in Business 19 to Await FDA Approval of Last-Chance
Ethical Responsibilities of Business 20 Treatments? 109
BUSINESS ETHICS CASES 27
Pharmakon Drug Company 27 6 Criminal Law 113
Mykon’s Dilemma 28 Nature of Crimes 114
Oliver Winery, Inc. 33 Classification 115
JLM, Inc. 34 Concept Review: Degrees of Mental Fault 115
Sword Technology, Inc. 37 White-Collar Crime 116
Vulcan, Inc. 40 Crimes Against Business 120
Applying the Law: Criminal Law 120
Going Global: What about international
PART II bribery? 124
Defenses to Crimes 126
Criminal Procedure 126
The Legal Environment of Business 45 Concept Review: Constitutional Protection for
the Criminal Defendant 129
3 Civil Dispute Resolution 46
THE COURT SYSTEM 46 7 Intentional Torts 133
The Federal Courts 47 Harm to the Person 137
State Courts 49 Harm to the Right of Dignity 140
JURISDICTION 49 Business Law in Action 142
Subject Matter Jurisdiction 50 Concept Review: Privacy 146
Concept Review: Subject Matter Jurisdiction 53 Harm to Property 146
Jurisdiction over the Parties 53 Harm to Economic Interests 147
CIVIL DISPUTE RESOLUTION 56 Concept Review: Intentional Torts 149
Civil Procedure 56 Ethical Dilemma: What May One Do to Attract Clients
Alternative Dispute Resolution 62 from a Previous Employer? 150
vi
Table of Contents vii
8 Negligence and Strict Liability 155 Bargained-for Exchange 254
NEGLIGENCE 156 Contracts Without Consideration 255
Breach of Duty of Care 156 Business Law in Action 258
Factual Cause 165 Ethical Dilemma: Should a Spouse’s Promise Be
Scope of Liability (Proximate Cause) 165 Legally Binding? 260
Harm 168 13 Illegal Bargains 265
Defenses to Negligence 169 Violations of Statutes 265
STRICT LIABILITY 172 Violations of Public Policy 269
Activities Giving Rise to Strict Liability 172 Effect of Illegality 278
Defenses to Strict Liability 175 Business Law in Action 279
Ethical Dilemma: What Are the Obligations of Ethical Dilemma: When Is a Bargain Too Hard? 280
a Bartender to His Patrons? 176
14 Contractual Capacity 285
PART III Minors 285
Business Law in Action 289
Incompetent Persons 294
Contracts 183 Ethical Dilemma: Should a Merchant Sell to One Who
Lacks Capacity? 297
9 Introduction to Contracts 184
Development of the Law of Contracts 185 15 Contracts in Writing 302
Going Global: What about international STATUTE OF FRAUDS 303
contracts? 186 Contracts Within the Statute of Frauds 303
Definition of Contract 186 Going Global: What about electronic commerce and
Requirements of a Contract 187 electronic signatures in international contracts? 305
Classification of Contracts 190 Concept Review: The Statute of Frauds 312
Promissory Estoppel 193 Compliance with the Statute of Frauds 313
Quasi Contracts or Restitution 195 Effect of Noncompliance 315
Concept Review: Contracts, Promissory Estoppel, Business Law in Action 315
and Quasi Contracts (Restitution) 195 PAROL EVIDENCE RULE 316
Business Law in Action 197 The Rule 316
Situations to Which the Rule Does Not Apply 318
10 Mutual Assent 202 Supplemental Evidence 319
OFFER 203 INTERPRETATION OF CONTRACTS 320
Essentials of an Offer 203 Ethical Dilemma: What’s (Wrong) in a Contract? 321
Duration of Offers 208
Applying the Law: Mutual Assent 211 16 Third Parties to Contracts 328
ACCEPTANCE OF OFFER 213 Assignment of Rights 328
Communication of Acceptance 213 Delegation of Duties 335
Variant Acceptances 217 Third-Party Beneficiary Contracts 338
Business Law in Action 218 Applying the Law: Third Parties to Contracts 338
Concept Review: Offer and Acceptance 219
17 Performance, Breach, and Discharge 347
11 Conduct Invalidating Assent 225 Conditions 347
Duress 225 Discharge by Performance 350
Undue Influence 228 Discharge by Breach 351
Fraud 230 Applying the Law: Performance, Breach, and
Concept Review: Misrepresentation 234 Discharge 352
Nonfraudulent Misrepresentation 234 Discharge by Agreement of the Parties 353
Mistake 235 Discharge by Operation of Law 355
Applying the Law: Conduct Invalidating Assent 235 18 Contract Remedies 365
Concept Review: Conduct Invalidating Assent 238
Monetary Damages 366
12 Consideration 245 Business Law in Action 367
Legal Sufficiency 245 Remedies in Equity 372
Concept Review: Consideration in Unilateral and Restitution 376
Bilateral Contracts 247 Limitations on Remedies 376
viii Table of Contents
PART IV PART V
Sales 385 Negotiable Instruments 499
19 Introduction to Sales and Leases 386 24 Form and Content 500
NATURE OF SALES AND LEASES 387 Negotiability 501
Definitions 387 Concept Review: Use of Negotiable Instruments 501
Going Global: What law governs international sales? 389 Types of Negotiable Instruments 502
Fundamental Principles of Article 2 and Formal Requirements of Negotiable Instruments 505
Article 2A 391
FORMATION OF SALES AND LEASE 25 Transfer and Holder in Due Course 517
CONTRACTS 394 TRANSFER 517
Manifestation of Mutual Assent 394 Negotiation 518
Consideration 399 Indorsements 521
Form of the Contract 399 Concept Review: Indorsements 525
Business Law in Action 400 Applying the Law: Transfer of Negotiable
Concept Review: Contract Law Compared with Law Instruments 525
of Sales 401 HOLDER IN DUE COURSE 527
Ethical Dilemma: What Constitutes Unconscionability Requirements of a Holder in Due Course 527
in a Business? 402 Holder in Due Course Status 533
The Preferred Position of a Holder in Due
20 Performance 407 Course 536
Performance by the Seller 408 Limitations upon Holder in Due Course Rights 539
Performance by the Buyer 413 Ethical Dilemma: What Responsibility Does
Obligations of Both Parties 418 a Holder Have in Negotiating Commercial
Going Global: What about letters of credit? 419 Paper? 542
Ethical Dilemma: Should a Buyer Refuse to Perform a
Contract Because a Legal Product May Be Unsafe? 423
26 Liability of Parties 549
CONTRACTUAL LIABILITY 549
21 Transfer of Title and Risk of Loss 429 Signature 550
Transfer of Title 429 Liability of Primary Parties 553
Risk of Loss 435 Liability of Secondary Parties 553
Bulk Sales 441 Concept Review: Contractual Liability 557
Ethical Dilemma: Who Should Bear the Loss? 441 Business Law in Action 558
Termination of Liability 558
22 Product Liability: Warranties and Strict LIABILITY BASED ON WARRANTY 559
Liability 446 Warranties on Transfer 559
WARRANTIES 447 Warranties on Presentment 560
Types of Warranties 447 Ethical Dilemma: Who Gets to Pass the Buck on
Obstacles to Warranty Actions 453 a Forged Indorsement? 564
Concept Review: Warranties 456
STRICT LIABILITY IN TORT 457 27 Bank Deposits, Collections, and Funds
Requirements of Strict Liability in Tort 457 Transfers 569
Obstacles to Recovery 462 BANK DEPOSITS AND COLLECTIONS 570
Concept Review: Product Liability 464 Collection of Items 570
Business Law in Action 465 Going Global: What about letters of credit? 571
Restatement (Third) of Torts: Products Liability 466 Relationship Between Payor Bank and Its
Ethical Dilemma: When Should a Company Order Customer 575
a Product Recall? 467 ELECTRONIC FUNDS TRANSFER 581
Types of Electronic Funds Transfer 582
23 Sales Remedies 475 Business Law in Action 583
Remedies of the Seller 476 Consumer Funds Transfers 584
Remedies of the Buyer 481 Wholesale Funds Transfers 585
Concept Review: Remedies of the Seller 482 Concept Review: Parties to a Funds Transfer 588
Applying the Law: Sales Remedies 483 Ethical Dilemma: Can Embezzlement Ever Be
Concept Review: Remedies of the Buyer 488 a Loan? 588
Contractual Provisions Affecting Remedies 488
Table of Contents ix
Ethical Dilemma: When Is an Opportunity a
PART VI Partnership Opportunity? 670
Agency 595 31 Operation and Dissolution of General
Partnerships 675
28 Relationship of Principal and Agent 596 RELATIONSHIP OF PARTNERSHIP AND
Nature of Agency 597 PARTNERS WITH THIRD PARTIES 675
Creation of Agency 599 Contracts of Partnership 676
Duties of Agent to Principal 603 Business Law in Action 680
Duties of Principal to Agent 607 Torts and Crimes of Partnership 680
Termination of Agency 608 Notice to a Partner 681
Applying the Law: Relationship of Principal and Liability of Incoming Partner 681
Agent 612 DISSOCIATION AND DISSOLUTION OF
Ethical Dilemma: Is Medicaid Designed to Protect GENERAL PARTNERSHIPS UNDER THE
Inheritances? 613 RUPA 683
Dissociation 683
29 Relationship with Third Parties 619
Dissolution 684
RELATIONSHIP OF PRINCIPAL AND THIRD
Concept Review: Dissociation and Dissolution Under
PERSONS 620
the RUPA 687
Contract Liability of the Principal 620
Dissociation Without Dissolution 689
DISSOLUTION OF GENERAL PARTNERSHIPS
UNDER THE UPA 693
Tort Liability of Principal 630
Dissolution 693
Criminal Liability of the Principal 635
Winding Up 693
RELATIONSHIP OF AGENT AND THIRD
Continuation After Dissolution 694
PERSONS 636
Ethical Dilemma: What Duty of Disclosure Is Owed to
Contract Liability of Agent 636
Incoming Partners? 695
Tort Liability of Agent 639
Rights of Agent Against Third Person 639 32 Limited Partnerships and Limited Liability
Ethical Dilemma: When Should an Agent’s Companies 703
Power to Bind His Principal Terminate? 640 Limited Partnerships 703
Concept Review: Comparison of General and Limited
Partners 709
PART VII Limited Liability Companies 710
Concept Review: Comparison of Member-Managed and
Business Associations 647 Manager-Managed LLCs 714
Applying the Law: Limited Partnerships and Limited
30 Formation and Internal Relations of General Liability Companies 715
Other Unincorporated Business Associations 720
Partnerships 648 Concept Review: Liability Limitations in LLPs 721
CHOOSING A BUSINESS ASSOCIATION 648
Factors Affecting the Choice 649 33 Nature and Formation of Corporations 728
Forms of Business Associations 650 NATURE OF CORPORATIONS 729
Concept Review: General Partnership, Limited Corporate Attributes 729
Partnership, Limited Liability Company, and Classification of Corporations 730
Corporation 652 Business Law in Action 733
Going Global: What about multinational Business Law in Action 734
enterprises? 653 FORMATION OF A CORPORATION 734
FORMATION OF GENERAL Organizing the Corporation 734
PARTNERSHIPS 653 Formalities of Incorporation 737
Nature of Partnership 653 Concept Review: Comparison of Charter and
Formation of a Partnership 654 Bylaws 738
RELATIONSHIPS AMONG PARTNERS 663 RECOGNITION OR DISREGARD OF
Duties Among Partners 663 CORPORATENESS 738
Rights Among Partners 666 Defective Incorporation 738
Concept Review: Partnership Property Compared with Piercing the Corporate Veil 741
Partner’s Interest 667 CORPORATE POWERS 744
x Table of Contents
Sources of Corporate Powers 744 Essentials of Secured Transactions 833
Ultra Vires Acts 744 Classification of Collateral 834
Liability for Torts and Crimes 744 Attachment 836
Perfection 839
34 Financial Structure of Corporations 752 Priorities Among Competing Interests 843
DEBT SECURITIES 753 Concept Review: Applicable Method of Perfection 843
Going Global: What about foreign investment? 753 Concept Review: Requisites for Enforceability
Authority to Issue Debt Securities 754 of Security Interests 844
Types of Debt Securities 754 Concept Review: Priorities 848
Business Law in Action 756 Default 848
EQUITY SECURITIES 756 Business Law in Action 849
Issuance of Shares 756 SURETYSHIP 852
Classes of Shares 760 Nature and Formation 852
Concept Review: Debt and Equity Securities 761 Duties of Surety 854
DIVIDENDS AND OTHER DISTRIBUTIONS 761 Rights of Surety 854
Types of Dividends and Other Distributions 761 Defenses of Surety and Principal Debtor 855
Legal Restrictions on Dividends and Other Ethical Dilemma: What Price Is ‘‘Reasonable’’
Distributions 762 in Terms of Repossession? 859
Applying the Law: Financial Structure of
Corporations 764 38 Bankruptcy 867
Declaration and Payment of Distributions 766 FEDERAL BANKRUPTCY LAW 868
Concept Review: Liability For Improper Going Global: What about transnational
Distributions 768 bankruptcies? 869
Liability for Improper Dividends and Distributions 768 Case Administration—Chapter 3 869
Creditors, the Debtor, and the Estate—
35 Management Structure of Corporations 774 Chapter 5 871
CORPORATE GOVERNANCE 774 Liquidation—Chapter 7 876
ROLE OF SHAREHOLDERS 777 Applying the Law: Bankruptcy 878
Voting Rights of Shareholders 777 Reorganization—Chapter 11 879
Concept Review: Concentrations of Voting Power 782 Adjustment of Debts of Individuals—
Enforcement Rights of Shareholders 782 Chapter 13 883
ROLE OF DIRECTORS AND OFFICERS 787 Concept Review: Comparison of Bankruptcy
Function of the Board of Directors 789 Proceedings 889
Election and Tenure of Directors 790 CREDITORS’ RIGHTS AND DEBTORS’ RELIEF
Exercise of Directors’ Functions 791 OUTSIDE OF BANKRUPTCY 889
Officers 792 Creditors’ Rights 890
Duties of Directors and Officers 793 Debtors’ Relief 890
Business Law in Action 801 Ethical Dilemma: For a Company Contemplating
Ethical Dilemma: Whom Does a Director Represent? Bankruptcy, When Is Disclosure the Best
What Are a Director’s Duties? 802 Policy? 892
36 Fundamental Changes of Corporations 808
Charter Amendments 809
Combinations 809
PART IX
Dissolution 821
Concept Review: Fundamental Changes Under
Regulation of Business 897
Pre-1999 RMBCA 821
Ethical Dilemma: What Rights Do Minority 39 Securities Regulation 898
Shareholders Have? 825 THE SECURITIES ACT OF 1933 900
Definition of a Security 900
Registration of Securities 902
PART VIII Exempt Securities 904
Exempt Transactions for Issuers 904
Debtor and Creditor Relations 831 Exempt Transactions for Nonissuers 908
Concept Review: Exempt Transactions for Issuers
37 Secured Transactions and Suretyship 832 Under the 1933 Act 909
SECURED TRANSACTIONS IN PERSONAL Liability 910
PROPERTY 833 THE SECURITIES EXCHANGE ACT OF 1934 914
Table of Contents xi
Disclosure 915 Concept Review: Consumer Rescission Rights 1037
Concept Review: Disclosure Under the 1934 Act 919 Consumer Credit Transactions 1037
Business Law in Action 920 Business Law in Action 1044
Liability 920 Creditors’ Remedies 1045
Going Global: What about international securities Ethical Dilemma: Should Some Be
regulation? 928 Protected from High-Pressure Sales? 1048
Concept Review: Civil Liability Under the 1933 and
1934 Acts 931 45 Environmental Law 1054
Ethical Dilemma: What Information May a Corporate COMMON LAW ACTIONS FOR
Employee Disclose? 932 ENVIRONMENTAL DAMAGE 1054
Nuisance 1055
40 Intellectual Property 937 Trespass to Land 1055
Trade Secrets 937 Strict Liability for Abnormally Dangerous
Trade Symbols 940 Activities 1055
Trade Names 945 Problems Common to Private Causes of Action 1056
Copyrights 945 FEDERAL REGULATION OF THE
Patents 950 ENVIRONMENT 1056
Going Global: How is intellectual property protected The National Environmental Policy Act 1056
internationally? 951 The Clean Air Act 1057
Concept Review: Intellectual Property 953 The Clean Water Act 1061
Ethical Dilemma: Who Holds the Copyright on Lecture Hazardous Substances 1065
Notes? 954 International Protection of the Ozone Layer 1070
41 Employment Law 960 Concept Review: Major Federal Environmental
Statutes 1071
Labor Law 961
Concept Review: Unfair Labor Practices 962 Ethical Dilemma: Distant Concerns 1072
Employment Discrimination Law 962
46 International Business Law 1077
Concept Review: Federal Employment Discrimination
The International Environment 1078
Laws 977
Jurisdiction over Actions of Foreign Governments 1080
Transacting Business Abroad 1083
Going Global: Do the antidiscrimination laws apply
outside the United States? 979
Forms of Multinational Enterprises 1091
Employee Protection 979
Ethical Dilemma: Who May Seek Economic
Ethical Dilemma: What (Unwritten) Right to
Shelter Under U.S. Trade Law? 1094
a Job Does an Employee Have? 985
42 Antitrust 992
Sherman Antitrust Act 993
Going Global: Do the antitrust laws apply outside the PART X
United States? 994
Concept Review: Restraints of Trade Under Sherman Property 1099
Act 1002
Clayton Act 1005 47 Introduction to Property, Property Insurance,
Robinson-Patman Act 1008
Federal Trade Commission Act 1010
Bailments, and Documents of Title 1100
Ethical Dilemma: When Is an Agreement INTRODUCTION TO PROPERTY AND PERSONAL
Anticompetitive? 1011 PROPERTY 1101
Kinds of Property 1101
43 Accountants’ Legal Liability 1016 Concept Review: Kinds of Property 1104
Common Law 1016 Transfer of Title to Personal Property 1105
Federal Securities Law 1020 PROPERTY INSURANCE 1108
Applying the Law: Accountants’ Legal Liability 1023 Fire and Property Insurance 1108
Concept Review: Accountants’ Liability Under Federal Nature of Insurance Contracts 1109
Securities Law 1024 Business Law in Action 1110
BAILMENTS AND DOCUMENTS OF TITLE
44 Consumer Protection 1029 BAILMENTS 1113
State and Federal Consumer Protection Agencies 1030 Bailments 1113
Consumer Purchases 1035 Concept Review: Duties in a Bailment 1117
xii Table of Contents
Documents of Title 1118
Ethical Dilemma: Who Is Responsible for the
APPENDICES
Operation of Rental Property? 1121
Appendix A
48 Interests in Real Property 1130
Freehold Estates 1130 The Constitution of the United States
Leasehold Estates 1132 of America A-2
Concept Review: Freehold Estates 1133
Concurrent Ownership 1139 Appendix B
Nonpossessory Interests 1141
Concept Review: Rights of Concurrent Owners 1142 Uniform Commercial Code
Applying the Law: Interests in Real Property 1144 (Selected Provisions) B-1
49 Transfer and Control of Real Property 1150
TRANSFER OF REAL PROPERTY 1151 Appendix C
Contract of Sale 1151
Deeds 1153 Dictionary of Legal Terms C-1
Secured Transactions 1154
Adverse Possession 1156 Index I-1
PUBLIC AND PRIVATE CONTROLS 1156
Zoning 1156
Eminent Domain 1157
Private Restrictions on Land Use 1159
Ethical Dilemma: Where Should Cities House
the Disadvantaged? 1162
50 Trusts and Wills 1168
TRUSTS 1168
Types of Trusts 1169
Creation of Trusts 1171
Concept Review: Allocation of Principal and
Income 1174
Termination of a Trust 1175
DECEDENT’S ESTATES 1175
Wills 1175
Intestate Succession 1181
Administration of Estates 1182
Ethical Dilemma: When Should Life Support
Cease? 1182
TABLE OF CASES
Cases shown in red are new to this edition. Burlington Northern & Santa Fe Railway Company
v. White, 963
Burningham v. Westgate Resorts, Ltd., 236
A
A.E. Robinson Oil Co., Inc. v. County Forest Products,
Inc., 638
C
Caldwell v. Bechtel, Inc., 12
Alcoa Concrete & Masonry v. Stalker Bros., 266 Cappo v. Suda, 1161
Aldana v. Colonial Palms Plaza, Inc., 332 Carter v. Tokai Financial Services, Inc., 388
Alexander v. FedEx Ground Package System, Inc., 598 Catamount Slate Products, Inc. v. Sheldon, 204
Alpert v. 28 Williams St. Corp., 814 Chapa v. Traciers & Associates, 849
Alzado v. Blinder, Robinson & Company, Inc., 705 Christy v. Pilkinton, 356
American Manufacturing Mutual Insurance Company Coastal Leasing Corporation v. T-Bar S Corporation,
v. Tison Hog Market, Inc., 856 489
American Needle, Inc. v. National Football League, Cohen v. Mirage Resorts, Inc., 819
995 Commerce & Industry Insurance Company v. Bayer
Anderson v. McOskar Enterprises, Inc., 273 Corporation, 397
Any Kind Checks Cashed, Inc. v. Talcott, 530 Conklin Farm v. Leibowitz, 682
Arrowhead School District No. 75, Park County, Connes v. Molalla Transport System, Inc., 631
Montana v. Klyap, 369 Construction Associates, Inc. v. Fargo Water
Association for Molecular Pathology v. Myriad Equipment Co., 392
Genetics, Inc., 951 Conway v. Cutler Group, Inc., 1152
Cooke v. Fresh Express Foods Corporation, Inc., 822
B Cooperative Centrale Raiffeisen-Boerenleenbank B.A.
v. Bailey, 511
Bagley v. Mt. Bachelor, Inc., 275
Beam v. Stewart, 799 Coopers & Lybrand v. Fox, 736
Belden, Inc. v. American Electronic Components, Inc., Cox Enterprises, Inc. v. Pension Benefit Guaranty
448 Corporation, 765
Berardi v. Meadowbrook Mall Company, 226
Berg v. Traylor, 287
Bigelow-Sanford, Inc. v. Gunny Corp., 484 D
Border State Bank of Greenbush v. Bagley Livestock Dahan v. Weiss, 313
Exchange, Inc., 836 Davis v. Watson Brothers Plumbing, Inc., 554
Borton v. Forest Hills Country Club, 1142 Denney v. Reppert, 250
Bouton v. Byers, 193 Department of Revenue of Kentucky, et al. v. Davis, 79
Brehm v. Eisner, 795 Detroit Lions, Inc. v. Argovitz, 606
Brentwood Academy v. Tennessee Secondary School DiLorenzo v. Valve & Primer Corporation, 256
Athletic Association, 77 Dixon, Laukitis and Downing v. Busey Bank, 572
Brown v. Board of Education of Topeka, 89 Dodge v. Ford Motor Co., 766
Brown v. Entertainment Merchants Association, 84 Donahue v. Rodd Electrotype Co., Inc., 787
Bulova Watch Company, Inc. v. K. Hattori & Co., 1092 Dunnam v. Burns, 268
xiii
xiv Table of Cases
In re Magness, 331
E In re The Score Board, Inc., 289
Eastman Kodak Co. v. Image Technical Services, Inc., In the Matter of 1545 Ocean Ave., LLC, 718
1001 In the Matter of the Estate of Rowe, 1172
Ed Nowogroski Insurance, Inc. v. Rucker, 938 Inter-Tel Technologies, Inc. v. Linn Station Properties,
Edmonson v. Leesville Concrete Company, Inc., 59 LLC, 742
Enea v. The Superior Court of Monterey County, 664
Environmental Protection Agency v. EME Homer City
Generation, L. P., 1058
Ernst & Ernst v. Hochfelder, 1021
J
Jasdip Properties SC, LLC v. Estate of Richardson, 196
Estate of Countryman v. Farmers Coop. Ass’n, 716
Jasper v. H. Nizam, Inc., 980
Jenkins v. Eckerd Corporation, 317
F Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich

LPA, 1046
F. Hoffmann-La Roche Ltd v. Empagran S.A., 1086
Faragher v. City of Boca Raton, 971
FCC v. Fox Television Stations, Inc., 105
Federal Ins. Co. v. Winters, 337
K
Kalas v. Cook, 311
Federal Trade Commission v. Cyberspace.com LLC, 1031
Keeney v. Keeney, 1170
Ferrell v. Mikula, 138
Kelo v. City of New London, 1158
First State Bank of Sinai v. Hyland, 296
Kelso v. Bayer Corporation, 460
Fox v. Mountain West Electric, Inc., 190
Kenco Homes, Inc. v. Williams, 478
Frank B. Hall & Co., Inc. v. Buck, 140
Keser v. Chagnon, 293
Freeman v. Quicken Loans, Inc., 1042
Kimbrell’s of Sanford, Inc. v. KPS, Inc., 842
Furlong v. Alpha Chi Omega Sorority, 414
King v. VeriFone Holdings, Inc., 782
Kirtsaeng v. John Wiley & Sons, Inc., 947
G Klein v. Pyrodyne Corporation, 173
Korzenik v. Supreme Radio, Inc., 528
Gaddy v. Douglass, 610
Galler v. Galler, 780
Greene v. Boddie-Noell Enterprises, Inc., 461
L
Leegin Creative Leather Products, Inc. v. PSKS, Inc., 998
H Lefkowitz v. Great Minneapolis Surplus Store, Inc., 206
Leibling, P.C. v. Mellon PSFS (NJ) National
Hadfield v. Gilchrist, 1114
Hamilton v. Lanning, 886 Association, 576
Harold Lang Jewelers, Inc. v. Johnson, 731 Louisiana v. Hamed, 124
Harris v. Looney, 740 Love v. Hardee’s Food Systems, Inc., 163
Harris v. Viegelahn, 884
Heinrich v. Titus-Will Sales, Inc., 433
Heritage Bank v. Bruha, 507 M
Herron v. Barnard, 1102 Mackay v. Four Rivers Packing Co., 308
Hessler v. Crystal Lake Chrysler-Plymouth, Inc., 421 Madison Square Garden Corp., Ill. v. Carnera, 375
Hochster v. De La Tour, 353 Mark Line Industries, Inc. v. Murillo Modular Group,
Home Rentals Corp. v. Curtis, 1136 Ltd., 551
Hospital Corp. of America v. FTC, 1006 Maroun v. Wyreless Systems, Inc., 232
Household Credit Services, Inc. v. Pfennig, 1039 Martin v. Melland’s Inc., 439
Matrixx Initiatives, Inc. v. Siracusano, 921
Mayo Foundation for Medical Education and Research
I v. United States, 97
In re KeyTronics, 657 McDowell Welding & Pipefitting, Inc. v. United States
In re L. B. Trucking, Inc., 451 Gypsum Co., 354
Table of Cases xv
Merritt v. Craig, 378
Metropolitan Life Insurance Company v. RJR Nabisco, R
Inc., 754 RadLAX Gateway Hotel, LLC v. Amalgamated Bank,
Michael Silvestri v. Optus Software, Inc., 348 882
Midwest Hatchery v. Doorenbos Poultry, 491 Ray v. Alad Corporation, 810
Miller v. McDonald’s Corporation, 600 Reed v. King, 233
Mims v. Arrow Financial Services, LLC, 51 Republic of Argentina v. NML Capital, Ltd., 1081
Mirvish v. Mott, 1106 Ricci v. Destefano, 968
Montana Food, LLC v. Todosijevic, 712 RNR Investments Limited Partnership v. Peoples First
Moore v. Kitsmiller, 170 Community Bank, 678
Morrison v. National Australia Bank Ltd., 1088 Robertson v. Jacobs Cattle Co., 685
Moulton Cavity & Mold Inc. v. Lyn-Flex Ind., 410 Robinson v. Durham, 432
Mountain Peaks Financial Services, Inc. v. Roth-Steffen, Rosewood Care Center, Inc., v. Caterpillar, Inc., 306
333 Rubin v. Yellow Cab Company, 634
Murphy v. BDO Seidman, LLP, 1018 Ryan v. Friesenhahn, 158
N S
NationsBank of Virginia, N.A. v. Barnes, 509 Sackett v. Environmental Protection Agency, 104
Neugebauer v. Neugebauer, 228 Schoenberger v. Chicago Transit Authority, 628
New England Rock Services, Inc. v. Empire Paving, Schreiber v. Burlington Northern, Inc., 929
Inc., 251 Securities and Exchange Commission v. Edwards, 901
Nitro-Lift Technologies, L.L.C. v. Howard, 65 Seigel v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
Northern Corporation v. Chugach Electrical 578
Association, 357 Shawnee Telecom Resources, Inc. v. Brown, 816
Sherrod v. Kidd, 208
Soldano v. O’Daniels, 160
O South Florida Water Management District v.
Miccosukee Tribe of Indians, 1062
Omnicare, Inc. v. Laborers District Council
Speelman v. Pascal, 329
Construction Industry Pension Fund, 911
State of Qatar v. First American Bank of Virginia, 523
O’Neil v. Crane Co., 458
State of South Dakota v. Morse, 121
Osprey L.L.C. v. Kelly-Moore Paint Co., Inc., 216
Steinberg v. Chicago Medical School, 188
Stine v. Stewart, 339
P Strougo v. Bassini, 784
Palsgraf v. Long Island Railroad Co., 166
Palumbo v. Nikirk, 175
Parker v. Twentieth Century-Fox Film Corp., 58, 371
T
Texaco, Inc. v. Pennzoil, Co., 147
Parlato v. Equitable Life Assurance Society of the
The Hyatt Corporation v. Palm Beach National Bank,
United States, 626
519
Payroll Advance, Inc. v. Yates, 271
Thomas v. Lloyd, 661
People v. Farell, 117
Thor Properties v. Willspring Holdings LLC, 212
Perez v. Mortgage Bankers Ass’n., 99
Toyota Motor Manufacturing, Kentucky, Inc. v.
Petition of Kinsman Transit Co., 167
Williams, 974
Philip Morris USA v. Williams, 134
Travelers Indemnity Co. v. Stedman, 562
Pittsley v. Houser, 390
Triffin v. Cigna Insurance Co., 536
Prestenbach v. Collins, 373
Tucker v. Hayford, 1137
Prine v. Blanton, 1176
xvi Table of Cases
Watson Coatings, Inc. v. American Express Travel

U Related Services, Inc., 534
Union Planters Bank, National Association v. Rogers, 580 Whatley v. Estate of McDougal, 1178
United States v. Bestfoods, 1068 White v. Samsung Electronics, 143
United States v. E. I. du Pont de Nemours & Co., 1003 Williamson v. Mazda Motor of America, Inc., 74
United States v. O’Hagan, 925 Windows, Inc. v. Jordan Panel Systems Corp., 437
Womco, Inc. v. Navistar International Corporation,
V 454
Wood v. Pavlin, 1140
Vance v. Ball State University, 965 World-Wide Volkswagen Corp. v. Woodson, 54
Vanegas v. American Energy Services, 248 Wyler v. Feuer, 708
W Z
Waddell v. L.V.R.V. Inc., 416
Wal-Mart Stores, Inc. v. Samara Brothers, Inc., 942 Zelnick v. Adams, 291
TABLE OF FIGURES
1-1 Law and Morals, 4 10-2 Mutual Assent, 215

1-2 Classification of Law, 4 12-1 Modification of a Preexisting Contract, 253
1-3 Hierarchy of Law, 6 12-2 Consideration, 259
2-1 Kohlberg’s Stages of Moral Development, 19 14-1 Incapacity: Minors, Nonadjudicated
2-2 The Stakeholder Model, 23 Incompetents, and Intoxicated, 295
2-3 Pharmakon Employment, 27 15-1 Parol Evidence Rule, 319
2-4 Pharmakon Affirmative Action Program, 28 17-1 Discharge of Contracts, 359
2-5 Mykon R&D Expenditures, 30 18-1 Contract Remedies, 377
2-6 Global Summary of the AIDS Epidemic, 31 19-1 Battle of the Forms, 396
2-7 Regional Statistics for HIV and AIDS End 20-1 Tender of Performance by the Seller, 410
of 2013, 32 20-2 Performance by the Buyer, 418
2-8 Stock Price of Vulcan, Inc. (note irregular 21-1 Void Title, 431
intervals on time axis), 41 21-2 Voidable Title, 432
2-9 Average Daily Volume of Vulcan, Inc., Stock for 21-3 Passage of Risk of Loss in Absence of Breach,
Week (in 1,000s), 42 440
2-10 Purchases of Vulcan Stock by Selected 24-1 Order to Pay: Draft or Check, 503
Executives, 42
24-2 Draft, 503
3-1 Federal Judicial System, 47
24-3 Check, 503
3-2 Circuit Courts of the United States, 48
24-4 Promise to Pay: Promissory Note or Certificate
3-3 State Court System, 49 of Deposit, 504
3-4 Federal and State Jurisdiction, 52 24-5 Note, 504
3-5 Stare Decisis in the Dual Court System, 53 24-6 Certificate of Deposit, 504
3-6 Jurisdiction, 56 25-1 Bearer Paper, 518
3-7 Stages in Civil Procedure, 63 25-2 Negotiation of Bearer and Order Paper, 519
4-1 Separation of Powers: Checks and Balances, 76 25-3 Stolen Order Paper, 519
4-2 Powers of Government, 82 25-4 Placement of Indorsement, 526
5-1 Limits on Administrative Agencies, 103 25-5 Rights of Transferees, 528
7-1 Intent, 136 25-6 Effects of Alterations, 539
8-1 Negligence and Negligence Per Se, 158 25-7 Alteration, 540
8-2 Defenses to a Negligence Action, 170 25-8 Availability of Defenses Against Holders and
9-1 Law Governing Contracts, 186 Holders in Due Course, 541
9-2 Contractual and Noncontractual Promises, 187 25-9 Rights of Holder in Due Course Under the
9-3 Validity of Agreements, 188 Federal Trade Commission Rule, 541
10-1 Duration of Revocable Offers, 214 26-1 Liability on Transfer, 561
xvii
xviii Table of Figures
26-2 Liability Based on Warranty, 562 37-2 Suretyship Relationship, 852
27-1 Bank Collections, 571 37-3 Assumption of Mortgage, 853
27-2 Credit Transaction, 587 37-4 Defenses of Surety and Principal Debtor, 855
28-1 Duties of Principal and Agent, 607 38-1 Collection and Distribution of the Debtor’s
29-1 Contract Liability of Disclosed Principal, 621 Estate, 879
29-2 Contract Liability of Unidentified Principal, 622 39-1 Registration and Exemptions Under the 1933
Act, 905
29-3 Contract Liability of Undisclosed Principal, 623
39-2 Registration and Liability Provisions of the 1933
29-4 Tort Liability, 630
Act, 914
30-1 Business Entities, 649
39-3 Applicability of the 1934 Act, 915
30-2 Tests for Existence of a Partnership, 657
39-4 Parties Forbidden to Trade on Inside Information,
31-1 Contract Liability, 676 924
31-2 Tort Liability, 681 41-1 Charges Filed with the EEOC in 2008–2014, 978
33-1 Promoters’ Preincorporation Contracts Made in 42-1 Sherman Act Violations Yielding a Corporate
the Corporation’s Name, 735 Fine of $300 Million or More, 993
34-1 Issuance of Shares, 759 42-2 Meeting Competition Defense, 1010
34-2 Key Concepts in Legal Restrictions upon 43-1 Accountants’ Liability to Third Parties for
Distributions, 763 Negligent Misrepresentation, 1018
35-1 Management Structure of Corporations: 44-1 Magnuson-Moss Warranty Act, 1036
The Statutory Model, 776
48-1 Assignment Compared with Sublease, 1134
35-2 Management Structure of Typical Closely Held
49-1 Fundamental Rights of Mortgagor and
Corporation, 776
Mortgagee, 1155
35-3 Management Structure of Typical Publicly Held
49-2 Eminent Domain, 1160
Corporation, 776
50-1 Trusts, 1169
35-4 Shareholder Suits, 786
50-2 Per Stirpes and Per Capita, 1181
36-1 Purchase of Shares, 812
37-1 Fundamental Rights of Secured Party and
Debtor, 834
PREFACE
Regulation Section
THE TRADITION CONTINUES I. Ethics, Professional, and Legal Responsibilities
The twelfth edition of Business Law and the Regulation A. Legal Duties and Responsibilities [of Accountants]
of Business continues the tradition of accuracy, com- 1. Common law duties and liability to clients
prehensiveness, and authoritativeness associated with and third parties
its earlier editions. This text covers its subject material 2. Federal statutory liability
in a succinct, nontechnical but authoritative manner, 3. Privileged communications, confidentiality, and
and provides depth sufficient to ensure easy compre- privacy acts
hension by today’s students. II. Business Law
A. Agency
1. Formation and termination
Certified Public Accountant 2. Authority of agents and principals
Preparation 3. Duties and liabilities of agents and principals
This text is designed for use in business law and legal envi- B. Contracts
ronment of business courses generally offered in univer- 1. Formation
sities, colleges, and schools of business and management. 2. Performance
Because of its broad and deep coverage, this text may be 3. Third-party assignments
readily adapted to specially designed courses in business 4. Discharge, breach, and remedies
law or the legal environment of business by assigning and C. Uniform Commercial Code
emphasizing different combinations of chapters. 1. Sales contracts
Furthermore, this text covers the following parts of 2. Negotiable instruments
the CPA Exam: (1) the legal responsibilities and liabil- 3. Secured transactions
ities of accountants section and (2) the corporate gover- 4. Documents of title and title transfer
nance portion of the business environment and D. Debtor-Creditor Relationships
concepts section. See the inside back cover of this text 1. Rights, duties, and liabilities of debtors, cred-
for a listing of the CPA Exam topics covered in this itors, and guarantors
text as well as the chapters covering each topic. 2. Bankruptcy and insolvency
E. Government Regulation of Business
1. Federal securities regulation
Uniform CPA Examination 2. Other federal laws and regulations (antitrust,
Content Specifications copyright, patents, labor, and employment)
The American Institute of CPAs (AICPA) Board of F. Business Structure (Selection of a Business Entity)
Examiners has approved and adopted content specifica- 1. Advantages, disadvantages, implications, and
tion outlines (CSOs) for the four sections of the new constraints
computer-based Uniform CPA Examination: Auditing 2. Formation, operation, and termination
and Attestation, Financial Accounting and Reporting, 3. Financial structure, capitalization, profit and
Regulation, and Business Environment and Concepts. As loss allocation, and distributions
updated, effective January 1, 2016, the CSOs include the 4. Rights, duties, legal obligations, and authority
following topics, which are covered in this textbook: of owners and management
xix
xx Preface
Business Environment and Concepts Regulation A and new disclosure rules clarifying how
Section companies can use social media to disseminate infor-
I. Corporate Governance mation. The Intellectual Property chapter (Chapter
A. Rights, Duties, Responsibilities, Authority, and 40) includes the changes made by the Foreign and
Ethics of the Board of Directors, Officers, and Economic Espionage Penalty Enhancement Act of
Other Employees 2012 to the Economic Espionage Act of 1996. The
For more information, visit www.cpa-exam.org. Environmental Law chapter (Chapter 45) includes
coverage of the EPA’s regulation of greenhouse gases.
The International Business Law chapter (Chapter 46)
Business Ethics Emphasis covers the United Nations Convention on the Law of
The Chapter 2 Business Ethics case studies require stu- the Sea (UNCLOS).
dents to make the value trade-offs that confront busi-
• New Cases. Twenty-nine legal cases are new to
nesspeople in their professional lives. (We gratefully
this edition. (See Table of Cases.) The new cases
acknowledge the assistance of James Leis in writing the
include recent U.S. Supreme Court decisions such as
Mykon’s Dilemma case.) Two-thirds of the chapters also
Nitro-Lift Technologies, L.L.C. v. Howard; Perez v.
contain an Ethical Dilemma, which presents a manage-
Mortgage Bankers Ass’n.; Omnicare, Inc. v. Laborers
rial situation involving ethical issues. A series of ques-
District Council Construction Industry Pension Fund;
tions leads students to explore the ethical dimensions of
Harris v. Viegelahn; Association for Molecular
each situation. We wish to acknowledge and thank the
Pathology v. Myriad Genetics, Inc.; Vance v. Ball
following professors for their contributions in preparing
State University; Environmental Protection Agency v.
the Ethical Dilemmas: Sandra K. Miller, professor of
EME Homer City Generation, L. P.; and Republic of
accounting, taxation, and business law, Widener Univer-
Argentina v. NML Capital, Ltd.
sity, and Gregory P. Cermignano, associate professor of
accounting and business law, Widener University. In • Coverage of Recent U.S. Supreme Court Decisions.
addition, to provide further application of ethics in dif- The Constitutional Law chapter (Chapter 4) discusses
ferent business contexts, an ethics question follows many recent U.S. Supreme Court’s decisions in the cases
cases. These questions are designed to encourage stu- challenging the constitutionality of (1) the Defense of
dents to consider the ethical dimensions of the facts in Marriage Act, (2) a federal statute restricting how
the case or of the legal issue invoked by the facts. much money an individual donor may contribute in
total to all candidates or committees during a politi-
cal cycle, (3) Michigan’s constitutional amendment
banning affirmative action in admissions to the
NEW TO THIS EDITION state’s public universities, and (4) states’ refusal to
• Going Global. A Going Global feature has been license a marriage between two people of the same
added to fifteen chapters (Chapters 1, 3, 6, 9, 15, 19, sex and to recognize a marriage between two people
20, 27, 30, 34, 38, 39, 40, 41, and 42), thus integrat- of the same sex when their marriage was lawfully li-
ing international business law content throughout the censed and performed out of state. The Administra-
text. This feature enables students to consider the tive Law chapter (Chapter 5) discusses the Supreme
international aspects of legal issues as they are cov- Court case making the Patient Protection and Afford-
ered. The International Business Law chapter (Chap- able Care Act’s tax credits available in those states
ter 46) has been retained in its entirety. that have a Federal Exchange. The Employment Law
chapter (Chapter 41) covers the Supreme Court case
• Up-to-Date and Expanded Coverage. The 2012
holding that in disparate-treatment claims, an
amendments to Uniform Commercial Code (UCC) Ar-
employer may not make an applicant’s religious prac-
ticle 4A has been added to Chapter 27. Coverage of
tice, confirmed or otherwise, a factor in employment
limited liability companies has been updated and
decisions.
expanded in Chapter 32. Coverage of benefit corpora-
tions has been added in Chapter 33. Coverage of sure- • Coverage of Restatement of Restitution. Chapters 9,
tyship in Chapter 37 has been updated and expanded. 11, 13, 14, 15, 17, 18, and 50 cover the new Restate-
The Employment Law chapter (Chapter 41) covers ment (Third) of Restitution and Unjust Enrichment.
the Genetic Information Nondiscrimination Act. The • Additional End-of-Chapter Question and Case
chapter on Securities Regulation (Chapter 39) covers Problems. Almost all of the chapters include one or
the U.S. Securities and Exchange Commission’s new more new questions and/or case problems.
Preface xxi
versity of Miami, for her contribution in preparing this
KEY FEATURES feature.
Excerpted Cases Practical Advice

From our long classroom experience, we are of the opin- Each chapter contains a number of statements that
ion that fundamental legal principles can be learned more illustrate how legal concepts covered in that chapter
effectively from text and case materials having at least a can be applied to common business situations.
degree of human interest. Accordingly, we have included
a large number of recent cases, as well as earlier land- Chapter Outcomes
mark cases. All of the cases have the facts and decisions Each chapter begins with a list of learning objectives
summarized for clarity and the opinions edited to pre- for students.
serve the language of the court. Each case is followed by
an interpretation, which explains the significance of the Enhanced Readability
case and how it relates to the textual material.
To improve readability throughout the text, all
unnecessary “legalese” has been eliminated, while nec-
Case Critical Thinking Questions essary legal terms have been printed in boldface and
Each case is also followed by a critical thinking ques- clearly defined, explained, and illustrated. Each chapter
tion to encourage students to examine the legal policy is carefully organized with sufficient levels of subordi-
or reasoning behind the legal principle of the case or to nation to enhance the accessibility of the material. The
apply it in a real-world context. text is enriched by numerous illustrative hypothetical
and case examples that help students relate material to
Ample Illustrations real-life experiences.
We have incorporated more than 220 classroom-tested
figures, tables, diagrams, concept reviews, and chapter Classroom-Proven End-of-
summaries. The figures, tables, and diagrams help stu- Chapter Materials
dents conceptualize the many abstract concepts in the
Classroom-proven questions and case problems appear
law. The Concept Reviews not only summarize prior
at the end of the chapters to test students’ understand-
discussions but also indicate relationships between dif-
ing of major concepts. We have used the questions
ferent legal rules. Moreover, each chapter ends with a
(based on hypothetical situations) and the case prob-
summary in the form of an annotated outline of the
lems (taken from reported court decisions) in our own
entire chapter, including key terms.
classrooms and consider them excellent stimulants to
classroom discussion. Students, in turn, have found the
Applying the Law questions and case problems helpful in enabling them
In a number of chapters, we have included a feature to apply the basic rules of law to factual situations.
that provides a systematic legal analysis of a single con-
cept presented in that chapter. It begins with the facts
of a hypothetical case, followed by an identification of
Taking Sides
the broad legal issue presented by those facts. We then Each chapter—except Chapters 1 and 2—has an end-of-
state the rule—or applicable legal principles, including chapter feature that requires students to apply critical
definitions, which aid in resolving the legal issue—and thinking skills to a case-based fact situation. Students
apply it to the facts. Finally we state a legal conclusion are asked to identify the relevant legal rules and develop
or decision in the case. We wish to acknowledge and arguments for both parties to the dispute. In addition,
thank Professor Ann Olazabal, University of Miami, students are asked to explain how they think a court
for her contribution in preparing this feature. would resolve the dispute.
Business Law in Action Pedagogical Benefits

Classroom use and study of this book should provide
A number of chapters include a scenario that illustrates
students with the following benefits and skills:
the application of legal concepts in the chapter to busi-
ness situations that commonly arise. We wish to 1. Perception and appreciation of the scope, extent,
acknowledge and thank Professor Ann Olazabal, Uni- and importance of the law.
xxii Preface
R
V
2. Basic knowledge of the fundamental concepts, principles, • PowerPoint Slides clarify course content and guide
and rules of law that apply to business transactions. student note-taking during lectures.
3. Knowledge of the function and operation of courts • The Test Bank contains thousands of true/false,
and government administrative agencies. multiple-choice, and essay questions. The questions
4. Ability to recognize the potential legal problems that vary in levels of difficulty and meet a full range of
may arise in a doubtful or complicated situation and tagging requirements so that instructors can tailor
the necessity of consulting a lawyer and obtaining their testing to meet their specific needs.
competent professional legal advice. • Cengage Learning Testing Powered by Cognero is
5. Development of analytical skills and reasoning power. a flexible, online system that allows you to:
• author, edit, and manage test bank content
from multiple Cengage Learning solutions
ADDITIONAL COURSE TOOLS • create multiple test versions in an instant
• deliver tests from your LMS, your classroom
MindTap or wherever you want
New for Business Law and the Regulation of Business,
Twelfth Edition, MindTap is a personalized teaching ex- Business Law Digital Video
perience with relevant assignments that guide students Library
to analyze, apply, and improve thinking, allowing you Featuring more than ninety video clips that spark class
to measure skills and outcomes with ease. Personalized discussion and clarify core legal principles, the Business
teaching becomes yours through a pre-built Learning Path Law Digital Video Library is organized into five series:
designed with key student objectives and your syllabus in Legal Conflicts in Business (includes specific modern
mind. The customizable online course allows you to con- business and e-commerce scenarios); Ask the Instructor
trol what students see and when they see it. Relevant read- (presents straightforward explanations of concepts for
ings, multimedia, and activities within the learning path student review); Drama of the Law (features classic
intuitively guide students up the levels of learning to (1) business scenarios that spark classroom participation);
Prepare, (2) Engage, (3) Apply and (4) Analyze business Real-World Legal (presents legal scenarios encountered
law content. These activities are organized in a logical pro- in real businesses); and Business Ethics in Action
gression to help elevate learning, promote critical thinking (presents ethical dilemmas in business scenarios). For
skills and produce better outcomes. Analytics and reports more information about the Digital Video Library, visit
provide a snapshot of class progress, time in course, www.cengage.com/blaw/dvl.
engagement and completion rates.
Instructors can personalize the experience by custom-
izing authoritative Cengage Learning content and learn-
ing tools. MindTap offers instructors the ability to add ACKNOWLEDGMENTS
their own content in the Learning Path with apps that We express our gratitude to the following professors
integrate into the MindTap framework seamlessly with for their helpful comments on this edition of the book:
Learning Management Systems (LMS).
Larry Cohen, Oakton Community College
Larry DiMatteo, University of Florida
Instructor’s Resources
J. Royce Fichtner, Drake University
Access instructor resources by going to login.cengage.
com, logging in with your faculty account username Shara Galloway, Maryville College
and password, and searching ISBN 9781305509559 to Matthew S. Geimer, University of Wisconsin–Green Bay
add instructor resources to your account “Bookshelf.” Kyle Kaplan, Carson-Newman University
• The Instructor’s Manual prepared by Richard A. Dianne McDonald, Bucknell University
Mann, Barry S. Roberts, and Beth D. Woods con- Jeff Nielsen, University of Utah
tains chapter outlines; teaching notes; answers to the
Virginia Rich, Caldwell College
Questions and Case Problems, and Taking Sides;
and part openers that provide suggested research Harold Silverman, Bridgewater State University
and outside activities for students. Samantha Sindles, Oakton Community College
Preface xxiii
Roscoe B. Stephenson, III, Virginia Military Institute Douglas E. McClelland, Montana State University;
Dale Thompson, University of St. Thomas Brad McDonald, Northern Illinois University; Sharlene
McEvoy, Fairfield University; Russell A. Meade, Vir-
Patricia Wall, Middle Tennessee State University
ginia Tidewater Community College; Radlyn Mendoza,
We also are grateful to those who provided us with Old Dominion University; Debbie L. Mescon, Salisbury
comments regarding earlier editions of the book: State University; D. Lynn Morison, Michigan State Uni-
versity; Gregory C. Mosier, Oklahoma State University;
William Dennis Ames, Indiana University–Purdue;
Megan Mowrey, Clemson University; Darwin H.
Denise Bartles, Missouri Western State College; Joseph
Mueller, Tacoma Community College; Lee J. Ness,
Boucher, University of Wisconsin–Madison; J. Lenora
University of North Dakota; Ann M. Olazabal, Univer-
Bresler, University of South Florida; Susan Cabral,
sity of Miami; Robert L. Peace, North Carolina State
Salisbury State University; Elizabeth A. Cameron, Alma
University; Neal A. Phillips, University of Delaware;
College; Harriet Caplan, Fort Hays State University;
James L. Porter, University of New Mexico; Frank Pri-
Ronald R. Caplette, Western Piedmont Community
miani, Green River Community College; Michael
College; Theresa Clark, Methodist College; David
Rainey, Pepperdine University; Daniel L. Reynolds, Mid-
Cooper, Fullerton College; Patricia DeFrain, Glendale
dle Tennessee State University; Rhonda Ross, Saginaw
College; James Doering, University of Wisconsin–Green
Valley State University; Ellen Blumberg Rubert, College
Bay; Bruce Farrel Dorn, Oakton Community College;
of Lake County; Linda B. Samuels, George Mason Uni-
Kurt E. Erickson, Southwestern Michigan College;
versity; Kurt Saunders, California State University–Nor-
Vincent A. Errante, University of North Dakota;
thridge; Pamella A. Seay, Edison Community College;
J. Royce Fichtner, Drake University; Robert A. Fidrych,
Harold Silverman, Bridgewater State College; Kirke
University of Wisconsin–Platteville; Robert Freer, The
Snyder, Regis University; Beverly Stanis, Oakton Commu-
Citadel; Steven J. Green, University of California–
nity College; Dorothy L. Steele, Montclair State College;
Berkeley; Walter Griggs, Virginia Commonwealth Uni-
Stanley E. Stettz, Lafayette College; Rene Thomas, Holyoke
versity; Gary A. Hanson, Pepperdine University; Bruce
Community College; Edward L. Welsh, Jr., Mesa Commu-
L. Harms, University of Wisconsin–Madison; Charles
nity College; John T. Wendt, University of St. Thomas;
Hartmann, Wright State University; Gregory T. Hinton,
Keith E. Werner, Wesleyan College; Scott White, University
Fairmont State College; Clay Hipp, New Mexico State
of Wisconsin–Platteville; John G. Williams, Northwestern
University; Georgia L. Holmes, Mankato State Univer-
State University; Raymond Wyrsch, Catholic University;
sity; Robert J. Hotopp, Indiana University–Southeast;
Joseph Zavaglia, Jr., Brookdale Community College; and
Neely S. Inlow, Lynchburg College; Uldis E. Inveiss,
Raymond C. Zumoff, Camden County College.
Carroll College; Susan S. Jarvis, Pan American Univer-
sity; Susan Glatthorn Johnson, University of South We express our thanks and appreciation to Debra
Florida; Catherine Jones-Rikkers, Grand Valley State Corvey for administrative assistance. For their support,
University; John R. Jozwiak, Loyola University of Chi- we extend our thanks to Karlene Fogelin Knebel and
cago; Jack E. Karns, East Carolina University; Robert Joanne Erwick Roberts. And we are grateful to Vicky
H. Kieserman, Philadelphia College of Textiles and Sci- True-Baker, Sarah Blasco, and Ann Borman of Cengage
ence; Karl H. Kline, Lafayette College; Frank J. Kolb, Learning for their invaluable assistance and cooperation
Jr., Quinnipiac University; Ruth B. Kraft, Audrey in connection with the preparation of this text.
Cohen College; Richard G. Kunkel, University of This text is dedicated also to our children Lilli-Marie
St. Thomas; Logan Langwith, College of St. Thomas; Knebel Mann, Justin Erwick Roberts, and Matthew
Vonda Laughlin, Carson-Newman College; Anne Charles Roberts.
Lawton, Miami University; Michael Magasin, Pepper-
Richard A. Mann
dine University; Stephen M. Maple, University of India-
napolis; Keith A. Maxwell, University of Puget Sound; Barry S. Roberts
PART I
INTRODUCTION
TO LAW
AND ETHICS
CISG
CHAPTER 1
Introduction to Law
CHAPTER 2
Business Ethics
CHAPTER 1
INTRODUCTION TO LAW
The life of the law has not been logic; it has been experience.
OLIVER WENDELL HOLMES, THE COMMON LAW (1881)
CHAPTER OUTCOMES
After reading and studying this chapter, you should be able to:
1. Identify and describe the basic functions of law. 4. Identify and describe the sources of law.
2. Distinguish between (a) law and justice and 5. Explain the principle of stare decisis.
(b) law and morals.
3. Distinguish between (a) substantive and
procedural law, (b) public and private law,
and (c) civil and criminal law.
L
aw concerns the relations between individuals as either directly or indirectly. Law is, in part, prohibitory:
such relations affect the social and economic order. certain acts must not be committed. For example, one
It is both the product of civilization and the means must not steal; one must not murder. Law is also partly
by which civilization is maintained. As such, law reflects mandatory: certain acts must be done or be done in a
the social, economic, political, religious, and moral phi- prescribed way. Thus, taxes must be paid; corporations
losophy of society. must make and file certain reports with state or federal
Law is an instrument of social control. Its function is authorities; traffic must keep to the right. Finally, law
to regulate, within certain limitations, human conduct is permissive: certain acts may be done. For instance,
and human relations. Accordingly, the laws of the one may or may not enter into a contract; one may or
United States affect the life of every U.S. citizen. At the may not dispose of one’s estate by will.
same time, the laws of each state influence the life of Because the areas of law are so highly interrelated,
each of its citizens and the lives of many noncitizens as you will find it helpful to begin the study of the differ-
well. The rights and duties of all individuals, as well as ent areas of business law by first considering the na-
the safety and security of all people and their property, ture, classification, and sources of law. This will enable
depend on the law. you not only to understand each specific area of law
The law is pervasive. It permits, forbids, or regulates better but also to understand its relationship to other
practically every human activity and affects all persons areas of law.
Chapter 1 Introduction to Law 3
resolution, protection of property, and preservation of
NATURE OF LAW [1-1] the state.
The law has evolved slowly, and it will continue to Disputes, which arise inevitably in any modern soci-
change. It is not a pure science based on unchanging ety, may involve criminal matters, such as theft, or non-
and universal truths. Rather, it results from a continu- criminal matters, such as an automobile accident.
ous striving to develop a workable set of rules that bal- Because disputes threaten social stability, the law has
ance the individual and group rights of a society. established an elaborate and evolving set of rules to
resolve them. In addition, the legal system has instituted
societal remedies, usually administered by the courts, in
Definition of Law [1-1a] place of private remedies such as revenge.
Scholars and citizens in general often ask a fundamen- A second crucial function of law is to protect the
tal but difficult question regarding law: what is it? private ownership of property and to assist in the mak-
Numerous philosophers and jurists (legal scholars) have ing of voluntary agreements (called contracts) regarding
attempted to define it. American jurists and Supreme exchanges of property and services. Accordingly, a sig-
Court Justices Oliver Wendell Holmes and Benjamin nificant portion of law, as well as this text, involves
Cardozo defined law as predictions of the way in which property and its disposition, including the law of prop-
a court will decide specific legal questions. The English erty, contracts, sales, commercial paper, and business
jurist William Blackstone, on the other hand, defined associations.
law as “a rule of civil conduct prescribed by the A third essential function of the law is preservation
supreme power in a state, commanding what is right, of the state. In our system, law ensures that changes in
and prohibiting what is wrong.” political structure and leadership are brought about by
Because of its great complexity, many legal scholars political action, such as elections, legislation, and refer-
have attempted to explain the law by outlining its enda, rather than by revolution, sedition, and rebellion.
essential characteristics. Roscoe Pound, a distinguished
American jurist and former dean of the Harvard Law
School, described law as having multiple meanings: Law and Morals [1-1c]
Although moral concepts greatly influence the law,
First we may mean the legal order, that is, the regime of morals and law are not the same. You might think of
ordering human activities and relations through systematic them as two intersecting circles (see Figure 1-1). The
application of the force of politically organized society, or area common to both circles includes the vast body of
through social pressure in such a society backed by such ideas that are both moral and legal. For instance, “Thou
force. We use the term “law” in this sense when we speak shall not kill” and “Thou shall not steal” are both
of “respect for law” or for the “end of law.” moral precepts and legal constraints.
Second we may mean the aggregate of laws or legal On the other hand, the part of the legal circle that does
precepts; the body of authoritative grounds of judicial and not intersect the morality circle includes many rules of law
administrative action established in such a society. We that are completely unrelated to morals, such as the rules
may mean the body of received and established materials stating that you must drive on the right side of the road
on which judicial and administrative determinations pro- and that you must register before you can vote. Likewise,
ceed. We use the term in this sense when we speak of the part of the morality circle that does not intersect the
“systems of law” or of “justice according to law.” legal circle includes moral precepts not enforced by legal
Third we may mean what Justice Cardozo has happily sanctions, such as the idea that you should not silently
styled “the judicial process.” We may mean the process of stand by and watch a blind man walk off a cliff or that
determining controversies, whether as it actually takes you should provide food to a starving child.
place, or as the public, the jurists, and the practitioners in
the courts hold it ought to take place.
Law and Justice [1-1d]
Law and justice represent separate and distinct con-
Functions of Law [1-1b] cepts. Without law, however, there can be no justice.
At a general level the primary function of law is to Although defining justice is at least as difficult as defin-
maintain stability in the social, political, and economic ing law, justice generally may be defined as the fair,
system while simultaneously permitting change. The equitable, and impartial treatment of the competing
law accomplishes this basic function by performing interests and desires of individuals and groups with due
a number of specific functions, among them dispute regard for the common good.
4 Introduction to Law and Ethics Part I
FIGURE 1-1
Law and Morals
Law Morals
“You must drive “Thou shall “You should not
on the right side not kill” silently stand by and
of the road” watch a blind man
walk off a cliff”
On the other hand, law is no guarantee of justice. criminal. See Figure 1-2, which illustrates a classifica-
Some of history’s most monstrous acts have been com- tion of law.
mitted pursuant to “law.” Examples include the actions Basic to understanding these classifications are the
of Nazi Germany during the 1930s and 1940s and the terms right and duty. A right is the capacity of a per-
actions of the South African government under apart- son, with the aid of the law, to require another person
heid from 1948 until 1994. Totalitarian societies often or persons to perform, or to refrain from performing,
have shaped formal legal systems around the atrocities a certain act. Thus, if Alice sells and delivers goods to
they have sanctioned. Bob for the agreed price of $500 payable at a certain
date, Alice is capable, with the aid of the courts, of
enforcing the payment by Bob of the $500. A duty is
the obligation the law imposes upon a person to per-
CLASSIFICATION OF LAW [1-2] form, or to refrain from performing, a certain act.
Because the subject is vast, classifying the law into cate- Duty and right are correlatives: no right can rest upon
gories is helpful. Though a number of categories are one person without a corresponding duty resting upon
possible, the most useful ones are (1) substantive and some other person, or in some cases upon all other
procedural, (2) public and private, and (3) civil and persons.
FIGURE 1-2
Constitutional Law
Classification of Law Public Law Criminal Law
Administrative Law
Substantive Law
Torts
Contracts
Law Private Law Sales
Commercial Paper
Agency
Partnerships
Procedural Law Corporations
Property
Substantive and Procedural (the plaintiff) has the burden of proof, which the plain-
tiff must sustain by a preponderance (greater weight) of
Law [1-2a] the evidence. The purpose of the civil law is to compen-
Substantive law creates, defines, and regulates legal sate the injured party, not, as in the case of criminal
rights and duties. Thus, the rules of contract law that law, to punish the wrongdoer. The principal forms of
determine a binding contract are rules of substantive relief the civil law affords are a judgment for money
law. On the other hand, procedural law sets forth the damages and a decree ordering the defendant to perform
rules for enforcing those rights that exist by reason of a specified act or to desist from specified conduct.
the substantive law. Thus, procedural law defines the A crime is any act prohibited or omission required by
method by which to obtain a remedy in court. public law in the interest of protecting the public and
made punishable by the government in a judicial pro-
Public and Private Law [1-2b] ceeding brought (prosecuted) by it. The government must
Public law is the branch of substantive law that deals prove criminal guilt beyond a reasonable doubt, which is
with the government’s rights and powers and its rela- a significantly higher burden of proof than that required
tionship to individuals or groups. Public law consists of in a civil action. Crimes are prohibited and punished on
constitutional, administrative, and criminal law. Private the grounds of public policy, which may include the safe-
law is that part of substantive law governing individu- guarding of government, human life, or private property.
als and legal entities (such as corporations) in their rela- Additional purposes of criminal law include deterrence
tionships with one another. Business law is primarily and rehabilitation. See Concept Review 1-1 for a com-
private law. parison of civil and criminal law.
Civil and Criminal Law [1-2c]

The civil law defines duties, the violation of which con- SOURCES OF LAW [1-3]
stitutes a wrong against the party injured by the viola- The sources of law in the U.S. legal system are the fed-
tion. In contrast, the criminal law establishes duties, the eral and state constitutions, federal treaties, interstate
violation of which is a wrong against the whole commu- compacts, federal and state statutes and executive
nity. Civil law is a part of private law, whereas criminal orders, the ordinances of countless local municipal gov-
law is a part of public law. (The term civil law should ernments, the rules and regulations of federal and state
be distinguished from the concept of a civil law system, administrative agencies, and an ever-increasing volume
which is discussed later in this chapter.) In a civil action of reported federal and state court decisions.
the injured party sues to recover compensation for the The supreme law of the land is the U.S. Constitution,
damage and injury sustained as a result of the defend- which provides in turn that federal statutes and treaties
ant’s wrongful conduct. The party bringing a civil action shall be paramount to state constitutions and statutes.
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
Federal legislation is of great significance as a source of the case law developed by its judiciary. Likewise, rules
law. Other federal actions having the force of law are and regulations of state administrative agencies have
executive orders by the President and rules and regula- the force of law, as do executive orders issued by the
tions set by federal administrative officials, agencies, and governors of most states. In addition, cities, towns, and
commissions. The federal courts also contribute consid- villages have limited legislative powers to pass ordinan-
erably to the body of law in the United States. ces and resolutions within their respective municipal
The same pattern exists in every state. The para- areas. See Figure 1-3, which illustrates this hierarchy.
mount law of each state is contained in its written con-
stitution. (Although a state constitution cannot deprive
citizens of federal constitutional rights, it can guarantee Constitutional Law [1-3a]
rights beyond those provided in the U.S. Constitution.) A constitution—the fundamental law of a particular level
State constitutions tend to be more specific than the of government—establishes the governmental structure
U.S. Constitution and, generally, have been amended and allocates power among governmental levels, thereby
more frequently. Subordinate to the state constitution defining political relationships. One of the fundamental
are the statutes enacted by the state’s legislature and principles on which our government is founded is that of
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
separation of powers. As incorporated into the U.S. Con- (“to stand by the decisions”). Under the principle of stare
stitution, this means that government consists of three dis- decisis, courts adhere to and rely on rules of law that
tinct and independent branches—the federal judiciary, the they or superior courts relied on and applied in prior sim-
Congress, and the executive branch. ilar decisions. Judicial decisions thus have two uses: (1) to
A constitution also restricts the powers of government determine with finality the case currently being decided
and specifies the rights and liberties of the people. For and (2) to indicate how the court will decide similar cases
example, the Constitution of the United States not only in the future. Stare decisis does not, however, preclude
specifically states what rights and authority are vested in courts from correcting erroneous decisions or from choos-
the national government but also specifically enumerates ing among conflicting precedents. Thus, the doctrine
certain rights and liberties of the people. Moreover, the allows sufficient flexibility for the common law to change.
Ninth Amendment to the U.S. Constitution makes it The strength of the common law is its ability to adapt to
clear that this enumeration of rights does not in any change without losing its sense of direction.
way deny or limit other rights that the people retain.
All other law in the United States is subordinate to Equity As the common law developed in England, it
the federal Constitution. No law, federal or state, is became overly rigid and beset with technicalities. As a
valid if it violates the federal Constitution. Under the consequence, in many cases no remedies were provided
principle of judicial review, the Supreme Court of the because the judges insisted that a claim must fall within
United States determines the constitutionality of all laws. one of the recognized forms of action. Moreover,
courts of common law could provide only limited rem-
edies; the principal type of relief obtainable was a mon-
Judicial Law [1-3b] etary judgment. Consequently, individuals who could
The U.S. legal system, a common law system like the sys- not obtain adequate relief from monetary awards began
tem first developed in England, relies heavily on the judi- to petition the king directly for justice. He, in turn,
ciary as a source of law and on the adversary system for came to delegate these petitions to his chancellor.
settling disputes. In an adversary system the parties, not Gradually, there evolved what was in effect a new
the court, must initiate and conduct litigation. This and supplementary system of needed judicial relief for
approach is based on the belief that the truth is more those who could not receive adequate remedies through
likely to emerge from the investigation and presentation the common law. This new system, called equity, was
of evidence by two opposing parties, both motivated by administered by a court of chancery presided over by
self-interest, than from judicial investigation motivated the chancellor. The chancellor, deciding cases on “equity
only by official duty. In addition to the United States and and good conscience,” regularly provided relief where
England, the common law system is used in other Eng- common law judges had refused to act or where the
lish-speaking countries, including Canada and Australia. remedy at law was inadequate. Thus, there grew up, side
In distinct contrast to the common law system are by side, two systems of law administered by different tri-
civil law systems, which are based on Roman law. Civil bunals, the common law courts and the courts of equity.
law systems depend on comprehensive legislative enact- An important difference between common law and eq-
ments (called codes) and an inquisitorial system of uity is that the chancellor could issue a decree, or order,
determining disputes. In the inquisitorial system, the ju- compelling a defendant to do, or refrain from doing, a
diciary initiates litigation, investigates pertinent facts, specified act. A defendant who did not comply with this
and conducts the presentation of evidence. The civil order could be held in contempt of court and punished
law system prevails in most of Europe, Scotland, the by fine or imprisonment. This power of compulsion avail-
state of Louisiana, the province of Quebec, Latin Amer- able in a court of equity opened the door to many needed
ica, and parts of Africa and Asia. remedies not available in a court of common law.
Courts of equity in some cases recognized rights that
Common Law The courts in common law systems were enforceable at common law, but they provided
have developed a body of law that serves as precedent more effective remedies. For example, in a court of eq-
for determining later controversies. In this sense, common uity, for breach of a land contract the buyer could
law, also called case law or judge-made law, is distin- obtain a decree of specific performance commanding
guished from other sources of law, such as legislation the defendant seller to perform his part of the contract
and administrative rulings. by transferring title to the land. Another powerful and
To evolve in a stable and predictable manner, the com- effective remedy available only in the courts of equity
mon law has developed by application of stare decisis was the injunction, a court order requiring a party to
do or refrain from doing a specified act. Another rem- Currently the ALI is made up of more than 4,300 law-
edy not available elsewhere was reformation, where, yers, judges, and law professors.
upon the ground of mutual mistake, an action could be Regarded as the authoritative statement of the com-
brought to reform or change the language of a written mon law of the United States, the Restatements cover
agreement to conform to the actual intention of the many important areas of the common law, including
contracting parties. An action for rescission of a con- torts, contracts, agency, property, and trusts. Although
tract, which allowed a party to invalidate a contract not law in themselves, they are highly persuasive, and
under certain circumstances, was another remedy. courts frequently have used them to support their opin-
Although courts of equity provided remedies not ions. Because they provide a concise and clear state-
available in courts of law, they granted such remedies ment of much of the common law, relevant portions of
only at their discretion, not as a matter of right. This the Restatements are relied on frequently in this book.
discretion was exercised according to the general legal
principles, or maxims, formulated by equity courts over Legislative Law [1-3c]
the years.
Since the end of the nineteenth century, legislation has
In nearly every jurisdiction in the United States,
become the primary source of new law and ordered
courts of common law and equity have merged into a
social change in the United States. The annual volume
single court that administers both systems of law. Ves-
of legislative law is enormous. Justice Felix Frankfurt-
tiges of the old division remain, however. For example,
er’s remarks to the New York City Bar in 1947 are
the right to a trial by jury applies only to actions at
even more appropriate in the twenty-first century:
law, but not, under federal law and in almost every
state, to suits filed in equity. Inevitably the work of the Supreme Court reflects the great
See Concept Review 1-2 for a comparison of law shift in the center of gravity of law-making. Broadly speak-
and equity. ing, the number of cases disposed of by opinions has not
changed from term to term. But even as late as 1875 more
Restatements of Law The common law of the than 40 percent of the controversies before the Court were
United States results from the independent decisions of common-law litigation, fifty years later only 5 percent,
the state and federal courts. The rapid increase in the while today cases not resting on statutes are reduced
number of decisions by these courts led to the establish- almost to zero. It is therefore accurate to say that courts
ment of the American Law Institute (ALI) in 1923. The have ceased to be the primary makers of law in the sense
ALI is composed of a distinguished group of lawyers, in which they “legislated” the common law. It is certainly
judges, and law professors who set out to prepare true of the Supreme Court that almost every case has a
statute at its heart or close to it.
an orderly restatement of the general common law of the
United States, including in that term not only the law devel- This emphasis on legislative or statutory law has
oped solely by judicial decision, but also the law that has occurred because common law, which develops evolu-
grown from the application by the courts of statutes that tionarily and haphazardly, is not well suited for making
were generally enacted and were in force for many years. drastic or comprehensive changes. Moreover, while
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
Remedies Judgment for monetary damages Decree of specific performance, injunction,

reformation, rescission
courts tend to be hesitant about overruling prior deci- Probate Code. The ALI has developed a number of model
sions, legislatures commonly repeal prior enactments. In statutory formulations, including the Model Code of Evi-
addition, legislatures may choose the issues they wish to dence, the Model Penal Code, and a Model Land Devel-
address, whereas courts may deal only with those issues opment Code. In addition, the American Bar Association
presented by actual cases. As a result, legislatures are has promulgated the Model Business Corporation Act.
better equipped to make the dramatic, sweeping, and rel-
atively rapid changes in the law that technological, Treaties A treaty is an agreement between or
social, and economic innovations compel. among independent nations. The U.S. Constitution
While some business law topics, such as contracts, authorizes the President to enter into treaties with the
agency, property, and trusts, still are governed princi- advice and consent of the Senate, “providing two thirds
pally by the common law, most areas of commercial of the Senators present concur.”
law, including partnerships, corporations, sales, Treaties may be entered into only by the federal gov-
commercial paper, secured transactions, insurance, ernment, not by the states. A treaty signed by the Presi-
securities regulation, antitrust, and bankruptcy, have dent and approved by the Senate has the legal force of
become largely statutory. Because most states enacted a federal statute. Accordingly, a federal treaty may
their own statutes dealing with these branches of com- supersede a prior federal statute, while a federal statute
mercial law, a great diversity developed among the may supersede a prior treaty. Like statutes, treaties are
states and hampered the conduct of commerce on a subordinate to the federal Constitution and subject to
national scale. The increased need for greater uniform- judicial review.
ity led to the development of a number of proposed
uniform laws that would reduce the conflicts among Executive Orders In addition to the executive
state laws. functions, the President of the United States also has
The most successful example is the Uniform Com- authority to issue laws, which are called executive
mercial Code (UCC), which was prepared under the orders. This authority typically derives from specific del-
joint sponsorship and direction of the ALI and the Uni- egation by federal legislation. An executive order may
form Law Commission (ULC), which is also known as amend, revoke, or supersede a prior executive order. An
the National Conference of Commissioners on Uniform example of an executive order is the one issued by Presi-
State Laws (NCCUSL). All fifty states (although Louisi- dent Johnson in 1965 prohibiting discrimination by fed-
ana has adopted only Articles 1, 3, 4, 5, 7, and 8), the eral contractors on the basis of race, color, sex, religion,
District of Columbia, and the Virgin Islands have or national origin in employment on any work the
adopted the UCC. contractor performed during the period of the federal
The ULC has drafted more than three hundred uni- contract.
form laws, including the Uniform Partnership Act, the The governors of most states enjoy comparable
Uniform Limited Partnership Act, and the Uniform authority to issue executive orders.
GOING GLOBAL
What is the WTO?
Nations have entered into

bilateral and multilateral
treaties to facilitate and regulate
menced on January 1, 1995, and
has at least 160 members, includ-
ing the United States, accounting
regulations, antidumping restric-
tions (the prohibition against sell-
ing goods for less than their fair
trade and to protect their national for more than 97 percent of world market value), subsidies, and import
interests. Probably the most impor- trade. (Approximately twenty-five fees. The WTO administers trade
tant multilateral trade treaty is countries are observers and are agreements, acts as a forum for
the General Agreement on Tariffs seeking membership.) Its basic pur- trade negotiations, handles trade
and Trade (GATT), which the pose is to facilitate the flow of disputes, monitors national trade
World Trade Organization (WTO) trade by establishing agreements policies, and provides technical assis-
replaced as an international orga- on potential trade barriers, such tance and training for developing
nization. The WTO officially com- as import quotas, customs, export countries.
Administrative Law [1-3d] twenty states no longer publish official reports and
have designated a commercial reporter as the authorita-
Administrative law is the branch of public law that is
tive source of state case law.
created by administrative agencies in the form of rules,
After they are published, these opinions, or “cases,”
regulations, orders, and decisions to carry out the reg-
are referred to (“cited”) by giving (1) the name of the
ulatory powers and duties of those agencies. It also
case; (2) the volume, name, and page of the official
deals with controversies arising among individuals and
state report, if any, in which it is published; (3) the vol-
these public officials and agencies. Administrative
ume, name, and page of the particular set and series of
functions and activities concern general matters of
the National Reporter System; and (4) the volume,
public health, safety, and welfare, including the estab-
name, and page of any other selected case series. For
lishment and maintenance of military forces, police,
instance, Lefkowitz v. Great Minneapolis Surplus Store,
citizenship and naturalization, taxation, environmental
Inc., 251 Minn. 188, 86 N.W.2d 689 (1957), indicates
protection, and the regulation of transportation, inter-
that the opinion in this case may be found in Volume
state highways, waterways, television, radio, and trade
251 of the official Minnesota Reports at page 188 and
and commerce.
in Volume 86 of the North Western Reporter, Second
Because of the increasing complexity of the nation’s
Series, at page 689, and that the opinion was delivered
social, economic, and industrial life, the scope of
in 1957.
administrative law has expanded enormously. In 1952
The decisions of courts in the federal system are
Justice Jackson stated, “the rise of administrative bodies
found in a number of reports. U.S. District Court opin-
has been the most significant legal trend of the last cen-
ions appear in the Federal Supplement (F.Supp. or
tury, and perhaps more values today are affected by
F.Supp.2d). Decisions of the U.S. Court of Appeals are
their decisions than by those of all the courts, review of
found in the Federal Reporter (Fed., F.2d, or F.3d), and
administrative decisions apart.” This is evidenced by
the U.S. Supreme Court’s opinions are published in the
the great increase in the number and activities of fed-
U.S. Supreme Court Reports (U.S.), Supreme Court Re-
eral government boards, commissions, and other agen-
porter (S.Ct.), and Lawyers Edition (L.Ed.). While all
cies. Certainly, agencies create more legal rules and
U.S. Supreme Court decisions are reported, not every
decide more controversies than all the legislatures and
case decided by the U.S. District Courts and the U.S.
courts combined.
Courts of Appeals is reported. Each circuit has estab-
lished rules determining which decisions are published.
In reading the title of a case, such as “Jones v.
LEGAL ANALYSIS [1-4] Brown,” the “v.” or “vs.” means versus or against. In
Decisions in state trial courts generally are not reported the trial court, Jones is the plaintiff, the person who
or published. The precedent a trial court sets is not suf- filed the suit, and Brown is the defendant, the person
ficiently weighty to warrant permanent reporting. against whom the suit was brought. When the case is
Except in New York and a few other states where appealed, some, but not all, courts of appeals or appel-
selected opinions of trial courts are published, decisions late courts place the name of the party who appeals, or
in trial courts are simply filed in the office of the clerk the appellant, first, so that “Jones v. Brown” in the
of the court, where they are available for public inspec- trial court becomes, if Brown loses and hence becomes
tion. Decisions of state courts of appeals are published the appellant, “Brown v. Jones” in the appellate court.
in consecutively numbered volumes called “reports.” In Therefore, it is not always possible to determine from
most states, court decisions are found in the official the title itself who was the plaintiff and who was the
state reports of that state. In addition, state reports are defendant. You must carefully read the facts of each
published by West Publishing Company in a regional case and clearly identify each party in your mind to
reporter called the National Reporter System, com- understand the discussion by the appellate court. In a
posed of the following: Atlantic (A., A.2d, or A.3d); criminal case the caption in the trial court will first des-
South Eastern (S.E. or S.E.2d); South Western (S.W., ignate the prosecuting government unit and then will
S.W.2d, or S.W.3d); New York Supplement (N.Y.S. or indicate the defendant, as in “State v. Jones” or
N.Y.S.2d); North Western (N.W. or N.W.2d); North “Commonwealth v. Brown.”
Eastern (N.E. or N.E.2d); Southern (So., So.2d, or The study of reported cases requires an understand-
So.3d); Pacific (P., P.2d, or P.3d); and California Re- ing and application of legal analysis. Normally, the
porter (Cal.Rptr., Cal.Rptr.2d, or Cal.Rptr.3d). At least reported opinion in a case sets forth (1) the essential
facts, the nature of the action, the parties, what hap- 1. The court must decide the dispute that is before it. It
pened to bring about the controversy, what happened cannot refuse because the job is hard, or dubious, or
in the lower court, and what pleadings are material to dangerous.
the issues; (2) the issues of law or fact; (3) the legal 2. The court can decide only the particular dispute
principles involved; (4) the application of these princi- which is before it. When it speaks to that question
ples; and (5) the decision. it speaks ex cathedra, with authority, with finality,
A serviceable method of analyzing and briefing cases with an almost magic power. When it speaks to the
after a careful reading and comprehension of the opin- question before it, it announces law, and if what it
announces is new, it legislates, it makes the law.
ion is for students to write in their own language a
But when it speaks to any other question at all, it
brief containing the following:
says mere words, which no man needs to follow.
1. the facts of the case Are such words worthless? They are not. We know
them as judicial dicta; when they are wholly off the
2. the issue or question involved
point at issue we call them obiter dicta—words
3. the decision of the court dropped along the road, wayside remarks. Yet even
4. the reasons for the decision wayside remarks shed light on the remarker. They
may be very useful in the future to him, or to us.
The following excerpt from Professor Karl Llewellyn’s But he will not feel bound to them, as to his ex
The Bramble Bush contains a number of useful sugges- cathedra utterance. They came not hallowed by a
tions for reading cases: Delphic frenzy. He may be slow to change them;
but not so slow as in the other case.
The first thing to do with an opinion, then, is read it. The
3. The court can decide the particular dispute only
next thing is to get clear the actual decision, the judgment
according to a general rule which covers a whole
rendered. Who won, the plaintiff or defendant? And watch class of like disputes. Our legal theory does not
your step here. You are after in first instance the plaintiff admit of single decisions standing on their own. If
and defendant below, in the trial court. In order to follow judges are free, are indeed forced, to decide new
through what happened you must therefore first know the cases for which there is no rule, they must at least
outcome below; else you do not see what was appealed make a new rule as they decide. So far, good. But
from, nor by whom. You now follow through in order to how wide, or how narrow, is the general rule in
see exactly what further judgment has been rendered on this particular case? That is a troublesome matter.
appeal. The stage is then clear of form—although of The practice of our case-law, however, is I think
course you do not yet know all that these forms mean, fairly stated thus: it pays to be suspicious of gen-
that they imply. You can turn now to what you want eral rules which look too wide; it pays to go slow
in feeling certain that a wide rule has been laid
peculiarly to know. Given the actual judgments below and
down at all, or that, if seemingly laid down, it
above as your indispensable framework—what has the
will be followed. For there is a fourth accepted
case decided, and what can you derive from it as to what canon:
will be decided later?
4. Everything, everything, everything, big or small, a
You will be looking, in the opinion, or in the prelimi-
judge may say in an opinion, is to be read with pri-
nary matter plus the opinion, for the following: a state-
mary reference to the particular dispute, the partic-
ment of the facts the court assumes; a statement of the ular question before him. You are not to think that
precise way the question has come before the court— the words mean what they might if they stood
which includes what the plaintiff wanted below, and what alone. You are to have your eye on the case in
the defendant did about it, the judgement below, and what hand, and to learn how to interpret all that has
the trial court did that is complained of; then the outcome been said merely as a reason for deciding that case
on appeal, the judgment; and, finally the reasons this court that way.
gives for doing what it did. This does not look so bad. But
By way of example, the following edited case
it is much worse than it looks.
of Caldwell v. Bechtel, Inc. is presented and then
For all our cases are decided, all our opinions are writ-
briefed using Llewellyn’s suggested format. (Note: The
ten, all our predictions, all our arguments are made, on cer-
cases in the rest of this text have their facts and deci-
tain four assumptions. They are the first presuppositions of
sion summarized for the reader’s convenience. The
our study. They must be rutted into you till you can juggle
edited portion of the case begins with the judge’s
with them standing on your head and in your sleep.
name.)
CALDWELL V. BECHTEL, INC.

United States Court of Appeals, District of Columbia Circuit, 1980
631 F.2d 989
OPINION MacKinnon, J. We are here concerned It is important to keep these differences between con-
with a claim for damages by a worker who allegedly tract and tort duties in mind when examining whether
contracted silicosis while he was mucking in a tunnel Bechtel’s undertaking of contractual duties to WMATA
under construction as part of the metropolitan subway created a duty of reasonable care toward Caldwell.
system (Washington Metropolitan Area Transit Author- Dean Prosser expressed the relationship in this terse
ity [WMATA]). The basic issue is whether a consultant fashion.
engineering firm owed the worker a duty to protect him [B]y entering into a contract with A, the defendant
against unreasonable risk of harm. may place himself in such a relation toward B that the
law will impose upon him an obligation, sounding in
*** tort and not in contract, to act in such a way that B will
In attempting to convince the court that it owes no not be injured. The incidental fact of the existence of
duty of reasonable care to protect appellant’s safety, the contract with A does not negative the responsibility
Bechtel argues that by its contract with WMATA it of the actor when he enters upon a course of affirmative
assumed duties only to WMATA. Appellant has not conduct which may be expected to affect the interests of
brought action, however, for breach of contract but another person.
rather seeks damages for an asserted breach of the duty ***
of reasonable care. Unlike contractual duties, which are Analyzing the common law, Prosser noted that courts
imposed by agreement of the parties to a contract, a have found a duty to act for the protection of another
duty of due care under tort law is based primarily upon when certain relationships exist, such as carrier-passenger,
social policy. The law imposes upon individuals certain innkeeper-guest, shipper-seaman, employer-employee,
expectations of conduct, such as the expectancy that shopkeeper-visitor, host-social guest, jailer-prisoner, and
their actions will not cause foreseeable injury to another. school-pupil. These holdings suggest that courts have
These societal expectations, as formed through the com- been eroding the general rule that there is no duty to act
mon law, comprise the concept of duty. to help another in distress, by creating exceptions based
Society’s expectations, and the concomitant duties upon a relationship between the actors.
imposed, vary in response to the activity engaged in by
the defendant. If defendant is driving a car, he will be ***
held to exercise the degree of care normally exercised by We find that case law provides many such analogous
a reasonable person in like circumstances. Or if defend- situations from which the principles deserving of appli-
ant is engaged in the practice of his profession, he will cation to this case may be culled. The foregoing con-
be held to exercise a degree of care consistent with his cepts of duty converge in this case, as the facts include
superior knowledge and skill. Hence, when defendant both the WMATA-Bechtel contractual relationship
Bechtel engaged in consulting engineering services, the from which it was foreseeable that a negligent under-
company was required to observe a standard of care or- taking by Bechtel might injure the appellant, and a spe-
dinarily adhered to by one providing such services, pos- cial relationship established between Bechtel and the
sessing such skill and expertise. appellant because of Bechtel’s superior skills, knowl-
A secondary but equally important principle involved edge of the dangerous condition, and ability to protect
in a determination of duty is to whom the duty is owed. appellant.
The answer to this question is usually framed in terms of We reverse the summary judgment of the district
the foreseeable plaintiff, in other words, one who might court, and hold that as a matter of law, on the record
foreseeably be injured by defendant’s conduct. This sec- as we are required to view it at this time, Bechtel owed
ondary principle also serves to distinguish tort law from Caldwell a duty of due care to take reasonable steps to
contract law. While in contract law, only one to whom protect him from the foreseeable risk of harm to his
the contract specifies that a duty be rendered will have a health posed by the excessive concentration of silica
cause of action for its breach, in tort law, society, not the dust in the Metro tunnels. We remand so that Caldwell
contract, specifies to whom the duty is owed, and this will have an opportunity to prove, if he can, the other
has traditionally been the foreseeable plaintiff. elements of his negligence action.
BRIEF OF CALDWELL V. BECHTEL, INC.
FACTS Caldwell was a laborer who now suffers he seeks damages for an alleged breach of the duty of
from silicosis. He claims that he contracted the disease reasonable care. Unlike contractual duties, which are
while working in a tunnel under construction as part of imposed by agreement of the parties to a contract, a
the Washington Metropolitan Area Transportation duty of due care under tort law is based primarily on
Authority (WMATA). He brought his action for dam- social policy. That is, the law imposes upon individuals
ages against Bechtel, Inc., a consultant engineering firm the expectation that their actions will not cause foresee-
under contract with WMATA for the project. able injury to another. These societal expectations com-
prise the concept of duty—a concept that varies in
ISSUE Did Bechtel breach a duty of due care owed to response to the activity engaged in by the individual.
Caldwell to take reasonable steps to protect him from the Moreover, the duty is owed to anyone who might fore-
foreseeable risk of harm to his health posed by the exces- seeably be injured by the conduct of the actor in ques-
sive concentration of silica dust in the subway tunnels? tion. In contrast, under contract law, a duty is owed
only to those parties specified in the contract. Here, by
DECISION In favor of Caldwell. Summary judg- entering into a contract with WMATA, Bechtel placed
ment reversed and case remanded to the district court. itself in such a relation toward Caldwell that the law
will impose upon it an obligation in tort, and not in
REASONS Caldwell has not brought an action for contract, to act in such a way that Caldwell would not
breach of contract as Bechtel seems to believe. Rather, be injured.
You can and should use this same legal analysis when This feature begins with the facts of a hypothetical case,
learning the substantive concepts presented in this text and followed by an identification of the broad legal issue pre-
applying them to the end-of-chapter questions and case sented by those facts. We then state the rule of law—or
problems. By way of example, in a number of chapters applicable legal principles, including definitions, which aid
throughout the text we have included a boxed feature in resolving the legal issue—and apply it to the facts.
called “Applying the Law,” which provides a systematic Finally we state a legal conclusion, or decision in the case.
legal analysis of a single concept learned in the chapter. An example of this type of legal analysis follows.
APPLYING THE LAW

INTRODUCTION TO LAW
Facts Jackson bought a new car and planned to sell his (1) the donor’s present intent to transfer the property and
old one for about $2,500. But before he did so, he hap- (2) delivery of the property.
pened to receive a call from his cousin, Trina, who had just Application In this case, Jackson is the would-be donor
graduated from college. Among other things, Trina told and Trina is the would-be donee. To find that Jackson had
Jackson she needed a car but did not have much money. already made a gift of the car to Trina, both Jackson’s intent
Feeling generous, Jackson told Trina he would give her his to give it to her and delivery of the car to Trina would need
old car. But the next day a coworker offered Jackson to be demonstrated. It is evident from their telephone con-
$3,500 for his old car, and Jackson sold it to the coworker. versation that Jackson did intend at that point to give the
Issue Did Jackson have the right to sell his car to the car to Trina. It is equally apparent from his conduct that
coworker, or legally had he already made a gift of it to he later changed his mind, because he sold it to someone
Trina? else the next day. Consequently, he did not deliver the car
Rule of Law A gift is the transfer of ownership of prop- to Trina.
erty from one person to another without anything in return. Conclusion Because the donor did not deliver the prop-
The person making the gift is called the donor, and the per- erty to the donee, legally no gift was made. Jackson was
son receiving it is known as the donee. A valid gift requires free to sell the car.
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 resolution, 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 individual 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 available 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
CHAPTER 2
BUSINESS ETHICS
Our characters are the result of our conduct.
ARISTOTLE, NICOMACHEAN ETHICS (C. 335 BCE)
CHAPTER OUTCOMES
After reading and studying this chapter, you should be able to:
1. Describe the difference between law and ethics. 4. Explain Kohlberg’s stages of moral development.
2. Compare the various ethical theories. 5. Explain the ethical responsibilities of business.
3. Describe cost-benefit analysis and explain
when it should be used and when it should
be avoided.
B
usiness ethics is a subset of ethics: no special set $65 billion in paper losses. In May 2011, Galleon
of ethical principles applies only to the world of Group (a hedge fund) billionaire Raj Rajaratnam was
business. Immoral acts are immoral, whether or found guilty of fourteen counts of conspiracy and secur-
not a businessperson has committed them. In the last ities fraud. In 2013, large international banks faced a
few years, countless business wrongs, such as insider widening scandal—and substantial fines—over attempts
trading, fraudulent earnings statements and other to rig benchmark interest rates, including the London
accounting misconduct, price-fixing, concealment of Interbank Offered Rate (LIBOR).
dangerous defects in products, reckless lending and Ethics can be defined broadly as the study of what is
improper foreclosures in the housing market, and brib- right or good for human beings. It attempts to deter-
ery, have been reported almost daily. Companies such mine what people ought to do, or what goals they
as Enron, WorldCom, Adelphia, Parmalat, Arthur should pursue. Business ethics, as a branch of applied
Andersen, and Global Crossing have violated the law, ethics, is the study and determination of what is right
and some of these firms no longer exist as a result of and good in business settings. Business ethics seeks to
these ethical lapses. In 2004, Martha Stewart was con- understand the moral issues that arise from business
victed of obstructing justice and lying to investigators practices, institutions, and decision making and their
about a stock sale. More recently, Bernie Madoff perpe- relationship to generalized human values. Unlike legal
trated the largest Ponzi scheme in history with an esti- analyses, analyses of ethics have no central authority,
mated loss of $20 billion in principal and approximately such as courts or legislatures, upon which to rely; nor
15
do they follow clear-cut universal standards. Nonethe-

less, despite these inherent limitations, it still may be LAW VERSUS ETHICS [2-1]
possible to make meaningful ethical judgments. To As discussed in Chapter 1, moral concepts strongly
improve ethical decision making, it is important to affect the law, but law and morality are not the same.
understand how others have approached the task. Although it is tempting to say “if it’s legal, it’s moral,”
Some examples of the many business ethics questions such a proposition is generally too simplistic. For
may clarify the definition of business ethics. In the example, it would seem gravely immoral to stand by
employment relationship, countless ethical issues arise silently while a blind man walks off a cliff if one could
regarding the safety and compensation of workers, their prevent the fall by shouting a warning, even though
civil rights (such as equal treatment, privacy, and free- one would not be legally obligated to do so. Similarly,
dom from sexual harassment), and the legitimacy of moral questions arise concerning “legal” business prac-
whistle-blowing. In the relationship between business tices, such as failing to fulfill a promise that is not
and its customers, ethical issues permeate marketing legally binding; exporting products banned in the
techniques, product safety, and consumer protection. United States to developing countries where they are
The relationship between business and its owners bris- not prohibited; or slaughtering baby seals for fur coats.
tles with ethical questions involving corporate gover- The mere fact that these practices are legal does not
nance, shareholder voting, and management’s duties to prevent them from being challenged on moral grounds.
the shareholders. The relationship among competing Just as it is possible for legal acts to be immoral, it
businesses involves numerous ethical matters, including is equally possible for illegal acts to seem morally pref-
fair competition and the effects of collusion. The inter- erable to following the law. For example, it is the
action between business and society at large presents moral conviction of the great majority of people that
additional ethical dimensions: pollution of the physical those who sheltered Jews in violation of Nazi edicts
environment, commitment to the community’s eco- during World War II and those who committed acts of
nomic and social infrastructure, and depletion of natu- civil disobedience in the 1950s and 1960s to challenge
ral resources. Not only do all of these issues recur at segregation laws in the United States were acting prop-
the international level, but also additional ones present erly and that the laws themselves were immoral.
themselves, such as bribery of foreign officials, exploita-
tion of developing countries, and conflicts among dif-
fering cultures and value systems.
In resolving the ethical issues raised by business ETHICAL THEORIES [2-2]
conduct, it is helpful to use a seeing-knowing-doing Philosophers have sought for centuries to develop de-
model. First, the decision maker should see (identify) pendable and universal methods for making ethical
the ethical issues involved in the proposed conduct, judgments. In earlier times, some thinkers analogized
including the ethical implications of the various avail- the discovery of ethical principles with the derivation of
able options. Second, the decision maker should know mathematical proofs. They asserted that people could
(resolve) what to do by choosing the best option. discover fundamental ethical rules by applying careful
Finally, the decision maker should do (implement) reasoning a priori. (A priori reasoning is based on
the chosen option by developing and implementing theory rather than experimentation and deductively
strategies. draws conclusions from cause to effect and from gener-
This chapter first surveys the most prominent ethical alizations to particular instances.) In more recent times,
theories (the knowing part of the decision, on which many philosophers have concluded that although care-
the great majority of philosophers and ethicists have ful reasoning and deep thought assist substantially in
focused). The chapter then examines ethical standards moral reasoning, experience reveals that the complex-
in business and the ethical responsibilities of business. ities of the world defeat most attempts to fashion pre-
It concludes with five ethical business cases, which give cise, a priori guidelines. Nevertheless, a review of the
the student the opportunity to apply the seeing-knowing- most significant ethical theories can aid the analysis of
doing model. The student (1) identifies the ethical issues business ethics 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; Ethical Fundamentalism [2-2a]
and (3) develops strategies for implementing the ethical Under ethical fundamentalism, or absolutism, individu-
resolution. als look to a central authority or set of rules to guide
Chapter 2 Business Ethics 17
them in ethical decision making. Some look to the assesses each separate act according to whether it maxi-
Bible; others look to the Koran or to the writings of Karl mizes pleasure over pain. For example, if telling a lie in
Marx or to any number of living or deceased prophets. a particular situation produces more overall pleasure
The essential characteristic of this approach is a reli- than pain, then an act utilitarian would support lying
ance on a central repository of wisdom. In some cases, as the moral thing to do. Rule utilitarians, disturbed by
such reliance is total. In others, followers of a religion the unpredictability of act utilitarianism and its poten-
or a spiritual leader may believe that all members of tial for abuse, follow a different approach. Rule utilita-
the group are obligated to assess moral dilemmas inde- rianism holds that general rules must be established
pendently, according to each person’s understanding of and followed even though, in some instances, following
the dictates of the fundamental principles. rules may produce less overall pleasure than not follow-
ing them. It applies utilitarian principles in developing
Ethical Relativism [2-2b] rules; thus, it supports rules that on balance produce
the greatest satisfaction. Determining whether telling a lie
Ethical relativism is a doctrine asserting that actions
in a given instance would produce greater pleasure than
must be judged by what individuals feel is right or
telling the truth is less important to the rule utilitarian
wrong for themselves. It holds that when any two indi-
than deciding whether a general practice of lying would
viduals or cultures differ regarding the morality of a
maximize society’s pleasure. If lying would not maximize
particular issue or action, they are both correct because
pleasure generally, then one should follow a rule of not
morality is relative. However, although ethical relativ-
lying even though on occasion telling a lie would pro-
ism promotes open-mindedness and tolerance, it has
duce greater pleasure than would telling the truth.
limitations. If each person’s actions are always correct
Utilitarian notions underlie cost-benefit analysis, an
for that person, then his behavior is, by definition,
analytical tool used by many business and government
moral and therefore exempt from criticism. Once a per-
managers today. Cost-benefit analysis first quantifies in
son concludes that criticizing or punishing behavior in
monetary terms and then compares the direct and indi-
some cases is appropriate, he abandons ethical relativ-
rect costs and benefits of program alternatives for meet-
ism and faces the task of developing a broader ethical
ing a specified objective. Cost-benefit analysis seeks the
methodology.
greatest economic efficiency according to the underlying
Although bearing a surface resemblance to ethical
notion that, given two potential acts, the act achieving
relativism, situational ethics actually differs substan-
the greatest output at the least cost promotes the great-
tially. Situational ethics holds that developing precise
est marginal happiness over the less-efficient act, other
guidelines for effectively navigating ethical dilemmas is
things being equal.
difficult because real-life decision making is so complex.
The chief criticism of utilitarianism is that in some
To judge the morality of someone’s behavior, the per-
important instances it ignores justice. A number of sit-
son judging must actually put herself in the other per-
uations would maximize the pleasure of the majority at
son’s shoes to understand what motivated the other to
great social cost to a minority. Another major criticism
choose a particular course of action. Situational ethics,
of utilitarianism is that measuring pleasure and pain in
however, does not cede the ultimate judgment of the
the fashion its supporters advocate is extremely diffi-
propriety of an action to the actor; rather, it insists
cult, if not impossible.
that, prior to evaluation, a person’s decision or act be
viewed from the actor’s perspective.
Deontology [2-2d]
Utilitarianism [2-2c] Deontological theories (from the Greek word deon,
Utilitarianism is a doctrine that assesses good and evil meaning duty or obligation) address the practical prob-
in terms of the consequences of actions. Those actions lems of utilitarianism by holding that certain underlying
that produce the greatest net pleasure compared with principles are right or wrong regardless of any pleasure
net pain are better in a moral sense than those that pro- or pain calculations. Believing that actions cannot be
duce less net pleasure. As Jeremy Bentham, one of the measured simply by their results but rather must be
most influential proponents of utilitarianism, pro- judged by means and motives as well, deontologists
claimed, a good or moral act is one that results in “the judge the morality of acts not so much by their conse-
greatest happiness for the greatest number.” quences but by the motives that lead to them. A person
The two major forms of utilitarianism are act utilita- not only must achieve just results but also must employ
rianism and rule utilitarianism. Act utilitarianism the proper means.
The eighteenth-century philosopher Immanuel Kant members of society but also on the individual’s rights
proffered the best-known deontological theory. Under and obligations within the society. For example, social
Kant’s categorical imperative, for an action to be moral egalitarians believe that society should provide each
it (1) must potentially be a universal law that could be person with equal amounts of goods and services
applied consistently and (2) must respect the autonomy regardless of the contribution each makes to increase
and rationality of all human beings and not treat them society’s wealth.
as an expedient. That is, one should not do anything Two other ethics theories have received widespread
that he or she would not have everyone do in a similar attention in recent years. One is the theory of distribu-
situation. For example, you should not lie to colleagues tive justice proposed by Harvard philosopher John
unless you support the right of all colleagues to lie to Rawls, which seeks to analyze the type of society that
one another. Similarly, you should not cheat others people in a “natural state” would establish if they
unless you advocate everyone’s right to cheat. We apply could not determine in advance whether they would be
Kantian reasoning when we challenge someone’s behav- talented, rich, healthy, or ambitious, relative to other
ior by asking: what if everybody acted that way? members of society. According to distributive justice,
Under Kant’s approach, it would be improper to the society contemplated through this “veil of igno-
assert a principle to which one claimed personal excep- rance” is the one that should be developed because it
tion, such as insisting that it was acceptable for you to considers the needs and rights of all its members. Rawls
cheat but not for anyone else to do so. This principle did not argue that such a society would be strictly egal-
could not be universalized because everyone would then itarian and that it would unfairly penalize those who
insist on similar rules from which only they were turned out to be the most talented and ambitious.
exempt. Instead, Rawls suggested that such a society would
Kant’s philosophy also rejects notions of the end jus- stress equality of opportunity, not of results. On the
tifying the means. To Kant, every person is an end in other hand, Rawls stressed that society would pay heed
himself or herself. Each person deserves respect simply to the least advantaged to ensure that they did not suf-
because of his or her humanity. Thus, any sacrifice of a fer unduly and that they enjoyed society’s benefits. To
person for the greater good of society would be unac- Rawls, society must be premised on justice. Everyone is
ceptable to Kant. entitled to his or her fair share in society, a fairness all
In many respects, Kant’s categorical imperative is a must work to guarantee.
variation of the Golden Rule; and, like the Golden In contrast to Rawls, another Harvard philosopher,
Rule, the categorical imperative appeals to the individu- Robert Nozick, stressed liberty, not justice, as the most
al’s self-centeredness. important obligation that society owes its members.
As does every theory, Kantian ethics has its critics. Libertarians stress market outcomes as the basis for dis-
Just as deontologists criticize utilitarians for excessive tributing society’s rewards. Only to the extent that one
pragmatism and flexible moral guidelines, utilitarians meets market demands does one deserve society’s bene-
and others criticize deontologists for rigidity and exces- fits. Libertarians oppose social interference in the lives
sive formalism. For example, if one inflexibly adopts as of those who do not violate the rules of the market-
a rule to tell the truth, one ignores situations in which place; that is, in the lives of those who do not cheat
lying might well be justified. A person hiding a terrified others and who disclose honestly the nature of their
wife from her angry, abusive husband would seem to be transactions with others. The fact that some end up
acting morally by falsely denying that the wife is at the with fortunes while others accumulate little simply
person’s house. Yet a deontologist, feeling bound to tell proves that some can play in the market effectively
the truth, might ignore the consequences of truthfulness, while others cannot. To libertarians, this is not unjust.
tell the husband where his wife is, and create the possi- What is unjust to them is any attempt by society to
bility of a terrible tragedy. Another criticism of deonto- take wealth earned by citizens and distribute it to those
logical theories is that the proper course may be difficult who did not earn it.
to determine when values or assumptions conflict. These theories and others (e.g., Marxism) judge soci-
ety in moral terms by its organization and by the way
in which it distributes goods and services. They demon-
Social Ethics Theories [2-2e] strate the difficulty of ethical decision making in the
Social ethics theories assert that special obligations arise context of a social organization: behavior that is consis-
from the social nature of human beings. Such theories tently ethical from individual to individual may not
focus not only on each person’s obligations to other necessarily produce a just society.
Chapter 2 Business Ethics 19
Other Theories [2-2f] and lends credibility to the notion that moral growth,
like physical growth, is part of the human condition.
The preceding theories do not exhaust the possible
Kohlberg observed that people progress through se-
approaches to evaluating ethical behavior; several other
quential stages of moral development according to two
theories also deserve mention. Intuitionism holds that a
major variables: age and reasoning. During the first
rational person possesses inherent powers to assess the cor-
level—the preconventional level—a child’s conduct is a
rectness of actions. Though an individual may refine and
reaction to the fear of punishment and, later, to the
strengthen these powers, they are just as basic to humanity
pleasure of reward. Although people who operate at
as our instincts for survival and self-defense. Just as some
this level may behave in a moral manner, they do so
people are better artists or musicians, some people have
without understanding why their behavior is moral.
more insight into ethical behavior than others. Consistent
The rules are imposed upon them. During adoles-
with intuitionism is the good person philosophy, which
cence—Kohlberg’s conventional level—people conform
declares that if individuals wish to act morally, they should
their behavior to meet the expectations of groups, such
seek out and emulate those who always seem to know the
as family, peers, and eventually society. The motivation
right choice in any given situation and who always seem to
for conformity is loyalty, affection, and trust. Most
do the right thing. One variation of these ethical
adults operate at this level. According to Kohlberg, some
approaches is the Television Test, which directs us to imag-
reach the third level—the postconventional level—at
ine that every ethical decision we make is being broadcast
which they accept and conform to moral principles
on nationwide television. An appropriate decision is one
because they understand why the principles are right
we would be comfortable broadcasting on national televi-
and binding. At this level, moral principles are voluntar-
sion for all to witness.
ily internalized, not externally imposed. Moreover, indi-
viduals at this stage develop their own universal ethical
principles and may even question the laws and values
ETHICAL STANDARDS IN that society and others have adopted (see Figure 2-1 for
BUSINESS [2-3] Kohlberg’s stages of moral development).
In this section, we explore the application of the theo- Kohlberg believed that not all people reach the
ries of ethical behavior to the world of business. third, or even the second, stage. He therefore argued
that essential to the study of ethics was the explora-
Choosing an Ethical System [2-3a] tion of ways to help people achieve the advanced stage
of postconventional thought. Other psychologists
In their efforts to resolve the moral dilemmas facing
assert that individuals do not pass sequentially from
humankind, philosophers and other thinkers have
stage to stage but rather function in all three stages
struggled for years to refine the various systems previ-
simultaneously.
ously discussed. All of the systems are limited, however,
Whatever the source of our ethical approach, we can-
in terms of applicability and tend to produce unaccept-
not avoid facing moral dilemmas that challenge us to
able prescriptions for action in some circumstances. But
recognize and do the right thing. Moreover, for those
to say that each system has limits is not to say it is use-
who plan business careers, such dilemmas necessarily
less. On the contrary, a number of these systems pro-
will have implications for many others—employees,
vide insight into ethical decision making and help us
shareholders, suppliers, customers, and society at large.
formulate issues and resolve moral dilemmas. Further-
more, concluding that moral standards are difficult to
articulate and that moral boundaries are imprecise is Corporations as Moral
not the same as concluding that moral standards are Agents [2-3b]
unnecessary or nonexistent. Because corporations are not persons but rather artifi-
Research by the noted psychologist Lawrence Kohl- cial entities created by the state, whether they can or
berg provides some insight into ethical decision making should be held morally accountable is difficult to
FIGURE 2-1 Levels Perspective Justification

Kohlberg’s Stages of Preconventional (Childhood) Self Punishment/Reward
Moral Development
Conventional (Adolescent) Group Group Norms
Postconventional (Adult) Universal Moral Principles
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PART I 20 Performance 407

PART VIII APPENDICES

PART I Concept Review: Comparison of Court Adjudication,

F Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich

Watson Coatings, Inc. v. American Express Travel

1-1 Law and Morals, 4 10-2 Mutual Assent, 215

Excerpted Cases Practical Advice

Business Law in Action Pedagogical Benefits

Civil and Criminal Law [1-2c]

CONCEPT REVIEW 1-1

Purpose Compensation Punishment

Burden of Proof Preponderance of the evidence Beyond a reasonable doubt

Principal Sanctions Monetary damages Capital punishment

Treaties Federal Statutes

CONCEPT REVIEW 1-2

Availability Generally Discretionary: if remedy at law is inadequate

Precedents Stare decisis Equitable maxims

Remedies Judgment for monetary damages Decree of specific performance, injunction,

Nations have entered into

CALDWELL V. BECHTEL, INC.

BRIEF OF CALDWELL V. BECHTEL, INC.

APPLYING THE LAW

do they follow clear-cut universal standards. Nonethe-

FIGURE 2-1 Levels Perspective Justification

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