Legal Fundamentals

Introduction To Law

Law is essential to any society in that it provides the rules by which people and businesses interact. Law affects almost every function and area of business. The authors of one business law text go so far as to say that “the difference between winning and losing in the business world often depends upon the ability to make good choices from a legal perspective.” This is because almost every business decision has legal repercussions, including deciding whether to incorporate a business, obtaining financing, protecting proprietary knowledge used to develop products/services, entering into contracts to purchase raw materials, ensuring that products meet safety standards, disposing of plant wastes, promoting and pricing products/services, entering into contracts to sell products/services, and providing product warranties and aftersales service.

At all stages of business, running afoul of the law can hurt a business, while playing within the boundaries of the law can help the business to succeed. For this reason, accountants, who play a key role in almost every aspect of operations, must have a solid working knowledge of the law.

Definition and Purpose of Law

The word “law” is generally associated with the word “rules.” McInnes, Kerr, and Van Duzer provide a simple definition of law as “a rule that can be enforced by the courts.” Similarly, Yates defines law as “the body of rules that can be enforced by the courts or by other government agencies.” DuPlessis and O’Byrne define law as “a set of rules and principles intended to guide conduct in society, primarily by protecting persons and their property; facilitating personal and commercial interactions; and providing mechanisms for dispute recognition.” Smyth, Soberman, Easson, and McGill describe what law does, which is to “set standards of behaviour that are enforced by government, and also by individuals and groups with the help of government.”

With these definitions in mind, business law could be defined as rules that govern business relationships. DuPlessis and O’Byrne suggest that business law performs many functions, including:

·         Defining general rules of commerce;

·         Protecting business ideas and business assets;

·         Providing mechanisms that allow business people to determine how they will participate in business ventures and how much risk they will bear;

·         Ensuring that losses are borne by those responsible for causing them; and

·         Facilitating planning by ensuring that commitments are honoured.

Business Law versus Business Ethics

While staying within the confines of an increasing array of business laws is necessary for success in business, it is not sufficient. Businesses must also recognize additional limitations and expectations placed upon them by business ethics, those principles and values that define what is right and wrong. While ethical principles normally start with what is legal, they often impose a higher standard that recognizes a multitude of stakeholders beyond just suppliers, customers, and employees.

While the focus of this document is on what the law requires of business, ethical standards will also be discussed.

Sources Of Canadian Law And The Legal System

We begin this section with an overview of the Canadian legal environment to set the stage for subsequent sections, where specific types of law pertaining to businesses, such as tort law and contract law, will be examined. Categories of Law The law can be categorized in several ways. First, there is the distinction between substantive law and procedural law. Substantive law consists of the rights and duties that each person has in society, e.g., the right to own property or to make contracts and the duty to avoid injuring others and to obey various laws. Procedural law deals with the protection and enforcement of the rights and duties of substantive law; it provides the machinery by which these rights and duties are realized and enforced. To put it briefly, substantive law relates to what the law is, whereas procedural law relates to how it is enforced. Substantive law is divided into two fields

1. Public law is concerned with the conduct of government and with the relationship between government and private individuals. Public law is divided into categories such as constitutional, criminal, and administrative law.

2. Private law consists of the rules governing relations between private individuals or groups of persons. Private law—which can be divided into categories such as torts, contracts, business entities, business relationships, and property rights—forms the substance of business law and is the main focus of this document.

While the predominant concern in a business law course is substantive law, we will first consider the basics of procedural law, the form or organization of the legal system and its methods of conducting trials.

Systems of Law: Civil Law and Common Law

Around the world, two basic legal systems exist, civil law and common law. In brief, civil law emphasizes legislation, while common law emphasizes decisions handed down by the courts.

Civil law is the system of law derived from Roman law. Its focus is on the development of a comprehensive legislated code. Civil law developed in continental Europe and was greatly influenced by the Code of Napoleon in 1804. Most of the private law in Quebec is civil law, but the rest of Canada falls under common law (to be described next). Civil law applies to only a few southern states in the United States (e.g., Louisiana), as well as to Mexico, continental Europe, most of Scotland, much of Africa, and all of South and Central America.

Common law is the system of law in most of the English-speaking world and many non-English-speaking countries that were once part of the British Empire, such as India, Pakistan, and the Caribbean. Within Canada, all provinces and territories except Quebec have adopted common law. Common law is based on precedent, the recorded reasons given by judges for their decisions and adopted by judges in later cases.

Common law is designed to facilitate two important aspects of justice:

1. Consistency, so that there is equal treatment in like situations;

2. Predictability, so that people can find out ahead of time where they stand and act with reasonable certainty in making decisions about whether to sue or to defend themselves.

The system of determining law by following already-decided cases, or precedent, is known as stare decisis, a Latin phrase meaning "to stand by a previous decision." On the one hand, we want the law to be stable and certain enough that it can be consulted confidently to predict the legal consequences of our conduct. On the other hand, we want the law to be flexible enough to relate to changing conditions and social attitudes—we do not want to be judged by out-of-date standards. Stare decisis implies a preference for the objective of certainty ("let the decision stand"), but the courts have reserved for themselves a considerable amount of flexibility while still formally accepting the authority of their earlier decisions. Thus, there is an attempt to strike a balance between accommodating change and achieving consistency.

Stare decisis means that a lower court is bound by a decision of a superior court in the same jurisdiction when the superior court has decided the same issue. A decision in one province will have persuasive value in other provinces but will not be binding. Sometimes, a court of appeal in another province will come to a contrary decision, leaving the law in an uncertain state that can be resolved only by a decision of the Supreme Court of Canada, which is binding on all other courts in Canada. However, lower courts are constrained only to the extent that the facts of a case before them substantially coincide with, i.e., are not "distinguishably different" from, the facts of the earlier Supreme Court decision.

Therefore, lower courts still have considerable scope to distinguish the earlier case on the basis of its facts. When a losing party believes a lower court has incorrectly distinguished the facts, it may appeal to a higher court on these grounds. While the decision of a lower court is not a binding authority on other courts, the facts of the case may still be of wide general interest and the reasons for judgment so easily understood that the decision may have considerable influence and even be "followed" in other later cases unless and until the Supreme Court of Canada rules on the matter and comes to a contrary decision. The decisions of respected English and American judges as well as the decisions of judges from other common law countries may similarly influence the decisions of Canadian courts.