How to Analyze a Business Legal Issue

By bcummings

man holding newspaper and briefcase

An important skill for business professionals to develop is how to analyze a legal situation that might affect their business so they can exercise sound judgment and make good business decisions. Most undergraduate Business Administration and MBA programs require students to take a business law course to provide new business executives and managers with an overview of the legal issues they may encounter and to help develop their legal reasoning skills.

IRAC Method

There is a specific process for analyzing a business law issue. First, you should identify the legal issue and the facts and circumstances of the situation. Next, you will need to do some research to determine the rule of law. Then, you will analyze the facts and circumstances of the situation by applying the rule of law to the facts. Finally, you reach a conclusion based on your analysis. This process is called the IRAC method (Issue, Rule, Analysis, Conclusion) and is the basic method that lawyers depend on to analyze legal issues. 

For example, suppose you are the chief executive officer of a business that puts on firework displays, and you are concerned about your business’s liability in the event that a spectator is injured by a stray firework.


Applying the IRAC method, you would first identify that the issue is whether your business would be liable for damages caused by a stray firework that injures a spectator. 


Next, you would research the issue and determine that the two possible legal theories for liability in this situation might be negligence and strict liability. These are the rules of law, and you would need to find out the elements of each legal theory. For example, the elements of negligence are duty of care, standard of care, breach of the duty of care, actual causation, proximate causation, and actual damages.


Thirdly, you would analyze each of these elements and apply them to the facts of the firework business situation. Ask questions to synthesize the information and understand the situation: Does your business have a duty of care toward the spectators? If so, what is the standard of care? Would the stray firework be the result of falling below that standard of care? Would the stray firework be the actual cause of injury to the spectator? Would the type of injury be expected from a stray firework (proximate cause)? What kind of damages would the spectator encounter?


Finally, you would conclude whether (based on your analysis) the business would be liable for negligence. 

Having completed your analysis under the theory of negligence, you would repeat the process for strict liability and any other legal theory of liability that you may find. Once you understand these legal theories of liability and how they would apply to a situation in which a stray firework injures a spectator, you are ready to make good business decisions on a wide variety of matters such as how much liability insurance you need, policies to implement regarding safety precautions, training of employees who set off the fireworks, quality, size, and type of fireworks to use, type of business entity, and many more factors.

One thing to keep in mind is that there is rarely a clear, black-and-white answer to many legal questions. Most legal issues have gray areas, and there may be good arguments on either side of the issue. Your job is to determine the likely outcome so you can assess the risk and make an informed business decision on how to proceed. Another thing to consider is whether you have the experience and training to accurately analyze and assess the legal issue. In many cases, a business executive and manager have done their job by simply identifying the issue exists and then consulting with corporate counsel. When in doubt, get an opinion from the legal department or your business attorney. It is generally much easier and less expensive to avoid a legal issue than it is to go to court.



Written by David Mackusick, JD, CPA[TJ1]assistant professor with the Forbes School of Business & Technology™ at Ashford University.


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