Discussion see attached docs International Dispute Resolution
Applicability of Foreign Law
It is important for those of us interested in international bu
Discussion see attached docs 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 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.
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.
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.
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 …