BUSINESS LAW ============================================================== Business law includes those branches of law, including corporations, that affect the formation, operation, and termination of a business firm (see CORPORATION). The legal system regulates or determines (1) the way a firm is organized, (2) the nature of its transactions with other firms, (3) employer-employee relationships, (4) its responsibility to consumers, and (5) the obligations it owes to society at large. Specific subjects in the field of business law include, among others, contracts, agency, sales law, bankruptcy, insurance, negotiable instruments, and business organization. Contracts A commercial CONTRACT may be viewed as a tool by which business people establish rules to govern a particular business or personal relationship. Contract law determines which contracts are enforceable in court and defines what must be done to comply with contractually established obligations. For a contract to be enforceable in most U.S. jurisdictions, it must meet the following conditions. There must be: (1) a valid offer, (2) a proper acceptance, (3) sufficiency of consideration (both parties must incur a legal obligation), (4) parties with legal capacity, (5) absence of fraud, force, or legally significant mistake, (6) observance of proper legal form, (7) consistency with general public policy, and (8) consistency with special rules governing the type of agreement involved. Agency The legal cornerstone of the entire area of business transactions is agency law. An AGENT is a person empowered to act so as to legally bind another, the principal. Agency enables principals to handle a multitude of transactions at once to greatly extend their geographic reach, and to make use of professional expertise when incurring legal obligations. An agent must be loyal to the principal, act with reasonable care under community standards, follow reasonable instructions, and make an appropriate accounting. Professional agents must perform according to the standards of their profession. So long as the agent acts with authority, the principal is bound to perform the obligation to the third parties with whom the agent has dealt. The third parties are similarly liable to the principal. Sales The Uniform Commercial Code (UCC) sets forth the rules governing sales of goods, commercial paper, and sellers' security interests. Emphasizing honesty, the UCC holds merchants to high standards of conduct. A written sales contract will generally specify the performance obligations of both buyer and seller. The seller's minimum obligation is to put conforming goods at the buyer's disposition and give the buyer notice thereof. If the contract obliges the seller to deliver the goods to the buyer or to a carrier, the seller must do so, obtaining the necessary documents and delivering them to the buyer. Warranties A warranty is a guarantee by a seller that the goods will be of a certain quality. If they are below that quality, the buyer may sue for the difference in value. The UCC sets forth the implied warranties that exist in certain sales transactions unless they are specifically excluded. The effect of these warranties is to neutralize the old doctrine of caveat emptor ("let the buyer beware") by requiring that the goods be either of average quality or that the buyer be conspicuously warned that the goods may not be up to standard. Secured Transactions When a sales transaction involves an extension of credit, the seller naturally wants to ensure that the buyer will pay as promised by establishing a legal interest in property held by the buyer that may be enforced if the buyer defaults. The most logical property for the seller to hold a secured interest or LIEN in is the merchandise sold. The UCC sets up a legal procedure for handling defaults, establishing priorities among various classes of creditors. Bankruptcy The law of BANKRUPTCY provides a method by which an honest but insolvent debtor may be discharged, or freed, from claims held by creditors. In the bankruptcy proceding, the bankrupt lists all assets and debts. The creditors are paid on a pro rata basis out of the debtor's available assets, and the debtor is then released from any legal responsibility to pay the remaining claims. Negotiable Instruments Certain kinds of business documents, or paper, can be exchanged for money because they enable their holders to obtain legal interests on the basis of the documents themselves. NEGOTIABLE INSTRUMENTS are usually classified under the following three groupings: (1) commercial paper, which includes formal documents involving a promise (for example, a promissory note) or order (for example, a check) to pay a sum of money; (2) commodity paper, which represents an ownership interest in property held by another such as a trucker or shipper (for example, a bill of lading); and (3) investment paper, which includes stocks and bonds. Business Organization The three principal ways of organizing a business are: as a sole proprietorship, as a partnership, or as a corporation. Other less well-known forms of business organization include the limited partnership and the unincorporated association. The rules of law spell out the consequences of operating under each form of organization. The corporation is the most formal arrangement, since it must be chartered by the state in which it is located. The rules of operation of corporations are spelled out in great detail in state statutes. The partnership is more casual and may be formed by the independent action of the partners. The rights and duties of the partners, however, will be spelled out in some detail by state statutes. The sole proprietorship involves an individual acting on his or her own behalf in a business context and is the least specially regulated and least complex form. The limited partnership involves one or more investing partners and at least one operating partner. States impose restrictions on the formation of limited partnerships. Such restrictions are designed to ensure that creditors are aware that an investing partner will be liable only to the extent of that partner's investment.