Legal Aspects of International Business Transactions





International trade is increasing day by day, small and big countries alike are mutually engaging in the transfer of huge quantities of goods and services. As with any contractual relationship, these mutual actions, between the trading partners may at times, create legal challenges and problems. However, due to the international nature of these undertakings, potential difficulties are exacerbated if and when they do become present.

The issues which tend to give rise to the complications are the formation of contracts, distribution of agreements, joint ventures and the setting up of foreign companies or subsidiaries. Such transactions can pose a wide-range of legal uncertainties and it is trite that uncertainty does not bode well in contractual undertakings. For example, determining appropriate jurisdictions, interpreting applicable legal norms such as promissory estoppel and the enforcement of bilateral or unilateral promises (1). are particularly troublesome.

As per international trade practices, goods are sold against bills of exchange, delivery of documents, letter of credits, bank guarantees, merchant leasing, post-arrival payments or through barter trade.

Globally, bills of exchange are governed by two legal families. These are the Geneva system founded in the Geneva Conventions and the Anglo American system which applies in the UK, much of the Commonwealth and the United States. The distinctions between the two families can be traced back to different origins of law - thus the Geneva system is adopted in civil law jurisdictions whereas the latter applies to countries under the common law system.(2) Before we look at specific issues, let's examine to what extent a court, in these different legal traditions, can, essentially, ignore what a contract states and apply what the court believes are principles of fairness in deciding a case.(3)

All these segments of trade create legal complexities and therefore can give rise to conflict. Where the legal instruments, relating to such transactions are properly drafted and executed, no adverse cause arises, but where there are mistakes, errors or shortcomings particularly in the bilateral trade instruments, these faults or oversights may lead to dispute and litigation. These contractual disagreements so arisen, pose manifold problems of jurisdiction, applicability of law, enforcement of judgments and the interpretation of the parties' actions and the instruments involved.

Adequate understanding and correct advice is essential. When a problem does arise it will not necessarily only relate to individual businesses, but may also encompass conflicts between respective states on bilateral trade matters. A degree of uncertainty in these dealings is evident, perhaps no more so than when prior to executing an investment, promises made by a state to foreign investors are withdrawn. This change of policy leads to conflict both at domestic and international levels. Therefore conscientious decision making by the parties in these international regards are crucial, as ultimately this will affect their rights and obligations. When conflicts do occur, they are often settled either through municipal courts lex fori or by mutually agreed international tribunals.(4)

The disputes so arising are settled through arbitration either by the International Chamber of Commerce (ICC) or through the International Centre for Settlement of Investment Disputes (ICSID) as the case may be. The states in such disputes give their consent for settlement through arbitration. Particular reference is invited towards Bilateral Investment Treaties (BIT's). There are hundreds of such bilateral treaties between different countries which govern the rules for Foreign Direct Investment (FDI). For example, the ICSID tribunal has, in many cases, found there to be violations of such bilateral or multilateral treaties by the states, thereby violating treaty provisions.(5)

The issues relating to trade laws are generally governed by conflict of laws where the principle of lex domicile (6)determines the issue of jurisdiction and the application of law in such disputes. It is desirable for the parties when reaching an agreement to specify which country and which court has the jurisdiction to settle a potential dispute.(7 )This explains why the trading parties are required to be more vigilant in respect of their international business transactions. Businesses must show attention to detail whilst agreeing to the terms and conditions of the contracts. Litigation is never without problems, yet understandably, such problems are magnified when they present international ramifications. It is advised that particular regard and diligence is afforded to the specification of jurisdiction and the application of law and the clauses for the settlement of disputes.

The International Chamber of Commerce (ICC) (8) plays an important role in the settlement of such disputes through arbitration, yet another important institution is the United Nations and its instruments such as the Convention on Contracts for the International Sale of Goods. [CSIG](9)

The Uniform Commercial Code (UCC) and the UNIDROIT principle of international commercial law, also become applicable in addition to the said convention, where disputes arise from transactions involving the international sale of goods. One has to be vigilant to compare the said conventions; the UNIDROIT principles and Article ii of the Uniform Commercial Code are noteworthy for understanding the complexities arising from the bilateral relationship between trading partners.

Three other recent treaties, the United Nations Convention on International Bills of Exchange and International Promissory Notes (CIBN) and the two Conventions on International Lease Financing and International Factoring (CILF) are also important.(10)

In addition to merchant trading, contractual relationships also exist between private businesses and the state ie agreements with the state in respect of foreign direct investments etc. In such cases, the disputes arise from a violation of bilateral treaties, restrictions imposed on the transfer of technologies, creating licensing requirements, and the imposition of technical fees. Regarding the bilateral relationship between the states, grievances are settled by way of arbitration either through the International Chamber of Commerce or the tribunal constituted under the ICSID.(11)

The tribunal under the ICSID has so far arbitrated and decided many important cases in relation to foreign investments particularly where the terms of agreement between the parties stood changed, eg where certain facilities extended earlier were withdrawn.(12) Such events generally happen in developing and underdeveloped countries.

The WTO, under the 1994 General Agreement on Tariffs and Trade (GATT) is another important institution which defines the limits of international business transactions in the framework of international agreements agreed among states. The issues under the trade laws of various countries relate to import controls, customs controls, anti-dumping, countervailing, origin of goods, and export controls. One of the striking features of GATT's forty-five-year history, however, is that it has evolved an elaborate dispute settlement procedure. In recent years this has resulted in a fairly rigorous approach to the legal obligations of the GATT. In fact, an argument can be made that the GATT jurisprudence which now exists and consists of almost 200 reported cases, is the largest significant body of case law experience developed through a major multilateral treaty of broad purpose and application.

Among the many issues raised in this jurisprudence are those of institutional power distribution, treaty compliance, the role of tribunals in settlement negotiations, the use of prior reports as a sort of "precedent," legal authority of an organisation to interpret its own charter, and third party interests in a procedure between two other disputants, to say nothing of the headline grabbing questions such as those of the 1991 Tuna Dolphin case,(13) which involved mediating a clash between international trade and environment treaties. World Trade Organisation tribunals have also decided many other important principles of international law.

Another leading case relates to the dispute between Panama and Columbia, which involved the wrong application of Article vii of the GATT and the WTO Customs Valuation Agreement. The restriction and wrong application of GATT vii, were made by Columbia in violation of GATT principles.(14)

The current wave of international business law treaties is supplemented by the older INCOTERMS (an acronym for "international commercial terms"). Lawyers prepare these definitions of trade terms for the Commission on International Commercial Practice of the International Chamber of Commerce. The Commission first adopted a uniform statement of the meaning of nine such terms in 1936. The INCOTERMS are important because parties may use them as a shorthand way of stating their agreement, with assurance that there is an outside, objective source for the definition of the contract terms. Although certainly not positivistic law per se, the INCOTERMS represent a quasi-codification of the trade usages among merchants. Particularly where the parties expressly refer to the INCOTERMS themselves when incorporating those terms into a contract, much of the uncertainty inherent in the conflicts approach, and even in the lex mercatoria approach, may be reduced. As a clarification and crystallization of trade practices, the INCOTERMS help bridge the latter two evolutionary periods of international business.

There are many vague areas relating to commercial trade such as quantity restrictions, application of the rules of origin, technical specifications, and health regulations. All these have been used by states to restrict or bar the flow of trade in order to afford protection to the domestic industry.(15)

(Legal disputes, disputed regulations, unethical state policies, and powerful domestic lobbies, create barriers to trade by applying laws and regulations that are contrary to GATT principles.

There is another aspect of trade as well, that is where import traders indulge in unethical practices either by mis-declaring the values of imported goods, or by hiding the quantity, or description or by violating the state regulations with regard to fitness of the goods so imported.(16)

To sum up, it is observed that the flow of trade in goods and services across borders faces legal issues relating to: (a) licensing (b) quality (c) fitness (d) quantity (e) specification (f) value (g) import-ability (h) contractual obligation (i) origin of goods (j) state policies which often change without prior notice and which do not consider the contractual obligations between the parties as a final step towards commercial bargain.(17 )There can also be disputes between a state and the individual relating to promises made at an earlier time and withdrawn subsequently. There may be issues relating to public policy, where the investor can be denied the contractual obligations in the name of public policy.(18)

One can imagine the existing complexities of the legal aspects of international business transactions. Trading partners are advised to be careful while considering the impact of trade laws and regulations which govern international trade. Showing laxity in understanding the legal aspects of international business transactions is likely to result in loss or damage.

Nevertheless, it is important that the changes in international business today suggest more than an incremental revision of the law-they symbolize a paradigmatic shift in the international business system itself, a shift in the structural underpinnings of the legal order.

(The writer is an advocate and is currently working  with Azim-ud-Din Law Associates Karachi)

References:

1. See the provisions of bilateral investment treaties: For a compendium on bilateral treaties see Bilateral Investment Treaties: 1959-1999, UN: 2000: available at www.UNCTAD.org/Docs/Poiteiiad2.en.pdf

2. Civil Law (Europe, China): Abstract; ordered by general concepts and highly codified, tendency of the courts to apply, rather than interpret or overrule, legislature-made statutes. Common Law (England, United States, most of British Commonwealth): Judge-made law; pragmatic; case by case solutions to the problem at hand. Insistence that the courts interpret and sometimes, as a matter of checks and balances, overrule statutes created by the legislature.

3. Equity in the Civil Law Tradition: No formal distinction between "legal" rights and remedies (those already established by statute), and "equitable" remedies. If a particular law code, a commercial code, for example, provides that a judge may fashion an equitable remedy, then the judge can do so.

Equity in the Common Law Tradition: Scope of relief is broader in equity than in the strict application of the common law. For example, in common law jurisdictions, equity may be used by courts to intervene in certain cases to provide relief from the rigors of the common law. In parts of Canada, for example Quebec, the codified civil law concept of "good faith" can be used by the courts in limited circumstances to fashion an equitable remedy.

4. There are many dispute settlement bodies at the international level, well known among them are organs of the United Nations (UN), such as the International Court of Justice (ICJ), the International Chamber of Commerce (ICC), or other tribunals of arbitration constituted under the International Center for the Settlement of Investment Disputes (ICSID).

5. For example, see the case of SGS Societe Generale de Surveillance v. Islamic Republic of Pakistan: ICSID case no. ARB/01/13 decided on 6-8-2003: Where the issue of whether an investment was made in the territory of a treaty party arose in two cases by the same claimants involving similar transactions, one against Pakistan and the other against the Philippines. In SGS Societe Generale de Surveillance SA v Islamic Republic of Pakistan, and SGS Societe Generale de Surveillance SA v Republic of the Philippines, the disputes arose out of the alleged wrongful termination of contracts under which SGS, a Swiss group, was to provide 'pre-shipment inspection services', including comprehensive import supervision of goods before shipment to the Philippines and Pakistan. Because of the nature of the services to be rendered, the SGS activity was carried out in the territories of exporting countries. In both cases the respondent states I objected to the tribunal's jurisdiction by arguing that SGS?s investments were not made in the territory of the host states and so were not covered by the applicable BITs, which included the territoriality investment requirement. As a result, they argued, the dispute did not arise out of an investment. In determining whether SGS made an „investment? „in the territory of Pakistan?, the tribunal noted that the Pre-Shipment Inspection (PSI) Agreement SGS?s commitments such a way as to ensure that SGS, if it were to comply with them, had to make certain expenditures within Pakistan. It observed that „while the expenditures V may be relatively small (Pakistan's Reply estimated them as amounting to approximately US $800,000, while SGS?s estimate put them at US $15 million), they involved the injection of funds into the territory of Pakistan for the carrying out of SGS?s engagements under the PSI Agreement?. The tribunal also found relevant the fact that the claimant adduced evidence of expenditures to establish and operate liaison offices in Pakistan to perform its obligations under the PSI Agreement, "and that Pakistan itself recognized that the PSI Agreement involved the delegation of some of the state's customs powers to the private party in order, to increase the customs revenue of that state." Therefore, the tribunal held that the expenditures made by SGS pursuant to the PSI Agreement constituted an investment within the meaning of the BIT and, moreover, that the ICSID Convention's requirement that there be a legal dispute arising directly out of an investment' stood satisfied.

6. In conflicts, the law of one's domicile is applied in choice of law questions.

7. The parties are free to choose whatever law they want to apply to their contract, but "closest connection" and protection of "weaker party" to a contract may prevail. Example: termination of an agent. In United States, a party can inadvertently find itself bound to a contract if, by its conduct in the negotiations, it can be "proved" to have entered into an oral agreement. Solution: writing between the parties, sometimes called a "nonbinding letter of intent" which states that either side can pull out of the discussions, without any consequence, at any time prior to execution of a formal manuscript contract. Caveat: A letter of intent can constitute a binding contract, or be nonbinding, depending upon its terms. In Canada, general rule is that the parties are free to choose the law that will govern the contract. There are exceptions. Canada: Important to specify, in addition to the federal laws of Canada, the laws of a particular Canadian province. China: Parties may select the governing law, except as otherwise provided by law. Where parties fail to select the governing law, contract shall be governed by the law of the country with the "closest connection" to the contract. A contract for a joint venture in China between a Chinese person or entity and a foreign person or entity must be governed by the law of China. Canada: Canadian courts will generally recognize the choice of forum selected by the parties in the contract. Where the contract does not specify the forum for the resolution of disputes, Canadian courts will look to a multi-part test to determine the most appropriate forum, focusing on the location of the parties, the location for performance of the contract, and the "interests of justice". United States: In general, the law selected by the parties in the contract will be applied. Sometimes, if all the facts surrounding the contract and the dispute took place in a state other than the state whose law was selected by the parties in the contract, and if the application of the law of the state selected by the parties would impose a significant hardship on one of the parties, a court may choose to ignore the governing law clause and apply the law of that other state. Where the parties have failed to choose a governing law, a court will likely apply the law of the state where the parties are located or where the contract was performed (or not performed).

8. See the provisions of UCP 600, through this binding procedure ICC has prescribed uniform documentations relating to letters of credit and has also published ICC standard documentary credit forms (UCP600). Occasionally, the ICC banking commission is asked to express its views on the interpretation and application of UCP by the banks and its published collection of opinions provide valuable source material.

9. The new international sales convention, while the most important and far-reaching of the multilateral treaties enacted thus far, it is yet not completely paramount even within the sphere of international sales. Reservations allowing limitations on the treaty's scope coupled with the treaty's opt-out feature result in a scheme far narrower in scope than, for example, the U.C.C. And topics like products liability proved too sensitive for multilateral treatment.

As a nation's interest in having its own law applied within its own borders grows stronger, its willingness to bow to international norms lessens. Resolving such conflicts between municipal and international law is destined to be a key focus of subsequent international legislation. Nevertheless, the CISG represents a giant step forward from the eras of conflicts and the law of merchants in the international unification of commercial law.

10. The United Nations Convention on International Bills of Exchange and International Promissory Notes, UN COMM'N ON INT'L TRADE LAW, 21st Sess., at 2-42, UN Doc. A/43/820 (1988), reprinted in 28 I.L.M. 170 (1989) (with commentary) [hereinafter CIBN]; Conventions on International Factoring and on International Lease Financing, Unidraft Conf. 7/C.1/W.P.27 (1988), reprinted in 27 I.L.M 922 (1988) (with commentary) [hereinafter CILF].In addition to these broadly applicable conventions, multilateral treaties that are more specialized in focus have recently been enacted. See, eg, World Intellectual Property Organisation Treaty on Intellectual Property in Respect of Integrated Circuits, 28 I.L.M. 1477 (1989); Arrangement Regarding International Trade in Cotton Textiles, December 20, 1973, 25 UST 1001; general agreement on tariffs and trade organisation, basic instruments and selected documents 7 (33d Supp. 1987).

The world order is also increasingly marked by regional multilateral treaties. The most systematic regional efforts are those of the European Economic Community. See, eg, convention on the law applicable to contractual obligations, O.J. (l 266) 1 (1980); convention on the contract for international carriage of goods by road, May 19, 1956, 399 UNTS 190.

11. International Convention on the Settlement of Investment Disputes (ICSID)

12. See for example, CMS Transmission Co v Argentina, ICSID Case No ARB/01/08, Award dated 10th May 2005. ICSID has taken cognizance in respect of issues such as Treatment No Less Favorable than that required by International Law, "Arbitrary Treatment", "Discrimination", and "Comply with all Obligations Undertaken towards Investment", "Currency Transfer and Expropriation".

13. Tuna/Dolphin case, GATT, DS21/R of September 3, 1991, J. H. Jackson, "Dolphins and Hormones: GATT and the Legal Environment for International Trade after the Uruguay Round" (1992) 14 University of Arkansas at Little Rock Law Journal 429-454.

14. See WTO decision in re Colombia - Indicative Prices and Restriction on Ports of Entry WT/DS366/a dated April 27, 2009.

15. Whereas the fact is that in many cases domestic industries are either inefficient or uneconomical and efforts are made to create monopoly to protect inefficient domestic industry to hinder the flows of international trade.

16. I recall one such case where in violation of domestic health laws an importer did import cooking oil which was unfit for human consumption and in spite of the fact that goods were not fit for consumption the legal battle was won by the unethical trader on the basis of flaws in the relevant laws. There are two sets of views on this issue. One view suggests that import control authorities have no legal authority to detain imported goods since the fitness problem falls within the domain of laws controlled and implemented by the local authorities. The other view states that trade control authority can withheld release of imported goods where the same are found to be unfit for human consumption. The examples suggest, how complex are the legal aspect of international business transactions.

17. For example, see Section 31A of the Pakistan Customs Act, 1969. It reads: 31A Effective rate of Duty - (1) Notwithstanding anything contained in any other law for the time being in force or any decision of any court, for the purposes of section 30 [30A] and 31, the rate of duty applicable to any goods shall include nay amount of duty imposed under section 18 [18A and 18C] and the amount of duty that may have become payable in consequence of the withdrawal of the whole or any part of the exemption or concession from duty whether before or after the conclusion of a contract or agreement for the sale of such goods or opening of a letter of credit in respect thereof.

18. It may be noted that in many cases promissory estoppel does not apply against the state