Summary

The Law

Statutory, Common, and Tort Law

There are different sources of law in the U.S. legal system. The U.S. Constitution is foundational; US statutory and common law cannot be inconsistent with its provisions. Congress creates statutory law (with the signature of the president), and courts will interpret constitutional law and statutory law. Where there is neither constitutional law nor statutory law, the courts function in the realm of common law. The same is true of law within the fifty states, each of which also has a constitution, or foundational law. Specifically of interest to business are torts which are a civil wrong (other than breach of contract) arising out of conduct or nonconduct that violates societal norms as determined by the judicial system. Unlike contracts and crimes, torts do not require legislative action.

Contracts

Every transaction in business creates a contract (agreement) between the parties. In order to determine whether a valid, enforceable contract exists, the following questions must be answered: (1) Did the parties reach an agreement? (2) Was consideration present? (3) Was the agreement legal? (4) Did the parties have capacity to make a contract? (5) Was the agreement in the proper form? Remedies available against someone who breaches a contract include damages, specific performance, and restitution. Frequently the party who is not in breach must choose between tort and contract remedies.

Liability, Negligence, and Fraud

Because the doctrines of breach of warranty and negligence did not provide adequate relief to those suffering damages or injuries in products-liability cases, beginning in the 1960s courts developed a new tort theory: strict products liability.  This doctrine of law says that if goods sold are unreasonably dangerous or defective, the merchant-seller will be liable for the immediate property loss and personal injuries caused thereby. But there remain obstacles to recovery even under this expanded concept of liability: disclaimers of liability have not completely been dismissed, the plaintiff’s conduct or changes to the goods may limit recovery, and—with some exceptions—the remedies available are limited to personal injury (and damage to the goods themselves); economic loss is not recoverable.

Warranties

A first basis of recovery in products-liability theory is breach of warranty. There are two types of warranties: express and implied. Under the implied category are three major subtypes: the implied warranty of merchantability (only given by merchants), the implied warranty of fitness for a particular purpose, and the implied warranty of title. Under warranty law there must have been a sale of the goods; the plaintiff must bring the action within the statute of limitations; and the plaintiff must notify the seller within a reasonable time. The seller may limit or exclude express warranties or limit or exclude implied warranties.

Damages

As the purpose of contract remedies is, in general, to make the nonbreaching party whole, the law allows several types of damages (money paid) to reflect the losses suffered by the nonbreaching party. Compensatory damages compensate for the special loss suffered; consequential damages compensate for the foreseeable consequences of the breach; incidental damages compensate for the costs of keeping any more damages from occurring; nominal damages are awarded if the actual amount cannot be shown or there are no actual damages; liquidated damages are agreed to in advance where the actual amount is difficult to ascertain, and they are allowed if not a penalty; and punitive damages may sometimes be allowed if the breaching party’s behavior is an egregious tort, an outrage.

Synthesis

Now that you have studied the legal environment of business, let’s go back and check on your roommate. What do you think the outcome of the lawsuit was?

You probably won’t be surprised to learn that your roommate was liable for negligence in kicking over the paint bucket, but you may be dismayed to learn that you were, too. When it comes to the claim of assault and battery, your roommate was also liable for that, but you may be protected from liability. As for the damages that you’ll have to pay in order to settle the homeowner’s negligence suit, you’ll be pleased to learn that you can indeed write them off as “ordinary” business expenses (unless they’re paid by your insurance company).

After working through this module you should be aware that even after paying damages you still fared better than your roommate, because assault and battery violates statutes established by two different types of law—criminal and civil.

It is incumbent on each business professional to become familiar with the legal environment in his or her profession. Employers may provide training regarding legal environment issues, such as anti-sexual harassment training or anti-insider trading training, but ultimately, becoming familiar with the legal environment is each person’s individual responsibility. Remember that a defense of “I didn’t know the law!” is no defense at all.