Business Law

Abstract

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

Overview

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. Modern business law 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. As of 2022, it has been adopted by all fifty states, the District of Columbia, and several territories, but not all articles were adopted by all jurisdictions ("Uniform commercial code (UCC)," n.d.). 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. 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.

Contracts

Every business, whether large or small, enters into contracts with employees, suppliers of goods and services and customers 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 businesses 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 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 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 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 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 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

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 provide 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 an appropriate remedy.

Commercial Paper

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 non-negotiable 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 can make the payment in a far more convenient and secure manner.

Business Formation, Organization & Dissolution

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 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 the secretary of state. The name of an LLC must include the words "limited liability company" or some designation that makes the public aware of its business form. The advantage to LLCs is that they combine the limited liability of corporations, in that the business assets and liabilities are separate from the assets and liabilities of its owners, with the preferential tax treatment of partnerships. LLPs are formed when partners file LLP formation documents with the state and maintain an adequate amount of professional liability insurance. An LLP functions to limit the liability of the personal assets of partners who are innocent of wrongdoing, in that partners are not liable for damages from malpractice claims against the firm that do not involve their own actions. However, partners who do commit the malpractice still have unlimited personal liability for any ensuing damages.

Agency Relationships

Agency is a relationship between two individuals where one person, called the agent, is authorized to act for and on behalf of the other, known as the principal. An agent may be an employee of the principal, but this is not a requirement. Principals set the scope of the authority of the agents, and provided they are acting within that scope, agents may negotiate and enter contracts with others and bind the principal to those contracts. Agency is primarily governed by state common law. Businesses frequently develop agency relationships, and thus must follow agency law as it relates to issues that frequently arise, such as what duties a principal and agent owe one another, the liability of the principal and the agent on contracts made by the agent and when the principal is liable for any torts the agent may commit.

Principals and agents create their relationship through mutual consent, not necessarily through a written contract. An agency relationship may arise by oral agreement or may be inferred from the conduct of the principal. Because the agent represents the principal in many business dealings and is in a position where her actions could harm the principal, the agent owes the principal certain duties, including the duty of obedience, diligence, and loyalty. The agent must inform the principal of any information that is relevant to the matters entrusted to her and must keep the principal's property separate from her own. In addition, as a fiduciary of the principal, an agent must act solely in the interest of her principal so as not to create conflicts of interest in business dealings and may not enter into contracts or other matters that would place the agent in competition with the principal.

Just as the agent owes the principal certain duties based on their agency relationship, a principal must also maintain certain duties to the agent. For instance, a principal owes to his agent the duties of compensation, reimbursement, and indemnification. In other words, the principal has a duty to compensate his agent unless the agent has agreed to serve without pay. The principal has a duty to reimburse his agent for authorized payments that the agent makes on behalf of the principal and for any authorized expenses the agent incurs. Finally, the principal has a duty to indemnify the agent for losses the agent incurred or suffered while acting as directed by the principal in a transaction that was not illegal or not known by the agent to be wrongful.

Because the authority of an agent is based on the scope of the relationship set by the principal, the agency relationship is terminated when the principal's consent for the agent to act on his behalf is withdrawn or otherwise ceases to exist. An agency relationship may be terminated by the acts of the parties or by operation of law, such as the death or incapacity of the principal or agent or the disloyalty of the agent. At this point, the agent's actual authority ends, and she is not entitled to compensation for any future services. However, she may continue to owe her principal certain fiduciary duties, such as refraining from entering into contracts that create conflicts of interest.

Bankruptcy

Businesses create debts by purchasing goods, borrowing funds from various lending institutions, or issuing or selling various types of debt securities. Under ideal circumstances, businesses can pay debts when they become due while still generating profits. However, businesses may encounter financial hardships or misfortunes that lead to an accumulation of debts that exceed their total assets. Or, they may have assets that are not liquid and thus cannot be used to pay the debts. In these circumstances, businesses may be able to create arrangements with creditors for alternative means of repaying debt, such as by making installment payments to creditors over a period of time. However, most businesses seek relief from their debts by filing a proceeding in federal court for bankruptcy.

Bankruptcy legislation serves to bring about a quick and equitable distribution of the debtor's property among her creditors and to discharge the debtor from her debts. Bankruptcy proceedings are governed by the U.S. Bankruptcy Code. There are several different types of bankruptcy proceedings. One type, known as straight or ordinary bankruptcy, is regulated by Chapter 7 of the Bankruptcy Code. Straight bankruptcy provides for the liquidation and termination of the debtor's business and is the most common form of bankruptcy. In the liquidation proceeding, the debtor's assets, if any, are sold by a trustee and the proceeds are distributed to the creditors in order of their priority, which is established by the Bankruptcy Code. Chapter 7 bankruptcy proceedings are available to individuals, corporations, and partnerships.

Another common form of bankruptcy proceeding for businesses is based on Chapter 11 of the Bankruptcy Code. These types of proceedings provide for the reorganization or restructuring of the debts of the business so that the business can remain viable, rather than the liquidation of the business under Chapter 7. Chapter 11 is a reorganization proceeding that is typically used by corporations and partnerships. In such a proceeding, the business usually remains in possession of its assets and continues to operate, subject to the oversight of the court and its creditors. A plan of reorganization is then drawn up, and once accepted by a majority of the creditors and confirmed by the court, this plan binds both the business and its creditors to its repayment terms. Reorganization plans can establish that the debts will be paid out of future profits, by the sale of some or all the business assets or by a merger or issuance of debt securities. The purpose of a Chapter 11 reorganization proceeding is to preserve a struggling business entity by restructuring its assets and liabilities so that it can regain its status as a profitable enterprise.

Factors Affecting Business Law

Businesses do not operate in isolation. Instead, businesses are managed by individuals who make decisions that can have a profound impact on the future of the business on a daily basis. In addition, as society develops, businesses may face changing expectations regarding their ethical responsibilities as business entities and as providers of goods and services for consumers. Although businesses are inanimate organizations, they may sue or be sued and may be charged for committing crimes. In addition, the owners, founders, managers and officers also have certain legal and ethical responsibilities that they must maintain, or face the potential for legal actions for the failure to do so. The following sections explain these factors in more detail.

Business Ethics

Ethics is the study of morals to determine what is right or good for human beings. Business ethics is a subset of ethics and is simply an examination of what is right and good in business practices. Business ethics seeks to understand the moral issues that arise from business practices and management and the relationship that these issues have to human values and morals. Unlike legal analyses, ethical analyses are not founded on any body of law or centralized authority, such as courts or legislatures. Instead, ethical considerations are founded upon moral values and principles that are cultural or universal.

Some of the issues that arise in business ethical analyses include establishing appropriate employer-employee relationships for the safety and compensation of workers, using truthful or candid marketing techniques, monitoring product safety and complying with consumer protection laws. In addition, ethical questions frequently arise from matters involving corporate governance, shareholder voting and management's duties to shareholders. Also, the relationships between businesses can pose ethical dilemmas, such as how businesses can foster fair competition and prevent collusive conduct while remaining profitable. The interaction between businesses and modern society at large is generating increasing ethical consideration, as such issues as the pollution of the physical environment, protection of a community's economic and social infrastructure and the depletion of natural resources are at the center of national and international discourses. Finally, ethical concerns arise in international business dealings as corporations face issues such as bribery of foreign officials, exploitation of less-developed countries and conflicts among differing cultures and value systems.

Businesses must analyze such ethical concerns in every stage of their development. Because businesses are not persons but artificial entities created by the state, both businesses and the individuals who run them face the potential consequences for the breach of their ethical responsibilities. Though individuals within a corporation clearly can be held morally responsible for their wrongdoings, the responsibility of the corporate entity itself is not always clear. This is because some people assert that the only responsibility of business is to maximize profit and that this obligation overrides any ethical or social responsibility. Yet the interconnectedness of the world of business, people and the environment has led others to argue that businesses have responsibilities beyond making a profit, such as to refrain from harming society or the environment or to assist in resolving societal problems. The bounds of a business organization's responsibility in ethical analyses is still being explored by corporations large and small, domestic and international, as the world of business becomes increasingly global and the actions of corporations have a discernible effect on people around the world.

Business Crimes

Corporations were traditionally not held criminally liable in their capacity as a business entity because, as an inanimate creation of the state, corporations were believed to be incapable of forming criminal intent and thus incapable of committing a crime. Modern corporations may incur corporate liability when a high corporate officer or the board of directors commits a criminal offense. In penalizing criminal activity, corporations are fined while the individuals who bear responsibility for any criminal acts face fines, imprisonment, or both.

One form of corporate crime that has received a great deal of attention in recent years is white-collar crime. The U.S. Department of Justice defines white-collar crime as any nonviolent crime that involves deceit, corruption, or a breach of trust. White-collar crimes include acts committed by individuals, such as embezzlement and forgery, as well as crimes committed on behalf of a corporation, such as commercial bribery, false advertising, antitrust violations and safety and health crimes related to consumer and business products. In the past, white-collar crimes were seldom prosecuted because society did not consider them violent or threatening. However, the modern view is that white-collar crimes do inflict violence in the form of unsafe products that injure or kill consumers or unsafe working conditions that create dangerous conditions for employees. In addition, corporate mishandling of its finances and the pensions of its workers can wipe out the lifelong savings of employees. Thus, because the effect of white-collar crimes can have severe repercussions, white-collar criminals are facing tougher penalties and prison sentences when convicted.

One type of white-collar crime that is on the rise is computer crime, which involves the use of a computer to commit a crime, such as if employees use computers to embezzle money or steal valuable confidential information such as trade secrets or corporate client data. Because computer crimes can be difficult to detect, losses stemming from computer crimes are estimated to surpass hundreds of millions of dollars every year. In addition, as technology advances, computer crimes take new shape. As a consequence, businesses are spending large sums of money to increase computer security and almost all states have enacted computer crime laws that are designed to establish better avenues for prosecuting and penalizing those convicted of computer crimes.

While criminal activity may be committed by individuals within an otherwise legitimate business, sometimes businesses are created for the sole purpose of serving as a front for covert criminal operations. In response, Congress enacted the Racketeer Influenced and Corrupt Organization Act ("RICO") in 1970, which imposes civil and criminal penalties for businesses engaged in a pattern of racketeering involving such criminal offenses as securities fraud, mail fraud, bribery, extortion, drug dealing or even murder. In addition to being involved in organized crimes, businesses may be liable for torts, which are civil wrongs that are committed against the person, property, or economic interest of an individual or business. A corporation is liable for all torts committed by its employees when they are acting within the scope and course of their employment. Likewise, a partnership is liable for any damages resulting from a partner's wrongful act while acting within the ordinary course of business or with the authority of other partners. In a general partnership, each partner has unlimited personal liability for the partnership's debts and obligations. As a result, even a partner who is innocent of wrongdoing is still liable for damages stemming from the wrongdoing of any other partner, although the partner committing the tort must indemnify the partnership for any damages it pays.

Thus, business crimes may be committed by the employees, partners, directors, or officers of the enterprise. However, businesses themselves may also be victims of crimes. Crimes against businesses include extortion, bribery, embezzlement, forgery, and even bad checks. These crimes cost businesses millions of dollars in uncollected debts, investigative costs, and lost profits. Because these crimes are often committed by isolated individuals who misappropriate or steal relatively small amounts of money, many businesses simply write off their losses because the cost of locating and prosecuting the wrongdoers would exceed the losses. However, businesses often try to recoup these costs and lost revenues by raising the prices of their goods and services, thus shifting the financial consequences of crimes against businesses to consumers.

Business Management

Businesses are managed according to the form in which they are organized. Sole proprietors have absolute control over their business and are free to manage its growth objectives within the bounds of the law. Partnerships are managed by their general partners, who typically make managerial decisions regarding the partnership as a group. Limited partners may not participate in many of the management tasks that are reserved for general partners. Corporations are a type of business organization in which the ownership and management responsibilities are divided among the shareholders, boards of directors and officers. Shareholders are the owners of the corporation, and they control the corporation by exercising their rights to elect representatives and to vote at annual and special shareholder meetings. Also, shareholders elect the corporation's board of directors to represent their interests and delegate to the board the power to manage the business of the corporation. Likewise, shareholders may vote to remove directors with or without cause and they have the right to inspect the corporation's books and records and bring shareholder suits in certain circumstances. The board of directors selects and removes officers and determines their compensation, decides the financial policy of the corporation, effects corporate mergers and declares the amount and type of dividend distributions. Officers are agents or employees of the corporation who hold their offices at the will of the board of directors. The officers run the day-to-day affairs of the corporation and perform any other roles and duties that are described in the corporation's bylaws.

Applications

Business Law in the Modern World

The business community in the United States is more vibrant than ever. The rise in the Internet and new technologies has spawned a generation of young businesses. In addition, mergers and corporate takeovers have created multinational corporations, some with a greater net worth than the economies of entire countries. Through all this growth, a web of legislation and government regulations has been created to monitor and regulate almost every aspect of the lives of businesses. These laws serve to facilitate, and at times restrain, healthy business development and competition. The following sections explain some of the areas in which the activities of businesses have an effect on the lives of individuals and the economy, and the government regulations that have been promulgated to exert some control over these activities.

Business Law & the Environment

Environmental issues are increasingly becoming an area of concern for individuals, businesses, and governments around the world. This is because business activities are using ever greater quantities of the earth's resources, some of which are limited, and these activities in turn have an effect on the local and sometimes global ecosystem. In 1970, the Environmental Protection Agency (EPA) was created to oversee and implement the federal government's environmental policies. Since then, Congress has passed comprehensive new legislation covering all aspects of the environment, including air and water pollution, pesticides, ocean dumping and waste disposal.

One of the earliest forms of environmental legislation was the Clean Air Act, which was enacted in 1970 to provide measures to control air pollution. Under the Clean Air Act, each state is required to develop and obtain EPA approval for an implementation plan that will ensure that the state will meet the national ambient air quality standards. The major emitters of pollutants within the state are then required to ensure that their emissions do not surpass these standards. For example, a factory may be required to limit its emissions of certain compounds that contribute to ozone and smog to a certain amount per unit of production or hour of operation, or a power plant might have its emissions of polluting compounds limited to a percentage of its energy produced. Thus, the environmental regulations established by the federal and state governments mean that businesses must modify or contain their production methods to comply with these standards. In addition, businesses seeking to develop new facilities or modify their existing facilities must develop ways to ensure that their total output of identified pollutants stay below the state standards, such as by decreasing their total emissions or by buying pollution emission rights from other businesses in the area.

Like the Clean Air Act, the Clean Water Act provides comprehensive legislation to regulate water pollution. It limits certain types of industrial waste and requires industries that discharge wastes into the municipal systems to pretreat the wastes to ensure that the discharge will not excessively pollute the water. Dischargers are required to keep records, install, and maintain monitoring equipment and sample their discharges to make sure that they remain in compliance with the legislation. Penalties for violating the law include fines and prison terms.

In 1980, Congress passed the Comprehensive Environmental Response Compensation and Liability Ace (CERCLA), commonly known as Superfund, to deal with the uncontrolled or abandoned hazardous waste sites. In 1986, Congress revisited the legislation and added provisions that strengthened and expanded its coverage. Under Superfund law, the EPA is required to identify and assess the sites in the United States where hazardous wastes have been spilled, stored, or abandoned. By 2022, the EPA identified over 40,000 such sites and ranked them according to the type of waste, quantity and toxicity of the waste and the number of people potentially exposed to the waste. This ranking left more than 1,000 sites on the National Priority List ("National Overview: Facts and Figures," 2022). While the cleanup activity has been financed by the imposition of various tax measures, Superfund law requires that businesses contribute to the cleanup costs, and these costs could be so extraordinary that they could force a company into bankruptcy.

Business Law & Consumer Protection Regulations

For many years, consumers dealt with merchants and providers of services largely on their own with little government protection. Even more, laws were often drafted to heavily favor and protect business interests rather than consumer interests. In the twenty-first century, the government has made significant strides to draft legislation that provides consumers with a far greater standing to pursue their claims and disputes against businesses.

For instance, Congress enacted federal legislation that requires sellers of consumer products to provide adequate information about the warranties that assure features of their goods or services. Similarly, a number of state legislatures have enacted "lemon laws" that attempt to provide new car purchasers with protections that require a manufacturer to replace the car or refund the full purchase price if a consumer can prove that she purchased a defective automobile. In addition, the federal government and states have enacted a series of consumer credit laws to govern credit transactions. The Truth-in-Lending Act gave consumers the right to be advised of all the terms of their credit transactions at or before the time they sign the credit contract. The Equal Credit Opportunity Act prohibits all businesses that regularly extend credit from discriminating against any applicant on the basis of sex, marital status, race, color, religion, national origin, or age.

In addition, legislation has also been enacted to regulate creditors' remedies should a debtor default or become late in payment. Limitations have been placed on the amount that a creditor may deduct or garnish from a consumer's wages. Also, while sellers may retain a security interest in the goods they sell, they must follow state regulations when suing a consumer or proceeding with obtaining deficiency judgments. Finally, Congress enacted the Fair Debt Collection Practices Act to prevent debt collection agencies from employing abusive, deceptive, or unfair practices in the collection of consumer debts.

Business Law & Antitrust Regulations

The business community generally exists in a free-market economy that fosters free enterprise and healthy competition. However, strong antitrust laws that developed to combat the powerful industry trusts of the 1800s restrain anticompetitive maneuvers so that businesses cannot eliminate competition from the market. While competition is good for consumers in that it drives down prices while boosting quality and service; businesses are forced to offer better products and services to compete for a greater share of the market, and thus would prefer to eliminate competition. With no competition, businesses would enjoy the ability to control the price, quality and quantity of the goods and services they produce. Without strict anticompetitive legislation and rigorous government oversight of competition in the market, businesses will generally try to reduce or eliminate competition by merging with, acquiring or squeezing out their competitors. This became apparent in the early years of the United States, as key industries became dominated by powerful businesses or trusts that engaged in activities that were corrupt or harmful to consumers and their employees.

While the common law in the U.S. has traditionally supported competition by holding that agreements and contracts in restraint of trade are illegal and unenforceable, influential businesses continued to strive to eliminate competitors through illegitimate business activities, such as fixing prices and controlling profitable and critical territories within their industries. In response, Congress enacted the Sherman Antitrust Act, which prohibits contracts, combinations and conspiracies that restrain trade. It also outlaws both monopolies and any attempts to monopolize. Congress later passed the Clayton Act, which supplements the Sherman Act by providing for treble damages and attorney's fees in antitrust matters. The Clayton Act also prohibits tying arrangements, which occur when the seller of a product or service conditions the sale of the product on the buyer purchasing a second product or service, and exclusive dealing arrangements, where a seller of a product conditions the sale upon the buyer's promise not to deal in a competitor's goods. Finally, the Clayton Act prohibits a corporation's merger or acquisition of another corporation's stock or assets where such an action would substantially lessen competition or would tend to create a monopoly.

These and other antitrust regulations are aimed at preserving healthy competition in the marketplace and preventing unfair methods of competition or other deceptive practice in commercial activities. In the twenty-first century, antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. They prohibit a variety of practices that restrain trade and eliminate competition from the marketplace. The Federal Trade Commission and the Department of Justice take active roles in monitoring business activities and initiating investigations or injunctions that are designed to eliminate anticompetitive activities that endanger the benefits consumers enjoy when companies are forced to compete for their business.

Conclusion

Business law is a broad area of law that covers the basic concepts that comprise the most common activities in which businesses participate, such as forming and enforcing contracts, purchasing, and selling goods, and handling various forms of commercial paper and negotiable instruments. Business law also governs the formation and organization of all forms of enterprises as well as agency issues that arise as businesses develop, and even bankruptcy proceedings that transpire when businesses fail. There are many factors that companies and organizations face as they enter the bustling and competitive world of commerce, such as the ethical obligations they must uphold, the criminal liabilities they face and the many issues that develop relating to their management and administration. Finally, business law includes the framework of laws and legislation that courts and lawmakers have created to regulate many aspects of business activities. Some of the areas that are heavily regulated include businesses' responsibilities to comply with environmental regulations, consumer protection laws and antitrust and business competition laws. Thus, while businesses exist to provide products and services and create profits for their owners, businesses must also conform to the many legal and ethical principles that regulate the worlds of commerce and industry.

Terms & Concepts

Actual Authority: Power conferred upon an agent by actual consent given by the principal.

Agent: Person authorized to act on another's behalf.

Bad Check: Issuing a check with funds insufficient to cover it.

Bearer: Person in possession of a negotiable instrument or commercial paper.

Breach: Wrongful failure to perform the terms of a contract.

Check: A draft drawn upon a bank and payable on demand, signed by the maker or drawer, containing an unconditional promise to pay a sum certain in money to the order of the payee (Black’s Law Dictionary).

Consumer Goods: Goods bought or used for personal, family or household purposes.

Contract: An agreement between two or more persons that creates an obligation to do or not to do a particular thing.

Damages: Money sought as a remedy for breach of contract or for tortuous acts.

Draft: A written order by a drawer instructing the drawee to pay the payee a sum of money that is signed by the drawer, payable on demand or at a specific time and to order or bearer.

General Partner: Member of either a general or limited partnership with unlimited liability for its debts, full management powers and a right to share in the profits.

Insolvency: The inability to pay debts in the ordinary course of business as they become due. Also, when total liabilities exceed the total value of assets.

Liquidation: The settling of financial affairs of a business or individual, usually by liquidating or turning into cash all assets for distribution to creditors or other parties (Black’s Law Dictionary).

Order to Pay: Instruction or command to pay.

Partnership: An association of two or more persons to perform duties as co-owners of a business.

Performance: Fulfillment of one's contractual obligations.

Winding Up: To settle the accounts and liquidate the assets of a partnership or corporation for the purpose of making distributions and terminating the entity.

Bibliography

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Suggested Reading

Jones, J. & Middleton, K. (2007). Ethical decision-making by consumers: The roles of product harm and consumer vulnerability. Journal of Business Ethics, 70, 247–264. Retrieved May 24, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23750495&site=ehost-live

Kelly, D., Hammer, R., & Hendy, J. (2021). Business law (4th ed.). Routledge.

Sagner, J. (2006). Antitrust as frontier justice: Is it time to retire the sheriff? Business & Society Review (00453609), 111, 37–54. Retrieved May 24, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19641895&site=ehost-live

Veltri, S., Cavanagh, G. & Turner, P. (2006). Payments: 2005 developments. Business Lawyer, 61, 1571–1590. Retrieved May 24, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23411780&site=ehost-live