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					IBT Outline – Fall 2007

*Introduction to IBTs
1) 2) 3) 4) 5) Distinction between public law and private law environments within which IBTs take place Identifying different forms of IBT Interaction between law and non-law concerns The role of private international law in resolving disputes arising out of IBTs (conflicts law) Identifying major categories of law governing IBTs

Distinction Between Public Law & Private Law Environments Within Which IBTs Take Place Private Law vs. Public Law Hallmarks 1) Private Law Hallmark: Parties have the freedom & authority to contractually change private law rights & obligations 2) Public Law Hallmark: Mandatory govt. regulation of int’l trade & economic relations Different Forms of IBT Transactions are sequential: Listed according to levels of penetration by companies 1) Sale of Goods & Services a) Step: Testing the waters, most basic form of IBTs b) Export Sale / Import Purchase c) Legal Instruments i) Contract for sale of goods ii) Contract for shipping goods iii) Method used to finance purchases (L/C) 2) Agency/Distributorship a) Step: US co. engaged in enough business with parties in a certain region b) Sale of goods & services through agent/distributor c) Legal Instruments i) Agency Agmt ii) Distribution Agmt 3) Technology & Knowledge Transfer a) Step: US co. arranges for a foreign company to produce its product i) Implication: US co. does not have complete control b) Transfer of technology – Rights to use IP of one company is given to another c) Legal Instruments i) Licensing Agmt – IP ii) Franchising Agmt – Brand, trade secrets 4) Foreign Direct Investment (FDI) a) Step: US co. invests capital – take monetary resources & move then into foreign country to establish subsidiary i) Implication: US co. maintaining complete control b) Establish lasting ownership interest in a business entity resident in another nation 5) Transnational Corporation (TNC) / Multinational Enterprise (MNE) a) Several affiliated businesses which function simultaneously in different countries, are joined together by ties of common ownership/control & are responsible to a common management strategy Interaction Between Law and Non-Law Concerns Law Concerns: Laws that Govern IBTs 1) Choice of Law 2) Default Laws in areas of int’l business 3) Regulations Non-law Concerns: Foreign Countries 1) Cultural differences 2) Differences in national laws/enforcement issues 3) Non-western concepts re business

The Role of Private Int’l Law in Resolving Disputes Arising out of IBTs (Conflicts Law) Legal Framework in which most Private IBTs Occur: 1) Choice of Law principles & substantive rules of law that apply to particular IBTs 2) Primary legal institutions & forums that create & interpret the law
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Issue: How is choice of law determined in an int’l context? What principles govern choice of law?

2 Fields of Int’l Law 1) Public Int’l Law: System of laws that governs relations b/n nation-states, IGOs, & sometimes individuals’ private conduct a) Relevant Sources of Public Int’l Law i) Treaties – Explicit Ks b/n states; legally binding (1) Force of Law – Directly makes law 2) Private Int’l Law (“Conflicts Law”): Use of domestic choice of law rules by domestic courts to resolve issues of conflicts of law in an int’l context a) Conflicts Law = Domestic rules that dictate which country’s laws should apply to an IBT dispute i) Domestic courts must apply domestic law & their own choice of law rules to determine what law applies b) Problem w/ Applying Private Int’l Law: Different Nations  Different Rules  Different Substantive Laws How to Harmonize the Law Applicable to IBTs? 1) Utopia: One world, one law of Ks 2) Harmonize Choice of Law Rules (not substantive K law) a) By multilateral treaty – States sign treaty sign to be subject to a rule (binding on state parties) i) Ex. Hague Conference conventions (1) Ex. “In so far as it has not been chosen . . ., the applicable law shall be the internal law of the State where, at the time of formation of the agency relationship, the agent has his business establishment or, if he has none, his habitual residence.” ii) The more nations that sign on, the more certainty there becomes in IBTs b) By regional agmt (Ex. EU agmts) 3) Harmonize Substantive Law a) Regionally – Supranational laws that are immediately effective as a superseding int’l law i) Similarities of existing law & working conditions (ex. EU law) ii) Force of Law: Directly makes law b) Sectorally – Particular types of transactions are governed under the same law i) Ex. CISG – Covers 1 kind of transaction (K for the sale of goods), sets forth substantive K law ii) Force of Law: Binding on all nations that have agreed to the rules 4) Facilitate Party Autonomy – Improve parties’ ability to make own rules & to be bound by them; make private int’l law/conflicts law irrelevant a) Uniform Rules – Rules that codify int’l commercial custom & usage and define trade terms i) Parties can incorporate int’l trade terms into their Ks (1) Ex. Incoterms – Commercial shorthand for the rights & duties of exporters & forwarders involved in int’l shipment of goods; use of terms in K = parties agreeing in advance to interpretations of terms used/K itself (2) Ex. UCP – Governs L/C & has been adopted by banks internationally ii) Force of Law: Rules are issued by state or have int’l validity (i.e. treaty) and parties must adopt by K b) Lex Mercatoria – Creation of int’l body of rules & forms to govern IBTs i) Parties agree among themselves how they want to do business on their industry’s own customs ii) Ex. Self-regulation with CSR iii) Force of law: Parties use it (does not come from legal system/legislation) Identifying Major Categories of Law Governing IBTs  Know where to look to solve IBT issue: Is the issue under Public/Private, Public Int’l/Private Int’l? 1) Public Law – Private transactions are governed by mandatory regulations issued by the govt. a) Parties can’t K around these regulations b) Ex. Antitrust regulations 2) Private Law – Law that serves a default function a) Rules are there, but parties can opt out or change them by K b) Ex. CISG 3) Public Int’l Law – Law regulates relations b/n different nations (re: wars, boundaries, etc.) 4) Private Int’l Law/Conflicts Law – Domestic rules applied by domestic courts that help determine what substantive law governs an IBT a) Form of domestic law applied by domestic courts
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5) Lex Mercatoria – Law that the parties to a particular transaction or participants in a particular industry have agreed upon will govern their transactions 6) Domestic Law = Gap-filler when there is no non-domestic source of law to govern IBT a) Domestic Law will apply if there is NO: i) superseding treaty ii) explicit adoption of a uniform code by the parties b) Domestic Law can be the applicable substantive law for IBTs if: i) it is chosen under Private Int’l Law/Conflicts Law or ii) parties have agreed to have the IBT governed by domestic law

International Sale of Goods (IBT Form #1)
1) Understanding the steps in a documentary sale (Figure 2-1, p.73) 2) Functions of the various documents in allocating risk among parties to the transaction Expectations of Parties / Risks of Parties in IBTs: More b/c lack immediate “trust” element 1) Expectations a) Buyers – Receive goods b) Sellers – Receive payment ASAP 2) Risk of Nonperformance a) Buyers – Goods not delivered/damaged, non-conforming b) Sellers – Buyer does not pay/accept goods (Seller has to recover goods) Dealing with Expectations of Parties / Risks of Parties in IBTs 1) Expectations: Agree to commercial terms that assign duties & obligations in IBT (Incoterms, UCP) 2) Risk of Nonperformance: Documentary Sale Transaction (delivery of docs by Seller to Buyer constitutes a symbolic delivery of goods) Understanding the Steps in a Documentary Sale Transaction Documentary Sales Transaction (DST) 1) Transaction in DOCUMENTS (versus transaction in goods) 2) Goal/Purpose: Minimize payment risks, Meet expectations of Buyer & Seller 3) Component Parts = 3 different & separate “contracts” a) Sales Contract b) Letter of Credit for payment (not required; must agree to; usually have in IBTs b/c of trust issues) c) Bill of Lading 4) DST Players a) Sales Contract – Buyer & Seller b) L/C – Buyer, Seller (Shipper), Confirming Bank (CB), Issuing Bank (IB), Carrier c) Bill of Lading – Seller (Shipper) & Carrier i) Make negotiable so it can be endorsed along the L/C process DST Goal: Mitigate risks of payment; allocate risk to party that is best to evaluate it & bear it 1) Seller’s Risks: a) May never get paid (Buyer either a chump or refuses to accept delivered goods) i) Solution: L/C Transaction – Just have to deliver documents to bank to get paid b) Payment under L/C is withheld from Bank i) Solution: Confirmed L/C Transaction – Better to sue Confirming Bank in Seller’s jurisdiction rather than Issuing Bank in foreign jurisdiction (1) If Seller uses Confirmed L/C, also has 3 promises of payment (a) Confirming Bank – Seller has to present draft + docs (b) Issuing Bank – Seller has to present draft + docs (c) Buyer – Seller has to present goods 2) Confirming Bank’s Risk: Payment under L/C is withheld from Issuing Bank a) Solution: Confirming Bank has even leverage with Issuing Bank b/c both in financial industry (already in the best position to find out whether Issuing Bank is reliable; even leverage)

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3) Issuing Bank’s Risk: Payment under L/C is withheld from Buyer a) Solution: Issuing Bank will not set up L/C for Buyer until Buyer sets up sufficient accounts (in the best position to prevent this situation from happening by making sure Buyer is able to pay back) 4) Buyer’s Risk (not really resolved by L/C process) a) Goods may not be delivered i) Solution: If there was L/C, then Buyer is not out any money b/c if goods are not shipped, then there is no BOL, which is required to set the whole L/C process in motion b) Goods arrived damaged/non-conforming/defective i) Solution: Cannot be resolved with L/C since L/C only deals with payment risks (1) Buyer must hire either an independent company or send an employee to inspect the goods before they are shipped and to certify that the goods are conforming (a) Use inspection method b/c Buyer can’t get insurance against fraud (2) Carriers can provide “Clean on Board” certificate stating that goods are in good condition Component Parts = 3 different & separate “contracts” DST Component #1: Sales Contract (Trans in Goods = PO + Acknowledgement Letter) 1) Letter of Inquiry a) Buyer is requesting for info on goods, prices & delivery alternatives from Seller b) Buyer requests for Seller to send PFI 2) Pro Forma Invoice (PFI) a) Seller quotes prices for goods & different delivery routes b) “All purchase orders subject to written acknowledgment from Seller” – Reservation b/c Seller does not want PFI to constitute an offer 3) Purchase Order from Buyer (The Offer) a) Buyer chooses goods to purchase & delivery option from PFI b) “Look forward to your early acknowledgement by mail” = Offer 4) Acknowledgment Letter from Seller (The Acceptance)   Issue: A lot of risk in IBT for Buyer to send money before receipt of goods & for Seller to send goods without payment first  B/c of lack of trust, Seller may hike up prices to take into account risk of sending goods without being paid (bad for int’l business all around) Solution: Letter of Credit (Buyer’s bank will issue a L/C in favor of Seller so that Seller can get paid ASAP)

DST Component #2: L/C (Method of Payment for Sales of Goods under DST) a) Sales K must stipulate that L/C will be used in order for L/C to be used i) Ex. Pro Forma Invoice – Seller says it will not sell to Buyer until Buyer establishes L/C in Seller’s favor b) Transaction in Documents i) Payment given to Seller/Banks if conforming docs are presented even if something goes wrong with shipment of goods c) Commercial Letter of Credit (“commercial credit”) = THE L/C! i) From: Issuing Bank to Beneficiary/Seller; bank agrees to pay on the presentation of specified docs ii) Includes: (1) The final word: Terms & conditions under which credit operates (a) The docs must comply w/ these terms & conditions! (2) Doc specification: What docs that are supposed to be presented & description of docs (a) Ex. Docs = BOL, Insurance Policy, Commercial Invoice (b) Docs must conform to their descriptions in the L/C to be properly accepted by Banks (3) Confirmation?: Whether L/C is unconfirmed or confirmed (a) Unconfirmed L/C – Seller presents docs to Buyer’s/Issuing Bank for payment (b) Confirmed L/C – Seller presents docs to Seller’s/Confirming Bank for payment; Seller’s/Confirming Bank presents docs to Buyer’s/Issuing Bank for reimbursement

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DST Component #3: Bill of Lading (Issued by Carrier to Seller/Shipper) – Functions of BOL: 1) Contract of Carriage: Carrier promises to transport the goods to a certain destination & Seller promises to pay the Carrier’s fees 2) To who: Determines to whom the Carrier should deliver the goods (Nonnegotiable vs. Negotiable) a) Nonnegotiable BOL: Carrier must deliver to person “named as consignee” in BOL (1) Do NOT use if there is a L/C b) Negotiable BOL: Carrier must deliver only to person named in the original, properly endorsed negotiable bill (1) MUST use in DST b/c of L/C (cross out person named & re-endorse as BOL is passed around) 3) Terms & conditions: Provides standard terms that govern rights & obligations of parties a) Risk passes: Liability of Carrier starts from moment it receives Seller’s goods The Whole DST Process 1) Buyer & Seller enter Sales Contract 2) Buyer gets L/C a) Goes to Issuing Bank (domestic or foreign) & asks bank to issue a credit in favor of Seller b) Gives IB docs that detail the contents of the credit c) Payment options for Buyer i) Deposit $ for the amount of credit ii) Debit existing accounts when payment on credit is made iii) Reimburse IB after IB makes the payment on credit d) Significance of Buyer obtaining L/C: Earns Seller’s trust b/c it shows Seller that Buyer is a good credit risk 3) IB writes Commercial L/C to Seller 4) Seller makes shipment of Goods a) Buyer has option to get certificate of inspection at port b) Seller ships goods & gets BOL, endorses BOL (“To the order of: --), sends endorsed BOL to: i) Buyer – if no L/C in DST ii) IB – if unconfirmed L/C in DST iii) CB – if confirmed L/C in DST iv) NB (appointed by IB) – if unconfirmed L/C in DST & no IB branch in Seller’s country 5) Seller gets paid a) Seller gets payment under Unconfirmed L/C – Buyer’s Bank buys docs from Seller i) Gives IB draft + docs detailed in credit incl. (1) Properly endorsed BOL – K b/n Seller & Carrier (2) Commercial Invoice – Details quantity & nature of goods that have been shipped to Buyer (3) Insurance Certificate – Evidence that goods have been insured during transit or b) Seller gets payment under Confirmed L/C – Seller’s Bank buys docs from Seller i) Gives CB draft + docs detailed in credit incl. (1) Properly endorsed BOL – K b/n Seller & Carrier (2) Commercial Invoice – Details quantity & nature of goods that have been shipped to Buyer (3) Insurance Certificate – Evidence that goods have been insured during transit ii) CB forwards docs to IB for reimbursement – Buyer’s Bank buys docs from Seller’s Bank 6) Buyer buys docs from Seller’s Bank 7) Buyer receives goods when it gives Carrier properly endorsed BOL

The Sales Contract (DST Part 1)
1) Choice of Law: Determining what substantive law governs the int’l sales K a) Choice of Law Analysis where the parties have NOT selected a law to govern their contract (Kristinus) b) U.S. rules relating to Choice of Law 2) Contracts for the International Sale of Goods (CISG) a) Who CISG applies to b) Scope of application of the CISG (including reservations to its application in certain cases) i) Understanding basic structure of Joint Venture (Amco Ukrservice) c) Contract formation under CISG i) Offer & Acceptance (Battle of the Forms) d) Performance obligations of parties to a K under the CISG i) Seller: Delivery & Conformity of the Goods / Buyer: Payment
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3) Source and application of standard commercial terms (Incoterms) 4) C/A = Seller v. Buyer ; Buyer v. Seller Choice of Law: Determining What Substantive Law Governs the Int’l Sales Contract Choice of Law (in context of US rules relating to Choice of Law) 1) When parties have NOT selected governing law: Determine by using Private Int’l Law/Conflicts Law a) US Choice of Law Rules i) IBT dispute brought in US courts  Federal District Crts sitting in states under Diversity Jurisdiction (diversity & amt in controversy)  Erie Doctrine – Federal District Crts sitting in diversity apply substantive law in the state where they are located ii) ▲ Federal District Court applies choice of law rules (substantive law) of the state in which it sits 2) Possible Default Rule: CISG Why We Need CISG: Private Int’l Law/Conflicts Law Not the Best for IBT Disputes 1) Kristinus: Case in which court is applying private int’l law to determine what law to apply a) Facts: PA Buyer purchases gems in Brazil from Brazilian Seller who tells Buyer that he can return the gems to their store in NY; NY store does not accept Buyer’s return & Buyer sues in NY Federal District Court b) Choice of law matters here b/c: Results for who will probably win are different depending on whether you apply Brazilian law (no oral evidence allowed) or NY law (allow oral evidence) c) Outcome: NY Federal District Crt applies NY Choice of Law Rules (= Interest Balance Test) & picks NY law 2) Different Choice of Law Rules a) Interest Balancing b) Most Significant Relationship c) Most Closely Connected (presumption in favor of seller’s country) d) Traditional Rules (ex. K governed by the law of the place where it was executed) e) “Better Law” 3) Resulting Problems a) No predictability in what law will govern transactions/disputes for those IBTers b) Perception that courts assert nationalists interests & choose their own law rather than foreign law c) Parties have different expectations based on their different legal regimes 4) Solution: Harmonization of national substantive K law  Ex. CISG (private law) Convention on Contracts for the International Sale of Goods (CISG) Features of CISG 1) No more uncertainty: No more need for private int’l law/conflicts law analysis for K for sale of goods dispute b/n 2 state parties that have signed the CISG 2) Applies to all state parties: Self-executing treaty  Applies directly within contracting states 3) Supplementary private law = Possible default rule in int’l K for sale of goods disputes a) Resolves questions that the parties did not agree on b) CISG = Law of contracting state i) ▲ if 2 companies from 2 different contracting states have sales K where one of their domestic laws is chosen to govern, CISG will apply if K is dispute is over (1) formation issue or CISG’s limited Scope re basic aspects of the K for sale of goods (2) obligations of the parties ii) Ex. If US & Italy have sales K governed by US law, then US law will interpret the obligations of the parties according to CISG over other domestic law (UCC) since US is a CISG contracting state 4) Parties’ Autonomy First: Terms of parties’ K will override any conflicting CISG provisions a) Parties can exclude application of CISG b) Parties can change the effect of CISG provisions 5) When applied, CISG (Private Law) displaces: Domestic Law a) Private int’l law/conflicts law b) UCC in int’l sales of goods Ks

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CISG Provisions to Know 1) CISG Part 1: Application of CISG 2) CISG Part 2: Formation of the K 3) CISG Part 3: Obligations & Rights of the Parties 4) Article 92 Declaration: Opt out of 1(1)(b) CISG Scope Analysis (Look to CISG Provisions) 1) Who is subject to the CISG? 2) Does the CISG apply? 3) Are the issues in dispute the kind of transactions & issues are covered by CISG? CISG Part 1: Application of CISG Analysis for Deciding Whether CISG can Apply – CISG 1(1)(a) & 1(1)(b) 1) Have the parties to the K excluded the application of the CISG? a) Yes – CISG does not apply b) No – CISG might apply 2) CISG 1(1): Test of Internationality a) Do the parties to the K have their places of business in different states? i) No – CISG does not apply (b/c this is not an int’l sale) ii) Yes – CISG might apply; go to CISG 1(1)(a) 3) CISG 1(1)(a): Are both the states in question “contracting states?” (list on p.192) a) Yes – CISG applies i) Ex. US = Buyer (contracting state) ; Germany = Seller (contracting state) – CISG applies b) No – CISG might still apply; go to CISG 1(1)(b) 4) CISG 1(1)(b): Do the rules of private int’l law/choice of law rules lead to the substantive law of a contracting state? a) Yes – CISG applies i) UNLESS the contracting state whose substantive law was selected through the choice of law analysis has entered an Art. 95 reservation stating it will NOT be bound by Art. 1(1)(b) (1) Why a country would enter an Art. 95 reservation: Retain opportunity of applying domestic, non-CISG law b/c non-contracting party retains that opportunity (2) Ex. US entered Art. 95 reservation (retaining opportunity to apply UCC, domestic law) b) No – Choice of law of non-contracting state will be applied i) Ex. US Seller (contracting state w/ Art. 95 reservation); Buyer in Japan (non-contracting state) (1) Court applies choice of law rules & concludes that US law applies. CISG does not apply; UCC law applies. (2) Court applies choice of law rules & concludes that Japan law applies. Japanese K law applies. Scope of Application: What Transactions/Issues Does the CISG Apply to? – CISG Arts. (1)-(5) 1) CISG Art. 1-3: Identifies the transactions that are subject/not subject to CISG 2) CISG Art. 4-5: Defines the issues that are governed by CISG 3) CISG Art. 6: Opt-out/Change-up provision Transactions the CISG Applies To – CISG Art. 1-3 1) American Meter: Shows what transactions CISG applies to a) Case Law to use to determine definition of “K for sale of goods” since CISG lacks this definition b) F: P (Ukraine meter manufacturer) sues D (US supplier of meter parts) for breach of JV agmt; agmts entered into said that Ds would deliver goods based on demand in Ukraine (quantities & prices not specified, but would be based on demand) c) CH: CISG does not apply to JV agmts i) CISG only applies to Ks for sale of goods & not to Distributor/JV Agmts, which are (1) framework agmts for subsequent Ks for sale of goods (a) set up framework in which Buyer & Seller will operate in the future; does not set up the actual sale of goods itself (2) lack required specificity for quantity & prices required to constitute a K for sale of goods (CISG Art. 14(1))
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CISG does apply to the order of steel that was made before P & D’s relationship fell apart b/c in this was a specific order for tangible goods agreed to by the parties 2) CISG Art. 2 – Lists transactions that CISG does NOT apply to a) (a) Consumer Sales: Sales of goods bought for personal, family or household use b) (d) Sales of investment securities (i.e. stocks, bonds), Negotiable Instruments [that call for payment of $] c) Sales that the parties have opted out of CISG application under CISG 6 3) CISG Art. 3 – Lists Ks to which CISG does NOT apply to based on contributions of Buyer & Seller a) CISG applies to K for supply of goods to be manufactured = K for Sales of Goods UNLESS Buyer supplies a “substantial” part of the materials needed to manufacture goods i) Use Case Law to determine what constitutes a “substantial” part of supply by Buyer b) CISG does not apply to K where “preponderant” part of Seller’s obligations consist of supplying labor & other services to Buyer i) Use Case Law to determine what constitutes “preponderant” part by Seller 4) CISG Art. 4 – Issues that CISG covers a) Covers: i) Formation of K for Sale of Goods – Was a K formed? ii) Rights & Obligations of Seller & Buyer arising out of K for Sale of Goods – Were rights infringed upon? Were obligations breached? b) Does Not Cover: [UCC applies even if parties elected to use CISG if issue is about the following] i) Validity of the K for Sale of Goods ii) Interpretation of the K for Sale of Goods iii) Effect that the K for Sale of Goods might have on the property in the goods sold ii) Opting Out under CISG – Art. 6 & 12 1) CISG Art. 6 – Parties can Opt Out/Change Up (subject to CISG Art. 12) CISG application 2) CISG Art. 12 – Parties can use CISG Art. 96 to opt out of provisions of CISG Art. 11, 29 & Part II that allow Sales K, modification, termination, offer, acceptance, indication of intent to be made in any form other than in writing (i.e. parties can stipulate that everything has to be in writing) CISG Part 2: Formation of the K for Sale of Goods 1) CISG Art. 14-17: Offer a) 14: Min Requisites for an “Offer” b) 15: Withdrawal c) 16: Revocation d) 17: Termination of Offer 2) CISG Art. 18-24: Acceptance a) 18: Form of the Acceptance b) 19: Effect of an Acceptance that varies with the terms of the K c) 20-21: Time allowed for Acceptance d) 22: Withdrawal from the Acceptance Offer: Art. 14-17 1) CISG Art. 14 – Min Requisites for an “Offer” [ex. Purchase Order in Sales K] a) What constitutes an Offer (elements required) i) Proposal to conclude a K for Sale of Goods ii) Addressed to 1+ specific persons iii) Sufficiently definite (1) States the goods and (2) Expressly or implicitly fixes the quantity & price of goods iv) Indicates intention of Offeror to be bound if Offeree accepts b) Proposal that is not addressed to 1+ specific persons = Invitation to make offers (i.e. catalogue) 2) CISG Art. 15 – Effective Offer / Withdrawal a) Effective when: Offer reaches Offeree b) Withdrawal: Offer can be withdrawn IF withdrawal reaches Offeree BEFORE/AT SAME TIME as Offer i) Ex. Seller sends offer in letter to Buyer  Seller calls the same day & withdraws offer  Buyer receives letter 2 days later, but cannot accept offer
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3) CISG Art. 16 – Revocation a) Offeror can revoke Offer BEFORE Offeree accepts b) Offer can’t be revoked if: i) offer indicated that it is irrevocable (i.e. stating fixed time for acceptance – “you have 10 days to accept my offer”) (1) Ex. Seller calls Buyer & offers product; offer good for 15 days  Seller calls to revoke offer the next day  Seller can’t do this b/c offer is open for a period fixed for acceptance ii) r/s for offeree to rely on offer as being irrevocable & offeree acted in reliance on offer 4) CISG Art. 17 – Terminated by Rejection a) Offer is terminated when rejection by Offeree reaches Offeror, even if offer was irrevocable Acceptance: Art. 18-24 (Battle of the Forms) 1) CISG Art. 18 – Acceptance a) What constitutes an Acceptance (elements required) [ex. Acknowledgement Letter] i) Assent to the offer by Offeree and ii) Communicating that assent to the Offeror b) Effective when: Acceptance of the offer reaches Offeror  K is Formed i) Must reach Offeror within time Offeror fixed ii) Must reach Offeror within a r/s time if no time was fixed c) Oral offer must be immediately accepted unless otherwise stipulated by Offeror 2) CISG Art. 19 – Battle of the Forms: Issue of assent that contains modifications of offer’s terms a) Issue: Whether K was formed/Which of the different terms are enforceable b) Reply to an offer with different/modified terms that do NOT materially alter Offer’s terms = Acceptance i) UNLESS the Offeror objects in timely manner ii) Offeror’s objection turns Offeree’s acceptance into a rejection & counteroffer c) Reply to an offer with different/modified terms that DO materially alter Offer’s terms = Counteroffer (return to CISG Art. 18 for evaluation of original Offeror’s “acceptance” of counteroffer) i) Material Terms: (1) Price, payment, quality & quantity of goods (2) Extent of one party’s liability to the other (3) Settlement of disputes 3) Last Shot Theory (applicable to counteroffers): If the parties perform, the last form sent out will govern the arrangement a) An act can be an “acceptance” of a counteroffer b) Ex. Seller makes offer, Buyer makes counteroffer, Seller does not object & ships goods 4) Filanto – Battle of the Forms under CISG a) F: Filanto (Italy) contracted with Chilewich (US) – F was to send C shoes in 2 installments for C to sell. C had Russian K – C would sell shoes from F to R. Russian K had arbitration clause, C incl. arbitration clause in Memo Agmt to F. F holds onto agmt while C opens L/C in favor of F. F only signs & returns memo way later. C buys first set of shoes delivered by F, but not second set. F sues C; C now wants arbitration. b) CH: There was an agmt to arbitrate b/n the parties c) RL: An Offeree, knowing that the Offeror had started performance, who fails to notify the Offeror of its objections to the terms of the K within a r/s time will be deemed to have assented to those terms. i) CISG 18(1) – Conduct of Offeree indicating assent to an offer is acceptance ii) How Court gets around CISG 18(1) – Silence or inactivity does not constitute acceptance. (1) Court looked at prior relationship b/n the parties & found that they had “extensive course of prior dealing” thus imposing on F an affirmative duty to speak up (this is more than just silence CISG Part 3: Performance obligations of parties to a K under the CISG 1) If a valid K has been formed in accordance with CISG Part II (Formation of the K), then the parties must carry out their K obligations: a) Seller: Delivery – CISG Art. 30-34 & Conformity of the Goods – CISG Art. 35-44 & UCC Warranties b) Buyer: Payment – CISG Art. 53-59 c) Passing of Risk: CISG Art. 66-69 & Incoterms
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Seller’s Obligation: Delivery & Conformity of the Goods 1) Seller’s Obligation #1: Delivery a) What a Seller must do to satisfy its obligation to deliver the goods – CISG Art. 30, 31 i) Unless otherwise arranged by Seller & Buyer, Seller’s delivery obligation consists of: (1) If K involves carriage of the goods: Seller just has to hand the goods over to the first carrier (a) Ex. K: delivery “inland freight by truck” – Seller’s delivery obligation: Give goods to the first truck (carrier) (2) If K identifies goods to be drawn from specific stock or manufactured at a certain place: Seller just has to place goods at that place (3) In all other cases: Seller just has to place goods at his own place of business for Buyer to pick up b) CISG Art. 33 – When a Seller must deliver the goods i) If a date is fixed by K: On that fixed date ii) If a period of time is fixed: Any time w/in that period unless circumstances indicate that the Buyer is to choose a date iii) In any other case: Within a r/s time after the K has been concluded (1) “R/s time period” = Time of deliver in regards to custom & usage in a particular trade; compare with what is customary w/in the industry c) CISG Art. 67 – Risk of loss bearer as between Buyer & Seller if goods are damaged en route i) Risk of loss transfers to Buyer after Seller’s delivery obligation is complete (1) Seller’s delivery obligation determined according to whether (a) Seller is bound to hand goods over at a particular place – CISG Art. 31 ii) Side Notes: (1) Incoterms allocate risk b/n Buyers & Sellers b/c they determine who has title to the goods (a) Who has title the goods bears the risk of loss (2) Where the risk ultimately ends: Provisions of Carrier-Transport K (a) If goods get damaged on the way to the Buyer & Seller is not responsible for risk of loss, then whether the risk of loss falls on the Carrier or Buyer depends on the agmts b/n the Carrier & the Buyer iii) CISG Art. 32 – Insurance Issues (1) CISG Default Rule: Seller does not have to arrange for insurance (2) Buyer’s Responsibility: Get insurance (correlates with risk of loss passing to Buyer when Seller completes delivery obligation) (3) Seller’s Obligation: At Buyer’s request, give Buyer all info necessary to enable Buyer to get insurance 2) Seller’s Obligation #2: Conformity of the Goods – CISG Art. 35 & UCC (CISG displaces UCC if CISG is applicable; but see UCC Disclaimer of Warranties) a) Conformity of the Goods = Deliver goods that meet reasonable expectations of the Buyer b) Obligations of a Seller when: i) CISG Art. 35(1) & UCC Express Warranty – K stipulates quality, quantity & condition of goods to be delivered (1) Seller must deliver goods that conform to the description stated in K ii) CISG Art. 35(2) & UCC Implied Warranties – K is silent on quality, quantity & condition of goods to be delivered (1) UCC – K doesn’t usually specify descriptions of goods, so use implied warranties of the UCC (a) Warranty of Fitness – Purpose of Goods (i) Purpose = What goods would ordinarily be used for (ii) Any particular purpose = The purpose that the Buyer communicated expressly to Seller (b) Warranty of Merchantability – Quality of Goods (2) CISG Art. 35(2) – Includes provisions equivalent to UCC Implied Warranties (a) CISG 35(2)(a)&(b): Warranty of Fitness – Purpose of Goods (i) (a) Purpose = What goods would ordinarily be used for (ii) (b) Any particular purpose = The purpose that the Buyer communicated expressly or impliedly to Seller EXCEPT when (1) Buyer did not rely or (2) it was unr/s for Buyer to rely on Seller’s skill & judgment (b) CISG 35(2)(c): Warranty of Merchantability – Quality of Goods
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IBT Outline – Fall 2007

iii) Disclaim of Warranties under UCC: Able to disclaim warranties as long as proper notification has been given & disclaimers are made conspicuous (see CISG vs. UCC outcomes above) c) Medical Marketing (German Sup Ct on CISG interpretation) – Buyer trying to avoid K based on nonconformity of delivered goods i) F: MMI (US) Ks with IMS for IMS to sell MMI radiology equipment, but after delivery, equipment was found to be non-compliant with FDA regulations. (1) Note: Case would be easily resolved if K stipulated that equipment comply with FDA regulations/US safety regulations ii) RL: (1) CISG Art. 49 in conjunction w/ CISG Art. 25: (a) CISG Art. 49 – To avoid a K based on the nonconformity of goods, Buyer must allege & prove that the Seller’s breach was fundamental in nature (b) CISG Art. 25 – A breach is fundamental when it results in such detriment to the party that the party is substantially deprived of what it expected under the K unless the breaching party did not foresee such a result (2) Case Law (Germany Sup Ct case w/ respect to CISG interpretation is US law) (a) Obligation for Goods to Conform to Public Laws & Regulations of Buyer’s state (General Rule under CISG Art. 35) (b) A Seller is not generally obligated to supply goods that conform to the public laws & regulations enforced by the Buyer’s place of business except if: (i) the public laws & regulations of the Buyer’s state are identical to those enforced in the Seller’s state; (ii) the Buyer informed the Seller about those regulations; or (iii) due to special circumstances, the Seller knew or should have known about the regulations at issue 1. Ex. “Special circumstances” – Seller has branch office in Buyer’s state, thus signaling that Seller intends to sell in domestic market (3) CH: MMI can avoid its K w/ IMS based on nonconformity of the goods (4) R: There was something in the transaction that indicated that IMS intended to sell in US market, triggering the “special circumstances” exception under the case law’s general rule (in acc. w/ CISG Art. 35). Thus, IMS sent non-conforming goods since they were not up to US safety standards. The breach then was fundamental & grounds for avoidance of K on Buyer’s party since IMS could foresee such a result & MMI was substantially deprived of using the equipment it purchased. d) BP Oil International – When Seller is no longer responsible for conformity of the goods i) F: Petro purchases oil from BP & their K specified req. gum content. Petro hired Saybolt to inspect the gum content before it was loaded on board – passed inspection. Gum content excessive when arrived & Petro refused oil. ii) CH: BP may be able to hold Petro liable for breach of the K if it can show that (1) the goods were tested for conformity and passed before the risk of loss passed to Petro and (2) it did not know or could not have been aware that the oil was defective when the goods passed over the ship’s rail (K called for CFR delivery) iii) Buyer’s Arguments: (1) Argue goods nonconforming (a) If discovered to be nonconforming after risk has passed to Buyer, then: (2) Argue there was a hidden defect that (1) Buyer did not know about or (2) Buyer could have known about iv) RL: CISG Art. 35(3) & 36(1) in conjunction – At what point Seller is liable for lack of conformity (1) CISG 36(1) – Seller is liable for lack of conformity that exists at the time when the risk passes to the Buyer (= before the goods “pass the ship’s rail”) (2) CISG 35(3) – Seller is not liable for lack of conformity if, at the time the K was concluded, Buyer (a) knew of the lack of conformity or (b) could not have been unaware of lack of conformity (i) = Buyer cannot rely on lack of conformity argument if Buyer did not notify Seller of nonconformity after it should have discovered such nonconformity (in this case, nonconformity should have been spotted during inspection) (3) Note: Buyer should make Inspection Agency liable for not spotting nonconformities in a K
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IBT Outline – Fall 2007

Buyer’s Obligation: Payment Against Delivery 1) Buyer’s Obligation: To pay against delivery 2) CISG 66: Buyer is still obligated to pay in the event of loss or damage to goods after the risk has passed to the buyer UNLESS the loss or damage is due to an act or omission of the Seller Excused Performance: The conditions under which the performance of a K by the parties will be excused 1) CISG 79: Excused Performance = No Liability (can’t claim damages, but can still exercise other rights) a) 3 elements of Excused Performance i) The failure to perform must be due to an impediment beyond the control of the nonperforming party & ii) The nonperforming party could not reasonably be expected to take the impediment into account & iii) The nonperforming party could not overcome the impediment 2) Impediment = Barrier that prevents performance, not an event that makes performance more difficult or costly 3) Party opposite of nonperforming party: a) Excused from performance of the K (can avoid the K) b) Does not have to pay the K price c) Cannot sue nonperforming party for damages Real outcome differences in enforcing contractual obligations under CISG vs. UCC/Common Law 1) Offer – “The Mailbox Rule” a) CISG Art. 16: [Offer can be written or oral] i) Offeror can revoke Offer BEFORE Offeree accepts ii) Offer can’t be revoked if: (1) offer indicated that it is irrevocable (2) r/s for offeree to rely on offer as being irrevocable & offeree acted in reliance on offer b) UCC §2-205 – Firm Offers: An offer by a merchant to buy or sell goods in a signed record that by its terms gives assurance that it will be held open is NOT revocable during the time stated or if no time is stated for a r/s time (period of irrevocability shall not exceed 3 mos.) 2) Acceptance of the Offer a) CISG Art. 18(3): Affirmative conduct can create acceptance b) UCC §2-206: A definite & seasonable expression of acceptance in a record operates as an acceptance even if it contains terms additional to or different from the offer 3) Modification of K d) CISG Art. 19: i) Reply to an offer with different/modified terms that do NOT materially alter Offer’s terms = Acceptance UNLESS the Offeror objects in timely manner (then it is a counteroffer) ii) Reply to an offer with different/modified terms that DO materially alter Offer’s terms = Counteroffer a) UCC: i) A written acceptance is effective even if it adds additional terms unless the acceptance is expressly made conditional on the acceptance of such terms (then it is a counteroffer) – see Problem 3-9 ii) The additional terms are be considered as proposals for additions to the K & become part of the K unless: (1) the offer expressly limits acceptance to the terms of the offer (2) the additional terms materially alter the K or (3) notification of rejection of the additional terms is given within a r/s time 4) Conforming Goods a) CISG Art. 35: Combines all of Seller’s obligations concerning the conformity of the goods b) UCC: Warranties i) UCC §2-313: Express warranty ii) UCC §2-314: Implied warranty of merchantability relating to the quality of the goods iii) UCC §2-315: Implied warranty of fitness for a particular purpose 5) Disclaimer of Warranties a) CISG: Silent b) UCC: Governs i) UCC §2-316: “To exclude…the implied warranty of merchantability…the language must mention merchantability & in case of a record must be conspicuous”
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IBT Outline – Fall 2007

c) Whether the UCC disclaimer provisions are applicable to a K governed by the CISG i) Where a K is governed by the CISG & US law may be used to decide on an issue outside the scope of the CISG (i.e. parties elected US law as governing law of K for Sale of Goods) (1) Issues of validity (2) Issues of interpretation ii) ▲ Whether a Seller must comply with UCC requirements for disclaimer of implied warranties depends on whether the UCC establishes (1) a rule of validity (2) a rule of interpretation 6) Statute of Frauds a) CISG Art. 11: K for Sale of Goods does not have to be concluded in writing; K can be proved by any means, including witnesses b) UCC/Statute of Fraud = Sales K for $500+ must be in writing to be enforceable c) US has NOT opted out of CISG Art. 11 under CISG Art. 96 i) ▲ if there is a dispute b/n a K for Sale of Goods that is over $500 that is not in writing b/n US company & a company from another contracting state, then US company CANNOT use S/F defense (other company can use other means to prove K – emails, witnesses, phone calls etc.) 7) Validity of the K a) CISG: Outside the scope i) i.e. CISG would not address validity of K that lacked concrete terms on quantity & price (CISG would say that offer was not mad – CISG 14) b) UCC: Addresses issues of validity of the K i) i.e. Open price & open quantity Ks are valid Passing Risk in K for Sale of Goods – Incoterms: Source and application of standard commercial terms 1) Incoterms: Lex Mercatoria – Set of rules & definitions to guide the interpretation of commonly used commercial terms sued to designated the duties & obligations of Seller & Buyer to a K for the sale of goods a) To Use: [Incoterm] (Incoterms 2000) b) If adopted by K, usually applied complementarily with substantive K law (i.e. CISG) 2) Applies to: Matters concerning the duties & obligations of Seller & Buyer to a K of sale for tangible goods a) Does not apply to: Carriage K, L/C, Formation of K, Warranties, Breach of K, Damages, Other Remedies 3) Issue of Risk of Loss for Goods: Incoterms allocate the risk b/n Buyer & Seller b/c they are used to identify who has title to the goods (which is who would bear the risk of loss) a) Under all Incoterms: Risk of loss passes from Seller to Buyer once the Seller has completed its delivery obligation b) FOB vs. FCA – Seller’s delivery obligation i) FOB: Seller delivers when the goods pass the ship’s rail at the named port of shipment (1) Applies only to sea or inland waterway transport ii) FCA: Applies when parties don’t intend to deliver goods across the “ship’s rail” 4) Incoterms 200 – Groups a) Group E: Seller only has the obligation to make goods available to the Buyer at the Seller’s premises b) Group F: Seller must deliver the goods to a carrier named by Buyer c) Group C: Seller has to K for carriage but without assuming the risk of loss to the goods or additional costs past the point of shipment d) Group D: Seller has to bear all costs & risks and needs to bring the goods to the place of destination 5) Interrelationship b/n Incoterms & CISG – Force of Law a) Force of Law for CISG: Default rules (there in case parties have not “agreed otherwise in a K”) i) Buxbaum: CISG drafters did not intend for Incoterms to be implied into Ks for Sale of Goods b) Force of Law for Incoterms: Parties must incorporate into a K ▲ CISG will enforce Incoterms if the parties included them in their K c) Implying Incoterms when use not elected by parties? – Buxbaum says No i) CISG Art. 9: The parties are considered to have impliedly made applicable to their K or their K’s formation: (1) a usage of which the parties knew or ought to have known and (2) which an int’l trade is widely known and (3) regularly observed by parties to the Ks of the type involved in the particular trade concerned

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IBT Outline – Fall 2007

Letters of Credit (DST Part 2)
Basic function of L/C Sources of Law Governing L/C Independence Principle Strict Compliance a) Traditional Approach to Strict Compliance (JH Rayner) b) Modern Approach to Strict Compliance (UCP Art.13) 5) Fraud Exception a) Difference b/n Fraud in the Documents & Fraud in the Underlying Transaction b) The Approach to Fraud under UCC Art. 5 c) The Relationship b/n the UCP & UCC 6) Basic function of Standby L/C a) Differences b/n Standbys & Documentary Credits C/A: Beneficiary v. Bank (if Bank makes wrongful dishonor) ; Applicant v. Bank (not likely under UCC §5-109 as long as Bank honors in good faith) Basic Function of L/C Role of the L/C in DST: Provide mechanism for payment 1) Documentary Credit/Commercial Credit = Used to guarantee payment for Seller for its performance of a K  Primary L/C a) L/C is to protect the Seller against the risk of not being paid after completing delivery of conforming goods 2) Standby L/C = Used to guarantee payment to Buyer in the event of non-performance by Seller  Backup L/C (for longer duration Ks where taking chance on performance is riskier) a) Std L/C is to protect Buyer against risk of Seller not performing under the Sales K 3) When payment under L/C cannot be made: a) Non-conforming docs presented (UCP) b) Fraud in the transaction (UCC) L/C Terminology 1) Commercial L/C (p. 69) a) K with terms & conditions under which credit operates (incl. time, manner & place of presentation) b) Sent by Issuing Bank in which IB agrees to pay Beneficiary on the presentation of specified docs; c) States what docs that are supposed to be presented & provides description of docs i) Ex. Docs = BOL, Insurance Policy, Commercial Invoice ii) Docs must conform to their descriptions in the L/C to be properly accepted by Banks d) States whether L/C is unconfirmed or confirmed e) Should explicitly state UCP as governing law 2) Buyer & Seller a) Applicant of the credit = Party est. the credit b) Beneficiary of the credit = Party entitled to payment under the credit i) Assignee: Person/entity that Beneficiary may assign its rights under the L/C to 3) Banks a) Issuing Bank = Applicant’s Bank i) Obligation to make payment under credit ii) In return: Reimbursement + Fee iii) If pay: Protected from liability iv) UCP Art. 9: Liability of Issuing Bank b) Confirming Bank = Beneficiary’s Bank i) Used when Beneficiary is uncertain about the creditworthiness of Issuing Bank ii) Beneficiary requests from Issuing Bank that credit be confirmed iii) Obligation to make payment under credit iv) In return: Reimbursement + Fee v) If pay: Protected from liability vi) UCP Art. 9: Liability of Confirming Bank c) Nominated Bank = Bank designated in credit by Issuing Bank to serve as the place for document presentation by Beneficiary
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1) 2) 3) 4)

IBT Outline – Fall 2007

4)

5)

6)

7)

Appointed by Issuing Bank if there is no Issuing Bank office in the Beneficiary’s country where Beneficiary can go for document presentation & payment ii) Authorized to act on behalf of Issuing Bank to honor credit obligation, but no obligation to make payment under credit to Beneficiary d) Advising Bank = Bank, usually in the Beneficiary’s state that is asked by the Issuing Bank to tell the Beneficiary that the credit has been est. & terms of the credit; AB advises Beneficiary i) No obligation to make payment under credit ii) UCP Art. 7: AB only has to take r/s care in checking the apparent authenticity of the credit which it advices e) Wrongful Dishonor = What banks may be liable for if they do not pay when presented with docs that comply with the terms of the credit (anticipatory breach) i) Damages for Wrongful Dishonor: Seller can recover the whole amount that would have been due under the credit f) Fee Matter b/n Confirming & Advising Banks: To pay a bank to be an Advising Bank is cheaper than to pay a bank to be a Confirming Bank Types of L/C (Issue with L/C: Does this Bank have an obligation to pay against presentation of docs?) a) Straight L/C = Unconfirmed L/C – Beneficiary  IB (cheaper; not preferred) i) No flexibility: IB obligated to pay under the credit to Beneficiary/Seller only b) Negotiable L/C = Beneficiary  NB/CB  IB (preferred) i) Flexibility: Other parties can get payment under L/C if docs are properly endorsed c) Confirming L/C = Confirmation – Beneficiary  CB  IB i) Provides 2 independent promises of payment: 1 from Confirming Bank & 1 from Issuing Bank ii) ▲ IB cannot refuse to pay on the grounds that Beneficiary must first submit docs to CB under a Confirmed L/C Documents Beneficiary May Need to Present for Payment Under the Credit (must be specified in L/C) a) BOL = Receipt common carrier gives to Shipper/Seller for the goods that Carrier will transport (“document of title”) b) Commercial Invoice = Doc that details all items bought & amounts owed c) Drafts = Bill of Exchange i) Draft (1) An unconditional order in writing addressed from one person to another requiring the person to whom it is addressed to (a) make payment on demand (sight draft) or (b) make payment on some future date (time draft) and (c) make payment to the order of a specific person (2) Draft is submitted with all other required docs ii) Sight Drafts: Bank pays promptly full amount of the draft upon the Beneficiary’s presentation iii) Time Drafts: Bank’s obligation at the time of presentation is just to accept the draft for payment at a later date d) Consular Document = Shows that the goods comply with the relevant regulatory requirements of importing country (see Medical Marketing) e) Insurance Certificate: Buyer/Seller agrees to be responsible for insurance of goods transport (usually Buyer is responsible for insurance) f) Inspection Certificate: Goods passed inspection (independent/Buyer’s agent) before shipment Credits a) Payment Credit = Requires Bank to honor draft on sight that is immediately payable b) Acceptance Credit = Bank given period of time to make payment upon presentation of draft (Beneficiary submitted a time draft that requires payment by the date specified in the draft) c) Negotiation Credit = Beneficiary submits draft to a Nominated Bank (similar to Confirming L/C, but another bank is involved) Revocability of Credits a) Revocable L/C: L/C may be terminated at any time by the Applicant i) In practice, not used b/c the whole point of L/C transaction is to make payment reliable b) Irrevocable L/C: L/C is subject to expiration if not exercised w/in a stated period i) Irrevocable L/C required in most modern commercial transactions c) UCP Art. 6: Presumption of Irrevocability i) Presume credit is irrevocable if no indication of its revocability i)
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IBT Outline – Fall 2007

Sources of Law Governing L/C Sources of Law 1) UCP 500 (Uniform Customs & Practice for Documentary Credits) a) Lex Mercatoria – Set of trade generated rules/standardized banking practices with L/Cs i) Speaks to the obligation of Banks under L/C transactions according to the practices of banks b) Force of Law: To be enforced, must be incorporated into the L/C (UCP Art. 1) i) Banks routinely incorporate UCP into credits c) Only applies to documentary credits 2) UCC Article 5 (2003) a) Force of Law: US Law (with IBT, US law must be chosen or chosen by Private Int’l Law Analysis) b) Applies to domestic credit transactions c) Applies to fraud in DST (documents or underlying transaction) d) Applies to standby L/C Principles of L/C Law 1) Independence Principle: The credit transaction is independent/separate from the sales transaction a) Credit transactions are transactions in the documents vs. Sales transactions are transactions in the goods b) Fraud: Exception to Independence Principle i) Fraud in the documents vs. Fraud in the underlying transaction 2) Strict Compliance Principle: a) JH Rayner (Traditional): Docs presented to the Issuing Bank by Beneficiary must be exactly as stated in the L/C – there is no room for documents that are almost the same b) UCP 13 (Modern): Docs must appear compliant on their face after examined with r/s care Principle of L/C Law #1: Independence Principle 1) The L/C is independent from the underlying Sales K a) ▲ The performance of the L/C is separate & independent from the performance of the Sales K i) ▲ Payment by Bank to Beneficiary has to happen (1) if Beneficiary presents docs that conform to credit (2) even if Beneficiary did not comply with Sales K ii) ▲ Breach or Nonperformance of Sales K alone is not a defense for a Bank that does not pay under the L/C when Beneficiary makes conforming documentary presentation 2) Independent Principle in UCP a) UCP Art. 3 – Credits vs. Contracts b) UCP Art. 4 – Documents vs. Goods/Services/Performances 3) Exception to Independence Principle: Fraud 4) Policy underlying Independence Principle (upholds policies for L/C transaction): a) Make the payment process efficient; inefficient if banks investigate into the sales transaction b) Seller should be entitled to prompt payment if present sight drafts & conforming docs 5) O’Meara Co. – Issuing Bank withheld payment from assignee b/c Buyer said that the paper sold to them by Seller under the Sales K did not meet specifications & was not good enough a) CH: Issuing Bank was only obligated to pay upon the presentation of docs b/c they conformed with the terms of the L/C; it has no obligation to ensure that the paper met its specificity under the sales K b) RL: As long as documents are clean & conforming, the Bank has to pay the Beneficiary (in this case, the assignee) c) R: The Sales K should be of no concern to the Bank; if something is wrong with the underlying sales transaction (ex. nonconforming goods), Buyer has recourse against Seller under the Sales K. Bank should only be concerned with drafts & accompanying docs. d) DO: Cardozo foreshadows Fraud problem with Independence Principle i) Should not be the duty of Bank to check the conformity of the goods, but if the Bank discovers that the products are non-conforming, then it should be at the discretion of the Bank to pay or not pay (1) Bank still obligated to pay if it just has a suspicion rather than knowledge of the nonconformity of the goods ii) Rationale: Based on the nature of the credit transaction (1) If you have control of the BOL, you are in control of the goods; but if the goods are junk, you have no security in them! ▲ Bank should not be obligated to pay under the credit when there is no security by virtue of the goods being junk
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IBT Outline – Fall 2007

iii) Issuing Bank cannot w/hold reimbursement to Confirming Bank that had accepted docs in good faith from Beneficiary even if Beneficiary was fraudulent  Interplay b/n Independence & Strict Compliance Principles: Bank is only suppose to look at the documents & see whether they comply with the L/C (whether the “comply” is determined by the Strict Compliance Principle)

Principle of L/C Law #2: Strict Compliance Principle 1) Traditional Approach: JH Rayner a) JH Rayner v. Hambro’s Bank – Traditional Strict Compliance Rule i) F: L/C from Bank to Seller said that shipment covered in BOL had to be “coromandel groundnuts.” The docs presented to Bank listed “machine-shelled groundnut kernels.” Bank refused to pay seller under credit since such docs were non-compliant with L/C. ii) CH: An Issuing Bank is entitled to refuse to accept a draft drawn by the Beneficiary on the ground that the docs tendered did not comply precisely with the terms of the L/C that they had issued. iii) R: Bank must do exactly what its customer (Applicant) requires it to do b/c if Bank does not strictly comply with the terms imposed by the Applicant, then it runs the risk of the Applicant refusing to reimburse it. Even if one of the Bank’s employees understood that machine-shelled groundnut kernels were the same as coromandel groundnuts, Bank can & should still refuse payment on the grounds of nonconformity. iv) RL: Docs presented to the Issuing Bank by Beneficiary must be exactly as stated in the L/C – there is no room for documents that are almost the same. b) Hanil Bank v. PT Bank – Exception to Strict Compliance Rule & Waiver of Discrepancy i) Exception to Strict Compliance Rule: Some variations may be so insignificant as not to relieve the Bank of its obligation to pay (1) Ex. Typographical error: The name intended is unmistakably clear despite a typographical error ii) Why Bank still won in this case (despite applicable exception): (1) Discrepancy re the spelling of Beneficiary’s name was a proper basis to reject the L/C presentation b/c then the docs present did not comply precisely with the terms of the L/C that had been issued (2) Bank was correct in asking its customer (Applicant) whether it would accept the discrepancies & approve the requested payment; correctly followed Applicant’s instructions not to approve payment iii) Waiver of Discrepancy: When presented with a discrepancy, Bank can check with the Applicant to see if they’ll accept the discrepancy & whether it should pay Beneficiary (1) When looking to waive discrepancy, Bank should: (a) Give Applicant a list of the discrepancies (b) Ask Applicant whether it approves of payment to Beneficiary 2) Modern Approach: UCP Art. 13 – Standard for Examination of Documents a) Modern approach indicates that Banks don’t have to look for completely strict conformity b) UCP 13 – Standard for Examination of Documents i) Banks must examine docs with r/s care ii) Banks must determine whether docs appear on their face to be in compliance with terms of the Credit iii) Banks must determine this by int’l standard banking practice c) UCP 14 – Discrepant Docs & Notice i) If docs do not appear on their face to be compliant with terms of the Credit, then Banks can (1) refuse to take up docs or (2) approach Applicant for a waiver of discrepancies ii) If Bank does refuse to pay based on noncompliant docs, then Bank has to: (1) give notice (2) state all discrepancies in such notice (3) entitled to reimbursement (4) Note: Risky for Bank to refuse to pay without any hard evidence of fraud b/c Beneficiary will sue Bank for “wrongful dishonor” & Bank has the burden of proof in such a case iii) If Bank fails to act in accordance with UCP provisions, it will be precluded from claiming that docs are not compliant with terms of the Credit
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IBT Outline – Fall 2007



Problem with Independence/Strict Compliance Principle: Bank has to pay fraudulent Seller under credit if documents conform even though underlying transaction is fraudulent

Fraud: The Exception to Independence Principle/Strict Compliance Dynamic 1) Fraud: Deliberate misrepresentation of a material fact a) Intent to deceive b) Material 2) 2 Types of Fraud that can occur in a DST a) Fraud in the documents i) Ex. Forged BOL b) Fraud in the underlying transaction i) Ex. Supposed to ship 5k computers, but ship 5k computer chips 3) UCC §5-109 = Source of Law to resolve DST-Fraud Case: (not UCP!) a) UCP vs. UCC i) UCP – Silent on fraud issue ii) UCC §5-109 (p. 286) – Addresses fraud issue b) Mid-America: Where the parties have opted for the UCP in their K, UCC may still apply on issues where the UCC is silent 4) Analysis to resolve DST-Fraud Case: What does an Issuing Bank/Buyer do under UCC §5-109 a) Must first have established the occurrence of a material fraud i) Material Fraud = Fraud that vitiated the entire transaction so that there is no point any more to rely on the credit ii) Applies to both fraud in the (1) documents & (2) underlying transaction b) UCC §5-109(a) – WHO is presenting the docs to the Issuing Bank? i) (1) Protected Presenters? = Those that have already given value for the docs to the Beneficiary in good faith in reliance on the docs presented to them (i.e. Confirming Banks) (a) Yes – Issuing Bank must honor presentment by protected presenter even if there has been material fraud (i) Issuing Bank will be reimbursed by Buyer  Buyer v. Seller for fraud (b) No – Go to UCC §5-109(b) ii) (2) All other cases? = Protected Presenters are not present (a) Issuing Bank can choose to honor or dishonor the presentation as long as it acts in good faith (b) Exception: Bank knows that Seller is being fraudulent (i) Bank is presumed to be acting in good faith UNLESS it is acting in collusion with fraudulent Seller (c) Note: Issuing Bank has no duty to Applicant to dishonor payment (i) Issuing Bank does not want to be sued by Beneficiary for wrongful dishonor 1. Issuing Bank difficult has burden of proof under wrongful dishonor C/A (ii) ▲ Issuing Bank will always pay against presentation of docs even if it thinks there might be fraud (they are protected since this does not amount to bad faith) iii) If Bank is going to pay Seller, go to UCC §5-109(b) c) UCC §5-109(b) – Gives Applicant mechanism to stop Bank from Paying Seller i) Court can enjoin Issuing Bank from making payment under L/C (1) Elements for Injunction (a) Risk of irreparable injury to Applicant (b) Probable success on the merits (i) Applicant is more likely than not to succeed under its claim of material fraud (ii) Person demanding honor is not a Protected Presenter ii) Implication: Issuing Bank can wait until court order to refuse to pay upon presentation of docs so as to avoid wrongful dishonor suit by Seller against it

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IBT Outline – Fall 2007

Documentary Credit The Basics of L/C: The Process 1) Negotiations over Sales K b/n Beneficiary & Applicant must resolve the following L/C issues: a) Maximum amount of drawings available under the credit b) Expiration date for the credit c) Whether the credit will be revocable or irrevocable (UCP – presume irrevocable if not stipulated) d) Docs to be presented for receipt of payment under credit e) Where Beneficiary has to present docs required i) Issuing Bank’s office in Beneficiary’s jurisdiction or ii) Nominated Bank, Confirming Bank f) Whether the credit should be confirmed by Confirming Bank g) Whether the credit incorporates the UCP 500 (usually does) i) Note: UCC Art. 5 governs domestic credit transactions 2) Applicant applies with Issuing Bank for a commercial credit in favor of Beneficiary a) Credit must satisfy Sales K specifications negotiated for 3) Issuing Bank issues credit & Issuing Bank/Applicant enter into Reimbursement Agmt 4) Issuing Bank sends Commercial L/C to Beneficiary a) This is the Letter of Credit that specifies the terms & conditions under which the credit operates b) Beneficiary should make sure that credit satisfies Sales K specifications negotiated for 5) Beneficiary performs in accordance with the terms of the credit a) Must make documentary presentation that conforms to the requirements in the commercial credit b) Commercial credit requirements: i) Time (watch for exp. date specified in the credit & transport docs) (1) Docs must be presented on/before exp. date specified in credit (a) Beneficiary should make presentation ahead of time b/c banks have 7 days to examine a presentation & decide whether they conform to the credit; Beneficiary wants time to cure any defects before exp. date (2) Banks will only accept BOL & transport docs presented w/in 21 days after the date of shipment unless the credit specifies otherwise ii) Manner (apply Strict Compliance Rule – modern, UCP 13) iii) Place (must be at place specified in L/C) (1) Confirming Bank in Seller’s country (if requested by Seller); Issuing Bank (if branch office in Seller’s country); Nominated Bank (if appointed by Issuing Bank) 6) Confirming/Issuing Bank must honor if documentary presentation conforms to commercial credit a) To “honor” depends on the draft presented i) Sight Draft presented: Bank must honor by paying the draft promptly ii) Time Draft presented: Bank must honor by accepting draft promptly, but paying upon maturity 7) Confirming Bank forwards docs to Issuing Bank for reimbursement 8) Issuing Bank forwards docs to Applicant for reimbursement 9) Applicant uses docs to claim goods sent by Beneficiary from Carrier Standby L/C (Std L/C) Basic Function of Std L/C 1) Std L/C: L/C used to guarantee performance on the part of Seller where the Seller’s Bank/Issuing Bank agrees to Buyer/Beneficiary if the Seller/Applicant defaults on its obligation a) Buyer declares to Seller’s Bank: Seller has not performed; I want my $. 2) When to use Std L/C: Used with longer duration Ks (ex. K for Sale of Equipment + Consulting) 3) Std L/C = Guarantee  Use Std L/C as a backup to L/C: a) If all goes well, then don’t have to use Standby L/C b) If all does not go well, then able to use Standby L/C 4) Cases where Standby L/C are invoked: Attempts by Buyer/Beneficiary to enjoin payment under credit based on Seller/Applicant’s fraudulent conduct

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IBT Outline – Fall 2007

The Basics of Std L/C: The Process 1) Straight Std L/C Arrangement a) Setting Std L/C up i) Seller est. a Std L/C ii) in favor of Buyer that is iii) payable upon Buyer’s submission of a Pro Forma Declaration that says the Seller has failed to perform K to the Confirming/Issuing Bank & Buyer’s demand for payment (i.e. sight draft) b) Getting Paid: Buyer presents Pro Forma Declaration & demand for payment (i.e. sight draft) to Seller’s Bank & Bank pays Buyer 2) “Confirmed Std L/C” [Bank Guarantee] a) Buyer obtains Confirmed Std L/C from Buyer’s Bank (obligation for Buyer’s Bank to pay on presentation of Pro Forma Declaration & demand for payment (i.e. sight draft) b) Buyer’s Bank pays the Buyer under the Confirmed Std L/C when Buyer presents Pro Forma Declaration & demand for payment (i.e. draft) c) Buyer’s Bank fwds Declaration & demand for reimbursement to Seller’s Bank under the Std L/C d) Seller’s Bank reimburses Buyer’s Bank under Std L/C e) Seller’s Bank fwds Declaration & demand for reimbursement to Seller f) Seller reimburses Seller’s Bank  Buyer can sue Seller for nonperformance or fraud Comparison b/n Documentary Credits & Standby L/C Features Level of Obligation Applicant Beneficiary/Who is protected Issuing Bank Confirming Bank Purpose Documentary Credit (L/C) Primary Obligation Buyer Seller Buyer’s Bank – Pays under L/C Seller’s Bank – Pays under L/C Used by the Seller to guarantee payment upon its performance under the Sales K (delivery & conforming goods)  Upon performance of the Sales K  Present docs: Indicates Sales K transaction running smoothly  BOL (doc of title), Invoice, Insurance Certificate, Inspection Certificate, etc. Standby L/C Backup Obligation Seller Buyer Seller’s Bank – Pays under Std L/C Buyer’s Bank – Pays under Confirmed Std L/C Used by Buyer to protect itself f/ the risk of nonperformance by the Seller under the Sales K   Upon nonperformance of the Sales K Present docs: Indicates something went wrong in underlying transaction  Pro Forma Declaration (not a doc of title)  Buyer telling Seller’s Bank that Seller breached underlying K & he wants to get paid Bank has to determine whether the Declaration complies on its face with the terms of the credit  Committed by Buyer – Lying about performance of Seller  More susceptible b/c only have to inspect Declaration Heightened Risk – If Bank can’t get reimbursed under Std L/C, Bank can’t recoup losses b/c it has no title to any goods Set Up: Seller  Seller’s Bank  Buyer Redeem: Buyer  Issuing Bank  Seller

When Payable

Docs Submitted for Payment

Independence Principle / Strict Compliance – applicable to both Fraud Exception – applicable to both

Risk of Issuing Bank

The Process: Straight

Bank has to determine whether docs submitted comply on their face with the terms of the credit  Committed by Seller – Docs or Underlying Transaction  Less susceptible b/c of all docs that Bank has to inspect Lessened Risk – If Bank can’t get reimbursed for payment under L/C, Bank can recover possession of the goods by presenting BOL & then sell goods to recoup losses Set Up: Buyer  Buyer’s Bank  Seller Redeem: Seller  Buyer’s Bank  Buyer
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IBT Outline – Fall 2007

Non-establishment Forms of International Business
1) Agency / Distribution Agmts a) Possible ?s under foreign law that might affect the decision to enter into a Distribution Agmt 2) Technology Transfer a) Basic IP Terminology b) Identifying governmental interests in technology transfer 3) Contract Manufacturing & Franchising a) Structure of the franchise agmt b) Legal and cultural concerns relevant in franchising Intro to Non-establishment Forms of Int’l Business Non-establishment Forms of Doing Business Abroad 1) Agency/Distributorship Relationship: Seller engages a person (agent) or business entity (distributor) into a foreign market to serve as its sales rep 2) Contract Manufacturing/Franchising a) Contract Manufacturing: Seller licenses IP & proprietary info to a foreign entity so that F/E can manufacture Seller’s products in a foreign market rd b) Franchising: Seller will allow 3 party to use its IP to provide services or services/products Agency/Distributorships Setting Up an Agency/Distributorship: Developing a Distribution Network in Foreign Market 1) Why: Seller wants to penetrate foreign market, but lacks knowledge about that market 2) 2 Forms of Distribution: Seller has 2 options for who it can get to engage to sell its product in foreign market a) An independent foreign agent or sales rep b) An independent distributor (middle-man) 3) Decision Considerations: Seller’s choice b/n setting up an agent vs. distributor depends on a) how much control Seller wants to retain b) tolerance of risk of liability for agent’s / distributor’s actions 4) Foreign Law makes choice for Seller: The form of distribution may be mandated by local law Feature Order vs. Purchase Transaction Agent Orders for Buyer Distributor Buys Goods from Seller

Title & Risk of Loss

No title or risk Title & Risk w/ Seller Uncertain – Agent usually can’t bind Seller, but depends on jurisdiction’s law

Power to Bind Seller (P-A)

Nature Control of Price /Buyers

Individual or small co. Seller in control of ads/price Seller in control of who gets products Agent has no power to appt subagent Salary / Commission

Control to Appt Subagents Compensation

Takes title & risk More Risks: Unable to resell goods, storing goods Distributor has no power to bind Seller (Independent Contractor) Possible Pwr to Bind Seller when: - Distributor acts like agent for goods not already bought - Seller explicitly confers pwr to bind Seller on Distributor Larger, more est. co. Seller loses control of ads/price Seller loses control of who gets products *Seller can K for control Distributor has power to appt subagent *Seller can K around this Profit from re-sale

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IBT Outline – Fall 2007

Possible ?s under foreign law that might affect the decision to enter into a Distribution Agmt Issue Liability Problem The more control, the more likely Seller will be subject to liability under foreign nation’s laws  Depends on whether A/D are employees  Termination, Torts, Jurisdiction What may be legal in foreign nation may not be legal here Giving exclusive rights to agent / distributor for a particular territory has antitrust implications A/D may have rights against Seller if terminated wrongly Does foreign law allow termination w/ cause & w/out cause or just either or?  A/D infringe IP rights or disclose confidential info of Seller Solution: Put in K… Seller & A/D are Independent Contractors

Illegal Activity Antitrust & Anti-competition

Termination /Labor Law

IP/Proprietary Info

Prohibit any act by A/D that violates the law of the host nation Distinguish b/n Exclusive & Sole Exclusive – Excludes everyone incl. Seller Sole – Excludes everyone except Seller  Detail treatment of termination issues listing reasons that justify termination for cause  Incl. contingencies that automatically terminate the agmt  Protect IP rights  Protect confidential business info

Bottom Line: What Sellers should be familiar with before setting up Agency/Distributorship 1) Agency vs. Distributorship: Control & Risk a) Agency: Seller has more control, but more legal issues to deal with b) Distributorship: Seller has less control, but less legal issues to deal with 2) Exit Strategy: Seller should have one at the time of setting up an Agency / Distributorship. a) Some countries may mandate harsh requirements if Seller opts to exit (i.e. mandatory liquidated damages, 6 mos. notice) 3) Laws to know: Hire local counsel! a) Agency Principles (implications for more control by Seller) b) Business Customs (what is legal over there may not be legal over here) c) Antitrust/anti-competition law (extraterritorial effect of US antitrust law) d) Termination (laws of host nation) e) IP law (seller’s responsibility to register rights) Technology Transfer: IP Rights & “Know-How” Technology Transfer 1) Technology Transfer: Process by which an owner of technology gives access to its technology to another 2) “Technology” a) IP Rights: Patents, TMs, copyrights, trade secrets that are given statutory protection by domestic & int’l law b) Know-How: Valuable business info that may or may not receive statutory protection or recognition as IP 3) “Transfer” of . . . a) more limited right through a licensing agmt b) complete ownership through a sale or assignment of technology 4) Why License? a) The next step for a US seller to penetrate a foreign market; the US seller already knows that its product sells well in the foreign market after Agency / Distributorship b) When licensing rights in a foreign market, consider: The national & int’l legal frameworks that have been established for the protection of IP rights i) Focus: The substantive rights & procedures that must be followed to get & enforce IP rights abroad 5) Governmental interests in technology transfer : Want to get IP that results in production processes to kickoff modernization & industrialization; improve public health a) Heritage of Mankind Argument: If the benefit of the discovery is for the benefit of mankind, then the discovery cannot be made into “property” as to any one person/entity 6) “Property”: Identifying things like patents & TMs as “property” incentivizes competition
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IBT Outline – Fall 2007

The Int’l IP Legal System 1) 2 Categories of the System a) National legal systems: Directly creates IP rights; incl. substantive law that creates, recognizes, protects & enforces IP rights (ex. USPTO, Lanham Act) b) Int’l treaties: Do NOT directly create IP rights; establishes certain principles & procedures re the treatment of foreign IP rights by its members i) Purpose of treaties: Harmonize legal standards by creating min legal standards for IP rights protection for all its members ii) Ex. TRIPS (The Agmt on Trade Related IP Rights) 2) Principle of Territoriality: In absence of an int’l treaty, an IP owner must comply with the procedures for obtaining IP rights of every country that the owner seeks IP protection What to Know 1) The overall legal framework that relates to IP 2) What US Seller (Licensor) should put it its K with Licensee to protect its IP rights (see “Protecting IP Rights”) Basic IP Terminology US Law Definition Patent Granted to inventions or processes that are novel, useful, nonobvious Trademark Marks on goods; Any word, name, symbol, or device or any combination thereof that is capable of distinguishing goods from those of another Applied to goods, Service, Collective, Certificate Marks, Trade names Distinctiveness Unlimited – must be continuously used in “commercial activity” First Use (vs. First to Register) USPTO – Lanham Act Functions: Origin, Guarantee, Market Creature of state & federal law: State law creates substantive TM rights; Federal law (Lanham Act gives framework in which CL TM can be enforced at federal level) Only recognizes Economic Rights Copyright Protection is available for all original words fixed in a tangible medium of expression; exclusive rights incl. reprod., public performance Literary works, music, lyrics, dramatic works, pictorial, sounds Originality – Author must have created the work & did not copy it Life of author + 70 years after his death Know How Know How: Commercially valuable knowledge Trade Secret: Knowhow that may qualify for patent protection in the US

Categories

Hallmark

Novelty

Term of Protection Competing Apps Granting Systems Other

20 years

First to Invent (vs. First to File) Examination

USPTO – Lanham Act Fair Use Doctrine

Where know-how does not qualify as IP, it is protected by K & Tort law

K – impose confidentiality obligations rd on 3 parties Tort – Unfair competition

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IBT Outline – Fall 2007

TRIPS: The Agmt on Trade Related IP Rights 1) Substantive law covered: Inc. ©, TMs, patents, trade secrets 2) Patents & TMs under TRIPS (incorporates Paris Convention) a) Right of National Treatment: A nation cannot discriminate against foreign holders of patents or TMs, but must provide them with treatment equal to that received by domestic owners b) Right of Priority: An person/entity (A) that gets a patent or registers a patent/TM in a member country will have priority over any other person/entity (B) for the same invention or who wants to register the same patent/TM in any other member country if the (A) registers the same patent or TM within a period of priority 3) Copyrights under TRIPS (incorporates Bernes Convention) a) Copyright protection: A work that is first published in a member country is entitled to receive (1) the same © protection in every other member country that nationals of those countries receive & (2) rights specifically granted by the Bernes Convention b) Right of National Treatment applies to © c) No Moral Rights: TRIPs, like the US, does not recognize moral rights in © works i) Moral rights = Rights that are personal to the author 4) Trade Secrets under TRIPS a) Trade secret protection: Members must provide procedures to protect trade secrets Contract Manufacturing & Franchising Structure of the franchise agmt Franchising 1) Business Format Franchising: Form of d/b that allows corp. to achieve int’l recognition for its TMs, trade name & business identify/rep w/out having to invest a lot of capital a) How franchising works: Franchisee operates business, assuming Franchisor’s standard appearance & methods of operation 2) Franchisor’s control: Wants to ensure its reputation is held up and wants to maintain uniformity throughout its franchises (wants to ensure that everyone will trust & be familiar with the brand wherever they go) but wants to limit its liability, too Legal and cultural concerns relevant in franchising Legal concerns relevant in Franchising (use local counsel!) 1) TM & Trade Secret Protection – Agmt Art. 9 a) Significance of the Trade Name: Trade Name indicates the name under which the company is doing business & its purpose is to avoid confusion re ownership rights i) “The Franchisee agrees to use the names and marks as the sole service mark & trade name identification of the Restaurant” b) Understand public screening & registration process in foreign countries 2) Antitrust/anti-competition Implications – How to ensure franchisee will do what franchisor wants without running into regulatory problems a) Agmt Art. 1 (Exclusive Territory) b) Tying: Linking the right to operate under the franchise with the requirement that franchisee only purchase their equipment, supplies & products from franchisor 3) Agency Law: Watch Franchisor’s amount & degree of control! a) If Franchisor exerts too much control over franchisee, principal-agent relationship may be imputed opening the Franchisor up to liability b) Franchisor has all the power – may make Franchisee agree to some onerous provisions Cultural concerns relevant in Franchising 1) Franchises must: Change or modify parts of business image & operation to tailor to local market interests a) Cannot take what has worked in the US & transplant it into the foreign market without first considering the market’s culture & tastes BUT b) The more the Franchisor alters its business, plan & operations to suit the local market, the more it risks not reaping the benefits of franchising (recognition & market penetration with est. identity) 2) Sensitive areas: Public morality, religious law, building standards 3) Trust the Franchisee: In some cases, Franchisor should rely on Franchisee’s expertise re the foreign market
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IBT Outline – Fall 2007

Foreign Direct Investment (FDI)
1) Reasons to engage in FDI 2) Sources of law governing foreign investment / Investment dispute resolution a) Reasons for the limited utility of the ICJ as a forum for investment disputes b) Multilateral investment instruments (ICSID Convention; MIGA) c) Bilateral investment treaties d) NAFTA 3) The overlap between investment disputes and the legitimate exercise of regulatory authority by a sovereign state a) U.S. anti-bribery legislation (FCPA) and its scope of application Foreign Direct Investment 1) FDI: Investment that is made to acquire a lasting ownership interest in an enterprise operating in a foreign nation 2) Forms of FDI a) Wholly-owned subsidiary b) Joint Venture (foreign law may req. that US investor have a partner with foreign entity in the home state) 3) Ks related to FDI a) Commercial (ex. labor, supply & distribution) b) Investment arrangements (ex. JV, Concession Agmt) c) Insurance & financing d) State (i.e. b/n Investor & host state govt.) Reasons to engage in FDI From the perspective of the Investor 1) Market Penetration: Do lesser non-est. forms of d/b work, or does the co. need to kick it up a notch? 2) Mgmt & Control: More control over mgmt allows for more aggressive penetration into the foreign market (i.e. advertising) 3) IP: Does co. need to utilize its most valuable IP & yet, are not b/c it wants to protect it from foreign infringers? 4) Research & Development Abroad: Hallmark of a mature int’l business is an independent, regional R&D facility dedicated to its foreign market 5) Global Competition: FDI has become a necessary long-term strategy; Often, the “early bird gets the worm” in est. FDI in foreign countries since developing countries provide preferential treatment to foreign investors that enter market early From the perspective of the Host Country 1) Capital Inflow: Foreign Investors pumping own money into host country’s economy (i.e. means to development) a) Other means of capital inflow from foreign investors i) Portfolio Equity – Foreign Investors buying stock from local corps. ii) Issuance of Debt – If borrow too much, high repayment loans 2) Technology Transfer: FDI provides more supportive technology transfer than licensing a) Level of technology acquired is higher (b/c IP owner has better control over protecting its IP) b) Absorption & assimilation of technology by host nation is more effective 3) Changing circumstances: Even though nationalistic countries were not open to FDI b/c they did not want foreign ownership in their countries, they are now realizing that they can’t rely solely on issuance of debt to supply capital needs for development 4) Caveat: For developing country to benefit from FDI, country needs to reach certain level of development to increase the “gap” b/n Foreign Investor Co. & local firms re hard & soft structures (see MIGA efforts) a) Hard Structures: Physical structures i) Road, utilities, transportation, telecommunications, housing, schools, physical safety b) Soft Structures: Social structures & institutions (law-related) i) Due Process considerations, IP law (recognition & enforcement), Tax law, Political Risk, Environmental Implications, Secured Credit laws

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IBT Outline – Fall 2007

FDI – Regulatory Aspects Sources of law governing foreign investment FDI: Private & Public Components 1) Private Component: Relationship b/n US investor & foreign corp. (partners) a) JV – US investor has a local partner based in foreign market b) Relationship created by Ks: Agmt to create JV; Agmt to est. ownership stake (terms of investment); Additional agmts (i.e. Distribution Agmt) 2) Public Component: Relationship b/n US investor & foreign govt. a) Govt. may approach US corp & offer their state as a location for US corp’s FDI b) Agmts b/n US investor & foreign govt.: Agmts based on Preferential Treatment (i.e. tax breaks); Investment Agmt (sets time frame for how long US Investor stays with FDI) c) Issue of Expropriation: Home state declares ownership of US investor’s FDI (If things go badly in public component, then FDI may be expropriated) 3) Dispute resolution a) B/n private parties: Look at K b) B/n Investor & State: Limitations on how private co. can maintain litigation against a sovereign state Framework for Int’l Investment Law – Sources for Int’l Investment Law 1) Jurisprudence of the International Court of Justice (ICJ) 2) Multilateral investment treaties (i.e. ICSID & MIGA) 3) Bilateral Investment Treaties (BITS) 4) Multilateral free trade agmts (i.e. NAFTA) 5) WTO law 6) Relevant domestic law Resolving disputes at Private-Public Sector: Paths to the resolution of investment disputes International Court of Justice: Reasons for the limited utility of the ICJ as a forum for investment disputes ICJ is no good for commercial disputes in Private-Public component of FDI 1) State-State Disputes: Only disputes that can come before ICJ (not Private-State disputes) 2) Diplomatic Protection: If it wants to, State can intercede on behalf of an Investor if Investor is trying to sue foreign govt. under Private-State component of FDI a) Ex. Acme (US) has problem with Brazil over FDI. Acme can try to get US govt. to sue Brazil on its behalf & bring suit to ICJ. b) Not likely that US will get into ICJ litigation over regular commercial disputes Various Hurdles to Overcome in Filing Suit in ICJ for Private-Public FDI Commercial Disputes 1) Consent-Jurisdiction: State of Private Investor and Host State must give consent to ICJ jurisdiction over them a) The Anglo-Iranian Case (ICSID 1952) – Parties must have agreed to be subject to int’l treaties; Iran did not 2) Standing: Only the state whose citizens are being harmed has standing to assert a claim before the ICJ against another state ▲ only the state of Private Investor (corp.) has standing to assert a claim before the ICJ a) The Barcelona Traction Case (ICSID 1970) – Canadian co. was the injured party in this case ▲ Belgium cannot sue Spain in ICJ on behalf of its citizens who owned stock in the Canadian co. b) Barcelona Traction distinguishes b/n 2 kinds of state obligations i) Obligations that run to the int’l community as a whole – Rights are so important to all states that rights can be asserted by any state on behalf of another state against another state (i.e. rights to not be enslaved) ii) Diplomatic protection – Only the state whose own citizens are being harmed has standing to assert a claim before the ICJ 3) Local Remedies First: Exhaustion of local remedies before filing suit with ICJ may be required a) The ESLI Case (ICSID 1989) – Took 21 years for the case to get to the ICJ
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IBT Outline – Fall 2007

i)

Note: ICJ retreated from its position in Barcelona Traction – court allowed a SH’s country to bring a claim on SH’s behalf against a host country even if the SH’s company was not a national of SH’s country

Expropriation: State Responsibility to Foreign Investors? 1) Hull Formula (US): No govt. is entitled to expropriate private property, for whatever purpose, without the payment of prompt, effective & adequate compensation 2) Calvo Doctrine: A sovereign state has the right to nationalize property to assert control over its natural resources ▲ (a) compensation does not need to be prior or prompt & (b) the amt. of compensation can be determined by the law of the expropriating state 3) Creeping Expropriation: When the govt. does not issue 1 notice of expropriation, but rather issues smaller orders & regulations that “nibble away” at ownership rights of Foreign Investor 4) Correlation b/n: Value of Investor’s investment & Host State’s actions a) It is the Host govt.’s recognition of the foreign investor’s rights that creates value of foreign investment ▲ b) The ability of a foreign investor to realize the value out of a foreign investment is always dependent on an act of the Host govt. c) Tension: Host govt.’s ordinary action (ex. implementing tax policy) may impair the value of a Foreign Investor’s investment (see Martin Feldman v. Mexico) Multilateral Investment Instruments (ICSID Convention; MIGA) Understand about ICSID 1) ICSID Convention provides parties with a forum for resolution of Investor-State disputes 2) ICSID arbitrators have to look beyond ICSID & consider other avenues of law in regards to the law that they need to apply to resolve an Investor-State dispute ICSID – Int’l Convention on the Settlement of Investment Disputes b/n States & Nationals of Other States (p.411) 1) ICSID Convention & ICSID Tribunal a) Deals with: Investment disputes through ICSID arbitration b/n 2 parties of 2 ICSID contracting states b) Provides: Arbitration Forum for Private-Public, Investor-State disputes c) Mechanism: For the resolution of investment disputes b/n FDI Investors & Host Country 2) *ICSID Forum provides exclusive remedy if: a) the Investor’s Home Country & Host Country are both parties to the convention i) Home states of an investor cannot give diplomatic protection or bring an int’l claim in connection w/ the dispute – ICSID Art. 27(1) b) the dispute is an investment dispute i) “Investment dispute” was deliberately not defined in ICSID Convention c) the particular investment dispute is the subject of a consent to arbitrate under ICSID arbitration i) Consent can be given (1) in an investment agmt at the time the project in question is undertaken (2) in an ad hoc agmt after the dispute arises (3) through BIT, i.e. reference to arbitration under ICSID (see Lanco Int’l v. Argentina) ii) Once consent is given, it is not subject to revocation – ICSID Art. 25(1) Choice of Law: What Law is the ICSID Tribunal Supposed to Apply When Resolving an Investment Dispute? 1) Resolution – Avoid all attempts to define the substantive obligations b/n foreign investor & host state, but provide ICSID 42(1) a) The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agmt, the Tribunal shall apply the law of the Contracting State party [host state] to the dispute (incl. its rules on the conflict of laws) and such rules of int’l law as may be applicable. 2) ▲ The Hierarchy of Governing Laws ICSID Tribunal will apply: a) Autonomy of the Parties: What law did the parties pick to govern the investment? b) Host Country’s Law: In the absence of a choice of law provision in Investor-State agmt, ICSID will apply law of the host country c) Int’l Law (if applicable) i) ICSID Tribunal will have to apply int’l law when: (1) The parties have so agreed (2) Host state law applies & int’l law is part of that law
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IBT Outline – Fall 2007

(a) Ex. Host state is a party to certain int’l treaties / customary int’l law (3) Issue is directly regulated by int’l law (ex. by BIT – Treaty b/n Host State & Investor’s Home State) (a) If the BIT b/n the home state of the investor & the host state covers the investment dispute issue, then the BIT provisions will govern in the ICSID arbitration (4) Host state’s action taken under the host state’s law or law violates int’l law (a) Ex. Expropriation without appropriate compensation ICSID Tribunal Analysis: Does Tribunal Have Jurisdiction? (Lanco Int’l v. Argentina) 1) Eligible investor in eligible project? (refer to BIT) 2) Is there an investment dispute? (refer to BIT) 3) Is there consent to submit to ICSID arbitration by both Home & Host Country? (can refer to BIT) a) i.e. Is consent to ICSID arbitration referenced to in relevant BIT? ICSID Art. 25(2)(b) – “National of Another Contracting State” (Wena Hotels v. Arab Republic of Eqypt) 1) ICSID Art. 25 is a jurisdiction enhancing provisions b/c it covers: a) Investor corps incorporated in a state other than Host state b) Investor corps incorporated in Host state, but that have foreign control & ownership in another state 2) ICSID Art. 25(2)(b) should be read to preserve diversity jurisdiction of ICSID Tribunal a) Expand diversity to include either i) formally foreign investor & local govt. or ii) actual foreign owners & local govt. b) Key: Need to know where controlling SHs come from  ICSID’s “Foreign Control” language i) If Investor Corp is inc. in Host State & is controlled by SHs from Host State – ICSID Tribunal has no jurisdiction ii) If Investor Corp is inc. in Host State, but is controlled by SHs of another state – ICSID Tribunal has jurisdiction 3) Caveat: Look at BIT provisions b/c BIT may define what “controlling share-holdership” means w/in the context of the particular BIT MIGA – The MIGA Convention & The Multilateral Investment Guarantee Agency 1) Purpose: Improve the flow to developing countries of capital & technology through FDI by improving the conditions of FDI & reducing/insurance against the political risks of FDIs for Investors a) Benefit for Investor: Protected against risks b) Benefit for Home State: They can get investment they might not have otherwise been able to get 2) Eligible Investors a) National of a member country other than host country b) Corp organized in a member country other than host country c) Corp organized in the host country, but the majority of whose capital is owned by nationals of member countries 3) Eligible Projects: New investments, expansion, modernization, restructuring, privatization of existing investments, loans made or guaranteed by holders of equity in enterprise 4) Covered Risks: Eligible investors engaged in eligible projects can purchase insurance against risks of… a) Inconvertibility of local currency b) Expropriation c) Breach of K d) War & Civil disturbance 5) MIGA’s Influence on Developing, Potential Home States: Agency encourages developing countries to shape up by entering into BITs, joining ICSID Convention & adopting other rules that indicate investor-friendly regime a) If foreign investors cannot get MIGA insurance b/c a developing country does not meet standards, then this pushes developing countries to meet MIGA standards Bilateral Investment Treaties (BITs) BITs – Bilateral Investment Treaties Provides: Legal framework that facilitates FDI b/n 2 countries in the interest of both the Investor’s Home State & Host State (protect rights of investors & attract investment to host country)
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Rules set up by BITs If rules are broken, probably going to ICSID arbitration (▲ go through ICSID Tribunal Analysis above) 1) Admission of the Investment/Prohibitions of performance requirements: Host country cannot mandate as a condition of the est. of foreign investment certain obligations on part of investor (list of banned performance requirements on p.413) 2) Fair & Equitable Treatment: Host country agrees to treat foreign investors fairly, non-discriminatorily a) Min Standard: No discrimination w/ respect to matters like access to the courts & administrative bodies, applicable taxes & administration of govt. regulations 3) Full Protection & Security: Host country required to (1) not attack investors’ facilities & personnel; (2) protect investors & investment against others’ attacks 4) Expropriation & Compensation: Expropriation is lawful, but must be accompanied by compensation a) Expropriation is lawful if it is: i) carried out for a public purpose ii) non-discriminatorily iii) carried out in accordance with due process and iv) accompanied by just compensation b) Issues of compensation: i) No consensus, but most BITs adopt the Hull Formula (prompt, effective, adequate) ii) What is “prompt, effective & adequate?” 5) Dispute Settlement: Host state must give its consent to arbitration of any investment dispute subject to a treaty; consent generally made by reference to the rules or arbitral institutions provided for in the treaty a) ▲ if BIT calls for arbitration pursuant to ICSID Convention, then this constitutes consent required under ICSID (possibly constitutes “agmt in writing” for NY Convention) BIT b/n US & Argentina Concerning the Reciprocal Encouragement & Protection of Investment (p.421-23) 1) Lanco Int’l v. Argentina (ICSID) – Whether dispute should be resolved by ICSID arbitration 2) US-Argentina BIT Lanco court looks at to go through its analysis a) Article 1 – Defines “investment” b) Article VII – Defines “investment dispute” ; What to do in the event of an “investment dispute” NAFTA NAFTA – The North American Free Trade Agreement 1) Purpose: To eliminate trade barriers in North America 2) FDI related objective: Substantially increase investment opportunities in the territories of the parties 3) Parties to NAFTA: United States, Mexico, Canada NAFTA Chapter 11 1) Dispute Resolution Mechanism: Deals with the investment disputes within NAFTA a) Corps can sue NAFTA member states if they feel their investments have been treated discriminatorily 2) Provisions are similar to BIT basic rules – Foreign Investors want the same protections a) 1102: National Treatment i) Martin Feldman v. Mexico (ICSID 2003) – Winning Claim: Even though Mexican companies similar to foreign investor could not comply with the tax invoice requirement either, they did not receive the punishment CEMSA did (1) To show violation of a national treatment/non-discrimination provision, foreign investor must show: (a) which domestic investors are in “like circumstances” with the foreign investor (i) Poblano Group was also gray market exporters of cigarettes (b) there has been discrimination against foreign investor (i) CEMSA treated less favorably than domestically owned reseller/exporters of cigarettes since they had never been denied export privileges like CEMSA (c) differential treatment as a result of foreign investor’s nationality (i) differential treatment as a result of investor’s nationality only has to be proven circumstantially (violation can be implicit rather than explicit) ii) NAFTA 1102 claim is based on differential treatment ▲ if there are no domestic investors that were in similar circumstances as foreign investor, then foreign investor would lose on this claim b) 1103: Most-Favored Nation c) 1104: Standard of Treatment
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d) 1105: Minimum Standard of Treatment – Fair & Equitable treatment, Full Protection & Security, Nondiscriminatory treatment e) 1106: Performance Requirements f) 1110: Expropriation & Compensation i) Martin Feldman v. Mexico (ICSID 2003) – Losing Claim: Mexico had a “public purpose” in prohibiting the kind of resale activity CEMSA was engaged in & the regulation was not issued discriminatorily as it applied to both domestic & foreign gray market exporters of cigarettes g) 1114: Environment Measures 3) Arbitration Option: Investor can choose arbitration under ICSID in investment disputes a) US = Party to ICSID Convention b) Canada & Mexico ≠ ICSID Convention U.S. anti-bribery legislation (FCPA) and its scope of application Problem of Corruption 1) Supply & demand issue: Companies willing to pay bribes, payments, gifts & favors to foreign govt. officials of a host nation 2) Why problem of corruption is more serious in developing countries: a) Power structure type: Low-paid govt. officials with significant power b) Weak legal system: Govt. officials/corp. reps not held accountable by law for corruption (anti-bribery laws are not being enforced) c) Tolerated by culture: Govt. officials/corp. reps not held accountable by public for corruption FCPA – Foreign Corrupt Practices Act 1) US anti-bribery legislation: Provides limits on corporate conduct re improper payments, gifts & favors to foreign govt. officials 2) Part of securities regulation: If company is involved in illegal payments to foreign officials, this is something investors want to know about Basic Structure of FCPA 1) Accounting Provisions a) Applies only to Issuers (US / foreign cos. whose securities are publicly traded in the US) b) Requires i) Books & records to “accurately & fairly reflect” transactions ii) Sufficient internal accounting controls in place 2) Anti-bribery Provisions a) Issuers, Domestic concerns & any person are prohibited b) from making use of interstate commerce c) corruptly d) in furtherance of an offer or payment of anything of value e) to a foreign official, foreign political party, or candidate for political office f) for the purpose of i) influencing any act of that foreign official in violation of the duty of that official or ii) securing any improper advantage in order to obtain or retain business Breakdown of Anti-bribery Provisions 1) Persons/entities subject to FCPA a) Issuers = Corp with publicly traded securities in the US b) Domestic Concerns = US individual or US entity (≠ foreign subsidiary of US co.) c) Any person = foreign individual or foreign entity who acts within the US (not helpful for foreign entity) d) ▲ Loophole = Wholly owned subsidiaries i) US cannot apply their law to sanction a foreign, independent subsidiary ii) Absent evidence of US parent company directing wholly owned foreign subsidiary to bribe foreign govt. officials, US lacks authority to enforce FCPA anti-bribery provisions 2) Making use of interstate commerce a) Required to justify federal jurisdiction b) Requirement easily met (ex. use of interstate commerce = phone call)
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3) Corrupt intent = Evil motive, intent or purpose in order to a) wrongfully influence the recipient to abuse his official position or b) influence someone else to do so for the purpose of i) wrongfully directing business to the payor or ii) wrongfully obtaining favorable legislation or preferential legislation 4) Payments that are prohibited a) Actual corrupt payments b) Acts in furtherance of corrupt payments i) ▲ co. can be liable under FCPA even if no payment is ever made 5) Persons to whom payments are made – foreign officials, candidates, their employees & agents Elements that need to be shown to prove bribery occurred under FCPA 1) Corrupt “payments” made with corrupt intent a) Bribes do not have to be “cash” payments; can be transmission of anything of value 2) made to (1) foreign officials/political parties or (2) third parties knowing payment will be transmitted to foreign officials/political parties 3) for purposes of influencing an act or inducing the official to use his own influence 4) in order to assist the actor in obtaining or retaining business Exceptions/Defenses to FCPA 1) Grease payment exception: Payment that is facilitating payment to secure the performance of a routine govt. action is not prohibited under FCPA (vs. bribe = payment to persuade govt. official’s exercise of discretion) a) Ex. “Substantial fee” for business license falls under exception b) Ex. “Closing fee” to Minister of Trade does not fall under exception 2) Affirmative defense: Defense for payments that are a) lawful under the written laws of the foreign official’s country or b) bona fide expenditures that are i) directly related to the promotion or demonstration of products (1) Ex. Travel expenses for foreign govt. official to visit manufacturing facilities ii) directly related to the execution or performance of a K (1) Ex. Travel expenses for foreign govt. official to visit to sign Concession Agmt iii) reasonable Bottom Line: Fuzzy Lines with Anti-Corruption Standards Normal business practices like wining & dining foreign officials in an effort to build a relationship with the trade ministry or “closing dinners” after transaction closes present fuzzy lines as to what is bribery & what is clean business The Shift toward a more Multilateral Approach to Corruption The OECD Convention on Combating Bribery of Foreign Public Officials in IBTs 1) OECD = Organization for Economic Cooperation & Development 2) Convention on Combating Bribery of Foreign Public Officials in IBTs – US = state party a) To comply with convention: Country must enact legislation prohibiting transnational bribery i) Elements of transnational bribery are similar to those of the FCPA b) Requires: i) Contracting states to enact domestic criminal laws that prohibit ii) the making of payments directly or through an intermediary iii) to a foreign govt. official iv) for the purpose inducing official to act or refrain from acting in an official capacity v) in order to retain or obtain business or obtain some other improper advantage c) How Convention differs from FCPA: i) Does not apply to payments to political parties, party officials, or candidates for political office

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Transactional Aspects & Considerations of FDI Entry & Exit Restrictions Entry Restrictions 1) Entry Restrictions (ex. China) – Laws regulate foreign investment most heavily at point of entry w/ layers of govt. regulation a) Difficult process to go through to set up FDI (compare with US which welcomes foreign ownership & only requires party to set up corp the same way Americans would (file with Secretary of State, get tax ID #, file Articles of Inc., etc.) 2) Ex. China a) MNEs investing in JVs in China must partner with a state-owned enterprise since these are the only business entities with the resources & capacities necessary for JV project b) Establishing JV may be an arduous process i) Approval Process – Negotiating with approval authorities in the govt. ii) Capital Investment – Required initial capital investment in JV iii) Management Structure of JV – Board of Directors & General Mgr may have to be appointed jointly by foreign investor & local partner Exit Restrictions 1) Exit Restrictions (ex. Brazil) – Laws regulate foreign investment most heavily at point of exit a) Profits Remittance Law – restricts how much foreign investors can take out at any one time i) Implication for Parent Co. – Yes, the capital will eventually flow out of the country, but the US parent will be looking for capital to be returned 2) Ex. Brazil is restricting about foreign investors taking money out of the country a) Brazil is a country that remains short on hard currency ▲ want $ generated from foreign investment to stay in country to build up hard currency & to satisfy debts i) Hard Currency: The currency of an economically stable regime that can be freely exchanged with other currencies around the world ii) Soft Currency: Currency that cannot be freely converted

Protecting Intellectual Property Rights
1) Preventative Measures to Protect IP Rights a) Contractual provisions used to protect IP rights b) Regulatory limits on technology transfer agmts 2) Reactive Measures to Protect IP Rights a) Different kinds of IP rights infringement (piracy, counterfeiting) b) Actions MNEs take to counter such infringement 3) Gray Market a) Understanding the different ways in which a gray market in goods can be created b) US law governing the rights of IP holders in barring importation of gray market goods Preventative Measures to Protecting IP Rights Contractual provisions used to protect IP rights Selected Issues in Licensing 1) Risk of licensing IP: Licensee will take Licensor’s technology and capitalize on its use or improvements 2) Mitigate the risk: Licensor should use K to set limits on Licensee’s use of IP & IP rights in order to sufficiently protect IP rights throughout their relationship Key Contractual Provisions: Context of Patent Licensing Agmt (p.365) 1) Principle of Territoriality: Licensor must retain right to register IP licensed to licensee – Art. 3 a) “Licensee acknowledges that Licensor is the sole and exclusive owner of patent…” rd b) “Licensee shall not assert or assist any 3 parties in asserting a claim to the IP of the Licensor . . .” 2) Obligations of the parties: Set forth the parties’ fundamental obligations a) Licensor’s fundamental obligation: Grant license to licensee (ex. right to manufacture patented item) – Art. 2
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b) Licensee’s fundamental obligation: Paying up front royalty fee for license – Art. 7 c) Set forth other supporting obligations i) Sharing know-how – Art. 5 ii) Confidentiality – Art. 6 3) Anti-competition implications 4) Improvement of licensed IP: Grant Back of Improvements Provision – Art. 12 a) Issue: Improvements may be patentable itself ▲ if Licensor does not protect its right to improvements, Licensee may capitalize upon improvements during term of license & can make Licensor’s technology obsolete b) Include both: i) No Grant Back Provision – Art. 12(1): Licensor agrees to keep Licensee up to date, in Licensor’s interest to have product continuously improved under controlled conditions ii) Grant Back Provision – Art. 12(2): Licensee must notify Licensor of any improvements made upon IP; Licensor has right to seek patents for improvements (it wants full rights to the resulting improvements of its patent) c) Severability Issue: i) If the improvement is severable from original IP (can be used independently w/out building upon patented product), then Licensor CANNOT make Licensee give it exclusive rights to such improvements ii) If the improvement is non-severable from original IP (can only be used by building upon patented product), then Licensor CAN make Licensee give it exclusive rights to such improvements Reactive Measures to Protecting IP Rights Different kinds of IP rights infringement Kinds of IP Rights Infringement 1) Copyright Piracy 2) Trademark Counterfeiting 3) Patent Infringement IP Rights Infringement #1: Copyright Piracy 1) Copyright Piracy: Unauthorized copying of fixed content of a medium of expression (i.e. book) 2) Consumers: Consumers don’t see anything wrong in buying pirated goods; No consumer safety aspect to copyright piracy 3) Harm to © Owners: But for the copyright infringement, the consumer would have bought our product IP Rights Infringement #2: Trademark Counterfeiting 1) TM Counterfeiting: Unauthorized act of producing counterfeits & then passing them off as the genuine product by using the registered or unregistered TM on the counterfeited product 2) Consumers: Involves consumer deception – more serious with high involvement products a) High involvement products: Products that consumers ingest or put on their skin/hair (unknowingly buy counterfeited good) b) Low involvement products: Products that consumers wear (knowingly buy counterfeited good) 3) Harm to TM Owners: Reputation of the brand owner & goodwill with customers harmed if consumers believe that unsafe/crappy counterfeited product is the real product b/c it bears the TM; possible liability if co. didn’t do anything about counterfeited products & consumers sue IP Rights Infringement #3: Patent Infringement 1) Patent Infringement: Unauthorized copying of a registered patent (i.e. using reverse engineering) 2) Consumers: Public health concern 3) Harm to Patent Owners: Reputation of the patent owner & goodwill with customers harmed if consumers harmed from unsafe product that is the result of a patent infringement; possible liability if co. didn’t do anything about infringing products & consumers sue 4) Double Whammy: If patent-infringed product is sold under the brand name of the patent owner, then there is both TM & patent infringements

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Why commercial piracy & counterfeiting is high in developing countries 1) Govt. corruption & local protectionism 2) Weak enforcement of IP rights by the legal system 3) Lack of education about the importance of IP rights 4) Extensive involvement of int’l criminal organizations 5) Big money, low risk Actions taken by MNEs to counter infringement not very helpful 1) Meeting with foreign govt. – Govt. may be part of the problem (i.e. accepting bribes from counterfeiters); problem with central govt. trying to enforce but regional govts. encouraging infringements 2) Deter technology flow if foreign country does not enforce IP rights – MNEs are really not going to stay away b/c of counterfeits of their products 3) Law enforcement – Have US customs & counterparts to block entry into the US; jail time for people who run counterfeit operations 4) Securities – Hire special forces to partake in “war on counterfeiting” 5) Diplomatic channel – Have US govt. work with foreign govts. to suppress IP infringements The Gray Market & Gray Market Goods Gray Market Imports 1) Gray Market Good: Genuine product produced by a manufacturer and originally intended for Market A, but is sold in Market B without authorization of TM owner a) Parallel Import: Goods manufactured by a foreign licensee for sale in foreign markets, but are imported into the US for sale without authorization by the US TM owner 2) The Gray Market Problem: The geographical market in which genuine products are being sold & the channel of distribution such genuine products are being sold through is not authorized by IP owner 3) Harm to IP Owner a) Impairment to/damage to brand image b) Need to protect authorized distribution channels to maintain good business relationship with local distributors 4) Harm to IP Owner’s Local Distributors a) For every gray market product purchased in distributor’s territory, the distributor is losing a sale b) Gray Market traders are free riding on the fees licensees & franchisees have to pay for advertising by IP owner – they are benefitting from the advertising that they are not contributing to Understanding the different ways in which a gray market in goods can be created Configurations of Gray Market Arrangement may arise from (K-Mart v. Cartier, Inc. (US 1988)) 1) US owner of a foreign TM (classic gray-market goods case) 2) Affiliated companies under a common ownership 3) Licensed manufacturing abroad Situation #1: US owner of a Foreign TM 1) Situation: US co. buys the right to register & use w/in the US a TM for goods that the foreign co./TM owner also produces & sells abroad (US TM owner & Unaffiliated foreign manufacturer) 2) Gray Market arises: Foreign co. begins to import the good into the US using the foreign TM after US has purchased foreign TM to use in US Situation #2: Affiliated companies under a common ownership 1) Situation: US co. registers the US TM for goods manufactured abroad by an affiliated foreign manufacturer a) US co. is subsidiary of a foreign parent co. b) Foreign manufacturer is the subsidiary of a US parent c) Foreign manufacturer is an unincorporated division of the US co. 2) Gray Market arises: US co. manufactures & sells goods in the US, but goods are imported into the US by foreign co. or by a 3rd party that has purchased goods abroad from foreign co.

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Situation #3: Licensed manufacturing abroad 1) Situation: US co. manufactures & sells goods here, and has a foreign licensee manufacturing those goods abroad rd 2) Gray Market arises: Foreign licensee imports goods into the US or sells products to a 3 party who imports the goods into the US The Basic Problem Goods are being manufactured both domestically & abroad, but those being manufactured abroad are not being distributed through authorized distribution channels US law governing the rights of IP holders in barring importation of gray market goods Different legal avenues that IP owners have tried to use to assert their IP rights against Gray Market Importers IP owners are trying to block the importation of goods they did not authorize for selling in the US 1) Tariff Act of 1922 §526 – works in limited circumstances 2) Lanham Act § 42 – works when consumer confusion is present rd 3) Copyright Protection – blocked by First Sales Doctrine if involving 3 party gray market importer Tariff Act of 1922 §526 1) Tariff Act §526: US TM owner has to give its prior consent before the importation into the US of “any merchandise of foreign manufacture if such merchandise…bears a TM owned by a citizen of, or by a corp…created within the US” 2) Common Control Exception to Tariff Act §526 a) Restrictions on importation of gray market goods manufactured abroad do not apply to imported articles when: i) both the foreign & the US TM are owned by the same person or business entity or ii) the foreign & domestic TM owners are parent and subsidiary companies or are otherwise subject to common ownership or control b) *K-Mart v. Cartier, Inc. (US 1988) i) Accepts Common Control Exception; Rejects Authorized Use Exception (1) Authorized Use Exception: No consent by TM owner needed if the goods are of foreign manufacture but produced under authorization of the US TM holder through a licensing agmt ii) Rationale: Common Control Exception is acceptable b/c if there is common control, then US company/TM holder can control the activities of affiliated companies more than US company can control activities of licensee c) Problem: Most gray market trading is conducted by 3rd parties, not subsidiaries or licensees 3) Problem with Tariff Act §526: Ambiguities ▲ Limited Application a) “Foreign manufacture” – Act only gives right to bar importation of merchandise of foreign manufacture i) Act cannot apply when US parent is controlling pattern of manufacture abroad ii) See Lever Brothers b) “Owned by a citizen” or US corp – Act only gives right to bar importation if the TM is owned by a citizen or US corp i) Act cannot apply if it is a foreign co. that owns the TM, but has been bought by a US co. for use in the US market ii) See Quality King Distributors Lanham Act §42 – Gray Market Trading Creates “Consumer Confusion” 1) Lanham Act §42: Bars the importation of physically different foreign goods bearing a TM identical to a valid US TM, regardless of the TM’s genuine character abroad or affiliation b/n the producing firms 2) Lever Brothers Co. v. U.S. (US 1993) – Lever UK was manufacturing different soap products bearing a TM identical to a valid US TM (being used by Lever US) & the UK soap products were being imported through the gray market into the US a) Case proceeded under Lanham Act, not Tariff Act: The gray market goods were products from an affiliated company of P, thus the Common Ownership Exception of the Tariff Act kicked in & barred US company from preventing importation of Lever UK’s soap b) Consumer Confusion: Lever US can block importation using Lanham Act since the §42 of the Act is intended to prevent consumer confusion; consumers will eventually become confused about what TM stands for if there are identical, but different products in the market bearing the same TM.
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As long as goods bearing same TM are different, despite being from affiliated companies, IP owners can use Lanham Act to prevent importation of gray market goods c) ▲ If gray market imports were the same as domestic products, produced by affiliated companies & bearing the same TM, but all IP owner wants to do is to protect its channel of distribution, IP owner loses on both Tariff Act (Common Ownership Exception) & Lanham Act (no risk of consumer confusion claim brought) Copyright Protection – © Rights Blocked by First Sales Doctrine 1) Quality King Distributors v. L’anza (US 1998) – L’anza manufactures shampoos & sells product domestically and abroad; it sells the shampoos for much cheaper abroad. Shampoos that were purchased in Europe at a cheap price were being resold in the US. The gray market shampoos were manufactured by L’anza & first sold by L’anza to a foreign purchaser. a) Case proceeded under © protection claim, not Tariff Act: The gray market goods were not of foreign manufacture (they had been produced in CA). i) Round-trip products: Products that are manufactured in the US, exported overseas, imported back into the US for gray market sales. ii) © protection claim: L’anza brings claim over label attached to shampoo bottles, but court recognizes that it is trying to protect its authorized channel of distribution b) Copyright law does not work: Will not allow IP owner to block imports b/c of the First Sales Doctrine 2) First Sales Doctrine: Limits rights of a © holder a) After the first sale of a © item is lawfully made, any subsequent purchaser, whether from a domestic or from a foreign reseller is an “owner” of that item ▲ such an owner is entitled, without having to get the authority of the © owner, to sell that item. b) Such owners incl. those that legally purchase goods of a US company abroad & resells them in the US c) Bottom Line: Statutory right to control © material’s distribution is lost once material enters market

i)

Dispute Resolution
1) US law on the enforceability of Forum Selection Clauses (Bremen) 2) US law on governing Choice of Law analysis in the absence of a contractual governing law clause 3) Reasons for choosing arbitration over litigation as the mode of dispute resolution in IBTs a) US law governing the enforceability of agmts to arbitrate 4) Jurisdiction a) Distinguishing different categories of jurisdiction b) International law limits on jurisdiction c) US approach to personal jurisdiction over foreign defendants (Asahi) d) Different methods of establishing jurisdiction over affiliated companies e) State Rights i) US law on sovereign immunity (FSIA) ii) The act of State Doctrine and limits to its application 5) US law on the recognition & enforcement of foreign judgments Preliminary dispute resolution Issues in IBT disputes 1) Choice of Forum 2) Choice of Law 3) Jurisdiction – Subject Matter & Personal Starting Point ALWAYS: Does the K in question have provisions that speak to eventual dispute resolution? [Does the K have a forum selection clause; choice of law clause; arbitration clause?]  Does the court respect the choice the parties made?

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Forum Selection & Choice of Law Clauses US law on the enforceability of Forum Selection Clauses (Bremen) Forum Selection 1) Issue: In which forum should the lawsuit be brought? a) Forum in IBT disputes b/n: US Courts vs. Foreign Courts 2) With IBTs, forum selection clauses are usually used & enforced (Bremen) 3) Neutral forum: Parties can choose a neutral forum (i.e. a forum that has expertise in a certain area of law that is at the heart of the parties agmt & eventual dispute, ex. admiralty law) The Bremen Rule & Exceptions (M/S Bremen v. Zapata Off-Shore Company – US 1972) 1) Bremen Rule: Forum selection clauses are presumptively valid 2) Bremen Rule Exceptions: A forum selection clause may not be enforced if enforcement of the forum selection clause would… a) be unreasonable and unjust, posing a serious inconvenience b) contravene a strong public policy in the forum in which the suit is brought, whether declared by statute or by judicial decision Examples of Bremen Rule Exceptions: Forum Selection Clause is not valid when it is… 1) Unreasonable & unjust – The limit: Forum selected appears to have been chosen to deter eventual litigation as such a forum makes it prohibitively expensive for parties to sue a) A forum that is not seriously inconvenient: It would be inconvenient to move evidence from one country to another country’s forum (goes to forum nonconveniens) 2) Against public policy – the Limit: Clear discrimination against foreign (i.e. US) plaintiffs a) Public policies that aren’t strong enough: Forum selection clause was not freely negotiated, affected by fraud, undue influence, overweening bargaining power i) Carnival Cruise Line (US) – Forum selection clause upheld in adhesion K US law on governing Choice of Law analysis in the absence of a contractual governing law clause Choice of Law 1) Freedom to K: Parties are free to insert choice of law clauses in int’l Ks 2) Not Choosing vs. Choosing a) If parties have NOT chosen applicable law: Choice of law must be resolved under private int’l law/conflicts law – general choice of law approaches developed by courts or under an applicable statute or treaty i) Problems: Difficult to assess fairly when approach builds in governmental interest/most significant relationship test b) If parties have chosen applicable law: Court will probably uphold choice of law clause; rarely litigated issue c) Lesson: Always use a governing law clause to avoid ambiguity down the road re choice of law 3 Choice of Law Approaches Used in US States When the Parties Have Not Chosen Governing Law (Buxbaum will give on exam if have private int’l law issue) 1) Lexi Loci: The applicable law is the place of the K 2) Most Significant Relationship Test: Balance the interests & expectations of the parties involved in the dispute a) Factors to consider when doing Most Significant Relationship Test i) The needs of the interstate & int’l systems ii) The relevant policies of the forum iii) The policies of interested states iv) The expectations of the parties v) The basic policies underlying the particular field of law vi) The certainty, predictability, and uniformity of the result vii) The ease of applying the law 3) Governmental Interest Analysis: Court is required to make a preliminary analysis of the interests of the involved states & a determination of whether the conflict is a… a) True conflict: Court will apply the law of the forum with the greatest interest in the dispute i) True conflict exists when the governmental interests of both jurisdictions would be impaired if their law was not applied
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b) Apparent conflict: Court may be able to resolve conflict by interpretation c) False conflict: Only one state has an actual, legitimate interest i) False conflict exists when only one jurisdiction’s governmental interests would be impaired by the other jurisdiction’s law 4) Result: Appearance of courts being arbitrary, nationalistic & bias Arbitration: Dispute Resolution to Choose for IBTs Reasons for choosing arbitration over litigation as the mode of dispute resolution in IBTs Arbitration = Normal way to address & resolve int’l business disputes 1) Procedural advantages: Arbitration is fast, flexible & less expensive than litigation (i.e. discovery process) a) This advantage is changing over time: Arbitration looking more like litigation 2) Enforcement of arbitral awards: Arbitral awards are easier to enforce than judicial judgments b/c of the Convention on the Recognition & Enforcement of Foreign Arbitral Awards (NY Convention) 3) Favor of arbitration in IBT disputes: Strong federal policy in favor of arbitration b/c of lack of judicial resources Considerations when creating an Arbitration Clause 1) The Arbitration Type: Institutional or Ad Hoc? a) Institutional Arbitration: Institutions with services incl. administration, procedural, rules, technical expertise, arbitration experience & support staff & facilities i) Int’l Chamber of Commerce, London Court of Int’l Arbitration, American Arbitration Association ii) If parties choose arbitration under the rules of the ICC, they are choosing pre-set procedures to follow b) Ad Hoc Arbitration: No institutions; Requires parties to agree to procedure rules and to furnish services normally provided by arbitration institution i) Parties agree to appoint 1 arbitrator each, both of whom will appoint one other arbitrator c) “Trade Association” Arbitration: Arbitral panel works within a specific trade ▲ having expertise and industry background to make r/s interpretation of the trade-specific K i) Ex. North American Export Grain Association – Grain Arbitration Rules of the American Grain Assoc. ii) Kinds of cases where Association Arbitration is important: The issue is a question of interpretation as b/n the parties to a trade-specific term in the K (i.e. trade’s common names for ground-nuts) 2) Enforcement: (1) Enforceable agmt? (2) Enforceable award? a) Enforcement of the agmt to arbitrate – Was there an enforceable agmt to arbitrate? b) Enforcement of resulting award from arbitration – Is arbitration award enforceable in a number of places? 3) Authority: Arbitrators get their authority to hear a dispute from the parties’ consent a) Parties must agree to vest authority in the arbitrators oversee their dispute & make a binding decision b) Contrast with Courts’ source of authority: The state 4) Place of Arbitration: Locale should be a place convenient for the parties where sources of applicable law are readily available 5) Scope of Arbitration: (1) The dispute itself ; (2) “Arbitrality” of the dispute a) Issue: Whether the parties wanted to arbitrate all disputes or only certain disputes b) Did the parties really agree to submit THIS dispute to arbitration? c) Is this A KIND OF dispute that states permit to be submitted to arbitration? How Arbitration Issue Arises in Courts 1) There is an arbitration clause in the K & the parties are in dispute BUT the plaintiff files suit in court rather than submitting to arbitration 2) Arguments made by party opposing arbitration & wanting dispute heard in court: a) This particular claim that is the subject of the dispute is not governed by the agmt to arbitrate b) Even if this particular claim is covered by the agmt to arbitrate, it is a type of claim that is not arbitral (cannot be arbitrated) 3) These arguments stem from the NY Convention Art. II: Enforcement of the Agmt to Arbitrate

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US law governing the enforceability of agmts to arbitrate The NY Convention – Convention on the Recognition & Enforcement of Foreign Arbitral Awards 1) 2 Separate “Enforcement” Components of the NY Convention a) Enforcement of an agmt to arbitrate – NY Convention Art. II b) Enforcement of a resulting award (with narrow grounds for refusal to enforce) – NY Convention Art. III, V i) “Second Look Doctrine” Component #1: NY Convention Art. II – Enforcement of the Agmt to Arbitrate 1) Elements a) Each contracting state shall recognize an agmt in writing b) under which the parties undertake to submit to arbitration c) all or any differences which have arisen or which may arise b/n them in respect of a defined legal relationship, whether contractual or not, d) concerning a subject matter capable of settlement by arbitration 2) Key language to use in Arbitration clause: Language that indicates the scope of the arbitration – “All disputes,” “in connection with,” and “finally settled” Analysis for Finding the Elements of NY Convention Art. II: Enforcement of the Agmt to Arbitrate 1) Begin with presumption for arbitration (Moses H. Cone Memorial Hospital (US)) 2) Was there an agmt in writing to submit dispute to arbitration? a) Polytek Engineering v. Jacobson (DC Minn): Incorporation by reference to another K that had an agmt to arbitrate constitutes the necessary “agmt in writing” required by NY Convention Art. II 3) Is the particular claim at issue covered by the agmt to arbitrate? a) Mitsubishi Motors v. Soler Chrysler-Plymouth (US 1985) – Particular claim at issue is a statutory counterclaim (anti-trust) made in response to a contractual claim (breach of K – can’t sell cars outside of designated territory) i) Because the arbitration clause lang. is broad, the statutory claim is covered by the agmt to arbitrate. (1) Arbitration Agmt Language: “All disputes, controversies or differences which may arise b/n Mitsubishi & Soler out of or in relation to this Agmt or for breach thereof, shall be finally settled by arbitration in Japan in accordance with the rules & regulations of the Japan Commercial Arbitration Association.” (2) When a party has agreed to arbitrate a statutory claim, that party is not giving up the substantive rights afforded under the statute. The party is only submitting dispute resolution in an arbitral, rather than judicial, forum. The party is trading the procedures & opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration. (3) As indicated by the broad language of the arbitration clause, the intent of the parties was to submit these statutory counterclaims to arbitration. 4) Even if the particular claim at issue is covered by the agmt to arbitrate, is the claim “nonarbitrable?” a) Mitsubishi Motors v. Soler Chrysler-Plymouth (US 1985) – Court discounts all the reasons put forward for why the particular claim at issue (the statutory counterclaim, anti-trust) is non-arbitrable i) K of adhesion: i.e. distribution Ks – manufacturer with all the power over distributors (1) Court: A party resisting arbitration can always attack the validity of the K if the K being one of adhesion is really the issue. ii) Issue too complex for arbitral resolution: Antitrust issues are too complex for arbitral resolution (1) Court: Many commercial arbitrators are more sophisticated than judges; adaptability & access to expertise are hallmarks of arbitration iii) Arbitrators will be hostile: Arbitrators may be hostile to the kinds of business constraints US antitrust law imposes (1) Court: Don’t underestimate how good & balanced arbitrators can be iv) Claim touches may impeded upon fundamental policy: US antitrust regime is too important to US’s system of democratic capitalism; antitrust remedies (private damages) have to be sought in US courts (1) Court: No reason to assume that arbitrators will not provide an adequate remedy (a) Second Look Doctrine: NY Convention provides a safety net b/c even if the arbitrators issue an inadequate remedy, the NY Convention gives each signatory country the right to refuse to enforce an award where the “recognition or enforcement of the award would be
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contrary to the public policy of that country” ▲ US court will be able to verify that the public-law under the claim was properly applied by the arbitrators Side Notes: Mitsubishi Motors v. Soler Chrysler-Plymouth 1) Choice of Law & Arbitration a) Choice of Law in Distribution Agmt was Swiss Law, but at oral argument, Court asked Mitsubishi, “If this goes to arbitration, and if these statutory counterclaims (US antitrust law) are going to be heard, what law will apply?” b) Significance: Court wanted to know that even if these claims went to arbitration, they would be heard under US law so that arbitrators would be protecting the substance of US antitrust law; if Mitsubishi did not concede, then the case may have turned out differently 2) Important CH: As long as substance of US law is enforced, doesn’t matter if it is enforced in an arbitral forum a) Dicta: Even if the substance of US law is not enforced properly, US courts get a “second look” Component #2: NY Convention Art. III, V – Enforcement of the Resulting Arbitral Reward 1) Elements – Art. III – Recognition of Arbitral Awards a) Each contracting state shall i) recognize arbitral awards as binding and ii) enforce them in accordance with the rules of procedure of the territory where the award is relied upon 2) Elements – Art. V – Refusal of Arbitral Awards a) Recognition & enforcement of the award may be refused b) at the request of the party against whom the award is invoked c) only if that party provides proof to the court where the recognition & enforcement is sought that: i) parties are incapacitated/agmt to arbitrate lack validity ii) party against whom award was invoked was not given proper notice of the arbitration proceedings or was unable to be present at the case iii) matters ruled on were not within the scope of the arbitration iv) matters ruled on were not arbitrable Second Look Doctrine v) enforcement of award would be contrary to public policy of the country where the award is sought 3) In a nutshell: Each Contracting State must enforce arbitral awards in accordance with its rules of procedure unless the party resisting the award proves one of the circumstances under Art. V Analysis of the Elements of NY Convention Art. III, V: Enforcement of the Resulting Arbitral Award 1) Assumption of Losing Party’s courts getting “second look” a) Mitsubishi Motors v. Soler Chrysler-Plymouth (US 1985) – Court assumes that at the awardenforcement stage, it would have the opportunity to verify that the statutory, public-law claim was properly applied b) Problem with Mitsubishi Court’s assumption: An arbitral award can be enforced in any country where the party against whom the award has been invoked has sufficient assets to pay off the award 2) Automatic Element: Parties choose arbitration b/c enforcement of awards is almost automatic given that the grounds upon which a court may refuse an award are narrow (see Polytek Engineering) Jurisdiction Distinguishing different categories of jurisdiction Jurisdiction = Aspect of Sovereignty 1) Sovereignty: Every sovereign state has the authority to exercise ultimate control over persons & properties in the national sphere through its legislature, police force & courts 2) Problem with jurisdiction: The extraterritorial reach of sovereign states in regulating foreign persons & events 3 Types of Jurisdiction 1) Judicial/Adjudicatory Jurisdiction: Authority of a court to hear a particular claim (subject matter jurisdiction) and to render a judgment against a particular defendant (personal jurisdiction) 2) Enforcement Jurisdiction: Authority to take judicial or non-judicial (i.e. arbitration) enforcement measures in other countries
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3) Prescriptive/Legislative Jurisdiction: Authority to apply US law to transactions with foreign elements or to events that occur in other countries Judicial/Adjudicatory Jurisdiction 1) Subject Matter Jurisdiction: The authority of a particular court to decide a given dispute a) US federal courts can hear cases that involve: i) a federal question of law ii) b/n persons domiciled in different states (diversity) 2) Personal Jurisdiction – Establishing Personal Jurisdiction in a US court (2 Pronged Analysis) a) Does the court in question have statutory authorization to assert jurisdiction over D? i) Federal Rules of Civil Procedure (if filed in federal court) ii) State Long-Arm Statutes (if in state court) b) Would the assertion of personal jurisdiction over defendant violate its due process rights? i) If the following were to be established respectively, exercise of jurisdiction over defendant would not offend traditional notions of fair play & substantial justice (1) General jurisdiction: Claims are not related to the contacts (a) Test: The contacts in the forum are so systematic & continuous that it as though defendant were was really present in the forum ▲ defendant is always amenable to suit in that forum (b) Test as applied to foreign defendant-corps: If foreign corp. has systematic & continuous contacts with the US, then court will declare that foreign corp. “present” in the US such as that US courts can declare personal jurisdiction over them if they are sued in US courts (2) Specific jurisdiction: Claims arise out of the contacts (a) Test: Minimum Contacts & Purposeful Availment (b) Test as applied to foreign defendant-corps: (1) Min Contacts; (2) Purposeful Availment; (3) Reasonableness US approach to personal jurisdiction over foreign defendants (Asahi) Analysis: Establishing Personal-Specific Jurisdiction over Foreign Defendant-Corps. 1) Due Process Analysis Under General Jurisdiction a) If foreign corp. has systematic & continuous contacts with the US (i.e. on-going business activities), then court will declare that foreign corp. is “present” in the US such as that US courts can declare personal jurisdiction over them if they are sued in US courts 2) Due Process Analysis Under Specific Jurisdiction a) Did the foreign corp. purposefully establish minimum contacts in the forum state? i) Were the contacts that foreign corp. had with US sufficient? (1) Direct Contacts? (a) Yes (Maybe PJ) (b) No – No direct contacts (no offices, sales agents, business) (2) Did the foreign corp. purposefully avail itself of the privilege of conducting business in the jurisdiction? (a) Yes (Maybe PJ) (b) No – Mere awareness that product will end up in US is not enough to est. min contacts or purposeful availment (i) The “substantial connection” b/n D & the forum state necessary for a finding of min contacts must come about by an action of the D purposefully directed toward the forum State b) Would it be reasonable to assert jurisdiction over a foreign corp? [new prong b/c of foreign D] i) Yes (PJ, but only if min contacts); No (No PJ, even if min contacts) ii) Reasonableness Test: When there is a foreign defendant, the court must consider the reasonableness of the exercise of jurisdiction in the case, taking into consideration… (1) The burden on D (“unique” burdens to foreign D) (2) Interests of the forum state (3) P’s interest in obtaining relief (4) Interstate judicial system’s interest in obtaining the most efficient resolution of controversies (5) Shared interest of the several states in furnishing fundamental substantive social policies

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Special Jurisdictional Cases: Parent Sub & Foreign Sovereign Defendant Different methods of establishing jurisdiction over affiliated companies Substantive Liability of Sub may be Parent’s Substantive Liability  Parent cos. do not want to be found liable for the activities of their subs ▲ Parent co.’s concern is in structuring business activities & cos. in a way to limit liability of parent co.  To assert personal jurisdiction over foreign parent, starting point: Question of substantive liability (not jurisdiction)  P wants to show that it’s as if Foreign Parent had done what its Sub had done  Establish Sub’s substantive liability as Parent’s substantive liability under corporate legal principles (Itel Containers analysis)  Assertion of Personal Jurisdiction over Parent (Asahi analysis)

Analysis: Theories of Establishing Liability of Foreign Parent Co. for Liabilities of Subsidiary (Intel Containers) 1) Plaintiff’s Argument: As a matter of substantive liability, foreign parent co. should be liable for the debt obligations of its subsidiary incurred under the lease agmts with P 2) Theories to Use (Plead in the alternative): a) Joint Venture: Parent & Sub are actually joint venturers and should be treated as partners (if 1 does something, it imputes liability on the other) b) Agency: Sub was acting as an agent for Parent, the principal ▲ it binds the Parent by its actions c) Piercing the Corporate Veil: Parent abused the corporate form as to warrant piercing the corp veil 3) Know how to beat these theories – Intel Containers Theory #1 – Joint Venture: Parent & Sub are actually joint venturers and should be treated as partners 1) P’s Arg: The corp. form is actually of a JV, a partnership for a limited purpose a) Elements to est. that a JV was formed i) 2+ persons must enter into a specific agmt to carry on an enterprise for profit ii) The agmt must evidence their intent to be joint venturers iii) Each must make a contribution of property, financing, skill, knowledge or effort iv) Each must have some degree of joint control over the venture v) There must be a provision for the sharing of both profits & losses 2) Way to beat P’s arg: a) Disprove the elements of est. that a JV was formed b) Show that there is a corp. structure other than a JV present (i.e. parent-subsidiary) c) Intel Containers: Court found that Parent did not intend to engage in a JV as the record showed that the Parent purposely used layers of corporations so that its involvement with the (now bankrupt) Sub would be remote i) Note: It is okay to use corporate forms to avoid incurring liability ▲ in a parent-sub relationship like this one, Parent’s liability is limited to the capital contributions to the Sub Theory #2 – Agency: Sub was acting as an agent for Parent, the principal ▲ it binds the Parent by its actions 1) P’s Arg: There was express and/or implied agency a) Actual/express agency: An agmt where Parent says that it is the principal & Sub is the agent and Parent agrees to be bound by whatever Sub, acting in its official capacity as agent, does rd b) Implied agency: Parent communicates to a 3 party that Sub is authorized to act on its behalf or Parent rd behaves in a way that leads a 3 party to believe that Sub is authorized to act on Parent’s behalf 2) Way to beat P’s arg: a) Agency: Show that Parent made it clear from the start that its intention to utilize the corporate form for its Sub was to limit its liability b) Intel Containers: i) Express Agency: Court found that Parent authorized Sub to act on its behalf since the Sub operated independent & the Parent chose not to be a SH & did not have its employee sit on Sub’s Board of Directors ii) Implied Agency: Parent had denied P a guarantee for Sub’s lease obligations

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Theory #3 – Piercing the Corp Veil: Parent abused the corporate form as to warrant piercing the corp veil 1) P’s Arg: To pierce the corp veil is to be able to hold Parent liable for Sub’s liabilities since the Sub is just acting as the alter ego of the Parent, with no life of its own a) The veil can be pierced when: i) there has been fraud ii) the subsidiary has been used as an alter ego of the parent (the corp. formalities are not observed) 2) Way to beat P’s arg: a) Show that there was no fraud on the part of Parent i) Intel Containers: Parent was forthcoming about limiting its liabilities b) Show that the Parent is staying out of Sub’s business – literally! i) Parent is not managing day to day operations of its sub ii) Sub is holding its own annual SH meetings iii) Sub has its own Board of Directors iv) Sub has not been undercapitalized by Parent (1) Intel Containers: Sub was running the shipping line, Sub observed corp. formalities, no preferential treatment was given to Sub by Parent State Rights – Sovereign Immunity & Act of State Doctrine State Rights: Implications for Private-Public/Corp-Govt. Disputes 1) Disputes in int’l business can implicate: a) State sovereign immunity (doctrine of jurisdiction – status defense) b) Act of state doctrine (doctrine of judicial deference) 2) Even if P defeats the application of these doctrines (▲ allowing sovereign D to be brought into US court), still have to establish US court’s subject matter and personal jurisdiction over sovereign D (Diversity; Asahi analysis) US law on sovereign immunity (FSIA) 1) Sovereign Immunity: A sovereign state cannot be brought before the ordinary courts of another country a) = Doctrine of Jurisdiction (“status defense”) b) Hard norm: State is immune…period (now subject to FSIA exceptions) 2) Sovereign Immunity Restricted: a) RS on Sovereign Immunity – Under int’l law, a state or state instrumentality is immune from the jurisdiction of the courts of another state except with respect to claims arising out of activities of the kind that may be carried on by private persons b) As sovereigns increasingly acted in a commercial capacity in addition to a governmental capacity, the doctrine of Sovereign Immunity became more restricted c) Sovereign Immunity will only be recognized when the issue is about the sovereign’s actions in its governmental capacity ▲ MUST distinguish b/n sovereign’s govt. behavior & commercial behavior FSIA – Foreign Sovereign Immunities Act of 1976 (codification of restricted Sovereign Immunity doctrine) 1) FSIA §1603 – Definitions (defines who is entitled to Sovereign Immunity) a) Foreign State = i) A political subdivision of a foreign state or ii) An agency or instrumentality of a foreign state b) An agency or instrumentality of a foreign state = i) a separate legal person, corporate or otherwise, and ii) an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof, and (1) Consider: What constitutes a “majority?” iii) is neither a citizen of the US state nor created under the laws of any third country 2) FSIA §1604 – Immunity of a Foreign State from Jurisdiction (Sovereign Immunity subject to exceptions) a) Subject to existing int’l agmts to which the US is a party at the time of this Act’s enactment, a foreign state shall be immune from the jurisdiction of US courts EXCEPT as provided in §1605 & 1607 of this chapter 3) FSIA §1605 – General Exceptions to the Jurisdictional Immunity of a Foreign State (see p.271) a) A foreign state shall NOT be immune from the jurisdiction of the US courts in any case in which: i) Waive immunity: foreign state has waived its immunity
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Commercial activity exception: action is based on… (1) a commercial activity carried on in the US by a foreign state (2) an act performed in the US in connection with a commercial activity of the foreign state elsewhere (3) an act outside the territory of the US in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the US iii) Wrongful expropriation: rights in property taken in violation of int’l law are in issue iv) Tortuous act in US: not otherwise encompassed in the “commercial activity exception,” relating to the tortuous act or omission of that foreign state or of any official or employee of that foreign state while acting within the scope of his office v) Arbitration exception [watch for ICSID, NY Convention connection]: action is brought either to… (1) enforce an agmt made by the foreign state…to submit to arbitration…or (2) confirm an award made pursuant to such an agmt to arbitrate IF (a) the arbitration takes place or is intended to take place in the US or (b) the agmt or award is or may be governed by a treaty or other int’l agmt in force for the US calling the recognition & enforcement of arbitral awards ii) FSIA Exceptions in Practice: A foreign state/instrumentality of foreign state is amenable to jurisdiction in US if… 1) the foreign state has waived its immunity a) Foreign state can waive immunity in its contracting capacity ▲ US co. entering into K with foreign govt./instrumentality should stipulate for foreign state/instrumentality to waive its immunity 2) the action is based on commercial activity carried on in the US or having a direct effect in the US a) Locate a point of contact b/n commercial activity of the foreign state & US territory to demonstrate r/s connection to US to ground jurisdiction over sovereign 3) the action concerns rights in property taken in violation of int’l law a) Expropriation can be lawful, but must be accompanied by compensation b) Expropriation is lawful if it is: i) carried out for a public purpose ii) non-discriminatorily iii) carried out in accordance with due process and iv) accompanied by just compensation 4) the action involves a claim for damages under certain circumstances caused by the tortuous activity of the foreign state a) Foreign official must have committed a tort in the US while acting within the scope of his responsibilities 5) the action is brought in connection with an arbitration agmt with a foreign state a) Foreign state & US co. enter into a K with an “agmt to arbitrate” clause; dispute arises, dispute goes to arbitration & US co. wins against foreign state ▲ immunity is waived if US seeks enforcement of the arbitration award against foreign sovereign in US courts FSIA Analysis: Getting a “sovereign” into US courts 1) Determine if D is entitled to sovereign immunity from suit in US (§1603) 2) If immune, determine if D loses its entitlement to sovereign immunity (§1605) a) Immunity if no exceptions apply vs. No immunity if 1+ exceptions apply 3) If no immunity, apply subject matter jurisdiction (diversity) & personal jurisdiction analysis (Asahi) The Act of State Doctrine 1) Act of State Doctrine: Judicially created doctrine of deference under which US courts refuse to examine & adjudicate the legality of the acts of a foreign state a) = Doctrine of deference b) Soft norm: Court is generally refraining… 2) RS on Act of State Doctrine: In the absence of a treaty…courts in the US will generally refrain from…sitting in judgment on acts of a governmental character done by a foreign state within its own territory & applicable there Limitations on Act of State Doctrine 1) Doctrine ONLY applies to acts done by (a) a foreign state (b) within its own territory 2) Second Hickenlooper Amendment: Doctrine does NOT apply where the act in question is a taking of property (expropriation) in violation of the principles of int’l law
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a) Expropriation can be lawful, but must be accompanied by compensation b) Expropriation is lawful if it is: i) carried out for a public purpose ii) non-discriminatorily iii) carried out in accordance with due process and iv) accompanied by just compensation Recognizing & Enforcing Foreign Judgments US law on the recognition & enforcement of foreign judgments Source of Law for recognizing & enforcing foreign judgments = State Law Full faith & credit clause does not apply in int’l context; no applicable treaty in force, no federal statute in force ▲ Enforcement of foreign judgments is a matter of state law (in state & federal courts) Problem with using state law as source of law for recognizing & enforcing foreign judgments State laws differ from each other on the issue  Inconsistencies & complexities associated with recognition & enforcement of foreign judgments ▲ IBT parties prefer arbitration b/c arbitral awards are more easily enforced under the NY Convention 2 Types of State Laws on Recognizing & Enforcing Foreign Judgments 1) Comity: The recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to int’l duty and convenience, and to the rights of its own citizens a) Not a rule of law: Law of practice, convenience & expediency b) Comity should only be withheld when: Its acceptance would be contrary or prejudicial to the interest of the nation (public policy) called upon to give it effect (to recognize & enforce a foreign judgment) i) ▲ Challenging party’s argument: Enforcement of foreign judgment in US state court would violate public policy [in specific state / in US] ii) Caveat about public policy counterargument to Comity: Very narrow public policy exception to foreign judgments iii) Ex. of public policy arguments in IBT disputes: (1) Private damages issued in US under antitrust law in order to incentivize “whistle-blowing” (a) Many other nations view this as punitive damages & contrary to their public policy so may not issue judgment in accordance with US anti-trust law (2) Free speech – Foreign court issues judgment that would undermine free speech 2) Statutes based on the Uniform Foreign Money Judgment Act: Sets out conditions under which a foreign judgment is deemed “conclusive” and ▲ recognizable & enforceable in US state court a) Conclusive judgments must be recognized and enforced except in certain narrow circumstances i) UFMAJRA §4: Looking for basic procedural fairness (1) A foreign judgment is not conclusive if… (a) the judgment was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process law; (b) the foreign court did not have personal jurisdiction over the defendant; or (c) the foreign court did not have jurisdiction over the subject matter. ii) UFMAJRA §5: Looking for other ways to est. basic procedural fairness (1) Even if there is no personal jurisdiction, foreign judgment will still be enforced if… (a) D was served personally in the foreign state; (b) D voluntarily appeared in the proceedings, other than for the purpose of protecting property seized or threatened with seizure in the proceedings or of contesting the jurisdiction of the court over him; (c) D, before the proceedings started, agreed to submit to the jurisdiction of the foreign court with respect to the subject matter involved; (d) D was domiciled in the foreign state when the proceedings were instituted or, if a corporation, had its principal place of business incorporated in the foreign state; (e) D had a business office in the foreign state and the proceedings in the foreign court involved a C/A arising out of business done by D through that office in the foreign state; or (2) The courts of this state may recognize other bases of jurisdiction b) UFMAJRA only applies to money judgments
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Standard of Fairness US Court Applies in Examining a Foreign Judgment (applicable under all state rules) Hilton v. Guyot – Provides foundation for modern practice (p.765) 1) Look for basic procedural fairness: US court is looking for basic procedural fairness in the foreign forum to ensure that due process rights according to US standards were respected when it is deciding whether to enforce a foreign judgment a) Procedural safeguards to observe: Subject Matter Jurisdiction, Personal Jurisdiction, etc. 2) If US court finds basic procedural fairness met: Foreign judgment should be held conclusive on the merits tried in the foreign court unless party opposing judgment can show a special reason for impeaching the judgment a) Ex. Judgment was affected by fraud or prejudice 3) Can opposing party show a special reason for impeaching the foreign judgment?: Yes – Do not enforce foreign judgment / No – Enforce foreign judgment Reasons to Deny Enforcement of a Foreign Judgment 1) The issuing foreign court lacked personal jurisdiction over D 2) The issuing foreign court lacked subject matter jurisdiction over the claim(s) 3) The foreign litigation did not afford D due process a) Or the foreign system is incompatible with the requirements of due process? 4) Enforcing the foreign judgment would be contrary to public policy of the state in which enforcement is sought Note on Judgments Pending Appeals If there is a final judgment, but there is potential for appeal: The court that has been asked to enforce the judgment should issue a stay on issue to enforce pending appeal Reciprocity 1) Reciprocity: US court will not recognize foreign judgments if foreign country will not recognize US judgment 2) Drop Reciprocity: Many states have dropped the reciprocity requirement b/c it is inconsistent with the notion and application of “comity” Possible Change in Dual State-Law System of Resolving Foreign Judgment Issue? 1) Currently no applicable treaty in force BUT: Hague Convention on Choice of Court Agmts a) Art. 5: The courts of a Contracting State designated in an exclusive choice of court agmt shall have jurisdiction to decide a dispute to which the agmt applies. Such a court shall not decline to exercise jurisdiction on the ground that the dispute should be decided in a court of another state. i) Art. 5 is consistent with the Bremen Rule: Choice is presumptively valid b) Art. 6: A court of a Contracting State other than that of the chosen court shall suspend or dismiss proceedings to which an exclusive choice of court agmt applies unless i) a party lacked capacity to conclude agmt ii) giving effect to the agmt would lead to manifest injustice or be manifestly contrary to local public policy iii) Art. 6 is consistent with current reasons to deny recognition & enforcement of foreign judgment c) Art. 8: A judgment given by a court of a Contracting State designated in an exclusive choice of court agmt shall be recognized & enforced in other Contracting States in accordance with this Chapter. i) Art. 8 simplifies everything – no need to go through examination process 2) Currently no federal statute in force BUT: ALI a) Would make practice uniform throughout all states  No more half-comity, half-UFMJRA system b) Would include only a few grounds to deny recognition & enforcement c) Includes a reciprocity requirement

Corporate Social Responsibility
MNEs: Their rise, power & influence call for Corporate Social Responsibility 1) MNEs = Multinational Enterprises 2) Operate through individual linked companies so that they consist of a corporate group organized around a holding company and various subsidiary corps 3) Challenge: Reconciling goals of CSR with goal of corps to maximize profits for the interest of the SHs

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Corporate Social Responsibility (CSR) 1) Responsibility towards corp.’s own workforce 2) Responsibility towards the environment 3) Responsibility to respect human rights & individual liberties Public Int’l Law: A way to regulate MNEs? 1) National Law: The trend is towards more rigorous protection of certain things with national laws imposing greater accountability upon corps in general a) Race to the Bottom Problem: National laws (esp. in developing countries) may impose low legal expectations on MNEs in an effort to get MNEs to invest in developing country (ex. allow child labor) 2) Public International Law a) Historical thought on int’l law being used as a source of regulation on MNEs: Not possible b/c int’l law only created rights and obligations for states; MNEs have no int’l legal personality b) Expectations/Circumstances under which int’l law creates rights/obligations for individuals i) Individual acting under the “color” of state law: Derivative liability can attach to MNEs or other individuals when MNEs or individuals act under the “color” of state law (1) How a corp. can act under “color” of state law: Corp. performs a traditional state function; Govt. contracted with corp. to carry out its functions ii) Treaties: Law can apply to individuals if treaty says so ▲ treaties can create direct int’l liabilities of responsible individuals (1) How treaties can apply to corp.: Treaties apply to corps that are in a country that is a state party to the treaty or corps that are acting within a country that is a state party to the treaty iii) Customary int’l law: Recognized & consistent practice of states within the int’l community formed through state practice (1) How customary int’l law applies to corp.: Radical argument is that MNEs have become very strong & important players in the int’l community & their roles should be expanding in the int’l legal system c) Bottom Line: Public int’l law could provide a base level of protection in order to prevent desperate countries from participating in the race to the bottom i) Benefits of using Public Int’l Law to regulate companies: Raises the bar for everyone & gives corps. one set of rules to follow rather than disparate rules for different countries Using soft-law standards and self-regulation in shaping the behavior of MNEs 1) Self Regulation (in place of govt. regulation) a) Organization for Economic Cooperation & Development (OECD) Guidelines for MNEs – p.786 i) Force of law: Not legally enforceable ii) Voluntary code that sets forth recommendations jointly addressed by govts. iii) Provides principles & standards of good practice iv) Provisions (1) Concepts & Principles (2) General Policies (3) Disclosure (4) Employment & Industrial Relations (5) Environment (6) Combating Bribery (7) Consumer Interests (8) Science & technology (9) Competition (10) Taxation b) UN Code of Conduct for Transnational Corporations i) Challenge: Agreeing on the norms of int’l law to be established under the code c) UN Global Compact – p.800 i) Force of law: Not regulatory in scope, voluntary ii) Co. tries to implement the 9 principles re Human Rights, Labor Standards & Environment and to publish an annual report on its achievements (p.800) d) International Standards Organization (ISO) i) Voluntary – Cos. try to obtain ISO environmental management system (EMS) certification & submit themselves to environmental auditing
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EMS: A continuing organizational structure to assist companies in setting & achieving particular environmental regulation goals iii) To avoid complications & liability, have Parent co. set environmental policy & subsidiaries implement policy to ensure the achievement of environmental & safety benchmarks e) Why MNEs would voluntarily submit themselves to such guidelines, audits, reporting-obligations i) MNEs can promote themselves as striving for CSR ▲ attracting investors ii) If able to self-regulate, will be able to avoid external regulations imposed by govts. 2) Economic Instruments – Govt. intervening by using economic instruments in the form of taxes & charges that create incentives or disincentives for the purpose of changing behavior (“Polluter Pays Principle”) The use of litigation in national courts to address misconduct by MNEs The Alien Tort Statute in the context of int’l business 1) ATS: The District Courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations a) Key Elements of ATS i) Original jurisdiction: Vesting US federal courts with jurisdiction over this particular category of claims ii) Civil action (versus criminal action) iii) By an alien (P has to be foreign) iv) For a tort committed in violation of int’l law 2) Second Wave of ATS claims: Foreign Ps bringing cases against corps for torts (i.e. human rights violations) committed in connection with corps’ overseas operations a) Sosa v. Alvarez Machain (US 2004) i) Congress intended to create a private c/a by passing the ATS ii) ATS provides jurisdiction for a narrow set of actions alleging violations of the law of nations (1) = Courts have jurisdiction over CL actions that are (a) based on present-day law of nations that rest on (b) a norm of international character (c) accepted by the civilized world and (d) defined with specificity 3) After Sosa, to apply ATS, court is looking for violation that a) can be defined with specificity and b) has uniform acceptance among nations c) [as violations of int’l law as understood when ATS was originally passed – piracy, infringement on rights of ambassadors; violation of safe conduct] 4) Significance of Sosa: Court reaffirms that the US is bound by international law norms incl. customary int’l law ▲ ATS claims brought forth have arisen from custom ATS claims arising from Custom 1) To successfully assert an ATS claim: Foreign P must allege that a particular norm that rises to the level of custom has been violated & as a result, P suffered from a tort 2) Custom: All states adhere to a particular norm out of a sense of obligation as if bound by that norm as a law Barriers foreign Ps face in successfully asserting an ATS claim 1) Procedural Barriers a) High threshold for pleading requirement: Plead with specificity b) Forum Non Conveniens 2) Substantive Barriers a) Kind of int’l law violation b) Liable Parties 3) Bottom Line: ATS is not a natural fit for CSR Procedural Barrier #1: High Threshold for pleading requirement – Specificity 1) To plead with specificity: Must allege sufficient facts, and not make conclusory allegations a) Beanal v. Freeport-McMoran, Inc. – Foreign P alleged (1) individual human rights violations; (2) environmental abuses; (3) genocide & cultural genocide
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CH: P fails to establish ATS claim b/c he failed to plead with specificity individual human rights violations & genocide and cultural genocide ii) Looking for names, dates, locations, times, etc. 2) Barrier: Victims will be unwilling to become Ps in fear of retribution for stepping forward with such specific allegations Procedural Barrier #2: Forum Non Conveniens (Corp D’s golden ticket out of US courts) 1) Forum Non Conveniens: As long as there is (1) an adequate forum somewhere other than where the suit was filed and as long as (2) private & public interests weigh in favor of that other forum, case should be dismissed & sent over to other forum 2) Barrier: With ATS claim, always talking about a foreign P & a foreign tort ▲ forum is always going to point to forum abroad since all witnesses & evidence will be in foreign country 3) Forum Non Conveniens Analysis a) Adequate Alternative Forum i) There is an adequate alternative forum if D is amenable to process in the other forum & if the subject matter of the claim can be litigated there b) Balance of Private & Public Interests (p.829-30) i) Private Interests (1) Ease of access of sources of proof (2) Availability of compulsory process for attendance of unwilling (3) Cost of obtaining attendance of willing witnesses (4) Possibility of view of the premises if view would be appropriate to the action (5) All other practical problems that make trial of case easy, expeditious & inexpensive ii) Public Interests (1) Administrative difficulties associated with court congestion (2) The unfairness of imposing jury duty on a community w/ no relation to the litigation (3) The interest in having localized controversies decided at home (4) Avoiding difficult problems in conflict of laws & application of foreign law Substantive Barrier #1: Kind of Int’l Law Violation 1) Int’l Law: Affects relationship b/n states, individual & foreign state & is used by states for their common good ▲ 2) To be a “violation of int’l law” to warrant application of the ATS, the wrong alleged must: a) be universally accepted so as to rise to the level of being binding int’l law/customary int’l law and b) be of mutual concern to particular states & not just several or individual concerns to states 3) Beanal v. Freeport-McMoran, Inc. – Foreign P alleged environmental abuses (with requisite specificity actually) a) CH: Environmental damage does not rise to the level of a violation of int’l law b/c this environmental harm alleged here is a localized problem i) Although there is a general sense of environmental responsibility, environmental concerns have not risen to the level of int’l law – they are not specific enough, shared enough & are not of mutual concern b) Buxbaum: Stance on environmental harm should change given environmental harm is cross-border (i.e. climate change, global warming) Substantive Barrier #2: Liable Parties under ATS 1) Liable Parties: Individuals that can be held liable under ATS must be… a) state actors (actors who are acting for the state) b) private actors who are acting under the color of state authority 2) Barrier: ▲ the state ordinarily needs to be involved in the violation of int’l law for ATS to apply since it is the state that is bound by int’l law 3) Doe v. Unocal Corp. – Possible for a foreign corp. to be liable for aiding & abetting int’l law violations a) State action is not required to give rise to liability under ATS if: i) A private party that engages in egregious violations can be liable under ATS ii) A private party that engages in not-so egregious violations can be held liable under ATS if such violations are done in furtherance of the egregious violations (1) Ex. Alleged rape (not-so egregious violation) was committed in an effort to get the forced labor (egregious violation) program going for Unocal’s pipe project
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IBT Outline – Fall 2007

b) BUT Corp can be held liable under ATS if: i) Corp had knowledge of int’l law violations & substantial facts that are telling of such violations and ii) Corp did not take action to stop violations when it was able to do so Note: Many ATS cases arise out of Project Finance projects

Project Finance
What is Project Finance 1) Project Finance: The financing of a major new non-recourse project or large project expansion where a) the project debt (from lenders) and equity (from sponsors) used to finance the project are paid back from the cash flow generated by the project & b) the lenders use assets and Ks of the project as security 2) What PF is used for: To fund large-scale infrastructure & energy projects, natural resource exploitation a) Building roads, pipelines & refineries, electric-generating facilities, manufacturing facilities, ports 3) Alternative ways to raise money for project if don’t use PF: a) Sponsor can sell additional equity (stocks in private or public offerings); Issue debt securities (borrowing a lot of $ to be repaid); Take out commercial loan b) Downside of Alternatives: All on the credit of Sponsor (may not have the assets or equity to support a $10B project!) 4) Considerations in setting up PF: p.140 5) The PF Parties: Sponsor, Foreign Govt., Project Company, Lenders, Sellers (Feedstock), Buyers (Product Offtakers), Contractors, Project Operators, Consultants 6) The PF Phases: Project Development Phase, Construction Phase, Start-Up Phase, Operations Phase

The Project 1) Sponsor: Organizes all of the other parties a) If more than one sponsor, they will form a project company as a separate legal entity that enters into Ks with other parties to the project finance b) Responsible for gaining equity in the project company 2) Project company: Special purpose entity that consists of the project’s sponsors who may be investors or who have other interest in the project (i.e. contractor, operator) a) Basic forms of ownership of a project: i) Corporations – Simplest form of project ownership ii) General Partnerships – Used when the tax benefits associated with the project are significant iii) Limited Partnerships – Limited control over the business of the partnership & liable only for the debts and liabilities of the partnership to the extent of capital contributions in the partnership iv) LLC – Hybrid b/n Corps & LPs 3) Feasibility Study: Sponsor hires consultants to prepare a study showing the financial viability of the project a) Consultants in: Shipping & logistics, marketing, environmental, political i) Engaged by sponsors to undertake due diligence for the benefit of the project lenders b) Lenders want to make sure that they are investing in a good project & one that will be socially and environmentally responsible (saves ability to be repaid & reputation)

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IBT Outline – Fall 2007

4)

5)

6)

7)

Equator Principles: A set of principles that lenders have agreed to in which lenders will not provide loans to projects where the borrower will not or is unable to comply with lenders’ social & environmental policies and procedures Concession: Primary K b/n govt. & project co. and forms the contractual basis from which other Ks are developed a) With public sector public finance, the govt. awards the project company a concession granting it a “license” for exclusive ownership of a specified facility or asset for fixed number of years b) Entitles the project co. to build, finance & operate the facility for a fixed period Financing: Sponsors (providers of equity) a) Sponsor building equity in project company b) Equity to Debt Ratios for structuring of projects i) Strong projects w/ strong cash flow & low risks: 10%-90% ii) Weak projects w/ uncertain cash flow & high risks: 40%-60% c) Sponsors will minimize their equity contributions (equity more expensive then use of commercial bank debt) d) If Project defaults – Sponsor is second in line to the project’s assets & cash Lenders: Providing funding for the Project Debt a) Senior debt lenders: Project co. looks to commercial banks to fund remaining project costs i) Provide loans to the project co. to develop & construct the project; take security interest in all the project assets ii) Multilateral agencies may be involved to cover political & other risks iii) Lenders may require sovereign guarantees from host govt. where project is situated b) Lenders will normally give a grace period for repayment of capital on the loans until the construction phase has been completed & the project is generating cash c) How to protect Lenders i) Lender’s preferred loan: Secured loan (vs. unsecured loan) – Have financing secured by the assets of the Project (not of the sponsor) (1) ▲ if Project defaults – Lenders are first in line to the project’s assets & cash (2) Assets that can be used for collateral (consider the stages of the project & what assets the lenders can get at each stage) (a) Fixed assets (i.e. physical plant, port facilities, machines) (b) The Concession (unless host govt. provided that the rights are non-assignable) ii) Get int’l financial institution involved (World Bank, IMF, govt. type lender) iii) Guarantees, warranties & covenants (1) i.e. MIGA insurance – protects against loss in the event of expropriation (2) from other parties involved in the interconnected agmts (cost overruns will affect lenders’ ability to be repaid) Project Agmts: Structure of PF transaction is set out in contractual agmts (based on concession) b/n all the parties which (1) define each party’s role in the transaction; (2) clearly identifies their liabilities and expected functions w/in the PJ transaction & (2) apportions risk b/n the parties. a) Construction Contract: Agmt b/n Project Co. & Constructors i) EPC K (Engineering, Procurement & Construction) b) Loan & Security Agmt: Agmt. b/n Project Co. (borrower) & Lender i) Agmt. sets forth basic terms of the loan & general provisions relating to majority, interest rate & fees ii) Incl. security (multiple forms of collateral to secure the project loan – ex. mortgage on project facilities) c) Site Lease Agmt: Agmt. b/n Project Co. & Leasor i) Long-term lease for the life of the project relating to the real property on which the project is to be located d) Operations & Mgmt Agmt: Agmt b/n Project Co. & Operator Co. i) Long-term agmt for day to day operation & maintenance of project facilities by Operator Co., which has the technical & financial expertise to operate the project in accordance with the cost & production specifications for the project e) Product Off-take Agmts: Agmt b/n Project Co. & Buyers i) Represent the source of revenue for the project – agmt must be structured to give the Project Co. sufficient revenue to pay its project debt obligations & all other costs (operating, maintaining, owning the project) ii) Structures agmts can take (1) Hell or High Water – Buyers have to pay fixed amount regularly regardless of project’s output per term; best for project & lenders
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IBT Outline – Fall 2007

(a) But, Buyers aren’t going to agree to this if they are paying for nothing (2) Take or Pay – Buy a fixed percentage of what the plant can produce, regardless of whether Buyer wants it or not, but Buyers off the hook if project cannot generate quantity of products (a) But Buyers want a guaranteed supply, too! (3) Take and Pay – Buyer only pays for what they buy; worst for project & lenders iii) Buyer Guarantees: A possibility; Buyers may help pay for construction of facility if they know this will be a beneficial project for them f) Feedstock Supply Agmts: Agmt b/n Project Co. & Suppliers (of raw materials needed) i) Put or Pay structure: Supplier must either supply the feedstock or pay the Project Co. the difference in costs incurred in obtaining the feedstock from another source ii) Cost of feedstock is fixed within an acceptable range g) Insurance: Covers most common types of losses that a project may suffer i) Property damage, Machinery, Comprehensive General Liability, Worker’s Compensation, etc. 8) Project up & running so refinance: With a positive cash flow, the project sponsors often seek to refinance the project to obtain better financing terms & lower interest rates for the rest of project’s projected life Benefits of Project Financing 1) Non-recourse nature of the debt: Sponsors have no obligation to make payments on the project loan if revenues generated by the project are insufficient to cover the principal & interest payments on the loan a) Limits Sponsor’s exposure to the assets of the project rather than opening up Sponsor to liability itself b) Sponsor able to get financing on the strength of the project even if its own credit-worthiness is not great 2) Ability of project’s sponsors to maximize their equity leverage while maximizing any tax benefits: a) Maximize leverage: Sponsors can put a smaller portion of funds at risk to finance the project without diluting equity investment in the project 3) Ability to provide off-balance sheet treatment: Sponsors not required to report any of the project debt on the balance sheet b/c such debt is non-recourse a) PF transaction will not interfere with Sponsor’s other debt arrangements since PF is treated separately Risks & Ways to Mitigate Risks 1) Cost Overrun (umbrella concept)  Affects everything a) Natural disaster, Facility not constructed to specification or on time, Subcontractors go out of business b) Mitigating Risk: Allocate responsibilities & risks (i.e. use Force Majeure provisions, Insurance) 2) Supply Risk: Raw materials supply is interrupted b/c of insufficient supply resources, poor design, poor operation of the supply system  Affects Sales & Purchase Agmts a) Mitigate Risk – Ex. Negotiate long-term supply agmts that provide sufficient inputs to supply the project plant at full capacity with experienced suppliers (p.155) 3) Market & Product Price: Risks stem from the off-take buyer markets  Affect Project’s Cash Flow Generation ▲ Affects Lenders being repaid a) Risk of project being prevented from selling product b) Risk of project being unable to collect payment from product sales c) Mitigate Risk – Ex. Negotiation of a long-term, fixed-price purchase agmt that provides sufficient demand to maintain plant at full capacity (p.156) 4) Operational Risks: Non-proven technology, defective equipment, poor operation, natural disasters affecting the project’s ability to operate at full capacity a) Mitigate Risk – Ex. Establish a comprehensive insurance program with business interruption insurance (p.157) 5) Foreign Exchange: Fluctuations in exchange rate of currencies in which project is trading and/or borrows that may negatively affect the cash flow of the project a) Mitigate Risk – Ex. Revenues, costs, debts denominated in US dollars; MIGA insurance (p.157) 6) Political Risks: Risk of governmental action – expropriation, war, debt moratoriums, devaluation or other economic difficulties a) Mitigate Risk – Ex. Obligate the host govt. to provide security at all times adequate to protect the project’s property & personnel

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IBT Outline – Fall 2007

Dispute Resolution for Project Finance Transactions 1) Transactional Unity: A dispute over 1 K can have ramifications on other Ks & for the whole project a) Each K is concluded b/n different parties & has a different purpose  Participants MUST recognize the concept of unity with respect to the resolution of their disputes 2) Trend for dispute resolution: Towards int’l arbitration a) Private Arbitration: Either Co-Govt. dispute (i.e. over concession) or Co-Co dispute (i.e. over construction) b) Other means of dispute resolution: i) Nonbinding mechanisms (mediation) ii) Domestic Courts: Risk selecting unfavorable forum, fragmentation of the dispute resolution process (effect on construction K may have effect on purchase agmt, but have to send both to different forums for different resolutions even though they are connected) iii) Int’l Institutions 3) PF consists of intertwining Ks that can be divided into 2 categories a) Underlying docs re the project itself (construction, operation, sub-Ks – IP licensing, administrative) b) Financing & security docs 4) Dispute Resolution Clause in Ks should be uniform: International Arbitration a) Neutral alternative to domestic courts b) Why trend towards int’l arbitration i) Arbitration clauses enforced in domestic courts more easily and more successfully than forum selection clauses ii) Application of forum non conveniens may be an obstacle to an effective application of a forum selection clause for domestic courts iii) Adoption of int’l treaties (i.e. NY Convention) favor arbitral mechanism c) Arbitration’s Significance re PF disputes i) Flexibility in re to the resolution of multi-party disputes ii) On theory of unified transaction, an arbitral tribunal that has jurisdiction over the master agmt may have jurisdiction over the subsidiary agmts iii) Multi-party arbitrations are initiated with the consent of the parties & by arbitration rules of major int’l arbitration institutions (ICC) iv) Neutrality safeguard for private-public (co-govt. disputes) 5) Suggestion: Parties in PF Transactions should incorporate multi-party arbitration into their dispute resolution clause in their Ks (less uncertain & less expensive in the long-run for multi-party disputes) a) Features of multi-party arbitration component of dispute resolution clause i) Equality among all parties in the appointment of the arbitrators ii) DR clause of an agmt could incorporate parties’ consent to the participation of third parties (i.e. the parties to the related Ks) to future arbitration proceedings iii) DR clause provide for the consolidation of possible parallel arbitration proceedings b) Considerations in drafting multi-party arbitration DR clause i) Choose seat where both national legislation & judicial tradition favor arbitration ii) Selection of specialized arbitrators iii) Understand the specialties & experience of arbitral institutions iv) Predict country where enforcement of arbitral award can be enforced (NY Convention state parties)

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