Is Legal the Same as Ethical?

Let’s look at the definitions.

le·gal ˈlēɡəl/

adjective

1:  of or relating to law
2a:  deriving authority from or founded on law: de jure
b:  having a formal status derived from law often without a basis in actual fact:  titular <a corporation is a legal but not a real person>
c:  established by law; especially : statutory
3:  conforming to or permitted by law or established rules
4:  recognized or made effective by a court of law as distinguished from a court of equity
5:  of, relating to, or having the characteristics of the profession of law or of one of its members
6:  created by the constructions of the law <a legal fiction>

eth·i·cal ˈeTHək(ə)l/

adjective

1:  of or relating to ethics <ethical theories>
2:  involving or expressing moral approval or disapproval <ethical judgments>
3:  conforming to accepted standards of conduct <ethical behavior>

Based on the definitions, something can be legal but unethical.

What?

Legal relates to the law. The law is a man-made, abstract set of rules, and laws can be used to create something that is fiction, but legal. Look at item #6 for legal: “created by the constructions of the law <a legal fiction>.

Legal fiction? Logisticians and supply chain managers use legal fictions in the form of Foreign Trade Zones. A Foreign Trade Zone is an area that, for the purpose of legal trade, is not within the United States. Goods that move into the trade zone are exempt from state inventory taxes and are not subject to import duties and taxes until they leave the zone and enter the jurisdiction of the United States.

I think that a Foreign Trade Zone is both legal and ethical. The zone is actually a benefit to the people in the area around it because the activity inside the zone creates jobs that put wages into the local economy, which in turn helps other businesses, increases tax revenue, and supports the general welfare of the area.

Ethics are all about morals. Any given action is right or wrong, from a moral standpoint. Is it ethical to hire your son to work as a manager in the company? Yes, if your son is qualified to do the job. Is it ethical to have a romantic relationship with a subordinate? No, as a past president demonstrated. Congress did not vote to impeach President Clinton because he had sex with an intern, they voted to impeach because he lied under oath about it.

Some laws are outgrowths of ethical theory, based on ethical judgment, supporting ethical behavior. Thou shalt not kill is an ethical and moral rule. Murder is against the law. Killing someone in self-defense is not against the law, nor is it unethical.

Dipping into a hot button topic, abortion is legal, but some people question the moral and ethical issues associated with it. People who support abortion dance around the "killing others" issue by declaring that the unborn fetus is not yet a person, or holding that the rights of a woman who has an unwanted pregnancy are more important than the potential rights of the unborn child. People who disagree with abortion hold that an unborn baby's life is just as important as that of the mother. The issue gets stranger when the law considers acts of violence involving a pregnant woman. Thirty-eight states will charge a suspect with double homicide in the death of a pregnant woman when the unborn child dies as a result. New Jersey is the latest state to consider fetal homicide laws.

The disparity between laws and ethics crosses national borders and cultural boundaries. The recent Charlie Hebdo terrorist attack in Paris draws a sharp contrast between the voices of liberty and the French Government’s crackdown on speech. While people in the United States enjoy strong protections of free speech and assembly, people in other countries only dream of such freedoms. Just to the north in Canada, so-called "hate speech" was illegal under that country’s Human Rights Acts (a law that was upheld by the Canadian Supreme Court), until a new bill passed the Canadian House of Commons, setting aside the contentious section of the law.

Contracts Creating Mischief

Laws exist to regulate the behavior of individuals and organizations, like businesses.

Legal terms and conditions surround us, attempting to regulate our behavior and protect business entities. There is even a terms and conditions page for this website, which is necessary to define the legal rights and responsibilities of the publication, the writers, and readers.

Contracts can lead to behavior that is legal but unethical. An old business manager I know uses a rule of thumb when it comes to contracts: “If you need a magnifying glass, a dictionary, and a pad of paper to figure out a contract, expect that the other party will use that piece of paper to try to screw you.”

Let's look at an example of how a contract can be legal, but executed without ethics.

Prime and Sub

Two companies enter into a Prime Contractor and Subcontractor agreement. One company—let’s call them Prime—hires the other company (let’s call them Sub), to install machines and other materials provided by Prime. Prime sold the project to a large and rich customer. The project is worth tens of millions of dollars.

Prime makes special equipment, which it integrates into large and powerful systems that can help make the large and rich customer even larger and richer. Prime designs the system, integrating equipment it makes with equipment made by others. Prime buys other materials, the equipment made by others, and hires companies like Sub to provide the skilled labor to assemble all the equipment and materials into the massive system that will make lots of money for the large and rich customer.

If you think I am describing a complex material handling system, you could be correct. It can be a building, a manufacturing line, a building automation system, or anything in the supply chain. Contracts on contracts on contracts, defining complex relationships between companies involved in building these large and complex systems.

Prime creates a contract. Actually, they create two different contracts. The first contract, called the Installations Services Agreement, is 21 pages of two-column, eight-point type. The second contract is a Project Subcontract Agreement, which can be over 30 pages in length.

The Installation Services Agreement, also known as the ISA, defines a generalized scope of work:  the performance of work, progress and schedule, submittals and substitutions, quality and compliance issues, payment terms, changes to the work, subcontractor delay and execution, dispute resolution, risk management, safety and security, default and termination and miscellaneous items. The ISA is a blanket agreement, covering the consistent terms and conditions that define Prime’s expectation of how Sub is supposed to behave.

The Project Subcontract Agreement, also known as the PSA, defines in detail a specific project, including the specific scope of work, the visions of duties and responsibilities, conditions and assumptions, contract documents, the sum of money involved in the contract, specific payment terms, the requirement of bonds, reporting requirements, and terms regarding the modification of work. The PSA typically includes other referenced contractual documents, including the main contract that Prime has with its customer, specifications and drawings, equipment lists and installation manuals.

This two-part structure is normal in complex integrated systems contracting. A prime contractor qualifies the subcontractors it hires. This structure simplifies the contracting process for the prime contractor (though some may find it hard to agree that it's simple). The ISA defines the terms that are consistent across all projects while the PSA defines the terms that are specific to that individual project.

Up to this point, the story that I will tell you about prime and sub sounds kind of boring. And it would be boring if it were not for ethical issues that arise in the relationship between these two entities. However, real life is seldom boring, as we shall see in the next section, Contracts.

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