Business Legal and Ethical Issues
Business Legal and Ethical Issues
Ethics is a value system that guides the relationships between what is right and what is not acceptable. According to Kapottos and Youngner (2015), ethics lay the basis for rational decision making given a variety of choices that affect major business processes. Business ethics is, therefore, the application of moral philosophies within the context of organizations in solving controversies. Legality of business operations is guided by the articles of association unlike ethics, which is based on logic and common understanding. This essay will emphasize on a scenario with ethical and legal concerns and their respective remedies based on business law and ethical theories.
Liatec Company was incorporated in 2004. Its main business was to offer research consultancy services in market feasibility studies, agricultural survey, political polling, and media monitoring services. Within 2 years of operation, the company capital base had increased substantially to the level of being listed on stock exchange. The capital was raised through the sale of shares, long-term loans, and retained earnings. In order to increase the company’s revenue, the top management of Liatec decided to invest in a capital-intensive project, which was anticipated to raise the cash flows of the organization by 45 percent. The capital to finance the project was to be raised partially through debentures.
During the implementation of the project, internal management wrangles ensued which were fuelled by communication breakdown and the pursuit of personal interests. The departmental managers and board of directors failed to consult on pertinent issues regarding the project and operations of the company in general. Also, personal stakes led to a conflict of ideas, which contributed, heavily on the slowdown of the project and decrease in profitability of the firm.
In mid-2007, the company’s state of affairs worsened with the onset of the global economic recession. The revenue from the services offered declined, and the share value in the stock exchange market started declining exponentially. In addition, the ability to settle debts on time decreased and the company had to lay off some of its employees. This raised the red alert to the management and hence decided to consider a merger in order to survive. Furthermore, the merger would help reduce the operating cost, make changes to the company management, diversify the range of services, and expand its customer base.
Liatec Company contracted a financial expert to assess the worthiness of the merger with Inforstat Company. Inforstat was also a listed company and equally interested in the merger. It dealt with research related software, which Liatec had been using, in its activities. The expert and his colleagues conducted the assessment hastily ignoring some important financial aspects in the books of accounts in order to leave for the holiday. The result for this move would cause turbulence within the company. In addition, shareholders would lose their control in the company as well as ownership.
Nevertheless, it was the responsibility of the expert to assess the best decision that would benefit the organization together with its stakeholders. Failure to inspect critically all areas of interest for the success of the merger would result in a violation of moral principles as well as the law governing terms of association.
Following the risky scenario that the Liatec Company is experiencing and the consequent danger of merger if the proper analysis is not done, the financial expert and his colleagues ought to be rational, keen, and diligent in their assessment of the financial statements and other sensitive aspects of the merger. According to Gable (2015), the expert, in this case, acts as an agent of the company, which will rely on his report to develop the terms of the merger, define the worthiness of merger and subsequent decision during the combination of the companies. Therefore, given these amount of duties and responsibilities, it was unethical for the expert and his colleagues to do the sub-standard job in order to pursue their personal interests, that is, early breaking for a summer holiday.
Moreover, there was an ethical concern with respect to the management body of the company. Since they are the custodian of the organization, they have a duty of protecting the interests of the shareholders and hence act in their best interest to avoid agency conflict (Chaimongkonrojna and Steane, 2015). Therefore, it seemed unethical for the managers to have ineffective communication and consultation with each other and to have a conflict of ideas that could have deteriorated the growth of the company.
In addition, several theories can be considered to address these ethical issues. To start with is the casuist ethical theory. According to this theory, the current ethical issue is compared to with one or more similar ethical dilemmas that had already occurred and their outcomes is used in making the decision for the current situation (Menzel, 2015). Thus, the management could have evaluated their problem using this theory to search for other companies, which have experienced such scenarios and their outcome in order to rational decisions, solve their problem. Also, from expert’s point of view, several results from other organizations that had failed due to the sub-standard job could have been assessed and outcome evaluated so that the financial expert and his colleagues could be keen on their work. Despite the strength associated with this theory, it may prove difficult in finding a matching case from which reliable inferences can be made.
Secondly is the utilitarian ethical approach. This theory involves assessment of repercussion that would result from prediction after taking a certain course of action. From this theory, a utilitarian can look at the similarities between two forecasted solutions and eventually come up with one optimal choice, which will benefit more people (Menzel, 2015). Using utilitarian theory, the managers of Liatec could have looked at the consequences of failure to communicate and their personal interests, which contributed greatly to the retrogressive growth of the company. Likewise, the expert and his colleague could have predicted the outcomes to evaluate the books of account and provide ways of how this could have contributed to the failure of the merger. However, business situations are surrounded by uncertainties hence prediction of results based on other results may not always be correct.
Thirdly is the deontological theory. This theory emphasizes on people following their responsibilities and duties when evaluating an ethical scenario. This insinuates that a person will prefer to follow his commitments as compared others. Respecting one’s responsibility is viewed as ethically right (Menzel, 2015). Therefore, the expert could have upheld his duties and responsibilities and follow the right procedures in analyzing merger assessment, which could be ethical, correct. Similarly, with respect to this theory, the management could have followed their stipulated duties and obligations to protect the interest of the company’s stakeholder. In addition, the leaders in the company had a duty to communicate effectively, and to implement the project, which could have benefited the organization. On the other hand, there is no backing rationale as to why individuals decide to do these duties hence a demerit to this theory.
Nonetheless, on the overall, the best outlook that the company could have adopted is the utilitarian approach. Since the approach focuses on the prediction of the repercussion of the action taken, the experts could have formulated the appropriate duty of care in their evaluation of the merger and mitigate other legal issues that might arise such as negligence. Additionally, given that the management could have already predicted consequences of their actions, they would have developed better communication channels and avoided another legal issue as a breach of contract between them and shareholders.
The Law of Contract
A contract is an enforceable agreement that is legally binding, and the remedies for any express or the law provides for implied breach. It may be in the form of a written formal document, oral, memorandum, or partly oral and partly written. The laws governing contracts emanate from the substances of common law, doctrines of equity, and other statutes of general application. Contracts are characterized by an offer, acceptance of the offer, an intention that is well defined, legality of the purpose of the contract, and the formalities that lay the ground for compliance such as time.
An offer is an indisputable expression of the intention of one party to get a contract with another party. The most important aspect of the offer is that it becomes effective once the intended party receives it either in oral or written communication. In addition, the offer should have definite conditions, mode of communicating acceptance, and the time within which the acceptance is valid. However, an offer can be terminated subject to revocation by the provider, rejection by the intended person, a counter offer, lapse of the time of the offer, or failure to meet the stipulated conditions.
In contrast, acceptance of the offer has no conditions attached and must be done within the time specified in the offer. The mode of communicating acceptance may be in the form predetermined in the offer, with exceptions of any other applicable format where the offers relay the message of acceptance to the offerer. Nevertheless, silence by the offeree does not imply acceptance of the offer.
Notably, the parties involved in a contract ought to have the legal capacity to do so. For corporations, their contractual capacity should be well defined in the memoranda of association. Moreover, besides offer, acceptance, and capacity to contract, Levine (2015) asserts that the parties must agree on a legal consideration, that is, the price for a promise made by the contracting parties.
Under circumstances of misrepresentation of facts, duress, or undue influence, a contract may be deemed void or voidable. On the other hand, the discharge of such contracts may be by way of express statement, the performance of the contract, or a breach. In the first two instances, there may be no legal implications unlike in the third case. Breaching a contract is perceived as a failure to communicate inability to fulfill the promises agreed upon prior to engaging in performance. In their work, Steckman, Conner & Taylor (2015), demonstrate the importance of meeting all the legal prerequisites prior to engaging in any contractual relationship.
Discharge by breach may be anticipatory, where the offending party intentionally implies non-performance in advance. The other form may be actual breach where the contract is not completed by the due date, or involvement of defective workforce. The consequences of a breach of contracts are payment of damages and penalties as decided by a court of law.
In the situation of Liatec Company, the financial expert met all the necessary conditions for getting into a contract as well as the corporation. It is also clear that the offer was placed by the company and accepted by the expert in compliance with the stipulations therein. More so, the contract was valid and executable within the specified time. However, the financial expert discharged his duties in an unsatisfactory manner in pursuit of personal interests. Therefore, the company may sue him for any incurred losses as well as the involvement of his colleagues whose ability to perform the contract were not initially assessed.
On the other hand, Liatec may seek a court injunction against the expert, or seek to have him compelled to perform the duty with due diligence. While the expert may also sue for full compensation due to the contract, the company can also seek to pay him as much as he deserves, proportionate to the extent of performance. The instance may be treated as both anticipatory breach and actual breach.
The Law of Torts
A tort, unlike a breach of contract, is a civil wrong whose remedy is defined by the law as damages or other appropriate relief to the offended. The remedies under torts are more restricted compared to those in the contract. Most importantly, not every wrong is a tort, and a single action can instigate a tort and a crime. Persons liable for torts include individuals of sound and unsound mind, minors, bankrupt, corporations, aliens, partnerships, and the state.
Whenever a tort is committed, there are general defenses that can be used against the plaintiff. First, the defendant can prove that the tort occurred due to the fault of the plaintiff, or the plaintiff may have adequate knowledge of the risks involved in the pursuit of certain actions. Secondly, the tort might have happened due to unpredictable and uncontrollable natural circumstances (Buckley, 2015). Lastly, it might have necessary to commit the tort for the general good of the society, a condition known as a necessity.
Civil wrongs fall under different groups. To start with, assault, false imprisonment, and battery form the category of intentional torts. Next, property torts include those that involve trespass, trover, and illegal conversion. The other category is dignitary torts, where defamation, abuse of process and malicious prosecution are the major forms. There are also torts, which are attributed to business transaction and are called economic torts. These include different forms of fraud, civil conspiracy, and restraint of trade. Further, nuisance is a form of tort in which a person or a group of people is denied the freedom to a quiet and serene environment by the tortfeasors. According to Moncrieff (2015), corporates have a responsibility to avoid nuisance for the interest of the public.
Finally, the most pronounced tort is negligence. This is the intentional omission of doing something that any other sober and prudent person would have done if they were in a similar circumstance. There are three key elements that must be conspicuous in negligence: the legal duty of care, breach of duty, and damage or loss. Under duty of care, the defendant is assumed to have been aware that acting negligently would have detrimental effects on the plaintiff, as per the standard of care. Similarly, the plaintiff must prove breach of duty by producing evidence of which the defendant (Endres, Friehe & Rundshagen, 2015) omitted actions. The authors posit that each company should have policies suitable for ensuring environmental sustainability, which reduces adversities caused by natural disasters. However, not all cases of negligence require evidence. The exemptions need no explanations, as the evidence is Res ipsaloquitor, that is, “speaks for itself.” Lastly, the implied or actual loss must be proved by the plaintiff, and must be clear that it was solely caused by breach of duty.
With reference to Liatec Company, the financial expert would have been negligent if he hurriedly performed his duty and omitted important aspects of the process that could lead the company into legal and financial jeopardy. He had the legal duty of care to protect and accordingly advice the management of the company. If he intentionally ignored some procedures, then that would be a breach of duty, and the company would rightfully sue him for any losses attributed to such ignorance.
In his defense, however, the financial expert could provide proof that the company did not supervise the work being done thereby knowingly exposing itself to the risk of loss or collapse. Therefore, this would imply that the company would not get the full amount of damages due to contributory negligence on its side.
The Law of Agency
An agent is a person who creates a legal relation with another person, business, or company (called a principal) for the purpose of representation. An agency is therefore characterized by representation, actions on behalf of a principal, and that the actions of the agent legally affect the principal. An agency relationship may be created by first, by contract that is guided by mutual agreement. Secondly, the relationship can exist by ratifying the actions of a previously authorized person who was acting in the capacity of an agent.
When an agent is appointed, he is obligated to perform as long as the deal at hand is legal and not void. Also, he is expected to disclose all the necessary information to the principal for successful execution of his duties. Moreover, he must be careful and skillful, and is strictly prohibited from delegating his duties whatsoever. On the other hand, the principal is bound to fair remuneration for work done, as well as compensation that arise from loss or damage incurred in the course of duty.
When disputes arise, both the agent and the principals have legal remedies. The agent has the right to sue the principal and withholding the possessions of the principal until a solution is found (Connoly & Kaisershot, 2015). On the side of the principal, they can dismiss the agent or seek judicial redress. The agency relationship can be terminated by mutual consent, withdrawal of either party, lapse of time or destruction of subject matter.
In the situation of Liatec Company, the corporation is the principal, and the financial expert is the agent who has to represent them in Inforstat Company. Since the merger requires consolidation of accounts, any action by the expert will impact the legal position of Liatec. Therefore, it is prudent that the expert exercises care and skill failure to which he may be dismissed or sued. However, the expert is wrong to delegate his duties to colleagues who are authorized to act on behalf of Liatec.
In conclusion, there are various aspects of business ethics, which culminates to legal concerns. For instance, in the Liatec situation described above, it is clear that the unethical behavior of the management to overlook the essential aspect of communication and consultation had lead to failure of the organization. Since this is their duty to act in the best interest of the shareholders, this may be termed as negligence of duties, which may result in the conflict between shareholders and the top management. Furthermore, it is unethical for the expert and his colleagues to perform their duties inadequately in pursuit of personal interest. This shows carelessness in the execution of their duties, which is a legal issue. However, there are various ethical theories such casuist theory, deontological theory, utilitarian theory among others that organization can adopt to solve ethical issues during decision-making.
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