Documente Academic
Documente Profesional
Documente Cultură
Business Law
[Business Administration, 1]
Ada Popescu
[Parts of this material are adaptations of John Heads General
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.
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.
Jerome Frank, The Law and the Modern Mind, Brentanos Publ. House, New York, 1930.
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.).
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.
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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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?
George D. Cameron III, The Legal and Regulatory Environment of Business, Ed. South-Western Publ.,
1994, p.274.
11
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 partnerships 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
12
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.
13
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 companys 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 companys 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 companys 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 companys capital.
14
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.
15
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.
16
Definition
an enterprise organized around a parent
firm incorporated in one country that
operates through branches and subsidiaries
in other countries
parent company
Branch
Ray August, International Business Law, Ed. Prentice Hall, 2000, p. 159.
17
incorporated
Agent
representative office
holding company
subsidiary
joint venture
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.
19
Joseph Shade, Business Associations in a Nutshell, Ed. Thomson West, St. Paul, MN, 2003, pp.28-31.
20
21
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
Douglas Whitman and John William Gergacz, The Legal and Social Environment of Business, McGrawHill Publ., New York, 1994, p.671.
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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.
23
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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 claims9.
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 countrys economy.
George D. Cameron III, The Legal and Regulatory Environment of Business, Ed. South-Western Publ.,
1994, p.379.
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both: a situation in which the debtors liabilities exceed the debtors 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 debtors 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.
26
John W. Head, General Principles of Business and Economic Law, Ed. Carolina Academic Press,
Durham, NC, 2008, p. 43.
27
11
Miguel Virgos and Francisco Garcimartin, The European Insolvency Regulation: Law and Practice,
Kluwer Law International Publ., The Hague, Netherlands, 2004, p. 11.
28
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.
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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-obvious13. 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.
30
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 freeriding 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
31
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 owners 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;
32
15
Goodwill (fond de comer) 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.
33
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.
34
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 identity17.
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.
35
36
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.
37
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.
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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 defendants intentional making of
that false representation, the defendants 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.
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19
John W. Head, General Principles of Business and Economic Law, Ed. Carolina Academic Press,
Durham, NC, 2008, p. 97..
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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 Marys 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 websites 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.
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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 email 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.
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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 technology23.
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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
individuals 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
offerings24.
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 individuals 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. 10571058.
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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.
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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 partys 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 nonbreaching 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.
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arbitration
conciliation
mediation
negotiation
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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
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