Introduction to Contracts, Sales, Product Liability, and Bankruptcy

Contracts are an integral part of doing business. Managers in all areas of a business should have a basic understanding of what constitutes an enforceable contract. Finally, while business managers would hope not to be in a situation where they had to consider bankruptcy, they should still be aware of the options available to them, from complete liquidation to reorganizing or renegotiating part of their debt.

Understanding the Legal Environment

  1. How does the legal system govern business transactions and settle disputes?

Our legal system affects everyone who lives and does business in the United States. The smooth functioning of society depends on the law, which protects the rights of people and businesses. The purpose of law is to keep the system stable while allowing orderly change. The law defines which actions are allowed or banned and regulates some practices. It also helps settle disputes. The legal system both shapes and is shaped by political, economic, and social systems. As Judge Learned Hand wrote in The Spirit of Liberty, "Without [the law] we cannot live; only with it can we insure the future which by right is ours".

In any society, laws are the rules of conduct created and enforced by a controlling authority, usually the government. They develop over time in response to the changing needs of people, property, and business. The legal system of the United States is thus the result of a long and continuing process. In each generation, new social problems occur, and new laws are created to solve them. For instance, in the late 1800s corporations in certain industries, such as steel and oil, merged and became dominant. The Sherman Antitrust Act was passed in 1890 to control these powerful firms. Eighty years later, in 1970, Congress passed the National Environmental Policy Act. This law dealt with pollution problems, which no one had thought about in 1890. Today new areas of law are developing to deal with the internet and the recent financial scandals.

The Main Sources of Law

Common law is the body of unwritten law that has evolved out of judicial (court) decisions rather than being enacted by legislatures. It is also called case law. It developed in England and came to America with the colonists. All states except Louisiana, which follows the Napoleonic Code inherited from French settlers, follow the English system. Common law is based on community customs that were recognized and enforced by the courts.

Statutory law is written law enacted by legislatures at all levels, from city and state governments to the federal government. Examples of statutory law are the federal and state constitutions, bills passed by Congress, and ordinances, which are laws enacted by local governments. Statutory law is the chief source of new laws in the United States. Among the business activities governed by statutory law are securities regulation, incorporation, sales, bankruptcy, and antitrust.

Related to statutory law is administrative law, or the rules, regulations, and orders passed by boards, commissions, and agencies of federal, state, and local governments. The scope and influence of administrative law have expanded as the number of these government bodies has grown. Federal agencies issue more rulings and settle more disputes than all the courts and legislatures combined. Some federal agencies that issue rules are the Civil Aeronautics Board, the Internal Revenue Service, the Securities and Exchange Commission, the Federal Trade Commission, and the National Labor Relations Board.

Business law is the body of law that governs commercial dealings. These laws provide a protective environment within which businesses can operate. They serve as guidelines for business decisions. Every businessperson should be familiar with the laws governing his or her field. Some laws, such as the Internal Revenue Code, apply to all businesses. Other types of business laws may apply to a specific industry, such as Federal Communications Commission laws that regulate radio and TV stations.

In 1952 the United States grouped many business laws into a model that could be used by all the states. The Uniform Commercial Code (UCC) sets forth the rules that apply to commercial transactions between businesses and between individuals and businesses. It has been adopted by 49 states; Louisiana uses only part of it. By standardizing laws, the UCC simplifies the process of doing business across state lines. It covers the sale of goods, bank deposits and collections, letters of credit, documents of title, and investment securities.

The Court System

The United States has a highly developed court system. This branch of government, the judiciary, is responsible for settling disputes by applying and interpreting points of law. Although court decisions are the basis for common law, the courts also answer questions left unanswered by statutes and administrative rulings. They have the power to assure that these laws do not violate the federal or state constitutions.

Trial Courts

Most court cases start in the trial courts, also called courts of general jurisdiction. The main federal trial courts are the U.S. district courts. There is at least one federal district court in each state. These courts hear cases involving serious federal crimes, immigration, postal regulations, disputes between citizens of different states, patents, copyrights, and bankruptcy. Specialized federal courts handle tax matters, international trade, and claims against the United States.

Appellate Courts

The losing party in a civil (noncriminal) case and a losing defendant in a criminal case may appeal the trial court's decision to the next level in the judicial system, the appellate courts (courts of appeals). There are 12 U.S. circuit courts of appeals. Cases that begin in a federal district court are appealed to the court of appeals for that district. These courts may also review orders from administrative agencies. Likewise, the states have appellate courts and supreme courts for cases tried in state district or superior courts.

No cases start in appellate courts. Their purpose is to review decisions of the lower courts and affirm, reverse, or modify the rulings.

The Supreme Court

The U.S. Supreme Court is the highest court in the nation. It is the only court specifically established by the U.S. Constitution. Any cases involving a state or in which an ambassador, public minister, or consul is a party are heard directly by the Supreme Court. Its main function is to review decisions by the U.S. circuit courts of appeals. Parties not satisfied with a decision of a state supreme court can appeal to the U.S. Supreme Court. But the Supreme Court accepts only those cases that it believes will have the greatest effect on the country, only about 200 of the thousands of appeals it gets each year.

Administrative Agencies

Administrative agencies have limited judicial powers to regulate their special areas. These agencies exist at the federal, state, and local levels. For example, in 2017, the Federal Trade Commission (FTC) ordered satellite TV provider Dish Network to pay a fine of $280 million for violating the Do Not Call Registry, a clearinghouse for consumers who do not want to be contacted by telemarketers. A federal judge ruled that Dish Network was liable for more than 66 million calls that violated the FTC's Telemarketing Sales Rule. A list of selected federal agencies is shown in Table A1.

Federal Regulatory Agencies
Agency Function
Federal Trade Commission (FTC) Enforces laws and guidelines regarding unfair business practices and acts to stop false and deceptive advertising and labeling.
Food and Drug Administration (FDA) Enforces laws and regulations to prevent distribution of adulterated or misbranded foods, drugs, medical devices, cosmetics, veterinary products, and hazardous consumer products.
Consumer Products Safety Commission Ensures compliance with the Consumer Product Safety Act and seeks to protect the public from unreasonable risk of injury from any consumer product not covered by other regulatory agencies.
Federal Communications Commission (FCC) Regulates wire, radio, and TV communication in interstate and foreign commerce.
Environmental Protection Agency (EPA) Develops and enforces environmental protection standards and researches the effects of pollution.
Federal Energy Regulatory Commission (FERC) Regulates rates and sales of natural gas products, thereby affecting the supply and price of gas available to consumers; also regulates wholesale rates for electricity and gas, pipeline construction, and U.S. imports and exports of natural gas and electricity.
Federal Aviation Administration (FAA) Oversees the policies and regulations of the airline industry.
Federal Highway Administration (FHA) Regulates vehicle safety requirements.

Table A1

Nonjudicial Methods of Settling Disputes

Settling disputes by going to court is both expensive and time-consuming. Even if the case is settled prior to the actual trial, sizable legal expenses can be incurred in preparing for trial. Therefore, many companies now use private arbitration and mediation firms as alternatives to litigation. Private firms offer these services, which are a high growth area within the legal profession.

With arbitration, the parties agree to present their case to an impartial third party and are required to accept the arbitrator's decision. Mediation is similar, but the parties are not bound by the mediator's decision. The mediator suggests alternative solutions and helps the parties negotiate a settlement. Mediation is more flexible than arbitration and allows for compromise. If the parties cannot reach a settlement, they can then go to court, an option not available in most arbitration cases.

In addition to saving time and money, corporations like the confidentiality of testimony and settlement terms in these proceedings. Arbitration and mediation also allow businesses and medical professionals to avoid jury trials, which can result in large settlements in certain types of lawsuits, such as personal injury, discrimination, medical malpractice, and product liability.