Business Law & Ethics: Who Is Allowed to Do What, and Who Pays When It Goes Wrong

You tap "I agree" on terms nobody reads, buy a coffee, start a job, open a shop. Each act is quietly legal. The coffee is a sale contract. The job is an employment contract with rules the law adds whether you wrote them or not. The shop may be a "company", which the law treats as a separate person that owns the lease and owes the suppliers, so that you, the owner, can walk away from its debts.

Most of that is invisible until something breaks: a supplier does not pay, a customer is hurt, a founder is fired, a boss lies to investors. Then the questions are old and practical. Was there a deal? Who is responsible? How much? A business graduate does not become a lawyer. They learn which questions to ask before a lawyer is needed, and that the answers change at a border.

This piece describes how legal systems work in general. It is not legal advice, and statutes, courts and thresholds change. For a real decision, ask a lawyer qualified where you are.

Two families of law, and a layer on top

A judge faces a dispute that no rule clearly covers. What does she do? In the common-law family she looks at how earlier judges decided similar disputes and follows them (the principle of precedent, stare decisis). The law grew case by case in England and travelled with the British Empire: the United States, Canada (except Quebec's private law), Australia, India, Nigeria and many more. Statutes matter a great deal, but they are read against the decisions.

In the civil-law family she starts from a code, a systematic text drafted by scholars and legislators: France's Code civil (1804, the "Napoleonic Code"), Germany's BGB (in force 1900). She finds the article, interprets it, and decides. Earlier decisions are not formally binding, though in practice courts watch each other closely. Latin America is overwhelmingly civil-law: Chile's Civil Code was drafted by Andrés Bello in the 1850s, Brazil's current code dates from 2002, and Mexico has federal codes plus state codes. Some places mix both: Scotland, Louisiana, Quebec, South Africa.

The honest picture is convergence. Common-law countries pass vast statutes; civil-law courts publish decisions and mostly follow them. The difference is in the starting point and the habit of reasoning, which still shapes how contracts are written (long and defensive in the common-law world, shorter where the code supplies the gaps).

On top sits EU law, a third layer for 27 member states. Regulations apply directly everywhere (the data-protection regulation GDPR). Directives set a goal and each country writes its own law to meet it. The European Court of Justice established in Van Gend en Loos (1963) and Costa v ENEL (1964) that EU law can be invoked by individuals and wins over conflicting national law.

A contract is a promise the law will enforce

Not every promise binds. "I'll lend you my bike" does not; "I'll sell you my bike for 100" does. English-style common law asks for offer (a definite proposal), acceptance (agreement to exactly those terms; a changed term is a counter-offer, not an acceptance), consideration (each side gives something of value, though it need not be fair: a peppercorn can do) and an intention to be legally bound. A promise by deed, a formal signed document, needs no consideration. A promise for something already done ("thanks for last week, I'll pay you 50") is past consideration and generally fails, with narrow exceptions such as Pao On v Lau Yiu Long.

Civil-law codes ask instead for consent, capacity and a lawful content. Some also demand a cause, the reason the party binds themselves. Chile's Civil Code (art. 1445) lists capacity, consent, a lawful object and a lawful cause; Spain's code asks for consent, object and cause, and says that in a contract that rewards a service, the cause is that service (art. 1274). So Spain would enforce the "thanks for last week" promise where England would not. France removed "cause" as a separate requirement in its 2016 contract-law reform, keeping similar protection through other rules, and Germany's BGB needs neither consideration nor cause. Everywhere, a bare promise to give something away needs a formal act: a deed in England, a notary in Germany (BGB §518).

A company is a person, and limited liability moves the loss

Run a business as yourself (a sole trader or ordinary partnership) and its debts are your debts, down to your savings and often your home. Register a company and the law creates a separate legal person that owns the assets and owes the debts. Shareholders can lose what they put in, but creditors generally cannot chase them personally. That is limited liability. The English House of Lords confirmed it in Salomon v A Salomon & Co (1897): a boot-maker who had turned his business into a company was not personally liable for its debts, because the company was "at law a different person altogether".

The names change with the country: the UK private "Ltd", the US corporation or LLC, Germany's GmbH, France's SARL and SAS, Spain's S.L., Brazil's "Ltda.", and in Mexico the S.A. de C.V., the S. de R.L. de C.V. and, since 2016, the simplified S.A.S. Rules on capital differ: a German GmbH needs €25,000 of share capital (€12,500 paid in on registration), while its cheaper cousin the UG can start from €1. Banks often undo the shield by asking the owner for a personal guarantee on a loan, and courts may "pierce the veil" in cases of fraud. The shield protects against bad luck, not against wrongdoing.

Torts: owing care to strangers, and product liability

A tort is a wrong done to someone you have no contract with. The great case is Donoghue v Stevenson (House of Lords, 1932): May Donoghue said a decomposed snail came out of an opaque ginger-beer bottle in a Paisley café. The facts were never tested in court, because the manufacturer died and the claim settled in 1934. But the ruling on the law stood: a manufacturer owes a duty of reasonable care to the final consumer, which Lord Atkin built on the idea of a "neighbour", someone you ought reasonably to have in mind.

How much care is enough? Judge Learned Hand gave a famous rule of thumb in United States v. Carroll Towing (1947): you are negligent if the burden of the precaution (B) is less than the probability of the harm (P) times its size (L). Courts and juries seldom compute it, but it explains why a cheap fix for a deadly risk is a duty. Product liability goes further: in strict liability the question is not whether the maker was careful but whether the product was defective and caused harm. The EU's 1985 directive was strict; a new one (Directive 2024/2853) replaces it, explicitly covers software, and member states must write it into law by 9 December 2026.

Tort stories are often told wrong. In Liebeck v. McDonald's (1994), a 79-year-old woman suffered third-degree burns on 6% of her body, spent eight days in hospital for skin grafts, and the jury found her 20% at fault. It awarded $200,000 in compensation (reduced to $160,000) and $2.7 million in punitive damages, which the judge cut to $480,000, a total of $640,000. The parties then settled for an undisclosed sum. Not the "spilled coffee, millions" of the joke.

Intellectual property: ideas are free, expressions and inventions are not

Three main rights protect creations, and they protect different things. A patent protects a new, non-obvious invention for 20 years from filing (the international minimum in the TRIPS agreement; Mexico also uses 20), in exchange for publishing how it works. Copyright protects the particular expression of a work (a song, a book, source code) automatically, but never the bare idea; a boy-wizard-school premise belongs to everyone. A trademark protects a name or logo that tells buyers who made something, and can last indefinitely if renewed and used. A trade secret is no registered right at all: it lasts as long as you keep it secret and the law protects it against theft.

Copyright terms are where countries differ most. The Berne Convention sets a floor of the author's life plus 50 years; the EU, UK and US use life plus 70; Colombia 80; Mexico 100 for works in copyright since 2003. So one author's work can be free to copy in one country and protected in another. In the US, the 1928 film that introduced Mickey Mouse, Steamboat Willie, entered the public domain on 1 January 2024; only that early version, not the modern character.

Employment: "at will" is the exception, not the rule

In the US the default is at-will employment: an employer can end a job at any time for almost any reason, and an employee can quit likewise. Only Montana, since its 1987 Wrongful Discharge from Employment Act, requires good cause after a probation period. There are exceptions everywhere in the US (discrimination, retaliation, union and implied contracts), but no general severance pay by federal law. Most of the rest of the world sits at the other end: dismissal needs a recognised reason, notice, and often payment. The EU has no single dismissal law, only minimum rules (for example on collective redundancies), so each country keeps its own.

The UK sits in between. After a qualifying period, unfair dismissal is a claim; the Employment Rights Act 2025 (royal assent 18 December 2025) lowers that period to six months, though its provisions come in stages. Germany's protection law offers a statutory option of half a month's pay per year of service in certain redundancy dismissals (§1a KSchG). France sets a minimum legal dismissal payment of a quarter of a month's pay per year, rising to a third beyond ten years, after eight months' service. Spain's unfair-dismissal compensation is 33 days per year, capped at 24 months. Mexico's federal labour law ties an unjustified dismissal to a constitutional indemnity of three months' wages plus further amounts per year of service. These are floors that depend on circumstances; check the current text.

Who the board answers to: fiduciary duty and the stakeholder debate

Directors and managers hold power over other people's money, so the law gives them fiduciary duties. In the common-law world the two classics are the duty of care (decide with reasonable information and attention) and the duty of loyalty (do not put your own interest ahead of the company's). Courts are slow to second-guess honest decisions: the business judgment rule protects a board that acted informed and in good faith, even when the result was bad. Loyalty breaches, like self-dealing, get far less slack.

To whom is the duty owed? Shareholder primacy says the owners, who bear the residual risk; Milton Friedman put it in a 1970 New York Times Magazine essay: the social responsibility of business is to increase its profits within the law. The case people cite for it, Dodge v. Ford (Michigan, 1919), did order Ford to pay an extra dividend of $19.3 million, but the line about running a corporation for shareholders' profit is obiter dictum, and scholars such as Lynn Stout argue it is misread as a binding rule. Stakeholder views say employees, customers, suppliers and communities count too. The UK's Companies Act 2006 (s.172) says directors act for the members' benefit while "having regard" to such interests. Germany's 1976 law gives employees half the seats on the supervisory board of companies with more than 2,000 employees. In 2019 the US Business Roundtable statement, signed by 181 chief executives, committed to all stakeholders; critics have argued that this changed little in practice. Scholars still disagree; both sides have serious arguments.

Ethics cases, told correctly

Ethics asks what you should do where the law is silent or lets you. The famous cases teach most when the myth is separated from the record.

Case	What is established	What is told wrong or still disputed
Ford Pinto, 1970s	A 1973 Ford report weighed about $11 per vehicle for fuel-system fixes against valued deaths (about $200,000 each). In Grimshaw v. Ford the jury awarded $127.8 million; the judge cut the punitive part to $3.5 million. Ford recalled about 1.5 million cars in 1978.	The memo covered all manufacturers and a federal rule, not Ford's own lawsuit costs. Magazine claims of 500 to 900 deaths are unsupported; Gary Schwartz argued the Pinto's fire record was about average for its class.
Tylenol, 1982	Seven people died from poisoned capsules in Chicago. Johnson & Johnson recalled about 31 million bottles and reissued the product in tamper-resistant packs; share fell from 35% to 8% and recovered in about a year.	Nobody was ever charged with the poisonings. The case is a model of putting safety before sales, but the company was acting under heavy public and regulatory pressure.
Volkswagen, 2015	Software detected emissions tests and switched controls on only then; about 11 million cars worldwide. VW's total global cost reached about $33 billion by mid-2020.	Who at the company knew, and when, is still being settled in court in several countries.

Sources: see Sources & Further Reading.

What a graduate just sees

• A promise binds only when it fits the legal recipe, and the recipe differs by family: consideration in common law, cause or form in many civil codes.
• Before arguing "who is right", ask "which law applies, and which court?"
• A company is a separate person; limited liability moves loss from owners to creditors, which is why lenders ask for guarantees.
• Negligence asks whether you were careful; strict liability asks whether the product was defective.
• Ideas are free; expression, inventions and brands are protected for different times, and trade secrets only while secret.
• US at-will employment is the outlier; most countries require reasons, notice or payment.
• Directors owe duties of care and loyalty; courts rarely punish honest mistakes but punish self-dealing.
• "Legal" and "right" are different questions, and a viral scandal story usually has a documented version that is more interesting.

Where it shows up next

• Strategy & Competition (34/54): antitrust law is the legal limit on how far strategy can go.
• Entrepreneurship (34/56): choosing a company form, shareholder agreements, IP and employment contracts are the first legal decisions of any startup.
• Corporate Finance (34/51): limited liability and debt priority are what make creditors price risk.
• In the world: compliance jobs, in-house counsel, procurement, HR, and any founder signing a first lease.

If you want to go deeper

• 📘 Textbook. Clarkson, Miller and Cross, Business Law: Text and Cases (Cengage, many editions). Widely assigned US business law course text with cases.
• 📘 Textbook. Constance Bagley, Managers and the Legal Environment (Cengage). Written for managers and used on business-school courses.
• 📘 Across countries. Zweigert and Kötz, An Introduction to Comparative Law (3rd ed., Oxford, 1998), and H. Patrick Glenn, Legal Traditions of the World (5th ed., Oxford, 2014).
• 📘 Gentler. Jay Feinman, Law 101 (Oxford). An accessible tour of the US system.
• 🌐 Free course (ethics half). Michael Sandel's Justice course from Harvard, eight lectures online.