MBA 630 UMUC International Law Colossal Corporation Case Study Questions

The vice president is concerned that the company is undertaking anumber of international projects without a complete understanding of
the risks that such activities entail. Specifically, the VP would like further
thoughts on the following issues:
1. In one case, a subsidiary of Colossal Corporation has negotiated a
contract that calls for any disputes to be settled in the courts of
Zintar, a relatively small African country that supplies raw
materials for some of Colossal’s European operations. The VP
would like a discussion on the wisdom of this contract provision
and thoughts on possible alternative approaches if the contract
were to be renegotiated.
2. In a second case, a Colossal subsidiary in Bartan, an Asian
country, wants the company to enter into a sales contract with a
subsidiary there, using the UN Convention on Contracts for the
International Sale of Goods (CISG) as the controlling law. The VP
needs to know the ramifications of this option and decide
whether it is a good idea.
3. Colossal management also needs to know whether arbitration is a
good idea for a dispute resolution provision for both domestic
and international contracts and why.
4. The parent company, Colossal Corporation, has been sued in the
country of Notso in South America. The lawsuit claims millions of
dollars in damages due to supposed pollution at a mine that
Colossal owned there. Since Colossal has already decided to exit
that country and sold the mine there, the company’s regional VP
believes there is no risk if the company is taken to court in Notso.
He says that even if Colossal loses there and a court judgment is
rendered against it, there is no danger because the company will
have left the country. The VP needs to know if he is right.
5. Finally, one of Colossal’s suppliers in the country of Edfin no
longer wants to supply needed raw materials for Colossal’s
factories in the United States, unless Colossal agrees to pay them
by opening a letter of credit. Up to now, the company has paid
them after delivery to the United States, which has allowed
Colossal to inspect the quality of the shipments before sending
payment. What are the ramifications of granting Edfin’s request?
While you have some general awareness that there are many
ramifications of international transactions from a legal perspective,
including dispute resolution provisions, you realize that you need to
know a lot more about this subject before you can attempt to respond
to the VP’s questions.
You begin by researching international law, international contracts,
an introduction to alternative dispute resolution, and international
dispute resolution.
International Law
Print
by Robert C. Goodwin, Collegiate Professor, University of Maryland Global Campus
Introduction to Law
There are many definitions of law, each of which focuses on a different aspect of the
subject. Black’s Law Dictionary (n.d), for example, defines law in a way that emphasizes it as
applicable to people as well as physical phenomena: “That which is laid down, ordained, or
established. A rule or method according to which phenomena or actions coexist or follow one
another.”
Webster’s Third New International Dictionary (1961) is less broad, focuses on people, adds the
enforcement concept, and emphasizes the notion of law as an expression of the customs of the
people: “A binding custom or practice of a community. A rule or mode of conduct or action that
is prescribed or formally recognized as binding by a supreme controlling authority or is made
obligatory by a sanction made, recognized, or enforced by the controlling authority.”
An even more specific definition is, law consists of the entire body of principles that govern
conduct, the observance of which can be enforced in courts.
Man-made law is necessary to provide not only rules of conduct but also the machinery and
procedures for enforcing right conduct, for punishing wrongful acts, and for settling disputes that
arise even when both parties are motivated by good intentions. In its broadest sense, the purpose
of law is to provide order, stability, and justice. It is often said that procedure is the heart of the
law. There are many instances where the substantive words of the law appear to give someone a
right but they are unable to exercise that right for procedural reasons. Something as simple as
failing to file a lawsuit within the time limits set by the local court rules can prevent someone
from receiving the remedy they thought they had. We should always keep this distinction
between right and remedy in mind as we review the various materials in this course.
The Legal System
Each nation has its own legal system. Thus, the institutions that create the laws (such as
bureaucracies, courts, legislatures, a king) can differ significantly from country to country. So
also will the scope of the substantive rules enacted by these institutions, which define the rights
and responsibilities of the citizens of the nation. The rules relating to what constitutes criminal
conduct, when a contract is considered to be formed, what activities of private parties are subject
to government control, and myriad other substantive regulations of human conduct all differ
from country to country. A final aspect of a nation’s legal system consists of the procedural rules
that govern enforcement of the substantive ones. As noted, one doesn’t truly have a right without
a remedy, and it is the remedy that is defined by procedural law. These rules encompass
everything from the rules of evidence to the right to be represented by a lawyer and are a critical
component of a legal system.
While it is a fact that each nation has its own legal system, it is also true that legal systems can be
grouped into major categories, with the individual nations within a category having similar
structures to their legal systems. The two major legal systems in the world are the common law
legal system and the civil law legal system.
Civil Law and Common Law
A civil law country is one whose legal system reflects, however remotely, the principles of
classical Roman law as codified by the emperor Justinian I in the sixth century. While modern
countries that are part of the civil law system have substantive laws that differ greatly from the
law at the time of the Romans, the structure of the system and its approach to legal problem
solving date from the sixth century. We may be more familiar with the Napoleonic Code of
1804, which often is considered the father of civil law codes, but it too was a direct descendant
of Roman law.
Common law, on the other hand, owes its origins to the slow development of royal courts after
the Norman Conquest of England in 1066. Gradually, the expansion of royal power at the
expense of the local barons resulted in the ascendancy of royal institutions and particularly the
royal courts, where citizens perceived the likelihood of justice at the hand of the King’s judges as
greater than that of the purely local tribunals, which had existed before the conquest. The term
common law owes its origins to the fact that it was the law applied by royal or national courts
and hence “common” to the entire country as opposed to the customary law of the local courts.
More important for us than the origins of these two major legal systems are the questions: which
countries are influenced by which system, how do the two systems differ, and what do the
differences mean for international business, if anything?
Common law is applied in Great Britain and almost all of the countries where Great Britain had a
significant influence. Thus, the United States, Canada, Australia, India, and most other former
British colonies use the common law system. The civil law system is centered in continental
Europe and prevalent in South America and much of Asia, including Japan.
While in recent years the differences between the two major legal systems have narrowed
somewhat, with countries identified as common law or civil law borrowing legal approaches
from each other and being influenced by the same social movements and cultural changes, there
nevertheless are significant differences that should be highlighted. The most fundamental
difference rests in the very nature of how law is made.
In the civil law tradition, law is conceived as a rule of conduct expressed in written codes.
Nothing is law unless it is written down in such a code. The expression of the law is stated in
broad general terms, and a judge, when deciding a case, must find a basis for the decision in the
principles expressed in the code. While the judge may refer readily to legal scholars for
assistance in doing so, reference to other similar cases handled by other judges would ordinarily
not be part of the process. Rather, the civil law judge would apply deductive reasoning—solving
the case by deduction from a principle expressed in the code.
Common law focuses heavily on cases. While common law countries have codes (any statute
enacted by a legislative body would fit this definition) the law inferred by prior cases (i.e.,
judicial precedents) is equally as important as the statute. Common law lawyers and judges
reason by analogy to prior cases, and if a prior case decided by a higher court is essentially the
same in its factual pattern then the case will control the outcome under the principle of stare
decisis (i.e., that past decisions are generally binding for the resolution of factually similar
cases). Thus, the role of judges is critical, and the common law is often referred to as “judgemade law.” One of the facets of common law which often surprises those familiar with the civil
law tradition is that there are many areas of the common law where there is no written statute at
all—only prior cases. In order to know the state of the law, one has to study the cases first. A
good summary of these fundamental differences might be, a common law lawyer looks for a
case, a civil law lawyer looks for the principle involved.
In addition to the fundamental difference noted above, there are a number of less general but
equally important practical differences. For example, there are no juries in noncriminal cases in
civil law countries. In a court case in a civil law country, the judge assumes a far more activist
role, and attorneys for each side have an obligation to assist the judge in finding the facts. In
contrast, in litigation in a common law country, the judge is a neutral referee, ruling on motions
made by the advocates but not generally initiating his own inquiries.
The US Legal System
In order to understand the context of international law, it is important to have a basic
understanding of the US legal system. This system is somewhat complex because each state
within the United States has its own legislative body, executive branch, and court system. And,
of course, the federal government has this structure as well. How these systems overlap and
interact with each other is an important issue.
One of the most important aspects of the US federal system is the acceptance by courts in one
state of the judicial decisions made in another state. The Constitution itself requires that each
state give “full faith and credit” to the judicial determinations of its sister states. Thus, for
example, if I bring a successful lawsuit in Maryland against a party who moves to California, I
can take that Maryland judgment to the courts of California and ask that the California court
convert that judgment into a California judgment, which can then be enforced in that state.
Importantly, there is no comparable situation among countries. If I obtain a favorable court
ruling from the courts of France against a person who then moves to Brazil before the judgment
can be enforced it will be doubtful that I could convince a Brazilian court to adopt the French
judgment. There is no international “full faith and credit” clause, although negotiations on an
international agreement, which would do just that, are already underway.
One interesting aspect of the differences between federal laws and state laws is that those laws
that are of principal interest to us (i.e., those laws that deal with commercial matters) are
virtually all state laws. There is no federal law of contracts and no federal law of sales. That does
not mean, however, that federal courts are never involved in hearing a case involving a contract
dispute. But if and when they do hear such a case they apply state law. Assume, for example, that
you have a contract dispute that arises over a contract that was signed in New York and was to
be performed in New York. One party brings an action in the federal court sitting in the state of
Maryland (we’ll explain how this happens shortly). The federal court in the state of Maryland
would apply New York law to the case because (1) it has to apply state law since there is no
federal law on contracts, and (2) the jurisdiction with the closest connection with the case is New
York and hence, New York law should apply.
We all are familiar with the Supreme Court and its role as the final decision-making body on
matters of legal interpretation. The Supreme Court is the highest court in the federal system.
Immediately below the Supreme Court are thirteen circuit courts of appeal, which hear appeals
from the district courts, the trial-level courts in the federal system. Twelve of these circuit courts
of appeal cover geographic areas—the sixth circuit, for example, covers Michigan, Ohio,
Kentucky, and Tennessee. The courts have as many as twenty judges and they hear cases in
panels of three. The circuit courts do not conduct trials—they only hear appeals and, in the
common law system, appeals can only be made as to matters of law as opposed to facts. The trial
court and the jury have complete responsibility for determining the facts, and the appellate courts
can only hear appeals relating to matters of law.
Federal courts at the trial level (the district courts) and at the appellate level (the circuit courts of
appeal) have their basic power, or jurisdiction, defined by the Constitution. Under Article III of
the Constitution, specific powers are outlined for the federal courts. Federal courts have
jurisdiction with respect to the following:
1.
2.
3.
4.
5.
6.
7.
constitutional issues
laws and treaties of the United States
admiralty
ambassadors
where the United States government is a party
controversies between a state and citizens of another state
controversies between citizens of different states (called “diversity
jurisdiction”)
8. controversies between a citizen of a state and a foreign citizen
Plus, a $75,000 minimum applies to suits involving numbers 7 and 8 above.
Number 8 above is most significant for our purposes. The concept of “diversity jurisdiction” was
adopted by the framers of the Constitution in order to provide an alternative to the home field
advantage that might otherwise apply if lawsuits involving parties from different states could be
heard only in the state courts of one of the parties. The federal courts were seen as providing a
more neutral forum for such situations. Thus, because of this provision of the Constitution, a
party can either bring a case in a federal court (as a plaintiff) or ask to have it removed to a
federal court (as a defendant) so long as the diversity criteria are met. And, as already noted, the
federal court would apply state law in its consideration of the case, unless it is a case involving
federal law or one of the other categories set forth above.
International Legal Issues
Before considering the issues related to the application of legal rules to international businesses,
we should understand the scope of the power of nations to make such rules. In other words, what
are the limits of a nation’s law-making authority and where do such limits come from? Can the
Parliament in Great Britain issue edicts regulating businesses in Switzerland? What are the
principles involved?
We start with the consideration of public international law—that is, the category of international
law that defines the relationships between and among nations. It differs from what is usually
termed private international law, which really is simply another way of describing the rules that
apply to private businesses in an international setting. But our concern now is to analyze public
international law and to understand the reach of a nation’s power over its subjects and over the
subjects of other nations. Hereafter we’ll drop the word public and simply refer to public
international law as international law.
The term international law is used to describe the rules that regulate the conduct of nations.
International law differs from the laws of the various nations of the world in two major respects.
First, many areas of international law are not definitive—that is, nations (or states) differ as to
what the actual rule in question is (although there are many areas where the rules are clear, either
by virtue of an international agreement or long usage). Second, for the most part there is no
enforcement mechanism associated with international law, so that a nation that ignores the rules,
while subject to possible ostracism, is not otherwise at risk of being enjoined, fined, or arrested
as would a private citizen or business that violated the law of a nation.
International law is based on the principles of (1) sovereignty and (2) the consent of states. The
concept of sovereignty is that a nation is master in its own territory. The International Court of
Justice (ICJ) (1948) has defined sovereignty as “the whole body of rights and attributes which a
State possesses in its territory, to the exclusion of all other States, and also in its relations with
other States. Sovereignty confers rights upon States and imposes obligations on them.”
Thus, sovereignty is that concept which allows a state to make rules that are applicable
throughout its territory and that govern all people within the state. The concept of sovereignty
also conveys the notion that each state is equal to all other states, and the sovereign rights of any
particular state are limited by the sovereign rights of other states.
The acceptance of the concept of sovereignty dates from the middle of the seventeenth century at
the conclusion of the Thirty Years War, which marked the separation of the powers of the church
and the state. As time has passed, nations have begun to recognize specific principles that further
define the concept of sovereignty and the notions of territorial integrity and political
independence as being inviolable. Since each state is sovereign in its own territory, international
law recognizes the basic principle that no state has the right to impose its will on the territory of
another state.
Courts in the United States often use the term comity to refer to the deference or respect that is
due to the decisions and actions of another country in order to minimize the conflicts that could
arise through the assertion of conflicting jurisdiction by different countries.
There are a number of sources of international law. First, there is customary international law,
which derives from the practice of nations over a period of time; in other words,something that
over time is recognized by states as international law, whether from a sense of obligation or other
reason. Second, international conventions and treaties establish rules, which are accepted by the
nations that sign them, such as the Law of the Sea Convention. Third, general principles of law
recognized by civilized nations can serve as a source for international law. Finally, judicial
decisions by international courts such as the ICJ in the Hague, as well as the opinions of legal
scholars, can assist in determining the rules of international law.
While international law seems from one perspective to be academic and theoretical, it actually
has considerable practical impact in the real world. Consider, for example, if a US citizen were
involved in a dispute in Mexico with citizens of Brazil and a Brazilian court ordered him or her
to return to Brazil for a trial. Instead, the US citizen heads to Houston, where a representative of
Brazil appears in a Houston court and asks the judge to assist in enforcing the Brazilian court
order. The first thing the US judge will consider is international law and whether Brazilian courts
have the power to order a noncitizen outside their country to return to appear in their courts.
The Permanent Court of International Justice, or the World Court, was created as an international
court long before the founding of the United Nations after the Second World War. When the
United Nations was created, the court was named the International Court of Justice, and was
incorporated as one of the organs of the UN. Article 34 of the UN Statute defining the
jurisdiction of the court makes it clear that the court can only hear disputes that arise between
nations, not disputes that arise between private parties or between a nation and a private party.
And, the court only decides issues which are presented to it by the countries on a voluntary basis.
As a general rule, both nations involved in a dispute must agree to have the ICJ hear the dispute
in order for the court to have jurisdiction.
In general, international law recognizes, to one extent or another, five bases for the exercise of a
nation’s powers to cases involving foreign persons, property, or events. (Voluntary agreement of
the parties would be a sixth basis.) The support for and legitimacy of these theories of
jurisdiction differ, and they are outlined here in the order of acceptance:
•
•
•
•
•
•
territorial principle—This concept is universally accepted and is the
fundamental attribute of sovereignty—that a nation can control events and
people within its territory. Each nation is responsible for the conduct of
law and the maintenance of good order within its borders, and this
principle is an expression of that right and responsibility.
nationality principle—The person committing the offense is a citizen
who can be presumed to know his country’s laws wherever he is. By virtue
of nationality, a citizen becomes entitled to certain rights and protections
from his country (such as a passport, right to vote, etc.) and also
has certain obligations. Under this theory of jurisdiction, a nation can
exercise its control over its nationals wherever they may be.
protective principle—Jurisdiction can be exercised because of conduct
that was injurious to a fundamental national interest.
universality principle—Nations have jurisdiction to try cases where the
offense is one that is regarded as a crime by the entire international
community. The two most common situations are piracy and war crimes.
passive personality principle—Crimes against citizens (i.e., a nation
claiming jurisdiction to try a person for offenses committed abroad that
affect nationals of the country), such as crimes against ambassadors and
diplomats.
“effects” principle—The “effects” principle refers to the situation where a
state assumes jurisdiction on the grounds that the behavior of a party is
producing “effects” within its territory. This is the case even though all the
conduct complained of takes place in another state. The use of the
“effects” test has arisen most often in situations which are described as the
exercise of “extraterritorial” jurisdiction by a country. The United States,
for example, has been subject to considerable criticism for purporting to
control events and exercise jurisdiction over activities that occur outside of
its borders, particularly in the antitrust area and in the area of export
controls.
Determining the Applicable Law and Forum
We already discussed the jurisdiction of countries and their power to prescribe rules, and we
evaluated the various bases upon which such power could be exercised. When we talk
of jurisdiction, whether of courts or nations, think of the word as synonymous with the concept
of power. What we have learned so far is that there are various standards under international law
for determining the reach of the power of nations to assert their authority over people. We
observed the territorial principle, the nationality principle, and the effects test as being three of
the important ones.
Now we will consider a different aspect of jurisdiction—the jurisdiction of courts— starting with
an analysis of the situation in the United States. The concept of jurisdiction is central to the legal
system. If you are sued in California, can a California court proceed with the case even though
you live in Maryland? The answer depends upon the limits on the jurisdiction of US courts and
how those limits are determined. In fact, in every lawsuit, the first criterion that a plaintiff has to
include in his pleadings is a presentation of the legal basis as to why the court has jurisdiction
over the subject matter of the case and over the defendant.
After considering the concept of jurisdiction we will touch upon what is called “choice of law.”
Once a court has decided that it has jurisdiction, what law does it apply? The law of the state
where the court is located, the law of the state where the plaintiff or defendant resides, or some
other law? Like most areas of the law, the legal principles in this area are still developing and,
although it is easy enough to state the generally accepted principles, we must always be aware
that there are many gray areas in the law.
Finally, we will address the ability of parties to choose their own law and forum (i.e., in which
court the matter will be decided).
The Jurisdiction of Courts
Subject Matter Jurisdiction
Before we can determine if a court can exercise power over an individual or a corporation (i.e.,
exercise personal jurisdiction) we need to know that the court is authorized to deal with the
subject matter of the dispute. This is generally not a significant issue because most state courts
are courts of general jurisdiction and are empowered by statute to hear all controversies arising
under the laws of a particular jurisdiction. The federal courts have more limited subject matter
jurisdiction, as we discussed previously, where we reviewed the constitutional provision that
delineated the power of federal courts. And, there are a number of “specialized” courts where the
issue of subject matter jurisdiction is indeed significant. Take, for example, the bankruptcy
courts, which were created to deal exclusively with bankruptcy. If you were to try to bring
another type of case in a bankruptcy court, you would not be able to do so, because the court
would determine that it did not have subject matter jurisdiction. But, for the most part,
determining whether a court has subject matter jurisdiction is not a difficult issue. The same is
not true with respect to the issue of personal jurisdiction.
Personal Jurisdiction
By far the more significant jurisdictional issue from our point of view is that of personal
jurisdiction—whether a court has the ability to exercise power over a particular individual or
corporation. Keep in mind that the answer to this question could be quite important. If
a Maryland resident is sued in California and the court there determines that it has personal
jurisdiction over him then the defendant must undergo the trouble and expense of defending
himself in a court far from home. The principles that we discuss now will be helpful when we
evaluate the same problem in the international context.
Statutory Basis
In order for a US court to have jurisdiction over a person, there must first be a specific law that
purports to set forth the power of the court over persons. These laws are called long-arm statutes,
and every state has its own version of such a law. Generally, these laws grant the courts farreaching powers. For example, the statute may give the state jurisdiction over persons who
commit acts outside the state but which have an effect within the state.
Constitutional Basis
The principal limitation on the exercise of personal jurisdiction by courts in the United
States comes not from the state long-arm statutes but rather from the limitations of the
Constitution as expressed by the Supreme Court in a series of cases over the years. The
Constitutional provision is the due process clause, that is, the portion of the
Fourteenth Amendment to the Constitution, which says that no person shall be deprived of life,
freedom, or property without due process of law. In American jurisprudence, this clause has
come to serve many purposes. Another term for due process might be fundamental fairness, and
the essential notion the the Supreme Court has been dealing with in these cases is that the
Constitution requires the application of this fundamental fairness.
General Jurisdiction
The analysis of the legal sufficiency of personal jurisdiction is divided into two general
categories: general jurisdiction and specific jurisdiction. General jurisdiction is jurisdiction over
the person not related to the particular cause of action. In other words, the person’s connection
with the particular venue is so significant that she is subject to being sued in that place regardless
of whether the particular lawsuit has anything to do with the place of venue. For example, a
corporation is always subject to general jurisdiction in the state where it is incorporated. Thus,
a Maryland corporation is always subject to being sued in Maryland courts whether a particular
claim has anything to do with Maryland or not. Similarly, if a person or a corporation has
continuous and systematic activities within a forum state, that state will be considered to have
general jurisdiction over that person or corporation. By conducting such continuous and
systematic activities in a particular state, the legal theory is that, by regularly doing business in
that place, a person has to accept the notion that they can be sued there as well.
Specific Jurisdiction
Specific jurisdiction relates to situations where the particular action that is the subject of the suit
arose in the forum where the lawsuit is sought to be brought. In other words, a defendant has
caused some damage in a particular place, and the question is whether the defendant can be held
to account in that location or whether one must go to the defendant’s home state and sue there. In
these situations, the courts have developed a two-part test:
1. Did the defendant purposefully avail itself of the protections and benefits
of the forum state’s laws?
2. Would the exercise of jurisdiction be reasonable?
When a corporation purposefully avails itself of the privilege of conducting activities within the
forum state it has clear notice that it is subject to suit there and can act to alleviate the risk of
burdensome litigation by procuring insurance, passing the expected costs on to customers, or, if
the risks are too great, severing its connection with the state.
The explosive growth of the internet and electronic commerce have raised many issues related to
the law of jurisdiction. If you create a web page that slanders someone in California, are you
subject to suit in that state even though you have never been there, and your only connection
with the state is that your web page is available there as it is everywhere else? Courts have
addressed these questions by applying the traditional principles, adjusted perhaps, but still
largely intact.
The Ability of a Court to Refuse to Exercise Jurisdiction
The fact that a particular court has the power under the constitution to hear a case does not
necessarily mean that the court is required to hear the case. There is a judicial doctrine
called forum non conveniens, which allows a court to determine that, even though it has the
power to hear the case, it would be more appropriate for another court to hear it. A good example
of the application of this principle is the Bhopal case involving the explosion of a chemical plant
in India partially owned by Union Carbide. When the case was brought in New York, that court
clearly had jurisdiction over Union Carbide (although not over the Indian joint venture entity)
but declined to exercise jurisdiction under the doctrine of forum non conveniens. All the
witnesses were in India, the accident occurred there, the evidence was there, etc. Underlining the
application of this doctrine, in many cases such as Bhopal where foreign plaintiffs are involved,
is a policy view that US courts should avoid becoming the location of choice for all international
litigation simply because jury awards are traditionally higher in the United States.
References
Babock Gove, P. (1961). Webster’s third new international dictionary. Cambridge, MA:
Riverside Press.
International Court of Justice. (1948, May 28). Conditions of admission of a state to membership
in the United Nations. International Law Quarterly, 2(3), 483–519.
Law. (n.d.). In Black’s law dictionary free online legal dictionary (2nd ed.). Retrieved from
https://thelawdictionary.org/law/
nternational Contracts
Print
by Robert C. Goodwin, Collegiate Professor, University of Maryland Global Campus
In this paper we will focus on the specific rules relating to certain international contracts as well
as the critical question of how we make sure we get paid!
Formation of Contracts
Contracts involve an offer by one party and an acceptance by the other. Both the offer and the
acceptance must be definite, unqualified, and unconditional. An advertisement for bids is not
itself an offer, but a bid in response to such an advertisement is an offer. An offer may be
revoked at any time prior to its acceptance, but that revocation must be communicated to the
offeree before acceptance.
Under common law principles, the offer and the acceptance must match (i.e., must be a mirror
image of each other) at least as to those aspects that are considered “material.” The
term material basically means important or significant. In contract law, all the basic terms
involving price, quantity, delivery, and warranty are considered material. The provision of the
contract dealing with dispute resolution is also material, even though the parties may not pay
much attention to that.
In commercial transactions in the United States, the common law principles are less important
because all states except Louisiana have enacted Article 2 of the Uniform Commercial Code
(UCC). The code is not really “uniform,” since it is simply comprised of proposed text, which is
then adopted by each state, in many instances with their own changes to the “uniform”
provisions. But the UCC has given the United States a common sales law related to the sale of
goods in commercial transactions, even if there are a few minor differences among the states.
Article 2 of the UCC applies to contracts for the sale of goods, with goods defined as any
tangible personal property. Examples of such tangible personal property include moveable items
such as chairs, computers, and clothing. On the question of whether the offer and the acceptance
have to match precisely, the UCC differs from the common law mirror image rule. Under the
UCC, depending on if the parties are involved are merchants, the additional terms of an
acceptance either fall out of the contract or may become a part of it. If both parties are
merchants (e.g., people who regularly deal in these types of goods), then the additional terms
may become a part of the contract. If the parties are not both merchants, then they fall out of the
contract, and do not become a part of it.
Breach of Contract and Remedies
There is a breach of contract whenever one or both parties fail to comply with the terms of
contract without legal excuse. The remedies for breach include the following:
•
•
•
The injured party can bring an action for damages.
In some instance the injured party may cancel the contract.
In some instances the injured party may bring a suit to obtain “specific
performance.” This means requesting the court to order the breaching
party to do what he or she had promised to do in the contract instead of
simply having the court award monetary damages. Specific performance is
more common in civil law countries than common law countries, where
the courts prefer monetary damages, and is used even in common law
countries almost exclusively for goods ( particularly unique items), but
almost never to compel a person to perform a personal service obligation
of a contract.
The simple rule governing the appropriate damages in a contract case is that the injured party has
a right to recover a sum of money that will place him in the same position as he would have been
in if the contract had been performed. But this rule can become complex quite easily and it
doesn’t take account of the critical area of consequential damages.
Damages can be divided into three classifications:
1. compensatory damages, which compensate for the loss;
2. punitive damages, which are common in other areas of the law but not
favored in contract law
3. consequential damages.
The notion of consequential damages is that a contract violation can have additional
consequences beyond simply the failure to honor the particular contract obligation. Suppose your
failure to deliver a part on time as required by your contract causes a machine to shut down,
resulting in millions of dollars of damages. Are you responsible for the cost of the part, or for the
millions of dollars of damages?
U.N. Convention on Contracts for the International Sale of
Goods (CISG)
The U.N. Convention on Contracts for the International Sale of Goods (CISG) was an effort to
create a new international law of sales to apply to international sales transactions. The
convention entered into force between the United States and other signatories as of January 1,
1988. As an international agreement, it has the status of law in those countries that have adopted
it, and most major trading nations are signatories.
Basic Principles
Unless the parties to an international sales contract identify a specific legal regime that will apply
to the contract, the CISG will be applied to the interpretation of the contract, so long as both of
the parties to the contract have their places of business in a contracting state. Thus, if an
international sales contract between a US company and an Italian company (Italy has signed the
CISG) did not provide for the application of particular law, both a US court and an Italian court
would be bound to apply the rules of the CISG to the interpretation of the contract. Had the
contract said that the law of a particular US state would apply, then that choice would be honored
by the courts as well. The parties could always specifically identify the rules of the CISG as
applicable to the contract. But the important point is that the convention is the default legal
regime in contracts between parties whose places of business are in countries that have signed
the Convention. If the parties to a contract do not want the CISG to apply to their contract, they
will need to specify another law that will apply.
Another important point to remember about the convention, is that it applies to sales only, not to
other types of contracts. Of course, clarification is needed when you have more than one type of
activity covered by a contract. Many international sales contracts, for example, cover service of
equipment. Under the CISG, if the sales aspect of a contract is the “preponderant part of the
obligations,” then the convention will apply to the entire contract. Even with respect to sales
transactions, the convention expressly excludes from its coverage consumer sales, securities
transactions, and the sales of ships, aircraft, and electricity. Note that the exclusion for consumer
sales is not the same as excluding consumer goods from coverage.
Fortunately, the rules of the CISG are not dramatically different from common law contract
principles or statutes such as the UCC. But there are differences. The CISG applies the mirror
image rule on offer and acceptance: if the acceptance doesn’t match the offer (in all material
respects) then you have a rejection and a counteroffer. While the common law would also apply
this rule, most sales transaction in the United States between merchants are governed by the
UCC, which would reach a different conclusion, allowing a contract to be formed even if the
offer and the acceptance did not match. For example, a projected buyer accepts an offer to sell a
vehicle for $20,000 but adds a provision for a warranty. In this example, the added material
becomes a proposal for a separate agreement, but the underlying contract remains in place.
Another notable difference is that the UCC requires that contracts for sale of goods be in writing,
while the CISG has no such requirement.
Remedies
The discussion above focuses on the basic principles relating to the CISG and the specific rules
in that convention relating to contract formation. Now we are going to consider the rules of the
CISG relating to remedies, covering such things as contract frustration or the impossibility of
performance and the question of proper measure of damages.
Article 79 of the CISG is the “force majeure” provision that covers situations where a party is
unable to perform their contractual obligations due to impediment beyond their control. The first
section of Article 79 provides: “A party is not liable for a failure to perform any of his
obligations if he proves that the failure was due to an impediment beyond his control and that he
could not reasonably be expected to have taken the impediment into account at the time of the
conclusion of the contract or to have avoided or overcome its consequences.” Article 79 also
provides that the exemption has effect for the period during which the impediment exists (CISG,
1988). In other words, if you are prevented from delivering goods by a force majeure event, you
will still have to deliver them when the event that prevented delivery is over.
As a practical matter, sellers in international contracts will likely want a provision in the contract
that is broader than Article 79. For example, Article 79 would require a seller to acquire parts
elsewhere if his usual supplier were unable to supply them, since the exclusion in Article 79 does
not apply if the consequences of the problem can be overcome. In the real world, a seller would
want a force majeure provision that contained a list of those circumstances constituting
excusable delay, including failure on the part of a normal supplier to supply needed parts.
With respect to damages, the CISG states the standard principle that “damages for breach of
contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the
other party as a consequence of the breach. Such damages may not exceed the loss which the
party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in
the light of the facts and matters of which he then knew or ought to have known, as a possible
consequence of the breach of contract” (CISG, 1988).
Thus, the CISG specifically recognizes consequential damages, and this fact should cause those
who draft contracts to add a provision that effectively overrides it. The better course of wisdom
is to provide that no consequential damages will be available for breach of the contract. Since the
CISG recognizes freedom of contract, one can override any of its provisions through the drafting
of appropriate contract provisions.
There is also significant disagreement across contracting states over whether a “loss” under the
CISG includes attorneys’ fees, making attorneys’ fees recoverable as a loss in some contracting
countries, but not currently in the United States. One drafting a CISG contract would be prudent
to include an express provision authorizing the recovery of attorney’s fees for victims of
breaches of contracts, to ensure their recoverability. The UCC generally also only allows for the
recovery of attorneys’ fees for sales contracts if there is an express contractual provision
permitting their recovery.
Letters of Credit
As you know, the most important element of international sales transactions involves the
fundamental question of how one gets paid. After all, if both the buyer and the seller are in the
same country, and the buyer refuses to pay after receiving the goods, at least the seller has
recourse to courts, which can assert jurisdiction over the deadbeat buyer. Assuming the seller is
able to prove his case, he can get a judgment that can be enforced. But what does a seller do
when the buyer is in another country? We have already seen how difficult it is to get judgments
enforced in a country other than the country where it was issued. Arbitration awards are better,
but they still involve considerable expense to pursue an international arbitration. If the
transaction itself is not that large (possibly less than half a million dollars or so), the cost of
enforcing the contract may be too high, even with a good arbitration clause.
Letters of credit (L/C) are designed to solve this problem and to help encourage international
trade. (Click to see an example of a letter of credit.) By their nature, they are designed more to
help sellers than buyers. In addition to letters of credit, there is another mechanism that uses
banks and documents in a similar way, called payment on a collection basis, the most common of
which is documents against payment (D/P). Both L/C and D/P transactions are referred to as
documentary transactions because they rely principally on documents as the basis on which
payment is made.
While a documentary transaction involves a number of documents, there are two documents that
are important to understand.
A bill of lading (B/L) is issued by the carrier and is both a receipt and a contract for carriage.
(Click to see an example of a bill of lading.) In a typical ocean shipment, the captain of the
vessel is responsible for checking what has been loaded on the ship, noting whether there is any
obvious damage, and issuing a B/L to the shipper, (i.e., the person who is shipping the goods).
The B/L is a negotiable document, meaning it can be sold or exchanged for value. To understand
conceptually what a B/L is, think about a claim check for a coat that you check at a concert. The
claim check represents the goods and it can be transferred from one person to another. In effect,
whoever possesses the claim check possesses the goods and can use the claim check to obtain
them. In a documentary international trade transaction, the B/L serves the same purpose and is
transferred from one party to another until it eventually is obtained by the buyer, who can use it
to claim the goods. If the buyer doesn’t have the B/L, the carrier cannot release the goods to him.
There are different kinds of B/Ls, but for use in a documentary transaction, the B/L must be
indicated as being “clean” (no damage or defects noted by the captain), “negotiable” (able to be
transferred for value), and “blank endorsed” (just like endorsing a check so that whoever has the
check can cash it). The same basic principles of the nature of the document are applicable to air
waybills as well.
The second important document is the draft, which is a negotiable instrument containing an order
to pay. It is like a check in reverse where the person preparing the draft “orders” the recipient of
the draft to pay. The draft is the executing document in a documentary transaction and must be
included.
The basic rules relating to L/Cs are contained in a document by the International Chamber of
Commerce referred to as the Uniform Customs and Practice for Documentary Credits (UCP).
The UCP is not a rule promulgated by a governmental organization but rather was developed by
a private international organization, the International Chamber of Commerce (ICC). The UCP
creates a set of contractual rules that apply to documentary credits. Uniformity is obtained
because all documentary credits state that the credit is subject to the rules set forth in the UCP. In
using the credit, the user accepts the rules as set out in the UCP. The rules are comprehensive
and cover most, if not all, of the types of circumstances that can arise in a documentary credit
transaction (ICC, 2006).
Within the United States, however, for domestic transactions, L/Cs are governed primarily by
UCC Article 5.
From a legal perspective, a commercial letter of credit is a contractual agreement between a
bank, known as the issuing bank, on behalf of one of its customers (the buyer), authorizing
another bank, known as the advising or confirming bank, to make payment to the beneficiary
(the seller). This agreement is independent from the underlying contract between buyer and seller
other than the fact that the dollar amounts will be the same as set out in the underlying contract
of sale. A third contract exists between the issuing bank and its customer (the buyer), whereby
the buyer either pays for the credit in advance or has sufficient credit with the bank to have the
credit opened. The issuing bank, on the request of its customer, opens the L/C and agrees that it
will make payments in accordance with the schedule in the L/C so long as the documentation
presented exactly matches the documentation as described in the L/C. If the documentation does
not match exactly the bank will not honor the L/C.
It is this requirement for “exact compliance” which raises the most issues in disputes over
payments under L/Cs. So long as the goods are as described and both the buyer and seller are
happy with the transaction, the process of correcting L/Cs to cure any discrepancies is simple and
relatively common. But if there is a serious problem, such as a significant change in the market
value of the goods as compared with the contract amount, then a discrepancy in the
documentation can give a reluctant buyer (through his bank) a way to avoid the deal. Hence,
great care needs to be taken to ensure the terms in the L/C and in the documentation match
exactly.
References
CISG (Convention on Contracts for the International Sale of Goods), Jan. 1, 1988, 1489
U.N.T.S. 3.
ICC (International Chamber of Commerce). (2006). ICC uniform customs and practice for
documentary credits – UCP 600. Paris: ICC.
Introduction to Alternative Dispute
Resolution
Print
Alternative dispute resolution (ADR) refers to the methods that individuals use to resolve
disputes without resorting to civil litigation (i.e., without going through a trial). ADR includes
any method or procedure for achieving this purpose; however, there are two commonly
recognized processes: arbitration and mediation. Employing these resolution methods may be
mandatory or voluntary. Further, these methods may not be exclusive. That is, the parties may
employ mediation, arbitration, and litigation, all within the realm of a single dispute. There are
unique procedures and general legal principles applicable to each of these processes.
Alternative Dispute Resolution
Settlement of a Legal Dispute
Settlement means that the parties to a legal dispute work out their
differences and enter into an agreement to resolve the situation. The
benefit of a settlement is that the parties maintain control over the
outcome of the dispute. The parties are not subjected to a ruling,
judgment, or award of a third- party decision maker. Businesses often
settle legal disputes to avoid the high cost of litigation, maintain
privacy, and to preserve the professional relationship with the other
party. Also, juries tend to show favor to individual plaintiffs to the
detriment of businesses. Individuals, on the other hand, settle disputes
to avoid the long, tenuous litigation process and to make certain of
some level of recovery. Achieving a settlement is a core objective of
mediation, which is discussed in a separate section.
Alternative Dispute Resolution
Alternative dispute resolution (ADR), as the name implies, is an
alternative to resorting to litigation to resolve a legal dispute between
parties. The most common forms of ADR are mediation and arbitration.
Since ADR is an alternative to litigation, disputing parties do not have
to begin a lawsuit prior to using any form of ADR. Also, filling a lawsuit
does not preclude the use of ADR in conjunction with the litigation.
Some courts, such a family court, often encourage or require parties to
undertake some form of ADR prior to moving forward with litigation.
Advantages of ADR
The effective use of ADR offers several distinct advantages:
•
•
•
costs—ADR may reduce the costs associated with litigation for
the disputing parties. This is probably the most common reason
for including an ADR clause in a contract or agreeing separately
to submit a dispute to ADR.
no jury—Businesses generally prefer ADR to litigation because it
avoids allowing a jury to decide a dispute. ADR, unlike a jury trial,
generally involves the use of one or more knowledgeable
professionals to either decide or assist in resolving the dispute.
This is far more practical than letting a random group of jurors
resolve the issue.
privacy—Another reason to use ADR is that it is a private process;
whereas, litigation and court records are open to the public.
Individuals concerned with public knowledge of the dispute
•
harming the company’s brand or reputation strongly prefer the
use of ADR to resolve disputes.
business relationship—ADR can preserve the ongoing business
relationship between the parties, where litigation often destroys
the relationship.
Mediation
Mediation is the process by which parties to a legal dispute employ a
third party, called a mediator, to assist in resolving the dispute. The
mediator is an unbiased and disinterested third party. She generally has
undergone special training in dispute resolution and possesses indepth knowledge of the subject matter of the dispute. In most
instances, a mediator is a licensed attorney who has mediator training.
This is important, as the mediator should understand the legal
principles that will apply to the dispute and be able to explain those
legal principles to the parties. The mediator can honestly communicate
with each party the process and possible results if the parties cannot
resolve the dispute and decide to move forward with litigation. Mutual
understanding of the parties is import in resolution of the dispute.
The mediator is not a decision maker; rather, she is a facilitator helping
to bring the parties together toward a negotiated settlement. As such,
she cannot deliver a binding decision on a matter. The parties must
ultimately agree or refuse to settle the dispute.
Advantages and Disadvantages of Mediation?
There are numerous advantages and a few disadvantages to mediating
a dispute:
•
control—Recall that mediation allows the parties to retain control
over the dispute. They are free to refuse to negotiate, and they
are not required to find a resolution to the dispute. The voluntary
•
•
nature of negotiation in the mediation process allows the parties
to decide to pursue litigation or some other form of ADR. The
level of control retained by the parties can also be seen as a
disadvantage. Neither party can be certain that the mediation will
result in a settlement. This lack of certainty can frustrate the
parties with the process.
costs—There is significant cost savings associated with
mediation. While the parties generally share the responsibility of
paying the mediator, it avoids court fees, some legal fees, and
other expenses associated with going to trial. Further, the cost of
mediation is generally far lower than the cost of other ADR
approaches, such as arbitration. The cost disadvantage of
mediation is that it can still be expensive and not result in a
resolution. A simple negotiation between the parties can resolve a
dispute for free; but, employing counsel to represent the parties
at mediation and employing the mediator can cost significant
money. Generally, the mediator takes a small percentage of the
total settlement amount between the parties.
privacy—As with other types of ADR, mediation is a private
process. The parties do not have to disclose the dispute or any of
the facts of the situation to the rest of the world. Litigation, on
the other hand, is generally a public affair. Unless the court orders
otherwise, anyone can attend a public trial and can access the
court records. This includes access to all allegations, testimony,
and the evidence presented in the case. The disadvantage to
privacy generally concerns the expectations of the aggrieved
party. In many cases, the injured party seeks compensation for
the harm or loss to make certain that the alleged wrong is not
repeated. Negotiating a settlement of the dispute outside of the
public’s knowledge does less to prevent a party from repeating
the allegedly illegal conduct. This is particularly true when that
party’s conduct is intentional.
•
relationships—Disputes between parties can destroy their ongoing relationship. Being able to work out a mutually agreeable
settlement of the dispute can serve to preserve the relationship.
This is important for businesses that depend upon each other as
future business partners (such as in supplier-purchaser
relationships). Litigation generally destroys the business
relationship, as the process is highly competitive and
confrontational. The negative aspect of mediation is that
relationships can still be strained without any resolution to guide
the relationship going forward. A judicial determination that one
party’s conduct is not legal establishes precedent to guide the
future conduct of a business. A negotiated settlement does not
always achieve this same effect.
The above-mentioned advantages and disadvantages of mediation are
general examples. There may be any number of party or case-specific
benefits or detriments to mediation.
How do Parties Initiate Mediation?
Mediation can be either mandatory or voluntary. General principles
applicable to each are described below.
Mandatory Mediation
Mandatory mediation is initiated pursuant to a court order or pursuant
to the law (statute or regulation). For example, it is common for
jurisdictions or courts to mandate that the parties to a family dispute,
such as a divorce, work with a government sanctioned mediator prior
to initiating litigation. Remember, mediation does not involve a
decision maker. Mandatory mediation, therefore, simply requires that
the parties begin the process. The parties are not forced to negotiate
or arrive at a settlement. The hope is that requiring the parties to take
part in mediation will help them to voluntarily work out the legal
dispute without having to resort to litigation.
Voluntary Mediation
Voluntary mediation is initiated pursuant to agreement among the
parties. The parties may establish this agreement before a legal dispute
arises or afterward. Pre- dispute mediation agreements are generally
part of a separate contract between the parties. That is, the parties
enter into any form of contract. A clause in the contract dictates that
any legal dispute between the parties must be submitted to mediation
before pursuing litigation or another dispute resolution method. A
post-dispute mediation agreement generally arises pursuant to a
separate agreement between the parties to employ a mediator to
resolve the dispute. That is, the parties seeking to resolve a legal
dispute recognize the value of pursuing mediation and voluntarily
enlist the services of a mediator.
People often confuse mandatory and voluntary mediation by assuming
that mediation is mandatory because there is a mediation clause in a
contract. Even though a contract contains a mediation clause, it was
still a voluntary decision to enter into that contract. As such, this is
voluntary mediation. Mandatory mediation only arises pursuant to law
or judicial procedure.
Mediation Procedures
The voluntary mediation process is far less rigid than that of mandatory
mediation. Involuntary mediation is somewhat of an informal process.
The mediator may employ any number of techniques to help the
parties arrive at a negotiated settlement. Mandatory mediation
procedure may be subject to law or court order. The most common
format for carrying out voluntary or mandatory mediation of a legal
dispute with or between businesses is as follows:
•
•
•
•
•
delivery of evidence—Each party provides the mediator with all
of the facts and evidence surrounding the dispute. The mediator
will set a date for the mediation.
introductions—At the mediation, the mediator will introduce
everyone, give an overview of the mediation process, and
summarize the dispute at hand.
initial statements—The mediator will often allow the parties to
give an initial statement directed to the mediator and the other
party. This serves a couple of purposes. First, it appeases the
parties to allow them to voice their opinion on the matter.
Second, it allows the parties to state a summary of their belief
and facts in a persuasive manner.
private sessions—Following the initial statements, the mediator
will generally break the parties out into private sessions or
caucuses. This means that the parties are placed in separate
rooms, while the mediator moves back and forth between the
rooms to negotiate the position of each party. These private
sessions are optional at the mediator’s discretion, though, they
prove to be very effective in getting the parties to exchange
dialogue or enter into negotiations. They tend to break down the
competitive spirit that is present when the parties are together.
The mediator is in the position to play devil’s advocate and help
each party understand the logic and legality of the other party’s
argument. Importantly, the mediator explains the likely results at
trial if the parties proceed to litigation. This can be the strongest
tool of the mediator in opening the parties up to negotiation.
formalization of agreement—If the mediator is successful, she
will assist the parties in negotiating a resolution to the dispute.
Once a consensus is reached, counsel for one party is then
directed to draft a legal contract memorializing the terms of the
settlement. The parties sign the contract to settle the dispute.
They are legally obligated act in accordance with the terms of the
contract.
Involuntary mediation may follow the same or similar steps, but the
process is more closely dictated by court procedure, statute, or
regulation.
Challenging the Mediation Agreement
A successful mediation results in a negotiated settlement between the
parties. This is a formal contract that memorializes the agreed-upon
resolution of the legal dispute. Once the parties enter into this
agreement, it takes the place of the underlying dispute. The parties can
no longer pursue litigation for the underlying dispute without
breaching this contract. If, after the settlement agreement is signed, the
parties wish to dispute the agreement, they must bring a contract
action in court attacking the validity of the agreement. In this situation,
however, the suing party is not suing regarding the underlying dispute
but is arguing that the settlement agreement is not valid based upon
some contract law principle. If the party is successful in rescinding
(doing away with) the mediation agreement, the parties would be free
to litigate the underlying dispute or pursue other forms of ADR.
Arbitration
Arbitration is a form of ADR in which the parties choose to forgo
litigation and solve their problems through a third-party decision
maker, known as an arbitrator. The key characteristic of arbitration is
that the parties are hiring one or more unrelated and unbiased third
parties to decide the legal dispute. Basically, the arbitrator acts as
judge and jury in deciding the dispute. Unlike in mediation, the
arbitrators are decision makers. Arbitration yields a final resolution of
the dispute in the form of an arbitrator’s award. The award generally
consists of monetary damages, but may include equitable remedies as
necessary. Parties may generally enforce an arbitrator’s award similarly
to a judgment.
It may surprise you to know that popular reality court television shows
are actually arbitrations, as opposed to trials. The proceeding is made
to look like a trial proceeding, with the arbitrator acting like (and even
taking the title of) a judge.
Ask Yourself
•
How does the core principle behind arbitration compare to that
of mediation? Hint: Think about the role of a decision maker
versus that of a facilitator.
Advantages and Disadvantages of Arbitration?
There are numerous advantages and a few disadvantages of arbitration:
•
•
•
expertise—Arbitrators are generally chosen based upon their
expertise in the subject matter of the dispute. This is a key
advantage over litigation, which generally involves the use of
jurors as fact-finders. The jurors will lack the subject-matter
knowledge of professional arbitrators chosen by the parties.
Some argue that this fact makes it less likely that jurors will arrive
at a fair and just result.
resolution—Similar to litigation, in arbitration the parties lose
control of the dispute resolution process. The benefit of this
situation is that the arbitrators will decide the dispute and issue
an award. This may give the parties comfort in knowing that the
legal dispute will be resolved.
costs—There may be significant cost savings associated with
arbitrating rather than litigating a dispute. While the parties
generally share the responsibility of paying the arbitrators, it
avoids many of the court fees, legal fees, and other expenses
associated with going to trial. The primary point of savings is the
lack of formality in the discovery process. Generally, the
arbitrators control the proceeding and request from the parties
whatever evidence they require in deciding the dispute.
•
•
privacy—As with other types of ADR, arbitration is a private
process. The parties do not have to disclose the dispute or any of
the facts of the situation to the rest of the world. Privacy in
arbitration offers the same advantages and disadvantages as
mediation.
relationships—Arbitration can have the effect of preserving
ongoing business relationships. The parties may feel comfortable
that the dispute is not decided arbitrarily, as experts are reviewing
the facts and deciding the case. In this way, the parties are less
likely to feel that they were treated unfairly by the system.
The above aspects of arbitration may be seen by a party as an
advantage or disadvantage. For example, a party may hope to sway
jurors by appealing to their emotions. This is not as easy when dealing
with expert arbitrators who are more likely to apply the law without
regard to personal emotions. Further, arbitration will lead to a decision
on the dispute. One party may see this finality as a benefit, while other
parties may want to retain the ability to continue negotiating a
settlement.
Ask Yourself
•
•
Do you think businesses generally prefer arbitration to litigation?
Why or why not? Do you think individuals in a dispute with a
business generally prefer litigation or arbitration? Why or why
not?
Bernie and Hillary do business together. Unable to reach a
compromise in a dispute, they decide to submit their issue to
arbitration. What advantages does arbitration offer to Hillary and
Bernie?
How do Parties Initiate Arbitration?
Arbitration can be either voluntary or mandatory.
Voluntary Arbitration
Voluntary arbitration, as the name indicates, means that the parties
voluntarily agree to submit a dispute (or any dispute) to arbitration.
This is also known as arbitration at common law. This is normally done
through a formal, written agreement entered into between the parties.
Voluntary arbitration generally takes two forms:
•
•
predispute arbitration—A contract between parties may contain
an arbitration clause. These agreements require that any dispute
over the contract will be arbitrated. For example, assume you
enter into a contract to purchase a vehicle. The contract contains
a clause stating that any legal disputes about the contract will be
arbitrated. This is a predispute arbitration clause.
postdispute arbitration—The parties may enter into an
agreement after the dispute arises to resolve a dispute through
arbitration. Even if the contract has an arbitration provision that
makes arbitration of any disputes mandatory, it is still voluntary
arbitration. The reason is because the parties voluntarily entered
into the contract. Continuing the above example between you
and the car salesman, suppose the agreement does not contain
an arbitration clause. If a dispute arises, you and the car salesman
may enter into an agreement to submit the dispute to arbitration
rather than litigate it.
Mandatory Arbitration
Certain state and federal laws require parties to arbitrate specific types
of disputes. When a statute or court requires the parties to arbitrate a
matter, this is known as mandatory arbitration. This is common in some
very technical areas of law, such as alleged violations of rules put
forward by the Financial Industry Regulatory Authority (FINRA). The
requirement to arbitrate may be tied either to the type of dispute or
the amount in controversy in the dispute. When the law requires
arbitration, there is also a procedure in place for the identification and
hiring of certified arbitrators.
Ask Yourself
•
•
How do you feel about laws requiring that individuals arbitrate
their dispute? Does this have any constitutional implications (such
as the right to due process under the law)?
Carlos has a dispute with his employer. He believes that he has
been discriminated against in the promotion selection process. In
his employment contract, there is a clause requiring arbitration of
any dispute under the agreement. Also, a state employment law
requires arbitration of any employee-employer, discrimination
disputes. In this situation, is the arbitration between the parties
voluntary or mandatory?
Arbitration Procedures
The rules and procedures applicable to an arbitration depend on the
jurisdiction. Some jurisdictions rely upon common law to supply the
rules applicable to arbitrations. In these jurisdictions, judges often draw
heavily upon model laws or other influential sources in the
development of the law. Historically, common law arbitration
jurisdictions have far less developed procedural rules. Notably, these
jurisdictions vary in the degree to which they support the arbitration
process. Other jurisdictions pass statutes controlling the arbitration
process. In such jurisdictions, the general procedure for carrying out an
arbitration proceeding is as follows:
•
subject matter of the arbitration—The dispute may be a
question of fact, law, or a mixed question of fact and law. There is
a great deal of controversy surrounding what issues the arbitrator
has the ability to decide. The arbitration agreement should be
clear about the extent of the arbitrator’s authority. The arbitrator
•
•
•
exceeding her authority is the most common grounds for
challenging arbitration awards.
choosing arbitrators—In voluntary arbitrations, the parties
choose the arbitrator to decide the dispute. In most cases,
arbitration involves three arbitrators, which allows for a majority
vote on the matter. There are numerous methods the parties can
employ in selecting arbitrators. In some cases, an arbitration
agreement will outline the procedure. Mandatory arbitration may
identify or provide a limited pool of certified arbitrators.
Otherwise, the parties have latitude in choose an arbitrator. Most
jurisdictions do not require that arbitrators have any special
training. Each party may select one arbitrator and those
arbitrators select the third arbitrator. The parties will seek to
select experts with experience in the particular industry and with
knowledge of the customs and practices.
submit to arbitration—Arbitration begins by the parties
“submitting” their dispute to the arbitrators. Submission is simply
the act of contacting the arbitrators and providing them with the
dispute information and setting up a time to have an arbitration
proceeding. Submitting a dispute to arbitration authorizes
arbitrators to make a decision that binds the parties and resolves
their dispute. In mandatory arbitrations, many jurisdictions
require that the parties submit the matter to arbitration within six
months of the dispute arising.
agreement with arbitrator—In voluntary arbitration, the parties
must enter into an agreement with the arbitrators to resolve the
dispute. The terms of the arbitration agreement and the dispute
are passed on to the arbitrator. The parties may propose the rules
governing the arbitration. In most cases, however, the arbitrator
will agree to arbitrate the matter based upon model arbitration
procedural rules. Mandatory arbitration may have formalized
documents or procedures for this purpose. Many arbitrations
employee the rules provided in the Federal Arbitration Act.
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arbitration proceeding—The arbitration procedure follows a
semi-formal format with the arbitrators controlling the process.
Often the arbitrators will orchestrate the arbitration similarly to a
trial. The judicial rules of evidence and procedure do not apply, so
the arbitrators have a great deal of latitude. They look beyond
strictly legal criteria to other factors that bear on the proper
resolution of a dispute. They can look at such factors as the state
of the law, fairness, productivity, consequences on morale, and
whether tensions will be heightened or diminished. Of note, they
can generally request any evidence from the parties that is
necessary to arrive at a decision. The arbitrator will often follow a
form of model arbitration rules in holding the proceeding.
Mandatory arbitrations will always follow the procedure
proscribed by the law or court mandating arbitration.
award—arbitrators do not issue a judgment, as in civil trials.
Rather, they decide the matter and hand down an award in favor
of one party or the other. The arbitration agreement and the rules
employed by the arbitrators may limit the amount or type of
award the arbitrators can issue. Generally, the arbitrators do not
need to set forth findings of fact, conclusions of law, or reasons
for the award. The arbitrators may, however, be required to
elaborate on their reasoning if required by statute or arbitration
agreement. If so, the arbitrators generally provide the reasoning
for their decision in the form of an opinion letter. This opinion
letter becomes part of the award. Regardless of the reasoning,
parties are generally bound by the arbitrator’s decision.
enforcement—Courts will generally enforce arbitration awards
either through contract law or through recordation and
recognition as a judgment. Enforcement of arbitration awards is
discussed in greater detail in a separate section.
Ask Yourself
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What differences do you see between the arbitration and
mediation process? What differences do you see between the
arbitration and litigation process? Do you think it is wise for
businesses to include arbitration clauses in contracts? Is it wise for
individuals?
You work for ABC, Inc. ABC is involved in arbitration of a major
business dispute. Your boss wants you to attend the arbitration
and provide evidence to the arbitrators. Concerned that you
perform well, you begin researching the arbitration process. In a
short memo, explain the process for carrying out an arbitration.
Rules to Arbitration
The rules governing an arbitration vary depending upon whether the
arbitration is voluntary or mandatory. In a voluntary arbitration, the
parties may agree upon the rules to govern the proceeding. It is rare
that the parties will specifically state all of the governing provisions;
rather, the agreement to arbitrate will agree that statutory provisions or
a set of model rules will govern the arbitration proceeding.
The Revised Uniform Arbitration Act of 2000 is a model law commonly
employed in voluntary arbitrations.
In a mandatory arbitration, state law or court order dictates the rules
governing the arbitration. Notably, in 1925, Congress passed the
Federal Arbitration Act (FAA) to encourage the use of arbitration to
resolve conflicts. The FAA provides the process and procedure for
carrying out the arbitration. The FAA applies when the dispute is
subject to mandatory federal arbitration or when there is an voluntary
arbitration agreement and the dispute involves federal law. Of course,
the parties to voluntary arbitration may agree to a different set of laws,
but applying FAA standards may affect a party’s ability to enforce the
arbitrator’s award through the court system. Importantly, the FAA
requires that where the parties have agreed to arbitrate, they must do
so in lieu of going to court.
Ask Yourself
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Why do you think Congress found it necessary to establish
uniform Federal Arbitration Procedures? How do you feel about a
federal law attempting to control the state court procedure for
recognizing and enforcing arbitration agreements?
Pam and Lisa enter into a contract with an arbitration clause
covering any disputes. When a dispute arises, Pam and Lisa
decide to submit the matter to arbitration. If the contract does
not indicate, what rules apply to the arbitration process?
Challenging the Arbitration Award
An arbitration is a nonjudicial process. As such, there is no appeal
available. There is, however, a limited ability to challenge an arbitration
award in an Art. III court. The standard for challenging an arbitration
award differs for voluntary and mandatory arbitrations.
Challenging Voluntary Arbitration
In the case of voluntary arbitrations parties may challenge an
arbitration award based upon the arbitrator exceeding her authority or
based upon a contractual defense to the validity of the arbitration
agreement. That is, the court will not disturb an arbitrator’s award
based upon an error in the application of law or determination of a
fact. The challenging party must file a legal action attacking the validity
of the arbitration agreement or the authority of the arbitrator. For
example, the arbitrator may have issued an award that affected
property that was not subject to the original contract.
In general, arbitration clauses are liberally interpreted when a party
contests the scope of the clause. If the scope is debatable or
reasonably in doubt, the clause is construed in favor of arbitration. In
summary, the fact that the arbitrator made an erroneous ruling or
reached erroneous findings of fact are not grounds for setting aside
the award. Of course, an error of law may render the award void when
it requires the parties to commit a crime or otherwise to violate a
positive mandate of the law. In any event, judicial review of the
arbitration award may correct fraudulent or arbitrary actions by an
arbitrator.
Ask Yourself
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Why do you think courts, when reviewing a challenge to an
arbitration award, refuse to revisit the facts or procedures of the
arbitration? Do you believe they should revisit the facts and
procedures?
Brad and Angela agree to arbitrate their contract dispute. At the
end of the arbitration, Angela is not happy with the award
handed down by the arbitrators. What are her options for
challenging the arbitration award.
Challenging Mandatory Arbitration
Mandatory arbitration effectively cuts off the parties’ access to a trial
court. Many courts have held that mandatory arbitration statutes that
close the courts to litigants are void as against public policy and are
unconstitutional. The arguments against enforcing mandatory
arbitration statutes include the following:
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They deprive one of property and liberty of contract without due
process of law.
They violate the litigant’s Seventh Amendment right to a jury trial
and or state’s constitutional access to courts.
They result in the unconstitutional delegation of legislative or
judicial power in violation of state constitutional separation of
powers provisions.
Mandatory arbitration is generally deemed constitutional if fair
procedures are provided by the legislature and ultimate judicial review
is available. As such, statutorily mandated arbitration requires a higher
level of access to judicial review of the awards by the court. If a party
can reject the arbitrator’s award and seek de novo judicial review,
mandatory arbitration is generally considered constitutional. The right
to reject the award and to proceed to trial is the sole remedy of the
parties. If a party rejects an arbitrator’s award and challenges the case
at trial, the court may impose sanctions on the party who fails to
improve its position. Also, failing to attend the arbitration could forfeit
the right of a party to reject the award and proceed to trial.
Ask Yourself
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•
What is your opinion with regard to the above-mentioned
arguments against mandatory arbitration? Do you think that
allowing a party to refuse an arbitrator’s award makes mandatory
arbitration constitutional? Why or why not?
Brad and Angela have a dispute that is subject to a state law
requiring mandatory arbitration. At the end of the arbitration,
Angela is not happy with the award handed down by the
arbitrators. What are her options for challenging the arbitration?
Review Under the Federal Arbitration Act
In cases involving federal matters, the Federal Administration Act
controls the procedures. The procedures of the FAA are binding upon
both state and federal courts when called upon to review an
arbitration. Once an award is entered by an arbitrator or arbitration
panel, it must be “confirmed” in a court of law. Per the FAA, awards
must be confirmed within one year. A losing party must object and
challenge the award within three months.
As a federal law, the FAA trumps state statutes that conflict with its
provisions. For example, the FAA trumps state laws that allow for
challenge of arbitration awards in a manner that differs from the
provisions of the FAA.
Ask Yourself
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•
Do you think that the provisions of the FAA requiring a court to
confirm an arbitration award make the arbitration process more
fair? Why or why not? Do these provisions help to ensure the
mandatory arbitration statute observes Constitutional rights? Why
or why not?
Erica is a party to an arbitration under the Federal Arbitration Act.
She receives an award from the arbitrators. What is the process
for enforcing the arbitration award?
Arbitration Award Enforcement
The method of enforcing an arbitration award will vary depending
upon the jurisdiction. In a common- law arbitration jurisdiction, a party
must generally initiate a legal action to enforce an arbitration award as
a contract. Most statutory- arbitration jurisdictions establish a process
for enforcing arbitration awards. This may include seeking court
recognition and approval of the award. Many jurisdictions require
arbitration awards be registered with the court system to receive
judicial assistance in enforcement. Generally, the holder of the award
will file the award with the Clerk of Court’s office. The clerk will prepare
a certification of judgment order for a judge’s signature. Once a judge
signs and certifies the order, it may be enforced in the same manner is
a judgment. Once confirmed, the award is then reduced to an
enforceable judgment, which may be enforced by the winning party in
court, like any other judgment.
Under the FAA, state courts are encouraged to enforce arbitration
agreements. Arbitration agreements “shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.”
Ask Yourself
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•
What do you think about the process for enforcing an arbitration
award? Should it be easier or require more effort to enforce?
Should the courts get involved at all?
Josh receives an arbitration award in an arbitration governed by
the Federal Arbitration Act. What process can Josh follow to
enforce his arbitration award?
Licenses and Attributions
Business Law: An Introduction, by TheBusinessProfessor.com, Jason M.
Gordon & Colleagues has been adapted with permission from Jason M.
Gordon. © Business Professor, LLC.
The video What is Alternative Dispute Resolution has been adapted
with permission from Jason M. Gordon. © 2016, Business Professor, Inc.
International Dispute Resolution
Print
by Robert C. Goodwin, Collegiate Professor, University of Maryland Global Campus
Applicability of Foreign Law
It is important for those of us interested in international business to understand the nature of legal
responsibilities when conducting business in foreign countries and the power of countries to
impose rules that will influence business activities in another country. It would be useful for you
to be familiar with a few basic concepts in this area. First, each country has a sovereign right to
define the legal rules for activities within its territory, and the principles of international law are
supposed to respect that sovereignty.
There are several areas where this simple statement runs into problems. One is where a country
is undertaking actions that violate international law, such as allowing genocide. Another is where
one country (state A) attempts to regulate activity that occurs in a foreign country (state B)
because the activity has a direct effect in state A. The best example of this situation is US
antitrust laws. If UK companies conspire in London to fix prices on goods exported to the United
States, the United States will attempt to sue these UK companies in spite of the fact that their
actions might have been legal in the UK.
But, aside from these exceptions, the general rule that each country has the right to set its own
legal rules for activities within its borders still holds pretty well. The corollary to this rule is that
foreign companies are bound to obey the laws of the country where they are doing business. For
the most part this rule does not create conflict between the laws of the home country (e.g., the
United States) and the host country because countries usually do not give their laws
extraterritorial application. Thus, the United States does not typically attempt to regulate the
activities of US-owned companies that are operating in foreign countries.
There are, however, a few instances where the United States does regulate the activities of US
entities operating abroad, and these types of situations are increasing. But if there is no conflict
with the local law then there might not be a problem. For example, bribery, a common problem
in international business, is outlawed in all countries. Therefore, an American company has no
legal problem in complying with the US Foreign Corrupt Practices Act, which prohibits bribery,
even though it is a case of US law affecting activities taking place inside a foreign country.
Another tricky area is employment discrimination; the US Congress has made prohibitions on
discrimination applicable not only to US corporations abroad but also to subsidiaries controlled
by US corporations, unless compliance with the US antidiscrimination law would cause a
violation of the law of the country that the workplace is located in.
Where a conflict does exist between US law and local law, there often is an ad hoc solution
negotiated between the countries. Keep in mind that the US company operating abroad is clearly
subject to local law. A subsidiary established in country B is a country B company, not a US
company, even though it may be 100 percent owned by a US company. A GM subsidiary in
China is a Chinese company and must follow Chinese rules regarding its board of directors, etc.
Fundamentally, though, there is no good international system for solving conflicts involving the
legal rules of different countries. Suppose that you are a US company with subsidiaries in Japan
and China, and suppliers in China fail to honor some contract commitments. If the goods were
supposed to be delivered to Japan, does Japanese law apply? If a Japanese court ruled on the
dispute would a Chinese court honor the decision? These are difficult questions and arbitration
can be useful in such situations.
Choice of Law
Once we know what court will hear a case, we do not necessarily know what law will be applied
by that court. While courts in some countries prefer only to apply their own law to any case
which is heard in their court, in the United States that is often not true. If a court
in Maryland hears a case about a contract entered into between a Maryland corporation and
a California corporation which was negotiated in California and performed in California, then
the Maryland court will apply California law to the case. The short answer is that, absent a
choice by the parties, a US court applies the law of the state that has the most significant
relationship to the transaction and the parties.
Ability of Parties to Select the Forum
What if the parties themselves want to decide in advance that a particular forum will be the
location for any possible lawsuits? Can they do that? The short answer is yes, in the United
States, but maybe not so readily in other jurisdictions. (Read the 1972 US Supreme Court case
of M/S Bremen v. Zapata Offshore Co., 407 U.S. 1.)
Recognition and Enforcement of Foreign Judgments
In the United States there is a provision in the US Constitution that requires each state to give
full faith and credit to the judicial decisions of any of the other sister states. But internationally
there is no similar structure, and the extent to which each country will recognize the judgments
of other nations depends upon the law of the country that is asked to enforce a foreign judgment.
This type of enforcement is in stark contrast to arbitration, where there is an international
agreement whereby countries promise to enforce arbitral awards made in other countries. We
will discuss arbitration more in the section below
Many business people might be surprised to discover that if they were to be sued in a foreign
country they could be at serious risk of having any judgment that might be rendered in that
country brought here to the United States and enforced against them. The United States, unlike
many countries, is willing to accept judgments issued by the courts of other nations provided that
certain standards have been met. Courts will apply the following tests to determine whether the
foreign judgment should be accepted and enforced:
1. Did the foreign court have jurisdiction over the person and subject matter?
The question of whether the foreign court had jurisdiction is evaluated
using US standards of jurisdiction, not the standards as expressed in the
law of the foreign country. This takes us back to the standard reflected in
US court decisions that there be minimum contacts between the defendant
in the dispute and the jurisdiction or that a company has purposefully
availed itself of the privilege of doing business in the jurisdiction. Also, a
reasonableness overlay is part of the analysis. That is, the assertion of
jurisdiction must be reasonable under the circumstances of the case.
2. Was the defendant given adequate notice? Here adequate can refer to lead
time as well as the language of the notice.
3. Was the judgment rendered under a system that provides impartial
tribunals or procedures compatible with the requirements of due process
of law?
4. Was there fraud in obtaining the judgment? If fraud existed, of course,
the US court will not enforce the judgment.
5. Is enforcement of the foreign judgment consistent with US public policy?
6. Does the judgment conflict with another final judgment or is it contrary to
an agreement between the parties providing for arbitration or some other
alternate dispute settlement mechanism? The foregoing principles are
contained both in court decisions and in a uniform law that has been
adopted by some states, called the Foreign-Country Money Judgements
Recognition Act
Arbitration
Arbitration is a nonjudicial proceeding designed to settle disputes. Our focus here is arbitration
of disputes between two private parties to a contract, not the arbitration of disputes between a
private party and a government. Many people confuse arbitration with mediation. They are not
the same at all. In mediation, a neutral third party tries to bring the two disputing parties together.
A mediator serves as a facilitator and the parties themselves eventually reach an agreement.
Arbitration, on the other hand, involves the neutral third party (or parties) acting as a decision
maker in the same way that a judge does. Each party presents its point of view to the arbitrator,
who then makes a decision that the parties have agreed in advance they will honor.
There is no requirement as to how an arbitration will proceed—it is dictated by whatever is in the
contract between the parties. There are several organizations that provide arbitration services and
that have rules detailing how they conduct arbitrations, what procedures are applied, etc. The
International Chamber of Commerce (ICC) in Paris, for example, is a popular center for
arbitration, and many people draft contracts with an arbitration clause providing that arbitration
will be conducted in accordance with the rules of the ICC. The American Arbitration Association
(AAA) also provides arbitration services pursuant to its rules. Generally, in addition to
specifying the rules that will apply, parties to the contract should specify the location of the
arbitration, the language of arbitration, and the number of arbitrators. Sometimes one arbitrator
will make more sense than three. Keep in mind that arbitrators must be paid, so there may be an
advantage from a cost perspective for having a single arbitrator.
Arbitration has a number of advantages, including efficiency and confidentiality. But the most
important benefit is enforceability. Under the Convention on the Recognition and Enforcement
of Foreign Arbitral Awards (usually referred to as the New York Convention), most of the
world’s trading nations have agreed to have their courts enforce arbitral awards issued in foreign
nations. There are limited circumstances where a nation could refuse to enforce a foreign arbitral
award. These are set forth in Article V of the Convention.
Review the text of the Convention on the Recognition and Enforcement of Foreign Arbitral
Awards. Search for Article V in the pdf using the “Ctrl F” search function.
Important Takeaways for Your International Contracts
In terms of the important issues to keep in mind related to dispute resolution in contracts, with a
particular focus on international contracts, the following major issues are important:
1. US courts now have a strong bias for allowing the parties to determine
their own dispute resolution approach and are reluctant to allow a party to
bypass a contractual commitment to resolve disputes through
arbitration. This view is bolstered by the US Arbitration Act, which
2.
3.
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contains limited bases for overturning an arbitral award in the United
States.
Internationally, those nations that have signed the Convention on the
Enforcement of Arbitral Awards (called the New York Convention) have
also agreed to enforce arbitral awards and to allow them to be overturned
by their courts in only very limited circumstances, similar to the
circumstances set forth in the US Arbitration Act.
There is a major difference between enforcement of arbitral awards and
court judgments. In the United States, courts are liberal in enforcing
judicial awards made by the courts of other countries. However, other
countries do not follow the US practice. Thus, as a businessperson, you
might win a lawsuit but not be able to enforce the award in another
country. However, if you win an arbitration your chances of enforcing it
are far greater because of the New York Convention, which obligates
those countries that have signed it to enforce arbitral awards. As a
businessperson doing business internationally, you will more likely than
not want to include an arbitration clause in your contracts.
Note that many US lawyers like to put into contracts that both parties
agree that the courts of New York or some other state will be used to settle
disputes. But if you are doing business with a foreign company that doesn’t
have any assets in the US, what good does it do you to have a US
judgment? Courts overseas won’t honor the judgment and there are no
assets in the United States to execute against. You would be better off with
an arbitral award that can be enforced overseas, so long as the country has
signed the New York Convention.
For sales contracts, use letters of credit to ensure that you receive payment.
The true advantage of a letter of credit is that it involves a bank in the
process so the seller is not relying on the buyer to pay the invoice, but
rather on the bank.