Chapter 2 : LEGAL ENVIRONMENT OF BUSINESS

-INTRODUCTION TO LAW
After reading this lesson, you will be conversant with:
2.1 The meaning of law
2.2 Nature & Definition of Law
2.3 Functions and Purpose of Law
2.4 Advantages of Law
2.5 Disadvantages of Law
2.6 Kinds of Laws
2.7 Sources of Law
2.1 Introduction:
Business laws are essential for the students of management to understand the legal rules and
aspects of business. Just like any other study even business management is incomplete without
a proper study of its laws. Any form of business needs legal sanction. Therefore, it is
imperative that a manager understands the various ways in which businesses can be organized.
This subject introduces some of the common forms of business organizations, including some
forms unique to India like the Joint Hindu Undivided Family firm. Different types of
organizations like Sole Ownership, Partnership, Private Limited Company, Public Limited
Company, Joint Stock Company along with the rationale for adopting these forms are explored.
What form of business organization is the best under a particular set of conditions? What
advantage or disadvantage does it have over other forms of business? Formalities to be gone
through and some the quasi-legal processes required for starting a business will be discussed in
detail in this subject.
For the proper working of the society, there must exist a code of conduct. As you all know, in
the ancient times the society was not organized. The rights of the individuals were not
recognized. Gradually, the society evolved and the state came into being. As we all know, to
regulate the state, there should be a specific code of conduct, which should be followed by
everyone. As a result of which law evolved as a system of rights and obligations including all
the rules and principles, which regulate our relations with other persons and with the state.
These rules and regulations took the form of statutes.
To enforce the law and to resolve the conflicts arising there from, courts of law were setup by
the state. Laws were made to govern almost every walk of life. You all must know that criminal
laws were made to control criminal activities in the society like Indian Penal Code, which
enumerates which activities are considered criminal and what will be the punishment for
committing a crime. Likewise, mercantile law was evolved to govern and regulate trade and
commerce. Hence, the term mercantile law can be defined as that branch of law, which
comprises laws concerning trade, industry and commerce. It is an ever-growing branch of law
with the changing circumstances of trade and commerce.

2.2 Nature & Definition of Law

Law is a social science that grows and develops with the growth and development of society.
The law is required to deal with the new developments, which create new problems in the
society. Thus, the definition of law given at a particular time cannot remain valid for all times
to come. The definition of law today may become very narrow in future. Prof. Keeton rightly
points out that, to attempt or to establish a single satisfactory definition of law is to seek to
confine jurisprudence within a straitjacket from which it is continually striving to escape.
According to Austin, Law is the aggregate of rules set by men as politically superior, or
sovereign, to men as politically subject. In other words, law is the command of the sovereign.
It imposes a duty and is backed by a sanction. Command, duty and sanction are the three
elements of law.
According to Holmes, Law is a statement of the circumstances in which the public force will
be brought to bear upon men through courts. Again the prophecies of what the court will do in
fact and nothing more pretentious, are what I mean by law.
According to Woodrow Wilson, Law is that portion of the established habit and thought of
mankind which has gained distinct and formal recognition in the shape of uniform rules backed
by the authority and power of the government.
2.3 Functions and Purpose of Law
The main functions of law is:
1. To maintain law and order within a given society;
2. To maintain status quo in society ensuring stability and security of social order;
3. To enable individuals, maximum of freedom to assert themselves;
4. Determine the sphere within which the existence and activity of each individual will be
secure and free play;
5. The main goal of law is to secure justice; and
6. An important function of law is to ensure rule of law.
2.4 Advantages of Law
The main advantages of law are as follows:
1.

The principles of law provide uniformity and certainty to the administration of

justice.

2.

The existence of fixed principles of law avoids the dangers of arbitrary, biased and
dishonest decisions.

3.
4.

The fixed principles of law protect the administration of justice from the errors of
individual judgment.
These fixed principles are reliable than individual judgment.

2.5 Disadvantages of Law

Some of the disadvantages of law are:
1. The lack of flexibility in law results in hardship and injustice to people, which needs to
change according to the changing needs of the people.
2. Law is conservative in nature as the lawyers and judges favor continuation of the
existing law making it static.
3. Another disadvantage of law is formalism, which emphasis more on the form of law
than its substance.
4. Lastly, law is unduly and needlessly complex.
2.6 Kinds of Laws
The following are different kinds of law:
1. Imperative Law: It is a rule which prescribes a general course of action imposed by
some authority which enforces it by superior power either by physical force or any other
form of compulsion. Austin who is a chief advocate of imperative law defines, Law as a
command, which obliges a person or persons to a course of conduct.
2. Physical or Scientific Laws: Physical laws or the laws of science are expression of the
uniformities of nature-general principles expressing the regularity and harmony
observable in the activities and operations of the universe.
3. Natural Law or Moral Law: Natural law or moral law is ought to have the principles
of natural right and wrong, i.e., to include the principles of natural justice, if it is used in
a wider sense, then the term justice is to include all forms of rightful action.
4. Conventional Law: According to Salmond, conventional law means, any rule or
system of rules agreed upon by persons for the regulation of their conduct towards each
other.
5. Customary Law: According to Salmond, customary law means, any rule of action
which is actually observed by men any rule, which is expression of some actual
uniformity of some voluntary action. A custom may be voluntary and still becomes or
retains the features of law. Therefore, when a custom is firmly established, it is
enforceable by the authority of the state

6. Practical or Technical Law: Practical or technical law consists of rules, which are made
for the attainment of certain ends, for example, the law of health, the laws of
architecture, etc.
7. International Law: According to Starke, international law may be defined, for its great
part, as the principles and rules of conduct which the states feel themselves bound to
observe and therefore do commonly observe in their relations with each other and
includes: (i) the rules of law relating to functioning of international institutions and
organizations, their relations with each other and their relations with states and
individuals, and (ii) certain rules of law relating to individuals so far it relates to their
rights and duties are the concern of the international community.
8. Civil Law: According to Salmond, civil law is, the law of the state or of the land, the
law of lawyers and the law courts.
Advantages of Legal Justice
The key advantages of legal justice are:
i.

Legal justice ensures uniformity and certainty in the administration of justice;

ii.

Impartiality in the administration of justice is another important advantage;

iii.

Legal justice represents the collective wisdom of the community and it is always
to be preferred to the wisdom of any one individual.

Disadvantages of Legal Justice

Some of the disadvantages are:
i.

It is rigid, as it follows what has been laid down by precedents;

ii.

It is not always possible to adjust to the changing needs of the society;

iii.

Another defect of legal justice is its formalism or technicalities; and

iv.

Lastly, it is complex.

2.7 SOURCES OF LAW

According to Holland, the expression sources of law is employed to denote the quarter from
where we obtain our knowledge of law, for example, whether from statute book, the reports or
esteemed treatises. Sometimes it is used to denote the ultimate authority, which gives them the
force of law, i.e., the State.
John Austin refers to three meanings for the term sources of law: (a) the first term refers to
the immediate or direct author of the law which means the sovereign in the country, (b) the
second term refers to the historical document from which the body of law can be known, and
(c) the third term refers to the causes which have brought into existence the rules which later on
acquire the force of law.
According to Salmond, the two main sources of law were formal and material. The legal
sources consist of legislations, precedent (previous judgments of the court), custom, agreement
and professional opinion.

Formal Sources
The law derives its force validity from the formal sources.
The material sources of law is derived from the matter, which is composed of
(a)Legal sources and (b) Historical sources.
LEGAL SOURCES
These are the sources which are recognized by the law itself as authoritative, for example,
Statute Law, having its source in legislation; Case Law, having its source in precedents;
Customary Law, having its source in customs. All these are inherent sources of law and have a
binding force.
HISTORICAL SOURCES
The sources which have no binding force and which are not recognized by the law are referred
to as historical sources, for example, juristic writings, literary works, foreign decisions. These
are of a great persuasive force, but they are not binding law by themselves.
Legislation
Etymologically, legislation means the making or the setting of law. In a wide sense, it includes
all methods of law-making and, therefore, would include laws made by judges also. In the strict
sense, it may be defined as the promulgation of legal rules by an authority which has the power
to do so. In modern times, legislation is the most important source of law.
According to Salmond, legislation is that source of law which consists in the declaration of
legal rules by a competent authority.
According to Austin, there can be no law without a Legislative Act.