LEGAL ASPECTS OF BUSINESS

UNIT I
INTRODUCTION
Prepared By
Pashupati Nepal

MEANING OF LAW

Law is a fundamental instrument designed to govern society by regulating human conduct and
maintaining order, peace, and justice. It comprises a set of rules established by authorized bodies
to control behavior and impose penalties for violations, thus ensuring discipline and social
betterment. The concept of law varies across different cultures and legal traditions—referred to
as Dharma in Hinduism, Hukum in Islam, Jus in Roman law, Droit in French law, and Richt in
German law—each reflecting unique societal values.

Law is universally binding, requiring obedience from all members of society, whether rulers or
subjects. It is primarily a civil system enacted by legislative authorities to regulate external
human activities. The principle of ignorantia juris non excusat (ignorance of the law is no
excuse) underscores the expectation that all individuals must be aware of the law governing
them.

Due to its broad application across various disciplines—including economics, sociology, politics,
and history—law defies a singular, static definition. Jurists and scholars have therefore provided
multiple definitions over time, reflecting the evolving nature of law within dynamic societies.
Consequently, law must be understood as a complex and multifaceted concept rather than a fixed
notion.

DEFINITIONS AND THEORIES OF LAW BY PROMINENT JURISTS

 John Austin "Law is the command of the sovereign, backed by the threat of a sanction."

Austin believed that law is essentially the command issued by a sovereign (a ruler or
governing body), and it is enforced through the threat of punishment for non-compliance.
 Example: A government passes a law that mandates citizens to pay taxes. If a person fails
to comply, they face a fine or imprisonment. This law is a command from the sovereign,
backed by the threat of punishment.

 Hans Kelsen "Law is a system of norms, each of which is valid because it is based on a
higher norm."

Kelsen’s theory, called the norms (rules) "Pure Theory of Law," asserts that law is a
system of norms (rules) that are valid only because they are derived from higher norms.
These higher norms are often foundational legal principles.

Example: In the legal system, a specific law, such as a rule against theft, is valid because
it derives its authority from the constitution of the country, which is the "higher norm." If
a law violates the constitution, it is considered invalid.

 Roscoe Pound: "Law is the body of principles recognized and applied by the state in the
administration of justice."

Pound viewed law as a set of principles that the state uses to administer justice. He
emphasized that law serves societal needs and adapts to changes in society.

 Example: The introduction of labor laws protecting workers' rights is a good example.
As society evolved, these principles became necessary to protect workers from
exploitation and ensure fair treatment in workplaces. These laws help maintain justice in
society.

 Salmond: "Law is the body of principles recognized and applied by the state in the
administration of justice."

Similar to Roscoe Pound, Salmond emphasized that law is a collection of principles that
the state enforces to maintain order and justice in society. He also included customary
laws as part of the legal system.

 Example: Customary laws, like community rules in rural areas (e.g., how disputes are
resolved within the community), are still recognized and enforced by the state, such as in
the form of a formal contract in court.

 H.L.A. Hart : "Law is a system of rules, which are binding upon the individuals of a
community."
 Explanation: Hart’s perspective on law emphasized its dual nature, with both primary
rules (rules about what people can and cannot do) and secondary rules (rules about
how laws are made and applied).

Example: A primary rule would be the law that says "Don’t steal," while a secondary rule
could be a rule that governs the court’s authority to apply the law (e.g., how laws are
interpreted by judges).

 Black's Law Dictionary : "Law is a body of rules of conduct prescribed by the

controlling authority and having binding legal force."

According to Black’s Law Dictionary, law consists of formal rules created by

authorities (such as governments or legislatures) that are legally enforceable.

Example: A law that mandates minimum wage rates for workers is a clear example of a
legal rule prescribed by a governing authority that employers must follow, with penalties
for non-compliance.

NATURE OF LAW

The nature of law refers to its fundamental characteristics and the essential functions it serves
within society. It is a system of rules designed to regulate and guide human behavior, ensuring
that individuals interact in a manner that is acceptable and orderly. These rules serve to shape
personal, social, and professional interactions, creating a framework for society to function
smoothly and justly.

The nature of law refers to the fundamental characteristics and functions that make law a system
of rules and guidelines for regulating behavior within society. Here are the key aspects:

 Rule of conduct
 Social control
 Enforceability
 Legal sanctions

One of the key features of law is its role as a rule of conduct, where it sets clear guidelines for
what is considered acceptable or unacceptable behavior. This provides individuals with a
structured understanding of how to act in various situations. For example, laws prohibiting theft
serve as a direct instruction not to take someone else’s property, ensuring that personal rights and
possessions are protected.
Another essential aspect is social control, where law helps maintain public order. By defining
the behavioral standards deemed appropriate within a society, law functions as a mechanism to
prevent chaos and conflict. For instance, traffic laws, such as speed limits, regulate driving
behavior, ensuring that individuals adhere to safe practices for the protection of themselves and
others on the road.

The enforceability of law is critical to its effectiveness. Laws are only meaningful when they
can be enforced by appropriate institutions, such as the police and the judicial system. These
institutions ensure that laws are followed and that those who break them are held accountable.
Without the means to enforce laws, they become nothing more than theoretical rules with no
real-world impact. This enforcement mechanism ensures compliance and maintains the integrity
of the legal system.

Lastly, legal sanctions serve as deterrents for those who violate laws. These sanctions may take
various forms, such as criminal penalties for actions like fraud or civil penalties in cases of
contract breaches. Sanctions play an important role in maintaining order and justice by
discouraging illegal behavior and promoting lawful conduct.

Meaning of Business Law in Nepal

Business law refers to the body of legal rules and regulations that govern the activities and
operations of businesses. It covers a wide array of areas, including contracts, intellectual
property, commercial transactions, employment law, corporate governance, and dispute
resolution. Business law provides a structured framework within which businesses must operate,
ensuring fairness, accountability, and transparency in all commercial dealings. It is designed to
protect the rights of business owners, consumers, employees, and other stakeholders, while also
ensuring that businesses comply with legal standards and ethical practices.

In Nepal, business law plays a critical role in promoting economic growth and protecting the
interests of local and international investors. The Company Act of Nepal, for instance, regulates
the formation, operation, and dissolution of companies, ensuring businesses are legally
compliant. Similarly, labor laws in Nepal govern employee rights, working conditions, and
employer obligations. The Trade and Commerce Act outlines regulations on commercial
transactions, including import-export rules, contract enforcement, and consumer protection. In
addition, Nepal’s business law framework also includes provisions for taxation, environmental
regulations, and intellectual property protection, which collectively create a legal environment
conducive to business operations. By adhering to these laws, businesses in Nepal can reduce
risks, enhance their credibility, and contribute to the country's overall economic development.
SCOPE OF BUSINESS LAW

Business Law, also known as Commercial Law, governs the legal aspects of business activities
and transactions. It encompasses a wide range of legal disciplines that regulate the formation,
operation, and dissolution of businesses, ensuring smooth commercial operations within a legal
framework.

1. Contract Law: Business transactions are primarily based on agreements or contracts.

Business law governs the creation, enforcement, and breach of contracts between parties. Ex: A
supplier and retailer enter into a contract specifying delivery terms. If the supplier fails to deliver
goods on time, business law provides remedies for breach of contract.

2. Company Law: This area covers the legal requirements for the formation, registration,
management, and dissolution of companies. Ex: The process of registering a private limited
company, compliance with corporate governance norms, and filing annual returns are regulated
under company law.

3. Sale of Goods Law :Regulates transactions related to the sale and purchase of goods,
including rights and duties of buyers and sellers. Ex: If a consumer buys a defective product,
business law defines the legal recourse, such as return or compensation.

4. Employment and Labor Law : Business law defines the legal framework for employer-
employee relationships, including contracts, wages, working conditions, and dispute resolution.
Ex: Laws governing minimum wage, workplace safety, and termination procedures ensure fair
treatment of employees.

5. Intellectual Property Law: Protects business innovations, trademarks, copyrights, and

patents, enabling companies to safeguard their creative and commercial assets. Ex: A software
company registers a patent for its unique algorithm to prevent unauthorized use by competitors.

6. Negotiable Instruments Law: Covers legal principles related to negotiable instruments like
checks, promissory notes, and bills of exchange, which facilitate commercial transactions. Ex: If
a check bounces, the law provides mechanisms for the holder to claim payment.

7. Consumer Protection Law: Ensures the protection of consumer rights and regulates unfair
trade practices, deceptive advertising, and product safety. Ex: Laws requiring clear labeling of
products and protecting consumers against false claims in advertising.

8. Taxation Law: Governs the assessment and collection of taxes imposed on businesses,
including corporate tax, VAT, and income tax. Ex: Compliance with tax filing deadlines and
regulations to avoid penalties.

10. Environmental Law: Increasingly relevant, it mandates businesses to comply with

environmental standards and sustainability regulations. Ex: A manufacturing company must
adhere to pollution control laws to avoid fines.
CHARACTERISTICS OF LAW

Law embodies several fundamental characteristics that ensure its effectiveness and fairness
within society:

 Universality: Law applies equally to all people within its jurisdiction, regardless of their
social status, wealth, or background. Everyone is treated the same under the law. A law
prohibiting theft applies to both the rich and the poor, and they will face the same legal
consequences if caught stealing.
 Consistency: Laws are meant to be consistent and stable, ensuring that they do not
change randomly. This provides predictability and fairness in the legal system. A law
against fraud remains the same regardless of who is committing the act, ensuring that it is
applied equally to all individuals.
 Enforceability: For law to be effective, it must be enforceable through institutions like
the police, courts, and government authorities. This ensures compliance. Traffic laws are
enforceable through fines and penalties. If a driver runs a red light, they will receive a
ticket that enforces the law.
 Authority: Law must be derived from a legitimate source of authority, such as a
constitution, legislature, or government body. Only authorized entities can create and
enforce laws. Only elected government officials or lawmakers can create laws like tax
laws, not private individuals or groups.
 Flexibility: Laws must be flexible enough to adapt to changing societal needs,
technological advancements, and evolving moral standards. Laws related to internet
privacy have been updated over time to reflect the growing use of digital technology and
the need for personal data protection.
 Impartiality: Law must be applied equally to all individuals without bias or favoritism.
Courts and law enforcement must remain neutral and fair.A judge must rule on a case
based on facts and law, not influenced by personal opinions or the social status of the
individuals involved.
 Equity: Law should be fair and just, providing equitable treatment for all. Equity ensures
that individuals are treated fairly, even in cases where strict application of the law might
lead to injustice. In a divorce case, the court may divide assets in a way that ensures
fairness, rather than a strict equal split, based on the needs and contributions of both
parties.
 Publicity: Laws must be public and accessible, so individuals know what the law
requires of them. The law should not be secret or hidden. Public laws like the prohibition
of smoking in public places are made known to all citizens through notices, media, and
official publications.
 Stability: While laws must be adaptable, they should also provide a sense of stability in
society. Constant changes in law can lead to confusion and uncertainty. Criminal laws
that have been in place for decades (like laws against murder) remain stable to maintain
societal order, even if other laws might change over time.
  Justice: Law is fundamentally about justice—ensuring fair treatment and the protection
of individuals' rights. It seeks to correct wrongs and deliver fairness. A criminal who
commits a serious offense, such as assault, will be tried and punished to uphold justice
for the victim and society at large.

Importance of Business Law

 Maintains Order: Law helps to maintain social order by setting clear rules for
acceptable behavior, preventing chaos and conflict.Traffic laws, such as stopping at red
lights, ensure that roads remain orderly and reduce the risk of accidents.

 Protects Individual Rights: Law protects the rights and freedoms of individuals,
ensuring their safety and liberty are respected.Human rights laws protect individuals from
discrimination based on race, gender, or religion in the workplace or public spaces.

 Promotes Justice: Law ensures that justice is served by providing a framework for
resolving disputes and punishing wrongdoers.A criminal law system ensures that
someone who commits a crime, like theft, is held accountable through trials and
penalties.

 Facilitates Business Operations: Business laws provide the framework for businesses to
operate legally, ensuring they follow rules and regulations that protect consumers and
employees.Employment laws regulate working hours, wages, and conditions, ensuring
that employees are treated fairly and businesses operate smoothly.

 Resolves Disputes: Law provides mechanisms for resolving disputes fairly and
peacefully, preventing conflicts from escalating.Civil courts settle disputes between
businesses, such as breaches of contract, ensuring a legal resolution to conflicts.

 Protects Property: Laws protect ownership rights and ensure that individuals and
businesses can legally protect their property from theft or damage.Property laws allow a
business to defend its intellectual property, like trademarks or patents, against
infringement.

 Regulates Relationships: Law helps regulate personal and professional relationships,

providing guidelines for things like marriage, contracts, and business
partnerships.Business partnership laws regulate the responsibilities, profit-sharing, and
legal implications of business partners working together.

 Ensures Accountability: Law holds individuals and organizations accountable for their
actions, ensuring responsibility for both personal and corporate actions.If a company
 pollutes the environment, environmental laws hold it accountable by imposing fines and
requiring cleanup efforts.

 Promotes Economic Development: Stable and predictable laws foster an environment

conducive to economic growth, encouraging investment and trade. Trade laws, such as
tariffs and import/export regulations, provide a structured environment for
international businesses to engage in global trade.

 Protects the Environment: Environmental laws regulate businesses to ensure they do

not harm natural resources, promoting sustainability. Laws that limit emissions from
factories help protect air quality and reduce environmental degradation.

SOURCES OF LAW IN BUSINESS LAW

In business law, understanding the various sources of law is crucial as they define the legal
framework that governs business activities. These sources are classified into binding sources,
which must be followed, and persuasive sources, which influence decisions but are not legally
compulsory. The binding sources play a more direct and authoritative role in shaping the legal
environment.

1. BINDING SOURCES OF LAW

Binding sources of law are those that have mandatory legal authority, and courts and legal
institutions must adhere to them.

a) Legislation (Statute Law)

Legislation refers to laws that are formally enacted by a legislative body such as a parliament or
congress. These laws set out specific rules and regulations that govern various aspects of society,
including business activities. Statutes are often comprehensive, addressing a wide range of
issues, and provide businesses with clear legal guidelines. For example, the Companies Act
governs the formation, operation, and dissolution of companies, and it is binding on all
companies operating within the jurisdiction where the law is enacted.

b) Precedent (Case Law or Judicial Decisions)

Precedent, also known as case law, is the principle that past judicial decisions made by higher
courts must be followed by lower courts in similar cases. This doctrine, known as stare decisis,
ensures that the law remains consistent and predictable over time. For instance, if a higher court
has ruled on the interpretation of a specific contract clause, future courts in the same jurisdiction
must adhere to that interpretation unless it is overturned by a higher authority.
c) Customs or Usages
Customs are long-standing practices or traditions that have gained legal recognition due to their
consistent use within a particular community or business sector. For a custom to be legally
binding, it must be reasonable, certain, and continuously observed. An example of this would be
a common business practice, such as the custom of paying for goods within 30 days of delivery
in certain trade sectors, which may be recognized by law even if not explicitly stated in a written
contract.

d) Agreements and Conventions

Agreements refer to contracts or treaties that parties voluntarily enter into, creating binding
obligations between them. These agreements may be domestic or international. International
conventions, once ratified by member countries, become binding on those countries. For
example, the United Nations Convention on Contracts for the International Sale of Goods
(CISG) governs cross-border sales contracts and is binding on all member countries that have
ratified the treaty.

2. Persuasive Sources of Law

Persuasive sources of law do not have binding authority, meaning they are not mandatory for
courts to follow. However, they can influence judicial reasoning and decisions, especially when
binding sources are unclear, silent, or ambiguous.

a) Writings and Opinions

Writings and legal opinions from scholars, jurists, and legal commentators can provide valuable
insights into complex legal issues. Courts often refer to these sources to aid in the interpretation
of laws or to clarify difficult legal concepts. For example, a court might consult a well-regarded
legal textbook on contract law when faced with a complicated contractual term to guide its
judgment.

b) Decisions of Foreign Courts

Judgments from courts in foreign jurisdictions can serve as persuasive authority, particularly
when dealing with novel or complex legal issues. This is especially true in jurisdictions that
share a similar legal heritage or where foreign jurisdictions have well-established legal
principles. For instance, Nepalese courts may look to decisions from India's Supreme Court on
related legal questions, given the shared legal framework and traditions.

c) The Principle of Foreign Law

In some cases, courts may apply principles derived from foreign laws as persuasive authority.
This is often seen in international business disputes where no binding domestic law applies, but
foreign legal systems provide useful precedents. For example, arbitration tribunals frequently
rely on commercial laws from other countries to resolve cross-border disputes.

d) Opinion of Experts / Jurists

Expert opinions from recognized authorities in a particular field of law are often considered by
courts, especially in specialized or technical areas such as intellectual property or tax law. These
opinions can offer authoritative interpretations that influence the court's reasoning. For instance,
an expert's analysis of patent law might sway a court's decision in a patent infringement case.

e) Textbooks, Journals, and Periodicals

Academic and professional publications, including textbooks, legal journals, and periodicals,
provide in-depth analysis and critique of existing laws. These sources may not be binding, but
they can shape the development of future legal principles and are often cited in court cases. For
example, a law journal article on the changing landscape of e-commerce laws might be cited in
deliberations on a case involving online businesses.

f) Rules of Morality and Religious Books

While modern business law is generally secular, moral principles and religious teachings have
historically influenced legal systems. In some jurisdictions, legal reasoning may still be informed
by ethical considerations derived from religious texts. For example, principles of fairness and
honesty, often rooted in religious doctrines, might guide a court’s interpretation of good faith in
contract law.

CLASSIFICATION OF LAW IN BUSINESS LAW

Law in business can be classified in multiple ways based on various criteria. These
classifications help in understanding how legal principles apply to commercial activities. The
key classifications include enforcement, nature, subject matter, duties, and territorial operation.

1. Classification on the Basis of Enforcement

 Imperative Law (Mandatory Law): These laws must be followed and cannot be altered
by individual consent. Non-compliance with imperative laws leads to legal penalties. For
instance, consumer protection laws that ensure product safety standards are mandatory
for businesses to follow, regardless of individual agreements or contracts.
 Physical or Scientific Law: These laws govern natural phenomena and are not enforced
by human authority. They explain principles of nature that affect business operations
indirectly. For example, laws of gravity or thermodynamics impact how machinery and
production systems operate, but they are not legally enforced; they are universally
acknowledged principles of science.

2. Classification on the Basis of Nature

 Substantive Law: Substantive law defines the core rights and duties of individuals or
entities. It outlines the foundational legal principles that guide legal relationships in
business and society. For example, contract law establishes the requirements for valid
contracts and defines remedies when these contracts are breached, ensuring fairness and
accountability.
  Procedural Law: Procedural law governs the processes and methods used to enforce
substantive laws and protect legal rights. It sets the framework for how cases are handled
in courts. For example, civil procedure rules determine how business lawsuits should be
filed, processed, and resolved, ensuring a structured and fair judicial process.

3. Classification on the Basis of Subject Matter

 Public Law: Public law governs the relationship between individuals or businesses and
the state. It addresses issues related to public interests, government functions, and societal
order. Tax laws, corporate regulations, and environmental laws enforced by
government agencies are examples of public laws that regulate business activities for the
public good.
 Private Law: Private law deals with relationships between private individuals or entities
without government involvement. It focuses on the personal rights and obligations of
parties in legal disputes. Contract law, property law, and tort law are key areas of
private law, governing private business transactions and resolving disputes between
businesses or individuals.

4. Classification on the Basis of Duties

 Criminal Law: Criminal law addresses offenses against the state or society. It imposes
penalties such as fines, imprisonment, or community service for violations. In business,
corporate fraud, insider trading, and environmental law violations are examples of
criminal offenses that businesses may face legal consequences for.
 Civil Law: Civil law pertains to the resolution of disputes between individuals or
organizations, focusing on private rights and remedies. It is typically concerned with
cases where compensation or specific performance is sought. For example, breach of
contract or negligence lawsuits in business are civil cases where businesses seek redress
or compensation for harms suffered.

5. Classification on the Basis of Territorial Operations

 National Law: National law applies within the specific territorial boundaries of a
country. It governs all persons, organizations, and businesses within that jurisdiction. For
example, the Nepalese Companies Act regulates how businesses operate within Nepal,
setting standards for formation, operation, and dissolution of companies.
 International Law: International law governs relations between sovereign states and
international organizations. It includes treaties, conventions, and agreements that impact
multinational business operations. For example, WTO agreements regulate international
trade practices, tariffs, and trade relations between member countries, affecting how
businesses engage in cross-border commerce.
DEVELOPMENT OF BUSINESS LAW IN NEPAL

The history of business law in Nepal is relatively short compared to other branches of law. Early
business transactions were governed by traditional Hindu legal systems, primarily influenced by
the Dharmasastra. Even during the unification of Nepal, several rulers, including Mahindra
Malla, Jayasthiti Malla, Ram Shah, Prithvi Narayan Shah, and Ran Bahadur Shah,
introduced laws with provisions related to business. However, these were not considered modern
business laws and were limited to the territories ruled by these kings.

The first significant step in modern business law in Nepal came with the promulgation of the
Muluki Ain of 1910 BS (Code of 1854 AD). This was the first written law that applied
uniformly across unified Nepal, laying the foundation for business law in the country. The law
contained provisions on creditors and debtors, and general transactions, largely influenced by the
principles of Hindu Dharmasastra. It was not until 1992 BS that an amendment was made,
introducing a chapter on registration. This required certain agreements, such as property
transactions and adoption agreements, to be in writing and registered to be legally valid.

The Muluki Ain of 2020 BS (1963) was a significant update to the earlier version. Framed in
1963, it came into force on 17 August 1963 and included provisions regarding agreements. It
declared that any agreement not related to money lending, but not inconsistent with existing
laws, would be valid. However, this provision was eventually repealed by the Contract Act of
2023 BS in 1966. The Muluki Ain of 2020 BS also made provisions concerning contracts like
bailment and pledge, but these were repealed later by the Contract Act of 2056 BS.

A milestone in Nepalese business law came with the enactment of the Contract Act of 2023 BS.
This act was the first modern legislation of Nepal dealing with contracts. With 19 sections, it
addressed general provisions of contract law, though it lacked specific provisions for contracts
such as the sale of goods, agency, guarantee and indemnity, and bailment. Due to its
shortcomings, this Act was replaced by the Contract Act of 2056 BS in 1999.

The Contract Act of 2056 BS was a more comprehensive law and included provisions for
specific contracts like the sale of goods, guarantee, indemnity, agency, and bailment, which were
missing in the earlier Contract Act of 2023 BS. The provisions of the Contract Act of 2056 BS
were similar to those in the Indian Contract Act of 1872 and helped modernize Nepal's
approach to contract law. This law was amended in 2064 BS (2007) to address certain issues, and
it remained in force until the Muluki Civil Code of 2074 BS came into effect.

The Muluki Civil Code of 2074 BS, which came into force in 2018, marked a paradigm shift in
Nepalese business law. It consolidated all aspects of contract law into a single general civil
code, ending the era of specific statutes like the Contract Act of 2056 BS. This new code
harmonized modern contract law principles from international legal systems, making it the
cornerstone of business law in Nepal. It also repealed the earlier Contract Act and incorporated
the provisions into the new Muluki Civil Code.
In 2019, the Muluki Civil Code was amended to make minor changes, ensuring alignment with
modern contract law practices. This amendment also introduced new provisions that were
previously absent, making the code more comprehensive. The Muluki Civil Code continues to
serve as the governing law for business contracts in Nepal, reflecting the country’s shift towards
a more unified and modern legal system for handling business transactions.

Thankyou