Chapter 16 The Legal and Regulatory Environment of Business

Flexibility

At the same time, however, we should point out that, on a certain level, flexibility is a hallmark of law in the United States. Why do we say “on a certain level”? For one thing, it apparently isn’t sufficiently flexible on the level on which George McGovern was obliged to deal with it. In all probability, a small hotel like the Stratford Inn doesn’t need to meet the same fire regulations as a hotel with 1,500 guest rooms, 100,000 square feet of meeting space, three four-star restaurants, and a five-story parking garage. Laws, however, can’t be written to take care of each and every contingency that arises during the course of life in the real world—the one in which millions of people and organizations are constantly pursuing different social and economic activities. When it comes to law, therefore, we settle for general “rules and principles,” and the key to flexibility in a legal system is flexibility on the level at which rules and principles are applied. In the United States, the legal system evolves to respond to changes in social norms and commercial activities, and through the court system, it’s prepared to address each issue or dispute on its own terms.This section is based on Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 4.

Fairness

There are, of course, abuses, and mistakes by judges and juries and procedural mishaps occasionally tip the scales of justice in the wrong direction. Sometimes—as in George McGovern’s case—innocent parties are forced to bear the cost of defending themselves in court. On the whole, however, the U.S. legal system is remarkably fair.

The Rule of Law: Predictability and Fairness. How do we know what’s legally “fair” and what isn’t?This section is based on Monroe E. Price and Peter Krug, The Enabling Environment for Free and Independent Media (Washington, DC: USAID Center for Democracy and Governance, December 2000), Chapter 3, at http://www.medialaw.ru/e_pages/publications/ee/3.html (accessed October 27, 2008). Granted, depending on who’s enforcing the rules of the game, just about anything can be “fair” and just about anything can be “foul.” Legal tradition in the United States, however, rests on the principle of the rule of lawPrinciple by which government legitimately exercises its authority only in accordance with publicly declared laws that are adopted and enforced according to established procedure.—the principle by which government legitimately exercises its authority only in accordance with publicly declared laws that are adopted and enforced according to established procedure. All members of society know what the laws are and the conditions under which they should be applied. Under the rule of law, then, the legal system establishes the rules of the game, adopting and enforcing them in a reasonably predictable manner.

Unfortunately, the principle of predictability doesn’t in itself guarantee that a legal system is committed to fairness. If, for example, the law allows only certain people to vote—say, property owners—it extends a guarantee of fairness in the electoral process only to property owners. People who don’t own property would have a good reason to complain of social injustice in electoral matters, but only property owners could claim a right to fairness in the courts. Even under the rule of law, therefore, a legal system can achieve a reasonable degree of fairness in any given social or economic activity only if it also guarantees equal treatment of all members of society. Admittedly, the U.S. legal system hasn’t always been successful in guaranteeing equal treatment under the law—the original thirteen states, for example, granted the vote only to white male property owners, and women couldn’t vote in every state until 1920. Since 1868, however, U.S. courts have used the Equal Protection Clause of the Fourteenth Amendment to the Constitution to check a range of potentially discriminatory and unfair actions by governments at every level.

Functions of Law

Laws such as the Equal Protection Clause are designed to serve a general function—namely, the promotion of social justice. This is just one of several primary functions served by law in the United States:See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 3–4.

• Keeping the peace (e.g., designating some activities as crimesViolation of statute for which the law imposes punishment.—violations of statutes for which the law imposes punishment)
• Shaping moral standards (e.g., laws discouraging such activities as drug or alcohol abuse)
• Promoting social justice (e.g., laws prohibiting discrimination in such areas as voting and employment)
• Maintaining the status quo (e.g., laws preventing the forcible overthrow of the government)
• Facilitating orderly change (e.g., laws and practices requiring public scrutiny of proposed statutes)
• Facilitating planning (e.g., laws that enable businesses to evaluate the risks that they may be taking in a commercial venture)
• Providing a basis for compromise (e.g., laws and practices making it possible to resolve disputes without taking them to trial)
• Maximizing individual freedom (e.g., laws ensuring such rights as freedom of speech and religion)

Tort Law

Complaints of assault and battery fall under a specific type of civil law called tort law. A tortCivil wrong; injury done to someone’s person or property. is a civil wrong—an injury done to someone’s person or property. The punishment in tort cases is the monetary compensation that the court orders the defendant to pay the plaintiff.

The Law of Contracts

To answer these questions, we must enter an extremely important area of civil law—the law of contracts. A contractExchange of promises or exchange of a promise for an act. is an exchange of promises or an exchange of a promise for an act, and because it involves an exchange, it obviously involves at least two parties. As you can see in Figure 16.2 "Parties to a Contract", an offeror makes an offer to enter into a contract with an offeree. The offeror offers to do something in particular (or to refrain from doing something in particular), and if the offeree accepts this offer, a contract is created. As you can also see, both offer and acceptance must meet certain conditions.

Figure 16.2 Parties to a Contract

A contract is legally enforceable: if one party fails to do what he or she has promised to do, the other can ask the courts to enforce the agreement or award damages for injury sustained because the contract has been breached—because a promise made under the contract hasn’t been kept or an act hasn’t been performed. A contract, however, can be enforced only if it meets four requirements:See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 172.

• Agreement. The parties must have reached a mutual agreement. The offeror must have made an offer, and the offeree must have replied with an acceptance.
• Consideration. Each promise must be made in return for the performance of a legally sufficient act or promise. If one party isn’t required to exchange something of legal value (e.g., money, property, a service), an agreement lacks sufficient consideration.
• Contractual capacity. Both parties must possess the full legal capacity to assume contractual duties. Limitations to full capacity include mental illness and such diminished states as intoxication.See Mark E. Roszkowski, Business Law: Principles, Cases, and Policy, 5th ed. (Upper Saddle River, NJ: Prentice Hall, 2002), 181.
• Lawful object. The purpose of the contract must be legal. A contract to commit an unlawful act or to violate public policy is void (without legal force).

Employment Contracts

Here’s where you come in: an employment relationship like the one that you had with your roommate is a contract. Under this contract, both parties have certain duties (you’re obligated to compensate your roommate, for instance, and he’s obligated to perform his assigned tasks in good faith). The law assumes that, when performing his employment duties, your employee is under your control—that you control the time, place, and method of the work.See John Jude Moran, Employment Law: New Challenges in the Business Environment (Upper Saddle River, NJ: Pearson Education, 2008), 3. This is a key concept in your case.

Scope of Employment

In judging your responsibility for the damages done to the homeowner’s car by your employee, the court will apply a standard known as scope of employment: an employee’s actions fall within the scope of his employment under two conditions: (1) if they are performed in order to fulfill contractual duties owed to his employer and (2) if the employer is (or could be) in some control, directly or indirectly, over the employee’s actions.“Scope of Employment,” Law Library: American Law and Legal Information (2008), http://law.jrank.org/pages/10039/Scope-Employment.html (accessed October 31, 2008).

If you don’t find much support in these principles for the idea that your roommate was negligent but you weren’t, that’s because there isn’t much. Your roommate was in fact your employee; he was clearly performing contractual duties when he caused the accident, and as his employer, you were, directly or indirectly, in control of his activities. You may argue that the contract with your roommate isn’t binding because it was never put in writing, but that’s irrelevant because employment contracts don’t have to be in writing.John Jude Moran, Employment Law: New Challenges in the Business Environment (Upper Saddle River, NJ: Pearson Education, 2008), 11. You could remind the court that you repeatedly told your employee to put his paint bucket in a safer place, but this argument won’t carry much weight: in general, courts consider an employee’s forbidden acts to be within the scope of his employment.Scope of Employment,” Law Library: American Law and Legal Information (2008), http://law.jrank.org/pages/10039/Scope-Employment.html (accessed October 31, 2008).

On the other hand, the same principle protects you from liability in the assault-and-battery case against your roommate. The court will probably find that his aggressive response to the neighbor’s comment wasn’t related to the business at hand or committed within the scope of his employment; in responding to the neighbor’s insult to his intelligence, he was acting independently of his employment contract with you.

Finally, now that we’ve taken a fairly detailed look at some of the ways in which the law works to make business relationships as predictable as possible, let’s sum up this section by reminding ourselves that the U.S. legal system is also flexible. In its efforts to resolve your case, let’s say that the court assesses the issues as follows:

“The damage to the homeowner’s car amounts to $3,000. He can’t recover anything from your roommate, who owns virtually nothing but his personal library of books on medieval theology. Nor can he recover anything from your business-liability insurer because you never thought your business would need any insurance (and couldn’t afford it anyway). So that leaves you: can the homeowner recover damages from you personally? Legally, yes: although you didn’t go through the simple formalities of creating a sole proprietorship (see Chapter 4 "Selecting a Form of Business Ownership"), you are nevertheless liable for the contracts and torts of your business. On the other hand, you’re not worth much more than your roommate, at least when it comes to financial assets. You have a six-year-old stereo system, a seven-year-old panel truck, and about $200 in a savings account—what’s left after you purchased the two ladders and the platform that you used as scaffolding. The court could order you to pay the $3,000 out of future earnings but it doesn’t have to. After all, the homeowner knew that you had no business-liability insurance but hired you anyway because he was trying to save money on the cost of painting his house. Moreover, he doesn’t have to pay the $3,000 out of his own pocket because his personal-property insurance will cover the damage to his car.”

You should probably consider yourself lucky. Had your case gone to court, it would have been subject to the rules of civil procedure outlined in Figure 16.3 "Stages in a Civil Lawsuit". As you might suspect, civil suits are time-consuming. Research shows that litigation takes an average of 24.2 months from the time a complaint is filed until a judgment is rendered (25.6 months if you’re involved in a tort lawsuit).

Figure 16.3 Stages in a Civil Lawsuit

And of course it’s expensive. Let’s say that you have a $40,000-a-year job and decide to file a civil suit. Your lawyer will charge you between $200 and $350 an hour. At that rate, he or she will consume your monthly net income of about $1,800 in nine hours’ worth of work. But what about your jury award? Won’t that more than compensate you for your legal fees? It depends, but bear in mind that, according to one study, the median award in civil cases is $33,000.Judicial Council of California, “Unlimited Civil Cases,” California Courts (2008), http://www.courtinfo.ca.gov/reference/documents/retrounlimited.pdf; Thomas H. Cohen and Steven K. Smith, “Civil Trial Cases and Verdicts in Large Counties, 2001,” Bureau of Justice Statistics Bulletin (Washington, DC: U.S. Dept. of Justice, April 2004), http://74.125.95.132/search?q=cache:S7OE0v5jxicJ:http://www.ojp.usdoj.gov/bjs/pub/pdf/ctcvlc01.pdf+average+length+of+civil+case&hl=en&ct=clnk&cd=27&gl=us&ie=UTF-8 And you could lose.

Key Takeaways

• A negligence tort results from carelessness. In order to prove a negligence claim, a plaintiff must demonstrate four elements:

  1. That the defendant owed a duty of care to the plaintiff. Duty of care refers to the basic obligation not to cause harm or an unreasonable risk of harm.
  2. That the defendant breached his duty of care. Did the defendant fail to act as a reasonable person would act?
  3. That the defendant’s breach of duty of care caused injury to the plaintiff or the plaintiff’s property.
  4. That the defendant’s action did in fact cause the injury in question. The direct cause-and-effect relationship between the defendant’s action and the plaintiff’s injury is called a cause in fact or actual cause. The point beyond which a defendant is no longer liable for the actions set in motion by his or her carelessness is called a proximate cause or legal cause. The standard for determining proximate cause is generally foreseeability: could the defendant reasonably foresee the possibility of the injury suffered by the plaintiff?
• A contract is an exchange of promises or an exchange of a promise for an act. An offeror makes an offer to enter into a contract with an offeree—that is, to do something in particular (or to refrain from doing something in particular). If the offeree accepts this offer, a contract is created.

• A contract is legally enforceable: if one party fails to do what he or she has promised to do, the other can ask the courts to enforce the agreement or award damages for injury sustained because the contract has been breached. An enforceable contract must meet four requirements:

  1. Agreement. The parties must have reached a mutual agreement.
  2. Consideration. Each promise must be made in return for the performance of a legally sufficient act or promise.
  3. Contractual capacity. Both parties must possess the full legal capacity to assume contractual duties.
  4. Lawful object. The purpose of the contract must be legal.
• The law assumes that, in an employer–employee contract, the employer controls the time, place, and method of the employee’s work. The doctrine of respondeat superior—“Let the master answer [for the servant’s actions]”—applies to employer–employee contracts. In judging an employer’s responsibility for the damages caused by an employee’s negligence, the court will apply the standard of scope of employment: an employee’s actions fall within the scope of his employment under two conditions: (1) if they are performed in order to fulfill contractual duties owed to his employer and (2) if the employer is (or could be) in some control, directly or indirectly, over the employee’s actions.

Exercise

(AACSB) Analysis

Let’s say you own a used car business and offer to sell a customer a used car for $5,000. What is needed to create a binding contract for the sale of the car?

If, when the customer wants to go for a test drive, the salesperson drives into a tree and is injured, is your company liable? Why, or why not?

Grounds of Negligence

In selecting defendants in your case, you’ll start with the manufacturer of the ladder. Manufacturer’s negligence—carelessness—can take three different forms:This section is based on Nancy A. Kubasek, Bartley A. Brennan, and M. Neil Browne, The Legal Environment of Business: A Critical Thinking Approach, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2009), 377–81.

• Negligent failure to warn. The manufacturer may be liable if the company knew (or should have known) that, without a warning, the ladder would be dangerous in ordinary use or in any reasonably foreseeable use. It’s possible, for example, that you made the ladder’s collapse more likely by placing it at a less than optimal angle from the wall of the house. That mistake, however, is a reasonably foreseeable use of the product, and if the manufacturer failed to warn you of this possibility, the company is liable for failure to warn.This example is borrowed from Scott Baldwin, Francis Hare, and Francis E. McGovern, The Preparation of a Product Liability Case (New York: Aspen Publishers Online, 1998), 2–38, http://books.google.com/books?id=KOvn3Dz5-HAC&pg=PA76&lpg=PA76&dq=ladder%2Bdefective+design&source=web&ots=5fE8wEN7Yp&sig=RfevWGFp_s9jsZbfq9t7P_wnOHQ&hl=en&sa=X&oi=book_result&resnum=7&ct=result (accessed November 5, 2008).
• Negligent design. As the term suggests, this principle applies to defectively designed products. In law, a product is defective if, despite any warnings, the risk of harm outweighs its usefulness in doing what it’s designed to do. If, for example, your ladder left the manufacturer’s facility with rivets that were likely to break when weight was placed on it, the ladder may be judged defective in its design.

Figure 16.4

The U.S. Consumer Product Safety Commission has overseen the recall of thousands of baby cribs that it determined to have defective designs.

© 2010 Jupiterimages Corporation

• Negligence per se. The manufacturer may be liable if the ladder fails to meet legal standards. According to standards set by the Occupational Safety and Health Administration (OSHA), for example, the rungs on your ladder should be corrugated or covered with skid-resistant material to minimize slipping. If you’re injured because they’re not, the manufacturer may be liable on grounds of negligence per se.Occupational Safety and Health Administration, Stairways and Ladders: A Guide to OSHA Rules (Washington, DC: U.S. Dept. of Labor, 2003), 7, http://www.osha.gov/Publications/osha3124.pdf (accessed November 5, 2008).

If you decide to apply the concept of negligence in suing the manufacturer of the ladder, you must prove the four elements of a negligence case that we detailed above—namely, the following:

1. That the defendant (the manufacturer) owed you a duty of care
2. That the defendant breached this duty of care
3. That the defendant’s breach of duty of care caused injury to you or your property
4. That the defendant’s action did in fact cause the injury in question

Grounds of Strict Liability

For the sake of argument, let’s say that your lawyer isn’t very confident about pursuing a claim of negligence against the manufacturer of your ladder. The company doesn’t appear to have been careless in any of the three forms prescribed by law, and it will in any case be difficult to demonstrate all four elements required in negligence cases. He suggests instead that you proceed on grounds of strict liability, pointing out that the principle of strict liability often makes the plaintiff’s legal task less exacting. But (you ask) if the company wasn’t negligent, how can it be liable, either “strictly” or in any other sense? Under the doctrine of strict liability in tort, he replies, you don’t have to prove negligence on the manufacturer’s part. He goes on to explain that under this doctrine, your right to compensation for injury is based on two legal suppositions:

1. Certain products put people at risk of injury no matter how much care is taken to prevent injury.
2. Consumers should have some means of seeking compensation if they’re injured while using these products.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 93.

Day in and day out, of course, people use ladders quite successfully. According to the Consumer Product Safety Commission (CPSC), however, every year accidents involving ladders cause three hundred deaths and one hundred thirty thousand injuries requiring emergency medical treatment.American Ladder Institute, “Ladder Safety and Education” (2002), at http://www.americanladderinstitute.org/ali/about_ali.asp (accessed November 3, 2008); see also “Ladder Injuries Climbing, Study Finds,” ConsumerAffairs.com, May 1, 2007, http://www.consumeraffairs.com/news04/2007/05/ladder_safety.html (accessed November 8, 2008). In a certain number of these instances, the ladder is defective, and in cases of strict liability, it doesn’t matter how much care was taken by the manufacturer to prevent defects. This seems a little harsh to you, but your lawyer explains that, in establishing the doctrine of strict liability in tort, the court cited two reasons for making the grounds of liability so strict:See Greenman v. Yuba Power Products (1963), http://online.ceb.com/CalCases/C2/59C2d57.htm (accessed November 3, 2008).

• The manufacturer can protect itself by taking steps to anticipate and prevent hazardous product features, but the public can’t.
• The manufacturer can protect itself by purchasing insurance and passing the cost on to the public in the form of higher product prices. Again, the public enjoys no such protection.

Under these conditions, the manufacturer is willing to take a risk—namely, the risk of making available a product that’s potentially dangerous, especially if defective. The manufacturer thus takes the first step in a process whereby this product reaches a consumer who may suffer “overwhelming misfortune” by using it, especially if it has become defective during the process that takes it from the manufacturer to the user. “Even if he is not negligent in the manufacture of the product,” declared the court, the manufacturer “is responsible for its reaching the market” (italics added). There’s no way of telling when or how a product will become defective or of predicting how or how many people will be injured by it. Defects and injuries, however, are “constant” dangers when people use such products, and users must therefore have some form of “constant protection” under law. That protection is established by the doctrine of strict liability in tort. Why should the manufacturer be held responsible for such defects and injuries? Because, reasoned the court, “the manufacturer is best situated to afford…protection.”

And this, explains your lawyer, is why you’re going to sue the manufacturer of your ladder on grounds of strict liability.

Strict Liability in the Distribution Chain

You’re excited about the prospect of recovering monetary damages from the manufacturer of your ladder, but you continue to wonder (on completely hypothetical grounds, of course) whether the doctrine of strict liability is as fair as it should be. What about all the other businesses involved in the process of getting the product from the manufacturer to the user—especially the one that did in fact introduce the defect that caused all the trouble? Does the doctrine of strict liability relieve them of all liability in the case? Indeed not, your lawyer assures you. The concept of strict liability not only provides more practical grounds for suing the manufacturer, but also supports your right to pursue claims against members of the manufacturer’s distribution chain (see Chapter 9 "Marketing: Providing Value to Customers").See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 370. That’s one reason, he points out, why product-liability lawsuits against businesses that sell such “unreasonably dangerous” products as ladders (or even deliver them to worksites) went up a hundredfold between 1950 and 2001, to a total of $205 billion.Conrad Shawn, “Tackling Product Liability: NLBMDA to Introduce Product Liability Legislation,” AllBusiness, January 1, 2006, http://www.allbusiness.com/wholesale-trade/merchant-wholesalers-durable-goods-lumber/855278-1.html (accessed November 2, 2008).

Now, let’s say that your lawyer has given your defective ladder to a forensic laboratory in order to find out exactly what caused it to buckle and you to fall. As it turns out, the clue to the problem is the small patch of rust that brought down the price you paid for the ladder when you bought it. The ladder, concludes the lab, had for some time been in close proximity to liquid nitrogen, which can corrode various metals, including aluminum.See David E. Baker and Rusty Lee, “Portable Ladder Safety,” National Ag Safety Database, October 1993, http://nasdonline.org/document/1091/d000877/portable-ladder-safety.html (accessed November 2, 2008). Sure enough, further investigation reveals that the entire shipment of ladders had been stored for nearly two years in a Ladders ’N’ Things warehouse next to an inventory of liquid-nitrogen–based fertilizer. Your lawyer advises you that, in addition to your strict-liability case against the manufacturer of the ladder, you have a strong negligence case against the retailer from which you purchased it.

Figure 16.5 "Negligence versus Strict Liability" provides a simplified overview of the difference between negligence and strict liability as grounds for a product-liability claim.

Figure 16.5 Negligence versus Strict Liability

Grounds of Breach of Warranty

Moreover, adds your lawyer, there’s one more matter to be considered in determining liability for your injury. Had not the department manager at Ladders ’N’ Things assured you that the ladder would support a weight of three hundred pounds per rung? Your uncle had asked you about the weight capacity of the ladder because he knew that the roofing job meant putting heavy bundles of shingles on the scaffold. A ladder that holds three hundred pounds per rung is a Type IA extra-heavy–duty ladder suitable for such jobs as roofing and construction. According to the lab, however, the construction of your ladder is that of a Type II medium-duty–commercial ladder made for lighter-weight tasks.“Ladders: A Ladder for Every Task: Ladder Types and Industry Ratings,” Guide4Home (2008), http://www.guide4home.com/rem-lad (accessed November 6, 2008). The manager at Ladders ’N’ Things, explains your lawyer, may have been guilty of breach of warranty—yet further grounds for holding the retailer liable in your product-liability case.

Product Liability and Agency Law

When your lawyer has wrapped up his explanation of warranties and ways of breaching them, you feel compelled to ask one last question: Why is Ladders ’N’ Things, an entire corporate chain of retail stores, liable for breach of warranty committed by one department manager at one local outlet? Your lawyer replies that it’s a matter of agencyLegal relationship in which one party acts on behalf of, and under the control of, another., which he defines for you as a legal relationship between two parties in which one party acts on behalf of, and under the control of, another. In a principal-agent relationship like the one diagrammed in Figure 16.6 "Agency Relationship" the agent is acting on behalf of the principal.

Figure 16.6 Agency Relationship

A lawyer acting on behalf of a client is an agent, as is a real estate broker acting on behalf of a homeowner or a partner acting on behalf of a partnership. Perhaps the most common type of agency relationship is the one that applies to your case—the salesperson who’s acting on behalf of a retailer. If this sort of legal arrangement sounds familiar, that’s probably because employer-employee relationships are also agency relationships.

Agency law is actually a mixture of contract law and tort law.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 509. In order to appoint an agent, for example, a person must possess the capacity—the legal ability—to make a contract, and agency agreements must in general meet the four elements of a valid contract that we discussed in an earlier section of this chapter. As we’ve also seen, an agent (such as the department manager at your local Ladders ’N’ Things outlet) can make the principal for whom he or she is acting liable for such torts as breach of warranty. The same thing is true of the warehouse manager who stored your ladder next to a shipment of liquid-nitrogen–based fertilizer; acting on behalf of Ladders ’N’ Things, he or she exposed the company to liability for negligence.

The Goals of Tort Law

Imposing damages is the chief means by which the legal system meets the primary goal of tort law—compensating injured parties, or, more precisely, restoring victims to the conditions that they would have been in had their injuries never taken place. As we just saw, you settled out of court, but only after your attorney had notified the ladder manufacturer of your intent to seek damages. As the victim of a tort, you may have sought two major types of damages.See Nancy A. Kubasek, Bartley A. Brennan, and M. Neil Browne, The Legal Environment of Business: A Critical Thinking Approach, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2009), 339–47.

The Goals of Contract Law

Note that basically the same types of damages are available in cases involving contract law, which we discussed above. In contract law, the purpose of imposing monetary damages is to correct the wrong done when a contract is breached. Compensatory damages are paid by the party that breached the contract to compensate for losses suffered by the nonbreaching party. As in tort law, in other words, compensatory damages are awarded to restore the victim (the nonbreaching party) to the condition that he or she (or it) would have been in had the contract not been breached. Because each party entered into the contractual bargain in order to receive some benefit from it, the purpose of compensatory damages is to restore the “benefit of the bargain” to the nonbreaching party.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 270–71.

Courts typically don’t award punitive damages for breach of contract. They may be considered, however, if the breaching of the contract is accompanied by some kind of intentional tort, such as fraud or intentional failure to act fairly in discharging the contract.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 277. The purpose of punitive damages is to punish the breaching party, to deter it from similar conduct in the future, and to set an example for other parties to legal contracts.

As you can see from Figure 16.7 "Remedies for Breach", there are two categories of contractual breach. A minor breach occurs when the breaching party has achieved a level of substantial performance—that is, completed nearly all the terms of the contract. In the event of a minor breach, the nonbreaching party may seek damages. A material break occurs when one party renders inferior performance—performance that destroys the value of the contract. In such cases, the nonbreaching party may seek to rescind the contract and to recover damages to compensate for any payments made to the breaching party.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 267–68.

Figure 16.7 Remedies for Breach

Statutory Responses to Littering

Clearly the problem of cigarette litter has attracted the attention of lawmakers at every level. All the laws that we mentioned in this section are current or proposed statutory laws—laws made by legislative bodies. Enacted by the Connecticut General Assembly, the Clean Indoor Air Act of 2004 and Littering Law (amended 2005) are state statutes, as is California’s Vehicle Code, which was enacted by the California State Legislature. The antilittering law in Wallingford is a local law, or municipal ordinance, passed by the Town Council, whose authority derives from the state General Assembly. If Senator’s Lieberman’s proposed Cigarette Litter Prevention Act is passed by the U.S. Congress, it will become a federal statute. Note, by the way, that each of these laws is a criminal statute designed to prohibit and punish wrongful conduct (usually by fine).

Excises and Externalities

These taxes are excise taxes, a rather vague term that refers to taxes placed on “goods” produced within a country. Traditionally, excise taxes have been levied on a wide variety of products, and today they’re often placed on items and activities with which people may harm themselves (such as cigarettes), those around them (alcohol when overused), or the general environment (activities that pollute the air we all breathe).

In talking about taxes, we’re talking about one means of covering the costs of these items and activities, and economists have a word for such costs: externalitiesCost that doesn’t show up as part of the market price for a product. are costs that don’t show up as part of the market price for a product.See Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics, 7th ed. (Upper Saddle River, NJ: Pearson Education, 2009), 315–16. Actually, externalities can be either bad (i.e., costs) or good (i.e., benefits), but in detailing the negative effects of cigarette littering, we’re obviously focusing on negative externalities. Think of externalities as spillover effects: they’re costs or benefits that result from marketplace transactions—payments of certain prices for certain products—but that aren’t borne by the sellers or buyers of the products exchanged in those transactions. The price of a pack of cigarettes, for example, doesn’t include the cost of cigarette-litter cleanup or the cost of extinguishing wildfires. These costs are borne by other people—people who are outside or external to the basic transactions.See Daniel H. Cole and Peter Z. Grossman, Principles of Law and Economics (Upper Saddle River, NJ: Pearson Education, 2005), 14–15.

Because these costs don’t affect the seller’s total cost in making the product available, they don’t affect the price that the seller charges the buyer. And because the smoker doesn’t pay these costs when he or she pays the price of a pack of cigarettes, the product is, in effect, cheaper than it would be otherwise. How much cheaper? As we’ve just seen, the answer to that question depends on the total cost of externalities. We can’t pretend to trace every penny required to cover the total cost of having cigarettes for sale in the United States, but we can draw some conclusions from a few well-researched estimates. It’s estimated, for example, that the total cost of public and private cigarette-related health care in the United States is approximately $97 billion annually; it’s also estimated that the total cost to U.S. businesses in cigarette-related lost productivity is another $97 billion per year.Hilary Smith, “The High Cost of Smoking,” MSN Money, September 3, 2008, http://articles.moneycentral.msn.com/Insurance/InsureYourHealth/HighCostOfSmoking.aspx (accessed October 25, 2008). According to the U.S. Centers for Disease Control and Prevention, the combined cost of cigarette-related health care and lost productivity comes to $10.28 per pack.Campaign for Tobacco-Free Kids, “Top Combined State-Local Cigarette Tax Rates” (2008), http://www.tobaccofreekids.org/research/factsheets/pdf/0227.pdf (accessed October 25, 2008).

If you’re a smoker, in other words, it could be (and from an economic standpoint, should be) worse. Why isn’t it worse? Because the taxes attached to cigarette prices are, as we’ve explained, excise taxes, and excise taxes cover only a part of external costs.

Government Intervention in the Marketplace

This brings us to a crucial question among political theorists, economists, policymakers, business owners, and consumers—just about every member of society who has social and economic activities to pursue: Why does government intervene in marketplace transactions? Or, perhaps more accurately, Why have most of us come to expect and accept government intervention in our economic activities?

Efficiency and the Law

Efficiency, therefore, is one foundation of law: the rule of law encourages “efficiency” in the sense that it requires us to act within certain well-defined limits. It prohibits activities that take place outside those limits—such as stealing resources—because they make the process of allocating resources more wasteful and expensive.

Let’s say, for example, that you (hereinafter “Party A”) enter into a contract with Party B.This section is based on Daniel H. Cole and Peter Z. Grossman, Principles of Law and Economics (Upper Saddle River, NJ: Pearson Education, 2005), 156. The grid in Figure 16.9 "Contract Game" shows all the possible outcomes of this agreement. If you both perform as contracted, you both benefit from the bargain, each realizing a profit of $X. This is the result in the upper-left–hand box of the grid. Let’s say, however, that Party B takes your money but fails to live up to her end of the bargain. In that case, we get the outcome in the upper-right–hand box: because you’ve lost your money, you end up with –$X, and because Party B got your money without spending hers, she ends up with $2X. Understandably, you don’t intend for this to happen and so stipulate that Party B must perform her end of the bargain before you hand over your money. Fearing that you might not pay after she’s lived up to her part of the contract, Party B demands payment before she performs her part. The inevitable result of the contract is now displayed in both lower boxes of the grid: no one does anything and no one earns any profit. In completely wasting the value of every resource committed to the agreement by Party A and Party B, the business process has reached the ultimate level of inefficiency; it’s actually ground to a halt.

Figure 16.9 Contract Game

The only thing that prevents this scenario from playing out in any (or every) contractual situation is the existence of a legal system that can enforce contractual agreements. When such a system is in place, nonperformance makes very little sense. Had Party B taken your money and then failed to perform, the legal system would have required her either to pay back your $X or to live up to the contract, whereby you would earn your expected $X in profit. As a matter of fact, because she would also have been required to pay court costs, she’d end up with less than her original $X—in which case, she’d be worse off than had she performed her part of the bargain in the first place.

Federal Statutory Law: OSHAct

As most of us learned when we studied American government in high school, Article I, Section 1 of the U.S. Constitution gives “all legislative powers granted herein”—that is, all lawmaking powers set aside for the federal government—to Congress.This section is based on John Jude Moran, Employment Law: New Challenges in the Business Environment (Upper Saddle River, NJ: Pearson Education, 2008), 450–53. See also “Occupational Safety and Health Administration (OSHA),” Encyclopedia of Small Business, 2nd ed. (2002), http://findarticles.com/p/articles/mi_gx5201/is_/ai_n19121420 (accessed November 26, 2008). So that’s where we’ll start—with a specific law enacted by Congress under its constitutional powers. Congress passed the Occupational Safety and Health Act (OSHAct) in 1970 to establish standards of safety and health for American workers. In particular, the statute requires employers to keep workplaces free from occupational hazards.

Federal Administrative Law: OSHA

The OSHAct created three administrative agenciesBody created by legislative act to carry out specific duties.—bodies created by legislative act to carry out specific duties. The most important agency established by the OSHAct is the Occupational Health and Safety Administration (OSHA)Federal administrative agency empowered to set workplace safety and health standards and to ensure that employers take appropriate steps to meet them., which is empowered to set workplace safety and health standards and to ensure that employers take appropriate steps to meet them. OSHA was among a number of agencies created during the so-called “rights revolution” of 1960–1980, in which government acted to protect workplace, consumer, and environmental rights in addition to rights against discrimination based on race, sex, age, and national origin.

Responsibility for implementing the OSHAct is delegated to the Department of Labor, making OSHA one of more than fifty agencies managed by the executive branch of the federal government. Figure 16.10 "Administrative Agencies" shows the growth of federal administrative agencies from the end of the nineteenth century to the present. As you can see, periods of significant increase in the creation of such agencies tend to correspond to eras of perceived market failure—that is, the failure of unregulated market activity to maintain certain levels of fairness or social responsibility.See Kenneth F. Warren, Administrative Law in the Political System, 4th ed. (Boulder, CO: Westview Press, 2004), 41-43, http://books.google.com/books?id=AZVD_QM1QlYC&ie=ISO-8859-1&output=html (accessed November 27, 2008).

Figure 16.10 Administrative Agencies

Administrative Rulemaking: OSHA’s General Duty Clause

In passing the OSHAct, Congress didn’t determine appropriate standards of safety and health, nor did it designate specific occupational hazards. It stipulated only a so-called “General Duty Clause” requiring an employer to provide “employment and a place of employment which are free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees.”Occupational Safety and Health Administration, “SEC. 5 Duties” (U.S. Dept. of Labor, 2008), http://www.osha.gov/pls/oshaweb/owadisp.show_document?p_table=OSHACT&p_id=3359 (accessed November 30, 2008). In setting more specific standards for satisfying this “general duty,” OSHA may choose to adopt those of recognized industry groups or it may set its own standards, usually relying on research conducted by a sister agency, the National Institute of Occupational Safety and Health (NIOSH). In either case, proposed regulations must go through the five-step process summarized in Figure 16.11 "Administrative Rulemaking Procedure". When a regulation has passed through this process, it becomes administrative law, which, as we’ve seen, refers generally to statutes and regulations related to the activities of such agencies as OSHA.

Figure 16.11 Administrative Rulemaking Procedure

Administrative Law and Judicial Review

OSHA Regulation 29 CFR 1910.1000 deals with air contaminants but doesn’t address cigarette smoke itself. Rather, it limits exposure to some of the forty-seven thousand chemical compounds contained in environmental tobacco smoke (ETS). Based in part on NIOSH studies, OSHA has set permissible exposure limits (PELs) for such compounds and stipulated that employee exposure to them shall not exceed designated PELs.Occupational Safety and Health Administration, “Air Contaminants—1910.1000” (U.S. Dept. of Labor, 2008), at http://www.osha.gov/pls/oshaweb/owadisp.show_document?p_id=9991&p_table=STANDARDS (accessed November 26, 2008). OSHA continues to use PELs to assess levels of specific contaminants, and up until the early 1990s, it also relied on the General Duty Clause to deal with cases involving the hundreds of substances not covered by specific PELS. Since then, however, the agency has been forced to restrict its use of both the General Duty Clause and PELs in enforcing air-contaminant standards.See Occupational Safety and Health Administration, “Reiteration of Existing OSHA Policy on Indoor Air Quality” (U.S. Dept. of Labor, 2003), at http://www.osha.gov/pls/oshaweb/owadisp.show_document?p_table=INTERPRETATIONS&p_id=24602 (accessed November 26, 2008). What’s responsible for this change in policy? What could possibly prevent a federal executive agency from enforcing authority explicitly granted to it by Congress?

Case Law

To answer this question, we must understand an extremely important source of law known as case lawBody of law resulting from judicial interpretations of statutory and other forms of law.—law resulting from judicial interpretations of statutory and other forms of law. The business of the courts is resolving disputes, and when a dispute involves an interpretation of law, the court’s decision in the case may establish a precedentRule of case law that must be used by lower courts in deciding future cases.—a rule of law that must be used by lower courts in deciding future cases. The principle behind case law is known as judicial review, and it permits the judicial branch of government to “check and balance” the actions both of the legislative branch in making laws and of the executive branch in enforcing them.

At what point may judicial review affect the process of enforcing administrative law? After an agency rule has passed through the rulemaking process outlined in Figure 16.11 "Administrative Rulemaking Procedure", it usually becomes law. Typically, the courts accept these rules as law by upholding actions taken by agencies to enforce them. But not automatically. In a 1973 case involving a fine based on OSHA’s General Duty Clause, a federal court carefully translated the terms of the clause into three “necessary elements of a violation” and ruled that OSHA could win such cases only if it showed that a violation met all three requirements. A fourth requirement was later added, and OSHA now cites these four requirements in its official interpretation the General Duty Clause, issuing violations only “when the four components of this provision are present.”See National Realty and Construction v. OSHRC (1973), http://cases.justia.com/us-court-of-appeals/F2/489/1257/152788 (accessed November 29, 2008); OSHA, “Reiteration of Existing OSHA Policy on Indoor Air Quality”; OSHA, “Elements Necessary for a Violation of the General Duty Clause” (U.S. Dept. of Labor, 2003), at http://www.osha.gov/pls/oshaweb/owadisp.show_document?p_table=INTERPRETATIONS&p_id=24784 (accessed November 25, 2008).

In another case, the U.S. Supreme Court confirmed the opinion of a lower court that the OSHAct did not give OSHA “the unbridled discretion to adopt standards designed to create absolutely risk-free workplaces regardless of costs.” In this 1980 case involving workplace exposure to a cancer-causing substance, the Court set down much stricter requirements for the validity of OSHA-issued PELs and other standards.Industrial Union v. American Petroleum Institute (1980), http://biotech.law.lsu.edu/cases/adlaw/benzene.htm (accessed November 30, 2008). See Mark Robson and William Toscano, Risk Assessment for Environmental Health (Hoboken, NJ: John Wiley & Sons, 2007), 209–12, http://books.google.com/books?id=s_ih18SnrvcC&pg=PA212&lpg=PA208&ots=aiV5C-1chP&dq=Industrial+Union%2BPELs&ie=ISO-8859-1&output=html (accessed December 5, 2008); Randy Rabinowitz, Occupational Safety and Health Law (Washington, DC: BNA Books, 2004), 387, http://books.google.com/books?id=11e2Q2zABmIC&pg=PA91&lpg=PA91&dq=National+Realty+and+Construction+Co,+Inc+v+Occupational+Safety+and+Health+Review+Commission&source=web&ots=G8vrviG6JB&sig=_p1-watPer8eovM6o3hKLjy2Ask&hl=en&sa=X&oi=book_result&resnum=9&ct=result (accessed December 2, 2008).

Today, therefore, because it’s difficult to meet the stringent requirements set by judicial precedent, OSHA rarely resorts either to the General Duty Clause or to PELs established later than the 1970s.OSHA, “Enforcement Policy for Respiratory Hazards Not Covered by OSHA Permissible Exposure Limits” (U.S. Dept. of Labor, 2003), http://www.osha.gov/pls/oshaweb/owadisp.show_document?p_table=INTERPRETATIONS&p_id=24749 (accessed December 1, 2008). In the case of cigarette smoke (ETS), OSHA rules are applied only in rare and extreme cases, usually when ETS combines with some other contaminant produced by a manufacturing process.Nolo’s Encyclopedia of Everyday Law: Answers to Your Most Frequently Asked Legal Questions, ed. Shea Irving (Berkeley, CA: Nolo Press, 2007), 63, http://books.google.com/books?id=mvlXStpeSVEC&dq=%22OSHA+rules+apply+to+tobacco+smoke+only+in+rare+and+extreme+circumstances%22&ie=ISO-8859-1&output=html&source=gbs_summary_s&cad=0 (accessed December 1, 2008).

Beyond OSHA: Public Law, Public Policy, and ETS Today

And yet, if you’ve spent much time recently around American workplaces, you’ve no doubt observed that a lot of employers have instituted complete or partial restrictions on smoking. In 1985, for example, 27 percent of U.S. worksites with fifty or more employees either were smoke free or limited smoking to separately ventilated areas. According to the most recent data, the number had risen to nearly 90 percent by 2000.Nell H. Gottlieb, “Workplace Smoking Policies and Programs,” Encyclopedia of Public Health (New York: Macmillan Reference USA, 2002), http://www.answers.com/topic/workplace-smoking-policies-and-programs (accessed December 2, 2008); Jon Jenney, “Clean Indoor Air Ordinances,” Encyclopedia of Public Health (New York: Macmillan Reference USA, 2002), http://www.novelguide.com/a/discover/eph_01/eph_01_00186.html (accessed December 2, 2008). If OSHA standards aren’t responsible for this trend toward smoke-free worksites, to what can we attribute it?

For one thing, of course, national attitudes toward smoking have undergone significant changes in the last three or four decades. Few people would be surprised to find that the percentage of U.S. adults who smoke declined from just over 42 percent in 1965 to just under 21 percent in 2007. In addition, more and more American workers are aware of the effects of secondhand smoke (SHS). In one study, 76.5 percent of respondents said they believed that SHS causes heart damage, and 84.5 percent said they believed that it causes lung cancer.“Smoking Prevalence among U.S. Adults, 1955–2007” (2007), Information Please Database, http://www.infoplease.com/ipa/A0762370.html (accessed December 3, 2008); data from Centers for Disease Control and Prevention. Ellen Striebel, “Marion County Residents’ Attitudes toward Secondhand Smoke in Public Places,” December 8, 2005, http://www.bowenresearchcenter.iupui.edu/brc_lectures/BowenLecture2005-12-08.pdf (accessed December 3, 2008). (Interestingly, the conviction that SHS harms nonsmokers doubles the likelihood that a smoker will succeed in quitting.Stanton A. Glantz and Patrick Jamieson, “Attitudes toward Secondhand Smoke, Smoking, and Quitting among Young People,” Pediatrics 106:6 (December 2000), http://pediatrics.aappublications.org/cgi/content/full/106/6/e82 (accessed December 3, 2008).)

Naturally, public attitudes show up in public policy. In the legal environment of business, we can identify at least two areas that reflect public policy toward smoke-free workplaces:

• Other federal statutes. In particular, two federal laws support civil suits against employers that fail to take action against ETS or SHS:

  • The Americans with Disabilities Act (ADA) protects people with impairments that affect “major life activities.” The law requires employers to provide “reasonable accommodation” that allows impaired employees to perform their jobs. An employee with a respiratory impairment that prevents him or her from working in the presence of ETS may sue an employer that fails to provide appropriate working conditions.
  • The Rehabilitation Act of 1973 bars employment discrimination on the basis of disability. A worker with a respiratory disability can sue an employer that fails to limit workplace smoke for unlawful discrimination.

• State laws. Currently, twenty-four states have laws governing smoke-free workplaces (up from just two states in 2002), and these and related laws in many states have become more stringent in the past few years. According to the Centers for Disease Control, between 2004 and 2007, the following statistics were true:

  • Eighteen states strengthened restrictions for private-sector worksites, eighteen strengthened restrictions for restaurants, and twelve strengthened restrictions for bars.
  • The number of states requiring all three settings to be smoke free climbed from three to twelve.
  • The number of states with no restrictions on any of the three settings decreased from sixteen to eight.Centers for Disease Control and Prevention, “State Smoking Restrictions for Private-Sector Worksites, Restaurants, and Bars—United States, 2004 and 2007,” Morbidity and Mortality Weekly Reports (MMWRs) (U.S. Dept. of Health and Human Services, May 23, 2008), http://www.cdc.gov/tobacco/data_statistics/mmwrs/2008/mm5720a3_intro.htm (accessed December 3, 2008); Centers for Disease Control and Prevention, “New Study Shows Tobacco Control Programs Cut Adult Smoking Rates” (U.S. Dept. of Health and Human Services, January 30, 2008), http://www.cdc.gov/media/pressrel/2008/r080130.htm?s_cid=mediarel_r080130_x (accessed December 3, 2008).

Connecticut law, for example, restricts smoking in most workplaces with at least five employees to specially ventilated smoking rooms.Saul Spigel, “Statewide Smoking Ban,” OLR Research, June 9, 2003, http://cga.ct.gov/2003/rpt/2003-R-0466.htm (accessed October 25, 2008).

In addition, we shouldn’t underestimate the role played by business itself in the campaign to curb workplace smoking. In Connecticut, for example, the workplace smoking ban applies only to indoor areas, but many companies in the state take advantage of a provision allowing them to ban smoking anywhere on their properties. Businesses, of course, aren’t motivated strictly by civic responsibility. Workplace smoking increases employer costs in numerous ways. Smokers are absent from work 50 percent more often than nonsmokers, and they have twice as many accidents. Smoke-free firms often pay 25 percent to 35 percent less for health and fire insurance, and one government report calculates that U.S. businesses could save from $4 billion to $8 billion annually in building operations and maintenance costs if workplace smoking bans were enforced nationwide.“Smoking in the Workplace Costs Employers Money” (Washington, DC: Action on Smoking and Health, 2005), http://www.ash.org/papers/h100.htm (accessed December 3, 2008); American Lung Association, “Smoking Policies in the Workplace Fact Sheet.”

And last but not least, both for-profit and nonprofit organizations must always contend with lawsuits:See E. L. Sweda Jr., “Lawsuits and Secondhand Smoke,” Tobacco Control (London: BMJ Publishing Group, 2004), http://tobaccocontrol.bmj.com/cgi/content/full/13/suppl_1/i61 (accessed December 3, 2008).

• A man suffering from asthma repeatedly asked Olympic Airways flight attendants to change his seat because of persistent SHS. They refused, he died, and his widow sued the airline for negligence. A U.S. District Court awarded the plaintiff damages of $1.4 million.
• After sharing an office with a chain smoker for twenty-six years, a nonsmoking New Jersey teacher contracted tonsilar cancer and sought workers’ compensation benefits for a temporary disability caused by SHS. A workers’ compensation judge and a state appeals panel ordered the Middletown Board of Education to pay the plaintiff $45,000 in disability benefits, $53,000 in medical costs, and $20,000 in legal fees and to provide for any future treatment that he might require.
• When her employer refused to provide reasonable accommodation to protect her from SHS, a woman suffering from severe respiratory allergies sued under the Americans with Disabilities Act. A U.S. Appeals Court agreed with her contention that her disability interfered with a “major life activity”—namely, breathing. The case is still under consideration.