1. Chapter 8
Legal Environment
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MAJOR LEGAL SYSTEMSThe laws of a society are one aspect
of its culture. They are the rules established by authority,
society, or custom. Collectively, these rules govern the affairs
of people within a society.
At least four broad classifications of law in the world: common
law, civil law, socialist law, and Islamic law.
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The Common Law SystemThe common law originated in
England.
The primary focus of the common law is the case. The law
evolves over time as judges apply the reasoning of prior cases
to new facts. A key concept in the common law is that similar
2. disputes should have similar legal results.
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The Common Law System (Cont’d)Those earlier cases set a
precedent for a current case. Precedents in common law are
considered to provide the stability needed for citizens and
business to plan future actions.
The common law system allows more popular participation than
any other legal system through the use of the jury.
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The Common Law System (Cont’d)A commercial business
contract is a legal document that binds the parties involved in
the business transaction to their respective obligations.
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The Common Law System (Cont’d)Following is the outline of
the major components that are required by law for making a
commercial contract:
1. A valid offer
2. A valid acceptance
3. 3. The mutual assent of the parties
4. consideration
5. Contractual capacity of both parties
6. A lawful objective
7. Sometimes, a written contract (a commercial contract must
be in writing if a contract for sale of goods exceeds $500)
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The Common Law System (Cont’d)The parties to a contract are
expected to perform as they agreed. Parties must do exactly
what they promised on or before the time that was agreed.
If a party does not do what was promised, and has no legally
valid excuse for not doing it, the party is guilty of breaching the
contract.
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The Civil Law SystemThe civil law system traces its origin to
the Roman Empire. Justinian, one of the last emperors,
compiled the Corpus Juris Civilis I the sixth century.
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4. The Civil Law System (Cont’d)In some civil law countries, the
civil codes attempt to cover every aspect of the legal system. In
others, they cover more limited aspects, such as the obligations
that individuals owe each other in tort and contract.
In these countries, the codes will be supplemented by a
substantial body of other statutory law.
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The Socialist Legal SystemThe legal systems of the communist
countries are based upon socialist law. The socialist legal
system started with the Russian Revolution of 1917, and
consequently has affected a number of other countries that
adopted communism as their form of government, such as the
former Eastern European countries, China, Cuba, and several
countries in Asia and Africa.
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The Socialist Legal System (Cont’d)In the late 1980s, the
communist governments in the Eastern European countries and
the former Soviet Union collapsed.
The socialist legal system has been gradually replaced by the
civil law system as these countries developed new, free-market
economic systems. For example, jury trials, abolished by the
Bolsheviks in 1918, resumed in Russia in 1994.
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The Socialist Legal System (Cont’d)China still looks to
socialism for its formal legal institutions and methods. Even
today, with its rapid economic growth, China is still cautiously
experimenting with both its economic and legal systems,
resulting in a highly unstable legal environment for foreign
business.
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The Socialist Legal System (Cont’d)McDonald’s restaurant in
Beijing was opened in 1992. It is the largest restaurant in
McDonald’s systemwide operations.
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The Socialist Legal System (Cont’d)In late November 1994,
City officials demanded that McDonald’s vacate its central
Beijing site to make room for a $1.2 million commercial and
residential complex called Oriental Plaza, which was proposed
and would be financed by a Hong Kong billionaire, Li Ka-shing.
Apparently, he had better connections with the municipal
officials in Beijing.
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The Islamic Legal SystemThe Islamic legal system is the most
important non-Western legal system that is based on the
teachings of a religion. The Islamic religion is widely
distributed in the world.
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INTERNATIONAL LAWS AND
ORGANIZATIONSInternational law is different from the laws
of nations. The reason is that there is no international
legislative body making laws that govern international business
affairs.
What does exist is a collection of agreements, treaties, and
conventions between two or more countries, which constitute an
important element of international law.
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INTERNATIONAL LAWS AND ORGANIZATIONS (Cont’d)In
addition, international organizations such as the United Nations,
the General Agreement on Tariffs and Trade (GATT), the World
Bank, and so on have a direct impact on the conduct of
7. international business. International law is therefore an
amalgamation of rules and obligations derived from a number of
sources.
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INTERNATIONAL LAWS AND ORGANIZATIONS
(Cont’d)International treaties (agreements, conventions) are a
source to which a court refers regarding international
commercial relations and disputes between countries.
A treaty resembles an international contract. A treaty between
two countries is bilateral, and one between three or more
countries is multilateral.
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Agreement for the Sale of ServicesInternational agreements
involving the sale of goods and services have been developed
over the years by various sources, such as the General
Agreement on Tariffs and Trade (GATT).
Signed on January 1, 1948, the purpose of GATT was to commit
member countries to the principles of nondiscrimination and
reciprocity.
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8. WTO World Trade Organization.
There were 151 members in 2007.
Whereas GATT was a set of rules agreed upon by nations, the
WTO is an institutional body.
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