Page 477 - Encyclopedia of Business and Finance

eobf_L 7/5/06 3:14 PM Page 454

Law in Business

reinvested in the corporation to allow it to grow. The cor- the manufacturer guarantees all parts and workmanship
poration insulates the owners from liability. If Jill and for a period of one year. If the product breaks down or
Joan’s sporting-goods store was a corporation and declared wears out after that, the customer is responsible, although
bankruptcy, Jill and Joan would not have to pay any extended warranties can be purchased on many products,
remaining debt from their own money. such as cars and appliances. Occasionally products are
Those wishing to start a business may consult with a clearly labeled “Sold as is. No warranty of any kind.”
lawyer to determine which legal form the business should Product liability is a further step in consumer protec-
take. tion. Products must by law be free from hidden defects. A
hidden defect may come from a poor design or poor man-
ufacturing. If a hidden defect injures someone, the maker
CONTRACT LAW
must pay damages. If manufacturers deliberately or reck-
Contract law regulates the day-to-day business of buying lessly put defective products on the market, they are liable
and selling goods or performing services. A contract is for additional damages, called punitive damages. To pro-
defined in law as an agreement between two parties with tect themselves, makers warn buyers of possible dangers.
an offer, acceptance, and consideration. Assume Jill and
Major issues have included the side effects of drugs and,
Joan have a corporation named Sports Unlimited, Inc. Ed
in the auto industry, vehicles that roll over too easily or
comes in and decides to buy a tent priced at $225. He
have gas tanks placed in dangerous positions.
offers $225 to Sports Unlimited, which accepts the offer
by ringing it up on the cash register. The consideration is
what is exchanged; that is, $225 and the tent. When the EMPLOYMENT LAW
store accepts the price, there is a binding contract. Sup- As a business grows, employees are normally hired, and
pose a sign clearly in Ed’s view says “All returns must be the legal aspects can become very complicated. An agree-
made within thirty days with cash receipt.” This sign ment to employ is a contract of offer and acceptance. The
becomes part of the agreement. If Ed brings the tent back consideration is an exchange of services for a wage or
twenty-nine days later, he can get his money back; if he salary. In the United States, contracts of employment can
be quite simple. Bob agrees to work for Sports Unlimited,
brings it back thirty-one days later, it would be too late.
Inc., for $500 a week. He agrees to work under the direc-
Even though it is not stated by either party, if Ed used the
tion of Jill and Joan for a set number of hours. He, in the
tent on a camping trip, it would not be returnable. If,
words of the law, is an employee at will. He may quit or
however, the tent leaked, it is not “fit for the purposes for
which it was intended” and Ed could get his money back be fired at any time. Sports Unlimited is not required to
give a reason if it fires him. Bob may request a raise at any
within a reasonable time.
time and has no legal right to health benefits, pension, or
Suppose Sam and Mike form the partnership Quality
even vacation.
Mechanics and Mary comes in and says, “The brakes
aren’t right. Please fix them by 5 P.M.” Mike says, “It will The law does, however, require a number of things of
be done!” A contract now exists, even though many terms employers. Sports Unlimited must pay Bob at least the
are missing. Sam and Mike have agreed to fix what is hourly minimum wage. In addition Sports Unlimited
must withhold income taxes and pay social security taxes
wrong with the brakes, and Mary has agreed to pay a rea- for Bob. Sports Unlimited must also pay workers’ com-
sonable price. The brakes may need a simple adjustment pensation and unemployment insurance in case Bob is
or a complete overhaul. If Sam and Mike see that addi- injured on the job or laid off. The law also makes a dis-
tional work is necessary, it would be best to call Mary and tinction between an employee and an independent con-
extend the contract to include more work. Note that while tractor. If Sports Unlimited hires a painter to paint the
writing can help avoid misunderstanding, oral contracts building or a lawyer to draw up the corporation papers,
are valid for business services.
the service is done by an independent contractor. Typi-
cally, a gardener who cuts the grass and trims the hedges
WARRANTIES AND PRODUCT is an independent contractor and is simply paid. A clean-
LIABILITY ing person working inside the house under the direction
Warranties and guarantees may be implied or express. If of the owner is an employee, and thus the law requires
nothing else is said, it is implied that a product is guaran- additional paperwork and taxes.
teed to be fit for the purposes for which it is intended. A Federal law allows employees of larger companies to
tent will not leak for a reasonable time and an article of form unions and make a single employment contract. The
clothing will stand up to reasonable wear and tear. Most process is known as collective bargaining. If employees
products come with express warranties. Most common wish, the National Labor Relations Board will conduct an
among express warranties are limited warranties, whereby election; if a majority of workers want a labor union, the

454 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION