International Business TransactionsText: International Business Transactions, 6th Ed., Folsom, Gordon, Spanogle 1) Transfer of technology v. Foreign direct investment a) Transfer of technology- you find someone in Tropica who will make the stuff and you license them the technology. b) Foreign direct investment—you go there and start a plant yourself and keep the technology secret. c) Problem: Some countries are known for using or confiscating technology without paying for it: does the country have copyright laws? d) With foreign direct investment, you don‘t have to worry about protecting it. 2) Non-tariff barriers— 3) State trading organization—communist countries. Some of these don‘t let you take profits out of the country. you would want to invest in such a country because of Investment marketing—someday it will pay off, change. 4) World alliances—GATT, IMF, WTO, a) developed v. undeveloped nations b) Countries cultures are important. 5) Chapter 2: The Actors a) Roles to nations play in international trade: as producers or purchasers; if so you want to ask whether they can claim sovereign immunity. b) Multinational corporation: i) does business with several foreign countries, or ii) has shareholders in different countries, or iii) where it is incorporated. c) Labor issues: can you get workers, visas, whose labor laws, what laws apply to the foreign nationals, how to fire them. d) Creeping expropriation: begins by a country imposing regulations on a corporation, it slowly you need more and more permits. 6) Foreign law vs. international laws. a) International economic institutions. i) UN, has different economic commissions. ii) UN commission on international trade law (1) These write model laws, like the CISG, p. 19 7) Bretonwoods Conference after WWII created the World Bank, GATT, WTO etc., to promote trade to countries would be less likely to go to war again. 8) Documentary sales transaction, p. 48 a) International transaction different from a domestic one? i) Number of parties. ii) Risks. (1) Different currencies. (a) Devaluation. You may not want the currency of country X, and it may devalue by the time it gets to you, (b) Removal from the country. Can you can take dollars out of the country. iii) Different Legal systems, laws—common v. civil law; export laws. Does the particular buyer live in a country that has a boycott. iv) Int‘l law – treaties. Are there treaties that will establish different legal. v) Will the seller get paid? vi) Will the buyer getting the quality and quantity of goods he ordered. b) Int‘l Laws: i) licensing requirements, ii) in US, instead of article 7 UCC iii) Federal rules applies (1) Pomerene Act (Federal Act on Bill of Lading). (2) carrier of goods--COGSA, Carriage of Goods by Sea Act. iv) CISG, an int‘l treaty. If I do a transaction with a country that has signed onto the CISG, then the CI SG applies, not the UCC. But we might want the UCC to apply, and we can do that by putting it into the contract that the CISG doesn‘t apply. c) Responses to the risks Chop the risks into smaller risks, to those who are in the best position to evaluate the risks. d) i) Special terms governed by INCOTERMS. (a) F.A.S, (b) C.I.F., (c) F.O.B., (d) non-negoiable Bill of Lading, (e) negotiable draft (or bill of exchange), (f) confirmed and irrevocable letter of credit. 9) Problem 4.0 – The basic documentary sale transaction – Toys to Greece, p. 75 a) facts i) Santa Claus company of Aurora, NY will sell toys to Alpha Company of Athens, Greece. b) Contracts: independent but interrelated. i) sale contract (1) between buyer and seller ii) letter of credit contract (1) between Buyer’s bank ‗issuer‘ and Seller (beneficiary) (a) buyer is applicant (b) Seller‘s Bank is ‗confirming‘ or advising bank; iii) Bill of Lading contract: (1) Between Seller (shipper) and carrier c) Sales Contract d) How established: (1) request for an offer: Buyer sends a request for offer, and letter from Alpha. (2) Offer made. Then Santa Claus sends the offer itself with the proforma invoice. (3) Acceptance. the purchase order is an acceptance (but this would be a rejection and counter offer, if they had changed the terms. There is a new term here ―delivery required prior to July 1, 2000,‖ and a ―request for a response.‖) ii) Terms of the offer: Form 2, proforma invoice. (1) Payment terms: ―Confirmed irrevocable letter of credit confirmed by US bank and called for payment against documents in NY City in US funds.‖ (2) F.O.B. East Aurora, NY (buyer has risk) (3) F.A.S. NY City (seller has risk) (I‘ll ship the stuff so it‘s free alongside the ship) (4) C&F (cost and freight) (once on the ship, buyer has the risk; on the dock side, seller has risk) (5) C.I.F. (Cost, insurance, and freight)—its payment against documents. (6) Payment against documents—he gets paid when he presents the documents, the documents are listened in the payment of credit. e) Letter of Credit Contract, FORM 4, p. 55 i) Places the risk of default on the hands of the participant who can best evaluate the risk (Buyer‘s Bank, because they can get a credit report, or have done business with Alpha in the past.) (1) Buyer is concerned about getting the right quantity and quality. How to deal with this? Inspection Certificate. ii) How established: Buyer goes to his bank and asks them to issue a letter of credit to Santa Claus. This is a contract between the Buyer‘s bank and the Seller. (1) Bank promises to pay the seller if he produces certain documents. (2) The Seller‘s bank confirms the letter of credit with the seller. iii) Form 4: p. 59: Confirmed and irrevocable. The seller won‘t be paid unless the seller produces these five documents: (1) negotiable Bill of Lading, (2) Insurance policy, (3) Packing list, (4) Commercial invoice, (5) Export Declaration. iv) Governed by the UCP—Uniform Customs and Practices. If this hadn‘t been there, the UCC probably would control. f) Bill of lading, (agreement between the shipper and the carrier). i) Deliver the goods to the individual or entity bearing it (―Deliver to the order of . . . .‖ This makes it a negotiableinstrument. ii) This is between the buyer‘s bank and seller‘s bank. The Buyer‘s Bank is promising that if you handover the bill of lading, we will pay you. It wants to see the Bill of Lading made out ―To the Order of Greek bank.‖ But we put our own name on it, because the Bill of Lading Controls the goods. I want to maintain control so I‘ll get paid. The letter of credit was confirmed, so the Seller just brings it to his own bank in NY. The seller‘s bank will pay for it because the Seller‘s Bank has a contract this Seller. My bank will buy the documents from me and they want the seller to signed the documents over to the NY Bank. Marine Midland Bank will then signed the documents over to Athens, in exchange for the funds. Then Athens bank is the only one who can control them. The Athens bank then sells them to Alpha, who then is the only one who can go to the dock and pick up the toys. g) Form 2, p. 53 Proforma, FORM 5. h) FORM 9. Dock Receipt--―clean on board‖ = no damage to the goods. i) COGSA—insures for up to $500 per package. 1) PROBLEM 4.1, p. 75 a) FACTS: Universal Pipe Inc., in Kansas sells insulation to Euro, Ltd. Offer and acceptance have different terms. (1) ―goods sold as is with all faults (see UCC 2- 316).‖ (2) ―Contract governed by the laws of Kansas.‖ ii) Euro incurs $1m loss when insulation corrodes refinery pipes. b) Analyze breach of contract i) First: Conflict of laws (1) whose law governs interpretation of the contract? ii) Second: Contract formation/Battle of the forms (1) Substantive law question: How will contract be interpreted? will the law chosen govern it? c) Conflict of Laws – Whose law governs? i) US law on conflicts (Kansas or Federal) (1) UCC §1-105, p. 993: (a) Parties chose --- reasonable relation. (i) TEST: the law chosen must be that of a jx where a significant enough portion of the making or performance of the contract is to occur or occurs. Seeman v. Philadelphia. (b) Parties don‘t chose --- appropriate relation.. (2) Restatement of Conflict of law. §188 p. 78-9– use the law of the state that has the most significant relation to the transaction. (3) Problem: difficult to figure out. ii) German Law on Conflicts. p. 77-78. (1) E.E.C. Convention of the Law Applicable to Contractual Obligations. (a) freedom of choice. Art. 3 (i) Mandatory laws—can‘t escape. art. 3(3) if we make a contract and the contract has everything to do with Germany, but we choose English law, we can‘t use Germany law to escape mandatory German law. (b) Default. Art 4(1): if no choice is made, apply the law of the country with which the contract is most closely connected. p. 1057, supplement. (i) TEST: characteristic performance. 4(2) presumption of closely related to the country conducting the characteristic performance: The act required of the contract(here, the shipping). d) Substantive Potential Jx--contract interpretation i) US (a) UCC § 2-207, p. 81-84 ii) German Substantive Law, p. 85-87 (a) Ruster Article, p. 85-87 iii) Treaty (1) CISG p. 91 iv) United States (1) UCC 2-207--Between merchants, additional terms become part of the contract unless . . . they materially alter it. (a) Are these additional or different terms? If there is no choice of law designation, the CISG applies. (i) p. 29: CISG Art. 1 this law applies, unless under Art. 6 the parties opt out of it. (b) Different terms: (i) Choice of law: The statement that Kansas law applies. 1. law of Kansas as to the contract is substantive law and it has to be material. (ii) disclaimer. comment 4: a disclaimer of warranty is a material altering. (iii) Arbitration. v) 2-207 is very confusing, even White and Summers disagree, p. 81 (1) gap-fillers , such as §2-314 (Implied Warranty of Merchantability). If they are different terms, they get knocked out. and you have to figure out which law will provide the gap fillers. (2) White says they both get knocked-out, even when there is a contract. p. 82 (3) What if we make the decision that both of these terms are part of the contract? Then Kansas law applies, which is UCC and CISG, federal law will trump state law. (4) How would you argue to include UCC: if I hadn‘t said anything the CISG, and I said Kansas law, and because you cited the UCC. In real life you need to specifically opt out of the CISG under article 6. 2) B. German Substantive Law. a) Mirror image. If the acceptance isn‘t exactly the same as the offer, then it‘s a counter offer. i) EX: A client calls and the goods are on the ship, and the German buyer wants to renege, why do you want the contract to be governed by the UCC? Because the German law is a mirror image rule. If German law applies, there‘s no contract, unless the buyer performs, but as long as they are still in transit, buyer hasn‘t performed and he can renege. b) No Acceptance by silence. General rule is no. p. 86. Silence is generally not recognized as acceptance. i) Exception— (1) prior business relationship. However, if you‘re dealing with someone with whom you have a prior business relationship, you are obligated to answer immediately, and silence will be deemed acceptance of the offer. (2) Good faith; ―Acceptance of the new offer by silence is assumed where food faith standards would have require explicit rejection.‖ p. 85 3) CISG (Treaty law default law, art. 1) a) Material change—counter offer. Article 19, p. 32; i) No contract. if terms materially change the contract, then it‘s a counter offer, and there is no contract. If no materially change, then acceptance. (UCC would just knock out the different terms, but there would still be a contract) ii) Material: paragraph 3: terms relating to the price, payment, quality and quantity of the good, place and time of delivery, extent of one party’s liability to the other, or the settlement of disputes are considered to alter the terms of the offer materially. iii) But a german court held that such a modification was nonmaterial, and there was therefore still a contract. p. 92. So we don‘t know how the CISG will be interpreted. A German court may interpret it narrowly (more like the UCC), while a French court may interpret it broadly. b) Default—absent choice of law. Filanto, p. 94 i) Citing art 1(a) of the CISG, the court state that ―absent a choice of law provision, the CISG governs all contracts between parties with places of business in different nations, so long as both nations are signatories to the CISG. c) Parties may opt out under Article 6. i) USA has made a reservation under art. 95, with respect to art. 1(b). We want to apply the UCC. ii) Germany: ―as to any country that has reserved rights under art. 95, we reserve the right to treat them reciprocally.‖ Apply 1(b) with reciprocity. d) When would 1(b) apply? CISG will apply between contracting parties. But when there‘s a Contracting party (USA) and a non-Contracting party (Thailand), and they have a choice of forum clause which places them in a German court. e) The contract says apply Kansas law. You want CISG to apply. How could it come in under 1(b)?-- CISG law is Kansas law because of the preemption law. So the German court should apply CISG, but they‘re not going to because Germany has made a reservation which says that ―we‘re not going to apply 1(b) to those who have made a reservation regarding 1(1)(b). f) p. 91: Germany holds the view that Parties to the Convention that have made a declaration under art. 95 of the Convention are not considered ―Contracting States‖ within the meaning of subparagraph (1)(b) of art. 1 of the Convention. Accordingly, there is no obligation to apply [...] this provision when the rule of a private int‘l law leads to the application of the law of a party that had made a declaration to the effect that will not be bound by sub 1(1)(b) art. 1 of the Convention. 4) UNIDROIT—a Restatement of International trade custom. use to supplement your contract terms. Why would you want to a) UNIDROIT Principles: If the parties have difficulty agreeing ... p. 97 b) Battle of forms, p. 97 i) ‗custom made‖ acceptance (including handwritten)-same as art 1 of the CISG. ii) Use of Pre-printed standard form (boiler plate) form of acceptance of either parties‘ form– forms agree or else they knockout. iii) Written confirmations: If a written confirmation of a contract previously made is sent by one party to the other, and additional or different term becomes part of the contract unless it materially alters the contract or the recipient of the confirmation objects to the term. c) Arbitrators often use UNIDROIT. d) Problem: there‘s no database to find all the UNIDROIT decisions. 5) Filanto v. Chilewich a) Chilewich is buying shoes....contract with Russia includes an arbitration clause. Chilewich contracts with an Italian company, and says that all disputes have to be resolved in Russia. The first communication says arbitration, the second says no arbitration. There was no response from Filanto and Chilewich opened a letter of credit, which sounds like reliance. Then Filanto sends a letter excluding the Russian arbitration clause. Filanto sues in US District Court. Chilewich says you can‘t sue us in a US district Court. i) p. 95 ii) R: What law applies?- CISG. iii) Silence as acceptance under CISG. Court focuses on 18(1) ―A statement made by or other conduct of the offeree indicating assent to an offer is acceptance.‖ Filanto says that because it was silent there was no acceptance. The court says you knew that Chilewich had opened a letter of credit in Filanto‘s name. b) Moral: if your client needs a particular term, make sure that it‘s in the contract before hand, because if you have to go into a foreign court. If the other party won‘t allow that term, tell your client to charge more. 6) Problem 4.2 Commercial Terms, Bills of lading and insurance—Books to Bath, p. 105 a) Facts; Sam (Your client) is a book writer. Bill Bones (publisher in England) wants ‗two dozen gross.‘ Howard Hunt‖ Terms: contract with Bones; FOB Savanna; contract governed by ICC INCOTERMS (1990). Contract with Hunt: CIF, Bath, United Kingdom; terms governed by ICC INCOTERMS (2000). CN: no letter of credit in this case, these are small sells, and people with whom Sam has dealt with before. b) difference between i) mandatory laws. (state laws binding on the parties , may not be set aside), (1) COGSA (2) Pomerene Act. ii) optional laws, eg., (1) UCC (2) trade customs-INCOTERMS c) Trade terms i) FOB (1) English meaning of fob = the American fob vessel. (2) supply transactionseller needs to obtain export license. (3) Export transaction buyer needs to obtain export license. ii) C&F/CIF (1) Must have a negotiable Bill of Lading, p. 109 (2) basically FOB plus obligation for seller to arrange for carriage and carriage and insurance, respectively. (3) Two critical points (a) passing of the risk, like FOB - at port of shipment.(ship‘s rail) (b) costs of carriage and insurance, occurs at port of destination. iii) CIF-―Sale of documents‖, p. 110 1) Shipping documents : The seller has the obligation of tendering: i) bill of lading ii) insurance policy iii) invoice (1) shows the price, and a deduction of the freight which the buyer pays before delivery at the port of discharge. 2) CIF is a contract for the sale of goods to be performed by the delivery of documents, at which time the a) buyer is bound to pay for the goods, even if i) goods have already been lost. p. 111, C. Groom v. Barber ii) Name not controlling. if a contract does not possess this ‗sale of documents‘ character, it will not be a CIF, even though the parties call it that. The Julian, p. 111. 3) No right to inspection. you‘re buying documents in lieu of the goods, you cannot refuse to buy the documents just because you have not had the opportunity to inspect the goods. 4) Loading of goods. If the goods are not being loaded in the tradition way – that is, using a crane to take the goods over the ships rail, then you don‘t want to use either CIF or FOB. 5) INCOTERMS (2000 ed.), p. 113 : separate from substantive law, but rules which the parties may choose. a) Free on Board means b) Questions on 105:--FOB i) No, Sam has no duty to do this, INCOTERMS, p. 113, A3 (sellers has no obligation to contract carriage or insurance), the buyer is supposed to arrange for the transportation of the goods for an FOB. ii) If Sam arranges transportation, and wants to be sure that Bill pays--Make the Bill of Lading a negotiable bill, (its starting to look like a CIF) iii) No, seller has not responsibility to obtain insurance, only in a CIF. iv) In an FOB, seller doesn‘t need to buy any insurance. But you should go ahead and buy insurance. But COGSA already provides insurance. But there are lots of limitations on the insurance that COGSA provides. So you probably want to buy additional insurance. But if you‘re going to pay for carriage and insurance it‘s essentially a CIF. v) Can he put them all in one container and ship them separately? No, they are separate contracts and require separate documents. vi) Buyer‘s have no right to inspect. vii) What kinds of FOB contracts require a negotiable bill of lading--all? UCC 2-319, p. 1006. Only one person will be able to pick up that one package. viii) must relate only to the goods which the buyer has agreed to buy p. 111: ―Where the bill of lading is tendered to the buyer, it must relate only to the goods which the buyer has agreed to buy; if it covers other goods as well, the buyer may refuse the tender.‖ (1) ―To enable the buyer to deal with the goods while they are afloat the bill of lading must be one that covers only the quantity of goods called for by the contract. The buyer is not required to accept his part of the goods without a bill of lading because the latter covers a larger quantity , not is he required to accept a bill of lading for the whole quantity under a stipulation to hold the excess for the owner.1008, UCC, 2-320, com‘nt 4: c) Right to inspect. i) Yes—FOB plant. ii) No— (1) C.I.F. p. 1008: com‘nt 1, the buyer has no right to inspection prior to payment or acceptance of documents. (2) FOB vessel, FAS--If its payment against documents, whether fob or otherwise. see UCC 2-319(4). (3) ―The leading case concerning buyer‘s (lack of a) right of inspection under CIF contract (or any other contract which requires ―payment against documents‖) is Biddell Bros. v. Clemens Horst. See, p. 112; iii) Not directly covered under INCOTERMS, but. negotiable bill of lading CIF—to the order of negotiable bill of lading, not necessary FOB—to the bearer of (1) A10—FOB vessel--the seller must render the buyer every assistance. iv) Since both buyer‘s have declared INCOTERMS, buyer would have the right to inspect. v) If they specified the UCC, then buyer wouldn‘t have the right to inspect. d) CIF is negotiable, made ―to the order of‖ i) The Carrier stamps it ―On Board‖ ―Sam‘s Load, Weight & Count‖ and ―Contents Unknown‖ – Its not a clean bill of lading. Sam is worried that it‘s a foul or unclean bill of lading. But does this stamp make it an a foul Bill of lading? no. (1) p. 126, note 10: ―The following clauses do not convert a clean into an unclean bill of lading:‖ e) Mandatory laws. Can the shipper disclaim responsibility for shipping the wrong goods? Look to the mandatory laws? COGSA. Or in international law: the Hague Convention (1924), which were an attempt to codify an uniform international aw of carriers and shippers. This was amended in the Hague/Visby (1968), now the Hamburg convention. i) Carrier‘s liability. It is now less advantageous to the carrier: Now they say that they cannot have exclusion law, but liability is limited to $500 per package. ii) Declaring a higher value—obvious opportunity. What if I‘m the shipper and I want more than $500 of coverage? You declare a higher value on the Bill of Lading. (p. 64). The carrier must give the shipper an obvious opportunity to declare a higher value. But then the carrier can charge the shipper a little more. iii) Paramount clause p. 127—. You can‘t contract out of the Hague Rules. Both the Hague and Hague/Visby Rules contain paramount clauses. iv) COGSA is the American version of the Hague Rules. (1) applies to both import and export. p. 128 f) Three Roles of the Bill of Lading, p. 129, i) contract for carriage ii) receipt of goods iii) document of title g) p. 121: Hypo: if you send your agent to the dock to deliver the goods and he returns with a i) seaway bill--not a title to the goods). ii) Multi-modal transport bill of lading-- not a negotiable, (banks don‘t want to make these negotiable because there‘s so many different carriers involved). iii) Electronic bills of lading—non-negotiable: You give the goods to the carrier and he will create an electronic PIN. Then whoever shows up at the port with the PIN. A new Pin would have to be issued for each party. This method has not been all very successful. h) The Transnational law of int‘l commercial transaction, p. 130 i) ―The various systems of national law essentially consist of two types of the legal rules. Some of them are mandatory in character, others are optional. The mandatory rules have to be accepted by the persons affected by them, whether they like them or not. The optional rules may be accepted by the parties or not, or they may be modified for their convenience. i) Carrier‘s duty to inspect. Berisford, p. 131 i) Facts; The carrier locked the containers in Brazil, and when they arrived in the USA, some of them were empty. j) COGSA requires the carriers to conduct a reasonable inspection. k) p. 133, role of the Bill of lading: It is sole integral to international business transactions, that errors are not excused. i) acknowledgement by the carrier of receipt of the goods ii) a contract for carriage iii) a document of title it controls the possession of the goods themselves. l) Where does the carrier provide a description of the goods for which they are responsible.? On the Bill of lading. m) What if the shipper says ―its books,‖ but sends garbage. Is the carrier responsible for a mis-description? The carrier is responsible to provide a reasonable inspection of the goods. Carriers are allowed to stamp this on the bill of lading: ―Desire Under the Thornbush, shippers count, weight and.‖ n) It was unreasonable for them to say that they loaded an hundred ingots when they only shipped 30 and, and the containers weigh 78k lbs less than it was supposed to. o) Ct: yes, Carrier is contractually limited to $500 per container if you perform the contract, but if you breach the contract, then COGSA doesn‘t apply. So did it breach the contract, and is there a liability for mis- description? i) ―Even if opening of the containers posed difficulties, at the very least the carrier owed a duty to verify the weight of the containers at shipside before they were placed aboard its ship and before it stated that they contained 100 bundles of tin ingots weighing the equivalent of 111,656 lbs., which would have been 80k lbs. in excess of the weight the containers actually loaded.‖ p) Generally, the carrier will be relieved of liability if he stamps on it ―Shippers Load, Weight and Count.‖ unless a reasonable inspection . . . if it is obviously not what it says to be, then it won‘t be a reasonable inspection. q) Tetley, p. 129 ―the carrier must inspect the goods upon receiving them.‖ ―The inspection is nevertheless only a reasonable inspection.‖ i) This is important so he can give a clean bill of lading. If it weighs 78k lbs less then when you received it, it is probably not reaonsable. r) POLICY REASON: to protect the integrity of the bill of lading. s) Julia case, p. 111 i) CN: even if the good have been destroyed, I can turn the documents over to you have, and you have to pay. The parties called it a c.i.f. contract but it wasn‘t, it was just a contract to purchase. Rye was sent to Belgium, the ship gets captured by the Nazis and goods don‘t‘ get delivered. Argentina found that it wasn‘t a c.i.f. Ex ship does not require payment against documents. Int‘l state to state Within State COGSA- federal Harter Act UCC 1) The problem with FOB is knowing whether it should be defined by UCC, INCOTERMS, or English law. a) Under UCC i) Does FOB provide for a negotiable Bill of lading? yes, unless FOB vessel. Does it require an inspection of goods? If there‘s a negotiable Bill of Lading.. b) INCOTERMS (1) Does FOB provide for a negotiable bill of lading? no. (2) Buyer pays cost of Inspection? yes. c) ―Payment against documents‖ precludes inspection. 1) PROBLEM 4.3 Wars and other Frustrations: Oil from Araby, p. 136 a) Section 1: the Setting i) Gulf Refinery (Araby) ---- Jean Val Jean----- Javert (France) 1) Contract w/ Gulf Refinary i) FOB Refinery in Araby ii) Force majeure 2) Contract with Constant Carrier: i) Liberties clause: in event of great risk, Carrier may require shipper to take the goods at the port of shipment, or he make unload the cargo somewhere. He needn‘t give notice of this, and such discharge will constitute complete delivery and performance of the goods. 3) Contract with Javert. i) c.i.f. Marseilles, France ii) escalator clause iii) Excuse clause 4) Events: i) Fire in Araby refinery causing delays ii) War between Iran-Iraq b) CN: Either the law of US or Araby? Are they both members of the CISG. On an exam you want to say, you didn‘t tell me if they are members of the CISG, but if they are then CISG applies, if they are not then apply the UCC. Do a choice of law for each contract. c) Whose law applies in the contract between Jean and Araby? i) Issue: is there an excuse to get us out of the contract? ii) France: Use ―Contractual obligations‖ (EEC): ―if the contract is entered into in the course of the party‘s trade or profession ... [then apply the law of] where the performance is to be effected.‖ p. 1057, art. (4)(2) (absent a choice of law, the law of the country which is most closely connect, which, when the contract is entered into in the course of that party‘s profession, where performance is to be effected.) and the performance would be effected in France, so French law applies. [even though neither party is French??] iii) Also, the contracts themselves should apply, thus the force majeure, thus excuse. If the force majeure clauses don‘t apply then . . . iv) What could have been done better for our client regarding the force majeure clauses. Provide some kind of remedy? v) it looks like Araby is excused, if it was beyond their control. But what if there were no force majeure clause? Can we make Araby pay damages? vi) What substantive law applies? Araby is not a party to the CISG, so you can‘t use that. Look at all the possible laws, which one is best for your client? You want something that says that Araby can‘t get out unless it‘s absolutely impossible. Which is the harshest law? -- French. vii) The French law. (1) p. 161, it has to be absolutely impossible. (2) According to the doctrine of force majeure, prerequisites for discharge are: (a) unforeseeability of a fortuitous event, (b) absolute impossibility of performance and not mere onerousness, and (c) no fault on the obligors‘ part. viii) Which conflicts of law will we apply?: Araby may be a former French colony, so they may follow French law. Where suing? England, Araby? d) All of the laws require unforeseeability. i) The following general characteristics can be traced in all national jx: (1) (a) occurrence of an event after the making of contract; (2) (b) unforeseeable of the event; (3) (c) alteration of the contract in an intolerable degree, and (4) (d) no fault on the obligor‘s part. p. 163: (i) CN: even if its completely impossible to perform, they may not be excused because it may be their own fault. ii) Was it Araby Oil refinery‘s fault? Did they have fire trucks handy? was someone smoking? iii) Is it unforeseeable? (1) ―The more sophisticated and widespread international commerce becomes, the more difficult it is to say that a party could not reasonably have been expected to take an impediment into account. This is reflected in the paucity of successful cases under §2-615 of the UCC (Impracticality . .. ―a contingency the nonoccurrence of was a basic assumption ―). p. 153 (2) ―As commerce grows more sophisticated and multinational it becomes more vulnerable to disruption from embargoes, wars, revolutions, and terrorism in countries producing natural resources.‖ p. 156 e) Force Majeure clauses are options. We can select the CISG. But force majeure clause could amend the force majeure clause and the same things with the UCC. f) Substantive law: g) English: Radical difference (1) The Eugenia, p. 141 (a) The ship was stuck in the canal. Once they got out the original contract called for them to travel through the Suez, but it was blocked so they had to go around Africa. The owners say they had to pay more money. But the charterers say that it should be excused. (2) TEST: a situation must arise which renders performance of the contract ―a thing radically different from that which was undertaken by the contract.‖ (3) R: The fact that it has become more onerous or more expensive for one party than he though is not sufficient to bring about a frustration. (4) By the time you have to look at is the entire trip, and there‘s not that much of a difference. h) There are things which distinguish this case and make it radically different? i) p. 156: j) p. 145: If the goods were subject to spoilage (here is was iron ore). 5) Which Contract would the CISG (Treaty) apply to? a) With Javert-France is a party to the CISG. i) EXCUSE: article 79: impediment beyond his control. The CISG applies to any party in any situation. Whereas the b) Elastic words, p. 151 (Nicolas)—The court decides if there‘s an impediment. But the problem with elastic words, It allows for nonconformity in the interpretation of law, between the civil and common law system. Courts in these different systems will start interpreting the terms in this convention and in doing so they will rely on their own precedent. The Germans will look at how German courts will interpret it: broadly, whereas france will interpret it narrowly. This defeats the purpose of having an international convention. c) First, look to the definitions of the contract. Does the CISG allow you to change the definition under article 6? d) If you don‘t use your own law, you look to other courts. If there a prevailing pattern which is e) article 7(1)—―in the interpretation of the convention, regard is to be made to its international character and in need to preserve uniformity.‖ 6) Apply: a) Is Jean excused in the Javert contract under the CISG? Maybe, under 79(2). This force majeure clause is a ‗form‘ force majeure clause, it‘s too generic. One of the things Jean could have done was to define what ‗any circumstance‘ is. Jean could have say ―I‘m going to deliver this unless anything intervenes, like my supplier breaks down.‖ b) But 79(2) would only work if Araby would be excused c) But this force majeure clause is so vague that it could be interpreted that ―he still has to deliver oil and he can still get oil form other source such as the Holland on the spot market, though at a high expense.‖ He should have put it into the contract ―oil from Araby‖. d) What obstacles will jean run into if he starts including all these provisions? it suggests that the oil shortage was within his reasonable contemplation. e) Perhaps a generic force majeure is better because it show he didn‘t contemplate this fire ....but this couldn‘t help because the seller is responsible f) p. 155 ―To assist... i) Cn: just because we don‘t address it in the contract, there are contingencies which ...the seller will be held liable notwithstanding the occurance. g) CISG covers both the buyer and the seller. i) Rise in market price is not excuse to seller. (1) Exception. Astronomical increase in price. Lord Reid, Tsakiroglou. note 4, p. 148. He hints that an astronomical increase in price might be a factor. ―neither is a rise in the market, because ... but a severe shortage due to a contingency such as war...but it must be unforeseen. there is very little today which is unforeseen, and court often will not use this to let you out of the contract. h) UCC provisions rarely lead a court to permit excuse for performance....The court should seek to determine whether the risk was consciously undertaken or not. If so, it should follow the parties‘ expectations based on (a) type of business each merchant engaged in (b) how a reasonable person would allocate risk (c) the historical background of such risks (d) how that would affect foreseeability. (e) Note 8, p. 167 (Like Summers article): ii) You‘re not expected for foresee every contingency, but you are supposed to foresee the things that have happened in the past: the Suez closes, the mid-east is constantly at war, oil refineries catch fire. i) The Seller‘s answer is to charge more. i) LAW: (1) CISG-- (2) UCC--impracticality (3) English law—radical difference test ii) Civil law -- provides for reformation, because contracts are for the social good. iii) Common law—strictly upheld. felt this was a contract between two individuals and we will uphold it. But it is starting to become more forgiving. (1) France exception, which is very strict. Rapsomaticous. iv) UNIDROIT—for majeure and hardship. p. 157 (1) Force majeure comes under the nonperformance. (2) Hardship—‗nothing short of total impossibility will excuse nonperformance. 7) Problem 4.4 Electronic Commerce: Professor Pedro Buys A book, p. 169 a) CN: contract made over the internet; not in writing, non-human. Is there a contract?--Pedro orders some books over the internet which he pays for with his brother‘s credit card. The books are automatically packed and sent by rhein.com and new books ordered from rhein.com from East. b) CN: E-commerce is a huge industry. But different countries are passing different laws, which leads to a non-uniformity. What did companies do to get around these laws? Trading partner agreements where two entities agree to conduct business electronically, and promise not to sue each other under UCC § 2-201-- statute of frauds, which requires a signature and a writing. They establish the procedure by which an offer and acceptance are to take place. c) Pedro, rhein.com and East all want to know if they have enforceable contracts. i) Rhein.com is a German company owned by an American company, ‗rivers.com.‖ River.com prepares lists of customer‘s preferences, and wants to know if it can continue this practice d) in light of the new EU Privacy Directive. i) Law: all of these pretty much say that an electronic contract will be binding despite that the writing is in an electronic form. A writing can be reflected in an electronic media, but there is the question of authentication. 8) Federal a) Electronic Signatures in Global and National Commerce Act (E-SIGN Act), Suppl. p. 980: contract cannot be denied legal effect because they are based on an electronic signature. i) §102-exemption to preemption—if the state adopts the Uniform Electronix Transactions Act ii) §106-definitions 9) State a) Uniform Electronic Transactions Act (UETA)( same guys as wrote UCC)(preempts federal), §§2, 4,7, Suppl. p. 1037. i) Parties must agree to electronic media. applies only when the parties have each agreed to the use of electronic media. §5(b). ii) Must in fact be person‘s act. §9(a)—an electronic record or signature is attributable to a person only if it is in fact produced by an act of that person. iii) No Presumptions. b) Authentication--Digital Signature Statutes, (see Hornung: p. 172). How to get around the Statute of frauds when there is no signature? The UCC requires a writing for every sale valued at $500 or more. i) PKI—(public key encryption infrastructure). The problem with this is that it creates a bureaucracy, because you need a third party who verifies the signature. Problems: there could still be fraud but there‘s probably only fraud if you gave it to an agent; also, it doesn‘t provide for a natural evolution and PKI may limit the methods of authentication. (1) Germany use (2) Utah use ii) Biometrics—retina scans, fingerprints iii) Digital signatures rarely used. —no one is really using these digital signatures. People are using the existing infrastructure such as credit card numbers, billing address. Antifraud software that companies have recorded your spending history. Companies are assuming the risks they‘ve always assumed. Winn, p. 180 iv) digital certificates, v) PinOp 10) International a) UNCITRAL Model Law on Electronic Commerce, see Reed, §§7, 11, Suppl. p. 65: (written by the CISG writers, purpose: harmonize trade law) party autonomy. Does not specify what method of signing a message might be appropriate under particular circumstances. Even an X at the end of an e-mail would make it legally binding. b) GUIDEC—avoids mandatory systems based on a specific technology. p. 182. i) signature (1) any symbol executed or adopted by a party with present (2) intention to authenticatea writing. ―Because an ensured message (digital signature) is difficult to forge, its use binds the signatory, precluding a later repudiation of the message and form the basis for forming legally binding contracts ... since the ensured message can provide electronically the same forensic effect a signed paper message provides.‖ (a) ―Ensured message‖ means: (i) 1) ensurer had contact with the message and (ii) 2) message has been preserved intact since it was ensured.‖ (b) Agency: a principal will be bound if the agent had sufficient authority to ensure the message.‖ 11) Foreign a) Digital Signature Statutes i) EU Directive on Electronic Signatures, see Barofsky: ii) Germany: one of the most restrictive legal regimes in cyberspace in terms of ‗signatures‘. PKI only, no legal effect to electronic signature or email exchanges. If you don‘t meet the technical standard established by the German government for the proper PKI, you achieve no legal recognition. 12) Computer initiated transactions, p. 184 a) Can a computer bind a contract? Only persons legally capable of contracting may enter into a binding contract, only natural persons or those who have legal capacity. You had to have intent, and ability to negotiate. i) Agency law: consent by both parties is required. The computer is an extension of the human being. We can attribute human action to the computer so the computer contracts on behalf of the individual. What if there is a malfunction? The principal has to take responsibility. b) UNCITRAL, article 2: the originator of a data message includes both ‗a person by whom or on whose behalf‘ a message is purported, which includes computers. Article 13(2)(b)—attributes the operations of electronic devised to the person who originate the data message if it was sent by an information system programmed by, or on behalf of, the originator to operate automatically.‖ c) UETA §2(6) expressly recognizes that an electronic agent a can operate ―without review or action by an individual‘ and the definition of electronic agent seems wide enough to encompass both electronic agents that act automatically and those that act autonomously (intelligent agents). 13) (b) Privacy i) EU Privacy Directive on Data Protection. p. 190. Suppl. p. 1079--EU passed this omnibus privacy law because the various countries were each developing their own. ii) General Rule: Article 25 prohibits Member states from sending personal data to any nation outside the EU (1) unless that nation‘s privacy protections are (a) similar and provide similar regulatory structure, including enforcement actions. 25(3) if you decide it doesn‘t have adequate protection, inform the other Members. 25(4) the commission may have already decided that the third country does not provide adequate protection. ‗circumstances‘ to look to: ‗the nature of the data, the purpose and nature of the proposed processing, the country of origin, the country of final destination, the rules of law in the third country and the professional rules and security measure in the third country. iii) Exceptions: (1) 25(2) adequate protections. (2) 26(1) consent. (3) 26(2) where the controller of the data determines that adequate safeguard of individuals‘ privacy rights exist. p. 193: (4) Article 25 does not explain what constitutes an adequate level of protection. p. 195. How to show adequate protection: 193: ‗circumstances b) The US has no ‗similar‘ privacy protection regulation. U.S. has patchwork of privacy laws. Fair Credit Reporting Act, 1970; Privacy Act, 1974; Computer Matching and Privacy Protection Act, 1988. This is because of the First Amdt. Also, noninterference by the govt. 14) Application: rhein.com will violate article 25 by sending the information to its parent company, unless it gets permission from Pedro, or unless the US has adequate protection. But the US doesn‘t have adequate protection. a) p. 196: ―Although Member state should not white list the entire private sector, particular areas of the private sector do ensure adequate protection. EX: credit reporting industry, part of the telecommunications sector. b) Member states should not white list many areas of US private sector. Ex: data protection in health care, direct marketing. 15) In general will river.com have adequate protection? no. But does it fall under any of the exceptions under 26(1)? Was there consent? no. Is there any thing in 26(2)? Does the control adduce adequate safeguards with respect to the protection of the privacy? a) What is consent? If I enter all my information and an offer to read the privacy policy pops up and you say ‗no‘, is that consent? Does it have to say ―do you give us your permission?‖ and they have to click ‗yes‘.? b) Does Pedro have a private right of action against an EU company? 198 c) All the substantive law still applies. There may be a battle of the forms, but you have to figure out whose law applies. The CISG doesn‘t require a writing. The only new thing added here is the electronic part. 16) Problem 4.5 The Bill of Lading: Computers to Caracas, p. 200 a) Seller: S&A b) Buyer: Campeador (1) Contract: 100 ―El Cid‖ computers, 10k each, C.I.F. (―payment against documents‖). Inspection Certificate by ms. Jimena. c) Carrier: Saragossa Sea Shipping Lines. d) Facts: Three things that go wrong. (i) S&A send both conforming and non conforming goods; forged the Certificate of Inspection; Saragossa loaded the goods but stamped it ―Shipper‘s Load, Weight, and Count.‖ The bill of lading for the 10 computers is lost and found by Garcia Ordonez. (ii) 20 cartons of cheap computers. SA stolen blank bills of lading. (iii) 70 cartons of cheap computers, forged the blank bills of lading. e) Part A. Forged Endorsements and mis-delivery, p. 202 f) CN: this section will deal with the problem 1, the ten computers. g) English law : Schmitt, , p. 203 i) Int‘l rules relating to Bills of Lading, ii) The Bill of lading is a contract between the shipper and the carrier, but the shipper has little discretion in the negotiation of the terms. However, the shipper is protected against abuse by legislation. (1) By making the bill of lading negotiable, the cargo is made negotiable. The holder of a bill of lading cannot acquire a better title than his predecessor possessed, which means that where a negotiable bill of lading is obtained by fraud and indorsed to a bona fide indorsee for value, the latter does not acquire a title to the goods represented by the bill, while if the same happened in case of a bill of exchange which is regular or its face, and nor overdue or dishonored, the indorsee is entitled to all rights arising under the bill of exchange. h) Carrier: p. 204 The carrier is not responsible for wrongful delivery of the goods against the bill unless he knows of the defect in the title of the holder. If the carrier delivers the goods to a person who is not the older of the bill of lading, he does so as his peril. The carrier who delivers to someone who is not the true owner is liable to the true owner for conversion of the goods. i) Sze Hai Tong Bank v. Rambler Cycle, p. 204 j) A ship-owner who delivers without production of the bill of lading does so at his peril. The contract is to deliver, on production of the bill of lading, to the person entitled under the bill of lading. If he delivers the goods without the production of the bill of lading, carrier is liable in conversion. k) But even a true owner who cannot produce the bill of lading cannot claim the goods. l) They delivered the goods to someone other than the individual identified on the bill of lading, and the indemnity couldn‘t protect them because they breached their contractual obligation. m) Some foreign countries, such as Venezuala and other South American countries, a consignee may obtain delivery of the cargo without actual tender of the bill of lading. n) Applicable law, p. 205 o) Normally, in an action against a carrier, you apply the law of the jx in which the bill was issued. p) But shipments to or from the US is governed by COGSA which requires litigation to be determined by the US COGSA. q) The Pomerene Act applies to ocean bills issued in the US for shipment to a foreign country but not to bills issued abroad for shipment to the US, and it does contain provisions on rights acquired by negotiation. r) Adel Precision, p. 206 i) The carrier is the RR which released good to an entity that produced a forged bill of lading, and the RR is trying to get out of it. The Pomerene act places the burden on the carrier. s) ―There was no proper endorsement on the order bill of lading, accordingly .‖ t) The new version of the Pomeren Act does not contain the ‗properly endorsed‘ but courts have construed it to contain this requirement. u) Application: v) Who is liable for the 10 computers? The carrier is responsible to the owner, who is probably the Bank of Valencia. Why is the carrier responsible? Under Pomerene Act, the carrier cannot deliver to someone who is not the bill of lading. The Carrier must deliver the goods to someone who holds the bill of lading which has been properly endorsed. w) Part B. Misdescription and disclaimers of Description. x) Law governing the B of Lading contract with regard to negligent stowage or care of goods during transit. (a) COGSA (based on the Hague rules). (b) Harter—federal state to federal state, or within the U.S. ii) Law governing the transfer or transferability of the bill of lading. (1) Pomerene act: applies only to Bills of lading created in the US. iii) If the bill of lading was written in a foreign country for shipment to the US, which law applies? If written in Australia, then Australian law. iv) Summary: facts—seller bought 20 cartons of computers and the carrier signed off on the bill of lading but didn‘t inspect, and they get delivered but they‘re not the right computers. So who‘s responsible. v) Law: carrier has a duty to do a reasonable inspection. And because they did not stamp it ―Shipper‘s, load, weight and count,‖ there was no disclaimer so the carrier is responsible for misdelivery and misdescription. y) Both COGSA and Pomerene Act. z) Mitsui—Cogsa and harter both allow disclaimers, but they don‘t have any legal effect. But Pomerene modifies the legal effect that the bills of lading would otherwise have under the Harter Act and COGSA. aa) TO have a valid exculpatory clause, they must have a valid disclaimer. ―Shipper‘s load weight and count.‖ Then the shipper has to load them. bb) ftnt, p. 215. cc) Questions, p. 219: dd) 3. (1) not responsible because not responsible for how many and how much they weigh. (2) 20 cartons of El Cid. Same. (3) 15 cartons delivered. All are operational. But the Bill of lading says 20 cartons. they will be liable because there‘s no disclaimer. (4) same as c, but ... it would depend on who loaded it. If the shipper loaded it then they are protected by an exculpatory clause (5) i (6) Sancho and Alfonso delivers 20 cartons.....The question is if it would be reasonable for them to inspect. In this case its so obvious. (7) probably even more liable because they had an opportunity to see what was going on. ee) Part C: Forged Bills of Lading, p. 220 ff) Three functions of the bill of lading: i) receipt for the goods, ii) document of title to the goods and iii) evidence of contract of carriage. gg) Facts: S & A stole blank bill of ladings, and took the forged bill of lading to the bank. The Campeador pays for them. Who‘s responsible now for the loss? hh) Bank of Valencia will look it over to make sure all the documents are in order, then take it to campeador. Campeador will pay Valencia, and Valencia will pay the US bank, which will pay Sancho and Alfonso. ii) Law: Pomerene act because it deals with transferability. jj) Campeador will be responsible because no one had endorsed it along the way. Only Campeador endorsed it. Had it been a letter of credit transaction, then each would have endorsed it along the way and the buyer would not be liable. kk) Fort Worth Elevator, p. 222 i) F: Tankersley had forged a bill of landing saying he shipped a truckload of wheat to Texas. Here a draft written off on Fort Worth bank account, pay me for it. Then Fort Worth finds that nothing was ever shipped. ii) held, the bank is responsible for the loss because Pomerene had been passed by then. they accepted the obligation to accept it as a genuine bill. iii) How can I get out of any liability for warrantees under the Pomerene: Document a contrary intention. iv) p. 224—Unless a contrary intention appears 17) Problem 4.6 Selling through distributorships/Agents and the use of countertrade: p. 228 a) Facts: Client Sells Sollate, patented in the United States, Mexico and most European nations. He wants to expand into Mexcan market and Russian market. Set up either an indepndent agent or independent distributor. b) Independent agent—title remains with seller, based on commission, risk on seller. i) Independent distributor—title passes to the distributor. c) Part A. Sales Agent and distributorship Agreements. d) Folsom, p. 230 i) Independent foreign agent: a foreign person who does not take title to the goods, is paid on commission; does not bear risk that the buyer might not pay. Uncertain whether he has power to bind US supplier unless expressly given. he needn‘t provide storage. Usually more legal problems than an independent foreign distributor. Agency law differs in different countries, some of which cannot be contracted away and is mandatory. e) Independent foreign distributor (agent): buys the company‘s products and resell‘s them through the foreign distributor‘s network. Takes title, assumes the risk of not being able to resell goods. Must find storage. No power to bind the supplier, because he buys the goods himself. agent distributor—Mexico doesn‘t have this title remains with seller title passes to distributor risk of no sale remains with seller risk passes to distributor more control (price, distribution) less control (price, distribution) seller responsible for storage distributor responsible for storage can Bind the principal, possibly cannot bind the principal f) ISSUES: host government laws: antitrust law, labor laws, termination rights and obligations, import (in retaliation, or isolationism) /export (repatriation of profits) restriction. g) Siqueiros, Legal framework for the sale of goods to Mexico, p. 235 h) Antitrust in Mexico. A seller residing abroad will not encounter problems with antitrust when selling goods to Mexico, even when exclusive agents or distributors are appointed for certain areas of the country. i) But the seller is subject to the antitrust laws if it enters into agreements with other suppliers of goods, within or outside of Mexico, to restrict the access of products or to gain any other unfair advantage to the detriment of the Mexican consumer. j) What kind of contract do you write if you want to create an independent distributor? k) Contracto innominado. i) One commercial code; ii) Civil code one for every state, plus the federal code. l) Contrato Mediacion—he goes from farm to farm and asks the people if they need a tractor, hands them a catalogue and tells them that if they want anything, they should contact the seller. i) Payment method: finders fee. m) Contrato commission—closer to an agency relationship. closer to a employee/er relationship. If you call it a commission it will probably be called a contrato de commission. This does give the person power of attorney so he can bind the principal. You can add terms, But by adding terms you might turn it into a different kind of contract, because the Mexican courts don‘t look at the title of the contract. n) Labor law issues: who can we hire?We probably won‘t be able to hire foreign nationals to work in Mexico. An independent distributor may be an entity and Mexico may say that a certain percentage has to be Mexican owned. o) Termination: p) At will v. cause—govt may control this, and what ‗cause‘ is. q) Severance—penalties, inventory, breach penalty, good will. r) Notice—may be established by the govt or the parties. s) p. 241: List of possible bases of ―just cause‖: t) Waver of termination rights—usually the govt will not allow a waiver of these rights. u) Part B. Countertrade, p. 243 v) Why would I prefer good instead of money? Russia has soft currency, or it lacks hard currency, or the govt won‘t let it out of the country. i) What goods are you getting? ii) How do you value the goods? w) What is the quality? x) Is there a market for this stuff? y) Danger of dumping—sell product for below the market cost in the home country, antitrust laws prevent you from. so can you sell it for the price you want to sell it for. z) Exchange rate? once you figure out the value, is it in the official rate or the market rate? aa) McVey, p. 246 i) Types of Countertrade: ii) Counterpurchase. A private firm agrees to sell products to a sovereign nation and to purchase from the nation goods which are unrelated to the items which it is selling. (1) Then he has a certain period of time, 3 to 5 years. Three contracts: one to sell the jets, one for the goods in return, one for the protocol iii) Compensation (buyback)—a private firm will sell equipment, technology, or even an entire plant to a sovereign nation and agree to purchase a portion of the output product from the use of the equipment. (1) Period of time is much longer than in counterpurchase. iv) Switch trading—when you get a third party to take over your obligation. EX: Romania agrees to buy 100k, Brazil agrees to buy 100k, but Brazil only buys 70k worth, and Romania has no more goods it wants. So they finds a switch trader who finds Guatemala who wants Romanian goods. So Brazil will sell it to Guatemala at a 30% discount. 18) Chapter 5: Financing the Int‘l sale of Goods, p. 255 19) Problem 5.1 Letter of Credit and Electronic communication: Gold Watch pens for France. (1) Shady (beneficiary) (2) UCC, p. 1024, §5-107, definitions, 5-102; Adviser, confirmer, nominated person, issuer. (3) The letter is sent from BNP (issuer) to Metro (adviser, confirmer) bank. This is the letter of credit contract. (4) Ship LCD lighters and watches. (5) ‗fixed‘ letter of credit: certain amount of time after presentation. It can become exhausted, either from the time passing or the amount being paid. 256: (6) ―sight‘ letter of credit: must pay on sight. (7) General letter of credit: allows (8) Special instructions: (9) 258: Please add your b) mistake in the description: ―ICD‖. Now BNP is refusing to pay because the documents are not conforming. If they don‘t conform and BNP pays then BNP is responsible. c) Autonomous principle: The documents are autonomous, and banks may refuse to look at anything else, if the documents don‘t conform, then they will refuse to pay. d) ―ON September 25, BNP received a telex from Metro that the credit had been used.‖ Did they use is in time? yes. But had it been the 26, then it would not have been valid. e) Which date should control? When the beneficiary presents to the confirming bank? UCC 5- 108—the issuer‘s rights and obligations. Comment 1. p. 1027. i) Beneficiary‘s presentation of documents. The key date is when the beneficiary presents the documents. (1) Notice requirement—reasonable time, not more than 7 business days. How much time does the issuer or confirmer have to notice: maximum of 7 business/banking days, but sometimes shorter than 7 days. 7 days is not a safe harbor. UCC 5-108(b), (a) reasonable time no greater than 7 days. ―an issuer has a reasonable timeafter presentation but not beyond the 7th business day to honor or reject.‖ Comment 2, p. 1028, ―What is a ‗reasonable time‘ is not extended to accommodate an issuer‘s procuring a waiver from the applicant. See also UCP 14(c)(the issuing bank may in its sole judgment appeach the Applicant for a waiver of the discrepancy). (b) But under the UCP. 13 UCP, p. 268 .. but this is not a safe harbor either, but 14(e) says that if the bank fails to act in accordance with this shall waive their right to object. P. 265 ―The preclusion applies if the bank fails to give the prompt notice or fails to give notice for more than seven days after the beneficiary presents his documents. The bank that delays examining the documents for more than a reasonable time will escape the preclusion as long as it notifies the beneficiary promptly after it finally decides not to accept the documents and does so within the 7 days. (2) Requirement that all discrepancies be presented at the same time. You have present all the discrepancies at one time. UCP 14(d)(2).p. 269 ―Such notice must state all discrepancies of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is retuning to them, to the presenter.‖ ii) Why do you only get one bite at the apple? iii) The UCC does not require you to do it all at once. But case law might require it. p. 266. ―By formally placing its refusal to pay on one ground, the defendant must be hel to have waived all others.‖ Bank of Taiwan. iv) So BNP will be precluded from the objections raised on October 6th. 20) Who‘s at risk here? Does Metro need to go to Galleries and tell them of the discrepancy? no. Because they look only to the documents. a) If they honored the LC and pay Shady, can they force Shady to take the goods back. b) Metro is claiming that it was conforming, because their letter of Credit said ICD. c) But: p. 270: art. 16 UCP—banks assume no responsibility in the transit of the message or other errors arising from any transmission. d) If they are both banks and they‘re both not responsible then who‘s responsible? i) Confirming letter. Schmitthoff, p. 280: Telex instructions: Probably BNP is in trouble for not sending a confirming letter of credit like they should have under Article 12 of the UCP. Art. 12 provides that the issuing bank should make it clear in the telex that it considers the confirming letter as operative. If this is the intention, then works such as ‗full details to follow‘ or words of similar effect should be inserted into the telex or , better still, the telexk should state the the mail confirmation will he the operative credit instrument or operative amendment.‖ 21) But Galleries (applicant) might be responsible, under art 18, 16. 22) Conformity: 23) Slavish conformity not required. The UCC 5-108, comment 1. Substantial performance is not enough. ―Strict compliance does not mean ‗slavish conformity to the terms of the letter of credit.‖ i) Strict compliance is measure by standard practice. Id. ii) Standard Banking Practices. UCP Article 13, p. 283: Compliance shall be determined by international standard banking practices. b) Under the autonomy principle, the Bank should look only to the documents and not at the underlying transaction. 24) Some spelling errors are ok, p. 1027, of the UCC 5-108 Comment 1 3d para; and Hanil Case, p. 277 ―When it‘s a clear typographical error.‖ a) Hanil Case, p. 274: the (1) Letter of Credit ―Sun Jin‖; (2) Actual beneficiary ―Sun Jun.‖ b) Policy: It is too cumbersome. c) Can we look to the UCC? Yes, because the UCP is not a law. 25) Application: LCD and ICD might be an obvious typographical error. a) But banks don‘t have to have special knowledge. b) Rayner, p. 262: (1) Letter of Credit: ―Coromandel ground nuts.‖ (2) Bill of Lading : ―CRS.‖ (a) (universally understood in the nut business to mean coromandel.) c) ―It is quite impossible to suggest that a banker is to be affected with knowledge of the customs and customary terms of every one of the thousand of trades for whose dealing he may issue letters of credit.‖ d) But it‘s the bank who decides whether its an error or not. Bankers don‘t have the time to review all the underlying details. 26) This is a fixed credit -- it will expire. The buyer is concerned with the expiration. Shady has a certain amount of time to comply. If Metro say there‘s a problem with this, shady will be able to reform it. But the time is running out. 27) Terms: p. 256: a) Standby letter of Credit: it‘s a guarantee of performance. If I am doing construction. This is a mirror image of the letter of credit in the documentary sale transaction, Because now the applicant is the seller, not the buyer. b) I‘m selling my services to Guatemala. If I, the construction company, breach my duty to build the plant, Guatemala can go to the bank and collect. In the normal documentary sales transaction .... what must you present to collect? You wnt them to present come document that is certified....but many standby letter of credits don‘t require much documentation, also a ‗suicide letter of credit.” c) Revolving letter of credit. Progress payments. I get the first stage of the project done. 28) Problem 5.2 Enjoining Payment of Letters of Credit for Fraud, p. 292 a) Exception to the autonomy principle. Originated in the Cardozo dissent: ―I dissent from the view that if the issuing bank chooses to investigate and discovers thereby that the merchandise tendered is not in truth the merchandise which the documents describe, it may be forced by the delinquent seller to make payment of the price irrespective of its knowledge.‖ But there‘s a difference between fraud and breach of warranty. b) Policy: i) good: it prevents someone from perpetuating a fraud. ii) Bad: it allows the buyers to get out of their contract, it would slow down the international business process every time a buyer raises, but the letter of credit places the risk of fraud on the applicant/buyer, so why should we let him get out of the contract? 29) Our client has just learned that the seller is sending him junk and wants to stop the bank from honoring the letter of credit. a) First: has it happened before or after the LoC has been negotiated. If it has already been negotiated with a holder in due course, you‘re out of luck. UCC §5-109: 30) You can call the bank and ask them not to honor it. But the bank may not listen to you because they‘ve already made a contract with the seller in Seoul. It will probably depend on how much money and business you do with them. 31) Mid-Americas case, p. 293 32) I: Issue even if a letter of credit contract requires the UCP, apply UCC in cases of fraud because the UCC is the gap filler, art. 5. a) Measure of Fraud—material fraud: §5-109—only material fraud by the beneficiary will justify an injunction against honor. ―Material fraud‖ means fraud that so vitiated the entire transaction that the legitimate purposes of the independence of the issuers of the issuer‘s obligation can no longer be served.‖ Courts must look to the underlying contract. 33) In the Little John hypo, the bank will probably not stop payment on its own initiative. 34) Dolan, p. 304: The LC should be rapid and inexpensive, and if this exception is allowed it sort of defeats that purpose. 35) Fraud by the beneficiary (seller). Smith, p. 307,- American Accord. Where does the fraud lie and who has to commit the fraud for the buyer to invoke the exception. The American Accord [English case] says it has to be the beneficiary’s/seller’s fraud. ―Could this fraud exception to the established principles of documentary credits law be expanded to encompass the fraudulent acts of third parties as well as those of the seller? No. a) USA: UCC 5-109—even if there is a third party forgery or fraud. i) Fraud in the transaction, only the beneficiary‘s fraud will invoke the exception. ii) Fraud in the documents, then anyone can enjoin. (1) When bank must honor, despite fraud, UCC § 5- 109a1 (a) holders in due course, banks have to pay, because they‘re innocent. But if he‘s not a holder in due course, go to para 2. (2) paragraph 2 the bank may honor or dishonor. b) Dangers in honoring or dishonoring?: p. 308 ―If a bank refuses to pay against documents which are in fact genuine, although the bank honestly believed them forged, it has no defense to the seller‘s action for wrongful repudiation.‖ i) ―good faith‖ means ―honesty in fact.‖ This is a subjective test. c) So the bank may tell the applicant to go to the court and get an injunction and make me stop payment, because it doesn‘t want to be liable. 36) UCC §5-109(b)—the court can only enjoin if the court finds the following: i) the relief is not prohibited under the law ii) a beneficiary, issuer, or nominated person who may be adversely affected is adequately protected [i.e., requiring the asking party to put up a bond] against that it may suffer because the relief is granted. iii) on the basis of the information submitted to the court, the applicant is more likely than not to succeed under its claim of forgery or fraud. b) Clean credit (a suicide credit)—this is very hard to prove fraud because there‘s no documents. See comment 3. p. 1032. c) While the risk is on the applicant, he can protect himself by having an independent inspection certificate. But the banks are not in the business of adjudicating fraud, all they should have to look at is in the documents. 37) Banco Santander p. 310: when you assign your rights, the person you assign them to has all the rights and obligations. When you start drifting from the outline on p. 70, you‘re going to be in danger. What did they fail to do here? require a negotiable draft. [see, p. 68 ―Negotiable draft]. This was fatal because had the bank paid for a negotiable instrument, then Santander would not in paying that negotiable instrument be subject to the obligations of the person they bought it from. But they did pay the beneficiaries but not with a negotiable instrument. They paid the beneficiary at a discount in exchange for the assignment, the took subject to the fraud. a) Korean Law: p. 316: if there is any indication of fraud the bank has the duty to investigate. 38) 5.3 Standby letters of credit: Electronics to Israel, p. 319 a) FACTS: Israel is the beneficiary, and it can collect if there is a breach. Not an absolutely clean letter of credit, but almost because all they have to do is present a sight draft. Unlike a normal letter of credit, which requires all kinds of documents, with a standby letter of credit, you only need one piece of paper. b) Standby letter of credit: issued by the seller (of services), guaranteeing performance. c) URDG: Art. 20, p. 327: ―contains a very distinctive rule requiring the beneficiary (buyer) to present with his demand a statement that the principal is in breach, and the respect in which he is in breach.‖ d) Defense: Can SpaceCom (seller) stop the bank from paying this? p. 324: An injunction will be issued only if there is manifest abuse, and irrefutable proof of it. Courts will be very reluctant to enjoin this behavior. e) What should it do in the future?: get an independent third party to certify the breach. (See last article, p. 349- 50); put more stuff in it. The problem is that you might not be able get the other side to go along with all this. 39) Which Law applies?, p. 323 a) UN Convention of Independent Guarantees and Standby letters of credit: this applies whenever the two parties are in the Contracting States. i) parties can opt out of it, art. 1.1. p. 328. (1) Limitation—choice of law provisions. But even if you opt-out of the convention, you can‘t opt out of the choice of law provisions, under arts. 21 and 22. Art 21 says freedom of choice (but neither Israel and US are parties to this) b) Art. §1-105 UCC: i) It‘s not clear whether the contract provides for a choice of law. If they didn‘t than you apply UCC 1- 105, the ‗reasonable relation.‖ ii) If it were done in Israel? it would probably be the ECE ―characteristic performance.‖ But it will probably be in Israel. iii) Apply UCC 5-109 (Fraud and Forgery): Is the underlying transaction materially fraudulent? Has Israel committed a material fraud? see end of comment 1 which requires, ―nocolorableright,‖ no basis in fact, etc. 40) What does Israel have to do? Allege a clear and substantial breach. This breach was clear, but was it substantial? it was only four days. a) Case law—Islamic Republic of Iran, p. 336: The govt is overthrown, there is question whether the current Iranian govt will honor the contract. Bell just stopped, at which time Iran tried to collect. Held, the mere repudiation of a contract is. i) Caulfied test, p. 338, and HANDOUT. If you can‘t show irreparable harm then you don‘t need injunctive relief. b) Caulfield Test. Showing of possible irreparable injury and either (1) (1) probable success on the merits or (2) (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief. c) Because there‘s no relief at law, no money damages, to SpaceCom (seller) has to show irreparable harm. i) Application: their credit would be shot, it couldn‘t meet its payroll. ii) The risk of signing the suicide credit is that it will be called justly, or because of fraud iii) Mere loss of money means there‘s a remedy at law. p. 348—but if loss of money is the only risk, then there is a remedy at law, unless there‘s a risk of bankruptcy. But here there ‗no danger‘ of insolvency right now, but there might be when the 15k is called. (1) Danger of bankruptcy. d) American Bell—this is just a breach of contract, no irreparable harm. There is therefore an adequate remedy at law. e) Comment 3 &4 of 5-109: Comment 3: ―Courts should be skeptical of the claims of fraud by one who has signed a ―suicide,‖ or clean credit and thus granted a beneficiary the right to draw by mere presentation of a draft.‖ Comment 4: this standard is very high, and the burden remains on the applicant to show, by evidence and not mere allegation, that such relied if warranted.‖ f) Public interests, p. 346: risk of fraudulent demand. It would go against public interest to allow the bank to not honor these easily. Harris Corp. g) Banks are worried about losing their reputation and credibility, if they fail to honor the letter of credit. h) Arms length negotiation. p. 341: ―Bell was a sophisticated multinational enterprise well advised by competent counsel, entered into these arrangements with its corporate eyes wide open.‖ American Bell. i) This is was Comment 3 deals with, that court should be skeptical of claim of fraud by one who has signed a suicide letter of credit and thus granted the beneficiary the right to pay by mere presentation of a draft. i) This was not a bad deal for j) p. 338: ―Bell falls back on the contention that it is without any effective remedy in Iran because of xenophobia‖ but they haven‘ shown that they have no remedy at law in the US. Even though a judgment in the US would not be held up in Iran, if the Iranian company has assets in Iran they could get those. 41) Harris Corporation, a) Harris was supposed to deliver some radio transfers and was short; because of the war they were unable to ship the rest, and Iran makes a call on the letter of credit. b) Is there irreparable injury? – because they couldn‘t get adequate remedy in an Iranian court. This argument was rejected by the American Bell court. But what makes this different? We negotiated for the release of hostages, and set up an American –Iranian claims tribunal, which meant that any one having claims against Iran must take that claim to the Iran US claims tribunal. The US passes a law that prevents US citizen against Iran in a US court. How does it have the right to do this? Because of the sovereignty issue, you can‘t sue a sovereign as an individual, so the US is actually representing the person. That‘s why they said that they do meet the irreparable test because they don‘t have remedy in the Iranian or US courts. c) Harris tries to argue that because of the force majeure clause, the contract went away as well as the standby letter of credit contract. The court rejects this because they are two separate contracts. The banks were not parties to the underlying contract, only the letter of credit contract. d) Here, the bank was now an institution of the govt and NIRT was an institution of the govt and there was collusion. 42) 11.1 Resolution of International Disputes: Televisions everywhere, p. 1151 43) PART A: What forum is available if the parties do not choose one? a) First: What statute grants jurisdiction to a particular court? b) CN: this chapter introduces us to whether a court has jx over an individual over their courts. Does the US have jx over foreign parties. Second issue is forum nonconveniens. Even if a court has jx it may dismiss the case. 44) Lancelot-US Corp. incorp Delaware— i) Place of incorporation. Barcelona Traction, 1180: Is it a Canadian corp because incorporated in Canada or Belguim because it was mostly owned by Belgian. Belgium was claim that its nationals had been harmed by the govt of Spain. Held, Canada is the only nation that can raise a claim, thus the place of incorporation. ii) Where a significant portion of the stock is owned. Restatement: p. 1181 iii) Main site of corporation. Courts in other nations don‘t look where it is incorporated but where the main site of the corporation. 45) Lancelot v. Banco Lago/Pellinore a) Issue 1: Contract for sale of TV: Banco Lago is the issuing bank and it refused to honor the draft, because Pellinore asked them not to. (Lancelot will try to sue Pellinore and Banco Lago and probably in the US because it‘s cheaper). i) Jurisdiction over Pellinore. Can I get personal jx over Pellinore? Look at the State‘s Long arm statute, use Wisconsin‘s for Massachusetts. Pellinore has virtually no contacts with the state, so we might have to sue in Spain. (1) Tag jx—not apply to corporations.—when they‘re physically present in the state and you serve them. If I just happen to be vacationing in Massachusetts. But this doesn‘t apply to corporations. p. 1162. If it did then it would work if an officer went there. But there‘s no other way to get jx over Pellinore. ii) Jurisdiction over Banco Lago. p. 1173: Van Schaack. If the bank induces conduct in this state ... therefore we can get jx over them. So there‘s a possibility . But Van Schaak was a real estate case dealing with real estate in Colorado. this might give you some leverage to bring Banco Lago to the table iii) If there is jx, should the court take jx? Is there a forum non conveniens. The Gilbert Test: (1) Private interests: p. 1167 (i) the relative ease of access to sources of proof (ii) availability of a compulsory process for securing the attendance of uncooperative witnesses (iii) costs of obtaining the attendance of witnesses (iv) possibility of viewing the relevant premises (v) other practical problems which will allow the trial to be easy, expeditious, (vi) enforceability of a judgment if obtained. (2) Public interests: b) Is there an adequate alternate forum. Initially in determining whether to dismiss a case on the basis of fnc, a district court must find that there exist an adequatealternate forumfor the litigation. i) cause of action recognized. What is adequate alternative? Where the law is recognizes the cause of action and the statute of limitations has not run. But the Defendant must also be amenable to process ii) Piper—Scotland didn‘t recognize strict liability. Held it doesn‘t have to be the same cause of action, just an adequate cause of action. see p. 169. Negligence is 46) Arthur‘s Estate v. Lancelot 47) Issue 1: Did Arthur ever deal with Camelot? No, the only way to get with Camelot you have to pierce the veil. a) But the warranty came directly from Camelot, and they contracted with Sony to do the repairs. Look at i) Wisconsin statute, art 5(a). What facts might lead us to do veil piercing? ―The only assets of Lancelot are a leased one room office and some leased furniture, and some leased space in a warehouse where sometimes goods will be stored for two or three days awaiting shipment.‖ So there is some contact but does it survive the constitutional test? b) Int’l Shoe – does it offend traditional notions of fair play and substantial justice? Is there purposeful availment? There appears to be. c) But is minimum contacts is not sufficient, which Berger King established, bottom p. 1160, it is a factor, the second part if whether it comports with fair play and substantial justice. But the best argument is Volkswagen, say I‘m selling in NY, I shouldn‘t have to be responsible for the unilateral acts of the plaintiff. But the warranty says ―in the United States.‖ The warranty is the strongest argument. If Camelot‘s subsidiary is suing in NY, how would you show minimum contacts, and minimum contacts that would also be fair and substantial justice? d) Veil piercing—need fraud. So there has to be veil piercing, but for this you should have fraud, and there‘s no real evidence of fraud. If you don‘t have veil piercing and you don‘t have minimum contacts, then you have nothing. If Lancelot is a branch, then you could they say they are conducting business in the US. e) But if Arthur buys it in NY and then brings it to Wisconsin, Volkwagaen will prevent Arthur from hailing Camelot into court there. f) But it still has to meet the fair play and substantial justice part. g) Forum nonconveniens. p. Wisconsin, p., 1155 ―Stay of proceedings to permit trial in the foreign forum.‖ If Camelot moved for f.n.c., it has to first consent to jx in another forum, you will subject yourself to the jx of the alternate forum. Then it‘s left up to the discretion of the court. Gilbert test: 1) is there an adequate alternative forum. 2) weigh the private interest and public interest concerns. h) Where is the manufacturer? In Canada. i) Might the court demand that the US party submit to jx in the foreign court if the suit is dismissed? j) Do US citizens have an absolute right to sue in US courts? Courts usually want US citizen‘s to sue in a US court. The Piper case is an example of this. i) ―Despite the presumption in favor of a US citizen‘s choice of a US forum there are circumstances in which courts have dismissed such cases on fnc. ii) ―Parties who engage in international transactions should know that when their foreign operations lead to litigation they cannot expect always tot bring their foreign opponent s into a US forum and every reasonable consideration lead to the conclusion that the site of the litigation should be elsewhere.‖ p.1169 Bay Chem. p. 1169 48) Fabrique Breton v. Lancelot, a) After they made the contract, the French govt placed high tariffs and decreed that all TV‘s go to one port. b) Why do they want to sue in the US? Maybe because we allow for more depositions, greater damages, class action, jury trials. c) Is there jx over Camelot.? The only way is veil piercing. But if it does succeed in piercing the veil . .. argue fnc, that most of the transactions occurred in France. How many US citizens are involved in this case? Camelot is Canadian, and Fabrique is French, so argue that this case doesn‘t belong in a US court. But do we want to argue Forum Nonconveniens? it can only be granted if the moving party agrees to be subject to the alternative jx. you don‘t want to follow french law. So you probably want to be in Canada. But you have to look at the law. So you may not want to move for fnv, becaue then you have to agree to the alternative forum. You might want to simply argue lack of jx. d) Prince—the most suitable forum approach is disadvantageous to the plaintiff, as in Bhopal. We should adopt Australian which means it had to be oppressive, vexatious or harassing in the US. This allows us to hold multination corporations from getting away with stuff in other countries. They might be less likely for the corporations to do this if they know they will be subject to lawsuits in the US. 49) International Tribunals: p. 1177 a) Suing before the ICJ: only States can sue before the ICJ. They could petition the federal govt to take the case up for them, but this is extremely unlikely. They have to feel it is important enough to get involved. 50) 11.2 Choice of Law and choice of Forum Clauses: Dolls to Europe, p. 1185 a) Governing law: b) Choice of Law. i) Convention on the Law Applicable to contractual obligations(p. 1056 supp) : (1) art. 3 (choice of law). Para 1. basically says that there are no limitations on which laws can be chosen. But para 3 places a limitation on freedom of choice, such as mandatory rules, (i.e. COGSA). (2) EX: English buyer, American Seller, agree to apply German law. But everything is related to England. Even though the contract says apply German law, since everything is related to England, the mandatory rules of England will apply. (3) Art. 4. (absent a choice--most closely connected; characteristic performance) (4) Article 7. Mandatory Rules (5) Art. 7(1)—when applying under this convention the law of a country (even a third country), effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable. (6) Art. 7(2)—the law of the forum a may have the mandatory rules which the court must follow. So, and USA Court will apply COGSA even if the contract calls for the Hague-Visby rules. ii) UCC 1-105: The limitation on choice of law is that it has to have a reasonable or appropriate relationship. iii) Restatement (Substantial relation) 51) Choice of Forum. a) Brussels convention (Convention on Jx and Enforcement of Judgements in Civil and Commercial Matters), art. 17 (p. 1064, supp). i) Article 17. – only one of the parties has to be a resident of a contracting party. If none of that parties are members of a contracting state then b) Bremen—forum selection clauses are prima facie valid, absent compelling reasons not to give the clause full effect, such as fraud, undue influence, or overweening bargaining power, or a seriously inconvenient forum. i) Carbon Black—agreements in advance of controversy whose object is to oust the jx of the courts are contrary to public policy. ii) Bisso—exculpatory clauses may violate public policy, but the case dealt with entirely domestic waters. c) Carnival Cruise—a reasonable forum selection clause in a form contract could be upheld. Florida is not too remote alien forum. But what then is a seriously inconvenient forum. This was an adhesion contract. What if the clause said litigate in Panama? It probably would have had a different result. But if it said Montreal, then it would be reasonable. d) Caldas—permissive clauses. Corim buys Cloverdale from Carr. Corim sells Cloverdale to Caldas threes days before they owned it. Both Carr and Caldas sues Corim. Corim says that there was a forum selection clause saying that the (1) ―Laws and courts of Zurich are applicable.‖ e) Corim says that Bremen says that a forum selection clause is prima facie valid. There are exceptions, but this isn‘t one of the exceptions. But there is a difference between mandatory and permissible forum selection clauses. Here it just says that the law and courts of Zurich are applicable, but this didn‘t preclude any other forum. They could have said ‗must apply and no other laws should apply‖. f) COGSA, p. 1205—does not directly address forum selection clauses, but § 3(8) provides that ―any clause ... in a contract of carriage relieving the carrier or the ship from liability for loss or damage or in connection ...or lessening such liability otherwise than as provided in this chapter, shall be null and void.‖ i) Vimar, p. 1208—there‘s an arbitration clause, they tried to bring it in federal court. They said that there‘s no jx because it should go to arbitration. It potentially limited the liability of the shipper because it said to apply Japanese law. The forum selection clause might lessen the liability also because the foreign forum will also be more difficult, there are practical difficulties of litigating abroad, and the possibility that the foreign court would apply foreign law and not COGSA. the third concern is that the foreign court would not apply COGSA they way that USA courts would. But this number three is the weakest argument, because Piper said only that there only had to be an adequate remedy. So just the possibility that the Japanese court might not apply it the .... ii) Does the VIMAR serve as a precedent from UNDUSSA. Vimar did try to overrule Undussa, because Undussa was a forum selection case, not a arbitration case. g) Undussa, p. 1206, shipping from Belgium to San Fran, with a forum selection clause in Norway, for an amount of $2,600. But the Supreme Court is purporting to overrule this. h) Bonny, p. 1210: Arbitration forum selection clause. This involved a mandatory USA rule, the Securities Act, which says that you cannot waive this law. ―We have serious concerns that Lloyd‘s clauses operate as a prospective waiver of statutory remedies for securities violations. By including the anti-waiver provisions in the securities laws, Congress made clear that the public policy of these law should not be thwarted.‖ .... Piper says you don‘t need the exact remedy. ―We are satisfied that several remedies in England vindicate plaintiff‘s substantive rights while not subverting the US policies. Plaintiffs can bring a claim of fraud. 52) Arbitration choice of law: p. 1214 a) Choosing national law: i) an arbitrator normally faces the following choices: (1) the law of the seat of arbitration, the national law of the arbitration, (2) the national law of the parties, (3) the law of the place where the contract was concluded, (4) the law of the place where the contract must be performed, (5) the ‗proper law of the contract.‖ 53) Facts: Three contracts 54) Transaction no. 1. a) Buyer/seller. There‘s a German party, so apply the Brussels Convention. ―This contract will be governed by the laws of Germany. b) Carrier. Is it a Liberian, English, Monocan citizen? Barcelona Traction says that it‘s a citizen of wherever it is incorporated, but another case says whenever a significant amount of stock is owned. Where may Talking Toys Sue Gluck? Germany, but where else would a suit be sustained? What if I want to sue in the USA? Will the choice of law be respected by the USA Courts? Gluck could file a motion for lack of jx because the contract says apply the laws of jx. I may not want to file a motion for fnc because then I have to submit to jx somewhere else. How could you get this court not to recognize this choice of law? Argue Bremen, 1192—such clauses are prima facie valid and should be enforced unless shown by the resisting party to be ―unreasonable under the circumstances.‖ So I have to prove that the part of the contract that says German law should apply is unreasonable. Unreasonableness is set out on 1193: ―fraud, undue influence, or overweening power.‖ i) Bremen. Zapata wanted to take the rig to Italy, so they hired a towing company. Unterweser gets caught in a storm and they tow it back to Louisiana. Unterweser files a motion to dismiss for lack of jx and fnc because the contract has a forum selection clause saying any dispute should be decided in England. The US Supreme Court says that the court has to apply the clause and dismiss so it can be tried in England. Ct reasons that the contract was made with an arms length transaction. (1) Exculpation clauses, p. 1193 are contrary to public policy, under the Bisso case, because there is a strong public policy in the forum to discourage negligence. Supreme Court says that the exculpatory clause should be enforced because we don‘t know if it is reflected in the price. So Bisso only applies to US waters and this was an international business transaction. c) ―Is there a permissive law or mandatory? Saying the ―laws of the Republic Liberia shall apply?‖ See Caldas (―laws of Zurich are applicable‖ not mandatory). You could argue either way. d) ―Multimodal carrier:‖ p. 122. not negotiable. 55) Choice of law Clauses a) Which law will the German Court look to? The EE Convention on the Law applicable to Contractual obligations (art. 3—freedom of choice) b) USA court will look to the UCC 1-105, and the Restatement. 56) Will Choice of Forum Clauses be Respected by Courts? a) Analysis of choice of forum clauses must begin by noting that questions may arise in two entirely different contexts. p. 1189. i) One—the chosen forum may raise an issue as to whether that court will accept jx over the action. (German court will have to ask whether it should take jx,) ii) Two—if it is not the chosen forum will a non- chosen forum accept it. b) US Approach?—Bremen ―Forum selection clauses are prima facie valid unless unreasonable.‖ c) German approach? Brussels Convention. art. 17. Is the agreement in writing, is there a prior trade or custom. d) If suit is filed in German court e) If T&T tries to bring it in US Court? do we take it? i) apply Bremen: Prima facie valid. is there some countervailing reasons: fraud, freely negotiation, undue influence, over-reaching bargaining power, unjust, neutral forum with experience? But ‗reasonableness‘ is limited by Carnival. 57) Transaction No. 2. T&T and Poupee a) Choice of Forum analysis b) Contract between parties from two nations, it‘s reasonable c) Forum analysis. d) If suit is filed in French court? Court will look at art. 17 of Brussels. i) is at least one of the parties domiciled in a contracting state? e) Is the agreement in writing, prior course or custom? f) Second contract: filed in German court which is not the court that the contract said it will be filed. German court will look at the Brussels, which says that France has exclusive jx. g) If filed in USA courts, would US find it reasonable to apply French law? i) Apply Bremen: in Bremen clause choosing London upheld in contract between german and US parties. There was no connection between the parties and London, but international companies should be able to choose English law, but its reasonable even though there was no other relation. As long as bargained for and reasonable. These sophisticated parties have good reasons for choosing the terms of their contract. h) Exculpatory Clause? Will this be upheld? civil law v. Common law. Civil law say we look at contracts as social documents, so we want to be careful about overreaching. see 163-4. i) Invalid under COGSA carriers can‘t limit all liability. p. 1205: Any provision that lessens the liability under COGSA. 58) Transaction No. 3.: Vorm a) FORUM. Where can we file this lawsuit? Liberia or USA. There is an arbitration clause. Paris would be a good place to arbitrate. If filed in US federal court, you file a motion for lack of jx. Court will say that there is no jx. But if you want it to take place in USA court, you might argue that the foreign forum will not apply COGSA. The USA court can stay the proceedings until you go try it in Paris. Thus not relinquishing jx until they try it in the foreign. b) Law. customary international law is not a fixed concept. They could have asked for CISG or UNIDROIT. How would a judge file gap? Look at national law. USA law because one of the parties is from USA. Liberian law because one is Liberia. French law because that ‗s the law of the arbitrator. 59) 11.3 Extraterritorial jurisdiction and Discovery: Antitrust, Air travel and the North Atlantic, p. 1218 a) FACT: low cost carrier is opening up a route to London. competitors, two British and two US conspire against them. Skylow wants to bring action under the Sherman Act. Can we obtain jx over the two British corporations. 60) US law a) Determination of jurisdictional reach of antitrust laws: b) Sherman Act, p. 1220. Sec. 7 i) Direct effect test. (―This Act shall not apply to conduct ot commerce with foreign nations unless (1) such conduct has a direct effect—[trade in the US].) ii) Alcoa—‗effects test‖ US has jx over wholly foreign conduct, as well as other conduct, if that conduct has an effect within the US that was intended. (no room for comity) iii) Union Carbide—―conspiracy to monopolize or restrain the domestic or foreign commerce of the US is not outside the reach of the Sherman act just becase part of the conduct complained of occurs in foreign countries. iv) Timberlane—jurisdictional rule of reason using balancing factors (this includes considerations of comity): Degree of conflict v) Foreign Trade and Antitrust Improvements Act (― FTAIA‖). This amended the Sherman and FTC Acts to provide that challenged conduct in export commerce or wholly foreign conduct must have ―direct, substantial, and reasonably foreseeable‖ effect on the US domestic commerce or on the trade of a person engaged in export commerce. vi) Hartford Fire—―true conflict doctrine‖—a true conflict does not exist where a person subject to regulation by two nations can comply with the laws of both. So, if the London re-insurers are not required under British law to act in a fashion prohibited by US law, nor is compliance with the laws of both countries impossible, then there is no conflict. CN: If there‘s no true conflict then we don‘t have to look at the comity issue. D says the acts we did in England weren‘t illegal there, so comity... The fact that an action is not prohibited in your own country, doesn‘t mean that its prohibition in the US requires courts to allow it in the interests of comity. If a Defendant can lawfully abide by the laws of both countries, means that there is no true conflict. 61) Blocking statute: prohibits extensive discovery in my country. Civil law countries want to limit abusive forms of discovery. It also protects civil law damages. a) Discovery i) Westinghouse Cases—this case raises the concern of the vulnerability of foreign countries. Westinghouse had a contract to provide uranium and they failed to do so but they raise a defense of impracticability, because of a uranium cartel. They need evidence from foreign corporations which are government owned. But the government of Canada, England, etc., don‘t want to reveal their uranium secrets. ii) Foreign countries don‘t like the liberal discoveries rules of the US; iii) Foreign aversion to treble damages (1) it could bankrupt them, and (2) jointly and severally liable for a default judgment of someone else. So countries come up with ―blocking statutes.‖ b) British Protection of Trading Interests Act: The secretary of state of the UK can require under penalty of law that British citizens not comply with a discovery request of a foreign court. (1) Penalties, §3, fine, jail. Exceptions, if you‘re present in the UK but a citizen of another country, then you‘re not protected. (2) Multiple Damages prohibited: §6 not required to pay multiple damages. (3) Claw Back provision: (2) D can recover the amount of money which exceeds the part attributable to compensation, ie, punitive or treble damages. A British defendant subject to treble damages in the US can get their 2million back, by seizing the Plaintiff‘s (Skylow‘s) assets in England. §7 requires reciprocity. c) Treaty Establishing the European Economic Community p. 1242: Articles 85(1) and 81(1) and 82 of the Treaty Establishing the European Economic Community prohibit certain conduct that has an anticompetitive effect. [no jx over foreiegn nations, but] i) Wood Pulp Cartel: (sounds like Hartford Fire): the US based companies [Defs] claimed that the European Court of Justice had not jx over them because they were located outside the Common Market. They argued that the EC‘s anti-competition rules didn‘t apply to them as it would breach the public international law duty of non-interference, because their actions (being a pulp association) reflected US Govt‘s policy of promoting exports. ii) Held, under the Community law, jx exists over the firms outside the Community, if they ―implement‖ a price fixing agreement reached outside the community by selling to purchasers within the community. The decisive factor is where the conduct was ‗implemented,‘ not where its effect was felt. And here the pricing agreement had be implemented within the EC. d) Initiating discovery i) Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters (Hague Convention). (1) Letters rogatory: you have to seek permission from the partner nation if you want to take a deposition from an English citizen. Even if the witness is willing to come voluntarily, you should still get permission because the country might have laws against a corporation disclosing certain information. (2) Optoinal. Societe National Industrielle Aerospatiale—The Hague Convention is optional, not mandatory and the Fed.R.Civ.P. can be used. ii) Fed. Rul. Civ. Pro, p. 1232, Rule 45 if the person can be found within a judicial district of the US; you can serve a subpoena upon a witness in a foreign country if its a US citizen. Thus is a witness subpoena may be properly issued to a foreign non- resident corporation or individual only if the corporation or individual can be served with process in a judicial district of the US. e) Requirement of good faith-excusing nonproduction. p.1233-4. ―The general rule has developed that failure to produce documents is excused where there has been a good faith inability to comply with the discovery order, as opposed to willfulness, bad faith or fault. Where that inability is based on foreign law prohibitions, i) two conditions (1) Party or witness must: (a) not itself encourage or induce the foreign law prohibition. (b) make a good faith effort to have the foreign authorities or waive the prohibitions. f) Application: If Skylow wins a judgment against the British corporation, it will have to take it to England to have it enforced. Because it is for treble and punitive damages, it will be denied, so they will have to seize the assets of the British defendant in the US. The British defendants will use the claw back provision. 62) 11.4 International Enforcement a) FACTS: Pluto is Malaysian corporation with a contract with Mickey‘s in NY. Hard times fall, and Mickey‘s is required to violate some of the terms of the contract. The arbitration clause requires arbitration in Japan. The arbitral panel decides against Mickey‘s. So Pluto needs to take it to US federal court. Mickey‘s challenges using Art. 5 of the NY Convention. i) Arbitration –enforced in federal courts. Unlike the enforcement of judgments of foreign courts (which are enforced by state courts), the enforcement of the award of foreign arbitral tribunals is completely a matter of federal law. ii) Is the arbitration Clause requiring Japan valid? Think Bremen. Probably valid. iii) Choice of law clause: Malaysia, probably valid. 63) Grounds for refusing enforcement: a) NY Convention Article V: p. 1251, exceptions b) Recognition of enforcement reward may be refused if: (1) incapacity of a party to the arbitral agreement (2) lack of fair opportunity to be heard (3) the award deals with something not falling under the terms of arbitration. (4) the composition of the arbitral panel was not proper (5) the award has not yet become binding c) V(2)(a) recognition and enforcement may also be refused if (1) the agreement providing for arbitration is invalid under the law to which the partied have subjected it[ie, because Malaysia has not antitrust law, thus incapable of enforcement in Malaysia] (2) the subject matter of the dispute cannot be arbitrated under the law of the recognizing or enforcing nation. (3) award could be contrary to the public policy of the recognizing or enforcing nation. (a) Construe narrowly. This public policy defense must be construed narrowly. (b) Violation notions of morality and justice. Thus, enforcement must violate the forum state‘s most basic notions of morality and justice before the public policy defense can succeed. Parsons, p. 1252 (c) Public policy not foreign policy. Libyan Sun, p. 1269. (4) Manifest disregard of law. p. 1257 ii) Application: it violates US laws to allow exportation of goods to Cuba. Mickey‘s has a dealership in Canada, which has no restriction on trade with Cuba. Pluto is saying that we violated the agreement. But this won‘t get them off the hook. iii) Mickey‘s wants to argue that Antitrust law is mandatory law and cannot be escaped by arbitrating in a foreign court. But the choice of law clause says only Malaysian law and no other law applies. But this cannot be valid because mandatory laws cannot be opted out of. d) Preemptive avoidance. Mitsubishi, p. 1257—case had not yet gone to arbitration. Solar was trying to argue that Japan may not apply antitrust law. Held, it‘s speculative (Vimarlanguage) whether they will apply antitrust law. And the court can decide the public policy issue later when they come back to the US to enforce it. i) Steven’s Dissent in Mitsubishi, p. 1263. Considering the public policy argument at the enforcement stage is ineffective because Arbitration awards are only reviewable for manifest disregard of the law and the rudimentary procedures which make arbitration so desirable in the context of a private dispute often mean that the record is so inadequate that thearbitrator‘s decision is virtually unreviewable.‖ ii) Cf. Manifest disregard of law is a judge created defense, but this is most like the public policy defense, but not the same. ―For even assuming that the ‗manifest disregard‘ defense applies under the Convention, we reject the contention that such ―manifest disregard ‗is in evidence here. Overseas in effect asked this court to read this defense as alicense to review the record of arbitral proceedings for errors of fact or law—a role which we have emphatically declined to assume in the past and reject once again. Parson, 1257 iii) Here, the award has been given {unlike in Mitsubishi} and the question is whether the arbitration applied US antitrust law. But the arbitrators dealt with the antitrust issue in twosentences, so there is virtually no record to review.] iv) What if Mickey claims they applied anti trust incorrectly? Will the federal court review that? The whole point of having arbitration is to stay out of court, having quick results. So the court will not review decisions of an arbitral panel. e) Mitsubishi, 1259: ―We conclude that concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivities to the need of disputes require that we enforce the parties agreement, even assuming that a contrary result would be forthcoming in a domestic context.‖ f) Congress never said that antitrust had to be taken in federal court. The only question is whether the arbitrators took cognizance of the antitrust and did they decide them. [There is only two sentences.] g) 11.4 deals with arbitration choice of law, it is dealt with federal law, New York Convention, you‘ll enforce the award unless it fits under one of the exceptions of article 5. Also look at the Bremen issues, to see if you can argue it is unenforceable. Soler tried to argue that antitrust should be adjudicated in Federal courts, and Mitsubishi says, no, you have a right to turn over your remedies to foreign courts. h) All of the New York Conventions exceptions will be construed narrowly. If two parties contracted to the clauses, they shouldn‘t be able to get out easily. New York Convention has a bias toward enforcement. i) Laminoirs, p. 1272—part of the judgment was held to be against public policy. A French court imposed a 15% interest. The Georgia court held that this was usury. The statutory rate in Georgia was 7%, sometime 9% but not 15%. j) Application: Mickey argues that the enforcement of the award would be contrary to US public Policy. See Parson, Liminoirs, Due Process. k) Second, M argues the award ought not be enforced because the matter was not capable of settlement by arbitration under the law of Malaysia because Malaysia has no antitrust law. i) Answer: one side must argue that they will apply US anti trust law because it‘s mandatory law. Other side will argue that it‘s Malaysia and we don‘t know if they‘ll apply it. counter is that it is speculative to say that they won‘t apply it (Vimar, Mitsuibishi), and it can be remedied at the enforcement stage of the process. If Malaysia has a history of not applying it, then it wouldn‘t be speculative. l) Finally, Mickey argues that the decision was so brief and conclusionary and lacking in sufficient substance and reasoning that Mickey was inadequately prepared. See Steven’s dissent in Mitsuibishi. 64) 11.5 Enforcement of Judgments, p. 1276 a) Facts: Vancouver is in Quebec which is a civil law province of Canada. Civil law countries have stricter requirements when enforcing a foreign judgment. b) The Bank has a judgment in a BC court and is trying to enforce it in California state court, because enforcement is a state court deal. c) You could argue that this wouldn‘t apply – that French law should apply – because of conflict of laws, the relation to French law is Quebec because it‘s a Quebeçois bank. d) As security he gives the Bank 700 in IBM stock. They get a judgment for 3k plus interest, plus cost, plus punitive damages. e) Should it be enforced? f) g) Enforcement of judgments, unlike arbitral awards, is governed by state law. Many states have adopted the h) Hilton, p. 1278— Factors: (a) full and fair trial abroad (due process); (b) court of competent jx (personal, subject) (c) regular proceedings (d) due citation appearance (e) impartial system of justice (f) No prejudice or fraud. (g) Reciprocity (h) notice or voluntary proceedings; (2) CN: But state courts are not required to follow Hilton, it is only persuasive law. Reciprocity is the weakest argument, most states have thrown it out. i) General Factors developed by other Cases, p. 1279: (a) competent jx (b) adequate notice no fraud in obtaining judgment (c) public policy of US not harmed (d) Reciprocity MAY be raised j) Uniform foreign Money-Judgment Recognition Act (adopted by most states), p. 1045 i) §4. Grounds for refusing enforcement. (1) A foreign judgment is not conclusive if (a) due process (b) personal jx (c) subject jx (2) A foreign judgment need not be recognized if (a) notice (b) fraud (c) repugnant to public policy (d) conflicts with another final and conclusive judgment (e) but reciprocity is not required. k) Hunt (before Texas adopted the Uniform Foreign Money and Recognition Act. They apply State law, basically adopting the Hilton concept, but use the Bank Minero. i) Favored systems- rubber stamped, p. 1283: If it‘s a favored system, like England, then the US court will pretty much just rubber stamp it, but if it‘s a technocratic system then they might review. ii) Public policy iii) The fact that English courts no longer accept American judgments based upon American statutes, does not render a judgment non-enforceable. Held, reciprocity not required. l) Requirement that the foreign tribunal have personal jx. Koster—someone has come to the US District court and tries to enforce a judgment from the Netherlands against an American citizen. Held, no personal jurisdiction. Applying the US standard of personal jx, ie., minimum contacts, etc., the Netherlands did not have personal jx over D. The Netherlands had a more lenient standard. m) Bank of Nova Scotia, p. 1292 i) Bank of NS has a Canadian judgment against Pacific Western in California, and tries to enforce it in Washington. Court applies the Foreign Money- Judgment Act. Look at the Act, p. 1045 Suppl. n) Five Factors of Enforcement in France, p. 1301 i) Judgment must have been rendered by a court having pertinent jx under French rules. ii) the foreign judgment comply with the minimum standards of procedural fairness prescribed by ordre public. iii) the foreign court must have applied the ‗correct ‗ law. iv) even where French choice of law rules are satisfied, a judgment that violates public policy will not be given effect. v) a foreign judgment need not be final, but the judgment must be executoire, in other words it must be capable of immediate enforcement in the place of its origin. o) Canada, p. 1300 i) Canadian courts basically apply Hilton. But the understanding of jx used in the recognition of foreign judgments is different from the standards used by the Canadian courts to determine their own jx. The courts will instead use an ‗international‘ standard which limits recognized jx to five bases. This is a higher standard. In the US, the limits are our Due Process Clause. The International standard limits it to five bases: 1) where D is a subject of the country in which the judgment was rendered, 2) where he was a residence p) So you will have more difficulty enforcing in Canada, because they apply this international standard of jx..... q) p. 1302. Would Cough be less subject to enforcement of the Canadian jx against him were he in France? yes, because the recouture. r) Part B. Rendering Judgments—The choice of Currency. i) Three dates for selecting the currency exchange rate. (1) Date of breach. Earliest (2) Date of Judgment. (federal courts. The date the foreign court gives the judgment. It‘s supposed to avoid inconsistent results. But it also rewards a dilatory defendant. (3) Date of payment. (Restatement, ―use whatever date which serves the ends of justice,‖ Uniform Foreign-Money Claims Act.) s) If I‘m the pl and you‘re def, and I get a judgment against you and you‘re going to payme in your currency, pesos, which are devaluing with regard to my dollar. You want the one that will give me the best exchange, the earliest date. t) 1307: 65) Chapter 10. Foreign Investment, p. 894 i) Risk involved in foreign investment. ii) First, Who governs Foreign investment? Look at each one. (1) home nation (2) host nation b) Multi-national organization (1) UN (2) GATT/WTO (3) NAFTA ii) International Law (1) Few international law norms which govern multinational enterprises (customary international law) (2) norms often contested. iii) Here, the home nation is US, so we need to know about US laws; the host nation is wherever they invest; then there might be a multinational organization, like GATT and WTO which have specific norms of how to transact business, this will have rules that prohibit obstacles to trade c) Regulation of US multinational abroad by US govt d) Matter of US federal law i) Laws enacted to deal with domestic issue without concern for foreign host nation. (1) federal securities and antitrust law. (a) extraterritorial effect ii) Laws addressing foreign policy issues (a) intended to address largely political goals (b) anti boycott laws and foreign Corrupt Practices Act. iii) Other laws (a) Tax laws encouraging foreign investment in friendly nations (b) customs provisions providing for value added duties only (c) Generalized System of Preferences GSP— assist developing countries. e) Host nations will likely restrict foreign investment, because the home nation is not going to pass laws that protect them. f) Host Nation Laws i) Host nations realize that home nations won‘t pass laws protecting them. ii) host nation must pass laws regulating multinational activity in host nation iii) During 70s most host nations passed very restrictive foreign investment laws. (1) Mandatory joint ventures (2) local content requirements (using local labor, local suppliers) iv) ―Operational Code‖ or unwritten law (1) Allows foreign investors to avoid some of the host country‘s restrictive foreign investment laws. (2) How do you learn about this? through connections, networking, and local attorneys who will tell you what the exceptions are. v) Nations relaxed their foreign investment laws because they needed capital. g) Restrictive Investment laws of the 70s and 80s Dismantled in late 80s and early 90s. i) financial crises –debt—of early 80s. ii) Participation in... h) Common restrictions of which Counsel must be Aware i) Equity joint ventures (1) limits maximum equality allowed to foreign ownership (2) limits foreign mgmt or control to a minority interest i) Role of culture and protecting cultural industries. j) Repatriating capital, profits or royalties (countries which lack hard currency may do this, which would require you to reinvest) k) Access to hard currency for needed imports, plus they may want you to finance the investment with capital from abroad, you can‘t ask our investors to help build a particular plant. l) Performance requirements i) local content ii) local labor iii) managed levels of technology m) Restrictions on withdrawal of foreign investment (what restriction do we have when we leave, for fire someone) 66) Problem 10.1- Risk Analysis a) DGI has a goal to start manufacturing abroad within 5 years. My job is to identify the risks associated with foreign investment. b) p. 902: Theories of trade: the first step in int‘l trade is to trade, this is the theory of comparative advantage, and trade with the things that you have the lower comparative advantage. But the theory is based on the notion that I‘m immobile. c) Next step is, theory of foreign investment, because you can move; you can move abroad. Foreign trade or foreign investment have different advantages. d) Foreign investment is advantages if there is a lower cost of goods and resources and labor, transportations, tax a regulatory regimes, may make it cheaper, giving you an advantage over your home competitors (location advantage). But what gives you an advantage over the competitors in the host nation is the ‗ownership advantage‘, better technology. ―internationalization advantages‖—centralized marketing, you have manufacturing, marketing, etc., all under the same regime, which provides for economies of scale. e) Brand recognition, is another advantage. f) They were closer to the suppliers of fruit and closer to the market. g) Risks: i) political/ideological hostility: is it a stable regime? ii) Nationalistic concerns: we want our products for our nationals. If you‘re clients are getting too close to a particular govt might be a problem, because if that govt were to fall then you might be seen as a bad guy. iii) Global changes in industry patters, such as the oil crisis, when control of the . iv) Onerous Contracts. The government may come in an change the contract law if it contains punitive damages. Settebello. v) Prohibitions on certain sectors. p. 908. E.g., national security, petroleum, infrastructure, communications, electricity. (a) Equity percentage limitations. p. 909. But there are unwritten exceptions: (i) Technology (ii) plant location, build away from populations centers, but the problem here is transportation. (iii) education (iv) education, training centers (v) research and development (vi) Balance imports with exports (vii) sourcing capital from abroad. h) Some developing countries insist on joint ventures: i) Why do investors agree to limit participation to minority interest? (1) you might get a monopoly (2) local partners can be an asset, may assist you with distribution (3) you may already be in a country and they start regulating and then its cheaper to keep the investment than withdraw. (4) potential for market growth and legal modification; you want a foothold (5) investment incentives from host nation (6) But generally if you stay in a country with a minority interest, then you shouldn‘t expect those investors to bring over their best technology. i) If you want further assurances: p. 913 (1) distribution of ownership, all you need is a majority of the votes (2) Veto power: put it into the articles of incorporation, or whatever it is under the domestic law. (3) Technical superiority. You‘re going to have your own people operating the plant, because they‘re the only ones with technological expertise. (4) Special Agreements, which provides for where the management should reside, who will be in charge of the day to day activities. (5) Supermajority vote (3/4): certain decisions can require a supermajority vote. j) Degree of activity of partners i) where technical expertise is vital, foreign partner may stay out of decisions. ii) Host govs push for education. iii) domestic partners are just profit motivated and don‘t care about control iv) Management committee may handle day to day activities, not on Board of Directors k) Trade related investment measures. TRIMS. p. 915. These deal with certain barriers to trade which protect local trade. TRIM says certain obstacles to trade are illegal, for all countries which are members of WTO. i) Part of WTO that defines and prohibits certain trade –distorting practices. ii) prohibits local content requirements iii) prohibits import restrictions based on amount exported. iv) Prohibits access to foreign exchange based on exports ... they may require that you import as much as you export, (protect their hard currency). v) Prohibits certain tariffs, quotas, and limitations on foreign investment. l) These TRIMS are harder on developing countries who need restrictions to get their economies going. m) EXCEPTIONS: when balance of payment difficulties and during transition periods (2, 5, or 7 years for developed, developing, and least developed nations.) n) WTO provides a dispute resolution process when violations occur. o) Operation Code: a i) A system of unwritten laws , which are vital if you are helping with a foreign investment ii) -nations must be careful not to create so many regulations – written and unwritten- that foreign investment ceases. iii) Edge of Discouragement. The laws become so onerous that investors don‘t wan t to invest p) Chart, p.924 q) Aspirational Declarations: Usually above the edge of discouragement. They‘re written but they‘re not laws because the country would lose all its investors. i) -The operational code can also be lower than the Public Code for companies with a lot of bargaining power, i.e., IBM. r) Public Code, (written code). The public code had abruptly shifts. i) Drawer regulations: regulations which have been issued by various ministries which, even though not labeled secret, have not been publicly disseminated. These are apply inconsistently. ii) --p. 922: The definition of the operational Code suggests that it is limited to unwritten regulations and decisions, but it may also include formal written regulations and decisions which either ....This also allows the government to discriminate and allow some companies, which they really need, and at the same time allow some areas of investment that they really need. iii) --sometimes the operational code gives you a forecast of the future Public Code, but the opposite could happen too. 67) Problem 9.1:, p. 788: a) Question 5: Contrast Zeidman and Pengilly. CN: US attys view franchising as something that we‘re exporting, i.e., sending McDonalds to Honduras, so we tend to look at this Chauvinistically, but this is changing. Pengilly says US has something to learn from foreigners. Colonel Chicken franchising in other countries. But you may get client calling from Mexico saying I want to franchise in the US. b) Colonel Chicken has a formula for success, but it only applies in the US. ―Exclusive use of the Western building design which draws upon the Texas heritage.‖ this probably wouldn‘t work in Mexico. c) Get Intellectual property protection, i.e., trademark protection, patent protection. d) Question 1: Intellectual property protection it based on national laws. There are international conventions so you don‘t have to file an application in hundreds of countries. The Paris Convention applies to trademark law. e) ―Right of priority.‖—for trade mark, you have 6 months; patents you get a year. f) EX: in the US your client applies for a trademark on 1/1/2004. Then in Mexico, someone files for the same Trademark on 2/1/2004. Then your client goes to Mexico on 5.29.2004. Usually the first to file in the given country has the right. But the right of priority, means that in any of the Paris convention, if I file in Mexico within the 6 month period then it‘s back dated to the original filing. This gives you a little time to get your application in 100 countries. g) Patents: p. 765: Why might Colonel Chicken prefer a country by country trademark? i) The Patent Cooperation Treaty (PCT) consolidates the application process. If my country is a member of the PCT I just have to file one application with one of the ISAs, which are located in the USA, Japan, Russia, Sweden, Hague, Munich. This will save you lots of money, because one application works for all 40 members countries. the PCT doesn‘t require the country to change its patent laws. ii) You might prefer a country by country application because you want to customize your application for each country to make sure it gets passed. h) Trademark, p. 769: Vienna Trademark Registration Treaty. i) 788: Question 2: What are the areas of law that you have to think about and investigate? i) labor laws (benefits, severance pay, ), ii) hours of operation law, iii) ownership requirements, iv) agency law (will I be responsible for my franchisee), v) tax law (what will royalties based on, gross sales or net sales), can we expatriate royalties, or regulate the amount of royalties you are allowed to charge; vi) antitrust laws. if your contract says ‗exclusive sale with 1 mile radius‖ 68) PART B. Regulation of the int‘l Franchise Agreement, p. 789 i) Albert Franchise Act: this is like many state laws. Know this generally. ii) Pronuptia: antitrust in Europe, p. 795 iii) Hefter Zeidman, p.794-5. be familiar with these cases. iv) Application: (1) Where: (a) Hypo: you have the option of setting up in Russia, Mexico, Canada. (b) Intellectual property: (c) Patent law (special patented equipment): (d) Secret (2) Which country would have the best protection? Probably Canada, its in English, common law, and industrialized country, culturally more similar. But NAFTA provides for intellectual property protection. Probably weak IP protection in Russia because they were communist and didn‘t protect these rights. Also distance, language, culture, currency, political instability, etc. v) But proximity might be an issue: If you‘re headquartered in San Antonio, Mexico might be easier. b) What kind of Franchise. p. 776 (a) Direct Franchise agreement. – usually only used between countries with similar societies and legal systems (US, Canada, Australia, New Zealand) (b) Master or Area Franchise. A Master Franchise allows you to go to a group of investors who can buy the area franchise and they direct the operations and they sub-franchise, so you loose some control. This would be more appropriate when there are difference cultures, large distances, or different language and distribution system. But lack of control could allow it to loose its reputation if specific standards are not maintained. ii) A Trademark can be abandoned, if your don‘t maintain the quality. If you let the product degrade in value, then you‘ve abandoned it. c) Tax consequences. would you be taxed in both countries. As in California, which taxes on world wide profits. d) Choice of law: there will be a battle between the franchisor and franchisee. Usually the franchisor wins because he had greater bargaining power. But the franchisee will win if you really want to get into his govt and it had mandatory laws. How to discourage litigations: the compromise, which says that if anyone sues, then the other party‘s law applies. e) Antitrust. Here, mandatory rules regarding buying chicken. f) Tying: a seller agrees to sell on product on condition that the buyer also purchases a second product. (1) Chicken delight, p. 795. (2) Kentucky Fried Chicken, 795 ii) You could argue that we need to maintain our quality, and maintain our trade mark. iii) List of approved buyers. Kentucky Fried Cchicken. If I can prove that I can get the same quality chicken from somewhere else. iv) Susser v. Carvel—if you can provide specifications then its ok. v) Baskin & robins—held, there wasn‘t two products. The ice cream is the product. vi) Here, the trademark itself is the tying product, and to use it you have to use the special spices, chickens etc. g) Pronuptia, p. 796 h) Pronuptia makes wedding dresses. Mrs Shillgalis owes them royalties. Shillgalis claims that they were in violation of the EEC antitrust actions. Lower court found that the contract was inenforceable as in violation. i) Held, j) p. 800. k) The EU has concerns about cutting up Europe into markets. This is not so much of a problem in the US, because the US isn‘t as concerned with intr-brand competition. l) Application: local site selection process, the need to be careful how they carve up that area. Pronuptia. m) Their mandatory recipe, but in other countries they might have performance, they have to use local products, like oil, and it might be olive oil which changes the taste. There might be ‗tying‘ requirements. n) ―Cooperative advertising in English‖—does it have to be a ―Big Mac‖ or can they call it something else? o) Strongly recommended prices. Does this exceed the ‗recommendation‘ requirements of Pronuptia. 69) PROBLEM 10.5 Project Financing—Mogul Liquefies Gas, p. 1039 a) Issue: What are the risks and how will the be allocated? b) Projects running through foreign countries. Political instability. You don‘t know the property laws, or how to get to them. c) Financing. How are you going to finance this project? And fund it in such a way that they are not personally liable to the lending institution? Project finance. d) ftnt 1, p. 1042.: e) Project financing defined, p. 1042: Non-recourse financing based on the merits of the project instead of the credit of the project sponsor (borrower). The credit appraisal is based on the underlying cash flow from the revenue producing contracts of the project independent of the project sponsor. Because the debt is non recourse, the project sponsor has no direct legal obligation to repay the project debt or make interest payments if the case flows prove inadequate to pay the debt. f) What are the advantages, p. 1043 i) Non recourse, no personal liability ii) off-balance sheet debt treatment: debt is not reported on the parent company‘s finance statements. A subsidiary with less than 50% then the debt of the subsidiary is not shown on the parent companies financial statements. iii) Highly leveraged debt. I can finance a higher percentage of the project, so I don‘t have to contribute as much. You can borrow a higher percentage of the project in a non-recourse. You provide 25% you can borrow 75% iv) Avoidance of restrictive covenants in other transactions. Mogul wants to avoid restrictive covenants, such as existing agreements not to incur more debt. p. 1052. Unsecured and secured loans. Bank protect themselves by placing a restriction on your ability to incur more debt. e.g., you can‘t go over a certain debt to equity ratio. Mogul may have some restrictive covenants. v) Unsecured loans. covenants. negative pledge; ratio covenants; negative covenants; g) Disadvantage, p. i) They‘re complex transactions ii) higher fees iii) higher interest rates iv) higher transaction costs v) higher lender supervision. vi) high cost on due diligence h) Other sources of funding? p. 1049 i) Private sources of capital: (1) sell debt or security, but you wouldn‘t want to do this in the US, because there were be a high degree of disclosure requirements. So don‘t‘ rely on private domestic offerings. (2) Qualified institutional buyers. These are exempt from these registration requirements. ii) Multilateral sources (1) IFC (INt‘l Finance Corporation).—give loans (2) MIGA—to encourage foreign investment, by providing insurance, up to 90% of the debt , up to 50 million. i) Credit Enhancement i) Sponsor (1) a completion agreement ii) Third party (1) Standby letter of credit, by a bank (2) cost overruns by the contractor (3) ensuring that there‘s a Market; by having contracts with the suppliers in Japan. (4) Purchase agreements, p. 1069 (a) Hell-or-high-water contract: this is what the bank wants to see. (b) Take-or-pay Contract, you pay whether or not to take the goods. (c) Take-and-pay contract. Pay only if its delivered. (d) Through put agreement. You pay for a period of time for using the pipeline. (e) Cost of Service Contract. (f) Tolling agreement. You pay for exact the amount. iii) EX: OPM is the lessor, it will purchase equipment which it will then lease to the lessee (but OPM doesn‘t have the money). Its client is the State of West Virginia. The State agrees to pay LaSalle, the assignee. LaSalle was the financier, because OPM didn‘t have the money to buy. But OPM has a hell or high water contract with the State of Virginia, so LaSalle. OPM ends up not maintaining the equipment as per their contract. So Virginia tries not to pay. Held, it was a hell or high water contract and was therefore absolutely unconditional. These types of contract are essential to the equipment leasing business. In Re OPM. j) Defenses p. 1061 i) Force majeure: McLouth Steel. p. 1062. The government forced them to close a plant. Held, not a force majeure (1) Compare: Int’l Mineral: It must be absolutely impossible or illegal to be enforced. (2) NOTE: Rapsomanikous & Nicoulous..p. 152. Certain countries are more likely to apply force major more strictly, e.g., France. But France is the exception for civil law countries. Germany is less likely to apply such a strict standard because they view contracts as a social instrument. But in common law countries, we think that people should have the freedom of contract. But common law countries have become more ‗civilized.‖ we now have, instead of impossibility, impracticability. ii) Impracticability, UCC 2-615: p. 1063 (1) Three prong test. (a) unexpected contingency not contemplated by the parties at the time the contract was entered into (b) the party claiming impracticability must not have assumed the risk of the unexpected contingency either by agreement or by custom. (c) performance of the contract must be rendered commercially impracticable due to the occurrence of the contingency. (2) See International Minerals, ct rejects the force majuere defense, but nevertheless voids the take- or-pay contract because it was impractical under 2-615; when an environmental regulation was promulgated and constituted an event ‗beyond the reasonable control of the buyer. (3) and Eastern Airlines, where even though McDonnell voluntarily complied the the US govt‘s to provide more planes for Vietnam, government policy need not be mandatory to cause impracticability. iii) regulatory k) How do we allocate risks. 1056 i) General Rule: A particular project risk is assigned to the entity that is in the best position to control and manage that risk and to prevent ii) 1046: The allocation of risks is generally determined on the basis of control over the risk l) Typical Risks, p. 1054 i) unanticipated subsurface conditions ii) force majuere delays iii) design errors – to the owner iv) Material and labor shortages-- v) Price increases vi) site security 70) Problem 10.4 Third World Debt: The IMF, Amabank and World Debt, California Correspondent bank, p. 1005. a) Facts: Asiana has been borrowing a lot of money and just servicing its loans. Investors are starting to pull out, and there is a fear that it will default and stop servicing its debt. Amabank is a correspondent with California. It‘s loans with Asiana has cross default clauses: a default on Amabank is a default on California. b) Non performing loan. None of the loans are performing loans. They are at least paying interest on the loans. How? They have been consistently rolled over. The reason is the Amabank to pay their debt. So Amabank continues to invest. c) Players: i) IMF: bank of last resort. Gets its money from its members. Special drawing rights is a kind of currency with a particular value. The members pay based on the size of their economy, which gives you the right to borrow money. You can borrow up to the SDR level for free. Less developed countries pay less interest rates. The collapse of third world economies caused a rush on the banks. The economic crisis was caused because we had an oil crisis, so US was paying a lot of money to OPEC nations, so there‘s tons of money on the market. The OPEC countries began to buy investment portfolios, and the money ends up in US banks, and the US banks have to lend it, flooding the market with cheap money, driving the interest rate down. So all these banks try to sell their dollars at a lower rate and to sell it to third world countries. The banks stopped making realistic debt analysis. But it turns out that the third world countries cannot pay their debts back. Then the nations start defaulting on their loans. d) Conditionality. Conditions the IMF places on lending money: in order to borrow you have to be following sound economic policies in your country. i) This impacts on sovereignty. The developed countries of the world are imposing their views on the debtor nations. ii) Not impose by private banks, though they would like to. But they will look to what the country‘s economic policies are, before they make the loan. (1) But they ask the nation to be in good standing with the IMF. They say, we will loan to you as long as you‘re in good standing with the IMF. e) AMABANK ; 16% of its international loans are in Asiana and if it defaults then it will hurt their credit rating. see p. 1014. Reserve for losses is like self insurance, you want to keep this at about 1%. But if the Asiana loans defaulted? And what happens when the rating goes down? f) Application: Asiana is unable to pay, what is AMABANK‘s option. They can write it off or loan them more money so they will continue to be a ‗performing loan.‖ ―Performing loan.‖ not more than 90 days overdue. g) How to decide whether to foreclose, or whether to loan more money. If you think that by loaning them more money, then h) Factor: one, will the country‘s economic position improve? – look at political conditions, nationalism, two, how much money do you have riding on this? If the majority of you‘re portfolio is in Asiana, then you want to keep loaning them more money. == i) Mutual hostage---AMABANK can‘t pull out because he has too much invested, ASIANA is hostage because it has more debt than payback. ASIana doesn‘t want to just say, we won‘t pay, because then no one would ever want to loan them money again. If there is a small portfolio investment in Asian, then you want to cut your losses. But the correspondent California bank doesn‘t want this to happen, because a foreclosure by AMABANK will be a foreclosure on the California bank. ―Cross default clause.‖ So, the California bank will buy the debt. i) Gold, 1015: US response to banks making bad lending decisions. Creating the categories, which determine how much the banks have to set aside in reserves. j) Baker plan, p. 1023—but economic reform doesn‘t work. We‘re just pile loan upon loan. k) Brady Plan—debt reduction. (1) Discounted buyback. Sell it to a secondary market. e.g., sell a loan with a 30% discount. The bank would sell it to WORLDDEBT. But they could also sell it back to ASIANA. (2) loan swapping. Diversifying loan portfolio. AMABANK can swap its loan with ASIANA (3) Debt-equity swap. EX: AMABANK sells to IBM at a discount, IBM sells to ASIANA in ASIANA currency, and it‘s willing to take the ASIANA currency, because they want to use it to pay to build new facilities or pay it employees. But ASIANA may want a reduction. ―We know that IBM bought the debt for $500K, we‘ll buy the debt from them for $400k. (a) Downside—inflationary impact. When ASIANA pays IBM, their pumping all this ASIANA currency into its own market, it causes inflation to rise. So countries limit the amount of this debt-equity swap. (b) Privatization. ASIANA will sell their govt owned companies to private investors, even foreign investors. EX: I‘m the American investor, I go to AMABANK and say sell me 100k in debt at a discounted rate. I take the note and take it to ASIANA, and say that instead of paying this off, give me your power plant. (4) Par Bonds. p. 1024. Changing loans at a floating interest rate, and exchange it for a bond with a below market interest rate. (5) Discount bond. Exchange loans for a reduced face value, but continues to have a floating interest rate. ii) Secondary market. As a result of converting loans into bonds created a secondary market for these loans, because these loans have been. These junk bond investors are represented by WORLD-DEBT. As these individual investors buy more and more of this debt, it will have an impact on the future restructuring in ASIANA‘s debt. How? Lawsuits. Why are these lawsuits a concern. The investors are buying nonperforming securities, and suing for default. iii) Pravin bought for 27c on the dollar. The securities were already in default and they sue to accelerate payment. This is a change in what had happened before there was a secondary market. Why weren‘t there lawsuits before the emergence of the secondary markets? Before the secondary markets, the banks could have foreclosed. There was this idea of mutual hostage. US banks had no incentive to foreclose because if their portfolio ...if one foreclosed then all the other banks would foreclose, so the banks had a common interest not to foreclose on ASIANA. (1) p. 1030. ―In 1984, the US identified .... (2) some ―rogue ‗ banks were suing for default, but there wasn‘t much litigation before. Now we don‘t have the same common restraint we had before. Now we have these individual investors suing the states. iv) CIBC v. Banco do Brasil, p. 1029 v) Brasil and its creditors entered into a multi year deposit agreement. But even after this restructuring, it needs to restructure again. They offer the creditors a menu to choose from:par bonds; collateralized and uncollateralized bond; and discount bonds. But the Dart‘s didn‘t want to convert into discounted bonds, (it holds $1.4 billion), because it would make more money, almost a hundred million more dollars. The Darts were hoping that the majority of the creditors would convert to Brady bonds. Then the Darts would control the MYDFA debt. And if they controlled it, they would accelerate the debt. To defend, Brasil orders the brasilian bank to buy enough of the MYDFA debt, so that they have control of it. Darts sue the brazilian govt, claiming bad faith and breach of contract. The US submits its statement of interest, saying don‘t allow the Darts to do this. The problem was theAllied decision, in which the creditor was allowed to sue the sovereign. But that was ten years ago, when all the banks were allied. If in Allied, the court had not allowed the banks to sue, then the foreign govts would have the banks over a barrel. Held, Darts lose, they don‘t get to accelerate, because that‘s not what the contract says, the court refuses to amend the contract. a) Pravin, p. 1032 b) Pravin buys Peruvian debt. Peru uses the US statement of interest, saying that this is a different situation then 10 years ago. Court decides for Pravin, and allows Pravin to accelerate. The Darts wanted to amend the contract, but the Pravins