“Alexandru I . Cuza” University of Iasi, Faculty of Economics and Business Administration
Business Law [Business Administration, 1]
Ada Popescu
[Parts of this material are adaptations of John Head’s – General
Principles of Business and Economic Law, Carolina Acad. Press,
Durham, NC, 2008]
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Chapter 1. Introduction to Legal Heritage
1.1. What is Law?
Any society enacts and enforces laws that govern the conduct of the individuals,
businesses and other organizations that function within it. In other words, “without law
we cannot live”.
The law consists of rules that regulate the conduct of individuals, businesses and
other organizations within society. It is intended to protect persons and their property
against unwanted interference from others. In other words, the law forbids persons from
engaging in certain undesirable activities.
Definition of Law
The concept of law is broad. Although it is difficult to state a precise definition, it
can be said that: law, in its generic sense, is a body of rules of action or conduct
prescribed by controlling authority and having binding legal force. That which must be
obeyed and followed by citizens subject to sanctions or legal consequences is a law.
The difference between moral rules of conduct and the rules of law consists in the
presence of a well-established sanction that comes when breaking the later.
Social conduct rules are governing our existence giving meaning to it through order.
Thus, our society functions in a just, fair way, the right way.
Also, the word right has also another meaning in English. It refers to the
prerogatives of every individual: the right to freedom, education, work, private enterprise
etc. These prerogatives are best known as human rights or individual freedoms and their
respect should be guaranteed by state authorities in any society that calls itself
democratic.
Functions of the Law
The law is often described by the function it serves within a society. The primary
functions served by the law in any democratic country are:
1. keeping the social peace (example: laws that make certain activities crimes);
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2. shaping moral standards (example: laws that discourage drug and alcohol
abuse);
3. promoting social justice (example: laws that prohibit discrimination in
employment);
4. maintaining the status quo (example: laws that prevent the forceful
overthrow of the government);
5. facilitating orderly change (example: laws enacted only after considerable
study, debate and public input);
6. facilitating planning (example: well-designed commercial laws that allow
businesses to plan their activities, allocate their productive resources and
assess the risks they take).
Some scholars believe that other function of the law is the maximization of
individual freedom as long as the Constitution of a state is granting the freedom of
speech, religion and association.
Fairness of the Law
On the whole, any legal system has to be comprehensive, fair and democratic.
Nevertheless, some misuses and over-sights of any legal system, including abuses of
discretion, mistakes by judges, unequal applications of law and procedural mishaps allow
some guilty parties to go unpunished. However, these situations have to exist as
exceptions, as mistakes that can be corrected.
Flexibility of the Law
The rules of law evolve and change along with the norms of society, technology
and the growth and expansion of different activities in the world and in a particular
country.
“The law always has been, is now and will ever be largely vague and variable.
And how this could be otherwise? The law deals with human relations and their most
complicated aspects”1.
1 Jerome Frank, The Law and the Modern Mind, Brentano’s Publ. House, New York, 1930.
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Schools of Jurisprudential Thought
The philosophy or science of the law is referred to as jurisprudence. There are
several different philosophies about how the law developed, ranging from classical
natural theory to modern theories of law and economics and critical legal studies.
Classical legal philosophies are discussed in the following paragraphs.
Natural Law School
The Natural Law School of jurisprudence postulates that the law is based on what
is “correct”. Natural law philosophers emphasize a moral theory of law – that is, law
should be based on morality and ethics. Natural law is “discovered” by human thought,
the use of reason and choosing between good and evil.
Historical School
The Historical School of jurisprudence believes that the law is an aggregate of
social traditions and customs that have developed over centuries. It believes that changes
in the norms of society will gradually be reflected in the law. To these legal philosophers,
the law is an evolutionary process. Historical legal scholars look to past legal decisions
(precedents) to solve contemporary problems.
Analytical School
The Analytical School of jurisprudence maintains that the law is shaped by logic.
Analytical philosophers believe that results are reached by applying principles of logic to
specific facts of the case. The emphasis is on the logic of the result rather than on how the
result is reached.
Sociological School
The Sociological School of jurisprudence asserts that the law is a means of
achieving and advancing certain social goals. The followers of this philosophy, known as
realists, believe that the purpose of law is to shape social behavior. Sociological
philosophers are unlikely to adhere to past law as precedent.
Command School
The philosopher of Command School of jurisprudence believe that the law is a set
of rules developed, communicated and enforced by the ruling party rather than a
reflection of the society’s morality, history, logic or sociology. This school maintains that
the law changes when the ruling class changes.
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Critical Legal Studies School
The Critical Legal Studies School proposes that legal rules are unnecessary and
are used as an obstacle by the powerful to maintain the status quo. Critical legal theorists
argue that legal disputes should be solved by applying arbitrary rules that are based on
broad notions of what is “fair” in each circumstances. Under this theory, subjective
decision making by judges should be permitted.
Law and Economics School
The Law and Economics School or the Chicago School believes that promoting
market efficiency should be the central goal of legal decision making. For example,
proponents of law and economics theory believe that a prisoner cannot find a lawyer who
will take the case on a contingency-free basis (pro bono), the case is probably not worth
bringing to justice.
1.2. Sources of Law
In most countries, the sources of modern law have a certain hierarchy according to
the authority that enacts them. Also, the sources of law can vary due to the existence of
two major legal systems: civil law system or common law system.
The Romano-Germanic civil law system, commonly called civil law dates of 450
B.C. when Rome adopted the Twelve Tables, a code of laws applicable to the Romans. A
compilation of Roman Law called Corpus Juris Civilis (Body of Civil Law) was
completed in 534 A.D. Later, two national codes – The French Civil Code of 1804 (The
Napoleonic Code) and the German Civil Code of 1896 – became models for countries
that adopted civil codes.
In contrast to the Anglo-Saxon common law system, in which the laws are created
by the judicial system as well as by the legislative power, the Civil Code and
parliamentary statutes that expand and interpret it are the sole sources of the law in most
civil law countries. Thus, the adjudication of a case is simply the application of the code
or the statutes to particular set of facts. In some civil law countries, court decisions
(jurisprudence) do not have the force of law. Most European countries follow the civil
law system.
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Anglo-Saxon common law or English common law is the other major legal system
developed by the judges who issued their opinions when deciding cases. The principles
announced in these cases became precedent for later judges deciding similar cases. The
common law system has been developed in United Kingdom after 1066. The system is
used today in some countries around the word, usually countries that were influenced by
the British colonial empire: United States of America, Australia, New Zeeland, Malaysia,
Thailand etc.
In spite of the differences, similarities exist between the two legal systems. These
similarities are mirrored by the principles of law that are animating the two systems,
including the sources of law.
The main sources of law are the following:
A. Constitution
Most countries have Constitutions as the supreme law of the land. This means that
any other law, whether national or local, that conflicts with the Constitution is
unconstitutional and, therefore, unenforceable.
The principles enumerated in the constitution are very broad because it is usually
intended for them to be applied to evolving social, technological, economic conditions.
The Constitution established the structure of state governance, usually creating three
branches of government and giving them the following powers:
The legislative branch (Parliament) has the power to make (enact) the law.
The executive branch (Government, President or both) has the power to
enforce the law.
The judicial branch (courts and other judicial authorities) has the power to
interpret and determine the validity of the law.
B. Statutes or Laws
Statutes are written laws that establish a certain courses of conduct that must be
adhered to by the covered parties. The statutes are enacted by Parliaments or by similar
bodies.
Sometimes, when a statute comprises an extensive set of rules it is organized as a
Code (Civil Code, Criminal Code, Civil Procedure Code etc.).
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C. Government (executive branch) ordinances, decisions and executive orders
State legislative is sometimes delegating lawmaking to the Government
(executive branch). Thus, the Government enacts ordinances that are considered sources
of law. Also, the Government is making decisions while enforcing the law. These
decisions can sometimes be considered sources of law as well.
Executive orders are issued by a member of the Government and they can also be
considered, in certain cases, sources of law.
D. Presidential executive orders
In some countries, including Romania, the President can issue an executive order
that can sometimes be considered a source of law.
E. Regulations and Orders of Administrative Agencies
In some countries, like the United States of America, the legislative and executive
branch of federal and state governments are empowered to establish administrative
agencies to enforce and interpret statutes enacted by the legislative branch. Many of these
agencies regulate commercial activities. Thus, these agencies are empowered to adopt
administrative rules and regulations, which have the force of law.
F. Treaties and other international sources of law
In most countries, including Romania, treaties are usually signed by the President
of a country with the advice of the Government and with the consent of the legislative
branch (Parliament). Thus, treaties are given the force of law becoming a national source
of law for a particular country or countries.
With increasing international economic relations among nations, treaties are
becoming an even more important source of law that will affect business in the future.
G. Judicial decisions
Based on the common law tradition, in certain countries, past court decisions
become precedent for deciding future cases. Lower courts must follow the precedent
established by the higher courts. Both types of courts will have to follow the precedents
of country’s supreme court decisions. Thus, judicial decisions are considered sources of
law in common law countries, stare decisis doctrine promoting the uniformity of law and
the efficiency of the court system.
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However, in civil law countries, court decisions are not considered sources of law.
Court decisions can only be used as a basis for interpretation of the law but cannot be
referred as sources of law.
1.3. What is Business Law?
All social, economic, political and cultural activities are governed by law. Thus,
there is also an obvious and strong relationship between law and economic activity. Any
country’s economic development – and, on an individual level, the economic well-being
of a particular individual or family or business entity – takes place within the context of
laws. Some of these laws provide the means by which individuals can carry out a
business on their own or they can join together into companies for the same reason. Some
laws establish a system by which a business can get access to banking services, such as
financing for the purchase and sale of goods. Other laws set forth rules regarding the
existence of different contracts or minimum requirements as to how a company should
treat its employees, refraining from damaging the environment or conduct its business
fairly.
This complicated web of legal rules is often referred as “economic law” or
“business law”. The first of these two terms, “economic law” is maybe more accurate and
descriptive of the two because it casts a “wider net” of meaning and the relationship
between law and economic activity encompasses many subjects. The term “business
law”, however, is more familiar in some countries, for example USA or UK.
Most law is national law. That is, the rules that govern behavior, including
economic activity, exist at the level of a particular country. Only a relatively few such
rules are international in scope or source. This fact reflects the importance of the nation-
state in today’s world. There are just under 200 nation-states in the world and most of the
laws in each are different from those in all the rest. Therefore, law practitioners must look
mainly to his or her own country rules for the specific legal rules that apply in a particular
case.
Despite the diversity in specific legal rules, certain basic concepts do hold true in
most countries. That is, some general principles of law are global in applicability and
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underlie the specific rules in most countries. Thus, there are also some general principles
specifically in the area of business and economic law and some rules that have been
explicitly agreed to at the international level; these include rules on international business
transactions and international economic relations.
Also, in order to determine how best to structure a particular transaction or how
much tax to pay on business profits or how to handle similar detailed matters, the
applicable rules of the local and national jurisdiction must be applied. In these particular
situations one has to know exactly what are the specific national rules in order to avoid
mistakes that can easily lead to serious and costly conflicts.
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Chapter 2. Business Entities
A large proportion of economic activity at all levels (international, national and
local) involves business entities. These business entities may be involved in the
manufacturing of goods, the sale of goods, the transport of goods, the provision services,
the hiring of employees and countless other activities that affect everyone in society.
Thus, it is absolutely necessary to know that legal rules that bear directly on how
such business entities are structured, what their attributes are, how they get the financial
resources they need to carry out their operations, what measures they need to take in
order to account for those financial resources and how they are to be treated when they
enter into serious financial difficulties.
2.1. Types of business entities
The organization of business is a matter of national law. Various countries have
developed a wide range of business forms – that is, types of business organizations.
The purpose of business organizations is to make a profit from commercial
activities. This distinguishes business organization from other groups formed for
charitable, social or other non-business purposes.
Depending on the country and its national legal rules, business can be done by a
single person, natural person, or by a group of people organized as legal associations of
person.
A legal person can be defined through its three distinct elements:
it is a group of individuals;
it has a patrimony of its own, separate from the ones of its founders;
it is organized based on a common agreement (memorandum) of its
promoters.
National law can impose certain conditions when it comes to consider a natural
person a merchant (tradesman). There are two jurisprudential rules that have been
developed on the matter: the objectivity rule and the subjectivity rule.
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The objectivity rule states that it is a trader the person who is engaged in
activities (instruments) that are considered commercial by law.
The subjectivity rule states that it is a trader the person who make from business
activity their usual profession.
Some national law (Romania, Italy, France etc.) use both rules to define the
capacity of a trader. Thus, traders are those who carry out commercial instruments and
who make this their usual profession.
The individuals that want to become traders are required by law to be 18 (21)
years old, having full legal capacity since business activities generate rights and
obligations that can only be personally exercised or assumed and for which a certain life
experience is necessary. Thus, minors are not allowed by law to be traders.
Taking into account these various legal rules, we can distinguish between diverse
types of business organization. Four issues should be borne in mind:
Creation – how it is formed?
Liability – when can third parties sue the owners?
Duties – what do the participants owe each other?
Termination – when does it end?
2.1.1. Sole proprietorship; partnership; limited partnership
A sole proprietorship or single owner business is the simplest type of business
entity to organize and operate. It has been described as “one person that has all
management authority, so decision can be reached quickly. That feature may be a plus or
a minus, depending on the ability of the sole owner. It may also be more difficult to raise
capital, since only one person is responsible for the debts of the business.”2
Because only one person is involved in a sole proprietorship, the other issues
raised above are easy to address. First, there is no separate creation process because there
is no separate “business” as such. There might, however, be registration requirements, as
the government authorities responsible for regulating business activities will need to
2 George D. Cameron III, The Legal and Regulatory Environment of Business, Ed. South-Western Publ.,
1994, p.274.
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know what business are subject to legal rules – such as the rules of taxation, health and
safety, insurance etc. Second, the owner of a sole proprietorship has full, unlimited
personal liability for all debts and liabilities of the business. Thus, a failure of the
business can lead to the loss not only of the business assets but the personal assets of the
owner. Third, there are no duties among owners because there is only one owner. Lastly,
termination of a sole proprietorship takes place when the sole owner decides to terminate
it or when it is terminated by reason of bankruptcy or the death of the owner.
A partnership is a combination of two or more persons organized to carry on a
business as co-owners and co-managers. It is also called a general partnership (“GP”). In
most cases, each member of a partnership is personally liable for the entire obligations of
the partnership.
1. A partnership can usually be created with little or no formality and typically
with no government approval being required, although registration with the appropriate
government agency or agencies will almost always be necessary (Mercantile Register,
Registrar Office).
2. Each partner is fully liable for the obligation of the partnership (solidarity of
the partners), subject to certain exceptions that some countries provide for (the largest
exception being the limited liability partnership arrangements).
3. Because so much is at stake for each partner, the relevant law usually demands
that each partner fulfill duties of fair dealing, honesty and fiduciary responsibility toward
the other partners and that no partner can make personal use of the business property
without the consent of the other partners.
4. Termination of business is triggered by several circumstances, including: a). the
bankruptcy of the business; b). the voluntary winding-up of the partnership’s operations;
c). usually, a change in the number or identity of the partners, unless a partnership
agreement establishes a method for determining how to pay off a departing partner (or the
estate of a deceased partner) and how much to charge an incoming new partner.
A limited partnership (“LP”) is designed to overcome one of the major
disadvantages of a partnership – the unlimited personal liability of each partner for the
obligation of the business. The limited partnership form of business organization does
this by permitting some of the owner-partners to enjoy limited personal liability as long
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as they comply with all legal requirements. It is this feature that characterizes the limited
partnership and makes it attractive.
As an example, assume that one person, Mr. Smith, wants to open a grocery
business but does not have enough capital of his own to do so. He might ask two or three
other people to join him in a limited partnership, under an arrangement by which:
1. those other people will provide the beginning capital;
2. Mr. Smith would run the business;
3. they would all split the profits or losses equally among them.
Once such a limited partnership is created, Mr. Smith would be the “general
manager” and would have unlimited liability and the “limited partners” would have
liability only to the extent of their contribution of capital.
The duties among partners in a limited partnership vary depending on the status of
the partner involved. A general partner owes the same duties of honesty and competence
as in a regular partnership. Limited partners typically are not involved in the management
of the business and their duties are correspondingly less. In fact, they risk losing their
limitation of liability of they do participate in the management.
In general, a limited partnership is more durable than a regular partnership. That
is, the number and identity of the limited partners can change rather easily without
affecting the continuity of the business organization itself. Indeed, it is the fact of limited
liability and ease of entry and exit that makes a limited partnership an attractive way of
investing in a business and therefore an important method of financing a business
undertaking.
In some countries yet another type of partnership has been established: the
limited liability partnership (“LLP”). Typically such a business organization is almost
identical to the general partnership for a business organization, except that all partners
have limited liability.
2.1.2. Limited Liability Company; Stock Company; Cooperative
The term limited liability company (“LLC”) is subject to various meanings. In
most civil law systems, a limited liability company is a separate legal entity whose
ownership interests (held by persons sometimes called “associates”) are not traded
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publicly and whose financial statements do not need to be disclosed to the public. The
term “limited liability company” carries a different meaning in most common law
systems. In these systems a different type of entity, the “close corporation” resembles the
civil law limited liability company.
The four issue identified above (creation, liability, duties and termination) apply
as follows in the case of a typical (civil law) limited liability company.
First, it is created by means of a series of steps that usually include: a). the
preparation and submission of a set of articles of association (articles of incorporation)
that identify the company’s name, the location of its offices, its purpose and the capital
invested; b). the pledging of the required minimum amount of capital; c). the issuance of
an approval by the responsible government agency and public notification of the fact.
Second, the successful creation of such an entity results in limited liability for all
participants. Thus, formalities and legal requirements have to be followed very carefully
in the creation of such a company. A member of the public is generally not permitted to
make a claim against the personal assets of its owners except in cases where defects
occur in establishing the company or where other unusual or illegal circumstances make
it necessary to “pierce the corporate veil”, that is to impose personal liability on the
owners.
It is worth pointing out that the liability of the company itself is not limited but
that of its individual owners.
Third, the main duties among persons involved in a limited liability company
typically fall on the officers and directors, that is on the persons responsible for the
management of the company. They owe to the company a fiduciary duty (a especially
demanding legal duty to handle the affairs of the company with care and for the benefit of
the company and its owners, rather than for their own personal benefit). The functions of
the owners of the company include electing the company’s directors, enacting the bylaws
or other internal rules of procedure, approving annual reports on operations and declaring
dividends (amounts to be paid proportionally to the owners out of the company’s annual
profits). However, the paying of such dividends, as well as many other financial actions
taken by the company and its managers and owners, is usually subject to legal restrictions
designed to guard against an impairment of the company’s capital.
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Because the ownership interests in a limited liability company are not publicly
traded, the transfer of those ownership rights can sometimes be difficult and subject to
restrictions.
As for the issue of termination: limited liability companies typically have
perpetual existence but can be wound up voluntarily or in case of bankruptcy.
A stock company, like a limited liability company, constitutes a separate legal
entity in which each owner’s liability is limited to the amount of his or her ownership
interests. Typically, the distinguishing marks of a stock company are: the fact that its
shares3 are freely traded among the public and the requirements that its financial
statements be disclosed to the public. The corresponding form of business organization in
many common law countries is the public corporation.
Of all the various forms of business organizations, the stock company (or its
common law relative, the publicly-traded corporation) has drawn the most attention in
recent years because its growing importance in the economic life of many countries. This
form of business organization has been called “the steaming engine of capitalism”
featuring the structure of a limited liability company and the ease of movement in and out
of ownership. Thus, it permits the accumulation of individual savings for a common
business purpose in an amount greater than almost any individual investor can dream of,
but at the same time allows any individual investor the freedom of removing his or her
ownership interest at will.
Many of the attributes of a stock company are similar to those of a limited
liability company as described above. A stock company is usually created when the
responsible government agency approves it. The officers and directors owe important
fiduciary duties to the company and its shareholders. The company normally has
perpetual existence, subject to voluntary winding-up or liquidation through bankruptcy
proceedings. Termination of a stock company can also come by way of merger into or
with another stock company.
A key difference between the stock company and the limited liability company is
its public nature. Partly because its shares are traded publicly, the stock company has
3 A share is a certificate representing one unit of ownership issued by a stock company.
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heavy responsibilities of fair disclosure (to the public) of its financial condition and
operations. Potential investors require accurate and understandable financial information
about the company before they will be willing to invest in it.
Another form of business organization that shares some features of limited
liability companies and stock companies is the cooperative. The details regarding this
type of entity vary greatly from one legal system to another. This type of business
organization is used extremely in some countries but very little used in others. For
example, in the USA, cooperatives are used mainly in the food and agriculture industries
and not so much used in other segments of the economy.
In general, a cooperative is a business that is owned and democratically controlled
by the people who use its services and whose benefits are derived and distributed
equitably on the basis of use. The user-owners, often called members, benefit in two
ways from the cooperative, in proportion to the use they make of it. First, the more they
use the cooperative, the more services they receive. Second, earnings from the
cooperative are allocated to members based on the amount of business they do with the
cooperative. Other features of the cooperatives are depending on specific national laws.
2.1.3. Government Enterprises
A government enterprise is one that is owned mainly or exclusively by the state.
Such entities appear in most legal systems, although their number and influence vary
greatly from one country to another. Their operations can be in the area of finance, trade,
industry, agriculture, mining, health, transportation and other sectors of the economy,
including electric, water and sanitation services. In some cases they are designed to
maximize profits but in most cases their dominant aim is public service – that is,
benefiting the country as a whole.
The methods of creating such government enterprises vary widely but typically
the most important such enterprises are specifically established by legislation. Such
legislation will define the character of the enterprise, its aims, financial status, methods of
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operations, management and so forth. Accompanying such legislation will be legislative
or executive action to provide the funding for capitalizing and operating the enterprise.
An example of a government enterprise is the country’s central bank. In most
countries, the central bank is established as a separate legal entity with a degree of
financial and operational independence from the short-term political pressures of
government. Directors are appointed by government and their powers and functions are
chartered by legislation.
2.1.4. Multinational Enterprises
An increasing number of business entities carry out operations internationally.
Such business entities are often referred as multinational enterprises.
These are the definitions that describe various structures and relationship within
multinational enterprises4.
type of multinational enterprise Definition
national multinational enterprise an enterprise organized around a parent
firm incorporated in one country that
operates through branches and subsidiaries
in other countries
international multinational enterprise an enterprise that operates through
branches and subsidiaries and that has
parent companies in two or more countries
parent company a company that acts as the head office for a
multi-national enterprise and which owns
and controls the enterprise’s subsidiary
entities
Branch a unit part of a company, not separately
4 Ray August, International Business Law, Ed. Prentice Hall, 2000, p. 159.
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incorporated
Agent an independent person or company with
authority to act on behalf of the enterprise
representative office an office that interested parties can contact
to obtain information about the company
but that is not empowered to conduct
business for the company
holding company a company owned by a parent company to
supervise and coordinate the operations of
subsidiary companies
subsidiary a company that is owned by a parent or a
parent’s holding company but which,
unlike a branch, is separately incorporated
as a legal entity
joint venture an association of persons or companies
collaborating in a business venture for
more than a short or transitory time period
These various types of entities are subject to the law of any state in whose
territory they operate. To a very limited extent multinational enterprises are also subject
to few guidelines of conduct issued by international bodies, but these rules are not legally
binding in character.
The real people who form business associations have choices as to the business
association they may use. How do we select the best business association for a particular
business? Factual and legal considerations and also, basic attributes of the business
associations are to be taken into account.
Factual considerations could be:
nature of the business – what is the nature of the proposed business? Is it
a business that is capital intensive, labor intensive etc?
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name – what will be the name of the business? Does the name has any
special meaning to the business? Are there any legal rules that impose
certain condition when choosing a name for the business?
participants – is there unanimity of interest among the participants as in
the case of a “family” business? Or are their interests diverse as in the case
of a money/talent deal? What will be the functions of the various
participants? Who will contribute to what to the deal – money, services,
property, patent rights etc.?
management – who will manage the business? Who will actively
participate? What salaries are to be paid to any of the participants?
funding – how much money will be needed to get the business started?
What are the sources of funding? How much money will the business
make during its first year of operation? How long will it take for the
business to begin showing a profit?
dividing the attributes of ownership – how will be profits divided
among participants? If the business fails how will the assets of the
business be divided among the participants in the even of liquidation?
exit strategy – how do the participants expect to make money from the
business (through salaries, distributions, sale of all or part of their business
interest in the business? Is it a selling/buying agreement necessary? Are
there plans to go public sometime in the future?5
Historically, selecting the best form of a business association for a particular
business involves consideration of relatively clear-cut legal issues.
Legal considerations usually are:
limited liability;
taxation (double-taxation – the business association itself pays taxes on
the income it earns and the owners of the business pay taxes on the
income they receive as dividends, or pass-through taxation – no tax is
payable at the business structure level but only at the personal level on
dividends);
5 Joseph Shade, Business Associations in a Nutshell, Ed. Thomson West, St. Paul, MN, 2003, pp.26-27.
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management (centralized/ by representatives or direct management
where each owner participates in management);
capitalization and financing – capitalization more flexible in
corporations than in partnerships or LLCs;
exit rules – owner’s freedom to transfer interests in the business, the
duration of the existence of the business association (at will, for a term,
perpetual) and the means by which the owners expect to get their money
out of the business (sale, dissolution, dissociation)6.
6 Joseph Shade, Business Associations in a Nutshell, Ed. Thomson West, St. Paul, MN, 2003, pp.28-31.
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Chapter 3. Competition Law
3.1. The Goal of Promoting Competition
The term “competition law” refers to law and regulations designed to ensure an
adequate degree of competition among business entities operating in an economy.
Competition is considered a good thing because it will require producers of goods
and services to strive to satisfy customer desires at the lowest price with the use of the
fewest resources. Hence the key aim of competition law is to promote competition at the
market level.
The precise method of achieving the aim of promoting competition varies from
one national legal system to the next. Sometimes, a nation adopts rules regarding
competition via both national and international legislation. For example, all members of
the European Union have national competition laws that operate alongside the EU’s
overall competition legal rules. Member states that did not have their own national
competition laws drafted new ones based upon EU rules and regulations, whereas
member states that did already have their own national competition laws simply amended
their laws in order to integrate the EU’s laws.
3.2. Issues Addressed by Competition Law
Avoiding the specific details of various national laws around the world in this
regard, here is a fairly comprehensive list of the types of behaviors that competition laws
might prohibit or restrict:
monopolies
market allocation
price fixing
resale price maintenance
group boycotts
tying arrangements
mergers
22
A monopoly has been defined as “a business entity that deliberately engages in
conduct to obtain or maintain the power to control prices or exclude competition in some
part of trade or commerce”7. A business entity that it is the only one operating in a
particular market is obviously a monopoly (or “has a monopoly” in the market).
However, even if there are several business entities in a particular market, one of them
can still in fact have a monopoly as the other entities lack the power to influence overall
prices or output in the market. In contrast to a monopoly, a competitive system includes
many business entities, each producing the same goods or providing the same services,
with none of the business entities individually possessing the power to control overall
prices and output.
Determining whether or not a monopoly exists requires a definition of the relevant
market. Usually, a market is defined both in terms of geography and in terms of product.
For instance, assume the following hypothetical facts:
1. a business entity named Handle, Inc., located in Detroit, Michigan
manufactures household-sized diesel-powered electrical generators and
sells them throughout Canada and the USA;
2. there are other manufacturers of electrical generators located in Canada,
but none of them makes household-size models;
3. there are other manufacturers of house-hold sized generators in the USA,
but only in the southeast part of the country and the cost of transporting
those products to Canada is prohibitively expensive.
On these facts, it would appear that Handle, Inc. has a monopoly in the Canada
for household sized diesel-powered electrical generators. It does not have monopoly in
terms of producing electrical generators in general, nor does it have a monopoly in any
product in all of the USA. But it does have a monopoly in its own particular geographical
and product market.
Although it might be argued that monopolies are not necessarily bad, the more
widely accepted view is that, with certain exceptions, monopolies are bad because a
company enjoying a monopoly can raise the price of goods and services at will, without
7 Douglas Whitman and John William Gergacz, The Legal and Social Environment of Business, McGraw-
Hill Publ., New York, 1994, p.671.
23
the discipline imposed by competition. Therefore, competition laws often give special
scrutiny to monopolies, prohibiting them in most circumstances.
They are not prohibited however, in businesses that are considered “natural
monopolies” (such as utilities companies) or in cases where control over some type of
property or operation serves other important purposes. For example, copyrights and
patent rights permit persons to exercise monopoly rights over the production of certain
types of products, but such monopolies are considered justified in order to encourage
persons to be creative, by promoting, for a limited period of time, their right to
exclusively use the fruits of their creativity.
In addition to monopolies, competition law often prohibits or restricts various
other types of conduct having the effect of placing restraints on competition. For
example, an agreement among ten companies to create horizontal market division (each
company would only sell products in a particular specified territory) would often be
prohibited by competition laws. In the EU, such an agreement is prohibited, as are
vertical agreements (agreement under which a producer grants a distributor the
exclusive right to distribute its products solely in a certain nation, region or territory).
Likewise, a price fixing arrangement among several business entities under
which they all agreed not to change less than a specific price for a particular product,
would often be prohibited.
A resale price maintenance arrangement represents a special type of price
fixing, in which a single manufacturer and a retail seller agree to set either the maximum
price or the minimum price at which commodity may be resold. The problem with such
an arrangement is that it prevents the competition between retailers. For instance, if a
television manufacturer required all television sets to be sold at no more than a certain
price, every retailer will be forced to sell the television sets at a price somewhere between
the wholesale price and the maximum price. This would probably lead to very little
competition at the retail level8.
If a business entity collaborates with another in order to refuse to deal with a third
business entity, this is called a group boycott. Some competition laws prohibit such
behavior. For example, a group boycott exists when for manufacturers of chairs, desiring
8 Ibidem, p.688.
24
to eliminate competition from Company X (another manufacturer of chairs) informed all
of their customers (the various small retail companies purchasing chairs from them) that
if they buy chairs from Company X, the first four manufacturers would stop selling chairs
to them.
Similar in concept to a group boycott is a tying arrangement, in which a seller
asks a buyer to purchase certain goods from the seller in addition to those that the buyer
really wants. In some countries, competition laws qualify such an arrangement as illegal.
Mergers are usually allowed by law. The merger itself is a way of creating and
organizing a new business entity that evolves from the union (combination) of two or
more separate business entities. However, often the competition law forbids such
mergers. The reason for it is that a merger can reduce competition, even creating a
monopoly, when two or more business entities become one single entity.
Mergers can take many forms. A horizontal merger involves a merger between
two companies that formally competed with each other in the same product or geographic
market. A vertical mergers involves a combination between a customer (or several
customers) and a supplier. For example, if Handle Inc. referred to above, purchased (and
in that way merged with) all the other manufacturers of household-sized diesel-powered
electrical generators in the USA, it would be a horizontal merger. If Handle Inc.
purchased all the retailers involved in selling such generators and the wiring used in
installing them, it would be a vertical merger. Under some competition laws, both types
of mergers would be scrutinized by government agencies responsible for fighting against
anticompetitive behavior. By prohibiting or reducing anticompetitive behavior, legal
systems aim at promoting competition and forbidding businesses from getting into a
position or using that position in such a way that will work to the detriment of customers.
Some laws have been criticized by companies and governments for their extraterritorial
application (application outside the national territory of a state). The USA legislation falls
into this category.
25
Chapter 4. Bankruptcy
4.1. Aim of Bankruptcy Law
Bankruptcy law provides a mechanism for dealing with a business entity that is
experiencing severe financial difficulties. According to one author „bankruptcy law has
two major purposes: to give the debtor a fresh start and to provide equal treatment to
creditors with the same types of claims”9.
However, beyond these general features, the specific rules on bankruptcy can vary
significantly from one legal system to another. They can also vary within one legal
system depending on the character of the person or entity that is bankrupt. For example,
banks are often subject to different rules from those applicable to other business entities
because of the special role the banks play in a country’s economy.
4.2. Common Themes and Concepts
Despite the diversity in laws around the world, a few general observations can be
made regarding bankruptcy. These relate to:
1. the situation that can trigger the commencement of bankruptcy
proceedings;
2. the immediate effects of commencing such proceedings;
3. the difference between bankruptcies culminating in liquidation and those
designed to reorganize a business entity;
4. the mechanism by which a bankrupt debtor’s assets are seized, sold and
distributed in a liquidation proceedings;
5. the role of a „conservator” in a business organization.
Commencement of bankruptcy proceedings typically can be triggered by a debtor
voluntary, or by one or more creditors. Usually bankruptcy takes place only if a debtor is
insolvent. Insolvency may be defined in various ways but a definition typically includes
9 George D. Cameron III, The Legal and Regulatory Environment of Business, Ed. South-Western Publ.,
1994, p.379.
26
both: a situation in which the debtor’s liabilities exceed the debtor’s assets and a situation
in which the debtor is not able to pay debts as they come due.
Once bankruptcy proceedings have been initiated, creditors are usually prohibited
from taking any further steps to collect outstanding claims against the debtor. The key
questions relating to such a restraint, sometimes referred to as an „automatic stay” are:
when does the automatic stay become effective, what is covered by the automatic stay,
when does the automatic stay end and how a creditor obtains relief from the stay. In
different legal systems, the answers to these questions are somewhat different.
1. Bankruptcy can lead to a liquidation proceeding, as the last phase of
bankruptcy proceedings. It typically involves the appointment of a person to prepare an
inventory of the debtor’s assets, take control over those assets (subject to certain
exceptions for personal property), sell the seized assets and then distribute the proceeds to
the creditors. In some legal systems, including Romania, the person in charge of
bankruptcy proceeding, including liquidation, is a judge.
In most cases, there will not be adequate proceeds to pay all creditors in full. At
that point the issue of priority arises. Some creditors’ claims are given priority over
others. For example, a creditor to whom specific property has been pledged as collateral
for a loan will in most cases have priority over any other creditor in respect of the
proceeds from the sale of that specific property.
Likewise, priority is often given to a person or entity that extends credit or
provides goods and services to keep a business entity in operation just following the
initiation of bankruptcy.
When several creditors having the same priority cannot all be paid in full, the law
typically provides for pro rata payments.
At the end of the liquidation phase, the debtor will be discharged (excused) from
any further liability on the debts involved in the bankruptcy proceeding, with some
important exceptions. These usually include taxes and fines due to the government, or
liability for money obtained by fraud or false pretenses, or liability to creditors whom the
debtor intentionally failed to inform of the bankruptcy proceeding.
27
2. Bankruptcy might also lead to a different outcome in the case of a debtor
business: reorganization of the business enterprise. “Whereas liquidation is similar to a
death, reorganization is similar to a rehabilitation or a resurrection”10
.
The aim in such a case is to overcome a temporary and curable financial problem
by imposing a temporary suspension of debt obligations while the business is being
reorganized in a way that will permit it to return to financial health and then pay off those
obligations in full. It is believed that this would also be less disruptive to the economy
(especially the local one where business operates where its worker live) than a
liquidation.
In some legal systems, reorganization is done following a reorganization plan that
has to be approved first by the owners of the business entities and second by the person in
charge of the legal proceedings. Thus, sometimes reorganization will take place under the
supervision of business entity’s own (pre-bankruptcy) managers that will remain in
control of the company’s operations. In other cases, the bankruptcy law will require the
appointment of a “conservator”, a person who will be responsible for turning around the
fortunes of the business entity within a prescribed period of time. If those efforts fail, in
many cases the business then will face liquidation as described above.
4.3. Cross-Border Insolvency
International bankruptcy, sometimes called cross-border insolvency, has become a
more important issue as businesses have become increasingly multinational.
For example, in Europe nations may follow two different models of law when
dealing with a multinational business’ cross-border insolvency: the territorial model and
the universal model.
According to the territorial model, in each nation the debtor has assets, that
particular nation handles the insolvency according to its own law. The insolvency
proceedings only concern the assets within the nation’s territory. Furthermore, only
creditors from that nation may participate in the proceedings. The disadvantage of this
10
John W. Head, General Principles of Business and Economic Law, Ed. Carolina Academic Press,
Durham, NC, 2008, p. 43.
28
model is that there can be many insolvency proceedings occurring simultaneously in
every different nation where the debtor operated his or her business11
.
In contrast, the universal model provides that a single insolvency proceeding is
held in the debtor’s „home” nation. The same insolvency law applies to both procedural
and substantive issues. The proceeding concern all debtor’s assets and activities from
every nation in which the debtor operated his or her business and all creditors, both
national and foreign, may participate.
However, the disadvantage of this model is that foreign creditors and nations are
forced to reorganize the „home” nation’s final judgment and settlement of the debtor’s
insolvency.
Sometimes, these two models can be combined, creating what is known as
„modified universalism”. Modified universalism accepts the central premise of
universalism, that assets should be collected and distributed on a worldwide basis, but
reserves to local courts discretion to evaluate the fairness of the home-country procedures
and to protect the interests of local creditors. When the local court decides to defer,
deference may be general and unconditional or may be limited and conditioned upon
certain developments in the bankruptcy case. Once the local court has determined to
defer, however, substantial local assets may be turned over to the home-country court, or
placed at its disposal and local creditors may be dispatched to the home-country court to
pursue their claims and resolve disputes.
11
Miguel Virgos and Francisco Garcimartin, The European Insolvency Regulation: Law and Practice,
Kluwer Law International Publ., The Hague, Netherlands, 2004, p. 11.
29
Chapter 5. Protection of Intellectual Property Rights
5.1. Intellectual Property Rights
The term “intellectual property” refers to certain types of knowledge, expressions
of ideas or other creations that can be ascribed to a particular person or entity.
In many countries, legal protection is provided for at least three types of
intellectual property. Patent law protects inventions, trademark law protects brand names
and designs and copyright law protects writings, including films, recordings, etc.
The first two of these (inventions and brands of names and designs) constitute
“industrial property” and the third one (writings) constitutes “artistic property”. In
addition, legal protection is sometimes provided for other types of intellectual property,
including in particular industrial models and designs, trade secrets and “know-how”, the
layout (topography) of integrated circuits, a famous individual’s “personality”, certain
types of biological technology and internet and electronic commerce technology12
.
Regarding these cases, the fundamental purpose of the legal rules is to protect the
results of innovation and creation, usually by providing a monopoly to the creator or
owner of the right. This is meant to prevent the others from using and/or producing the
protected item. Although multinational treaties have emerged in this area, most
intellectual property law is essentially national law. Thus, the international efforts in the
field of intellectual property have been undertaken to coordinate various national law
provisions.
5.2. Patents
Let us assume that after many years of research you have invented a special piece
of equipment that involves the passing of electrical current through a very thin wire
inside a sealed glass enclosure. The wire glows, creating light. In other words, you have
12
Gregory G. Letterman, The Basics of Intellectual Property Law, Hotei Publishing, Leiden, Netherlands,
2001, p. vii.
30
invented a light bulb. It might occur to you to “protect” your invention, in other one or
two different ways. First, you may wish to prevent other people from copying it and
selling it, thereby enjoying financial rewards from work that you (not them) have done.
Alternatively, you may wish to prevent other people from knowing about your invention
at all because you want to use it as a component of a larger product or process. Thus, you
wanted for it to remain a secret.
This example illustrates the difference between an invention and “industrial
know-how” and therefore different types of legal protection that might be afforded to
each.
What is essential to know is that the invention of the light bulb could be protected
as a legal matter under either patent or trade secret laws, but not both. Under the rules
most widely applicable around the world, a patent is a right granted to the inventor of a
technological product or process that is new, useful and “non-obvious”13
. On the other
hand, a trade secret is any information that provides a person with a competitive
advantage so long as it remains a secret14
.
In many countries, patent protection is provided by national legislation and
various international conventions. In comparison, trade secrets protection varies widely
from country to country and very little international law exists on the topic. However,
trade secrets protection is much easier to acquire than patent protection but its
disadvantage is that trade protection is less comprehensive than patent protection. For this
reason and many other commercial reasons, creators usually choose to patent their
inventions rather than to keep them secret.
Each of the three required features of a patent is important. The product or
process must be new or novel, in the sense that it has not already been invented, disclosed
or described by someone else. Questions often arise on this point. For example, how
much difference must there be between a particular type of light bulb that has already
13
A scientific discovery regarded as invention has to present some features that are established by law.
These are the novelty, the usefulness and the „non-obvious”, meaning that the discovery must not be just a
simple demonstration of an obvious physical, chemical, biological process but it has to bring something not
noticed before. 14
Roger D. Blair and Thomas F. Cotter, Intellectual Property: Economic and Legal Dimensions of Rights
and Remedies, Cambridge University Press, N.Y., USA, 2005, p.7.
31
been invented and patented and a new type of light bulb, in order to warrant protection?
National legislations on patent protection provide definitions to answer such questions.
Also, national laws establish standards on how useful an invention has to be in
order to be granted patent rights. Although it might be assumed that some commercial
use could be found to almost any invention, some of them might not have an immediate
use. Typically, mere speculations about some possible utility in the future will not be
sufficient to obtain patent protection. A common rule is that an invention cannot be
patented if it is just a curiosity with no real benefit. Thus, under this rule is not possible to
obtain patent rights for illegal, immoral and dangerous items.
An invention must also be “non-obvious” in order to obtain patent protection.
This means that the new product or process is not simply an elementary or apparent
improvement over an existing product or process.
Once a patent has been granted, the patentee typically will enjoy for a prescribed
period of time an exclusive right to make use or sell the invention. In some countries, this
includes the right to refrain from using the invention. In many countries, however, the
inventor is obligated to “work” the patent. If the inventor does not do that, he can be
required to grant compulsory license to others who wish to exploit the invention.
The reasons for granting patent rights could be related to commercial customs or
to prevention of “free-riding” and preserving an economic incentive to create. The “free-
riding” issue refers to the risks taken by a person to create, disclose, commercialize new
inventions. Persons spending time and money to create an invention need to be
financially compensated for their efforts.
However, since many legal systems reflect the belief that monopolies can bring
economic harm to society, patent rights typically are limited to a specified number of
years. After that period of time has run, the patent enters “public domain”, which means
that anyone else then has the right to make, use, or sell the invention.
A key multilateral agreement relating to patents is the Paris Convention for the
Protection of Industrial Property. The treaty entered into force in 1884 and it was revised
in 1967. It provides that an inventor from one member country will receive national
treatment, that is the same treatment that a citizen of that country receives. Moreover, the
treaty also grants certain procedural advantages, including special filing priority (one
32
year) to an inventor from one member country intending to apply for a patent in another
country. This is an important procedural right because in many countries the simple act of
filing an application publicizes the invention, making it ineligible for patent protection in
other countries that require absolute novelty of an invention (including lack of
publication) in order to receive a patent.
In Europe, the European Patent Convention allows applicants for patents to
choose to be examined by a central authority that makes a decision on patentability and
issues an European patent. However, it is still necessary to register formally for a separate
patent in each EU member country.
Also, the Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPs Agreement) negotiated by World Trade Organization members in 1993
incorporates some of the rules of the Paris Convention as well as some other treaties
regarding trademarks and copyright. Most countries in the world have accepted this
treaty.
5.3. Trademarks
A trademark is a sign, mark, or design that is used on or in connection with the
marketing of a product or service in order to distinguish the owner’s product or service
from those of other persons.
Under typical intellectual property rules, no person other than the trademark
owner may use the protected trademark or any similar mark in a way that would tend to
confuse the public.
It is believed that a trademark has traditionally performed four main functions:
it distinguishes the products of one enterprise from the products of
another one, thus helping a consumer to identify a product that was
already known to him or her;
it refers to a particular quality of products for which the trademark is
used;
33
it relates to a particular product to a producer, thus indicating the origin of
the product;
it promotes the marketing and sale of products.
Thus, trademark law provides two types of protection. First, it can protect the
trademark owner from “trademark dilution” or losing the benefit of goodwill15
that he has
been able to build up in the minds of the consumers who recognize his products through
quality and advertising. Second, trademark law can also protect the public from
“consumer confusion” resulted when one business uses the same mark or design that
another well-known business has already developed and used to distinguish its products
on the market.
The sign, mark, or design constituting the trademark may consist of one or more
distinctive words, letters, numbers, pictures, drawings, or distinctive form (for example
the shape of the Coca-Cola bottle). In certain cases and in certain countries, even a
specific color can constitute trademark, or at least its use can be protected as constituting
a key feature of a trademark.
In order to register a trademark, and thus gaining legal protection for its use, a
business needs to prove that it is already using the trademark in commerce. This
requirement is consistent with the theory that a trademark is already recognizable by the
consumers. However, in some countries (like the USA) it is also possible to register a
trademark simply by demonstrating an intention to use it in the future in marketing a
product.
The international protection of trademarks is enforced by the Madrid Agreement
Concerning the International Registration of Marks and its Additional Protocol. The
agreement, entered into force in 1891 and updated over the years, grants automatic
registration of a trademark in all member countries once the trademark is registered in
the country of origin.
Under the Madrid Agreement, the owner of a home country trademark may file an
international application with its national trademark office designating those other
member countries in which extension of protection is desired. The international
15
Goodwill (fond de comerţ) refers to everything that a business uses in order to function: different types of
goods, exclusive rights to use trademarks, brands, designs, its clients and its public image etc.
34
application is then forwarded to the World Intellectual Property Organization16
, which
issues an international registration for the mark and forwards the application to the
designated countries.
Under the Madrid Protocol, adopted in 1989, this international registration
procedure could be started as soon as a home country application (as opposed to a home
country registration) is made.
The Paris Convention, discussed above, also provides certain procedural
advantages (a filing priority of six months) in respect of trademark protection.
TRIPs Agreement provides some rules for trademark legal protection, as well.
5.4. Copyright
In very general terms, the protection of “copyright” applies to writings. In most
countries, copyright protection extends beyond mere writings to include all original
works – literary, dramatic, musical or artistic – that are fixed in any tangible means of
expression. Copyright protection is often extended, for example, to a sculpture,
videotape, recorded choreography and computer programs.
There are two fundamental reasons for the existence of copyright law: expression
and originality. The concept of expression means that only ideas as they are expressed
are copyrightable. Another way of describing this principle is that ideas in and of
themselves are not protectable under copyright law. The concept of originality means that
the work must have originated with the author. The author could not have copied it from
another.
Once granted, copyright protects authors and artists against the unauthorized
copyright or reproduction of their creative expression. The protection afforded by
copyright is typically longer than that given by patents – often for the life of the author or
artist plus some number of years after his death. However, throughout the life of the
copyright exceptions typically are made from the prohibition on copying. For example,
16
WIPO was established by a 1967 treaty and became a Specialized Agency of the United Nations in 1974.
Its activities center on facilitating the registration of intellectual property rights, the progressive
development of intellectual property law, and the resolving of disputes among states that are parties to
intellectual property treaties.
35
the right of “fair use” often permits portions of otherwise copyrighted works to be used
for instruction purposes.
Computer technology has made it possible to transform expressive works into
electronic form, which has in turn made it possible to reproduce those works easily and
inexpensively. This development gives more urgency to the question: how should the
benefits available to society from the easy distribution of information and culture be
balanced against the interests of copyright holders who fear loss of control over their
expressive works?
There are different theoretical approaches when trying to answer this question.
According to one source, “copyright exists to reward creators for their work and
disclosing them to the public and to foster cultural sensitivity and identity”17
.
A somewhat different theoretical approach (emphasized more in the European
law) rests on the notion of “moral rights” that authors or artists are viewed as having in
their works. Such moral rights, which are thought to be inalienable, include the right to
prevent a mutilation or other abuse of the work that would disparage the reputation of the
author.
At the international level, the Berne Convention for the Protection of Literary
and Artistic Works (1886) is one of the treaties that govern copyright. The Berne
Convention, which refers to “moral rights” guarantees national treatment and sets some
minimum standards for copyright protection among its member countries. The
Convention establishes three key principles:
The national treatment principle – works originating in one member
country (to the Convention) must be given the same protection in each of
the other member countries as they grant to the works of their own
nationals;
The principle of automatic protection – the protection mentioned above
must not be conditional upon compliance with any formalities;
17
Melvin Simensky, Lanning G. Bryer and Neil J. Wilkof, Intellectual Property in the Global Marketplace,
vol. I, John Wiley & Sons Publishing, N.Y., USA, 1999, p. 0.7.
36
The principle of independence of protection – the protection mentioned
above is independent of the existence of protection in the country of
origin of the work.
As in the case of patent and trademark, copyright protection at the international
level is affected by the TRIPs Agreement. Thus, even those countries that had not
acceded to Berne Convention earlier are now subject to some of its key provisions.
37
Chapter 6. Product Liability and Consumer Protection
6.1. Product Liability
A legal topic of growing importance to business entities concerns their liability
for injuries resulting from the use of products they manufacture and sell. Assume, for
example, that a company operating out of Mumbai manufactures televisions for sale in
Africa, Japan, Europe and USA. If several of those televisions are defective and explode,
causing serious injury to the persons who ultimately purchased and used the televisions,
can the Mumbai-based company be judged liable for those injuries and be required to pay
damages?
The answer differs from one legal system to another. In Europe and in the USA,
the answer is almost surely yes – the company could face enormous financial liability.
The trend in many countries around the world over the past few decades has been toward
providing more and more protection to consumers by placing more and more liability on
the manufacturers or sellers of consumer products.
Traditionally, these issues were typically handled under normal rules of the law of
obligations, divided in some systems, especially common-law ones, between contract
obligation and tort18
obligations.
Under contract obligations law, the predominant rule was stated in the Latin
phrase caveat emptor, which means “let the buyer beware!”. In other words, the seller of
goods generally was not liable for any problems in the goods, or injury caused, unless a
specific provision in the contract imposed that liability on the seller. Instead, the buyer
was responsible for inspecting the goods for defects or for suitability to the purpose that
he had in mind for those goods. Today things changed almost completely in some
countries, like the USA for example, where the rule might more accurately be described
as caveat vendor – “let the seller beware!”. Other countries have witnessed similar
developments.
18
The term “tort” as used in common law countries may be defined generally as a wrongful act, outside the
context of a contractual relationship, by which one person causes some injury to another person, thereby
triggering an obligation to compensate the injured person. The notion of tort is closely related to the notion
of delict as used in many civil law countries.
38
Under tort obligations, in most legal systems people have a duty to exercise
ordinary care in conducting their affairs, so as to avoid undue injury or damage to other
people or their property. If, through negligence, a person violates that duty, commits a
tort, then compensation is due. In other words, persons are held liable for the results of
their carelessness and disregard of the health, safety, or property of others. On that basis,
if a manufacturer of a product acts negligently in making it and thereby injures or
endangers a consumer, compensation is due.
In some legal systems, however, the responsibility of a manufacturer extends
much further: he can be liable to pay compensation for any injury, even if there was no
negligence involved at all. Where this “strict liability” or “absolute liability” approach is
taken, it sometimes applies only to specific kinds of products – those that are considered
to be inherently dangerous.
The three bases of liability – contract, negligence and “strict liability” appear in
different contexts in different legal systems. Most states, including Japan and most states
of the developing world, use only the first two of these. The common law countries, USA
and the British commonwealth countries, use all three. The European Union relies
principally on the last of these three bases of liability.
Another topic falling into the area of product liability relates to defenses –
arguments that can be raised by a business entity that has been accused of being liable for
injury of damage as a result of products it made or sells. These defenses also vary from
one legal system to the other. They can be classified as follows:
- defenses claiming that the injured consumer was in fact the primary cause of
the injury. This is sometimes referred to as “contributory negligence”
because the consumer contributed by his or her negligence to the injury. This
can sometimes serve as a complete defense or can sometimes serve to lessen
the compensation that a business entity has to pay.
- defenses claiming that the injured consumer was fully aware of the risks
involved in using the product and did so anyway. This “assumption of risk”
argument might not apply if the consumer in fact had no choice but to use the
product and if the product could have been made safer.
39
- defenses claiming that the state of scientific or technical knowledge at the
time the product was made or distributed was not advanced enough to permit
a defect to be discovered.
- defenses claiming that adequate warnings or disclaimers were provided to
alert the consumer of the risks involved in using the product and the restricted
responsibility that the maker or seller of the product was accepting.
Business entities need to be aware of the rules relating to product liability,
negligence, strict liability and other possible grounds on which they might be found
financially responsible for injury or damage that results from the use of products they
make or sell. In some markets, a business entity can be held liable for injury or damage
even if it cannot be proven that the injury or damage resulted from the use of that
business entity’s products. As long as the business entity id the producer of some of the
articles of a particular type in that market and as long as the injury resulted from use of
that type of article, all producers might share liability. Thus, the risks of such liability
must be taken into account in a decision whether or not to sell goods into a particular
market.
6.2. Consumer protection
Product liability is an especially important aspect of consumer protection law. In
many legal systems, governments are increasingly involved in a variety of efforts to
protect consumers.
The European Commission issued a “Green Paper” on consumer protection,
which summarized the EU’s consumer protection objectives but recognized that many of
the objectives had yet to be fully achieved in its member nations.
In both Canada and the USA, laws on consumer protection are enacted by
legislatures and the provincial (or state) level as well as at the federal level. Government
agencies also adopt rules regulating consumer protection. This trend toward increasing
government involvement in consumer protection might reflect in part the globalization of
the world economy. Increasingly more consumer transactions are conducted with
40
business entities that are not personally known to the consumers and many of those
business entities have vastly greater bargaining power than the consumers do.
A list of efforts at consumer protection would include the following:
- laws imposing “fairness” requirements on standard-form contracts. If Mr.
Smith hires a car from a car-rental company at Heathrow (London) international airport,
he has virtually no bargaining power regarding the terms of the contract. Thus, in order
for him to be legally protected against unfairly treatment from the car-rental company,
statutory rules or government agency regulations might require that the contract include a
variety of provisions to protect Mr. Smith - such as a promise by the company to provide
a replacement automobile of the one first given to Mr. Smith is defective, or a guarantee
that disputes or complaints could be brought before a government agency in the UK.
- laws prohibiting deception and fraud in consumer transactions. The term
“deception” would carry different specific meanings in different legal systems, of course,
but in many cases the term would apply to a practice that is likely to mislead consumers
who are acting reasonably (they do not believe everything they read or they are told) and
who are materially injured as a result. By contrast, “fraud” is typically more serious and
more difficult to establish. For example, in English and American common law, fraud
consists of five elements: a false representation, the defendant’s intentional making of
that false representation, the defendant’s knowledge of the falsity of the representation,
reliance on that false representation by the plaintiff, injury to the plaintiff as a result of
that reliance.
- laws requiring disclosure of product information to consumers. These might
stipulate that companies engaged in financial products and services (banking, insurance
etc.) provide specified types of information about the safety or liquidity of financial
products they sell or about the full range of fees applicable to certain types of services.
Other such laws might require labeling of the ingredients included in food products or
providing instructions and warnings with kitchen appliances etc.
- laws prohibiting specified sales practices. These might disallow, for example,
a provision in an insurance contract stating that the insurance policy is automatically
canceled if the insured person is even one day late in paying the premium.
41
- laws guaranteeing consumers access to financial information relating to
business or themselves. These might include requirements that a business makes
available to consumers financial and other information about the business, to assist the
consumer in deciding whether to enter into a transaction with that entity or to buy one of
its products. Such laws might also require that consumers have access to information
about them kept by business or government entities regarding their personal finance.
Lastly, consumer protection could also be seen as including certain rules of court.
Increasingly, courts in various countries are accepting cases brought jointly by a large
number of individual claimants against a particular business entity. These actions are
called “representatives actions”, “class actions” or “mass actions” and they are important
because they tend to overcome the natural advantage that such an entity has in such cases.
42
Chapter 7. Cyber Law and Business
Cyber law is considered to be an interdisciplinary topic because it cuts across
numerous areas of law such as commercial law, intellectual property, financial law,
criminal law, international law etc. This arises out of recent technological developments.
These developments are often described as the “informational revolution”, the rise of the
World Wide Web and the development of “cyberspace”.
The conflict of opinions regarding these technological developments has been
focused on their legal implications. On one hand, government officials and some other
commentators argued that the dramatic developments in information technology are so
great as to require brand-new types of regulation. On the other hand, others have taken
the position that while the technological changes are indeed dramatic, the legal
implications of these changes can fairly easy be accommodated by existing legal
concepts, institutions and rules.
At present, the balance inclines towards the first opinion. Thus, the technological
revolution triggered a legal one, departing from legal rules and doctrines towards the
development of entirely new ones. However, there is considerable uncertainty and
disagreement about precisely what changes are needed and what the content of new rules
should be19
.
Here are some of the questions that national and multinational legal system will
need to address.
7.1. Governance of cyber space
First issue focuses on whether there should be any government regulation
regarding cyber law and if so, what government institutions should be entrusted to
provide it. The question arises because unlike most other forms of activity, “cyber-
activity” does not take place to the same degree within the territorial sovereignty of any
particular state.
19
John W. Head, General Principles of Business and Economic Law, Ed. Carolina Academic Press,
Durham, NC, 2008, p. 97..
43
For example, if Cherry Mary sends an e-mail to her friend in another country or
searches the Internet for information about the explorer Christopher Columbus, or orders
a book from Amazon.com, or visits the website of The Economist magazine, her activity
not only that crosses national borders but remains in some sense outside the borders. That
being the case, what government entity, if any, has legal authority to regulate the content
of Cherry Mary’s e-mail message, to monitor the fees charged for using an Internet
search engine or reading an on-line magazine, or to settle an eventual commercial dispute
arising out of the agreement by Amazon.com to sell the book?
Some experts on the matter argue that cyberspace cannot legitimately be governed
by territorially based sovereigns and that the online world should be its own legal
jurisdiction or even multiple jurisdictions. Others, including government officials, argue
that territorially base laws should govern any conceivable online activity20
.
An important step towards solving the issue has been made ten years ago in the
US court case of Zippo Mfg. Co. v. Zippo Dot Com, Inc. The Court defined jurisdiction
over websites along a classification with three main categories.
Passive websites supply information accessible to anyone surfing the Internet.
Examples include informational and advertising websites, such as university websites.
Passive websites typically would not trigger jurisdiction in a foreign nation because they
do not avail themselves of the foreign market. However, foreign governments can
prohibit their own citizens from visiting certain websites containing content banned under
their own laws21
.
Interactive websites post information accessible to anyone surfing the Internet,
but also conduct a limited amount of interactive activities. It is not certain that interactive
websites should trigger foreign jurisdiction. Courts judge the issue on a case-by-case
basis, mostly depending upon the type and frequency of the website’s cyberspace
activities.
Highly interactive commercial websites direct activity into a foreign jurisdiction.
Highly interactive or commercial websites are generally seen as triggering jurisdiction in
a foreign nation and they are subject to foreign regulation, liability and judicial
20
Patricia L. Bellia et al., Cyberlaw: Problems of Policy and Jurisprudence in the Information Age, 2003,
p.63. 21
John W. Bagby, Cyberlaw Handbook for E-Commerce, 2003, p.21.
44
determination of their rights. For example, if a shoe company located in Malaysia sells its
shoes exclusively to Canada via its website, sends out advertising emails to Canadian e-
mail addresses, and establishes affiliate programs with Canadian business websites etc.,
then the shoe company will be subject to jurisdiction in Canada.
Thus, according to this classification of the websites, national governments will
try to impose regulation over some or all of the activities that Cherry Mary was engaged
in. However, it is uncertain whether such regulations in fact are enforced. In practice,
governments typically will be unable to impose effective regulation over some or all of
these activities in which Cherry Mary is engaged. If one national government would try
to do so, one or more other national governments are likely to object on the grounds that
such regulations will impinge on their own sovereignty.
Even non-governmental organizations such as Internet Corporation for Assigned
Names and Numbers (ICANN) or even “eBay” can and do regulate cyberspace.
However, there are disadvantages and advantages for NGOs in doing that. One
disadvantage is that because the regulation is non-governmental, there is no guarantee of
appropriate oversight or due process in the regulatory activities. However, one advantage
is that regulation is more flexible because it does not rely on top-down governmental
solutions22
.
Also, resistance to regulation will come from citizens or users themselves on a
variety of grounds. For instance, regulation of e-mail correspondence would in many
countries be considered illegal causing the infringement of guarantees and expectations
of the freedom of expression or the right to privacy.
Thus, we can say that the nature of “cyber-space” raises both practical and
conceptual issues. Here is an expert opinion on this matter: “Internet is arguably
regulated as much by non-state entities as it is by formal sovereign governments. […]
Traditionally, law involves a centralized sovereign actor that exerts power within its
territorial boundaries. However, several features of the Internet combine to disrupt this
framework: the instantaneous extraterritoriality of most acts, the lack of centralized
power and the fluidity of geographic or political boundaries. To a much greater degree
22
Patricia L. Bellia et al., Cyberlaw: Problems of Policy and Jurisprudence in the Information Age, 2003,
p.333.
45
than with other technologies, the design choices made by engineers will also act as a type
of “regulation”. [Thus,] challenges posed to the concept of law by Internet technology”23
.
7.2. Rights and Freedoms in Cyberspace
Although the new technology of cyberspace raises many issues specifically
relating to individual rights and freedoms, three in particular stand out as more important:
the right to intellectual property, the freedom of expression and the right to privacy.
From an intellectual property protection perspective several questions arise:
Who owns the content that travels through cyberspace and what rights
arise from such ownership?
How much control should content owners have over the use or
dissemination of their work over the Internet? Some argue that the law
should provide more and better tools to prevent members of the public
from “copying” writings, music and other works without the author
permission. Opponents of this view challenge the notion that digital
transmissions constitute “copies” at all. They argue that the public should
be allowed to share, lend and pass on digital materials as it was
traditionally done with “hard copies” of books, music etc.
What liability, if any, should Internet service have for infringement of
copyright initiated by their subscribers?
In the area of freedom of expression, many countries are struggling with the
question if where to strike a balance between government regulation and the freedom of
speech. The right is stipulated in many national constitutions and statutes and also it is the
key of many human rights treaties that were signed by most countries in the world.
However, cyberspace is a tool that can be adversely used conveying inflammatory
speech, threatening speech, defamation, hate speech, violent speech etc.
The question also arises in the area of privacy, meaning “the ability of consumers
to control what information about them other people may be able to view or gain access
23
Maggie Chon, Introduction to Cyberspace, at www.cyberspacelaw.org.
46
to on the Net. Privacy advocates that on the Net there is not much privacy at all. The
mere act of visiting a website generally triggers the placement of “cookies” on an
individual’s computer. These cookies enable the website to welcome back a visitor but
they also allow the operators of that website to read from the cookie what other websites
and that particular individual has visited. This information may be sold to the third parties
or kept by the website itself to ascertain consumers’ preferences and target new product
offerings”24
.
The European Union has taken preventive measures such as Directive on Data
Protection (Directive 95/46/EC, 1998). This Directive controls the gathering and use of
personal data as well as any dissemination of that information. Thus, a company that
gathers information must obtain the individual’s permission and explain how that
information will be used. Also, individuals can see the information that has been gathered
about them and correct or delete it. Individuals can also bring legal action against anyone
who misuses the information.
The American approach to this matter is more reactive, meaning that legal
remedies would be provided if an individual can prove that he or she suffered some
injury as a result of privacy invasion.
The two different views have generated considerable friction between EU and
USA, EU refusing to provide personal data on EU citizens to the countries that cannot
protect it according to EU standards.
7.3. Cybercrime
Usually, any new environment generates criminal activity. Cyberspace is no
exception. Criminal activity in the context of cyberspace can take many forms. National
governments and international agencies are just beginning to fight such crimes effectively
and to provide protection against the crimes and the criminals that commit them.
The range of cybercrimes includes the following:
24
Robert E. Litan, Law and Policy in the Age of Internet, 50 Duke Law Journal 1045 (2001), pp. 1057-
1058.
47
fraud – in financial transactions conducted over Internet and in an
electronic manner;
illegal gambling;
illegal copyright infringement;
malicious computer spamming;
identity theft – gaining enough personal information about an individual
via electronic means as to pretend to be that person;
drug-related crimes – using Internet “prescriptions” to buy controlled
drugs;
unauthorized access to computer files – “hacking”;
spreading computer “viruses”;
other Internet crimes of a financial nature – e.g. tax evasion;
computer crimes creating death or serious physical injury – the disruption
of emergency response, medical care, telecommunications, electric power;
cyber-stalking – crime done using chat rooms.
Many countries have problems in fighting this range of various forms of
cybercrime. One of the most challenging fights is the one at international level. Some of
the challenges arise because of inadequate coordination of laws and law enforcement
efforts of international level.
In response to these challenges, several multilateral steps have been taken. For
example, the Convention on Cyber Crime from 2000 takes serious steps in harmonizing
substantive national laws in the field of computer crimes, empowering domestic law
enforcement officials to obtain electronic evidence within their territorial jurisdiction and
developing mechanisms for expedited legal assistance in the investigation and
prosecution of computer crimes.
48
Chapter 8. Key Transactional Aspects of Business Operations
8.1. Contract Law and Commercial Law
Contract law is a basic element of any legal system. The legal enforceability of
certain promises forms the backbone of an economy. There are several key aspects of
contract law in general: formation of contracts; validity of contracts; interpretation of
contracts; performance, non-performance and termination; remedies for breach of
contract. Also, there are some special features of the laws governing commercial
contracts such as contracts for the sale of goods and services.
8.1.1. Contract Formation
In most legal systems and in recent multilateral agreements dealing with contract
law principles, the formation of a contract requires two elements: an offer and an
acceptance of that offer. For example, Mr. Smith says to Mr. Rogers “I will sell you this
book for 50 dollars” and if Mr. Rogers replies to Mr. Smith “I accept your offer”, then a
contract is formed.
However, in many cases two people will not speak this way. They will not make
their offer and acceptance so obvious. Therefore, rules have been developed to determine
when the behavior of one person constitutes an acceptance.
In general, an offer has been made if one person indicates to another, with a
reasonable degree of clarity, either by spoken or written words or by behavior, that he or
she is willing to enter into a binding agreement that requires to do a particular thing in
return for another one that will be done by another person.
Thus, an offer has almost certainly been made if Mr. smith, while wearing a
vender’s permit and standing at a booth marked “Books for Sale”, holds up a book to Mr.
Rogers as he walks by and says “50 dollars?” and shows a questioning look in his eyes.
Unless a reasonable person would know that Mr. Smith is just joking and that no offer
was intended, an offer has been made.
49
It is easy to imagine cases, in which reasonable people might have different
interpretations of Mr. Smith behavior. If he were not standing at a book selling booth but
instead he were engaged in a conversation with Mr. Rogers while walking down the
street and he might hold up a book and say “50 dollars?” as an abbreviated way of saying
any number of different things: “Can you believe I spent 50 dollars on this book?” or “Do
you think I should sell this book to my neighbor for 50 dollars?” or something else. In
such case, it will be difficult to determine whether an offer has been made or not.
Similar rules apply to the acceptance. In general, an offer has been accepted if
the person to whom the offer has been made (the offeree) has indicated to the person
making the offer (the offeror), with a reasonable degree of clarity, either by spoken or
written words of by behavior, that the offeree is willing to do the thing requested by the
offer. Thus, Mr. Rogers can accept an offer made by Mr. Smith by using several means –
by saying “OK” or by moving his head or hands signaling that he is willing to pay 50
dollars for the book. However, it is not completely clear sometimes whether an
acceptance has been made. In such a case it must be decided by application of legal
procedures. A court will usually examine all the circumstances closely to see how the
general rule stated above should apply in a particular case.
Detailed rules often exist regarding things such as: duration of an offer (how long
it is valid for a person to accept it); withdrawal of an offer (when an offer, once made,
can be withdrawn) or of an acceptance; the degree in which an acceptance must match
the terms of an offer in order for a contract to be formed and the effect of rejection of an
offer.
These rules vary from one legal system to another and they often vary depending
on whether the contract is for the commercial sale of goods or another kind of contract (a
contract for providing services, a contract for the sale of land etc.).
In many legal systems, particularly those influenced by English common law,
another element called “consideration” must be shown to exist before a contract is
formed. In English law, “consideration” is anything of value (item or service) which each
party to a contract must agree to exchange. In other words, a contract must be “met with”
or “supported by” consideration in order to be enforceable.
50
The rules in US law are closely related but slightly different. In that system,
“consideration” is something done or promised in return for a contractual promise. In
order for a contract to be binding (consideration shown), three elements must exist:
there must be a bargain regarding the terms of an exchange;
there must be a mutual exchange;
the exchange must be of something having a certain value.
The consideration procedure is quite complicated. Thus, it is absent from many
legal systems.
8.1.2. Contract Validity
If an offer has been made and accepted, then a contract exists. Often, the law
requires that a contract, once made, must be performed in accordance with its terms.
However, this general rule is subject to exceptions.
A contract is not valid and therefore not fully binding, if one of the parties did not
have the proper legal “capacity” to enter such a contract. Specific legal rules usually
govern what persons can have legal capacity. These rules are designed to protect different
groups of people whose maturity or mental abilities are considered inadequate to require
them to be bound by contractual promises that they make.
Similarly, a contract is not enforceable if there has been some serious
misrepresentation associated with its conclusion. For example, if Mr. Smith wanting to
sell a house to Mr. Rogers hides from him the fact that the roof leaks and tells him that
that everything is fine and Mr. Rogers accepts the deal and finds out after that that there
is a problem with the roof, he will not be required to pay the purchase price.
Also, a contract may be declared unenforceable if duress was involved in the
contract formation. Duress refers to the situations, in which persons could be forced to
enter into a contract, meaning “unwillingly”. For example, physical or physiological
violence exerted over an individual in order to determine him or her to enter a contract
will nullify such a contract.
In some cases, a contract will not be enforced if, at the time it was concluded, its
terms were so unfair as to make it “unconscionable” (in whole or in part) to hold one
party to the agreement.
51
The fundamental principle on which contract law is based is “the freedom of
contract”, meaning that persons are free to enter whatever agreement they want.
Therefore, in many legal systems, the authority of the court to declare a contract
unenforceable on account of “unconscionability” will be very limited. However, modern
economic life involves many situations in which the bargaining power between the
parties is unequal, leading to great temptation on the part of some contracting parties to
impose bargains on weaker parties, agreements that are unfair in every aspect.
Thus, “the freedom of contract” doctrine should be completed by rules that will
safeguard the rights and obligation generated by a contract.
8.1.3. Contract Interpretation
Many contracts are made without much formality or attention to detail.
People enter into hundreds of contracts in a year – buying groceries, taking a taxi etc.
Most of those contracts are unwritten. Sometimes, even when written, a contract can
never specify precisely what every term means and how it is to be construed in every
conceivable circumstance. As a result, questions sometimes arise about what the parties
agreed to or what they should be deemed to have agreed to. In short, questions arise about
how to interpret and apply the contract provisions.
There are several theories of contract interpretation, especially in the case of
written contracts. Under one theory, a judgment about how to apply a contract should be
made by examining only the words of the contract itself without any regard to other
evidence that might show what the parties intended in the particular circumstances that
have prompted a conflict.
Under another theory, a judgment about how to apply a contract should be made
after reviewing not only the text of the contract but also all other relevant information,
such as the behavior of the parties, including prior courses of dealing up to the time the
contract was made.
Under a third theory, the well-being of the parties and even the values and
priorities of the community as a whole should be taken into account when interpreting
and enforcing a contract.
52
Sometimes important terms of a contract are added by judges or through
legislation. For example, this is the case of the warranty when specified terms must be
added to the contracts used for the sale of goods or provision of services.
Some terms of the contract are “implied” and they should not be specified in
writing. For example, the law imposes in many legal systems a duty of good faith and fair
dealing in the performance of any contract.
8.1.4. Contract Performance, Non-Performance and Termination
Once a contract is formed and it is valid, it has to be performed according to its
terms as properly interpreted. What should happen if one of the parties to the contract
should not perform or only performs part of the obligations that were undertaken in the
contract? Special rules govern such situations.
In some cases, partial performance by one party has the result of reducing the
obligations of the other party. In some cases, a total non-performance by one party is
excused under the doctrine of “force majeure”. The doctrine provides that if a
circumstance that occurred in spite of the party’s will (“act of God”) made performance
impossible, the non-performance will be excused.
If there is no excuse for non-performance by one party, the situation will trigger
the availability of remedies to the other party to the contract.
Sometimes, the non-performance gravely affects the contract and, as a result, it
brings the contract to an end. Thus, a “fundamental breach” of contract usually relieves
the other party of all obligations under the contract, giving that other party the right to sue
for compensation (‘monetary damages”).
Also, the contract can be terminated by mutual consent of the parties.
8.1.5. Remedies for Breach of Contract
A fundamental breach of contract triggers the right of the non-breaching party to
sue for monetary damages. This is the term used in many legal systems when referring to
financial compensation owed by one party to another. The right to financial
53
compensations can occur in other circumstances as well when one of the parties does not
fulfill the contract obligations as agreed.
Detailed rules apply to the calculation of proper financial damages to be paid to
the non-breaching party, especially if the non-performance caused other injury or
economic loss to the other party. These rules will vary from one country to another.
However, in many cases the method of calculating the financial damages is the one called
“expectation measure of damages”. The method requires three steps: determining the
financial value of the obligations that had to be performed, determining the financial loss
resulted from the non-performance, awarding the sum of money resulted from the
difference between the two values.
In some cases, it might not be possible to use this method. Thus, another method
that can be used is the method called “reliance measure”. Thus, the aim is to restore the
injured party to the economic position that that party had at the time when the contract
was formed.
Another method is “restitution” and it is used to prevent the breaching party from
being unjustly enriched.
Detailed rules also govern the requirements of mitigation – that is, to what extent
a party to a contract should take steps to minimize the loss occurring as a result of
another party’s non-performance.
The remedy of “monetary damages” is the typical remedy used by European Civil
law countries.
However, besides the remedy of “monetary damages”, another type of remedy
called “specific performance” exists. This remedy is well-know to English common-law,
as a heritage from 14th
and 15th
centuries.
The remedy of “specific performance” instead of merely compensating the non-
breaching party, actually forces the breaching party to go forward with the performance
of the contract even though that party does not wish to do so.
8.1.6. Commercial Contracts
Definition of “commercial contracts” differs among legal systems. Commercial
contracts are agreements that are governed by the commercial legal rules. They are
usually perceived as contracts for the sale of goods or services used by merchants.
54
However, commercial contracts encompass different other agreements such as licensing,
franchising, transfer of technology contracts, consulting, mandating (representation
contracts) etc.
In comparison with the ordinary contracts, commercial contracts have special
features that need to be addressed with special legal rules, distinct from the ones
governing contracts in general. Thus, commercial rules are subject to separate laws and
codes in many countries and also at international level.
Property and ownership is one particular concept that is particularly addressed by
commercial law. Rules governing the sale of goods usually clearly specify the point at
which the ownership interests in the goods sold pass from the seller to the buyer. This is
important for several reasons. One of them relates to risk: the parties need to know when
the risk of loss or damage passes from the seller to the buyer. Another reason concerns
the financing of a sale of goods. In some cases, the buyer will not have the money to pay
for the goods and will need to obtain a loan from a bank. The bank will require the buyer
to give a security interest in the goods until the buyer has repaid the loan. If the buyer
fails to repay the loan, the bank will seize the goods and the situation will generate a
splitting the property rights over the goods.
Another special feature of commercial contracts relates to the variety of forms
that sales can take. The simplest sale would involve immediate exchange of goods for the
price. However, sometimes the sale of goods takes place in several installments and
payment is made on each installment. More complicated than that, payment can take
place on an entirely different schedule. Thus, questions can arise regarding the respective
rights and duties of the parties as well as the rights of third parties involved in the
transaction (e.g. the bank providing the loan for the buyer).
One last issue that relates to commercial contracts refers to specific elements that
must exist in order for a sale contract to be legally formed and binding. The usual terms
will include: a description of the goods, the price, the quality of goods sold, the time and
place of delivery and also, the time, the place and the form of the payment. These
requirements are stated internationally by United Nations Convention on Contracts for
the International Sales of Goods.
55
8.1.7. Electronic Commerce
The technological revolution dramatically influenced commercial activities. Many
business and individuals use computers and other electronic equipment to transmit
messages, to place orders, to conduct financial transactions. Thus, the law needs to keep
up with these changes. However, the law fails to do so.
There are theoretical and conceptual difficulties posed by the recent development
of electronic commerce. Also, there are numerous practical difficulties in applying
specific, traditional rules of contract law to electronic commerce. For example, many
national laws require that the contracts should be “in writing” in order to be enforceable.
Many times however, electronic commerce is not documented in any physical document.
Also, there are national rules that require that certain contracts must be signed in order to
be enforceable.
At the international level, UNICITRAL (the United Nations Commission on
International Trade Law) approved in 1996 a Model Law on Electronic Commerce that
can be adopted by nations.
In addition to UNICITRAL initiative, the International Chamber of Commerce
(ICC) has also promulgated a set of legal principles for digital signatures, known as the
General Usage of International Digitally Ensured Commerce (GUIDEC). This set of
rules can be regarded as an improvement on the UNICITRAL model law because it
provides more detail.
More recently, the 2005 United Nations Convention on the Use of Electronic
Communications in International Contracts is designed to enhance legal certainty and
commercial predictability in cases where electronic communications are used in
international transactions. However, until today, the treaty has relatively few parties.
8.2. Resolution of Commercial Disputes
Several key provisions need to be included in commercial sales contracts. Dispute
resolution is not one of them but it is often needed in order to solve potential conflicts
that might arise under the contract.
56
Dispute resolution provisions are especially important in international commercial
contracts, that is, contracts for the international sales of goods. Most transactions gave
birth to an international commercial arbitration system that originated in medieval
Western Europe during the growth of the mercantile trade between nation-states.
The reasons for commercial dispute resolution have remained the same for
centuries and they mainly try to: handle disagreements between parties, preferably in a
less formal and sometimes less expensive way than that provided by applicable
procedures in a court of law; choose a neutral forum to solve the dispute; obtain a ruling
against the losing party that can be enforced both nationally and internationally; provide
flexibility and confidentiality to the proceedings.
4.2.1. Choice of Law, Forum and Procedures
Three closely related topics bear on dispute resolution and on the drafting of
appropriate contractual provisions. The first is choice of law. The general trend is to
permit parties to choose the set of legal rules that will govern their contractual relation.
This is particularly important if the parties are coming from different countries.
The second related topic is choice of forum. This refers to the court or other
adjudicative body to which any dispute is to be submitted. This provision is of vital
importance in the case of international sales of goods or other type of contracts that have
an extraneous element.
The third issue concerns alternative dispute resolution. In most countries, the
parties may choose to handle disputes through commercial arbitration or other means of
dispute resolution that are less formal and less public than the court system usually is.
The full range of alternative dispute resolution procedures available in sales contracts
includes the following: commercial arbitration, conciliation, mediation, negotiation.
These terms and concepts differ from one country and language to the next. Here is one
set of commonly accepted definitions of these four procedures:
57
arbitration a procedure that is similar to public, formal litigation
but that is handled largely outside the court system
and thus it is subject to much greater input by the
parties as to the identity of the arbitrators; the rules the
arbitrators should use in determining the rights and
obligations of the parties; the procedures that the
arbitrators should follow in coming to a decision and
announcing it; the language and the location where the
arbitral proceedings will take place
conciliation a procedure that is more informal than arbitration or
litigation and that involves a person (conciliator) who
reviews the claims of both parties to a dispute and
offers solutions that will focus on the repair of the
damage and not on the allocation of the blame
mediation a „go-between” procedure in which a person acts as a
vehicle for communication between the parties, so that
their differing views on the dispute can be understood
and reconciled, the parties will be responsible for their
reconciliation and not the intermediary person
negotiation direct discussion between the parties without the
involvement of a third party with the hope that the
business decision makers can resolve the dispute
without any formal or external proceedings
58
Selective bibliography:
1. Ewan MacIntyre – Essentilas of Business Law, Ed. Pearson, Edinburgh, 2009.
2. John Cheesman – Introduction to Business Law, Ed. Pearson, Edinburgh, 2009.
3. John Head – General Principles of Business and Economic Law, Carolina Acad.
Press, Durham, NC, 2008.
4. Jay Lawrence Westbrook, A Global View of Business Insolvency Systems, World
Bank Publ.H., Washington DC., 2009.
5. International conventions regarding commercial activities
