Legal Systems in Business

Legal Systems and Business

The legal system is important for all businesses, whether it is homegrown or expanded to a foreign land. The legal system of a nation affects the investment in its market. Different countries have different legal frameworks to allow businesses to run in their countries. Although there are many legal systems, there are four basic systems on which the contemporary legal system is based – civil law, common law, statutory law, and theocratic/religious law.

Common Law

Common law is named so because it traces its origin from the law that was “common” to all the king’s courts across England. Common law is generally followed by countries that were once colonies of Great Britain, for example, the USA, India, Australia, etc. In this law, the court generally uses past court rulings to decide a particular case. Common law is enriched with new features with every new court ruling. Common law is beneficial for businesses for its flexibility, innovation, and certainty.

Common Law

Flexible and Innovative

It is beneficial especially to those businesses that operate in innovative sectors such as technology and financial services. Rather than wait for new legislation, courts utilize existing case law precedent to find logical solutions to novel issues. The law can quickly adapt to commercial innovation unforeseeable by legislators in a way that less prescriptive and more controlling civil law systems cannot. In contrast with the civil code’s aim of uniformity, parties have the freedom to agree on anything they want (with limited exceptions to prevent exploitation).

Common Law and precedent


Civil law systems (such as the EU’s) may use a highly “purposive” method of interpreting legislation, which may lead to unpredictability and inconsistent rulings between judges. The emphasis on judicial precedent in common law systems, on the other hand, makes it easier for businesses to predict legal outcomes.

Civil Law

Civil law is derived from the Roman Empire, and it has comprehensive legal codes. Legislation is the primary source of law in civil law systems, whereas judges play a more active role by setting legal precedents in common law systems. A commercial agreement drafted in a civil law country typically uses broad terms instead of restating codified laws. The resolution of commercial disputes in civil law takes place with an inquisitorial model. An example of the written statute in civil law is the Companies Act 2006 (the longest piece of legislation in the UK), the scope of which clearly corresponds to the civil law spirit of in-depth codification. Despite the fact that many civil law countries include a choice-of-law provision in their contracts, many civil law countries have their own substantive law for governing construction projects. The civil law system categorizes legal matters through legislative prescriptions. In many countries under civil law, limitations on damages and indemnity obligations are restricted by law. A delay liquidated damages agreement is common in most civil law countries, which is often enforced by courts, just like the common law system. Reportedly, two-thirds of the world follows the civil law system.

Theocratic Law/Religious Law

Theocratic or religious law is based on religious guidelines. Islamic law, also known as Sharia, is the most well-known example of religious law. Countries like Pakistan, Saudi Arabia, Iran, etc., follow theocratic or religious laws. Islamic law has a direct impact on businesses since it is a moral rather than a commercial legal system. In Islamic law, interest, for instance, directly impacts businesses. Islamic law prohibits banks from charging or benefiting from interest. It has created a whole set of products and strategies for Islamic banks to simulate interest without technically being considered interest. There are some banks that charge a large up-front fee, while some are permitted to engage in sale-leaseback transactions. An Islamic bank, for example, will buy a company’s goods or assets for a fixed price in exchange for financing. The bank would sign an agreement to sell the assets back to the company at a later date and at a higher price. Interest is calculated as the difference between the sale price and the buyback price. It is evident that many businesses and investment banks are looking for innovative ways to deal with these Islamic banks so that they can comply with Islamic legislation while earning a profit.


Contract Law

All sizes of companies rely on contracts and agreements to conduct business. Having a good understanding of contract law is very important because these laws are the ones that regulate the entire business transaction. In common law countries, the contract law is quite detailed and elaborated. Contract law is an area that involves agreements between people, businesses, and groups. In the event of a breach of contract, you have the option of taking the issue to court. Despite the fact that a verbal contract is still legal (except in certain situations), most contracts are documented in writing. Nowadays, contracts are more detailed than ever, and every effort is made to clarify every possibility.

Enforceable Contracts/Valid Contracts

To be legally enforceable, a contract must meet certain criteria in addition to being clear and specific. A valid contract is one that is legally enforceable. If an item is legally enforceable, it can be used in court as evidence to support a decision. A contract can’t be enforced if it lacks certain essential components. In the event that one party to a valid (enforceable) contract believes the other party has broken the contract (the legal term is breached) the harmed party can file a lawsuit against the party who it believes has broken the contract. During the legal process, or litigation, it is determined whether a contract has been breached or if there are circumstances that negate it. A contract dispute, however, will be heard only if the contract is valid.

Elements of a contract

Intellectual Property Rights

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A creation of the mind is an intellectual property (IP), which includes inventions, literary and artistic works, designs, and symbols, names, and images. Patents, copyrights, and trademarks are some examples of IP protected in law, which allow people to earn recognition or financial benefit from what they invent or create. IP policies aim to foster innovation and creativity by striking the right balance between innovators’ interests and the public interest. Having an understanding of intellectual property (IP) will help your company become more competitive and manage IP risks.  The IP system may help you:

  • protect innovative products and services
  • increase the visibility, attractiveness, and value of your products in the market
  • distinguish your business and its products from the competition
  • access technical and business information and knowledge
  • avoid the risk of unknowingly using third-party proprietary content or inadvertently losing your own valuable information, innovations, or creative output.

Product Safety Law

The purpose of product safety laws is to regulate the design, manufacture, distribution, sale, and resale of products. These laws are intended to keep consumers safe from dangerous products and to notify them of potential dangers associated with the product. As different products in the market evolve, so do product safety laws. In most countries, those who manufacture, import, distribute, or sell consumer products are all responsible for their safety. In the event that a manufacturer discovers its product poses a safety risk, it must take action to correct the situation. This may include modifying the product or issuing new instructions or requiring consumers to return the product.

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United Nations Commission on International Trade Law

The United Nations General Assembly established United Nations Commission on International Trade Law in 1966. It has six working groups, ranging from transport law to electronic commerce to insolvency law and many more. The primary goal of this organization is to unify and harmonize the different laws of internal business or international trade. This, in turn, will help reduce the obstacles faced in international trade. They also prepare model laws and conventions that deal in transactions and international trade.

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