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Step 1: Review Turnip Plaza Hotel Case
Invigorated by your early success at Colossal Corporation, you open
The Turnip Plaza Hotel case file
Ken
neth Dodger has provided to you. In the next step, you will gather the information you need to write the report.
Step 2: Gather and Analyze Information
INBOX (1 NEW EMAIL)
From: Kenneth Dodger, Vice President, Colossal Corporation
To: You
Good morning,
Hope you’ve had time to review the case file on The Turnip Plaza Hotel. In order to formulate a sound response to my questions, you’ll need to review a number of specific foundational issues involving legal contracts.
First, find the necessary information about
contract formation and execution
. Then, look into possible
contract remedies
for when a breach of contract occurs. As you read over this information, be sure to record your thoughts pertaining to the case, while noting the places in the readings that prompted your thoughts.
After you have refreshed your understanding of contract law generally, you should supplement that understanding by doing
legal research
on specific laws related to contracts in Michigan. Again, make sure to take notes as you read. Good notes will help you write your report.
Thinking over this case, put some of your focus on Edward Griffin’s role in this situation with Mark Piper. More specifically, consider whether Edward had the authority to make the promise he made (or any promises) to Mark.
Review the
legal responsibilities of agents and employees
to help formulate your answer. You should also review
ethical business decision making
, as it pertains to keeping promises in business situations and the ethical questions I have asked you to consider.
I trust you to perform with the same tenacity as you did with the first cases.
Thanks,
Ken
In the next step, you will use what you have learned to create an outline that will prepare you to write the report.
Step 3: Focus on Your Rationale and Conclusions: Create Your Outline
You’ve finished your research and reflected on how the facts and the law come together in this situation. You’ve also analyzed the possible arguments and determined which seem most reasonable (all things considered). Now it is time to formulate them, making sure to address all the concerns that VP Dodger expressed to you when you met. Outline the report that you will draft for your VP and review your document to make certain it covers all relevant points and progresses in a logical order.
After you finish the outline, if you have time, give yourself one night of sleep before you begin the next step, in which you will write the report. Fresh eyes might help you see points that need revision.
Step 4: Communicate Your Findings and Conclusions to the VP: Create Your Report
Use your outline and research notes to prepare your report for the VP. Be sure to meet the following requirements he has requested:
Format your report by including APA-formatted in-text citations and an APA-formatted reference list (do not format the body of the report using APA style, just the reference list). See
references and citations
for details.
Include a specific recommendation of what action, if any, the VP should take based on your analysis and conclusions.
Support your conclusion with references to legal principles and laws.
The report should be no more than 10 pages (double spaced, 12-point font; the reference list does not count towards page limit).
Step 5: Review Colossal’s International Legal Challenges
Successfully completing the Turnip Plaza report, you’re ready to review your next assignment: the
International Legal Challenges case file
.
You open the file and read over the specifics of this situation. You soon see that VP Dodger is concerned about some of the risks involved with a number of Colossal’s international projects.
In the next step, you will gather the information you need to identify important issues for the VP.
Step 6: Gather and Analyze the Information
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.
Step 7: Engage in the International Legal Challenges Discussion
Include a specific recommendation of what action, if any, the VP should take based on your analysis and conclusions.Support your conclusion with references to legal principles and laws. Course Resource
Print
The Turnip Plaza Hotel
Notice: Contains Confidential Information
Mark Piper was employed for several years as a tour guide at the Turnip
Plaza Hotel in Port Austin, Michigan. Turnip Plaza is one of Colossal
Corporation’s luxury hotel holdings, strategically located near Lake Huron’s
famous Turnip Rock. Over the years, Mark developed a reputation as one
of the most skillful tour guides in Michigan. He would guide tourists
through extreme kayaking, hiking, and camping adventures in and around
the Great Lakes. He was often requested by name by tourists visiting the
hotel and was featured on extreme sports television. His high adventure
kayaking tours brought in significant revenue for the hotel.
One month ago, Mark was approached by Stacey Nguyen, the manager of
the Huron Overnight Inn—a rival company of Turnip Plaza. Stacey offered
Mark a substantial salary increase to leave Turnip Plaza and come to work
for her. Mark agreed to think about this offer and get back to Stacey in 48
hours. When he returned to Turnip Plaza, he asked several of his colleagues
what they thought about the offer. One of them immediately went to Turnip
Plaza’s manager, Edward Griffin, and told him the details of Stacey’s offer
to Mark.
Upon hearing of the offer, Edward called Mark into his office and said: “If
you stay with Turnip Plaza, I promise that next month you will receive a
promotion with a 50 percent raise and a guaranteed contract for a two-year
term.” This sounded good to Mark, and he turned down the offer from
Stacey to stay with Turnip Plaza. However, last week, shortly before Mark
was to receive his new contract, he was dismissed from Turnip Plaza
because of corporate restructuring due to concerns about the increased
liability risks of managing high adventure tours through Colossal’s hotels.
Although Mark has not taken any formal action at this point, the vice
president is concerned that Mark might try to hold Turnip Plaza to
Edward’s promise.
Your task is to research the legal and ethical issues associated with this
situation and write a report to the vice president answering the following
questions:
1. What legal theories might Mark use to try to legally enforce Edward’s
promise? Explain the elements of these theories and how they apply to the
facts of this scenario.
2. If Mark were to file a lawsuit and win, what sort of damages or other
remedies might he be entitled to? Include your reasoning and any evidence
that led you to your conclusions.
3. Finally, regardless of the legal implications, the vice president would like
your view on the ethical issues. Does Turnip Plaza have an ethical
obligation to fulfill the promise made by Edward to Mark? Is it right to lay
off Mark under these circumstances? What should Turnip Plaza do from an
ethical perspective? Use ethical theory and principles to analyze these
questions.
Learning Topic
Print
International Contracts
In this paper we will focus on the specific rules relating to certain international contrac ts 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 consu mer
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 CIS G
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 t ransaction
(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.
Learning Topic
Print
International Law
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 “judge-made 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 noncrimin al
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.
8.
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”)
controversies between a citizen of a state and a foreign citizen
Plus, a $75,000 minimum applies to suits involving numbers 8 and 9 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 p arties.
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 are as
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 o f 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 longarm statutes, and every state has its own version of such a law. Generally, these laws grant
the courts far-reaching 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/
Learning Topic
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International Dispute Resolution
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
contains limited bases for overturning an arbitral award in the United
States.
2. 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.
3. 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.
4. 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.
5. 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.
