Essentials of Business Law and The Legal Environment 13Th Edition Richard A Mann Full Chapter

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

The University of North Carolina at Chapel Hill The University of North Carolina at Chapel Hill
Member of the North Carolina Bar Member of the North Carolina and Pennsylvania Bars
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Essentials of Business Law and the Legal © 2019, 2016 Cengage Learning®
Environment, Thirteenth Edition
Richard A. Mann and Barry S. Roberts Unless otherwise noted, all content is © Cengage
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Print Number: 01 Print Year: 2017
About the Authors
RICHARD A. MANN received a B.S. in mathematics from the University of North

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Levels Perspective Justification
Preconventional (Childhood) Self Punishment/Reward

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

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

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

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

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

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

A number of arguments oppose business involvement in socially responsible activities: profitabil-
ity, unfairness, accountability, and expertise.
Profitability Profitability As Milton Friedman and others have argued, businesses are artificial entities
the business of business established to permit people to engage in profit-making, not social, activities. Without profits, they
should be to return as assert, there is little reason for a corporation to exist and no real way to measure the effective-
much money as possible to ness of corporate activities. Businesses are not organized to engage in social activities; they are
shareholders structured to produce goods and services for which they receive money. Their social obligation
is to return as much of this money as possible to their direct stakeholders. In a free market with
significant competition, the selfish pursuits of corporations will lead to maximizing output, mini-
mizing costs, and establishing fair prices. All other concerns distract companies and interfere with
achieving these goals.
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“Granddad can stay but a day,” said he, “and I will see that they
are driven back to you the next morning.”
The rancher was something of a sportsman himself, and he
finally consented to help the boy. The cattle were sent over. Old
Doctor Bright duly arrived and was driven out to the herd, which
Dickie said was only a sample of his stock that had been brought in
to be shown to his visitor. The boy added, however, that it was not
good to keep the cattle penned up, and that they must go back upon
the range right away. The old doctor was delighted, and before he
left he gave Dickie a check for ten thousand dollars to develop the
business.
Another young remittance man added to his income by
pretending to have a gopher farm. His father had never heard the
word “gopher” before, and supposed that the tiny ground squirrels
were some kind of valuable live stock. He was, therefore, quite
pleased when his boy wrote an enthusiastic letter saying that he had
now seven hundred blooded gophers on his range. When sonny
added that the animals were in good condition, but that it would take
a thousand dollars more to carry them through the winter for the
market next spring, father sent on the money.
CHAPTER XXVIII
OVER THE GREAT DIVIDE
Over the Great Divide and across the mighty ranges of the
Rockies!
Hundreds of miles between ice-clad peaks and over snow-
covered plains!
Up and down the ragged passes of towering mountains, their
heads capped with blue glaciers, and their faces rough with beards
of frosty pines!
For the last week I have been travelling across the western
highland of Canada. I have gone over the backbone of the continent,
which reaches north to Alaska and south to the Strait of Magellan.
Here in Canada the Rockies extend in three ranges from western
Alberta throughout the entire width of British Columbia. The
easternmost marks a part of the boundary line between the
provinces and the westernmost range rises steeply from the Pacific
Ocean. All between is high plateaus and broken mountain chains
spotted with glaciers.
This vast sea of mountains is said to be the equal of twenty-four
Switzerlands, and I can well believe it. It is only five hours by rail
across the Swiss Alps from Lucerne to Como, but the fastest
Canadian Pacific trains cannot make the trip from Cochrane, Alberta,
to Vancouver in less than twenty-three hours. Switzerland is noted
the world over for its glaciers, yet here in the Selkirk range alone
there are as many glaciers as in all the Alps thrown together.
I have visited the great mountain regions of the world. I have
stood on the hills of Darjiling and watched the sun rise on Mount
Everest. From the tops of the Andes, three miles above the level of
the sea, I have taken a hair-raising ride in a hand-car down to the
Pacific. I have looked into the sulphurous crater of old Popocatepetl,
and I have stood among the Alpine glaciers on the top of the
Jungfrau. But nowhere have I found Mother Nature more lavish in
scenes of rugged grandeur than right here in Canada not far from
our own northern boundary.
The mountains change at every turn of the wheels of our train.
Now they rise almost straight up on both sides of the track for
hundreds upon hundreds of feet. They shut out the sun and their
tops touch the sky. Now we shoot out into the open, and there is a
long vista of jagged hills rising one above the other until they fade
away into the peaks on the horizon. We ride for miles where there is
no sign of the works of man except the gleaming track, the snow
sheds here and there, and the little mountain stations, where the
shriek of our engine reverberates and echoes throughout the valley.
Each mile we cover seems to bring a new wonder. It may be a
majestic waterfall, a towering peak, an over-hanging cliff, a glacier
sparkling under the rays of the winter sun, or a vast panorama of
glittering snow and ice standing out in bold contrast against the dark
rocks and forests. It takes my breath away, and I think of the Texas
cowboy who had made his pile and had started out to see the world.
His life had been spent on the plains, and at his first visit to these
Canadian mountains their grandeur so filled his soul that, unable to
contain himself, he threw his hat into the air and yelled:
In a region of beautiful lakes, the “Lake of the
Hanging Glaciers” is one of the most picturesque in
the Canadian Rockies. Behind it lowers the snowy
crest of Mount Sir Donald, some two miles high.
Wainwright National Park has the largest herd of
buffalo in America. More than five thousand animals,
the descendants of a herd of seven hundred originally
purchased from a Montana rancher, range over a
fenced-in reserve of one hundred thousand acres.
“Hurrah for God!”
One gets his first view of the mountains at Calgary. As we
travelled through the foothills our train climbed steadily, and at Banff,
eighty miles to the west, we had reached a height of almost a mile
above sea level. The region about Banff has been set aside by the
government as Rocky Mountain Park. It is known as the Yosemite
Valley of the North, and has become the finest mountain resort of
Canada. Here the Canadian Pacific Railway has built a magnificent
hotel. It stands high above the confluence of the Bow and Spray
rivers and affords a splendid view of Mount Assiniboine.
In summer the attractions at Banff include hot sulphur baths,
open-air swimming pools, tennis courts, and golf links, and in winter
there are snow carnivals and ski-jumping contests. The surrounding
country offers mountain climbing of all kinds, from easy slopes for
the inexperienced tenderfoot to almost inaccessible peaks that
challenge the skill of the most expert climber. The region outside the
park limits contains some of the finest game lands on the continent,
and is a Mecca for the fisherman and the hunter.
In addition to the railway, Banff is reached by a ninety-mile motor
road from Calgary. In 1923 this road was extended southwesterly
across the Vermilion Pass to Lake Windermere in British Columbia.
The construction of that stretch completed the last link in the “circle
tour” motor route that now runs from Lake Windermere via Seattle to
southern California, thence through the Grand Canyon and
Yellowstone and Glacier National parks, and back to the Canadian
boundary.
Thirty miles west of Banff, and almost six thousand feet above
the level of the sea, is the gem-like Lake Louise in its setting of dark
forests and snow-clad mountains, and not far away is the famous
Valley of the Ten Peaks. A few miles farther on we reach the Great
Divide, which marks the boundary between Alberta and British
Columbia. Here we see the waters of a single stream divide, one
part going west to the Pacific and the other flowing to the east and
eventually losing itself in Hudson Bay.
Between Calgary and the Great Divide the railway track climbs
three eighths of a mile. It goes over the main range through the
Kicking Horse Pass, more than a mile above sea level, and then
drops down to the valley of the Columbia River. It rises again a
quarter of a mile where it crosses the Selkirks through the five-mile-
long Connaught tunnel, and then winds its way downward through
the coast ranges to the great western ocean.
The Kicking Horse Pass was so named from an incident that
occurred when the surveyors for the railway were searching for a
route over the mountains. At this point one of the men was kicked by
a pack horse and apparently killed. His companions had even dug a
grave for him, but just then the supposedly dead man showed signs
of life. He soon was fully recovered and the party proceeded onward.
Later, his curiosity led him to revisit the scene of his narrowly averted
burial, and in so doing he discovered this gap in the mountains.
The Kicking Horse was Canada’s first, and for years its only,
railway pass over the Rockies. The construction of the railway
through it was considered a great feat of civil engineering, but it has
been much improved. In 1909 two spiral tunnels were built for the
descent to the Kicking Horse River, twelve hundred feet below. Here
the track, sloping downward, makes two almost complete circles
inside the mountain, and the tunnels have so cut down the steep
grade that the number of engines required for a train has been
reduced from four to two.
Another line of the Canadian Pacific climbs over the mountains
through the Crow’s Nest Pass, not far north of the United States
boundary. A third gateway to the ocean is the Yellowhead Pass, west
of Edmonton, by which the Canadian National lines cross the
Rockies. Beyond that pass the tracks branch out, one section ending
at Prince Rupert and the other at Vancouver. The Yellowhead,
though the lowest of the three passes, is under the very shadow of
some of the loftiest of these mountains. Near it is Mount Robson, the
highest peak in Canada, which rises in a mighty cone almost two
miles above the surrounding range and more than thirteen thousand
feet above the sea.
The Yellowhead route passes through Jasper Park, the greatest
of Canada’s western game and forest reserves. That park is almost
four times the size of Rhode Island, and much larger than Rocky
Mountain Park, which we saw at Banff. It contains the beautiful Lac
Beauvert, on the shores of which a hotel and several lodges are
operated by the Canadian National Railways. Mount Robson Park
adjoins Jasper Park at the west, and farther south are Yoko,
Waterton Lakes, and other great national playgrounds.
One of the most interesting of Canada’s twelve Dominion parks
is that at Wainwright, Alberta. I saw something of it on my way from
Saskatoon to Edmonton. There a hundred thousand acres of land is
fenced in as a reserve for the largest herd of buffalo in America. The
seven hundred and six animals of the original herd were purchased
by the Canadian government from a Montana rancher. That was less
than twenty years ago, but the herd increased so rapidly that it soon
numbered between seven and eight thousand. This was more than
could be provided for on the ranging grounds of the park, and it was
found necessary to slaughter two thousand of the animals. Some of
the meat was sold as buffalo steak, and the rest was dried and made
into pemmican for the arctic regions. An animal called the cattalo, a
cross between buffaloes and domestic cattle, which is noted for its
beef qualities, has been raised in large numbers at the Wainwright
Park.
When a transcontinental railway to the Pacific coast was first
proposed, the objectors to the project sarcastically called British
Columbia and western Alberta a “sea of mountains.” To-day these
same mountains, once considered merely an expensive barrier in
the path of the railways, have proved to be one of the largest factors
in building up what is said to be the fourth industry of Canada—its
tourist traffic. The business of “selling the scenery” has been
developed to such a degree that it is estimated that the national
parks of the Dominion yield an annual revenue of twenty-five million
dollars. In a year, more than one hundred thousand people travel
over the C. P. R. route alone. It is interesting to note that eighty per
cent. of them are Americans, and that there are more from New York
City than from the entire Dominion of Canada.
The Canadian Pacific has for years led in exploiting the scenic
wonders of Canada. It carries tourists over the mountains in summer
in open observation cars, and adds to their comfort by using oil-
burning locomotives on its passenger trains. It has a half dozen
resorts in the Rockies where one may enjoy all the comforts of a
modern city hotel or the rugged pleasures of a wilderness camp. It
has established a colony of Swiss mountaineers brought from the
Alps to act as guides for mountain climbers. It has cut new trails
through the country and has sent out geologists to map the
unexplored territory.
Even the names of scores of peaks and valleys originated with
the Canadian Pacific. Mount Sir Donald, one of the mightiest of the
Selkirks, was so called in honour of Lord Strathcona, who was a
power behind the building of the railway, and who drove the final
spike uniting the east and west sections of the transcontinental line.
Mount Stephen was named after the first president, and Mount
Shaughnessy after a later one. The Van Horne Glacier in the
Selkirks and the Van Horne Range have the same name as the
famous builder of the Canadian Pacific, and Mount Hector was
named after the intrepid explorer who discovered the Kicking Horse
Pass.
Indeed, that railway has become so great a booster of the
Dominion’s natural show places that it has even been given credit for
supplementing nature in the matter of scenery. The story is told of a
woman who had just had her first view of the mighty crystal mass of
the Illecillewaet Glacier towering thousands of feet above the railway.
She stared in open-eyed and incredulous wonder. Then she
exclaimed:
“It ain’t real! The Canadian Pacific put it there for advertising!”
CHAPTER XXIX
THROUGH BRITISH COLUMBIA TO THE
COAST
British Columbia is the third largest province of the Dominion of

Canada. It has an area as great as that of France, Italy, Belgium,
and Holland combined. It extends from the United States boundary
to Yukon Territory and Alaska, and, except for the northeastern
section, it is all plateaus and mountains and valleys. The interior
table-lands have an average elevation of three thousand feet. They
contain some good farms and dairies, but the chief wealth of the
province is in its forests, fisheries, and mines.
I have crossed this great territory often on my way westward,
and have at times gone southward from Golden into the Kootenay
country. This is far below the main line of the Canadian Pacific
Railway. Another line of the Canadian Pacific crosses the region
from the Crow’s Nest Pass.
In the mighty hills of the Kootenays I saw the headwaters of the
Columbia River. Its source is only a few hundred feet from the
Kootenay River, which at this point is a good-sized stream. The
Columbia flows north for one hundred and eighty miles, and then
makes a sharp bend and turns to the south. The two rivers meet
after each has completed about four hundred miles of its course, the
parent stream of the Columbia crossing the United States border to
the Pacific. Before meeting, the two rivers wind in and out among the
hills, now in narrow streams, and now in long, winding lakes that
make one think of Como and Maggiore on the borders of Switzerland
and Italy. They are walled in by peaks that rise almost straight up for
hundreds of feet. Their waters are so clear that one can stand on the
slopes high above them and see the fish swimming in the streams
far below. The sides of the hills are covered with fir and tamarack,
and their tops are often capped with snow.
The Columbia and the Kootenay, by their circling courses, have
made a mighty island in the interior of British Columbia. If you will
imagine two gigantic wish bones, the tips of which are touching each
other, enclosing a diamond of mountainous land larger than the state
of Ohio, you will have an idea of the curious formation that Nature
has created here. A short canal that connects the two rivers near the
headwaters of the Columbia makes the island complete. The valleys
of these two streams, containing a million acres or so, are growing in
importance as a mixed farming, fruit growing, and dairying region.
The Kootenay country has also some of the richest mineral
deposits of the Rockies. It has gold, silver, copper, coal, iron, and
lead. The coal deposits near the Crow’s Nest Pass are said to
contain thousands of millions of tons, and near them are thousands
of coke ovens blazing away. Not far distant are deposits of hematite
ore, upon which the Canadians may some day build up a big iron
and steel industry.
Coming farther on into British Columbia, I took a steamer
through Kootenay Lake and stopped at the town of Nelson, which is
in the heart of the mining country. There I talked with one of the men
who opened up some of the big silver and lead deposits more than
two score years ago. Said he:
“There had been a rush to this region, and I came in with five
other prospectors. When we got to the camp I suggested that our
party see what we could find in a mountain across the valley. We set
out with only two days’ provisions. Almost as soon as we started up
the hill we struck some float rock that showed signs of silver and
lead, and on the following day we discovered a great mass of
galena, which was from twenty-five to thirty feet wide. There were
boulders of lead ore close by, and we at once staked out our mine. It
proved to be a rich one, and was eventually sold for more than a
million dollars.”
This whole region is a treasure house of minerals. Mining
operations were carried on for years near Phoenix in one of the
biggest copper beds of the world. The metal lay in a great mass two
hundred feet wide and more than a half mile in length.
The millions of tons of ore taken from the Phoenix mines were
fed into the smelter at Grand Forks, which stands on the banks of
the Kettle River, shadowed by mighty mountains. For years it
annually produced millions of pounds of copper, and in addition silver
and gold worth a million dollars or more. The smelter was closed in
1919 with a record of having smelted fourteen million tons of ore,
and the mines ceased operations that same year.
In the meantime, the Granby Company, which owned the mines
and the smelter, had begun to take copper out of the Le Roi mine at
Rossland, a few miles to the east. Shafts there have been sunk more
than two thousand feet into the earth, and there are about ninety
miles of underground workings. This same company, which is owned
largely by American stockholders, operates the Hidden Creek copper
mines at Anyox, the biggest in British Columbia. They are located on
the coast near the Portland Canal, hundreds of miles to the
northward and only a short distance from Alaska. In one year they
produced thirty million pounds of copper. Other mines are worked on
Vancouver Island and on Howe Sound north of the city of Vancouver.
The Canadian Rockies, with three hundred peaks
more than ten thousand feet high, offer thrills aplenty
for even the most seasoned mountain climber. Alpine
guides have been brought here from Switzerland and
have established a colony in British Columbia.
The line of the Canadian National Railways
through Yellowhead Pass, the lowest gap in the
Canadian Rockies, lies near Mt. Robson, 13,068 feet
high, and the tallest peak in all the Dominion.
Although the deposits of the Boundary District have been
practically worked out after yielding twenty million tons of copper ore,
British Columbia still has more than half the copper output of the
Dominion. Its total annual mineral production is worth more than six
hundred million dollars. Of this, coal and coke make up about one
third. Silver, lead, zinc, and platinum are also mined.
Gold was first discovered in British Columbia on the Fraser
River. That was around 1857, just as the California placers had
begun to play out, and thousands of prospectors rushed here from
our Pacific coast. Many fortunes were made in a single season, and
by 1863 the placer mines had an annual yield of more than three
million dollars’ worth of gold. The total production to the present time
has been valued at more than seventy-five million dollars.
All of this gold was recovered by the pick and shovel and without
the aid of machinery. Hydraulic mining was not introduced until the
easily accessible gold had been washed out by primitive methods.
The lode mines were not worked to any extent until 1893, but these
are now producing more than the placers.
Northwest of the Boundary District we take a flying trip through
the Okanagan Valley, famous as a fruit-growing region. Apples from
here are shipped all over the Dominion. They are sold three
thousand miles away in eastern Canada in competition with those
grown in the Annapolis Valley in Nova Scotia. The region has been
developed largely through irrigation, and as we travel through it the
green of the watered areas stands out in sharp contrast to the sun-
baked dry lands of the hills. British Columbia has forty thousand
acres in fruit, and it ships more than a million boxes of apples a
season. The interior valleys have been found to be well adapted to
raising peaches, plums, grapes, and small fruits as well.
The chief city of British Columbia, as well as Canada’s most
important Pacific port, is Vancouver. It is beautifully situated on
Burrard Inlet on a site discovered in 1792 by Captain John
Vancouver. In 1865 a lumber mill was started on the inlet and a
settlement grew up here. About twenty years later the town was
entirely destroyed by fire, so that the city of to-day was really
founded in 1886.
Vancouver is about the same size as Omaha, and is the fourth
largest city of the Dominion. It is the terminal of the Canadian Pacific
and Canadian National railways, and of several roads from the
States. It has steamship lines to Hawaii and China and Japan and
also to the Philippines, Australia, and New Zealand. There are coast
lines to Seattle, Victoria, Prince Rupert, and Alaska.
Let us go for a motor ride about the city. The Vancouver climate
is warmer and more moist than that of the south of England, and
flowers can be seen blooming in the gardens all the year round. On
Shaughnessy Heights are the beautiful homes of Vancouver’s
millionaires, and farther out is Stanley Park. Here, overlooking the
Narrows through which the ships enter the harbour, are thousands of
giant cedars and Douglas firs, some of them one hundred and fifty
and two hundred feet high.
We find Vancouver’s commercial districts busy and crowded. At
the wharves we see twenty ocean steamers loading lumber to be
carried to all parts of the world, and learn that sixteen million feet are
shipped from here in one month. Vancouver is increasing in
importance as a wheat-shipping port. It sends a million bushels or
more to the Orient, and twice as much to Europe by way of the
Panama Canal.
Eighty miles across the Strait of Georgia from Vancouver is
Victoria, British Columbia’s capital, noted for the architectural beauty
of the provincial government buildings. It lies at the southern end of
Vancouver Island, overlooking the Strait of Juan de Fuca and the
snow-capped Olympic Mountains on the mainland. It is considered
one of the most English of Canadian cities, not only in climate and
aspect, but in the customs and traditions of its residents. It is the site
of the Dominion Astrophysical Observatory, one of the largest of its
kind in the world.
CHAPTER XXX
PRINCE RUPERT
I am at the north terminal of the Canadian National Railways and

the port of the shortest Pacific route to the Orient. Prince Rupert is
located on an island in a beautiful bay five hundred miles north of
Vancouver and only thirty miles south of our Alaskan boundary. Its
harbour is open all the year round. It is fourteen miles long, is
sheltered by the mountains and islands about it, and large enough
for all the demands of travel. The town reminds me of Jaffa, the port
of Jerusalem. It is right on the sea, and the buildings climb up and
down the mountains of rock close to the shore. The chief difference
is that the hills of Jaffa are bleak and bare, while those of Prince
Rupert are wooded and clad in perpetual green.
Until 1912, when the Grand Trunk Pacific Railway, now a part of
the Canadian National lines, chose this point for its western
terminus, this place was a forest. Pines and cedars covered the
mountains above, and the stumps still rising out of the vacant lots
look like the black bristles of an unshaven chin. The town has
several thousand people, and I venture it has thousands of stumps.
They are rooted in the crevices of the rock, and the ground between
them is matted with muskeg, which holds water like a sponge and
makes it impossible to go across country without thick boots or
rubbers.
Southern British Columbia is a land of winding
rivers and lakes, towering mountains and sheltered
valleys. Many of the little cities along the Columbia
and the Kootenay have been settled largely by
Britishers.
Apples from the irrigated orchards of the Pacific
slope are sold in eastern Canada, three thousand
miles away, in competition with the famous Nova
Scotia fruit. British Columbia often ships a million
boxes of apples a season.
Victoria, in its appearance, its climate, and its
people, is like a section of the south of England
transplanted to Vancouver Island. It is noted for the
beauty of its location and for its handsome provincial
parliament buildings.
The muskeg was one of the difficulties that had to be overcome
in laying out and building the city. Another and still greater difficulty
was blasting the hills. Every bit of the town is founded on bed rock,
and many places have had to be levelled with dynamite for the
business streets and foundations of buildings. The streets in the
residential section are paved with three-inch planks. They look like
continuous bridges, but they are substantial enough for heavy
teams, motor trucks, and automobiles. In some places the planks are
spiked to trestle-work from ten to fifteen feet high, and in others they
lie on the rock. The steep hills that extend back to the wooded
mountains behind Prince Rupert are so rough that to cut roads
through them would bankrupt the city many times over.
It was in company with a member of the board of trade and the
civil engineer who laid out Prince Rupert that I took an automobile
ride through the town. The plank roads are so narrow that turning-out
places have been built at the cross streets and curves, and the

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Essentials of Business Law and the

Legal Environment 13th Edition Richard

Richard A. Mann Barry S. Roberts

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

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

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

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

3 Civil Dispute Resolution 44 Part V

33 Nature and Formation of Corporations 634 45 Environmental Law 925

Chapter 7: Intentional Torts 121 Fraud 199

Chapter 19: Introduction to Sales and Leases 332

Warranties on Presentment 487 Forms of Business Associations 564

Bank Deposits and Collections 494 Nature of Partnership 567

Business Law in Action 540 Dissolution 603

Chapter 33: Nature and Formation Officers 691

Trade Names 834 Nuisance 925

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

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

The Tradition Continues

Uniform Certified Public Accountant Examination

Business Ethics Emphasis

New to This Edition

Additional End-of-Chapter Questions and Case Problems

Coverage of Recent U.S. Supreme Court Decisions

Case Critical Thinking Questions

Applying the Law

Business Law in Action

Classroom-Proven End-of-Chapter Materials

Additional Course Tools

Nature of Law [1-1]

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

Functions of Law [1-1b]

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

Figure 1-1 Law and Morals

Law and Justice [1-1d]

Classification of Law [1-2]

Figure 1-2 Classification of Law

CONCEPT REVIEW 1-1

Comparison of Civil and Criminal Law

Burden of Proof Preponderance of the evidence Beyond a reasonable doubt

Principal Sanctions Monetary damages Capital punishment

Sources of Law [1-3]

Constitutional Law [1-3a]

Figure 1-3 Hierarchy of Law

Treaties Federal Statutes

CONCEPT REVIEW 1-2

Comparison of Law and Equity

Availability Generally Discretionary: if remedy at law is inadequate

Precedents Stare decisis Equitable maxims

Decree of specific performance, injunction, reformation,

Legislative Law [1-3c]

Administrative Law [1-3d]

Legal Analysis [1-4]

Law Versus Ethics [2-1]

Ethical Theories [2-2]