The legal Environment of

Business and Online Commerce

by Henry R. Cheeseman

Chapter 1
Legal Heritage and the
Information Age
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 Chapter content
• Introduction
• What is law?
• Functions of law
• Qualities of law
• History of American law
• Sources of law in the United States
• Priority of law

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 Introduction (1/2)

• Every society makes and enforces laws that

govern the conduct of the individuals,

businesses, and other organizations that

function within it.

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 Introduction (2/2)
• US law is primarily based on English common
law; it is also influenced by other legal systems,
such as Spanish and French civil law.
• Businesses in the United States are subject to
its laws, and to the laws of the countries in
which they operate.
• Businesspeople also owe a duty to act ethically
in the conduct of their affairs, and businesses
owe a responsibility not to harm society.
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 What Is Law?
• The law consists of rules that regulate the
conduct of individuals, businesses, and other
organizations within society.
• It is intended to protect persons and their
property against unwanted interference from
others.
• The law forbids persons from engaging in
certain undesirable activities.

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 Definition of Law
• The concept of law is broad, and it is difficult to
state a precise definition
• Black’s Law Dictionary gives the following
definition:
– Law is a body of rules of action or conduct
prescribed by controlling authority, and having
binding legal force.
– That which must be obeyed and followed by
citizens subject to sanctions or legal consequences.

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 Functions of the law (1/3)
• The law is often described by the function it serves in a
society.
• The primary functions served by the law are the following:
1. Keeping the peace
Example: Some laws make certain activities crimes
2. Shaping moral standards
Example: Some laws discourage drug and alcohol abuse
3. Promoting social justice
Example: Some laws prohibit discrimination in
employment

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 Functions of Law (2/3)
4. Maintaining the status quo
Example: Some laws prevent the forceful overthrow
of the government
5. Facilitating orderly change
Example: Laws are enacted after considerable
study, debate, and public input
6. Facilitating planning
Example: Well-designed commercial laws allow
businesses to plan their activities, allocate their
resources, and assess their risks

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 Functions of Law (3/3)
7. Providing a basis for compromise:
Example: Approximately 90 percent of all lawsuits
are settled prior to trial
8. Maximizing individual freedom:
Example: The rights of freedom of speech, religion,
and association are granted by the First
Amendment to the U.S. Constitution

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 Qualities of the Law
Fairness
Fairness of
of the
the Law
Law (1/2)
(1/2)
•• On
Onthe
thewhole,
whole,the
theAmerican
Americanlegal
legalsystem
systemisisone
oneofof
the
themost
mostcomprehensive,
comprehensive,fair,
fair,and
anddemocratic
democratic
systems
systemsof oflaw
lawever
everdeveloped
developedandandenforced.
enforced.
•• Nevertheless,
Nevertheless,some
someof ofits
itsmisuses
misusesand
andoversights
oversights--
including
includingabuses
abusesof ofdiscretion
discretionand
andmistakes
mistakesbybyjudges
judges
and
andjuries,
juries,unequal
unequalapplications
applicationsofofthe
thelaw,
law,and
and
procedural
proceduralmishaps
mishaps--allow
allowsome
someguilty
guiltyparties
partiesto
togo
go
unpunished.
unpunished.

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 Qualities of the Law
Fairness
Fairness of
of the
the Law
Law (2/2)
(2/2)
•• Example
Example (p.(p. 44 of
of textbook):
textbook): In In Standefer
Standefer v.v.
United
United States,
States, Chief
Chief Justice
Justice Warren
Warren Burger
Burger of of
the
the U.S.
U.S. Supreme
Supreme CourtCourt stated,
stated, “This
“This case
case
does
does no
no more
more than
than manifest
manifest the the simple,
simple, ifif
discomforting,
discomforting, reality
reality that
that different
different juries
juries may
may
reach
reach different
different results
results under
under any
any criminal
criminal
statute.
statute. That
That isis one
one of
of the
the consequences
consequences we we
accept
accept under
under ourour jury
jury system.”
system.”
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 Qualities of the Law
Flexibility of the Law
• U.S. law evolves and changes along with the norms of
society, technology, and the growth and expansion of
commerce in the United States and the world.
• The constant development of unprecedented problems
requires a legal system capable of fluidity and pliancy.
• Landmark Law: The U.S. Supreme Court case—Brown
v. Board of Education shows the flexibility of the law
because the U.S. Supreme Court overturned a past
decision of the U.S. Supreme Court.(pp. 5-6).

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 Landmark U.S. Supreme Court - CASE Equal
Protection - Brown v. Board of Education
• Supreme Court reversed prior precedent of
Plessy v. Ferguson (1896).
• Court held that the separate but equal
doctrine violated the Equal Protection Clause
of the Fourteenth Amendment to the
Constitution.
• The case demonstrates that one Supreme
Court can overrule prior Supreme Court cases
to promote justice.
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 History of American Law
• When the American colonies were first
settled, the English system of law was
generally adopted as the system of
jurisprudence.
• This was the foundation from which
American judges developed a common
law in America.

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 English Common Law (1/4)
• English common law was developed by judges
who issued their opinions when deciding a case.
• The principles announced in these cases became
precedent for later judges deciding similar cases.
• The English common law can be divided into
cases decided by the law court, equity courts (or
the court of Chancery), and merchant courts.

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 English Common Law (2/4)
Law courts
• Established after 1066 by William the Conqueror
and his successors to the throne of England to
replace the various local laws.
• To accomplish this, the king or queen appointed
loyal followers as judges in all local areas.
• Legal procedure was emphasized over the
substance (merit).
• The only relief was a monetary award for damages.
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 English Common Law (3/4)
Chancery (equity) courts
• Because of the unfair results of law courts, a second
set of courts - the Court of Chancery (or equity court)
- was established.
• Persons who believed that the decision of a law court
was unfair could seek relief in the Court of Chancery.
• Chancery courts granted relief based on fairness
(rather than procedure).

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 English Common Law (4/4)
Merchant courts
• As trade developed, merchants developed certain
rules to solve their commercial disputes.
• These rules were based on common trade practices
and usage.
• Eventually, a separate set of courts was established
to administer these rules. This court was called the
Merchant Court.
• In the early 1900s, the Merchant Court was absorbed
into the regular law court system of England.

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 Landmark Law
Adoption of English Common Law in America
• All states, except Louisiana, base their legal systems
on the English common law.
• In the U.S., the law, equity, and merchant courts have
been merged.
• Most U.S. courts permit the aggrieved party to seek
both legal and equitable orders and remedies.
• Currently, the law of the United States is a
combination of law created by the judicial system
and by congressional legislation.

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 Global Law (1/2)
Civil Law System of France and Germany
• In addition to the Anglo-American common law
system, the Roman-Germanic civil law system
(commonly called the civil law), is one of the major
legal systems developed in the world.
• This legal system dates to 450 BCE, when Rome
adopted the Twelve Tables, a code of laws applicable
to the Romans.
• Later, the French Civil Code of 1804 (the Napoleonic
Code) and the German Civil Code of 1896—became
models for countries that adopted civil codes.

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 Global Law (2/2)
Civil Law System of France and Germany
• In contrast to the Anglo-American law, in which laws
are created by the judicial system as well as by
congressional legislation, the civil code and
parliamentary statutes are the sole sources of the
law in most civil law countries..
• The adjudication of a case is simply the application
of the code or the statutes to a particular set of
facts.
• Many countries in Europe and elsewhere in the world
follow the civil law system.
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 Sources of Law in the United States
The sources of modern law in the United States are:
• Constitutions
• Treaties
• Federal statutes
• State statutes
• Ordinances
• Executive orders
• Regulations and orders of administrative agencies
• Judicial decisions
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 Constitutions (1/2)
• The US Constitution is the supreme law of the land: Any law -
federal, state or local - that conflicts with the US Constitution is
unconstitutional and, therefore, unenforceable.
• Established the structure of the federal government and
created the following three branches of government :
– The legislative branch (Congress) has the power to make
(enact) the law.
– The executive branch (president) has the power to enforce
the law.
– The judicial branch (courts) has the power to interpret and
determine the validity of the law.

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 Constitutions (2/2)
• Powers not given to the federal government are
reserved for the states.
• States also have their own constitutions often
patterned after the US Constitution.
• State constitutions establish the legislative, executive
and judicial branches of state government and
enumerate their powers.
• Provisions of state constitutions are valid unless they
conflict with the US Constitution or any valid federal
law.
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 Treaties
• The US Constitution provides that the president,
with the advice and consent of two-third of the
Senate, may enter into treaties with foreign
governments.
• Treaties become part of the supreme law of the
land.
• With increasing international economic relations
among nations, treaties will become an even more
important source of law that will affect business in
the future.
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 Federal Statutes
• Statutes are written laws that establish certain courses of
conduct that covered parties must adhere to.
• The US congress empowered to enact federal statutes to
regulate foreign and interstate commerce (such as antitrust
laws, bankruptcy laws and consumer protection laws).
• Examples of federal statutes: The federal Clean Water Act
regulates the quality of water and restricts water pollution;
the federal Securities Act of 1933 regulates the issuance of
securities; the federal National Labor Relations Act establishes
the right of employees to form and join labor organizations.

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 State Statutes
• State legislatures enact state statutes.
• Examples: The state of Florida has enacted the Lake
Okeechobee Protection Act to protect Lake
Okeechobee and the northern Everglades ecosystem;
the Nevada Corporations Code outlines how to form
and operate a Nevada corporation; the Texas Natural
Resources Code regulates oil, gas, mining,
geothermal, and other natural resources in the state.

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 Ordinances
• State legislatures often delegate lawmaking
authority to local government bodies,
including cities and municipalities, counties,
school districts, and water districts.
• These governmental units are empowered to
adopt ordinances.
• City ordinances include zoning laws, building
codes, and sign restrictions.

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 Executive orders
• The executive branch of government, which
includes the president of the United States and
state governors, is empowered to issue executive
orders.
• This power is implied from the U.S. Constitution
and state constitutions.
• For example, when the US is at war against
another country, the US president may issue
executive orders prohibiting US companies from
selling goods or services to that country.
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 Regulations and Orders of Administrative
Agencies
• The legislative and executive branches of federal and state
governments are empowered to establish administrative
agencies to enforce and interpret statutes enacted by
Congress and state legislatures.
• Many agencies regulate business.
• Example: The US congress created the Securities and Exchange
Commission (SEC) to enforce federal securities laws.
• Administrative agencies adopt administrative rules and
regulations to interpret the statutes and have the power to
hear and decide disputes (their decisions are called orders).
• Because of their power, administrative agencies are often
referred to as “the fourth branch of government”.
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 Judicial decisions (1/3)
• When deciding individual lawsuits, federal and state
courts issue judicial decisions.
• In these written opinions, the judge or justice usually
explains the legal reasoning used to decide the case.
• These opinions often include interpretations of
statutes, ordinances, administrative regulations, and
the announcement of legal principles used to decide
the case.

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 Judicial decisions (2/3)
Doctrine of Stare Decisis
• Based on the common law tradition, past court
decisions become precedent for deciding future
cases.
• Lower courts must follow the precedent established
by higher courts.
• Thus, all federal and state courts in the U.S. must
follow the precedents established by U.S. Supreme
Court decisions.

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 Judicial decisions (3/3)
Doctrine of Stare Decisis
• Adherence to precedent is called stare decisis (“to stand
by the decision”).
• The doctrine of stare decisis promotes uniformity of law
within a jurisdiction.
• The courts of one jurisdiction are not bound by the
precedent established by the courts of another
jurisdiction, although they may look to each other for
guidance.
• A court may later change or reverse its legal reasoning if a
new case is presented to it and change is warranted.
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 Priority of Law in the United States
• The U.S. Constitution and treaties take precedence
over all other laws.
• Federal statutes take precedence over federal
regulations.
• Valid federal law takes precedence over any conflicting
state or local law.
• State constitutions rank as the highest state law.
• State statutes take precedence over state regulations.
• Valid state law takes precedence over local laws.

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