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Chapter 1
Sources of Law and Risk Management
Why study the law?
• Business decisions have legal consequences
• Negative: dumping pollutants into environment
• Positive: binding contractual party to promise

• Legal consequences affect profits and losses

• Some decisions create opportunities, others impose liability
• Knowing the law decreases liability through risk management

• Purpose of Business 1320

• Understand the role of law in business transactions
• Recognize and manage legal risk
Risk management
• Three steps of risk management:
• identification: recognize legal risks
• “Can we be held liable for this?”

• evaluation: assessment of legal risks

• “What are the chances of something going wrong?”

• response: reaction to legal risks

• “What are we going to do about it?”
Risk management strategies
Risk management strategies
Risk management strategies
Risk management examples
• Exclusion and limitation clauses (chapter 9)
• contractual terms that exclude liability for some acts/losses, or limit
compensation available

• Insurance (chapter 17)

• liability insurance or property insurance

• Incorporation (chapter 21)

• “limited liability”: shareholders not usually liable for company debts
What is the law?
All laws are rules but not all rules are laws

• Morality and law

• moral wrongs are informally sanctioned
• damaged relationships or reputation
• legal wrongs are formally sanctioned
• fines or imprisonment

• Laws are rules that can be enforced by courts

What is the source of law?
• Natural Law Framework:
• Considers law to have a “real” existence.
• Moral values derive from a rational examination
of the world, and the rational examination
reveals Principles of Justice.

• Positive Law Framework

• Source of positive law is people with power
• These man-made laws allow
• Giving rights to some
• Taking rights from others
Categories of law
Legal Traditions
• Civil law jurisdictions:
• Originated in ancient Rome
• most of Europe, Louisiana, and Quebec

• Common law jurisdictions:

• Originated in England
• England, Australia, New Zealand, most of Canada

• To understand Canadian law, we must look at British

A brief history of the common law

Tribalism (BC)
• In ancient Britain, the law was

• what the tribal leader said it was

• unwritten

• uncertain
• changed with the leadership

• unpredictable
• depended on leader’s mood

• without due process

• the right to appeal

Q: Natural law or Positive law?

Pax Romana (40 AD - 400 AD)
• Roman rule and the application of Roman Law.
• civil law

• Breakdown of tribal allegiances

• Expansion of trade & commerce

• common currency
Feudalism (8th -11th century):
• Tribal land ownership replaced by
private ownership.

• Clan loyalty replaced by responsibility

to the Lord

• Disputes submitted to a local court

Norman conquest (1066)
• William I of France conquers England
• Retains right to make laws
• Claims all land rights, redistributes land

• Courts established with the monetary interests of the king

• (law and order = king’s revenue)
• travelling judges exercising centralized control
• Their decisions produced a body of legal precedent
Norman conquest (1066)
• Common Law:
• the rules of settling disputes, common to all England
• Ends legal variation based on local custom
• Judges interpret and apply law, but do not create it
Q: Natural law or Positive law?
• Because reasoning is based on precedent, the rate of
change in the law is slow
Courts of Chancery (13th century)
• King hears from persons suffering under Common Law
• Offloads responsibility on his Chancellor (advisor)
• Concerned with fairness (equity), not common law
• Upside: innocent party finds justice
• Downside: predictability of common law goes out the window
• Eventually Common Law and of Chancery courts merged
• As a result, a judge sitting in court is supposed to have
two minds:
• Common Law mind for procedure (form = consistency)
• Chancery mind for equity (substance = justice)
Mercantile class (14th century)
• Guilds give money and power to tradesmen
• Crown (King) and Nobility (Lords) become indebted to
mercantile class
• Mercantile class gains influence over law
• Development of the Law Merchant: rules and practices of
guilds, administered by own courts
Parliament (15th century)
• Legislative power of the king (the right to make laws)
transferred to Parliament
• Two houses in Parliament:
• House of Lords: represents the interests of the (hereditary) landed
• House of Commons: represents the interests of the commoner
(the mercantile class).
Parliamentary democracy (17th century)
• Legislation becomes more important than Common Law
• Elected representatives in House of Commons propose legislation
to serve their constituents
• House of Lords approves the legislation
• Monarch consents to the legislation
• Legislation allows for changes in the law faster than at
Common Law
Canada (1867)
• Canada inherited Britain’s:
• Common Law
• Parliamentary Democracy
• British Statutory Law in effect at the time
• Canada and the provinces came to rely on their own
statutes under the Constitution Act, 1867
Sources of Canadian law
• Hierarchy of sources of law
• Constitution
• legislation
• courts
Purpose of Constitution Act (1867)
• Constitution
• Fundamental principles by which a nation is governed
• promote Peace, Order and Good Government
• provides rules for society, and legal and political systems
• allocate power to Federal and Provincial legislatures
• highest source of law
• law inconsistent with Constitution: no force or effect (section 52)
• difficult to amend
• requires consent of both Parliament and two-thirds of all provinces with
at least 50% of population
Constitution - federalism
Constitution Act (1867)
• The Dominion of Canada formed as a federation of
• Two constitutionally recognized levels of government
• Federal government: represents entire country
• Parliament
• made up of Senate (appointed) and House of Commons (elected)
• lead by Prime Minister
• Provincial (territorial) government: represents province
(territory), called the Legislature (elected),lead by Premier
Constitution – division of power

• Federal (s. 91) • Provincial (s. 92)

• trade • stores and commerce
• fishing and shipping • timber and resources
• penitentiaries • reformatory prisons
• intellectual property • real property
• military and banking • hospitals and charities
• marriage and divorce • old age pensions

• residual power
Constitution – residual power
• federal government holds residual power
• doctrine of federal paramouncy determines which law
prevails when federal and provincial statutes conflict
• when a government legislates outside its authority, the law is ultra
vires and has no force or effect (s. 52)
Constitution – subordinate legislation
• Subordinate legislation (regulations, by-laws)
• created under Parliament’s or legislature’s authority
• example of municipality
• province creates municipality
• province gives municipality power to pass by-laws

• Businesses are responsible to 3 levels of government:

• Federal
• Provincial
• Municipal
Constitution – kinds of power

• Constitution allocates power under three headings:

1. Executive Power (the power to rule)
2. Legislative power (the power to pass laws)
3. Judiciary Power (the power to pass judgment)
1. Executive power
The power to rule

• Remains vested with the Queen

• Includes military power
• (commander in chief)
• The power is exercised through her local
representative, the Governor-General
• In practice, the Queen is a figurehead
• Real power exercised by the Prime Minister
2. Legislative power
The power to pass laws

• Federal Parliament for all the provinces passes federal laws

• Each province has its own legislature to pass provincial laws
• Federal Parliament has two houses:
• House of Commons
• Represents the interests of the constituency.
• Members elected
• Open to every citizen
• Sits for a term of no more than 5 years
• Senate
• Equivalent in function to the House of Lords
• Members appointed
• Must own land ($4000)
• Sits for life (age 75) unless turns bankrupt
2. Legislative power
Parliamentary procedure

• Bills introduced in the House of Commons are decided by the

majority through 3 readings
• Proposed legislation sent to Senate for approval
• Senate sends legislation to Governor-General
• Governor-General approves on Queen’s behalf
• “royal assent”
3. Judicial power
The power to pass judgment

• Function of courts
• create and apply “common law” (judge-made law)
• interpret and apply Constitution
• review unconstitutional laws (ultra vires - outside scope of powers)
• interpret and apply legislation
• Literal approach (traditional English)
• Give a word its plain meaning
• Liberal approach (contemporary Canadian)
• Look at the intention of Legislature and give a fair interpretation
• protect civil liberties (Charter of Rights and Freedoms)
Charter of Rights and Freedoms (1982)
• Adds human rights to the Canadian Constitution for all
matters within the authority of the government
• Charter rights cannot be overridden by legislation under
ordinary circumstances

• Limitation of Charter
• Charter serves to protect citizens and residents against
excesses of the state, but not against excesses of other
citizens and residents
Charter of Rights and Freedoms (1982)
Charter dialogue

• Charter dialogue
• Government creates laws through legislation
• Courts identify Charter violations
• Government may respond by amending or enacting laws to
conform with Charter