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International Law and Transactions

International law may be defined as a body of law formed as a result of international cus­toms, treaties, and organizations that governs relations among or between nations. International Customs are customs evolved over the centuries. Treaties and International Agreements are agree­ments between or among nations. International Organizations and Conferences are composed mainly of nations and usually established by treaty — for example, the 1980 Convention on Contracts for the Interna­tional Sale of Goods, or CISG.

Legal systems are generally divided into common law and civil law sys­tems. Common law systems are based on case law. These systems exist in countries that were once a part of the British Empire (such as Australia, India, and the United States). Stare decisis requires following precedent unless otherwise necessary. Civil law systems are based on codified law (statutes). Courts interpret the code and apply the rules without developing their own laws. Civil law systems exist in most European nations, in Latin American, African, and Asian countries that were colonies of those nations; Japan; South Africa; and Muslim countries.

There are three important legal principles based largely on notions of courtesy and respect:

  • the Principle of Comity,
  • the Act of State Doctrine, and
  • the Doctrine of Sovereign Immunity.

The Principle of Comity: Comity is legal reciprocity — the principle that one jurisdiction will extend certain courtesies to other nations (or other jurisdictions within the same nation), particularly by recognizing the validity and effect of their executive, legislative, and judicial acts. The term refers to the idea that courts should not act in a way that demeans the jurisdiction, laws, or judicial decisions of another jurisdiction. Part of the presumption of comity is that other jurisdictions will reciprocate the courtesy shown to them.

The Act of State Doctrine: The ju­dicial branch of one country will not examine the validity of public acts committed by a rec­ognized for­eign gov­ernment within its own territory.  This doctrine avoids disturbing dip­lo­matic relations. The act of state doctrine and the doctrine of sovereign immunity tend to immunize foreign nations from the jurisdiction of U.S. courts so that, in gen­eral, U.S. firms or individuals who own property overseas have little U.S. legal protection against government actions in the countries in which they operate. The act of state doctrine is a judicially created doctrine that provides the judicial branch of one country will not examine the validity of public acts committed by a recognized foreign government within its own territory. This doctrine is often employed in cases involving expropriation or confiscation.

The Doctrine of Sovereign Immunity: The Foreign Sovereign Immunities Act (FSIA) of 1976 governs the circumstances in which an action may be brought in the United States against a foreign nation, including attempts to attach a foreign nation’s property.  A foreign state is not immune from the jurisdiction of U.S. courts if:

  • The state has waived its immunity;
  • The action is based on a commercial activity carried on in the United States by the foreign state.  A “foreign state” includes a po­litical subdivision and an in­strumentality of the state.  A “commercial activity” is a mercan­tile activity that has substantial contact with the United States.
  • The state has committed a tort in the United States or violated certain international laws. Under the Foreign Sovereign Immuni­ties Act, a foreign state may be subject to the jurisdiction of U.S. courts when the state has “waived its immunity either explicitly or by implication” or when the action is “based upon a com­mercial ac­tivity carried on in the United States by the foreign state.”

Doing Business Internationally: International business transactions include selling products (or services) in foreign markets. There are basically two ways to sell products in foreign markets:  export goods manufactured domestically or manufacture goods there.  Manufacturing goods in foreign countries may have the advantages of lower costs, taxes, and trade barriers, as well as less government regulation.

Exporting: There are two ways to export:  direct and indirect.  Direct exporting does not involve third par­ties.  Indirect exporting involves the use of a third party to sell a product in a foreign market for a domestic manufacturer.  When that party is in a foreign market, it’s an agent.  If that party, located in a foreign market, takes title to the goods, it’s a distributor.

Manufacturing Abroad

There are several ways to manufacture goods abroad:

  • Licensing, which involves payment of royalties;
  • Franchising, which is a grant of the right to operate and share in the profits of a business or sell goods or services under a brand or chain name. Franchise may mean the right one has to operate a store or sell goods or services under a franchise agreement. In a franchise business relationship, the owner (the franchisor) licenses others (the franchisees) to operate outlets using business concepts, property, trademarks and trade names owned by the franchisor; and
  • Investing in a Wholly Owned Subsidiary or a Joint Venture. When a U.S. firm establishes a wholly-owned foreign subsidiary, the parent company often re­tains complete ownership of the fa­cilities and complete control over all phases of the operation.  In a joint venture, a U.S. firm shares ownership, con­trol, profits, and liabilities.

Regulation of Specific Business Activities: National laws and international agreements impose controls on international business transactions.

Investing – Government regulation of expropriation and confiscation of in­vestment prop­erty.  Essentially, expropriation involves compensation for what is taken; confiscation does not.  International law principles are violated when property is confiscated.  Some countries provide constitutional or statutory guaranties against it, or insurance for their citizens’ investments abroad.  Few remedies are available, however.

Export Controls – Under the Constitution, Congress cannot impose export taxes, but Congress controls exports by setting quotas or other restrictions on the flow of commodities, products, and data.  Congress stimulates exports through tax incentives (exempting income) and encouraging investment in and loans to U.S. export companies. Under the Ex­port Administration Act of 1979, restrictions can be imposed on the flow of technologically ad­vanced products and technical data.

Import Controls — The production and sale of domestic products may also be stimulated by import re­strictions, which include prohibitions, quotas, and tariffs.  Prohibitions are imposed on illegal drugs, books that urge insurrection against the U.S. government, agricultural products that pose dangers to do­mes­tic crops or animals, goods coming from enemies of the United States.

Quotas and Tariffs are imposed on such products as oil. The procedure for imposing antidumping duties involves two U.S. government agencies:  the International Trade Commission (ITC) and the International Trade Administration (ITA).  The ITC is an in­de­pendent agency  that makes recommendations to the president concerning temporary im­port restrictions.  The ITC assesses the effects of dumping on domestic businesses.  The ITA is part of the Department of Commerce and decides whether import sales were at less than fair market value.  The ITA determination establishes the amount of antidump­ing duties, which are set to equal the dif­fer­ence between the price charged in the United States and the price charged in the exporting country.  A duty may be retroactive to cover past dumping incidents.

Dumping — Specific laws deal with what the United States regards as unfair inter­na­tional trade prac­tices (dumping is an example).

Minimizing Trade Barriers — To minimize international trade barriers, most of the world’s leading trade nations abide by the World Trade Organization (WTO). Each member country agrees to treat other members at least as well as it treats the country that receives its most favorable treatment (normal trade rela­tions (NTR) status).  Regional trade agreements that help to minimize barriers include the European Union (EU), the North American Free Trade Agreement (NAFTA), and the Central America–Dominican Republic–United States Free Trade Agreement (CAFTA-DR).

Bribing Foreign Officials — Congress attempts to reduce the amount of bribes given foreign government officials by rep­re­sentatives of U.S. corporations through the Foreign Corrupt Practices Act of 1977. The Foreign Corrupt Practices Act (FCPA) is designed to prevent the bribing of foreign officials in order to obtain foreign government contracts.  Payments to foreign officials for facilitation, often referred to as grease payments, are not prohibited under FCPA so long as these payments are made only to get officials to do their normal jobs that they might not do, or would do slowly, without some payment.  These payments can be made only to secure a permit or license; obtain paper processing; secure police protection; provide phone, water, or power supply; or similar such actions.

Commercial Contracts in an International Setting

Problems arising from language and legal dif­ferences may be avoided by including provisions designating the official language of the con­tract, the legal forum for resolving contract dis­putes, the substantive law that will be applied, whether disputes will be arbitrated or liti­gated, and what acts or events will excuse the parties from performance under the contract.

Choice of Language — Besides des­ignating the official language by which the contract will be interpreted, this clause may allow for a translation that can be authoritative if it is rati­fied by all parties.

Choice of Forum — This clause should identify the specific court that will have jurisdiction over a dispute.  The choice cannot deny a party an effective remedy, be the product of fraud or un­conscionable con­duct, cause substantial inconvenience to a party to the con­tract, or vio­late public policy.

Choice of Law — As with language and forum, the parties to an international contract can choose what­ever law they wish to govern their contract (at least under international agreements—the UCC restricts the choice to whatever is “reasonable”).  Under the 1986 Hague Convention on the Law Applicable to Contracts for the International Sale of Goods, if a choice-of-law is not speci­fied, the gov­erning law is that of the country in which the seller’s business is located.

Force Majeure Clause– Force ma­jeure clauses commonly stipulate eventualities in addition to acts of God that may ex­cuse a party from liability for nonperformance.

Civil Dispute Resolution — Arbitration clauses are common in contracts gov­erning in­ternational sales.  The arbitrator of choice is sometimes a neutral entity (the International Chamber of Commerce, for instance).  The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards as­sists in en­forcing arbitra­tion clauses, as do provisions in other treaties.

Payment Methods for International Transactions

Monetary Systems —Firms engaged in international transactions rely on the convertibility of currencies.  Exchange rates are set by the forces of supply and demand. Correspondent banking makes it possible to transfer funds in­ternationally.  Most interbank transfers are han­dled electronically.

Letters of Credit — Letters of credit facilitate international transactions.  In a simple letter of credit transaction, the is­suer (a bank) agrees to pay the beneficiary (seller) when the beneficiary has com­plied with the terms of the letter (which typically requires delivery of a bill of lading to prove that a shipment has been made).  In return, the account party (buyer) promises to reimburse the issuer for the amount paid to the benefi­ciary. The issuer does not police the underlying contract: a letter of credit is independent of the underlying contract between the buyer and the seller.

U.S. Laws in a Global Context

International Tort Claims —  All nations have laws governing torts, but there are significant variations in the application and effect of the laws. The Alien Tort Claims Act of 1789 allows foreign citizens to bring suits in U.S. courts for injuries allegedly caused by violations of international tort law. Some cases have in­volved violations of human rights. Some have alleged environmental crimes.

Antidiscrimination Laws — Under the Civil Rights Act of 1991, Title VII of the Civil Rights Act of 1964 covers U.S. citizens working abroad for U.S. employers, unless compliance with Title VII would violate the laws of the country in which they work.

Author: William Glover

I received my B.B.A. from the University of Mississippi in 1973 and his J.D. from the University of Mississippi School of Law in 1976. I joined the firm of Wells Marble & Hurst in May 1976 as an Associate and became a Partner in 1979. While at Wells, I supervised all major real estate commercial loan transactions as well as major employment law cases. My practice also involved estate administration and general commercial law. I joined the faculty of Belhaven University, in Jackson, MS, in 1996 as Assistant Professor of Business Administration and College Attorney. While at Belhaven I taught Business Law and Business Ethics in the BBA and MBA programs; Judicial Process and Constitutional Law History for Political Science Department; and Sports Law for the Department of Sports Administration. I still teach at Belhaven as an Adjunct both in the classroom and online. In 2004 I left Belhaven for a short stay at Wells Marble & Hurst, PLLC, and then joined the staff of US Legal Forms, Inc., 2006 where I draft forms, legal digests, and legal summaries. My most recent publications and presentations include: • Author: Sports Law Handbook for Coaches and Administrators, Sentia Publishing, 2017. • Co-Author: In the Arena published by the New York State Bar Association in 2013; • Co-Author: Criminal Justice Communications - Corinthian Colleges, Inc. in 2014. • Co-Author: Business Law for People in Business, Sentia Publishing, 2017.