The Regulation of
1. Identify and discuss some basic principles
and doctrines that frame international
2. Describe some ways in which U.S.
businesspersons do business internationally.
3. Explain how parties to international
contracts protect against various risks
through contractual clauses and letters of
4. Discuss how specific types of international
business activities are regulated by
5. Give examples of the extraterritorial
application of certain U.S. laws.
International law is a body of
written and unwritten laws that are
observed by otherwise independent
nations and that govern the acts of
individuals as well as states.
The three important legal principles
and doctrines include:
Principle of Comity
Act of State Doctrine
Doctrine of Sovereign Immunity
The Principle of Comity
Under this principle, nations give
effect to the laws and judicial
decrees of other nations for
reasons of courtesy and
The Act of State Doctrine
A doctrine under which
American courts avoid passing
judgment on the validity of
public acts committed by a
recognized foreign government
within its own territory.
The Doctrine of
When certain conditions are satisfied,
foreign nations are immune from U.S.
jurisdiction under the Foreign Sovereign
Immunities Act of 1976.
Exceptions are made when the:
foreign state has “waived its immunity
either explicitly or by implication”
action is “based upon a commercial activity
carried on in the United States by the
Case 25.1 Holden v. Canadian
Canada closed its consulate in San Francisco
which caused Arlene Holden to lose her job
after thirteen years as a commercial officer.
Canada then opened a small office with only
one commercial officer, Mark Ritchie, who was
younger and less experienced than Holden.
Holden filed a suit against the consulate
alleging discrimination. The consulate asked
the court to dismiss under the FSIA.
What did the courts rule?
Does the “commercial activities” exception to
the FSIA conflict with the Act of State Doctrine?
Doing Business Internationally
Ways in which U.S. domestic
firms engage in international
business transactions include:
exporting, which may involve foreign
agents or distributors
manufacturing abroad through
licensing arrangements, franchising
operations, wholly owned
subsidiaries, or joint ventures
Exporting can take two forms:
Direct exporting—U.S. company
signs a sales contract with a foreign
purchaser that provides for the
conditions of shipment and payment
for the goods.
Indirect exporting—can be
undertaken by the appointment of a
foreign agent or a foreign distributor.
What Is a “Commercial Activity”?
According to the U.S. Supreme Court, a
state engages in a commercial activity
“where it exercises „only those powers
that can also be exercised by private
citizens‟ as distinct from those „powers
peculiar to sovereigns.‟”
In addition to finding that a government-
controlled foreign defendant has engaged
in a commercial activity, what other
requirement must be met before a U.S.
court can exercise jurisdiction over the
U.S. firms want to establish
manufacturing plants abroad if
they believe that by doing so
they will reduce costs, particu-
larly for labor, shipping, and
raw materials, and thereby
be able to compete more
effectively in foreign markets.
Commercial Contracts in an
Choice-of-language, forum-selection, and
choice-of-law clauses are often included in
international business contracts to reduce the
uncertainties associated with interpreting the
language of the agreement and dealing with
Force majeure clauses are included in most
domestic and international contracts.
They commonly stipulate that certain events, such
as floods, fire, accidents, labor strikes, and
shortages, may excuse a party from liability for
nonperformance of the contract.
Arbitration clauses are also frequently found in
Legal Documents in French
In 1995, France implemented a law
making the use of French mandatory
in certain legal documents.
Certain legal terms in documents
governed by U.S. or English law have
no equivalent terms or phrases in the
French legal system.
How might language differences affect
the meaning of certain terms or
phrases in an international contract?
Making Payment on
Currency differences between nations
and the geographical distance between
parties to international sales contracts
add a degree of complexity to
international sales that does not exist
within the domestic market.
Because international contracts involve
greater financial risks, special care
should be taken in drafting these
contracts to specify both the currency in
which payment is to be made and the
method of payment.
Because nations have different monetary
systems, payment on international
contracts requires currency conversion at a
rate specified in a foreign exchange market.
Correspondent banks facilitate the transfer
of funds from a buyer in one country to a
seller in another.
One reason many businesspersons find it
advantageous to include arbitration
clauses in their international contracts is
because arbitration awards are usually
easier to enforce than court judgments.
What might be some other advantages of
arbitration in the context of international
transactions? Are there any
Letters of Credit
Letters of credit facilitate
international transactions by
ensuring payment to sellers and
ensuring to buyers that payment
will not be made until the sellers
have complied with the terms of
the letters of credit.
Typically, compliance occurs when
a bill of lading is delivered to the
Case 25.2 Pacific Reliant Industries, Inc. v.
Amerika Samoa Bank
Pacific Reliant Industries sold building materials
to a company in American Samoa on the strength
of a letter-of-credit (LC) issued by Amerika
Samoa Bank (ASB).
Later, alleging that ASB had wrongfully
dishonored the LC, Pacific brought suit in Oregon
against ASB to recover payment.
The court dismissed the suit for lack of sufficient
personal jurisdiction and Pacific appealed.
If a court could exercise jurisdiction over a
nonresident corporation that did not have
minimum contacts with the jurisdiction in which
the suit was brought, what might result?
Regulation of Specific
In the interests of their economies, foreign
policies, domestic policies, or other national
priorities, nations impose laws that restrict or
facilitate international business.
Such laws regulate foreign investments;
exporting and importing activities; and in the
U.S., the bribery of foreign officials to obtain
The General Agreement on Tariffs and Trade
attempts to minimize trade barriers among
nations, as do regional trade agreements,
including the European Union and the North
American Free Trade Agreement.
U.S. Laws in Global Context
U.S. antitrust laws may be applied beyond
the borders of the United States.
Any conspiracy that has a substantial effect
on commerce within the United States may
be subject to the Sherman Act, even if the
violation occurs outside the U.S.
The major U.S. laws prohibiting employment
discrimination cover U.S. employees working
abroad for U.S. firms—unless to apply the
U.S. laws would violate the laws of the host
Case 25.3 United States v. Nippon Paper
A criminal indictment was filed against
Nippon Paper Industries Co. (NPI) and others
alleging that the meetings to reach the
agreement had occurred entirely in Japan but
that the defendants had sold the paper
through subsidiaries in the United States at
above-normal prices. These activities had
allegedly violated Section 1 of the Sherman
Act. NPI filed a motion to dismiss.
What did the courts rule?
Why should the United States apply its
antitrust laws to business firms owned by
citizens or the government of another nation?
There are laws in the U.S.
prohibiting discrimination on
the basis of race, color,
national origin, religion, sex,
age, and disability.
These laws, as they affect
1. What is the principle of comity, and why do
courts deciding disputes involving a foreign law
or judicial decree apply this principle?
2. What is the Act of State Doctrine? In what
circumstances is this doctrine applied?
3. A foreign nation is not immune from the
jurisdiction of U.S. courts if the nation waives its
immunity. Under the Foreign Sovereign
Immunities Act of 1976, on what other basis
might a foreign state be considered subject to the
jurisdiction of U.S. courts?
4. In what circumstances will U.S. antitrust laws be
5. Do U.S. laws prohibiting employment
discrimination apply in all circumstances to U.S.
employees working for U.S. employers abroad?