Lecture notes Principles of Business law

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STUDY MANUAL Foundation level Fundamentals of Business Law 2012 Chapter 1 Sources of law and types of legal system Learning objectives Reference Sources of law LO1 Identify the sources of different types of law LO1.1 Identify features of the different legal systems LO1.2 common law LO1.2.1 civil law LO1.2.2 Sharia law LO1.2.3 Topic list 1 The concepts of national and international law 2 Legal systems 3 Criminal law 4 Civil law 5 Common law systems 6 Civil law systems 7 Sharia law systems 1 Introduction In this chapter we will be looking at the overall context in which national and international law exists. There is no all-encompassing international law as such; instead there are national legal systems which have varying sources of law (of three kinds: common law, civil law or Sharia law). These may be contradictory (creating the problem of conflict of laws), therefore some model international laws and conventions have been put together by international organisations such as the United Nations to help resolve the problem. In these ways the relations between sovereign states, and between individuals in different states, are regulated. The kind of legal system used by a sovereign state depends on historical and cultural factors, and to some extent on economic and political factors. Whatever the legal system, we will be looking in particular at: principles of law, sources of law and the role of judges. Conflict of laws Public Private Civil law Criminal law National law International law Type of law Barriers to trade Sources of law and types of legal system Influences on legal Legal systems systems Common law Civil law Sharia law Economic Cultural Political 2 Fundamentals of Business Law Before you begin If you have studied these topics before, you may wonder whether you need to study this chapter in full. If this is the case, please attempt the questions below, which cover some of the key subjects in the area. If you answer all these questions successfully, you probably have a reasonably detailed knowledge of the subject matter, but you should still skim through the chapter to ensure that you are familiar with everything covered. There are references in brackets indicating where in the chapter you can find the information, and you will also find a commentary at the back of the Study Manual. 1 Broadly, what is a legal system? (Section 2.1) 2 What are the main differences between the common law system and the civil law system? (Section 1.1, Section 5, Section 6) 3 Explain federalism. (Section 1.5) 4 What is the separation of powers? (Section 1.8.2) 5 Define public and private international law. (Section 2.4) 6 Explain the concept of ‘conflict of laws’. (Section 2.6) 7 Define criminal law and civil law. (Section 3, Section 4) 8 What is equity? (Section 5.2.2) 9 Define the core principle of Sharia law. (Section 7.1) 10 Explain the role of judges in the Sharia legal system. (Section 7.3) 3 1: Sources of law and types of legal system 1 The concepts of national and international law Section overview • There are various model international laws that regulate the relationship of sovereign states and their rights and duties with respect to each other. Most law, however, consists of the national laws of sovereign states which nevertheless follow certain common methodologies. Exam comment Exam questions on the topics in this chapter are most likely aimed at testing your knowledge and understanding of distinctions, and so are unlikely to contain a scenario element. 1.1 Model international laws and exemplar national laws LO Although 'law' is a global concept, it is usually organised on national lines, and there is only a limited 1.1 amount of truly international law. In this Study Manual we shall consider some national laws that have been examples for various countries developing their legal systems, namely Australia and the United Kingdom, both common law countries, France, a civil law country, and Pakistan and Iran, both Sharia law countries. These may therefore indicate the practice of law in many countries worldwide. We shall also examine model laws and conventions that have been developed by international bodies and which have been adopted by various countries so that nations may interact with one another more easily. First of all we shall look in general terms at how nations have ordered their own legal systems. We shall give examples of a number of nations, but we shall by no means be comprehensive in world terms. Exam comment If you are studying in a country to which we do not make reference, find out the origins of your nation's legal system so that you can compare it to the ones we discuss here. Remember that you are not going to be examined on any one nation's legal system, rather you will be examined on principles of law that have international significance. Section overview • There are three key legal systems or underlying methodologies of law operating in the world that have been adopted by different countries for different reasons: common law, civil law and Sharia law. 1.2 Common law LOs Common law is a historic system of laws formulated in England between 1066 and 1400. The 1.1 terminology associated with this system can be confusing. You will find that the legal system is named after 1.2.1 one distinctive source of law within itself, but that the system comprises several sources of law. Common law systems developed in England, but have been exported to many former British colonies, including Australia, Singapore, Malaysia, India and the United States of America. 1.3 Civil law Civil law systems originated in continental Europe and have developed from the Ancient Roman legal LOs 1.1 system. Like English common law, civil law systems were widely exported during the colonial era and so are 1.2.2 equally prominent in other world areas, for example Japan, China, Indonesia and Brazil. Codes of law are a common feature of civil law, however they are not a compulsory feature. Civil law systems are much 4 Fundamentals of Business Law younger than common law ones, although they come from equally old legal heritages. We shall use France as an exemplar of these systems. Increasingly in modern times, civil and common law systems share common elements, but historic differences have a conceptual impact. 1.4 Sharia law LOs Sharia law is significantly different in both purpose and practice from common and civil law systems 1.1 as it is bound up in the religion of Islam. It has influence on the interpretation of law in many Islamic 1.2.3 countries worldwide, and has been adopted as a comprehensive legal system in some. We shall look at two exemplar countries where such adoption has taken place: Pakistan and Iran. 1.5 Legal pluralism In fact most countries have multiple legal systems: • Australia has a uniform common law system based on English common law, but of primary importance is the Australian Constitution. Australia is a federation of previously autonomous states and territories combined under the Commonwealth of Australia. The United States of America (the US) is another example of a federation of states. In Australia, the federation of states means there are two co-existing systems of government in each state or territory and the Australian Constitution clearly outlines the division of powers between the state/territory governments and the federal (also known as the Commonwealth) government. Further, there are federal statutes enacted by the Parliament of Australia which apply to the whole of Australia, and laws enacted by the self-governing Parliaments of the Australian states and territories. These are separate jurisdictions with their own systems of courts and parliaments; the legal systems in the self- governing states and territories influence each other, but do not bind each other. • In India legal pluralism takes the form of different laws governing different groups within the country; there are special Muslim courts that address concerns in Muslim communities by following Sharia law principles. Secular courts (based on English common law) deal with the issues of other communities. • Malaysia operates a dual legal system similar to India and is a federation of various states, like Australia. There are separate state Sharia court systems (Syariah courts) which have jurisdiction over all Muslims and hear all matters pertaining to Islamic law. These run alongside the federal common law court system. • Canada has multiple legal systems within one geographic area, namely a common law system in the majority of the country, but a civil law system in Quebec. • In South Africa there is a mix of a civil law system (e.g. for the law of tort), a common law system (e.g. for the law of contract), and African customary law. Though South Africa has elements of a civil law system it does not have codified law. 1.6 The effects of economic and political contexts on legal systems Business activity takes place within a particular economic, political and legal context, and each of these areas will affect each other to an extent. The economic and political context of each nation is not the same, although many groups of nations are similar, and therefore nations' legal systems vary considerably from one another. The differences between nations in terms of economics, politics and, most importantly for this syllabus, legal context, can present problems for international trade. We shall cover some of the difficulties presented and the solutions created by various international bodies, particularly the United Nations (UN). 5 1: Sources of law and types of legal system 1.7 Economic systems Section overview • Economics can be described as the ways in which society decides what to produce, how to produce it and who to produce it for. There are three basic kinds of economic system – planned, market and mixed economies. Each individual is involved in economics, in 'providing' by salary or labour for themselves and their family. On a wider scale, governments are involved in economics for the whole country. There are various types of economic system that might exist in a country: planned, market and mixed. 1.7.1 Planned economy A planned economy exists where the decisions and choices about resource allocation are made by the government. Money values are attached to resources and to goods and services, but it is the government that decides what resources should be used, how much should be paid for them, what goods should be made and what their price should be. Although the individual might be allowed to own some personal possessions, most kinds of wealth would not be available for ownership by individuals. 1.7.2 Market economy A market economy exists where the decisions and choices about resource allocation are left to market forces of supply and demand, and the workings of the price mechanism. In the market economy, most wealth is owned by individuals, with a minimum being collectively owned. 1.7.3 Mixed economy In a mixed economy, decisions and choices are made partly by free market forces of supply and demand, and partly by government decisions. Economic wealth is divided between the private sector and the public sector. In practice, all modern national economies are mixed economies, although with differing proportions of free market and centrally planned decision-making from one country to the next. 1.8 Political systems: separation of powers Section overview • Political systems affect legal systems. There may be a democracy or a dictatorship, which generally influences the nature of the rule of law in the nation. In democratic systems there is usually separation of powers between the head of state, the executive, the legislature and the judiciary. In dictatorial systems some or all of these powers may be combined so that one person or party has total power. We have already referred to the role of government in national economics. Governments, as we shall see, are also heavily involved in law-making. Politics, the process of how nations are governed and by whom, is clearly relevant to how law is developed. Law-making can be a democratic process, where law is developed by citizens, or a more dictatorial process, where law is developed by a government put in place by another method, for example a military coup. What process is in force in a nation also affects two very important factors: the rule of law, and the separation of powers. 1.8.1 The rule of law How and what laws are made and enforced in a country depends to a large extent on the emphasis that the country's political system places on the nature of the rule of law. This is the degree to which individual behaviour is regulated by law and to distinguish the law from the arbitrariness of the rule of man. In dictatorial systems there tends to be an emphasis on state or government regulation and control of resources. This means individual freedom is heavily subject to the rule of state-made law, and the behaviour of individuals is to a large extent dictated by the state by means of law. 6 Fundamentals of Business Law In more democratic or laissez-faire political systems, the emphasis is on the law being a means of sorting problems out where they arise. Provided individuals act within the letter and spirit of the law, they are free to choose for themselves how they regulate their lives and how they relate to other people and groups. 1.8.2 Separation of powers The concept of the 'rule of law' is closely bound up with that of the separation of powers. Most clearly democratic nations in the world have power held in different places, so that no part of the political process holds too much influence. They usually have: • An elected legislature, a body which decides on what laws should be passed to ensure that the people's wishes – for example, freedom or wealth – are met. • An elected executive, or government body, which makes the decisions that put the laws into action. • A judiciary, which may or may not be elected, that rules on any disputes about laws, whether between the government and the people (criminal law) or between individuals (civil law). In some nations the legislature, the executive and the judiciary are completely separate, therefore each is accountable to, and can operate as a 'check and balance' on, the others. In most states however there is a complex relationship between the three sets of powers. This means that a balance is struck between control and accountability, on the one hand, and actually 'getting things done' on the other. The other separation of powers that frequently exists is where the person who is head of the executive is not the same person as the head of state. In most nations the two persons are separate. Australia is an example of a constitutional monarchy tied to the United Kingdom. The head of state is the reigning monarch of the United Kingdom as represented by the Australian executive-appointed Governor- General, while the head of the executive is the Prime Minister. Malaysia is also a constitutional monarchy, and the head of state is an elected monarch selected by, and from, the nine Royal rulers of nine Malay states. The term of office is five years and it is largely a ceremonial role. The head of the executive is the Prime Minister. Malaysia is one of the few elected monarchies in the world. In comparison, the US operates a presidential republic where the President is both head of state and head of the executive, while India is a parliamentary republic where the President is head of state and the Prime Minister head of the executive. 2 Legal systems Section overview • 'Legal systems' can be used in two senses: to describe the body of laws and mechanisms for their enforcement in a country, and to describe the underlying nature of a country's law. 2.1 What is a legal system? A legal system in a country embodies both the laws of that country and the mechanisms the country has in place for regulating and enforcing those laws. Therefore a legal system incorporates: • The country's laws. • The legislature: the law-making body. • The judiciary (or judicature): the body that sits in judgment on disputes about laws. • The prosecution system: the system that seeks to ensure the criminal law is enforced and that people who break the law are prosecuted. • The police: the body that seeks to enforce the law and to protect the public. • The prison system: the system that ensures that people who have broken the criminal law are detained in accordance with their sentence. The term 'legal system' is also used to describe the underlying nature of the country's laws. It is in this sense that we shall be using the term later in this chapter. 7 1: Sources of law and types of legal system Before embarking on the rest of this Study Manual and sitting the exam, it is vital that you have an understanding of what international law is, and how the various aspects of the learning objectives fit together. In order to do so, it will be necessary first to consider what law itself is, and to understand some key terms taken from the Oxford Dictionary of Law. 2.2 What is law? Section overview • Law is the enforceable body of rules that govern any society. Positive law is the body of law imposed by the state. Law is a body of rules that enables society to operate. As such, it does not have to be written down, LO 1.1 but can be simply rules that everyone in the society knows. Given the sheer size of the world, then, law has not historically been seen in global terms, but rather in manageable 'societies'. Both far back in human history and today in some societies, law has been seen in terms of families and tribes. More recently in much of the world, it has been seen in terms of nation states or sovereign states. Many states have written constitutions outlining citizens' basic legal rights, and a body of national law, or rules, which governs how the state operates. This is known as positive law. 2.3 Types of law Section overview • The main distinctions to be made between types of law are between national and international law, and between criminal and civil law. LO Each sovereign state has a set of laws which regulate how entities relate to each other and to the state, in 1.1 their own country, known as national law. This is distinct from international law, which reflects the interrelationship of sovereign states, and which attempts to resolve the problem of conflict of national laws. Within each state, and increasingly across national boundaries, there is also a distinction between civil law and criminal law. We shall come back to this shortly. 2.4 International law Section overview • Public international law is the system of law regulating the interrelationship of sovereign states and their rights and duties with regard to one another. Private international law regulates cases where there is a conflict of national laws. Sources of international law are treaties, custom and general legal principles. LO In addition to the existence of positive national law, sovereign states, individuals and corporations interact 1.1 with one another globally and that has led to conflict of laws. Conflict of laws can occur when there is interaction between sovereign states, organisations, or individuals from different jurisdictions. While nations have interacted happily with one another over many years, improved communication systems resulting in increased international trade and other relationships has prompted moves by various bodies to develop international legal systems and understandings with each other. Public international law is the system of law regulating the relations between sovereign states, and the rights and duties they have with regard to each other. It deals with matters such as: • The formation and recognition of states. • Acquisitions of territory. • War. • The law of the sea and of space. 8 Fundamentals of Business Law • Treaties. • Treatment of aliens – a person in a country who is not a citizen of that country. • Human rights. • International crimes and international judicial settlement of disputes. Certain international organisations, such as the United Nations, companies and sometimes individuals for example, in the area of human rights, may have rights or duties under international law. Private international law regulates cases which involve the national laws of two or more states where a different result will ensue depending on which state's law is applied. To address our Fundamentals of Business Law learning objectives we are concerned with situations where individuals or corporations interact or act on the basis of international commerce, that is private international law. There are various sources of international law: • Conventions and treaties, for example, double taxation agreements. • International custom, for example, aspects of international trade law. • The general principles of law recognised by civilised nations. We have seen that economics, politics and law all affect international trade. Given the differences between economic and political systems in nations, there are therefore significant barriers to free international trade. 2.5 Barriers to free international trade Section overview • Barriers to free trade exist to protect markets from outside competition. They include: tariffs or customs duties; import quotas; embargoes; hidden subsidies for exporters and domestic producers; import restrictions, as well as the barriers created by differences in laws. In practice many barriers to free trade exist because the governments of sovereign states try to protect home industries against foreign competition. Protectionism can be practised by a government in several ways. 2.5.1 Tariffs or customs duties Tariffs or customs duties are taxes on imported goods. The effect of a tariff is to raise the price paid for the imported goods by domestic consumers, while leaving the price paid to foreign producers the same, or even lower. The difference is transferred to the government sector. 2.5.2 Import quotas Import quotas are restrictions on the quantity of a product that is allowed to be imported into the country. The quota has a similar effect on consumer welfare to that of import tariffs, but the overall effects are more complicated: • Both domestic and foreign suppliers enjoy a higher price, while consumers buy less at the higher price. • Domestic producers supply more. • There are fewer imports in volume. • The government collects no revenue. 2.5.3 Embargo An embargo on imports from one particular country is a total ban, which is effectively a zero quota. 9 1: Sources of law and types of legal system 2.5.4 Hidden export subsidies and import restrictions There has been an enormous range of government subsidies and assistance for exports and deterrents against imports. Some examples are given below: • For exports – export credit guarantees, insurance against bad debts for overseas sales; financial help, such as government grants to the aircraft or shipbuilding industry; and general state assistance. • For imports – complex import regulations and documentation, or special safety standards demanded from imported goods. 2.5.5 Differences in law In addition to the economic problems above, there are legal barriers to trading between nations. For instance, take a moment to try and define what a contract is. A contract is something defined by the law, and so, as the law varies from country to country, it may be one thing in one country and a different thing in the other. It may have different legal consequences in different parts of the world. For example, the following definition of a contract could be given. Definition A contract is a legally binding agreement. However, what makes an agreement legally binding is likely to vary from country to country. In one country, a legally binding agreement may be formed by two people making an agreement and shaking hands on it. In another, the agreement may have to be committed to writing and evidenced by witnesses. In some countries, it may be the case that an agreement does not become legally binding unless other conditions are fulfilled. For example, in common law systems, there is a legal doctrine known as consideration. Under this doctrine parties have to exchange promises, acts or forfeitures of value to create a contract. Such a legal doctrine is unknown in civil law systems. This raises a problem. People wanting to engage in international trade, say person A (from country Z) wants to trade with person B (from country Y). If the relationship breaks down, the following issues arise: • A could claim that under Z's law, no contract was ever formed. • B could claim that under Y's law, no contract was ever formed. • Both parties could claim that the contract is not legally enforceable in their country. • The remedies available for broken contracts in the different countries may differ. • The parties might disagree on which country to seek legal resolution in. • They might seek legal resolutions in their countries and be unable to enforce them. The list above summarises some of the issues arising from conflict of laws. 2.6 Conflict of laws Section overview • Conflict of laws is where parties from different nations have a legal dispute, and it is necessary to determine which national law governs the validity of the legal situation. 2.6.1 Example: Conflict of laws A contract is made in Australia, but the contract is to be fulfilled in Japan. The relationship between the parties breaks down and legal resolution is sought. But should this be under Australian law or Japanese law? 2.6.2 International conventions, treaties and model laws When problems such as the above arise, international co-operation is required to ensure that solutions can be found. Otherwise, the parties may be able to avoid each other and any solutions sought may not be enforceable. 10 Fundamentals of Business Law Countries have sought solutions to these problems by coming to agreements with each other and by enacting various conventions and treaties that regulate international practice. UN Conventions are binding under international law on states and other entities. For instance, the Rome Convention 1980 set out policy on what law should govern the validity of international contracts. It sets down the general principle that if the parties have a written contract and have expressed preference for a particular law in that written contract, that law should govern the contract. This is known as choice of laws. The New York Convention 1958 set out the agreement of countries relating to referring cases to arbitration. However, the conventions have not necessarily solved all the problems presented by conflict of laws completely. The United Nations has also developed Model Laws that countries may adopt into their own national laws. These make practices uniform on an international basis and iron out any remaining problems. Later in the Study Manual we shall look briefly at the UN's Model Laws on arbitration and insolvency. We shall also examine the UN Convention on Contracts for the International Sale of Goods (UNCISG). The best way to access all UN conventions, treaties and bodies such as the International Court of Justice (ICJ) as discussed in Chapter 3 is to go to the UN parent website at www.un.org and select International Law. From there you will see the headings International Courts and Tribunals and Legal Resources and Training. You will find all treaties and conventions under Legal Resources and Training. 3 Criminal law Section overview • A crime is conduct prohibited by the law. It is usually punished by the State, which prosecutes the case, by means of fines or imprisonment. There is usually a heavy burden of proof. In a criminal case, the State is the prosecutor because it is the community as a whole which suffers as a result of the law being broken. Persons guilty of crime may be punished by fines payable to the State or imprisonment. In some circumstances the court may make a compensation order, by which the criminal must pay some compensation to the victim or their family. In a criminal trial, the burden of proof to convict the accused rests with the prosecution, which must prove its case beyond reasonable doubt. In the United States, reported cases are usually cited with the prosecutor’s name first then that of the accused, for example The State v Smith or, in Australia for instance, R v Reid. In this instance, ‘R’ denotes Regina or Rex meaning Queen or King, the head of state, acting as the prosecutor. What is actually considered a crime will vary from jurisdiction to jurisdiction. Other differences include the types of punishments delivered to guilty parties, the degree of evidence required to convict someone of an offence, and the extent to which the court may order the guilty criminal to compensate the victim. In resolving criminal issues, the outcome is usually punishment of the wrongdoer, although a compensation order may be made in some circumstances. Some legal systems based on Sharia or Islamic law contain the concept of qisas, or retribution. This is covered in more detail shortly. In certain cases these give a legal right to inflict on the wrongdoer the same hurt as he has perpetrated on the victim, or to accept diyat, or compensation, instead. This provides some compensation to the victim of criminal activity, who is not necessarily considered in common and civil law systems. In these systems, the focus of the law is mainly to punish the wrongdoer, so victims might have to undertake a personal action under the civil law to receive significant compensation. 11 1: Sources of law and types of legal system 4 Civil law Section overview • Civil law exists to regulate disputes about the rights and obligations of persons when dealing with each other. The State is not party to a civil case, and there is a lighter burden of proof. In civil proceedings, the case must usually be proven on the balance of probability, to convince the court that it is more probable than not that the assertions are true. This is a lighter burden of proof than in criminal law cases, which is beyond reasonable doubt. Terminology in civil cases is different from that in criminal cases. The plaintiff (claimant) sues the defendant. A civil case would therefore be referred to as, for example, Smith v Megacorp Co. One of the most important areas of civil liability for business, and accountants in particular, is the law of trade and contract. We shall be discussing the international laws relating to trade in later chapters of this Study Manual. It is therefore important for you to understand the nature of civil law, as opposed to criminal law, as it is a type of law existing in all legal systems. 4.1 Distinction between criminal and civil cases It is not an act or event which creates the distinction between criminal and civil cases, but the legal consequences. A single event might give rise to criminal and civil proceedings. A broken leg caused to a pedestrian by a drunken driver is a single event which may give rise to: • A criminal case – prosecution by the State for the offence of driving with excess alcohol, and • A civil case – the pedestrian sues for compensation for pain and suffering. The two sorts of proceedings are usually easily distinguished because three vital factors are different: • The courts where the case is heard (explained further Chapter 3). • The procedures. • The terminology. In criminal cases the rules of evidence are usually very strict. For example, a confession will be carefully examined to see if any pressure was brought to bear upon the accused. An admission in a civil case will not usually be subjected to such scrutiny. Question 1: Criminal and civil law While on a sales trip, one of your employees is involved in a car accident. The other vehicle involved is damaged and it is alleged that your employee is to blame. What legal proceedings may arise as a result of this incident? (The answer is at the end of the chapter) 12 Fundamentals of Business Law 5 Common law systems Section overview • Common law forms the foundation of the law in many jurisdictions throughout the world. LO Common law systems derive from, and are named after, the law developed in England between 1.2.1 1066 AD and about 1400 AD. Although the law was developed in England, it has been exported globally as a result of the British Empire. It is the basis of the legal system of Australia, Singapore, Malaysia and the US. We shall use Australia, England, the US, Singapore and Malaysia as exemplar of the system throughout this section. You should note that England has been part of what is now the United Kingdom (UK) for over three hundred years. Some of England's legal system remains peculiar to itself within that kingdom, but many of the modern aspects are common to all the nations in the kingdom (England, Scotland, Northern Ireland and Wales), and you will find both England and the UK referred to in this Study Manual. 5.1 Principles of common law Section overview • Common law builds up over time, added to by the legislature (statutes are presumed to add to, not alter, existing law) and by precedent. In common law, principles of law do not become inoperative through the lapse of time. In other words, law does not become irrelevant and invalid just because it is old. This applies to all sources of the law. Also, new laws developed by the legislature are presumed not to alter, merely to add to, the existing law, unless they specifically state that they do. Another important principle of common law is the concept of precedent, which we shall look at in more detail below, when we discuss judge-made law, and in Chapter 2. Definitions A precedent is a previous court decision or case which another court is bound to follow by deciding a subsequent case in the same way. Hence the type of law is often known as case law. The doctrine of precedent means that a judge is bound to apply a decision from an earlier case to the facts of the case before them provided, among other conditions, that there is no material difference between the cases. 5.2 Sources of law in common law systems There are various sources of law in common law systems: • Common law (from which the legal system derived its name) – based on case law. • Equity – based on case law. • Statute. • Custom – still important in Australia where, since 1992, customary laws of indigenous people have been held to co-exist with mainstream common law. • Constitutional law –Australia has a significant additional source of law, the Australian Constitution. Malaysia and Singapore both have written constitutions which are primary sources of law, as does the US in the American Constitution. The UK does not have a written constitution. 13 1: Sources of law and types of legal system Case law is a significant difference between common law and civil law systems. We shall consider it later on in connection with the role of judges, and in detail in Chapter 2. 5.2.1 Common (case) law At the time of the Norman Conquest of England in 1066 there was no system of law common to the whole country. Rules of local custom were applied by local manorial courts. To improve the system, the King sent royal commissioners on tour to deal with crimes and civil disputes. At first, these commissioners applied the local customary law of the neighbourhood. On their return from circuit they sat in the royal (known as common law) courts in London to try cases there. In time the commissioners in their judicial capacity developed rules of law. These (known as common law) were selected from the differing local customs which they had encountered, and which they applied uniformly in all trials (before the King's courts) throughout the kingdom. There were a number of problems with the system of common law on its own: (i) Common law was often inflexible. Before he could bring an action, a claimant or plaintiff had to obtain a writ which was an order issued under the King's authority. Writs covered only a limited number of matters. If there was no appropriate writ form, an action could not be brought. (ii) Only a limited remedy, damages (compensation), was available. Common law could not stop a person doing something or compel them to do something. (iii) There was too much emphasis on procedure. A claimant or plaintiff might lose their case because of a minor technicality or wording. The system was open to bribery and corruption. 5.2.2 Equity As a result of these problems with the common law, a parallel system of complementary law was developed. Citizens who could not obtain redress for grievances in the King's common law courts petitioned the King to obtain relief by direct royal intervention. These petitions came before the King in Council and by custom were referred to the principal civil minister – the Chancellor. In dealing with each petition the Chancellor's concern was to establish the truth of the matter and then to impose a just solution without undue regard for technicalities or procedural points. Because the principles on which the Chancellor decided points were based on fair dealing between two individuals as equals, it became known as equity. The courts of equity developed legal principles which still underpin common law such as the concepts of a fiduciary relationship (discussed in Chapter 10 ) and unconscionable conduct. The system of equity was not a complete alternative to the common law. It was a method of adding to and improving on the common law. Both sources of law are now administered in the same courts and by the same personnel. Together, these two historic sources of law form case law which is law made by judges. 5.2.3 Statute Definition Statute law is made either by the legislature as primary legislation, or by some other body in exercise of law-making powers delegated by the legislature, known then as delegated or subordinate legislation. In common law systems statute is now the primary source of new law, but as stated above it does not automatically override common law. In Australia the emphasis is on making sure that the people who are most likely to use the statutes, namely administrative decision makers, can interpret what is meant. Conversely, UK tradition is to draft statutes in comprehensive detail to attempt to cover all eventualities that the statute is designed to cover. From time to time, the legislature may produce a codifying statute, which puts common law in an area on a statutory footing. In that respect, codifying statutes are similar to civil law codes, which we shall consider later. However, codification is not common in the either Australia or the UK for example, and many areas of law – for example, contract and property law – still largely derive from common law with equitable principles applied as well. 14 Fundamentals of Business Law 5.2.4 Constitutional law The Australian Constitution is made up of the Constitution of the Commonwealth of Australia from 1901, together with the Statute of Westminster Adoption Act of 1942 and the Australia Act of 1986. The High Court of Australia (which we shall refer to in Chapter 3) has the authority to interpret constitutional provisions. You can access it on the Internet, for example at www.australianpolitics.com/articles/constitution The American Constitution, mentioned earlier, is the ultimate source of law in the US. Any statute passed by the American Senate, by the federal government or in individual states may be challenged by a citizen on the grounds that it is unconstitutional. The American Constitution sets out the basic rights of US citizens and the systems of government for them. You can access it on the Internet, for example at www.usconstitution.net 5.3 Role of judges in common law systems Section overview • Judges play two roles in building up case law in common law systems – by setting and applying precedent and by interpreting statutes, via which they also perform the important function of judicial review. 5.3.1 Precedent in case law It is generally accepted that consistency is an important feature of a good decision-making process. Judges are required to treat similar cases in the same way. A judge's decision is expected to be consistent with previous decisions. It should provide an opinion which the parties, and others, can use to direct their future relationships as it creates law. This is the basis of the system of precedent, which we introduced above, and which we shall look at in more detail in Chapter 2. Question 2: Case law What do you think are the advantages of case law as a source of law in common law systems? (The answer is at the end of the chapter) 5.3.2 Statutory interpretation in case law When deciding cases based on statute law, judges will be required to interpret the statutes that the legislature has enacted. There are various models, rules and presumptions associated with the interpretation of statute, which we shall look at in Chapter 2. 5.3.3 Judicial review in common law systems Where judicial review is an aspect of a country’s constitution – as it is in many common law systems, including Australia and the US – it is possible for judges to review legislation or case law to establish whether it conflicts with the country’s constitution. A US citizen has the right to challenge law which appears to be unconstitutional. The role of determining whether created law conflicts with the Constitution falls to judges in the courts, notably the US Supreme Court. In Australia, the High Court of Australia has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and it interprets the Constitution of Australia. 15 1: Sources of law and types of legal system 6 Civil law systems Section overview • Civil law systems seek to ensure comprehensibility and certainty by means of codification via statutes and administrative regulations. In simple terms, this is so that common law and custom do not apply. Civil law developed in Continental Europe, during a period of revolutionary change and creation of new LO 1.2.2 nation states. It spread to other areas of the world during the era of European colonial expansion. We shall use France as exemplar. 6.1 Principles of civil law Two key principles in civil law are comprehensibility and certainty. This can be seen in the Codes that provide the hallmark of civil law, and the different role allocated to judges in the civil law system compared with the common law systems. 6.2 Codification in civil law Civil law tradition historically owes much to the law of the Roman Empire, and is sometimes given a date of origin as early as 450 BC. In more recent times, a key period in the development of civil law was the era of revolution in Western Europe in the late eighteenth and early nineteenth centuries. It was after these revolutions that emerging nations decided to codify their law, abolishing the mixture of common law and custom remaining from Roman times, and establish a national law. In France, the process of law-making can been seen in the period after the French Revolution in the years following 1789. The French Civil Code, the Code Napoleon, published in 1804 is the key example. France now has a large number of such codes of law. The German Civil Code was published in 1896. Where law is codified in civil law systems, it is generally codified so as to provide a comprehensive code of the enacted law in a certain area. Codes of law are a common feature of civil law, although they are not a compulsory feature. While France has the Code Napoleon other civil law countries, such as South Africa, do not have codified law. 6.3 Sources of civil law There are various sources of law in France: • The Constitution, • European Union (EU) law, • Statutes, • Administrative regulations, and • Custom (of limited importance, so we shall not consider this further). The key source of law is statute, much of which is codified. Administrative regulations are also codified. Statute law is usually drafted as general principles and in simple language as far as possible, so as to ensure that the law is accessible. This is in stark contrast to English statutes, which are complex and drafted to cover many eventualities. 16 Fundamentals of Business Law 6.4 The role of judges in civil law Section overview • In civil law systems, judges simply apply the law – they do not make law via precedent, although they may perform a judicial review to ensure that statutes and other parliamentary laws are in line with the constitution. The role of judges in a civil law system is significantly different in theory from the role of a common law judge. In France, there is a distinct division between those who draft the law and those who apply the law, judges being the latter. There is no such thing in France as judge-made law. While previous decisions of other judges will be persuasive to judges making decisions, they do not create precedent in the same way as in the common law system. 6.4.1 The Court of Cassation The top court of appeal in France is the Court of Cassation. Cassation comes from the French word meaning 'to quash'. When the Court of Cassation was originally formed, it was a government department set up to quash any court decisions where the legislators felt that the law had been incorrectly interpreted. The history of the Court of Cassation is therefore not as a court. Originally it was manned not by judges, but by legislators, whose role was to quash the original decision and return the case to the court system to be retried. In practice, the Court became a court of appeal, where the people determining that the law had been incorrectly interpreted also set out what the correct interpretation should have been, so that the case was not returned to the judicial system. In time, then, the Court of Cassation has been subsumed into the judicial system. 6.4.2 Statutory interpretation in civil law There is no general principle in French law on how judges should interpret statute. This is probably due to the historic feeling that judges should not interpret the law but merely apply it to the letter. However, some general principles of statutory interpretation have developed. Statutory interpretation 'Quand la loi est claire, il faut la Where the meaning of the law is clear, it must be followed. French suivre' judges will not extend or restrict the scope of a statute that is unambiguous. 'Quand elle est obscure, il faut Where the statute is obscure or ambiguous, one should construe it approfondir les dispositions in accordance with the spirit of it, rather than to the letter, in order pour en pénétrer l'esprit' to determine its legal meaning. 'Si l'on manque de loi, il faut If there is a gap in the law, judges must resort to custom and equity. consulter l'usage ou l'équité' However, as stated above, custom is only of limited application in France. There are also the following alternative methods of statutory interpretation: • Teleological method. This is where a judge seeks to identify the social purpose of the legislation and apply it in a manner that achieves it. • Historical method. This is where the judge looks at the intention of the legislator and then tries to envisage what the intention would be if the law was being drafted in modern times. The judge then applies that intention. 17 1: Sources of law and types of legal system 6.4.3 Judicial review in civil law Although in the civil law tradition judges do not have a key role interpreting statute, a system of judicial review has grown in certain civil law countries. This role is to comment on whether statute law is in accordance with the country's constitution. This is the case in Japan, where the Supreme Court has the power of judicial review. However, the Japanese Supreme Court is extremely conservative in exercising its powers and has overruled only eight statutes in over 50 years. In Germany separate constitutional courts have been set up for the purpose of judicial review. However, the judges in constitutional courts are not the same as in the normal court system. In other words, special judges are created to comment on whether legislation is constitutional. The specialist German courts are very active - over 600 statutes have been overruled in roughly 50 years. Question 3: Codification What is the difference between codification in a common law system and codification in a civil law system? (The answer is at the end of the chapter) 7 Sharia law systems Section overview • Sharia law is based on the religion of Islam. This means that the law extends into areas of belief and religious practice and that the law is God-given and so has wider significance than social order. The major difference between Sharia law and the other legal systems we have introduced in this chapter is LO 1.2.3 that Sharia law is explicitly based on, and connected with, the religion of Islam. We shall describe Sharia law in general terms, but also use Pakistan and Iran as exemplars of countries that have adopted Sharia. Sharia is 'a way to a watering place', in other words, a path to be followed. Sharia law is ordained by Allah as guidance for mankind. 7.1 Principle of Sharia law As can be seen above, the main principle of Sharia law is that it is the divine way ordained for man to follow by Allah. The law, therefore, is sourced directly from Allah and this has a significant impact on how it is interpreted by judges. In true Sharia tradition, judges are clerics, known as Imam. 7.2 Sources of Sharia law Section overview • The main sources of Sharia law are the Quran and the Sunnah. The secondary sources of law are the Madhab. The key source of law in Sharia is the Quran, which contains various injunctions of a legal nature. Definition The Quran is Allah's divine revelation to his Prophet, Muhammad. 18 Fundamentals of Business Law The Quran was revealed to the Prophet Muhammad during the last years of his life, around 619–632 AD. It was written down piecemeal during his lifetime but not fully collated until after his death. The Muslim calendar is different from the Western systems of years BC and AD. However, for the purposes of comparability with common and civil law systems, the AD dates are being used here. The Quran includes various injunctions of a legal nature, but it does not cover every detail, so another primary source of law in Sharia is the Sunnah. Definition The Sunnah is 'the beaten track', in other words, what has come to be the acceptable course of conduct. It is derived from the sayings of the Prophet, known as Ahadith (known in the singular as Hadith). There are also five major secondary sources of law in the Muslim world, known as Madhab. These are schools of thought based on writings and thoughts of major jurists formed in the years immediately following the death of the Prophet and are named after those jurists: • The Shia school. • The Hanafi school (Imam Abu Hanifa). • The Maliki school (Imam Malik). • The Hanbali school (Imam Ahmad Ibn Hanbal). • The Shafii school (Imam As-Shafii). These schools of law are given more prominence in certain parts of the world, so, for example, parts of Iraq and parts of Iran follow the Shia school ('Shia Muslims'). The majority of the Muslim world follows the other four schools, which together, are termed Sunni (hence 'Sunni Muslims'). In Pakistan, the generally preferred school is Hanafi. 7.2.1 Constitution Many Muslim countries have a written constitution. Both the countries we are using as exemplars of the system, Iran and Pakistan, have such a constitution. The Iranian Constitution upholds the role of Sharia law in Iran, as can be seen from Article 2 of the Constitution. 7.3 The role of judges in Sharia law Section overview • In Sharia law, judges may need to interpret the law and it cannot be changed. They do this in line with the Sunnah Ahadith, meaning sayings of the Prophet, that are varyingly reliable. Fiqh is the process of further legal interpretation, using ijtihad. Judges may also perform a form of judicial review. As we have observed above, the religious nature of Sharia means that in true Sharia tradition, judges are clerics, known as Imam. This is the situation in Iran, for example. However, in other Muslim states, there are a mixture of clerical judges and secular judges. Judges are required to apply the law to cases brought before them. However, given the nature and source of the law, there are particular considerations with regard to interpretation of the law. 7.3.1 Interpretation of Sharia law The Quran cannot be altered, being the Word of Allah. It may only be interpreted. This leads to the problem in Islamic circles of who is qualified to interpret the Quran. Muhammad, as Allah's prophet, was qualified to do so. When clear guidance cannot be obtained from the Quran, the judge may turn to the Sunnah to see how the Quran was interpreted by the Prophet. The Sunnah is used by Muslim jurists to: 19 1: Sources of law and types of legal system

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