Chapter 25 The Regulation of International Transactions

2 Chapter Objectives 1. Identify and discuss some basic principles and doctrines that frame international business transactions. 2. Describe some ways in which U.S. businesspersons do business internationally. 3. Explain how parties to international contracts protect against various risks through contractual clauses and letters of credit. 4. Discuss how specific types of international business activities are regulated by governments. 5. Give examples of the extraterritorial application of certain U.S. laws.

3 International Principles and Doctrines International law is a body of written and unwritten laws that are observed by otherwise independent nations and that govern the acts of individuals as well as states. The three important legal principles and doctrines include:  Principle of Comity  Act of State Doctrine  Doctrine of Sovereign Immunity

4 The Principle of Comity Under this principle, nations give effect to the laws and judicial decrees of other nations for reasons of courtesy and international harmony.

5 The Act of State Doctrine A doctrine under which American courts avoid passing judgment on the validity of public acts committed by a recognized foreign government within its own territory.

6 The Doctrine of Sovereign Immunity When certain conditions are satisfied, foreign nations are immune from U.S. jurisdiction under the Foreign Sovereign Immunities Act of Exceptions are made when the:  foreign state has “waived its immunity either explicitly or by implication”  action is “based upon a commercial activity carried on in the United States by the foreign state”

7 Case 25.1 Holden v. Canadian Consulate Canada closed its consulate in San Francisco which caused Arlene Holden to lose her job after thirteen years as a commercial officer. Canada then opened a small office with only one commercial officer, Mark Ritchie, who was younger and less experienced than Holden. Holden filed a suit against the consulate alleging discrimination. The consulate asked the court to dismiss under the FSIA. What did the courts rule? Does the “commercial activities” exception to the FSIA conflict with the Act of State Doctrine?

8 Doing Business Internationally Ways in which U.S. domestic firms engage in international business transactions include:  exporting, which may involve foreign agents or distributors  manufacturing abroad through licensing arrangements, franchising operations, wholly owned subsidiaries, or joint ventures

9 ExportingExporting Exporting can take two forms:  Direct exporting—U.S. company signs a sales contract with a foreign purchaser that provides for the conditions of shipment and payment for the goods.  Indirect exporting—can be undertaken by the appointment of a foreign agent or a foreign distributor.

10 What Is a “Commercial Activity”? According to the U.S. Supreme Court, a state engages in a commercial activity “where it exercises ‘only those powers that can also be exercised by private citizens’ as distinct from those ‘powers peculiar to sovereigns.’” In addition to finding that a government- controlled foreign defendant has engaged in a commercial activity, what other requirement must be met before a U.S. court can exercise jurisdiction over the defendant?

11 Manufacturing Abroad U.S. firms want to establish manufacturing plants abroad if they believe that by doing so they will reduce costs, particu- larly for labor, shipping, and raw materials, and thereby be able to compete more effectively in foreign markets.

12 Commercial Contracts in an International Setting Choice-of-language, forum-selection, and choice-of-law clauses are often included in international business contracts to reduce the uncertainties associated with interpreting the language of the agreement and dealing with legal differences. Force majeure clauses are included in most domestic and international contracts.  They commonly stipulate that certain events, such as floods, fire, accidents, labor strikes, and shortages, may excuse a party from liability for nonperformance of the contract.  Arbitration clauses are also frequently found in international contracts.

13 Legal Documents in French In 1995, France implemented a law making the use of French mandatory in certain legal documents. Certain legal terms in documents governed by U.S. or English law have no equivalent terms or phrases in the French legal system. How might language differences affect the meaning of certain terms or phrases in an international contract?

14 Making Payment on International Transaction Currency differences between nations and the geographical distance between parties to international sales contracts add a degree of complexity to international sales that does not exist within the domestic market. Because international contracts involve greater financial risks, special care should be taken in drafting these contracts to specify both the currency in which payment is to be made and the method of payment.

15 Monetary Systems Currency conversion  Because nations have different monetary systems, payment on international contracts requires currency conversion at a rate specified in a foreign exchange market. Correspondent banking  Correspondent banks facilitate the transfer of funds from a buyer in one country to a seller in another.

16 Arbitration Clauses One reason many businesspersons find it advantageous to include arbitration clauses in their international contracts is because arbitration awards are usually easier to enforce than court judgments. What might be some other advantages of arbitration in the context of international transactions? Are there any disadvantages?

17 Letters of Credit Letters of credit facilitate international transactions by ensuring payment to sellers and ensuring to buyers that payment will not be made until the sellers have complied with the terms of the letters of credit. Typically, compliance occurs when a bill of lading is delivered to the issuing bank.

18

19 Case 25.2 Pacific Reliant Industries, Inc. v. Amerika Samoa Bank Pacific Reliant Industries sold building materials to a company in American Samoa on the strength of a letter-of-credit (LC) issued by Amerika Samoa Bank (ASB). Later, alleging that ASB had wrongfully dishonored the LC, Pacific brought suit in Oregon against ASB to recover payment. The court dismissed the suit for lack of sufficient personal jurisdiction and Pacific appealed. If a court could exercise jurisdiction over a nonresident corporation that did not have minimum contacts with the jurisdiction in which the suit was brought, what might result?

20 Regulation of Specific Business Activities In the interests of their economies, foreign policies, domestic policies, or other national priorities, nations impose laws that restrict or facilitate international business. Such laws regulate foreign investments; exporting and importing activities; and in the U.S., the bribery of foreign officials to obtain favorable contracts. The General Agreement on Tariffs and Trade attempts to minimize trade barriers among nations, as do regional trade agreements, including the European Union and the North American Free Trade Agreement.

21 U.S. Laws in Global Context Antitrust laws  U.S. antitrust laws may be applied beyond the borders of the United States.  Any conspiracy that has a substantial effect on commerce within the United States may be subject to the Sherman Act, even if the violation occurs outside the U.S. Discrimination laws  The major U.S. laws prohibiting employment discrimination cover U.S. employees working abroad for U.S. firms—unless to apply the U.S. laws would violate the laws of the host country.

22 Case 25.3 United States v. Nippon Paper Industries Co. A criminal indictment was filed against Nippon Paper Industries Co. (NPI) and others alleging that the meetings to reach the agreement had occurred entirely in Japan but that the defendants had sold the paper through subsidiaries in the United States at above-normal prices. These activities had allegedly violated Section 1 of the Sherman Act. NPI filed a motion to dismiss. What did the courts rule? Why should the United States apply its antitrust laws to business firms owned by citizens or the government of another nation?

23 Discrimination Laws There are laws in the U.S. prohibiting discrimination on the basis of race, color, national origin, religion, sex, age, and disability. These laws, as they affect employment relationships, generally apply extraterritorially.

24 For Review 1. What is the principle of comity, and why do courts deciding disputes involving a foreign law or judicial decree apply this principle? 2. What is the Act of State Doctrine? In what circumstances is this doctrine applied? 3. A foreign nation is not immune from the jurisdiction of U.S. courts if the nation waives its immunity. Under the Foreign Sovereign Immunities Act of 1976, on what other basis might a foreign state be considered subject to the jurisdiction of U.S. courts? 4. In what circumstances will U.S. antitrust laws be applied extraterritorially? 5. Do U.S. laws prohibiting employment discrimination apply in all circumstances to U.S. employees working for U.S. employers abroad?