Vet Your Lawyer

2 of 5 parts, by Richard J. Goossen.

I. The Law: Theory v. Application

It helps entrepreneurs to balance an understanding of the philosophical bases of a law with an appreciation of the application of a law. The law is a set of rules of conduct between individuals and groups created with the help of government and enforceable by government. The law binds the citizens of Western societies for the collective good — everyone submits to the legitimacy of the legal system.
There are several reasons for having a legal system. The law provides a means to protect persons and property without brute power. The law empowers government to act for the benefit of society in general. It enables individuals to make legally binding agreements among themselves which courts can enforce. The law is a complement of democratic rights, which lay at the core of Western societies. Everyone is subject to the law, including the government. Rules of law underscore the various rights of individuals, whether enshrined in a constitution or in judicial decisions. This legal infrastructure in which rights are clearly defined and properly enforced provides a stable framework for an entrepreneur’s activities.
Apart from the core philosophical concepts of law, any individual or organization doing business in the U.S will encounter mechanical aspects of law as well. For example, the first step for an individual starting a business is to decide on the form of the organization for the pursuit of economic activities. It can be an unincorporated entity, a partnership, or a corporation. Next, the entrepreneur will experience the legal regulations of closing a property transaction or complying with tax laws. He will enter into contracts with suppliers and customers and employees, while pursuing his economic objectives. The contract typically will provide a set of obligations. A court can interpret these obligations and award damages if something goes wrong.
Besides contract law, there is the ever-widening scope of tort law. A tort is a wrongful act done to the person or property of another. The most commonly known tort is negligence. The role of tort law is to compensate victims for harm suffered from the activities of others. Tort law identifies those actions that create a right to compensation. If an entrepreneur is negligent — carelessly injures to the person or property of another — there can be liability. One important element of establishing liability under tort law is determining what constitutes “reasonable” behavior by a defendant in a particular set of circumstances. This is not always easy to determine.
An entrepreneur may believe his conduct was reasonable — a judge may not. It will help if the entrepreneur is familiar with current judicial and jury notions of what reasonable conduct is and how aggrieved parties are compensated. Acts of the elusive “reasonable person” are always subject to interpretation.
Legislation, private contract law, and tort law all require interpretation. The entrepreneur cannot view the law in a simple black-and-white manner.
In addition, the entrepreneur cannot act on the basis that there are regulations that need only be read to be understood. One example is jaywalking, crossing a street outside the bounds of a crosswalk, illegal in many states. People rarely are charged with this offense, although they could be. This gap is the difference between the “law on the books” and the “law in action.” The “law on the books” is the law as is written. The “law in action” is the way in which these apparent straightforward laws are applied. This is very relevant yet difficult to comprehend.
An entrepreneur must understand the complexities and practical dynamics of the legal system. On the one hand, the law consists of a system of rules and procedures governing the minutiae of establishing and running a business. Many of these, such as the legal requirements for incorporating a company, may be applied predicatively. At the same time, there are many aspects of the law that are not always applied strictly in accordance with the published laws. The entrepreneur must adopt an understanding that the rules in practice are more realistic than the rules in theory.
Comparing business to a game such as ice hockey, the laws are the “rules” of the game, providing the framework within which the game is played. Some elements of the game are clear and not challenged — the length of periods, the number of referees and the types of penalties. Apply the rules and clarity diminishes. Some infractions, while in the rulebook, are rarely or infrequently enforced by the referees.
Learning how the rules are enforced in practice takes place by watching or playing the game, not by studying the rulebook. Likewise, for entrepreneurs to manage the legal process, they must understand the law in practice.