Organizational Structure Running A Successful Business
The legal environment unit1
1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
1
Module 10: The Legal Environment
2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
LEARNING OBJECTIVES
After studying this module you should be able to:
• Identify the sources of law relating to financial institutions
• Explain the principles of law
• Explain the need for contract law
• Relate the role of contract law in the business of banking
• Recognize how the daily operation of bank financial institutions is affected by Acts
of Parliament and statutes.
• Explain the concept of ‘negotiability’ as applied to cheques
• Understand the duties of the banker to his customer
• Know the rights of the banker to his customer
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Introduction to law
Contract law and Banking
Banking and its relationship with legislation
MODULE COVERAGE
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Banker-Customer Contract
Negotiable Instruments
4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Definition of Law
To understand the nature of law, legal theory provides answers to the
following questions: What is law? Why is law necessary? and What is the
purpose of law? We discuss answers to these questions below.
What is law?
• The word ‘law’ is not easy to define, particularly as it is used in many
different ways. Therefore our attempt to define the term ‘law’ at this level,
only gives a limited introduction to a very philosophical subject.
• Unlike scientific laws, law cannot be objectively defined, let alone proved!
It is the product of society, not of nature, and it means different things to
different people according to their time, culture and the social structure in
which they live. This means different jurists attach different meanings to
the word ‘law’ and no definition is considered perfect.
• That said, the banker’s approach to understand law follows an ‘analytical’
approach, i.e. adopts the legal theory that analyses the concepts and
structures of the law as they are. Thus for the banker, ‘law’ may be
defined as: a set of rules administered and enforced by the state.
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5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Why is law necessary?
The function of law is to regulate conduct within society or the state. This way, the
state regulates the rights and duties of individuals in relation to each other and to
the state.
The law of a country consists of rules of conduct and standards. These rules may
originate from Acts of Parliament or customs, and are enforced by the duly
constituted courts of law. For example the Banking Act 2000 was enacted to
regulate deposit taking.
Note that ‘law’ is not static but changes and develops. Changes and developments are
mainly through Acts of Parliament.
What is the purpose of law?
The purpose of the law is to provide ready reference for acceptable norms of society.
Acceptable norms or behavior controls society. The legal structure (framework) of
the state offers means of resolving conflicts and legally enforcing acceptable
behavior.
Company law, for example, provides that a bank (similar to other companies) exists at
law independently from its members and it can sue and be sued in its own right.
This kind of framework enables banks to exist and function the way they do.
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6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Principles of Law
• The rule of law is the supreme check on power used against peoples’ rights.
Without the regulation of state power by a system of laws, procedures, and courts,
democracy could not survive.
• The principles of law are: a government bound by and ruled by law; equality and
equity before the law; the establishment of law and order; the efficient and
predictable application of justice; and the protection of human rights.
• The cardinal principles of law are usually expressed in terms of the ‘Rules of
Natural Justice’. The rules of natural justice are the minimum standards of fair
decision-making imposed on persons or bodies acting in a judicial capacity.
• In the event of a hearing taking place, for example, or a decision being reached
which breaches the principles of natural justice, the person charged may seek a
review of the hearing and/or decision in the courts.
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7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Classification of law
This topic can be viewed in several ways, depending on what you are comparing. For
our purposes, we shall consider the most common divisions: Public law and Civil
law.
• Public law is concerned with matters of society as a whole, particularly the
relationship between individuals / organizations and the state.
• Civil law concerns individuals and / or organizations. Quite often we hear of
constitutional law (dealing with the exercise of power in the state); administrative
law (dealing with the rights and duties of administrative agencies of government);
and criminal law (dealing with those that break accepted codes of social
behavior). All these are branches of public law.
• We are not required to go into much detail of the above laws but need to be
aware of their application. Of much more relevance to financial institutions like
banks is ‘civil law’.
• An example of civil law is contract law (discussed in unit 2); this regulates
agreements between individuals or organizations, e.g. banks and their customers.
The banker / customer relationship (discussed in unit 4) also benefits from
contract law.
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8. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Legislation
• The term ‘Legislation’ means law made by Parliament and, is found in Acts of
Parliament and Orders made under them. Many Acts of Parliament are like mini
codes of law on particular subjects which the judges use when deciding cases.
• It is important that legislation be comprehensive and definite and should provide
code(s) against which future conduct can be judged. Legislation is not based on
past situations and can deal with hypothetical situations.
• The main Legal Institutions of law are the Courts. Legislation is subject to
interpretation by the courts and, it can be argued that, to a degree, this introduces
an element of uncertainty. This is because interpretation by the courts can result in
law somewhat - different from that intended by Parliament.
• But that said, Acts of Parliament are the SUPREME form of law. It is Parliaments
that can change, repeal or create law; and Judges, while they are able to interpret
an act when its meaning is ambiguous or obscure, have no right to challenge the
act itself.
Statute Law
Most of the business of financial institutions is regulated by statute law. Statutory
instruments are the regulations and orders made by government ministers under
the authority of ‘parent’ or enabling Acts of Parliament.
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9. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
We have mentioned above that the court has no right to challenge Acts. In
interpreting statutes, the Court is concerned with what the statute provides; it is
never required to take account of what may have been said in parliamentary
discussions. Therefore, unless a statute contains express words to the contrary, the
following ‘canons’ of statutory interpretation will always apply:
• The statute does not alter the existing law nor repeal other statutes;
• If a statute deprives a person of his property, he must be compensated for its
value;
• A statute does not have retrospective effect to a date earlier than its becoming
law;
• Any point on which the statute leaves a gap or omission is outside the scope of the
statute.
Finally, we look at the rules which are commonly referred to as ‘legal rules’. These
rules arise out of established business practice. For the banking industry, an
example of such rules is the Code of Banking. This is explained below.
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10. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
The Code of Banking (Legal Rules)
Having seen the legal laws creating by parliament and other societal institutions,
banks through practice have created what is referred to as the “Code of Banking”
or Practice of Banking Rules.
These rules are drawn by the Uganda Bankers Association, a body to which all
commercial banks and the affiliated financial institutions are members. The rules
that cover the clearance of cheques (payment of cheques drawn on competitor
banks) and bills, for example, are not laid down by any statutes; they are created
by the members of the Clearing House overseen by Bank of Uganda.
Note that disputes between parties on practice or procedure could lead to a court
action. Therefore, if a dispute is taken to court, a breach of established practice
could lead to one bank having to make good a loss caused by such a breach to the
innocent party bank.
These legal rules, by virtue of their creation, can be changed by the Bankers
Association without consultation.
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Editor's Notes
The laws of the country are the rules which the nation through its law-enforcing machinery makes compulsory. Penalties and other sanctions are imposed upon breaking the established laws.
The Law regulates the activities of the banks by providing a framework of rules governing every aspect of the business of banking. Banks use the law to achieve their objectives. For, example, contract law, discussed in unit 2, enables a bank to acquire in the market the resources (such as premises and personnel) it needs to do business, e.g. sell their current accounts, savings accounts, salary loans, etc. It is also interesting that the rules of an activity may prevent society from doing certain things while at the same time providing an enabling environment for society to engage in acceptable activities
It is largely through statutory instruments that government policies are implemented. An example of such instruments is the Bills of Exchange Act. This governs the use of cheques and other negotiable instruments. You will learn about ‘cheques as negotiable instruments’ in unit 4.