Step 1: Review Turnip Plaza Hotel Case
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.
Contract Formation and Execution
Contract law is a component of civil law that concerns the legal principles governing the exchange of goods or services between individuals or businesses. At its heart, contract law involves how legally enforceable promises are formed and executed.
A promise is a declaration by a legal person (called the promisor) to perform or forbear from performing specified act(s). The recipient of the promise (called the promisee), upon a promise being made, has rights to expect (and often to demand) that the promise be performed. Whether these rights to expect and demand performance are moral or legal rights depends on whether the promise was made in the context of a valid and enforceable contract. Only if the legal requirements of a contract are satisfied, or if other legal remedies are available, will a promise be enforceable in a court of law.
The law of contracts provides a means of distinguishing between types of promises that create moral obligation (e.g., a promise to meet a friend for coffee) and those that also create legal obligation (e.g., a promise to your bank to pay the mortgage acquired on your home).
Within the United States, there are two major sources of domestic contract law: the Uniform Commercial Code (UCC) and the common law. Depending on the subject matter of the contract, such as if the contract involves the purchase of tangible personal property (“goods”) or the hiring of an individual for employment (“services”), one will look to specific sources of law to determine whether the legal promise is enforceable.
Contracts for the sale of goods are governed by Article 2 of the UCC. Most contracts that are not for the sale of goods—such as contracts for employment, real property, insurance, and so forth—are governed by the common law, which is generally summarized in the Restatement of Contracts ( Restatement).
Once one identifies the applicable source of the contract law—that is, whether the contract is governed by the common law or by the UCC—then, one can determine if the particular promise is valid and enforceable under the applicable rules contained in that source of law. Although the UCC and the common law do overlap, there are many key differences between the two sources of law as regards many areas of contract law, including the formation and performance of a contract, the requirements for breach of a contract, the enforceability of a contract, and the remedies available for the victim of a breach.
The legal enforceability of a particular promise thus hinges on the rules contained in the relevant source of law that are applicable to the subject matter of that particular promise. The promise is, in many ways, the cornerstone of societal order. As stated by distinguished jurist Roscoe Pound, the “social order rests upon the stability and predictability of conduct, of which keeping promises is a large item” (Pound, 1959). Contract law provides the mechanism for determining when a promise is valid and enforceable in a court of law.
The US legal system is a common-law system, a type of system that originated in England after the Norman conquest of 1066 CE. The rulers of England, including William the Conqueror and his progeny, took measures to unify the country. One of the measures they took was to establish king’s courts, which sparked the beginning of a body of common law, or generally applicable rules of law, throughout England and, eventually, its colonies. Over time, the common law was brought to America through English colonization, and the system of common law was adopted by the Founding Fathers of the United States.
In medieval English times, one could seek different remedies in different courts. Remedies, broadly construed, are the legal method by which rights are enforced or wrongs redressed. In medieval English times, king’s courts resolved disputes by issuing an award of compensation to injured parties, often in the form of land, valuable property, or money. The king’s courts eventually became known as courts of law, and the awards of compensation, remedies at law. Remedies at law, today, are mostly issued in the form of monetary amounts called damages, and are awarded through court orders.
It became apparent during the medieval period that there was sometimes no adequate remedy at law available to resolve a dispute, and so, over time, chancery courts, also known as courts of equity, were established. The remedies available in the courts of equity (called remedies in equity or equitable remedies) were non-monetary remedies, including specific performance, rescission, reformation, and injunction.
During the medieval period and still today, equitable remedies are typically available to the injured party only when remedies at law (e.g., monetary damages) are inadequate for resolving a dispute. Over time, and particularly during the nineteenth century, most states in United States adopted rules to combine the traditional courts of law and courts of equity, streamlining the process by making injured parties capable of seeking both monetary and equitable remedies in the same court.
Remedies are available for victims of breach of contract. When one party to a contract does not fulfill his or her legal obligations under the contract (“breaching the contract”), the other party may seek a remedy, or some combination of remedies, to make the injured party whole. Today, in the United States, the remedies available for breach of contract include both remedies at law (damages), and equitable remedies, and in most states, these remedies may be sought simultaneously in the same court. When there is a valid and enforceable contract, monetary and equitable remedies may be available.
Even when there is not a valid and enforceable contract, in some cases, remedies may be sought under other common-law theories, such as promissory estoppel, or pursuant to theories of quasi-contract. The following decision tree explains how contract remedies work in tandem with noncontract remedies.
Contract Remedy Decision Tree
As the decision tree shows, when there is a valid and enforceable contract, then monetary and equitable remedies may be sought. If there is not a valid and enforceable contract, then one should ask if a promise has been made in order to determine the appropriate theory to use. If a promise has been made, then one may seek a remedy under the theory of promissory estoppel. If a promise has not been made, then one may seek a remedy under the theory of quasi-contract. If there might be a contract, but this is not certain, then one may seek relief in the alternative (by requesting the court to determine if there is a contract and, if so, to issue contract remedies; or, if not, to issue noncontract remedies).
Thus, even if no valid and enforceable contract exists, there is still the potential, depending on the circumstances, for the injured party to seek remedies.
Legal Responsibilities of Agents and Employees
Agency law is a component of civil law and deals with the legal relationship by which one person acts on behalf of another. The agent is the person who acts on behalf of the principal to do something the principal has delegated the agent to do, which the principal him or herself is legally permitted to do.
The creation of an agency relationship gives rise to both rights and duties of the agent and the principal, as well as the potential for liability to each other and to third parties. Principals may be held liable by third parties for the acts of their agents under certain, but not all, circumstances. The potential liabilities a principal has to third parties for the agent’s acts often depend on whether the agent is an employee or an independent contractor. Principals face potentially more liabilities to third parties for the acts of their employees than they do for the acts of their independent contractors.
Ethical Business Decision Making
It is reasonable that everyone who asks justice should do justice.
What Is Ethics?
Ethics has been a topic of discussion and debate starting with the Greek philosophers about 2,500 years ago. We can define ethics simply, but resolving ethical issues is rarely simple. Ethics is the study of good and of how people apply good principles in their behavior. Behavior includes how we treat people we know and, perhaps more importantly, how we treat people we do not know. Our biases and fears can complicate ethical decision making. Our own interests in achieving specific ends can also interfere with our choice of an ethical course of action; the ethical choice may not be the most profitable or socially acceptable.
It might be helpful to discuss what ethics is not. Ethics is not religion, although religion can guide ethical thinking. Ethics is not defined by what is possible (e.g., through scientific discovery or technology), although, as new machines are created, what is possible changes, giving rise to new ethical quandaries. Nor is ethics simply what is commonly practiced. Any one of us could cite a historically common practice that is unethical. In addition, what is common practice today in one place will conflict with what is common practice today in other places.
Ethics is not just how we feel: our instincts may tell us to act one way or another, but this feeling may not lead us to the best behavior. If making a public speech against a new piece of legislature were the only way to behave ethically following the passage of that legislature, would we take this action? Many people, for example, have a gut reaction against public speaking. The law is not an adequate guide either. Looking back at history, we can certainly name unethical laws.
An important outcome of ethical decision making is a standard for behavior. Standards can be informal, as in our behavior on the street, in a store, or with our neighbors. If you see someone drop a $20 bill, what should you do? Standards can also be formal, usually at the institutional level (e.g., at a university, trade organization, or business) or the societal level (city, county, state, national, international). At the societal level, for example, methods and forms of taxation must be determined. What means of taxation are ethical? Are there some that are unethical?
What Is Business Ethics?
Business ethics is ethics concerning behaviors occurring within a business context. The breadth of ethical considerations should be considered when one is formulating a standard of behavior in a business setting. We cannot look only to the law, only to common or prior practice, to religion, or to instinct. We must carefully consider multiple competing factors and, using logic and rational thought, create business standards of behavior that are ethical.
How Does a Business Provide Ethical Standards?
Businesses attempt to provide ethical standards in several ways:
· relying on each individual to make ethical decisions
· stopping at compliance with the law
· simply telling employees and officers to act ethically
And some businesses achieve results by taking a managing values approach—a systematic approach to maintaining the organization’s values that doesn’t depend on individual interpretation of those values or how to safeguard them.
The first three options are not helpful even when an employee wishes to act ethically; the employee may not understand how to judge what is ethical behavior. Thus, determining if your company is using a managing values approach is the first step. Places to look to make this determination include your organization’s mission statement, core values, and ethics code.
Operational Ethics in a Business Setting
But what if these don’t help, or worse, they raise ethical issues themselves? Fortunately, there is a set of standard ethics tests that you can apply yourself.
Ethics Tests You Can Apply
The first ethics test you can apply is called the front page test, or viral news test. This is a fairly new test, and it is simple: How would your business feel if the issue were on the front page of a newspaper? Or went viral on the internet?
More traditionally, there are five theoretical tests with which you can judge a business action (Markkula Center for Applied Ethics, n.d.):
· rights—What duty do the actors have to respect the human rights of those affected?
· justice or fairness—Are all parties treated equally or proportionally? If differently, is the basis for treating them differently rational?
· virtues—The good human being is fair, is honest, shows integrity, and shows compassion. Does the action uphold these virtues?
· common good—This test has become more common recently. How does the action benefit everyone in society? Whom does it not benefit? Whom might it harm?
· utilitarianism—Utilitarianism is also called the greatest good principle. Does the overall good outweigh any bad? Sometimes, this conflicts with other tests.
In order to answer the questions above, we must have a clear sense of what is a good? What is a harm? What are legitimate rights? What is the standard of fairness? What is the canon of virtues? What is the common good? These questions have been much debated.
A Method of Determining Ethical Responsibility
There are five questions you can ask to determine whether or not you should act on a given decision:
· What is the severity of the harm?
· What is the certainty of the harm?
· What is the degree of involvement?
· What is the cost of acting?
· What is the certainty of the solution?
Process of Ethical Analysis
Think of ethical analysis as a process that builds on itself. Follow the steps below, knowing that you might circle back and reevaluate your interpretation of the situation as you complete each step.
1. Identify the stakeholders and determine whether some are more important than others.
2. Determine whether all stakeholders have been consulted on the business decision at hand.
3. Describe the possible actions of the stakeholders following the business decision
4. Evaluate each of the possible business decisions in light of the ethical tests.
5. Identify the best possible decision and justify your choice, with reference to the ethical approach on which you have based it.
International Legal Challenges File
Notice: Contains Confidential Information
The vice president is concerned that the company is undertaking a number of international projects without a complete understanding of the risks that such activities entail. Specifically, the VP would like further thoughts on the following issues:
1. In one case, a subsidiary of Colossal Corporation has negotiated a contract that calls for any disputes to be settled in the courts of Zintar, a relatively small African country that supplies raw materials for some of Colossal’s European operations. The VP would like a discussion on the wisdom of this contract provision and thoughts on possible alternative approaches if the contract were to be renegotiated.
2. In a second case, a Colossal subsidiary in Bartan, an Asian country, wants the company to enter into a sales contract with a subsidiary there, using the UN Convention on Contracts for the International Sale of Goods (CISG) as the controlling law. The VP needs to know the ramifications of this option and decide whether it is a good idea.
3. Colossal management also needs to know whether arbitration is a good idea for a dispute resolution provision for both domestic and international contracts and why.
4. The parent company, Colossal Corporation, has been sued in the country of Notso in South America. The lawsuit claims millions of dollars in damages due to supposed pollution at a mine that Colossal owned there. Since Colossal has already decided to exit that country and sold the mine there, the company’s regional VP believes there is no risk if the company is taken to court in Notso. He says that even if Colossal loses there and a court judgment is rendered against it, there is no danger because the company will have left the country. The VP needs to know if he is right.
5. Finally, one of Colossal’s suppliers in the country of Edfin no longer wants to supply needed raw materials for Colossal’s factories in the United States, unless Colossal agrees to pay them by opening a letter of credit. Up to now, the company has paid them after delivery to the United States, which has allowed Colossal to inspect the quality of the shipments before sending payment. What are the ramifications of granting Edfin’s request?
by Robert C. Goodwin, Collegiate Professor, University of Maryland Global Campus
Introduction to Law
There are many definitions of law, each of which focuses on a different aspect of the subject. Black’s Law Dictionary (n.d), for example, defines law in a way that emphasizes it as applicable to people as well as physical phenomena: “That which is laid down, ordained, or established. A rule or method according to which phenomena or actions coexist or follow one another.”
Webster’s Third New International Dictionary (1961) is less broad, focuses on people, adds the enforcement concept, and emphasizes the notion of law as an expression of the customs of the people: “A binding custom or practice of a community. A rule or mode of conduct or action that is prescribed or formally recognized as binding by a supreme controlling authority or is made obligatory by a sanction made, recognized, or enforced by the controlling authority.”
An even more specific definition is, law consists of the entire body of principles that govern conduct, the observance of which can be enforced in courts.
Man-made law is necessary to provide not only rules of conduct but also the machinery and procedures for enforcing right conduct, for punishing wrongful acts, and for settling disputes that arise even when both parties are motivated by good intentions. In its broadest sense, the purpose of law is to provide order, stability, and justice. It is often said that procedure is the heart of the law. There are many instances where the substantive words of the law appear to give someone a right but they are unable to exercise that right for procedural reasons. Something as simple as failing to file a lawsuit within the time limits set by the local court rules can prevent someone from receiving the remedy they thought they had. We should always keep this distinction between right and remedy in mind as we review the various materials in this course.
The Legal System
Each nation has its own legal system. Thus, the institutions that create the laws (such as bureaucracies, courts, legislatures, a king) can differ significantly from country to country. So also will the scope of the substantive rules enacted by these institutions, which define the rights and responsibilities of the citizens of the nation. The rules relating to what constitutes criminal conduct, when a contract is considered to be formed, what activities of private parties are subject to government control, and myriad other substantive regulations of human conduct all differ from country to country. A final aspect of a nation’s legal system consists of the procedural rules that govern enforcement of the substantive ones. As noted, one doesn’t truly have a right without a remedy, and it is the remedy that is defined by procedural law. These rules encompass everything from the rules of evidence to the right to be represented by a lawyer and are a critical component of a legal system.
While it is a fact that each nation has its own legal system, it is also true that legal systems can be grouped into major categories, with the individual nations within a category having similar structures to their legal systems. The two major legal systems in the world are the common law legal system and the civil law legal system.
Civil Law and Common Law
A civil law country is one whose legal system reflects, however remotely, the principles of classical Roman law as codified by the emperor Justinian I in the sixth century. While modern countries that are part of the civil law system have substantive laws that differ greatly from the law at the time of the Romans, the structure of the system and its approach to legal problem solving date from the sixth century. We may be more familiar with the Napoleonic Code of 1804, which often is considered the father of civil law codes, but it too was a direct descendant of Roman law.
Common law, on the other hand, owes its origins to the slow development of royal courts after the Norman Conquest of England in 1066. Gradually, the expansion of royal power at the expense of the local barons resulted in the ascendancy of royal institutions and particularly the royal courts, where citizens perceived the likelihood of justice at the hand of the King’s judges as greater than that of the purely local tribunals, which had existed before the conquest. The term common law owes its origins to the fact that it was the law applied by royal or national courts and hence “common” to the entire country as opposed to the customary law of the local courts.
More important for us than the origins of these two major legal systems are the questions: which countries are influenced by which system, how do the two systems differ, and what do the differences mean for international business, if anything?
Common law is applied in Great Britain and almost all of the countries where Great Britain had a significant influence. Thus, the United States, Canada, Australia, India, and most other former British colonies use the common law system. The civil law system is centered in continental Europe and prevalent in South America and much of Asia, including Japan.
While in recent years the differences between the two major legal systems have narrowed somewhat, with countries identified as common law or civil law borrowing legal approaches from each other and being influenced by the same social movements and cultural changes, there nevertheless are significant differences that should be highlighted. The most fundamental difference rests in the very nature of how law is made.
In the civil law tradition, law is conceived as a rule of conduct expressed in written codes. Nothing is law unless it is written down in such a code. The expression of the law is stated in broad general terms, and a judge, when deciding a case, must find a basis for the decision in the principles expressed in the code. While the judge may refer readily to legal scholars for assistance in doing so, reference to other similar cases handled by other judges would ordinarily not be part of the process. Rather, the civil law judge would apply deductive reasoning—solving the case by deduction from a principle expressed in the code.
Common law focuses heavily on cases. While common law countries have codes (any statute enacted by a legislative body would fit this definition) the law inferred by prior cases (i.e., judicial precedents) is equally as important as the statute. Common law lawyers and judges reason by analogy to prior cases, and if a prior case decided by a higher court is essentially the same in its factual pattern then the case will control the outcome under the principle of stare decisis (i.e., that past decisions are generally binding for the resolution of factually similar cases). Thus, the role of judges is critical, and the common law is often referred to as “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 noncriminal cases in civil law countries. In a court case in a civil law country, the judge assumes a far more activist role, and attorneys for each side have an obligation to assist the judge in finding the facts. In contrast, in litigation in a common law country, the judge is a neutral referee, ruling on motions made by the advocates but not generally initiating his own inquiries.
The US Legal System
In order to understand the context of international law, it is important to have a basic understanding of the US legal system. This system is somewhat complex because each state within the United States has its own legislative body, executive branch, and court system. And, of course, the federal government has this structure as well. How these systems overlap and interact with each other is an important issue.
One of the most important aspects of the US federal system is the acceptance by courts in one state of the judicial decisions made in another state. The Constitution itself requires that each state give “full faith and credit” to the judicial determinations of its sister states. Thus, for example, if I bring a successful lawsuit in Maryland against a party who moves to California, I can take that Maryland judgment to the courts of California and ask that the California court convert that judgment into a California judgment, which can then be enforced in that state. Importantly, there is no comparable situation among countries. If I obtain a favorable court ruling from the courts of France against a person who then moves to Brazil before the judgment can be enforced it will be doubtful that I could convince a Brazilian court to adopt the French judgment. There is no international “full faith and credit” clause, although negotiations on an international agreement, which would do just that, are already underway.
One interesting aspect of the differences between federal laws and state laws is that those laws that are of principal interest to us (i.e., those laws that deal with commercial matters) are virtually all state laws. There is no federal law of contracts and no federal law of sales. That does not mean, however, that federal courts are never involved in hearing a case involving a contract dispute. But if and when they do hear such a case they apply state law. Assume, for example, that you have a contract dispute that arises over a contract that was signed in New York and was to be performed in New York. One party brings an action in the federal court sitting in the state of Maryland (we’ll explain how this happens shortly). The federal court in the state of Maryland would apply New York law to the case because (1) it has to apply state law since there is no federal law on contracts, and (2) the jurisdiction with the closest connection with the case is New York and hence, New York law should apply.
We all are familiar with the Supreme Court and its role as the final decision-making body on matters of legal interpretation. The Supreme Court is the highest court in the federal system. Immediately below the Supreme Court are thirteen circuit courts of appeal, which hear appeals from the district courts, the trial-level courts in the federal system. Twelve of these circuit courts of appeal cover geographic areas—the sixth circuit, for example, covers Michigan, Ohio, Kentucky, and Tennessee. The courts have as many as twenty judges and they hear cases in panels of three. The circuit courts do not conduct trials—they only hear appeals and, in the common law system, appeals can only be made as to matters of law as opposed to facts. The trial court and the jury have complete responsibility for determining the facts, and the appellate courts can only hear appeals relating to matters of law.
Federal courts at the trial level (the district courts) and at the appellate level (the circuit courts of appeal) have their basic power, or jurisdiction, defined by the Constitution. Under Article III of the Constitution, specific powers are outlined for the federal courts. Federal courts have jurisdiction with respect to the following:
1. constitutional issues
2. laws and treaties of the United States
5. where the United States government is a party
6. controversies between a state and citizens of another state
7. controversies between citizens of different states (called “diversity jurisdiction”)
8. controversies between a citizen of a state and a foreign citizen
Plus, a $75,000 minimum applies to suits involving numbers 7 and 8 above.
Number 8 above is most significant for our purposes. The concept of “diversity jurisdiction” was adopted by the framers of the Constitution in order to provide an alternative to the home field advantage that might otherwise apply if lawsuits involving parties from different states could be heard only in the state courts of one of the parties. The federal courts were seen as providing a more neutral forum for such situations. Thus, because of this provision of the Constitution, a party can either bring a case in a federal court (as a plaintiff) or ask to have it removed to a federal court (as a defendant) so long as the diversity criteria are met. And, as already noted, the federal court would apply state law in its consideration of the case, unless it is a case involving federal law or one of the other categories set forth above.
International Legal Issues
Before considering the issues related to the application of legal rules to international businesses, we should understand the scope of the power of nations to make such rules. In other words, what are the limits of a nation’s law-making authority and where do such limits come from? Can the Parliament in Great Britain issue edicts regulating businesses in Switzerland? What are the principles involved?
We start with the consideration of public international law—that is, the category of international law that defines the relationships between and among nations. It differs from what is usually termed private international law, which really is simply another way of describing the rules that apply to private businesses in an international setting. But our concern now is to analyze public international law and to understand the reach of a nation’s power over its subjects and over the subjects of other nations. Hereafter we’ll drop the word public and simply refer to public international law as international law.
The term international law is used to describe the rules that regulate the conduct of nations. International law differs from the laws of the various nations of the world in two major respects. First, many areas of international law are not definitive—that is, nations (or states) differ as to what the actual rule in question is (although there are many areas where the rules are clear, either by virtue of an international agreement or long usage). Second, for the most part there is no enforcement mechanism associated with international law, so that a nation that ignores the rules, while subject to possible ostracism, is not otherwise at risk of being enjoined, fined, or arrested as would a private citizen or business that violated the law of a nation.
International law is based on the principles of (1) sovereignty and (2) the consent of states. The concept of sovereignty is that a nation is master in its own territory. The International Court of Justice (ICJ) (1948) has defined sovereignty as “the whole body of rights and attributes which a State possesses in its territory, to the exclusion of all other States, and also in its relations with other States. Sovereignty confers rights upon States and imposes obligations on them.”
Thus, sovereignty is that concept which allows a state to make rules that are applicable throughout its territory and that govern all people within the state. The concept of sovereignty also conveys the notion that each state is equal to all other states, and the sovereign rights of any particular state are limited by the sovereign rights of other states.
The acceptance of the concept of sovereignty dates from the middle of the seventeenth century at the conclusion of the Thirty Years War, which marked the separation of the powers of the church and the state. As time has passed, nations have begun to recognize specific principles that further define the concept of sovereignty and the notions of territorial integrity and political independence as being inviolable. Since each state is sovereign in its own territory, international law recognizes the basic principle that no state has the right to impose its will on the territory of another state.
Courts in the United States often use the term comity to refer to the deference or respect that is due to the decisions and actions of another country in order to minimize the conflicts that could arise through the assertion of conflicting jurisdiction by different countries.
There are a number of sources of international law. First, there is customary international law, which derives from the practice of nations over a period of time; in other words,something that over time is recognized by states as international law, whether from a sense of obligation or other reason. Second, international conventions and treaties establish rules, which are accepted by the nations that sign them, such as the Law of the Sea Convention. Third, general principles of law recognized by civilized nations can serve as a source for international law. Finally, judicial decisions by international courts such as the ICJ in the Hague, as well as the opinions of legal scholars, can assist in determining the rules of international law.
While international law seems from one perspective to be academic and theoretical, it actually has considerable practical impact in the real world. Consider, for example, if a US citizen were involved in a dispute in Mexico with citizens of Brazil and a Brazilian court ordered him or her to return to Brazil for a trial. Instead, the US citizen heads to Houston, where a representative of Brazil appears in a Houston court and asks the judge to assist in enforcing the Brazilian court order. The first thing the US judge will consider is international law and whether Brazilian courts have the power to order a noncitizen outside their country to return to appear in their courts.
The Permanent Court of International Justice, or the World Court, was created as an international court long before the founding of the United Nations after the Second World War. When the United Nations was created, the court was named the International Court of Justice, and was incorporated as one of the organs of the UN. Article 34 of the UN Statute defining the jurisdiction of the court makes it clear that the court can only hear disputes that arise between nations, not disputes that arise between private parties or between a nation and a private party. And, the court only decides issues which are presented to it by the countries on a voluntary basis. As a general rule, both nations involved in a dispute must agree to have the ICJ hear the dispute in order for the court to have jurisdiction.
In general, international law recognizes, to one extent or another, five bases for the exercise of a nation’s powers to cases involving foreign persons, property, or events. (Voluntary agreement of the parties would be a sixth basis.) The support for and legitimacy of these theories of jurisdiction differ, and they are outlined here in the order of acceptance:
· territorial principle—This concept is universally accepted and is the fundamental attribute of sovereignty—that a nation can control events and people within its territory. Each nation is responsible for the conduct of law and the maintenance of good order within its borders, and this principle is an expression of that right and responsibility.
· nationality principle—The person committing the offense is a citizen who can be presumed to know his country’s laws wherever he is. By virtue of nationality, a citizen becomes entitled to certain rights and protections from his country (such as a passport, right to vote, etc.) and also has certain obligations. Under this theory of jurisdiction, a nation can exercise its control over its nationals wherever they may be.
· protective principle—Jurisdiction can be exercised because of conduct that was injurious to a fundamental national interest.
· universality principle—Nations have jurisdiction to try cases where the offense is one that is regarded as a crime by the entire international community. The two most common situations are piracy and war crimes.
· passive personality principle—Crimes against citizens (i.e., a nation claiming jurisdiction to try a person for offenses committed abroad that affect nationals of the country), such as crimes against ambassadors and diplomats.
· “effects” principle—The “effects” principle refers to the situation where a state assumes jurisdiction on the grounds that the behavior of a party is producing “effects” within its territory. This is the case even though all the conduct complained of takes place in another state. The use of the “effects” test has arisen most often in situations which are described as the exercise of “extraterritorial” jurisdiction by a country. The United States, for example, has been subject to considerable criticism for purporting to control events and exercise jurisdiction over activities that occur outside of its borders, particularly in the antitrust area and in the area of export controls.
Determining the Applicable Law and Forum
We already discussed the jurisdiction of countries and their power to prescribe rules, and we evaluated the various bases upon which such power could be exercised. When we talk of jurisdiction, whether of courts or nations, think of the word as synonymous with the concept of power. What we have learned so far is that there are various standards under international law for determining the reach of the power of nations to assert their authority over people. We observed the territorial principle, the nationality principle, and the effects test as being three of the important ones.
Now we will consider a different aspect of jurisdiction—the jurisdiction of courts— starting with an analysis of the situation in the United States. The concept of jurisdiction is central to the legal system. If you are sued in California, can a California court proceed with the case even though you live in Maryland? The answer depends upon the limits on the jurisdiction of US courts and how those limits are determined. In fact, in every lawsuit, the first criterion that a plaintiff has to include in his pleadings is a presentation of the legal basis as to why the court has jurisdiction over the subject matter of the case and over the defendant.
After considering the concept of jurisdiction we will touch upon what is called “choice of law.” Once a court has decided that it has jurisdiction, what law does it apply? The law of the state where the court is located, the law of the state where the plaintiff or defendant resides, or some other law? Like most areas of the law, the legal principles in this area are still developing and, although it is easy enough to state the generally accepted principles, we must always be aware that there are many gray areas in the law.
Finally, we will address the ability of parties to choose their own law and forum (i.e., in which court the matter will be decided).
The Jurisdiction of Courts
Subject Matter Jurisdiction
Before we can determine if a court can exercise power over an individual or a corporation (i.e., exercise personal jurisdiction) we need to know that the court is authorized to deal with the subject matter of the dispute. This is generally not a significant issue because most state courts are courts of general jurisdiction and are empowered by statute to hear all controversies arising under the laws of a particular jurisdiction. The federal courts have more limited subject matter jurisdiction, as we discussed previously, where we reviewed the constitutional provision that delineated the power of federal courts. And, there are a number of “specialized” courts where the issue of subject matter jurisdiction is indeed significant. Take, for example, the bankruptcy courts, which were created to deal exclusively with bankruptcy. If you were to try to bring another type of case in a bankruptcy court, you would not be able to do so, because the court would determine that it did not have subject matter jurisdiction. But, for the most part, determining whether a court has subject matter jurisdiction is not a difficult issue. The same is not true with respect to the issue of personal jurisdiction.
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.
In order for a US court to have jurisdiction over a person, there must first be a specific law that purports to set forth the power of the court over persons. These laws are called long-arm statutes, and every state has its own version of such a law. Generally, these laws grant the courts 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.
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.
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 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.
by Robert C. Goodwin, Collegiate Professor, University of Maryland Global Campus
In this paper we will focus on the specific rules relating to certain international contracts as well as the critical question of how we make sure we get paid!
Formation of Contracts
Contracts involve an offer by one party and an acceptance by the other. Both the offer and the acceptance must be definite, unqualified, and unconditional. An advertisement for bids is not itself an offer, but a bid in response to such an advertisement is an offer. An offer may be revoked at any time prior to its acceptance, but that revocation must be communicated to the offeree before acceptance.
Under common law principles, the offer and the acceptance must match (i.e., must be a mirror image of each other) at least as to those aspects that are considered “material.” The term material basically means important or significant. In contract law, all the basic terms involving price, quantity, delivery, and warranty are considered material. The provision of the contract dealing with dispute resolution is also material, even though the parties may not pay much attention to that.
In commercial transactions in the United States, the common law principles are less important because all states except Louisiana have enacted Article 2 of the Uniform Commercial Code (UCC). The code is not really “uniform,” since it is simply comprised of proposed text, which is then adopted by each state, in many instances with their own changes to the “uniform” provisions. But the UCC has given the United States a common sales law related to the sale of goods in commercial transactions, even if there are a few minor differences among the states. Article 2 of the UCC applies to contracts for the sale of goods, with goods defined as any tangible personal property. Examples of such tangible personal property include moveable items such as chairs, computers, and clothing. On the question of whether the offer and the acceptance have to match precisely, the UCC differs from the common law mirror image rule. Under the UCC, depending on if the parties are involved are merchants, the additional terms of an acceptance either fall out of the contract or may become a part of it. If both parties are merchants (e.g., people who regularly deal in these types of goods), then the additional terms may become a part of the contract. If the parties are not both merchants, then they fall out of the contract, and do not become a part of it.
Breach of Contract and Remedies
There is a breach of contract whenever one or both parties fail to comply with the terms of contract without legal excuse. The remedies for breach include the following:
· The injured party can bring an action for damages.
· In some instance the injured party may cancel the contract.
· In some instances the injured party may bring a suit to obtain “specific performance.” This means requesting the court to order the breaching party to do what he or she had promised to do in the contract instead of simply having the court award monetary damages. Specific performance is more common in civil law countries than common law countries, where the courts prefer monetary damages, and is used even in common law countries almost exclusively for goods ( particularly unique items), but almost never to compel a person to perform a personal service obligation of a contract.
The simple rule governing the appropriate damages in a contract case is that the injured party has a right to recover a sum of money that will place him in the same position as he would have been in if the contract had been performed. But this rule can become complex quite easily and it doesn’t take account of the critical area of consequential damages.
Damages can be divided into three classifications:
1. compensatory damages, which compensate for the loss;
2. punitive damages, which are common in other areas of the law but not favored in contract law
3. consequential damages.
The notion of consequential damages is that a contract violation can have additional consequences beyond simply the failure to honor the particular contract obligation. Suppose your failure to deliver a part on time as required by your contract causes a machine to shut down, resulting in millions of dollars of damages. Are you responsible for the cost of the part, or for the millions of dollars of damages?
U.N. Convention on Contracts for the International Sale of Goods (CISG)
The U.N. Convention on Contracts for the International Sale of Goods (CISG) was an effort to create a new international law of sales to apply to international sales transactions. The convention entered into force between the United States and other signatories as of January 1, 1988. As an international agreement, it has the status of law in those countries that have adopted it, and most major trading nations are signatories.
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. (.) 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. (.) In a typical ocean shipment, the captain of the vessel is responsible for checking what has been loaded on the ship, noting whether there is any obvious damage, and issuing a B/L to the shipper, (i.e., the person who is shipping the goods). The B/L is a negotiable document, meaning it can be sold or exchanged for value. To understand conceptually what a B/L is, think about a claim check for a coat that you check at a concert. The claim check represents the goods and it can be transferred from one person to another. In effect, whoever possesses the claim check possesses the goods and can use the claim check to obtain them. In a documentary international trade transaction, the B/L serves the same purpose and is transferred from one party to another until it eventually is obtained by the buyer, who can use it to claim the goods. If the buyer doesn’t have the B/L, the carrier cannot release the goods to him. There are different kinds of B/Ls, but for use in a documentary transaction, the B/L must be indicated as being “clean” (no damage or defects noted by the captain), “negotiable” (able to be transferred for value), and “blank endorsed” (just like endorsing a check so that whoever has the check can cash it). The same basic principles of the nature of the document are applicable to air waybills as well.
The second important document is the draft, which is a negotiable instrument containing an order to pay. It is like a check in reverse where the person preparing the draft “orders” the recipient of the draft to pay. The draft is the executing document in a documentary transaction and must be included.
The basic rules relating to L/Cs are contained in a document by the International Chamber of Commerce referred to as the Uniform Customs and Practice for Documentary Credits (UCP). The UCP is not a rule promulgated by a governmental organization but rather was developed by a private international organization, the International Chamber of Commerce (ICC). The UCP creates a set of contractual rules that apply to documentary credits. Uniformity is obtained because all documentary credits state that the credit is subject to the rules set forth in the UCP. In using the credit, the user accepts the rules as set out in the UCP. The rules are comprehensive and cover most, if not all, of the types of circumstances that can arise in a documentary credit transaction (ICC, 2006).
Within the United States, however, for domestic transactions, L/Cs are governed primarily by UCC Article 5.
From a legal perspective, a commercial letter of credit is a contractual agreement between a bank, known as the issuing bank, on behalf of one of its customers (the buyer), authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary (the seller). This agreement is independent from the underlying contract between buyer and seller other than the fact that the dollar amounts will be the same as set out in the underlying contract of sale. A third contract exists between the issuing bank and its customer (the buyer), whereby the buyer either pays for the credit in advance or has sufficient credit with the bank to have the credit opened. The issuing bank, on the request of its customer, opens the L/C and agrees that it will make payments in accordance with the schedule in the L/C so long as the documentation presented exactly matches the documentation as described in the L/C. If the documentation does not match exactly the bank will not honor the L/C.
It is this requirement for “exact compliance” which raises the most issues in disputes over payments under L/Cs. So long as the goods are as described and both the buyer and seller are happy with the transaction, the process of correcting L/Cs to cure any discrepancies is simple and relatively common. But if there is a serious problem, such as a significant change in the market value of the goods as compared with the contract amount, then a discrepancy in the documentation can give a reluctant buyer (through his bank) a way to avoid the deal. Hence, great care needs to be taken to ensure the terms in the L/C and in the documentation match exactly.
Introduction to Alternative Dispute Resolution
Alternative dispute resolution (ADR) refers to the methods that individuals use to resolve disputes without resorting to civil litigation (i.e., without going through a trial). ADR includes any method or procedure for achieving this purpose; however, there are two commonly recognized processes: arbitration and mediation. Employing these resolution methods may be mandatory or voluntary. Further, these methods may not be exclusive. That is, the parties may employ mediation, arbitration, and litigation, all within the realm of a single dispute. There are unique procedures and general legal principles applicable to each of these processes.
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 .)
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 . 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.
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