The International Legal Environment of Business

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THE INTERNATIONAL LEGAL ENVIRONMENT

OF BUSINESS

Chapter 22

Meiners, Ringleb & EdwardsThe Legal Environment of Business, 12th Edition


INTERNATIONAL LAW AND BUSINESS

International Trade Agreements U.S. Import/Export Policies Business Structures in Foreign Markets Foreign Corrupt Practices Act International Contracts International Dispute Resolution


THE INTERNATIONAL BUSINESS ENVIRONMENT

Includes all business transactions that involve entities from two or more countries Movement of goods across countriesMovement of services across countries Issues regarding capital Issues regarding personnel of multinational enterprises

Differences include risks in• Financial• Political• Regulatory


ORIGINS OF INTERNATIONAL LAW

Commercial codes date back to Egypt in 1400 B.C. Early trade centered around law of the sea Greek/ Roman Empires both had codes of

international trade Middle Ages: Lex Mercatoria (Merchant Law) –

Governed trading customs in Europe Today’s codes still partially derived from early efforts


SOURCES OF INTERNATIONAL LAW

Individual countries create their own laws Trade agreements between countries Worldwide/regional organizations, i.e.

United Nations European Union (EU)

No universal international court system for resolving international conflicts of businesses

Difficult to enforce decisions and contracts See Exhibit 22.1


INTERNATIONAL TRADE AGREEMENTS Improve economic relations of countries Cover variety of commercial issues Tax agreements prevent double taxation Examples:

North American Free Trade Agreement (NAFTA, 1992) Canada/US/Mexico Regional treaty

General Agreement on Tariffs & Trade (GATT) replaced in 1995 by World Trade Organization (WTO) International Treaty WTO has authority to investigate & rule on government

subsidies that give unfair advantage to producer in a country Also looks at countervailing measures Helps with worldwide protection of intellectual property


U.S. IMPORT POLICY Limits on imports

• To protect domestic interests

Taxes on imports Tariffs (Duties) – Taxes

imposed by a government on imported goodsSpecific tariffs: fixed

duties on productsAd valorem tariffs: %

of price of product

Harmonized Tariff Schedules – Standardized, worldwide classification of goods for customs officials Harmonized Tariff Schedule of

the United States (HTSUS) Each country uses same

codes Bans on Certain Products – i.e.

weapons, illegal products, narcotics, national security concerns, products made from endangered species


CASEUNITED STATES V. MEAD CORPORATION

Mead imported “day planner” calendars. Under the tariff (HTSUS) – general heading for “registers, account books, notebooks . . .and similar articles.” Under subheading 4820.10 “diaries, notebooks and address books” subject to 4.0% tariff. Another subheading was for “other” items NOT subject to a tariff.

“Other” heading applied to planners until 1993. Customs changed classification to “diaries” and applied 4% tariff. Mead protested, but Customs did not change.

Mead sued in Court of International Trade (CIT). Court granted summary judgment for Customs. Mead appealed to Court of Appeals for Federal Circuit.

It reversed. Held classification by Customs do not get high level of deference to some regulations because Customs can change classification without formal notice-and-rule process that occurs for most substantive regulations.

Also held planners were not “diaries”, as those defined as bound volumes. Planner was a three-ring binder, so should be classified as “other” and no tariff. Customs appealed.

(Continued)


U.S. Supreme Court HELD: Judgment vacated and remanded for further proceedings.

Court of Appeals for Federal Circuit ought have looked at these issues:

Notice-and-comment procedures seen by Customs only when “changing in practice” to Produce a tariff increase OR In the imposition of a restriction/prohibition, OR When Customs Headquarters determines matter is important to

“interest of domestic industry”. Classification rulings are best treated like “interpretations contained in

policy statement, agency manuals and enforcement guidelines”. Customs can bring the benefit of specialized experience to bear on

the subtle question in this case.

CASEUNITED STATES V. MEAD CORPORATION


IMPORT CONTROLS In U.S. – Dept. of Commerce through International Trade Administration

(ITA) & International Trade Commission (ITC). Some imports are prohibited for safety or environmental reasons. Bans on certain products: such as explosives, weapons, illegal products

such as narcotics Antidumping Orders: When there is charging a lower price in an export

market than in a home market. Duty is determined by comparing market price in home market vs. price charge in U.S. when item is imported, then duty is applied to product.

Duties on Governmental Subsidies: Tariff applied to offset subsidies provided by foreign governments to their industries that lower prices of products imported into the U.S. Duty applied is = to foreign governmental subsidy. (Purpose: To assist U.S. products to be competitive in the U.S. market) (counterveiling duties).

Foreign Trade Zones: Goods imported without paying tariffs. Goods then processed/assembled. Duties assessed upon leaving zone.

Duty Free Ports: No duties or tariffs assessed on products, i.e. Hong Kong.


EXPORT PROMOTION AND RESTRICTIONS Federal/State governments

Commerce Department helps promote exports through ITA activities.

Commerce Control List will specify controls, if export allowed, and licensing required for exporting an item.

Export Restrictions, if goods, for instance:(1) Injure domestic industry(2) Jeopardize national security(3) Conflict with national policy (i.e. goods to support

terrorist activities)Arms Export Control Act implemented through Traffic in

Arms Regulations imposes restrictions on exports of weapons and technology that can be used as weapons.


EXPORT PROMOTION AND RESTRICTIONS

Commodity Control ListList of goods subject to restricted licenses If item is not on Export Administration Regulations

list, then not subject to special control. Application to Reexported U.S. Goods

Commerce licensing requirements applyGoods that U.S. may not want imported from country

#1 exported into country #2 (favored country); then reexported from country #2 into country #3, i.e. U.S. (May violate U.S. licensing regulations)


PENALTY PROVISIONS For violation of commerce’s licensing provisions Include criminal and civil penalties Can also have administrative sanctions If an exporter knowingly violates the Export Administration

Act, there can be fines up to $50,000 per violation. Person who “willfully” violates the Act, can be fined more

and receive up to 20 years in prison, with a possible suspension or revocation of a business’s authority to export. Example: ITT fined $100 million for selling sophisticated night-vision

goggle technology to firm in Singapore that sold technology to China.


FOREIGN MANUFACTURING

Wholly Owned Subsidiary Business owns the

facilities – some countries limit % of ownership

Joint Venture Sharing ownership with

foreign partners Licensing Agreement

Licensor grants licensee access to patents and technologies

Franchise Agreement Franchisor grants franchisee

the rights to sell products or services, i.e. McDonald’s, Hertz

Contract Manufacturing Contract made for production

of products Issues to Consider

Labor expenses Shipping costs Raw material costs Avoid restrictions/tariffs Pirating of technology


THE FOREIGN CORRUPT PRACTICES ACT (FCPA)

Punishment of payer of bribe to foreign officials “Corrupt” person displays reckless or conscious disregard for consequences

of one’s actions Accounting provisions require practices to track transactions Payer knows payment will go to public official

“Any reasonable person would have realized” Requirement: Keeping accounts. Internal controls. Need paper trail.

“Consciously chose not to ask about what he/she had reason to believe would be discovered”

“Simple negligence” or “mere foolishness” exception “Routine Governmental Action” Exception: “facilitating or expediting payment .

. . the purpose of which is to expedite or secure the performance of a “routine governmental action.” (i.e. visas, providing basic utilities, transportation services, etc. – small amount and very limited usage)

In 2006 Congress ratified the UN Convention Against Corruption to bring international cooperation to corruption enforcement practices.


PENALTIES

Individuals: Maximum of $100,000 & 5 years in jail

Corporation: Up to $2,000,000/violation

Exception: Department of Justice “pre-deal interpretation”

Watch: “Slush funds” or “salaries, commissions or fees” disproportionate to service provided

German company Siemens agreed to pay an $800 million fine

Paid large bribes to government officials in Argentina in an effort to win contracts.

8 Siemens’ executives & contractors also charged


CASEUNITED STATES V. KING

Owl Securities and Investments (OSI) of Kansas City was raising funds for large land development in Costa Rica.

FBI investigated King, large OSI’s investors. Kingsley (OSI executive) tape recorded conversations. King convicted of planning a bribe to a senior Costa Rican official for rights to develop land.

Fined $60,000 and sentenced 30 months in prison under the FCPA. Appealed to U.S. Court of Appeals. HELD: Affirmed. Ample evidence to support jury’s conviction Tape recordings: “I think we could pay the top people enough, that the

rest of the people won’t bother us any. That’s what I’m hoping this million and a half dollars does. I’m hoping it pays for enough top people.”

Knowingly participated in, approved of and acted to further conspiracy to offer the bribe. Six witnesses over 5-day period and other exhibits supported jury’s conviction..

Guilty of conspiracy and violations of FCPA.


INTERNATIONAL CONTRACTS

Cultural Aspects• Sensitivity to cultural differences in contracting an attitudes toward

relationships• Language differences create barriers, especially when contract

involves multiple languages Financial Aspects

• Method of payment concerns re: removing profits from countries in which business is conducted

• Exchange Markets Risk in timing in currency exchanges

• Financial Instruments May differ from country to country Use of Letters of Credit: Assurance by bank of buyer to pay

seller upon receipt of documents that prove goods were shipped and contract was fulfilled – Revocable or Irrevocable


INTERNATIONAL CONTRACTS

Financial Aspects (continued)• Exchange Controls

Different countries exchange controls – can affect decision where to locate assets

• Transfer Pricing Multinational firm sells goods from division located in one county

to a division in the U.S. Must determine price, but because it is within the firm, there is

no “market price” to use Firm creates an artificial price Practice called transfer pricing IRS has guidelines as to what it considers “reasonable” for

taxing purposes


KEY CLAUSES IN INTERNATIONAL CONTRACTS

Payment Clauses & Exchange Rates Choice of Language Clause Force Majeure Clauses Choice-of-Law Clauses

Selection of Which Laws Apply Forum Selection Clause

Selection of Court See Exhibit 22.5


LOSS OF INVESTMENT Nationalization: Gov’t

“nationalizes” entire industry, including foreign investment Gov’t may pay less than

value Example: Venezuela

nationalized ExxonMobil holdings in country in 2007 – Paid only $255 million of $900 million owed and refused to work with Exxon

Expropriation: Taking foreign property in accordance with international law

Confiscation: Taking is unlawful

Insuring against Risk of Loss All risk insurance policy

Provides financial relief in event of nationalization & other problems

Short-term private insurers Available for most investments

Risks i.e. Blockages, embargoes,

arbitrary decisions Major insurers (Lloyds of London) Gov’t agencies (i.e. Overseas

Private Investment Corporation [OPIC]) insures investors who invest in less developed countries


INTERNATIONAL DISPUTE RESOLUTION Litigation

Differs within countriesComplication of evidence, witnesses and documentsJudicial system may be different from country to countrySome courts more influenced by political pressuresNot enforceable outside of countryTreaties/Conventions may assist potential partiesContract clauses assist courts in enforcement of claimsUsually need “minimum contacts” for jurisdiction


INTERNATIONAL DISPUTE RESOLUTION

International Court of Justice (ICJ) Only nations have standing - not individuals Nations “may” make claims on behalf of persons No mandatory compliance requirement UN Security Council must enforce

Arbitration: • 3rd neutral party decides outcome, which is binding

Mediation: • 3rd neutral party “suggests” outcome, which is not binding


INTERNATIONAL PERSPECTIVE“MIGRATING TO AUSTRALIA”

Allowing foreigners to migrate to a country can be politically charged. Australia seeks immigrants who

Can contribute to the economy. Will embrace “Australian values”.

Assessment under a point system to see if they are desirable. Examples: Having skilled occupation (40-60 points). Working 3 out of past 4 yrs. in 40-60 above occupation (5 more points) Having a spouse who satisfies basic immigration requirements (5 points) Fluency in certain languages (5 points) English language ability (competent = 20 points), (vocational ability = 15

points Usually immigrants need 120 points to be accepted. Must read booklet and sign statements agreeing to respect & uphold

Australian law and values


DOCTRINE OF SOVEREIGN IMMUNITY

Act of StateCourt gives up right of

jurisdiction over foreign country or representative

Court will bar compensation because the acts were by a foreign government or representative

Sovereign ImmunityBar to compensation by

foreign investors Immunity to foreign

representative or countryOne country must respect

the independence of other countries and their representatives

In U.S.: Foreign Sovereign Immunities Act

Documents

The International Legal Environment of Business