Business Law in the Global Marketplace

Peter Nayler

• Publisher: Routledge
• Year: 2006
• ISBN:
  9781136423550
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

The study of Law forms a component of many undergraduate and postgraduate programs. Its inclusion does not aim to equip business practitioners with skill and expertise to render professional legal advice unnecessary, but more to provide a legal framework of reference in which both strategic and more immediate business issues can be placed. Equipping managers with a basic understanding of how law impacts upon business activity can help them avoid legal pitfalls in the first place or at least identify potential problems at an early stage, to avoid inconvenience and cost.International business can present problems that are not present in a purely domestic transaction. Any law component in a management program should embrace it and by doing so the business practitioner can be familiarized with the wider picture in which modern business, aided by technological development, is increasingly practiced.

Chapter

1

The Legal Framework for International Business

Introduction

‘If the law supposes that, the law is an ass’ Mr Bumble once famously remarked in Charles Dickens’s Oliver Twist. Many people will, no doubt, agree with this sentiment, particularly if they have been on the receiving end of the law and its application. While the vast majority of us realise that law ‘exists’, the same proportion is unlikely to regard it as having an immediate impact on how we conduct our daily lives. True, some people go through their entire mortal existence without being caught up in anything remotely resembling a legal problem, but whether this is down to good fortune or a deft arrangement of their private and/or business affairs is a different matter. Whether one relishes the thought or not, there is no escaping the fact that law is part of the environment in which we live. It is not something existing merely in abstraction but is all around us. It can and does affect many aspects of our lives. Assuming the guise of an ostrich and burying one’s head in the sand may be a tempting option, but the fact remains that the law can bite and presenting it with an easy and ill-prepared target can cause more than a few ruffled feathers.

If we are prepared to recognise that, potentially, the law affects us all in the things we do, how does this manifest itself? Most people appreciate that it is illegal to kill a fellow human being or to point a gun at someone in the street and relieve this person of his or her wallet, but these are examples of criminal law which form but one small part of the law as a whole. While few would fail to agree that such antisocial behaviour as just described should be prohibited and that it should be down to the law to do this, there are very many other situations where a failure to satisfy the requirements of the law can have serious consequences, even if the threat of imprisonment is not one of them. For example, is it widely appreciated that, under English law, a person who witnesses a will cannot take a benefit under it? So if an uncle draws up a ‘do-it-yourself’ will and bequeaths a substantial legacy to his favourite niece, would he realise that if he requested her to witness his signature, he would simultaneously be depriving her of his benevolence? Likewise, would the average man in the street appreciate that he owes certain duties to persons who may trespass on his land? He might find it strange to be ordered to pay compensation to a teenager who falls down a disused well while stealing apples from his orchard. If a village resident sends a text message to her neighbour making disparaging remarks about the chairman of the Parish Council, would she readily appreciate that this bastion of local democracy may have an action for libel against her? It is unlikely that any of the actors in the scenarios just described would consider themselves to have done anything ‘wrong’, but nevertheless their actions or, in the case of the disused well, inaction, would be judged according to the requirements stipulated by law and noncompliance with these could have the consequences described.

If the law can impact on our everyday private lives, the same is true for any business activity we may pursue. Those who are engaged in business may be slightly more streetwise when it comes to the ‘legal stuff’ than their less commercially oriented brethren but, even so, ignorance or misunderstanding of the law and its effects is hardly a rare phenomenon and attitudes ranging from complacency to outright hostility can often be detected wafting through the corridors of business. ‘Law is for lawyers. If there is a problem, let them sort it out; after all it’s what they’re paid for.’ Such a view amongst business practitioners is not particularly uncommon and reflects an innate suspicion that the law and lawyers conspire together to obstruct entrepreneurial flair and endeavour, and that whoever may be the loser in a legal spat, it certainly won’t be the lawyers. Such is the antipathy to those versed in the law that, often, professional legal advice is only sought when a problem, which perhaps initially was avoidable, has escalated to a point where extrication at the lowest possible cost is the only option.

On the other hand, however, there are those engaged in business who recognise that law is part of the environment in which they must operate. This fraternity appreciates that, like it or not, the law does regulate, or at least affects, many aspects of business activity. They consider that, in strategic planning, it is far better to identify relevant legal issues as early as possible in the process. Taking these into account at this stage and making necessary adjustments should facilitate, not hinder, the attainments of commercial objectives. Alternatively, initially adopting a ‘head in the sand’ approach, which fails to identify legal pitfalls, can later present problems that are either insurmountable or, at the very least, expensive to address.

Nor should the law’s relationship with business always be looked at from a negative perspective, i.e. ‘it’s always there to work against us’. There are many situations where an adept use of the law can protect vital business interests; for example, an appropriately drafted contract can be employed as a vehicle for minimising, transferring or, in some circumstances, entirely excluding a variety of commercial risks; or, alternatively, the effective management and assertion of intellectual property rights can be crucial factors when seeking to maintain the integrity of a brand name; and so on.

Although business can be and very often is conducted in a purely national context, there are ever increasing possibilities for such activity to develop an international dimension. This may follow a decision of a domestic producer actively to establish a presence in a foreign market by co-operating with a local ‘partner’ in one way or another, or going it alone and establishing a branch office or legal entity in the chosen location. However, business activity can take on an international character without such formalised arrangements being involved. A home producer who supplies a single order originating from another country is engaged in an international business transaction. A sole trader who sets up his or her own website offering goods or services is conducting international business with anyone who responds from outside the country in which that trader is located.

International business of even the simplest variety can present problems that are not present in a purely domestic transaction. As in most cases, if the problems can be spotted in advance, the chances are they can be headed off or at least minimised. Slamming shut the stable door when the horse is but a speck on the horizon will provide scant comfort if appropriate safeguards could have prevented the animal’s escape in the first place.

However, whether the context is domestic or international, it would be neither realistic nor sensible to expect business practitioners to acquire specialist knowledge approximating that of the professional lawyer. The expertise of the professional is built upon more than simply knowledge of the law but includes skills of analysis and argument developed through long experience of the law in practice. The aim of this book, therefore, is not to supplant the need for appropriate professional advice but to provide the business practitioner with an introduction to the legal framework in which business and, particularly, international business operates. By acquiring an understanding of how the law can impact upon commercial activity, the modern manager should be better equipped to identify potential legal problems while they are still in early gestation. A timely realisation of what might lie ahead may offer the opportunity of taking appropriate action to prevent the escalation of what may be a controllable situation. By adopting a proactive approach rather than merely reacting to events, a business can better protect its essential interests which, in the heat of today’s trading environment, may constitute a vital competitive advantage.

So What is ‘Law’?

The comments made above stress the idea that the law affects us all in the way we conduct both our private and business lives. But before this can be explored in greater depth, a basic question needs answering: what exactly is meant by the term ‘law’? The question is simple to state but not so the answer. In truth, the term ‘law’ is extremely difficult to define. If asked the question, the average respondent might very well attempt to describe the law as, say, a ‘collection of rules’ or ‘something which you must obey’. While not being ‘wrong’, such an attempt would not address the essential issue, namely defining the term by reference to its intrinsic character. While it is true to say that law has a regulatory function, the same is also true of many other types of rule and/or custom that seek to control behaviour in any given society or community but which, nevertheless, do not have the character of ‘law’ as the word is commonly understood. For example, the rules provided by religious or moral teaching may have a strong impact on the way in which people behave, as may the cultural norms observed by a particular community. The rules of etiquette or simply good manners also play a part, but none of the controlling influences just mentioned purely in themselves constitute ‘law’. So, however much we may condemn the loutish teenager who refuses to give his bus seat up to an elderly fellow passenger, he is unlikely to have to defend his conduct before a magistrate.

Many great philosophical works have grappled with the inherent problem of distinguishing law from other forms of rule producing normative behaviour, but it is beyond the scope of this book to probe deeper into this, albeit interesting, argument. For present purposes, the definition of law provided by the Oxford English Dictionary will suffice; here law is defined as:

a rule enacted or customary in a community and recognised as demanding or prohibiting certain actions and enforced by the imposition of penalties.

The essential characteristics of a rule of law would appear to be that it:

1. has what may be described as the ‘official stamp’ of state authority, i.e. it has been created by an institution of state having legislative competence or is, otherwise, a rule recognised as having legal force by the courts responsible for the administration of the law within that state;
2. applies equally to and is binding on all members of society. In other words, no one is above the law;
3. results in certain consequences if it is contravened. Such consequences may include, say, a fine or imprisonment if a rule of criminal law is infringed but can also involve less obvious but nevertheless serious consequences. For example, a failure to comply with the law governing the transfer of property may result in the purchaser of a house later discovering that he or she does not in fact have legal title to it.

Chalk and Cheese

It should not require the international experience of Marco Polo for someone to realise that the law of, say, Sweden is probably different from that operating in Japan, but such a realisation is not an attribute characterising mankind as a whole. Not infrequently does a person brought up in the legal tradition of his homeland express incredulity at the suggestion that the law in other countries may be different. Such differences can and do exist and for the conduct of international business the implications can be profound. If two companies based in the same country are involved in a dispute, say, over a contract, the law governing the dispute, complex or otherwise, can at least be identified at the outset. Introduce an international dimension, however, and problems can arise that are unlikely to be encountered in a purely domestic contract. In later chapters, some of these problems will be examined, but for present purposes consider the following scenario: company A offers to provide services for company B at a certain price. Before B responds, A, realising that the quoted price is too low, retracts the original offer and substitutes a new one incorporating a higher price. Can A do this? Leaving aside ethical considerations, A’s ability to retract its offer will depend on whether the applicable legal rule permits this. If A and B are located in the same country and the services are to be provided locally, the rights or wrongs of A’s action will be decided by the law of the particular country involved. However, suppose that A is located in country X and B in country Y and, furthermore, the services being offered by A are to be provided in country Z. Suppose, also, that the law of X permits A to retract its offer as does the law of Y, but only in certain circumstances. The law of Z, however, contains a rule that an offer, once made, cannot be retracted. The answer to the original question has now become somewhat less certain.

The fact is, however, that although references are frequently made to the ‘global marketplace’, there is no such thing as a ‘global’ legal system containing laws of universal application; instead, one finds a mosaic of different systems existing in the world today, each having its own particular characteristics. It should hardly be surprising, therefore, to find disparity in the laws of countries that have had fundamentally different historical, cultural and political development. To compare the law of China with that of New Zealand may, indeed, be like comparing chalk and cheese.

Family Ties

At the time of writing, there exist approximately 190 independent states in the world. Does this mean, therefore, that there also exist an equivalent number of different legal systems, all containing widely differing laws? To a certain extent this view is correct, since every sovereign state has the right to enact law and provide for its operation in the territory concerned. However, a study of the main characteristics of the many apparently differing legal systems in the world would reveal similarities which are shared by more than one. For example, if the laws of, say, countries A and B were examined, the conclusion might be drawn that, in many ways, they are basically very similar. Equally, a comparison of the laws of countries X and Y might reveal a common ‘flavour’ shared by both. However, if one proceeded to contrast the laws of A and B with those of X and Y, fundamental differences might emerge. If this exercise were pursued on a global scale, it might be concluded that the world’s legal systems can, in fact, be reduced to a number of ‘families’ with the members of each, either by parentage or adoption, sharing a common heritage. Such a conclusion would essentially be correct.

Civil Law and Common Law

Among the major legal families existing today are the civil law and common law systems. Civil law comprises those systems either based on or influenced to a greater or lesser extent by Roman law. These include the laws of most European continental countries – for example, France, Germany, Spain, Portugal, Italy, Greece, etc. Almost the entirety of South and Central America has either inherited or adopted the civil law, with French law having had a major influence. Again, if one looks towards Africa and considers countries such as Morocco, Algeria, Cameroon, Rwanda, and Madagascar, it can be seen that, due to their historical links with mainland Europe, ...