This article will provide an overview of business law. The article will explain the basic concepts that are foundational to business law. These concepts include forming and enforcing contracts, dealing in the sales of goods and drafting and honoring negotiable instruments such as checks or promissory notes. In addition, this article also explains issues that relate to business formation and dissolution, such as common forms of business organizations, agency and employment relationships and bankruptcy proceedings. Other important factors that are central to business law are introduced, including business ethics, business crimes and business management. Finally, examples of the interplay between business law, government regulation and consumers are provided. These examples describe how business law is impacted by environmental regulations, consumer protection laws and antitrust laws and are included to help illustrate how business development and business law functions within the often competing interests of profit-making, consumer rights and government oversight.
Keywords Agency; Business Organization; Contract; Ethics; Goods; Negotiable Instrument; Partnership; Securities
Law: Business Law
Business law is a branch of civil law that governs business and commercial dealings. This broad area of the law includes sections dealing with business formation, administration and management as well as the contracts and ventures that businesses initiate, enter and enforce as they develop. Business law as it stands today is the result of principles that have developed through federal and state common law and the compilation of laws into legal codes and models that provide frameworks for certain areas of the law.
For many matters relating to routine business transactions, businesses follow the laws set forth in the Uniform Commercial Code (UCC). In 1952, the United States grouped many business laws into a model that could be used by all states to regulate business formation and operation. The UCC is a compilation of rules that apply to commercial transactions between businesses and between individuals and businesses. It has been adopted by 49 states, with Louisiana only using portions of it. By standardizing business laws, the UCC simplified the process of doing business across state lines, which greatly facilitated the rise in interstate commerce and business development. The major areas covered by the UCC include the sale of goods, bank deposits and collections, letters of credit, title documents and investment securities. In addition to the UCC, many government regulations and federal and state laws make up the body of business law. These laws have significantly shaped the relationships between businesses and consumers and businesses and government regulation. The following sections provide a more in-depth explanation of these concepts.
Basic Concepts in Business Law
Businesses do business with other business entities, with consumers and even with government agencies. In order to carry out their purposes, businesses enter into contracts, negotiate the sale of goods and create commercial paper and negotiable instruments. Each one of these business activities is regulated by law and businesses must conform their dealings with the relevant legal requirements or face penalties or lawsuits that could cripple, or even extinguish, its viability as a continuing enterprise. The following sections explain the legal principles at work in each of these business activities.
Every business, whether large or small, enters into contracts with employees, suppliers of goods and services and customers in order to conduct its business operations. This makes contract law an important subject for the business manager. Contract law is also basic to other fields of law with which business interact, such as agency, partnerships, sales of personal property and commercial paper. Thus, contract formation is a basic component of the life of any business.
A contract is a binding agreement that the courts will enforce. In other words, a contract is a promise that one or both parties to an agreement extend, and if the promise is broken or "breached," the courts will provide a remedy to the non-breaching party. Thus, a contract provides both parties to an agreement with the expectation that the other party will fulfill their promised performance. Contracts are primarily governed by state common law and certain sections of the UCC.
There are basic elements to a legally binding agreement that must be met in order for a contract to be considered valid and enforceable. These four requirements are mutual assent, consideration, legality of object and capacity. Mutual assent means the parties must show in words or actions that they have agreed to enter into a contract. Usually, this is shown by offer and acceptance, and mutual assent may be in the form of a writing or, in some circumstances, an oral agreement or simply a reasonable inference from a person's behavior. Consideration is a thing of value that each party intentionally exchanges as an inducement for the other party's fulfillment of the agreement. For instance, when one person exchanges money for the other party to perform a service, both parties have provided consideration to support their agreement. Legality of object means that the purpose of the contract must not be criminal, must not cause certain types of harm, known as torts, or be against public policy. Finally, both parties must have the capacity to enter into contractual obligations. In other words, minors and intoxicated parties have a limited capacity to enter into contracts while persons who have a court appointed guardian have no contractual capacity. Most others have full contractual capacity. While each of these elements require close analysis to determine whether they have been met, courts will generally uphold any agreement in which both parties who have the capacity to form contracts have assented to their agreement and provided consideration to support its terms, and the purpose of the contract is not criminal or against public policy. Courts will generally not examine the relative fairness of the terms of the contract if these elements have been met, unless there is some evidence of an egregious imbalance of power in the formation of the contract.
Contracts are generally classified into five categories according to their terms or method of formation. The first category deals with how a contract was formed. An express contract is stated in words that are expressed orally or are reduced to writing. An implied in fact contract is an agreement that is inferred from the conduct of the parties. For instance, if a customer walks into a fast-food restaurant and points at an item on the menu, the cashier will likely ring up the item and the customer will pay. Even though no words were spoken, this is a valid contract because the cashier understands from the customer's conduct that he wants to order the item he indicated and the customer understands that by pointing to an item on the menu, the cashier will charge him for the food.
Second, contracts can also be classified as bilateral or unilateral. In a bilateral contract, both parties exchange promises. In a unilateral contract, only one party makes a promise. If it is unclear as to whether a contract is bilateral or unilateral, courts will look to the behavior of the parties to see whether it is possible to presume that a bilateral contract was intended. Third, contracts are sometimes categorized according to their enforceability. A valid contract is one that meets all of the requirements of a binding contract, such as mutual assent, consideration, legality of purpose and capacity, and is enforceable by courts. A void contract is one that does not meet all of these requirements and thus has no legal effect because the contract was never fully formed. For instance, if the courts determine a person is incompetent, any contract in which he or she enters will be void because the party lacked the legal capacity to form a contract. A voidable contract is a fully formed contract, but because of problems in the way it was formed, courts permit one or more parties to avoid the legal duties that the contract creates. Finally, an unenforceable contract is one for which there is no remedy for a breach.
Contracts may also be executed or executory. An executed contract is one in which all of the parties have fully completed their promised performance. An executory contract is one in which one or both parties have not completed the performance due. Finally, contracts may be formal or informal. A formal contract is legally binding due to its particular nature. For instance, a negotiable instrument such as a check is a formal contract because it contains all of the necessary elements to transfer funds. An informal contract is a contract that is legally binding but does not require certain formalities to be met.
Sales are the most common of all commercial transactions. In an exchange economy such as ours, practically everyone is a purchaser of durable and consumer goods, and the movement of goods along the continuum from manufacturer to distributor and ultimately to consumer involves numerous sales transactions. The critical role of the law of sales is to establish a framework in which these exchanges may take place in a predictable, fair and orderly fashion with minimum levels of transaction costs.
Article 2 of the UCC governs the sale of goods. In general, a sale is the transfer of ownership of goods from seller to buyer for a price. The price can be paid in money, other goods, real property or services. Goods are essentially defined as movable, tangible, personal property. For example, the sale of a bicycle, stereo set or furniture is considered a sale of goods. Thus, the law of sales under the UCC does not cover secured transactions, leases or real property issues. The UCC requires that all sales contracts be performed in good faith, which means merchants must act with honesty and candor in their business dealings with consumers and observe reasonable commercial standards in dealing with other merchants. A court may refuse to enforce all or any part of a contract that it finds to be unconscionable, either because of unfairness in the bargaining process or because the terms of the contract are grossly unfair or oppressive.
Businesses must pay close attention to the special provisions for transactions between merchants, or those who act as dealers in goods, because the UCC establishes separate rules that apply to these transactions. These rules demand higher standards of conduct from merchants because of their knowledge of trade and commerce and because merchants as a class generally set these standards for themselves. The other sections of Article 2 regulate every phase of a transaction for the sale of goods and provides remedies for problems that may arise. Businesses must conform to the UCC's provisions for contract formation, issues arising prior to performance and the seller's obligations to the buyer regarding the condition and quality of his goods. In addition, the UCC also requires that merchants offer implied warranties of merchantability and fitness that assure that their goods are quality products that are fit for consumption.
Courts generally allow merchants and businesses to contract freely according to their individual needs. However, parties to a sales contract may not agree and may disregard their duties of good faith, diligence, reasonableness and care in their dealings with one another. If a sales negotiation or transaction does break down so that a lawsuit arises, the UCC provides that courts may grant remedies to place the injured party in as good of a position as she would have been in had the defaulting party fully performed. However, under the UCC, remedies are limited to compensation and thus courts may not set additional punitive damages if the UCC does not specifically provide for them. Courts may supply alternative remedies only if the UCC does not expressly provide for an appropriate remedy.
Commercial paper is essentially a contract for the payment of money. Commercial paper can function as a substitute for money that is payable immediately, such as a check, or it can be used as a means of extending credit or delaying payment, as in a promissory note or certificate of deposit. One form of commercial paper that is frequently used by businesses is a negotiable instrument. The UCC defines negotiable instruments as signed documents that readily transfer money and that provide a promise to pay the bearer a sum of money at a future date or on demand. If the instrument does not meet these requirements, it is nonnegotiable and is treated as a simple contract rather than as a negotiable instrument. If an instrument is incomplete because the party omitted a necessary element, such as the amount payable or the designation of the payee, the instrument is not negotiable until it is completed. If an instrument is ambiguous, such as if it is unclear whether the instrument is a draft or a note, the UCC allows the holder to treat it as either one and present it for payment to the drawee. However, certain rules of construction apply in that handwritten changes overrule typewritten or printed words and words overrule figures unless the words are unclear.
The two basic types of negotiable instruments are promises to pay money and orders to pay money. Promises to pay money are relatively simple documents such as a promissory note. A promissory note consists of one person, known as the maker, extending an unconditional promise in writing to pay another person, called the payee, or the person who bears the instrument a fixed amount of money either on demand when the note is presented for payment or at a specified date in the future. A promissory note is often used if a person borrows money from a bank to purchase an automobile. In this instance, the bank will direct the person to sign a promissory note for the unpaid balance of the purchase price.
Another type of negotiable instrument, called an order to pay money, directs a third person to pay money rather than using the two-person arrangement common in promises to pay money. A check is a form of this type of negotiable instrument. A check has three parties to it: one person, known as the drawer, writes a check ordering the drawee, such as a bank, to pay a certain sum of money to a third person, the payee. For instance, Lisa, the owner of a furniture store in Los Angeles, contracts with Juan, a furniture manufacturer in North Carolina, for $20,000 worth of tables, chairs and bookcases. Without negotiable instruments, Lisa would have to risk sending cash across the country to pay Juan for the furniture. If someone stole the money along the way, Lisa would lose the $20,000 and still not have the furniture she requested. By using a check in which Lisa orders her bank to pay $20,000 from her account to Juan, Lisa is able to make the payment in a far more convenient and secure manner.
Business Formation, Organization
The legal form of a business can have great bearing on the operation and profitability of a business venture. This is because different business organizations provide for different requirements in terms of the management or ownership of the operation, the division of profits, the liability of founders for the wrongdoing of any of their peers and the collection of debts and distribution of assets upon the dissolution of the enterprise. The following sections will discuss the various forms of business organizations in more detail.
Common Forms of Business Organization
The most common forms of business organizations are sole proprietorships, partnerships, corporations, limited liability companies and limited liability partnerships. A sole proprietorship is a business operated by a person as his own personal property. The enterprise is merely an extension of the individual owner. Agents and employees may be hired but the owner has all the responsibility for the development and growth of the business and personal liability for all of its profits and losses.
A partnership is a voluntary association of people who work together to carry on a business for profit. No formal or written agreement is necessary to create a general partnership. All that is required is that the parties intend to work together to run a business for profit. There are two types of partnerships. In a general partnership, each of the partners is an owner and is entitled to share in the profits of the business. In addition, each partner in a general partnership typically has unlimited personal liability and is jointly and severally liable for the damages resulting from the wrongdoing committed by any of the other partners. Joint liability means that the partners can be sued as a group; several liability means that the partners can be sued individually. Thus, there are benefits and risks involved in the formation of a general partnership. In a limited partnership, there are typically two classes of partners: general partners and limited partners. General partners may participate in the management of the partnership and are personally liable for damages. Limited partners, however, are allowed to share in the profits of the business but may not engage in management of the partnership. Also, limited partners are not personally liable for the partnership's debts.
A corporation is a business entity that is separate and distinct from its owners. Thus, the corporation continues to exist even if owners leave the corporation or die. Owners, known as shareholders, do not engage in management responsibilities but rather elect a board of directors to set the course for the corporation and appoint officers to carry out the daily tasks of managing the corporation. A corporation can acquire and hold property in its name and it can sue or be sued in its name. Most corporations are either close corporations or publicly held. A close corporation is held by a family or small group of people. A publicly held corporation is owned by shareholders from the general public who have invested in the corporation. Corporations are formed by filing articles of incorporation and other documents with the appropriate state agency.
Most states permit businesses to operate as limited liability companies ("LLCs") or limited liability partnerships ("LLPs"). LLCs are similar to corporations in that they require the filing of articles of organization with...