Introduction to Business Law

UNIT 1 INTRODUCTION TO BUSINESS

LAW

Objectives

After studying this unit you should be able to:

Explain the concept of Business
Understand the objectives, scope and significance of business law in the
present business environment
Describe the various sources through which business law has evolved
Structure
1.1 Introduction
1.2 Meaning of Business
1.3 Business Environment
1.4 Significance of Business Law
1.5 Objectives of Business Law
1.6 Scope of Business Law
1.7 Corporate Restructuring under Business Law
1.8 Sources of Business Law
1.9 Summary
1.10 Self-Assessment Questions
1.11 Further Readings/References

1.1 INTRODUCTION
The occupation of business plays an extremely important role in the economy of
any country. The act of engaging in business, which consequently results in the
creation of jobs and opportunities, along with the generation of revenues for the
economic sector, forms a significant part in nation building. The proliferation of
business activities calls for a mechanism to regulate its conduct, and law facilitates
this purpose. For strong and productive economies, the need to have an adequately
enforced system of equally applied law has been increasingly felt. Law has become
an important part of any business activity. A certain framework of law is necessary
for maximum incentive to entrepreneurs, investors and inventors. Business law
has taken an important place because it secures the elements of trust and certainty
that are vital to economic transactions amongst strangers. It also includes a study
of legal compliances related to any business activity. In this Unit, there will be a
discussion on the concept of ‘Business’ and the objectives of ‘Business Law’.
The Unit will help in the understanding of the significance of business law in the
present business environment and elaborate on the various sources of business
law.

The terms “Business law” and “Business Laws” are used interchangeably in the
text. “Business Law” is a generic or umbrella term which provides legal and
regulatory framework for doing business. Business environment in any country
7
Overview of Business Law is governed by its business laws that are necessary for conducting business
transactions and regulate business.

Understanding the basics of business law are extremely important for the students
of business management stream to get a firm grasp on the concepts and gaining
deeper knowledge of the subject. This Unit shall focus on defining the meaning
of business, the scope and significance of business law in the current economic
scenario, and to acknowledge the different sources of law which contributed in
the evolution of business law.

Three concepts establish a necessary framework for the most effective functioning
of market in the modern nation- Law, the Rule of Law and the Property.1 The
forces that hold societies together range from custom and religion to law and
economic ties. In the modern nation, however, the most significant of the social
forces is law because law can glue together diverse peoples of different
backgrounds in to very large, organized groups. Law is known by everyone as
being intended to tell members of society what they can and cannot do.2

Law:

It is necessary to have preliminary discussion on ‘what is law’ before students

are introduced to ‘Business Law’. The term “law” has been defined in many
ways. It is not easy to give a precise definition of law. It has been defined as rules
of human action.3 A simple definition of law provides that law is a formal social
force, is made up of rules which are laid down by the state and are backed by
enforcement.4

Rule of Law:

Under the Rule of law, laws are made generally and equally applicable. They
apply to all members of society and to various groups in the same way. In the
words of Secretary General of United Nations, “without confidence based on the
rule of law; without trust and transparency- there could be no well-functioning
markets.”

“Without the rule of law, major economic institutions such as corporations, banks
and trade unions would not function, and the government’s many involvements
in the economy- regulatory mechanisms, tax systems, customs structure, monetary
policy and the like- would be unfair, inefficient and opaque.”5

Property:

The term ‘property’ has two meanings, something that is owned and ownership.
It is through the law of property that individuals and business organizations can
possess, use and transfer their private resources. The property is a legal fence
that keeps others out without your permission. The exclusionary right of property
provides a basis for the private market and modern business. Property has been
thought of as the central concept underlying Western Legal Systems.6 Contract
law enables an owner to exchange resources at a future date, tort law compensates
owners whose resources are wrongfully harmed by actions of others, criminal
law punishes those who harm an owner’s resources in a particular way and the
law of business organizations identifies how individuals can own and use private
resources in groups. The below mentioned figure indicates the Wheel of Property.7
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 Introduction to Business Law

Figure .1.1: Wheel of Property

1.2 MEANING OF BUSINESS

A business can be defined as an enterprise or organization involved in an industrial,
mercantile or commercial activity. A business entity may be brought forth for a
profit purpose or it can serve non-profit purposes supporting a charitable or a
social cause. A business may also be referred to the activities of an individual or
a group of individuals engaged in the sale of goods and provision of services
with a profit motive.

“The term ‘business’ may be understood as the organised efforts of enterprises

to supply consumers with goods and services and to earn profit in the process.
Business is a broad term and includes such varied activities as production,
promotion, wholesaling, retailing, distribution, transportation, warehousing,
financing, insurance, consultancy, and the like.”8 L.R. Dickson has defined
‘business’ as a form of activity pursued primarily with the object of earning
profit for the benefit of those on whose behalf the activity is conducted.

“Businesses vary in size, as measured by the number of employees or by sales

volume etc. But all businesses share one common purpose that is to earn profits.
The purposes of business that goes beyond earning profits are -an important
institution in society, for the supply of goods and services, creating job
opportunities, offering better quality of life, contributing to the economic growth
of the country, etc.”9

Business law, also commonly known as commercial or mercantile law, is that

branch of law that conducts the relationship between the enterprises, companies
and individuals engaged in commercial matters. This section of law governs
issues in relation to the legal rights, duties and liabilities of the entities engaged
in business transactions.

Business Law has attained a significant position in the current era, due to the
formidable position held by the business enterprises and corporations in
contributing to the economy and by the supply of abundant job positions boosting
the employment sector, thereby contributing towards the generation of revenues.
“Business law consists of the enforceable rules of conduct that govern commercial
relationships. In other words, buyers and sellers interact in market exchanges
9
Overview of Business Law within the rules that indicate the boundaries of legal business behavior.
Constitutions, legislatures, regulatory bodies, and courts spell out what market
participants may or may not legally do. Understanding business law is necessary
for future businesspeople because there simply is no market transaction that occurs
outside legal guidelines. All contracts, employment decisions, and payments to
a supplier are limited and protected by business law. Each of the six functional
areas of business - management, production and transportation, marketing,
research and development, accounting and finance, and human resource
management - sits on a foundation of business law.”10

Business law is a body of legal rules regulating business activities. Business

Law can also be defined as follows:
1) “Business law is that portion of the legal system which guarantees an orderly
conduct of business affairs and the settlement of legitimate disputes in a just
manner.”
2) “Business law establishes a set of rules and prescribes conduct that enables
us to avoid misunderstandings and injury in our business relationships.”11

1.3 BUSINESS ENVIRONMENT

The business environment consists of all those factors or forces which shape the
conduct of business. Such factors may be categorized as internal and external
factors. Internal factors included factors within the control of any business.
External factors, on the other hand include factors that are beyond the powers or
control of any business. Both internal and external factors keep on changing and
are dynamic in nature. External factors also include laws, regulations and policies
that affect the conduct of business. Figure -1.2 very clearly explains the
characteristics of business environment in which businesses operate.

Figure-1.212: Business Environment

1.4 SIGNIFICANCE OF BUSINESS LAW

Business law is that branch of the legal system which promotes an orderly
treatment of business affairs, facilitates the regulation of commercial activities
in accordance with established practices of law, and provides for settlement of
disputes in an amicable manner. It constitutes that part of the legal system which
is most fundamental to national wealth creation. It also specifies the rules and
the conduct that needs to be adhered to, for the creation of successful business
relationships among the government, business entities and the public, and business
enterprises inter se. Business law also aids in establishing the environment needed
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for responsible and peaceful business dealings not just amongst the different Introduction to Business Law
enterprises but also for safeguarding the rights of the employees. Business law
also requires understanding and firm grounding of multiple substantive areas of
law.

Business law has gained significance due to the changing business environment.
Business environment is dynamic in nature and there is a requirement of having
adequate laws in place to govern the business organisations functioning in the
society.

1.5 OBJECTIVES OF BUSINESS LAW

We enter into contracts every day. Some of these contracts are made consciously,
for example, for the purchase or sale of any goods, purchase of a share of a
company or a plot of land. Entering into contracts determines the legal rights of
each party giving rise to legal obligations as well. People who are engaged in
business activities such as business owners enter into a contract on a daily basis
to further the business transactions. All business activities include a variety of
transactions which give rise to contracts on a daily basis. Some of these contracts
are as simple as purchasing goods from a shop thus giving rise to a legal right
and legal obligation.

Business law serves a variety of purposes some of which are listed below:

i) A comprehensive set of standards established universally: Business laws

are comprehensive and uniform set of standards that are applicable to all
business entities. Uniformity in laws helps in maintaining smooth relations
between the businesses and its various stakeholders including consumers,
suppliers, etc. It provides an environment where the businesses can function
smoothly and efficiently as the same rule shall be applicable to all the business
organisations falling in a particular category. However, there can be different
compliances for different kinds of business organisations depending upon
the size, nature of business activity or certain threshold limits.

It also helps in identifying and establishing the rights and liabilities of the
various parties interacting with each other. It provides a framework for
reducing the harm caused to either party due to fraudulent or unethical
activities. Business law also provides for steps that needs to be followed
while conducting due diligence before engaging with a particular company.

ii) Promoting industrial growth: Business laws not only provides different
provisions for compliance for the business but also facilitate industrial growth
by protecting and promoting the rights of businesses. Adherence to the rules
prescribed by the range of laws falling under the domain of business facilitates
businesses to achieve growth and success. Thus, business laws enable; capital
formation, promote industrial relations, facilitation of licensing, ease of doing
business, financial inclusion, etc. which promote economic growth.

iii) Laying down the procedure for the establishment of business: The laws
dealing with business provide the necessary framework required for the
commencement of a business corporation along with building of a strong
foundation for the business entity to thrive in the market. The formal process
provided under the laws also facilitates successful conduct throughout the
11
Overview of Business Law life-cycle of the business. For instance, Companies Act, 2013 lays out the
steps involved in the incorporation of a company, and provisions related to
the Articles of Association and the Memorandum of Association in detail.

iv) Enforcement of Rights: Business laws provide provisions for judicially

enforcing the rights of all the parties involved in a business transaction.
Thus, the businesses can approach the court to enforce the claims against
the debtors or right to a patent or copyright or the right to hold property, etc.
Businesses also have a right to defend themselves in case actions are filed
by the central, state and local bodies. Thus, businesses have been given the
power of initiating legal action in case any legal compliance are breached
by any outside party and also allowed to defend themselves against the
litigation filed by the government for the various stakeholders. Various
provisions aiding in carrying out the enforcement action have been provided
in statutes for effective regulation of the business practices.

v) Contributes to the building of healthy business relationships: Laws

dealing with business matters are extremely significant in the establishment
of secure and effective business relationships amongst the concerned entities
as the formation of strong business ties is an absolute must for building a
strong economy of a country. For instance, the Partnership Act lists out the
rights, duties, and obligations of the partners in a firm for carrying out a
successful venture.

Business Law also plays an extremely important role in facilitating Mergers

and Acquisitions (M&As) between enterprises looking to collaborate and
expand their business. Cross-Border M&AS transactions also contribute
immensely to the economy of a country by playing a significant role in
increasing the revenues generated through the means of Foreign Direct
Investment. Cross border M&A occurs between companies situated in two
different jurisdictions. If the resulting company is an Indian company, it
qualifies as an inbound merger, and if the resulting company is a foreign
company, it is christened as an outbound merger.

vi) Reduced possibilities of fraud: A robust and effective business law

framework helps in reducing the possibility of fraud as the parties entering
into contracts or dealing with each other are well aware of their rights and
liabilities which would prevent them in falling prey to the illegal or fraudulent
activities by the other party. The laws associated with Business Law also
provides for a highly effective enforcement mechanism, which are further
lined with stringent measures that could minimize the possibility of
perpetuating fraud.

vii) Business laws help maintain equilibrium: Business laws help in bringing
about uniformity and maintaining equilibrium as there are set rules which
have to be followed by each entity. Different forms of business organisations
are regulated by different laws. This helps in the ease of dealing and
conducting business as the same standards are followed throughout the
country. It helps in making the business transactions easier and smoother
across the country.

viii) Ethical conduct: Business laws also help in improving the conduct of the
business as the laws have to be followed in letter and spirit. Therefore, the
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 business organisations have a responsibility of maintaining ethical conduct Introduction to Business Law
while functioning in the society. As businesses survive in the society and
use its resources, there is a responsibility on the businesses to give back by
dealing ethically with all its stakeholders.

For instance, the multi-billion-dollar scam orchestrated by the promoters of

Satyam Computer Services, also referred to as “Satyam Scam”, made the
regulators across the country re-examine the then-existing corporate
governance standards and the fallacies therein. The scam resulted in the
violation of multiple provisions of various statutes, such as, Companies Act,
1956 (Sections 209, 233 and 628), Securities (Contract) Regulation Act 1956
(Sections 23A, 23E), SEBI Act (Sections 15HA and 24, and Criminal law.
Under the Companies Act, 1956, the resulting violations included failure to
maintain proper books of account, penalty for false statements and non-
compliance of auditor duties. However, after this incident, sweeping changes
were brought forth in the Companies Act, 2013 to combat any unforeseen
deviations that may be resorted by the corporate enterprises. The new
Companies Act, 2013 mandated at least one-third of the Board to be
comprised of Independent Directors, and that they shall not be eligible to
receive any stock options and be remunerated only in fee. The new Act also
imposed strict norms on any related party transactions along with providing
for class action suit options against the company and auditors, for protecting
minority shareholders’ interests. It also brough forth provisions clearly
defined demarcating the accountability of auditors.

ix) Social Responsibility: Business laws also lay down the criteria for business
to function in a society as the business utilize the resources of the society
there arises a responsibility of the business to give back to the various
stakeholders. This enables social justice and social responsibility in the form
of good employment practices, non-discrimination, sustainable utilization
of resources, prevention of environmental damage etc. Thus, it prohibits
businesses from entering into practices that are harmful to the society at
large.

x) Laying down law in accordance with the evolving standards: The

business environment is ever-changing and dynamic in nature. The laws
have to be enacted taking into account the economic and business
environment of the country. These laws not only provide uniformity in
business operations but also provide clarity to unforeseen situations.
Legislative changes in the form of amendments are made to address the
occurrence of unforeseen situations.

An example for this would be the Indian Competition Act, which handles
and regulates antitrust issues in the country. The Competition Act, 2002 is
concerned with keeping a check on the prevailing anti-competitive acts in
the relevant market being governed. The Act encompasses horizontal and
vertical agreements, cases related to abuse of dominance, and regulation of
combinations. It must be noted that until now Competition Act only focused
on price parameters such as unreasonable increase in prices or reduced output
in the supply of the goods. However, the advent of digital technology has
ushered an era demanding a change in the traditional methods employed to
gauge anti-competitive practices. The Indian Competition regulatory
authorities have also initiated investigation into degradation of non-price 13
Overview of Business Law parameters such as quality, privacy and innovation keeping pace with the
changing needs of the society in an era of online platform markets. The
Competition Commission of India, which until recently investigated anti-
competitive conduct solely based on monetary price increase, has
acknowledged the importance of data as a currency in the current business
scenario and initiated investigation against data monopolies.

xi) Providing penalties for violation of laws: Business law serves an extremely
important purpose of enlisting the various penalties that may be employed
by the regulatory bodies to ensure that the conduct of business activities
conforms to the prescribed standards set by the concerned branch of law.
The legislations dealing with the various aspects of the business have
provided the penalties that may be incurred by the wrongdoers on
contravention of the law and the rules provided therein. For instance, chapter
VI under the Competition Act, provides for various penalties for
contravention of the orders of the Commission or for non-compliance of the
directions of the Director-general or the Commission. Similarly, Chapter
VII of the Insolvency and Bankruptcy code (IBC) provides for punishment
of offences, penalties for acts including falsification of books of corporate
debtor, false representations to creditors and transactions for defrauding
creditors, etc.

xii) Insurance against Risks: Every business involves inherent risks that may
be related to operations of business, movement or transit of goods, and
financial risks, etc. Insurance laws provide mechanisms for insuring against
such unforeseen circumstances for the business. Directors and officers of
the companies can also take D & O insurance policies for protection against
future liabilities.

1.6 SCOPE OF BUSINESS LAW

For a better understanding of business laws and the scenario giving rise to their
emergence, it is imperative to understand the frame of societal reference which
gave birth to this branch of law. Any study of business law must necessarily
provide major thrust to the rules framed in relation to business law, because
“society has imposed constructive notice of that law.”.13 Understanding the
background sheds light on the reason behind the emergence and the functioning
of a particular law and shall aid in making policies that might prove beneficial in
the long run.

The scope of business laws is very vast. It takes into its ambit the laws related to
all the activities proving indispensable for the successful conduct of the business.
The scope of business laws is not restricted to the laws related to companies but
it also provides laws for business activities conducted by other forms of business
organisations. There are laws to deal with contracts, property, agency, negotiable
instruments, sale of goods, bailment, guarantees, intellectual property, etc. In
relation to companies, there is multitude of laws such as corporate laws, securities
laws, competition law, foreign exchange laws, tax laws, etc. Right from the
incorporation of a business entity till it attains finality, numerous laws are provided
for every significant act that may be resorted by a business entity throughout its
life. There are a range of laws that have been enacted for the proper
commencement of business activities, for the required conduct during its life
14
cycle, with finally laws laying down procedures directing the regulation and Introduction to Business Law
culmination of the business activity in question. Business law also aids in raising
questions against governmental regulations in case it results in violation of
legitimate business practices. The legal consequences of the multifarious business
transactions also play a significant role for the accountant of the company in
auditing the company’s books and in the course of preparing required financial
statements. Business laws also subserve the interests of society at large. Laws
dealing with insurance, environmental protection, taxation etc., are extremely
beneficial for the promotion of rights and interests of the general public. Antitrust
law, which also forms an important part of business law, keeps a check on market
concentration, monopolistic and oligopolistic companies along with the
dominance exerted by these companies in the market.

Government also facilitates business transactions wherever it is required in the

best interests of the company. The Government had invited bids for the Air India
divestment process, for which the Tata Group and Spice Jet promoters have
submitted bids. The Government has decided to offer hundred percent stake in
the debt-ridden state-run airline this time. This has been done after Air India had
failed to attract any bidder when the government had offered a 76 percent stake
in the former three years ago.14

1.7 CORPORATE RESTRUCTURING UNDER

BUSINESS LAW
Corporate restructuring also forms an essential part of the business development.
Corporate restructuring is a process whereby a firm looks to enhance its
shareholder value. It encompasses a broad range of transactions within its ambit,
including within its purview, changing its capital structure through the infusion
of high levels of debt to selling-off business lines or making acquisitions by
taking over corporations and making internal changes in the organization of the
firm. It is an absolute necessity for a company’s basic survival or sustenance in
the corporate sector to combat multiple competitors in the market looking to
dominate15. There are numerous ways by which a company may look to restructure
its business – viz., merger and amalgamation, merger through absorption, merger
through consolidation, acquisition, takeovers, divestiture, demerger, joint venture,
and buyback of securities, to name a few. There can exist multiple reasons for a
company to opt for internal or external restructuring such as, to focus on core
competency, for hiving-off assets, eliminating competition, achieving economies
of scope and economies of scale, gaining access to R&D and technology
knowhow, synergistic effects, diversification and enhancing public perception.
These different forms of restructuring are also supervised by different branches
of business law, such as Companies Act, FEMA, Taxation laws, SEBI Act to
name a few.

One recent example of a company engaging in restructuring, in the form of

acquisition as a means to expand could be the case of Ed-tech giant Byju’s,
which is looking to achieve success in K-12 (Kindergarten to 12th standard) online
education. Byju’s has already engaged in multiple acquisitions including medical
coaching Institute Aakash, Epic games, Great Learning, Scholr, Gradeup, to name
a few spending close to $2 billion for the same in this year. Byju’s has recently
made its ninth acquisition of the year when it acquired Tynker, a silicon-valley
based coding platform for children, for an estimated amount of $100 million, 15
Overview of Business Law also its third acquisition of a US-based company. These slew of acquisitions by
the company have been made with a view to obtain a public listing in the US.
The phenomenon of M&A is governed by legislations such as, Companies Act,
SEBI Act and its Substantial Acquisition of Shares and Takeover (SAST)
regulations among others.16

Most of the current dialogues about corporate governance can also be attributed
to discussing a corporation’s existence and for whose interests the corporate
exists and ultimately serves. Most commonly, the obvious answer is the
maximization of wealth for the shareholders of a company. The principle of
shareholder wealth focuses on the aspect of cash flows that may not be immediate
profit-generating and more of a future outcome. A company aims to amplify the
residual profits that remain after all the incidental costs are reduced. Profit
generation may not be the only aim of a company, but it may prove to be a
significant reason. From a shareholder perspective, in a competitive and
flourishing market, anything a company does to enhance share prices is a plus.
Moreover, whenever a shareholder does any activities, such as selling, buying,
or retaining their shares, it adds to their value.

1.8 SOURCES OF BUSINESS LAW

There are many sources from which the business law evolves. Some of these
main sources are:

i) Constitution:
The text of the Constitution along with its interpretation by the Supreme
Court from time to time, is considered as the supreme law of the land. All
laws and authority flowing from and traceable to the Constitution are
recognised as lawful power. The Indian Constitution establishes the
fundamental principles and rules by which the individual States are governed.
The term constitutional law refers to the general limits and powers of the
Central and State governments as stated in written constitutions. The Indian
Constitution is the supreme law of the land, and all the laws of the country
have their foundation in the Indian Constitution.

The Indian Constitution was drafted with certain objectives that were latent
in the text and provided directions to the State to achieve a social order for
the upliftment and welfare of the people. Even otherwise, post the 42nd
amendment, the Preamble of the Constitution was incorporated with the
terms “Socialist” and “Secular”, which strengthened the objective to promote
social welfare. Article 38 places the responsibility on the State to strive to
promote the welfare of the people by achieving a social order, while Article
39 provides for a few principles of policy to be observed by the State. Article
38 and 39, though having been placed in part IV of the Constitution as
Directive Principles of State Policy, and cannot be enforced in a Court of
Law, prove extremely significant laying down directions for good governance
of a State. Especially, it directs the State to frame policies that ensure that
the ownership and control of the material resources are adequately distributed,
and that the operation of the economic system must not lead to a concentration
of wealth to the common detriment. For instance, the Government of India
ordered the formation of a committee (Mahalanobis Committee) to assess
the income distribution in the society due to the rising monopolistic and
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 restrictive trade practices that were being observed in the Country. This led Introduction to Business Law
to the formation of the Monopolies Inquiry Committee and the report
submitted paved the way for the Monopolies and Restrictive Trade
commission Act (MRTP Act). This way, the Constitution of India, specifically
Article 39 sowed the seeds for the genesis of competition laws in India.

Article 19 (1) (g) of the Constitution guarantees that all citizens shall have
the right to practice any profession, or to carry on occupation, trade or
business. The right to carry on a profession, trade or business is not absolute.
Reasonable restrictions can be imposed by the state in the exercise of such
right. Part XIII of the Constitution deals with Trade, Commerce and
Intercourse within the territory of India. Article 301 provides that subject to
the other provisions of this Part, trade, commerce and intercourse throughout
the territory of India shall be free. Article 302 gives power to the Parliament
to impose restrictions. It says that the Parliament may by law impose such
restrictions on the freedom of trade, commerce or intercourse between one
State and another or within any part of the territory of India as may be required
in the public interest.

ii) Statutes:
A Statute can be defined as an act of the legislature in written form.
“Legislative actions, called statutes, are another important source of law.
The assortment of rules and regulations put forth by Legislatures is what we
call statutory law.”17 The Parliament and the State Legislatures have been
conferred the primary responsibility to enact laws as per the requirements of
the Union and the State respectively. “Legislation is the common source of
law. Both Parliament and State assemblies have enacted a number of
legislations that cover various aspects of business.”18

The act of creating laws, also known as legislating, cannot solely be

performed by the Parliament, due to the enormous number of legislations
required to run a State. The act of legislations can be delegated to subordinate
authorities such as executive bodies and individuals, by providing the
necessary guidelines, policies and rules that must be resorted to while laying
down the law. This area of legislations is also known as delegated or
subordinate legislation. The Legislature has come up with various laws to
counter the issues cropping up in the business administration in our country.

iii) Cases:
Case laws play an important role in shaping the law and bringing out its
relevance as per the prevailing conditions in the society. The interpretation
offered by the judges in the form of ratio decidendi aids in clarifying the
nuances of the law. Judicial decisions, in the form of precedents, are one of
the most important sources of law. Case laws, Constitution, legislatures,
and administrative agencies encourage certain behavior and prevent other
actions. But the boundaries of these laws are seldom self-explanatory.
Consequently, law must be interpreted. Case law is the collection of legal
interpretations made by judges. An alternative name for case law is common
law as common law is a judge made law. Interpretations provided by courts
in cases are law unless they are revoked later by new statutory law. Case law
is especially significant for businesses because a modern business often
operates in multiple legal jurisdictions. Because statutory laws are subject
17
Overview of Business Law to interpretation, one court may have interpreted laws one way at one business
location, and a second court may interpret a similarly worded statute
differently at a second business location. Courts issue judicial decisions that
often include interpretations of statutes and administrative regulations. These
decisions contain the reasoning the courts use to arrive at their decisions.
The reasoning depends heavily on precedent, the use of past decisions to
guide future decisions. An earlier decision in a similar fact pattern is a
precedent that guides later decisions, thereby providing greater stability and
predictability to the law.”19

iv) Custom:
Custom is one of the most important sources of law. It is possible to detect
two basic elements in the make-up of the custom - material facts, which is
the actual behavior of states founded upon the performance of the state
activities and practices; psychological element, which is the belief by the
state that behaved in a certain way that it was a legal obligation to act that
way. There are a number of factors concerning the nature of a particular
practice – Duration, repetition, consistency and generality. “A substantial
part of business law is customary, notwithstanding advances made in science
and technology. This is true both in developed and developing countries. A
custom, when accepted by courts and incorporated in judicial interpretations,
becomes a law. Many of the business customs or usages have already been
adopted and legalized. The Indian Contract Act provides that nothing therein
contained, “shall affect any usage or custom of trade.” Similarly, the
Negotiable Instruments Act provides that nothing there-in contained “shall
affect any local usage relating to instruments in an oriental language.”20

v) Treaties:
Treaties are a source of international business law. They are one of the sources
that have been mentioned under Article 38 of the Statute of the International
Court of Justice. Treaties are obligatory in nature and are founded upon the
customary principle that agreements are binding upon the parties and must
be performed in good faith. For many writers, treaties constitute most
important source as they require the express consent of the contracting states,
they are thus considered superior to custom. The consent to a treaty can be
signified by signature, exchange of instruments, ratification or accession by
the concerned countries. “The purpose of international laws is to permit
countries as much authority as possible over their own international business
affairs, while maximizing economic benefits of trade and working
relationships with other nations. Since many countries have historically
allowed governance by international agreements when conducting global
business, there exists an evolving body of international laws that facilitate
global trade and commerce.”21 “A treaty is similar to a contract in two
important ways. Both treaties and contracts are attempts by parties to
determine rights and obligations among themselves. In addition, when a
party fails to obey a treaty or an international contract, international law
imposes liability on that party.”22 Treaties can be multilateral – signed
amongst many countries, and bilateral – existing between two countries.

vi) Government Policies:

The legal power to make laws comes to the government from the Constitution.
18 Laws are framed according to the policies of the government. One can
 understand the focus of any government through its policies. For example, Introduction to Business Law
when the focus is to promote ease of doing business, the government
accordingly brought new legislations and regulated to remove bottlenecks
which had increased time consumed in contracts enforcement. Similarly,
the economic reforms undertaken, provision of easy financing for MSME
sector or women entrepreneurs, bringing new polices like e-commerce policy,
etc., are examples of government intervention for regulating the business
through policies. Laws are made according to the policies.

1.9 SUMMARY
Understanding the basics of business law are extremely important for the students
of business management stream to get a firm grasp on the concepts and gaining
deeper knowledge of the subject. This Unit focuses on defining the meaning of
business, the scope and significance of business law in the current economic
scenario, and to explain the different sources of law which contributed in the
evolution of business law.

A business can be defined as an enterprise or organization involved in an industrial,

mercantile or commercial activity. A business entity may be brought forth for a
profit purpose or it can serve non-profit purposes supporting a charitable or a
social cause. A business may also be referred to the activities of an individual or
a group of individuals engaged in the sale of goods and provision of services
with a profit motive.

Business law is that branch of the legal system which promotes an orderly
treatment of business affairs, facilitates the regulation of commercial activities
in accordance with established practices of law, and provides for settlement of
disputes in an amicable manner. It constitutes that part of the legal system which
is most fundamental to national wealth creation. It also specifies the rules and
the conduct that needs to be adhered to, for the creation of successful business
relationships among the government, business entities and the public, and business
enterprises inter se. Business law also aids in establishing the environment needed
for responsible and peaceful business dealings not just amongst the different
enterprises but also for safeguarding the rights of the employees. Business law
also requires understanding and firm grounding of multiple substantive areas of
law.

There are many sources from which the business law evolves. Some of these
main sources are: Constitution, Statutes, Cases, Custom, Treaties, and Government
Policies.

1.9 SELF ASSESSMENT QUESTIONS

1) What do you understand by the term “Business”? Elaborate.
2) What is the significance of business law in governing the functioning of the
business enterprises and companies in the society?
3) Explain out the different sources of business law and their significance in
the growth of business law.
4) Briefly explain the meaning of the term “corporate restructuring”.
19
Overview of Business Law 5) Which Article in the Indian Constitution promotes the idea of framing policies
to ensure that the operation of the economic system does not result in the
concentration of wealth in the society?

1.10 FURTHER READINGS/REFERENCES

Weblinks:
1. https://www.mca.gov.in/content/mca/global/en/home.html
2. https://www.sebi.gov.in/
3. https://www.cci.gov.in/
4. https://legislative.gov.in/sites/default/files/COI_1.pdf
References:
1
Reed, Pagnattaro, Cahoy, Shedd and Morehead, The Legal and Regulatory
Environment of Business, 16th edition, Part 1, Chapter 1, p.7, McGraw Hill
2
Ibid, p. 6
3
AVTAR SINGH, INTRODUCTION TO JURISPRUDENCE, CHAPTER V, KINDS OF LAW, 5TH
EDITION, LEXISNEXIS, 2020
4
Reed, Pagnattaro, Cahoy, Shedd and Morehead, The Legal and Regulatory
Environment of Business, 16th edition, Part 1, Chapter 1, p.7, McGraw Hill
5
Thomas Carothers, Director, Democracy and Rule of Law Project, Carnagie
Endowment for International Peace.
6
REED, PAGNATTARO, CAHOY, SHEDD AND MOREHEAD, THE LEGAL AND REGULATORY
ENVIRONMENT OF BUSINESS, 16TH EDITION, PART 1, CHAPTER 1, P.9, MCGRAW HILL
7
Ibid, p. 10
8
Aswathappa K. and Reddy G. Sudarsana, BUSINESS REGULATIONS 1
(Himalaya Publishing House 2015)
9
BUSINESS ENVIRONMENT AND LAW 3 (The Institute of Company
Secretaries of India 2017)
10
Kubasek Nancy et. al., DYNAMIC BUSINESS LAW: THE ESSENTIALS 3
(McGraw Hill Education 2016)
11
Supra note 1, at 3
12
Understanding The Importance of International Business Law, https://
elforeingoffice.com/understanding-the-importance-of-international-business-
law/ (Last visited on May 11, 2021)
13
Joseph L. Frascona, Business Law Is Business Law, 15 Am. Bus. L.J. 7, 8
(1977-1978).
14
Nikunj Ohri & Aneesh Phadnis, Govt may select winner in Air India’s
disinvestment in about three weeks, (Sept., 17, 2021) https://www.business-
standard.com/article/companies/govt-may-select-winner-in-air-india-s-
disinvestment-in-about-three-weeks-121091700029_1.html,
15
Kenneth Lehn, Public Policy Towards Corporate Restructuring, 25(2) Business
Economics. 26, 26-31 (1990)
16
Chandra R Srikanth, Byju’s buys US-based coding platform Tynker, its 9th
acquisition this year, (Sept., 16, 2021) https://www.moneycontrol.com/news/
20 business/startup/byjus-buys-us-based-coding-platform-tynker-its-9th-
 acquisition-this-year-7474051.html Introduction to Business Law
17
Supra note 3, at 4
18
Supra note 1, at 6
19
Supra note 3, at 5
20
Supra note 1, at 6
21
Valbrune Miranda and Assis Renee De, BUSINESS LAW 1 ESSENTIALS
(OpenStax 2019), https://openstax.org/books/business-law-i-essentials/pages/
1-introduction (Last Visited on 12/05/2021)
22
Supra note 3, at 7

21