2007 5

.Course Overview:
Course Classification:Required Course
Target Audience: Undergraduate Students Majoring in Economics
Credits: 3
Credit Hours: 54
Basic Text:
Schaffer, Richard; Earle, Beverly; Agusti Filiberto, International
Business Law & Its Environment, South-Western Thomson
Learning, 6th edition, 2005
Additional Readings:
1.Chatterjee, C., Legal Aspects of Transnational Marketing and
Sales, London,Cavendish, 1996
2.Goode, R., Commercial Law, London, Penguin, 1994
3.Schimitthoff, C., Schimmitthoffs Export Trade: The Law of
International Trade,London, Stevens, 1996
4.Various journals and internal legal materials
. Course Objectives and Requirements:
This course aims at providing a general understanding of the legal
problems
arising
fromtransnational
business
transactions.At
the
conclusion of this course, the student will be able to:
1.Understand the legal aspects of transnational business
2.Demonstrate a knowledge of the legal restrictions on
transnational
business,
such
asimport
control,
currency
regulations and protectionism
3.Identify different types of risks as they apply to transnational
business, such asforeign investment, creeping expropriation and
the UN resolutions 1803 and 3281
4.Competently discuss the meaning of sovereign immunity and
transnational business law
.Course Outline:
Chapter One

Introduction to International Business

Emphases on
Through this chapter studying, we can understand some international
trade theories, grasp the knowledge about exporting, government controls
over trade and international licensing agreement.
Hard parts
Some international trade theories

Government controls over trade.

Contents
I . Some International Trade Theories
A. Specialization
B. Absolute Advantage
C. Comparative Advantage
D. Opportunity Cost
II. Exporting
A. Direct Exporting
B. Indirect Exporting
III. Government Controls over Trade
A. Tariffs
B. Nontariff Barriers to Trade
C. Export Restrictions
IV. International Licensing Agreement
A. Technology Transfer
B. International Franchising

C ASES IN T HIS C HAPTER

First Flight Associates v. Professional Golf Co., Inc., p. 14.

Dayan v. McDonalds Corp., p. 16.
In re Union Carbide Corporation Gas Plant Disaster at Bhopal, p. 23.

Gaskin v. Stumm Handel GMBH, p. 34.

DIP SpA v. Commune di Bassano del Grappa, p. 39.

T EACHING S UMMARY
The three basic forms of international businesstrade, licensing, and
investmentare methods of entering foreign markets, but they are not
mutually exclusive. The savvy manager of an international business will seek to
create joint ventures and business opportunities to invest, manufacture,
export and import as well as license its products.
However, international
business opportunities are fraught with risk, and methods of entering a foreign
market or country must be tailored to the culture, politics, and economics of
the host country. Through the study of international law, one can better
identify and manage potential legal risks.

C ASE Q UESTIONS AND A NSWERS

First Flight Associates v. Professional Golf Co., Inc., p. 14.

1.

What issues are before the court?

Answer: The court must decide whether: (1) Pro Golf was entitled to
terminate the contract with FFA and (2) whether it was entitled to
royalties.

2.

Why does the court decide that the sales representation contract can
be terminated by Pro Golf?

Answer: Contracts that do not state a set length of time for

termination are presumptively at will and may be terminated by
either party at any time.
3.Under what theory did Pro Golf claim that it was entitled to royalties?
Answer: It claimed that FFA was its agent, and therefore it is entitled
to whatever FFA received from the Teito contract.
4.

Why did the court decide Pro Golf should not get
royalties?

Answer: There was no agency relationship between Pro Golf and FFA,
but rather a written trademark agreement for FFA to use the First
Flight trademark on golf soft goods. Courts in the U.S. are reluctant
to impose restrictions on assigning of rights in real or personal
property; FFA here has a contractual right to use the trademark on
golf soft goods in Japan and can freely transfer, assign, or sublicense all or part of those contractual rights. To quote the court:
Nothing in FFAs trademark license contract with Pro Golf
prohibited FFA from granting sub-licenses to others or required FFA
to pass along to Pro Golf any royalties FFA might receive from such
sublicenses.
5.

Why isnt Pro Golf entitled to reimbursement for its attempts to

perfect trademark rights in Japan?
Answer: In Japan, unlike the U.S., registration (not use) is the critical
factor for legal protection of a trademark. Third parties were able
to get registration without use, and Pro Golf apparently had to buy
them off. Its failure to do so is not the fault of FFA, nor should FFA
be responsible to reimburse Pro Golf for its own failure. Even though
U.S. trademark law (The Lanham Act) was amended in 1988 to allow
conditional protection based on intent to use, protection does not
fully accrue until the trademark has been used in commerce.

Dayan v. McDonald's Corp., p. 16.

1.

What social or cultural factors affected McDonald's marketing in

Paris?
Answer: Parisian customs will inevitably affect the franchise
agreement, which required the Paris franchisee meet the quality,
service and cleanliness standards set by McDonald's USA.
A
successful franchise requires the franchisee to have the ability or
desire to meet those U.S. standards. This case also illustrates the
problems of franchising (licensing) over long distances and beyond the
day-to-day control of the franchisor. The problems here could have
arisen as easily in the case of a manufacturing business and the
licensing of technology.

2.

How could McDonald's

franchisee?

have

exercised

greater

control

over

its

Answer: Better training in the U.S., more frequent inspection visits,

5

3.

and closer supervision of the Parisian franchises.

What types of products and/or services are most suitable for foreign
licensing?
Answer: Licensing generally is done as an alternative to foreign
investment in plant and equipment where the licensor is unwilling to
take the risks of further market penetration. Collecting royalties can
be far safer than risking production overseas. Collecting royalties
based on sales can be far safer than risking production overseas.
U.S. franchisors are getting a firm jump on the European market and
have been particularly successful worldwide in franchising fast food
restaurants as well as a host of service-related industries. An ability
to adapt to local markets has proven to be a crucial factor in the
success or failure of U.S. franchisors abroad.
As the
Johannesburgers and Fries article demonstrates, breaking into a
foreign market requires franchisors to examine carefully the might of
homegrown brands and local tastes.

In re Union Carbide Corporation Gas Plant Disaster at Bhopal , p. 23.

1.

How are the risks of foreign direct investment in a plant or production

facility greater than those associated with exporting or licensing?
How are those problems enhanced when the investment is in a
developing country?
Answer: Foreign direct investment usually represents the greatest
market penetration and greatest involvement in the foreign country and
therefore the greatest risk. A tendency to greater economic and/or
political instability, weak infrastructure, lack of foreign exchange, and
tighter controls on trade and investment are some factors that might
create problems when the investment is in a developing country.

2.

Was Union Carbide Corporation responsible for training and supervising

the employees of its subsidiaries?
Is it possible to supervise all
aspects of overseas production?
Answer: Yes, Union Carbide was very much responsible for training and
supervision. However, it should be pointed out that to a great extent
the managerial problems stemmed from the government of India's
insistence that ownership and control be turned over to Indians.
Indeed, it has been said that Indian managers were not open or
receptive to U.S. managers and technical specialists visiting the plant.
6

Those factors do not negate Union Carbides responsibility, rather,

they point to the dilemma that Union Carbide faced at the time, which
is an ongoing dilemma for multinationals today.
3.

What are the economic, political or social ramifications of this

disaster? Do you think that it could affect the demand for Union
Carbide's products?
Answer: The economic impact to both Union Carbide and to Bhopal has
been tremendous. Politically, these events typically result in calls for
increased regulation and supervision over multinational corporations.
The problem for India is, of course, how to regulate the firm without
driving away the benefits (jobs, tax revenues, transfer of technology,
etc.) of its presence in India.

4.

Had the legal requirements in India concerning the handling of hazardous

chemicals been less than that required in the United States, should
Union Carbide have ethically followed the higher U.S. standard?
Answer: This question might permit students to consider the loyalties
and attitudes of Western managers operating in foreign countries.

Gaskin v. Stumm Handel, GMBH., p. 34.

1.

Why did Gaskin claim that he was not bound by the forum selection
clause included in the contract to which he agreed?
Answer: Gaskin asserted that since he did not understand what a
forum selection clause was, due to it being in German, he could not
have agreed to it.

2.

Would the outcome have been different had Gaskin been illiterate?
Answer: No. In fact, Gaskin was illiteratein German. One who signs a
contract is bound by that agreement, otherwise Gaskin could simply
nullify contractual provisions through his inattentiveness or purposeful
neglect in reading them.

3.

Which party, if any, is obligated to provide translation services when

dealing with matters in two different languages?
Answer: Neither party is obligated, but translation services are
available worldwide.
The local offices of the U.S. Department of
Commerce can assist a U.S. firm in arranging translation services
7

abroad. One should clarify this in advance with the host.

4.

If prudent companies execute two copies of a contract, one in each

language, which is the operable and effective document?
Answer: Both represent the understanding of the parties, but this may
depend in part on the court hearing the dispute. This practice is
relatively common and is a requirement for doing business in many
countries, notably the former Soviet Union and the People's Republic
of China.

DIP SpA v. Commune di Bassano del Grappa , p. 39.

1.

The municipal plans seek to encourage free competition. How does this
method differ from the U.S. ideal of free competition? How is it similar
to U.S. laws?
Answer: The U.S. permits local government to zone areas, thus
prohibiting certain types of businesses from operating in the area.
One popular example is Rudolph Guillianis re-zoning of the New York
City Times Square area to evict sex shops and other similar
businesses. Communities also commonly zone to prohibit certain types
of late-night clubs or businesses from residential areas in the name of
community planning.
Nevertheless, provided there is compliance with zoning laws, any
business can open in any business-zoned area (or any area that is not
zoned to exclude business). Therefore, the governments view of
whether the market is already adequately served (or flooded) is
irrelevant; if a business wishes to enter a flooded market, it may do
so.

2.

Why was the act not found discriminatory?

Answer: Because in awarding licenses, it did not distinguish between
Italian and non-Italian businesses (or the origin of the goods sold) but,
rather, considered the type of business in relation to its market
contribution.

A NSWERS TO Q UESTIONS A ND C ASE P ROBLEMS

1.
Answer: There are many factors, including modern developments in
telecommunications, transportation, technology flows, international capital
flows, increased cross-border labor flows, the geographical distribution of
natural resources, an improved business climate in developing and non-market
countries, increased democratization and the opening of markets to trade and
investment, increased legal harmonization, the influence of international
intergovernmental organizations and their work in economic, cultural, social,
and political areas, increased travel and intercultural awareness, and more.
The answer develops throughout each chapter to the conclusion of the text.
2.
Answer: The risks of foreign direct investment result from the
social, economic and political environment facing the firm in the host country.
It might include political risk resulting from an uncertain or hostile political
environment (of which expropriation or nationalization would be the most
extreme result); public controls on trade, including trade restrictions, such as
minimum export performance requirements or import quotas that might limit
the firm's ability to source component parts or raw materials; restrictions on
financial transactions, such as currency restrictions, limits on the repatriation
of profits earned on investments; restrictions on corporate ownership and
local participation requirements; local labor and environmental laws, etc.
Union Carbide may have had little choice but to comply with the
demands of the Indian government. The obvious risk for Union Carbide was
loss of control over operations, but submitting to Indian government controls
probably insured against the kind of risks, e.g., expropriation or
nationalization, that many multinationals have faced in direct investment
ventures in developing nations. In effect, the operation is partly nationalized
from the start. Union Carbide appears to have few currency controls (limits
on repatriation of earnings), and few communications or cultural risks. The
usual risks of foreign laws and courts take a curious turn. Ordinarily, a
multinational takes a risk in being exposed to a foreign countrys laws and
courts. Here, however, Union Carbide takes refuge in the courts of India;
since it sought to operate in India, and the government imposed numerous
operating restrictions, it did not foresee being sued in the United States or
being held to U.S. legal standards of negligence and damages. In the case
extract, Union Carbide succeeds in persuading the court to adopt forum non
conveniens to the plaintiffs claims so that the case will be tried in India
rather than the U.S.
3.
Answer: Distance, time differences, language, cultural barriers,
religious and ethnic differences, differences in political and legal systems, and
those other factors that increase the risks of doing business internationally.
4.

Answer:

Information

is

available

from

variety

of

daily
9

publications (e.g. The Journal of Commerce), websites, business journals,

library reference sources, and reports of international and intergovernmental
organizations, (i.e. U.N. IMF, World Bank, U.S. government agencies such as
the International Trade Administration regional offices, U.S. and foreign banks,
political risk and insurance reports, trade missions of foreign countries
located in New York, Washington, and other cities, World Trade Centers,
etc.). Many state departments of commerce have information available on
trade opportunities in specific countries. Cable news special reports have
lately been excellent (e.g. detailing abuses in Chinese prison labor camps and
their potential impact on China's MFN status, child labor in Pakistan and its
impact on Wal-Mart in the United States, the impact of the Maastricht
Treaty and EMU voting on Europe, etc.).
5.
Answer: This question is particularly important for the small and
medium-sized new-to-export firms. The outside members of the export
team might include the international banker, the freight forwarder or customs
broker, export management consultant, government trade specialists.
Students should not fail to consider the importance of learning from the
experiences of other exporters through their state and local trade
associations.
6.
Answer: First, the court will attempt to discern what the
reasonable understanding of the parties was (that may include reference to
prior dealings between parties or industry practice). If, where, as here, the
meaning of the word differs, the court will then rely on the meaning of the
word in the language of the contract.
Of course, language problems are inevitable in international
negotiations.
In the case of sales contracts, as we shall see in later
chapters, the use of samples helps greatly. For this reason, reliance on
samples in doing business over great distances is very common. Certificates
of analysis and the use of local inspection companies are also widely used. It
is essential that the parties take the time to familiarize themselves with each
other's products. Visits to a supplier's plant or buyer's place of business
can be an invaluable learning experience and can serve to significantly reduce
the potential for communication problems and misunderstanding.
7.
Answer: Planning and commitment are essential because (1) poor
planning fails to anticipate the various risks that pertain to doing business
overseas, and (2) lack of commitment can undermine a sound, long-term
strategic decision to penetrate overseas markets where early losses are
sustained.
The search for a magic elixir can make the grass seem greener
overseas. A company that fails in its home market must carefully analyze the
reasons for that failure and make a clear-eyed assessment of whether
10

overseas markets offer better opportunities for licensing, exporting, or

direct investment. It is entirely possible that foreign markets may offer
enhanced opportunities (less competition, lower labor costs, better access to
markets, materials or sources), but if a company is failing in its home market,
it may not have the planning and commitment to insure a sound, long-term
strategy for going global.
8.
Answer: This answer will depend on the particular state you are
in. Leading export firms can be found through various publications, state
departments of commerce, or world trade clubs in your area. The impact of
exports will vary, but the number of jobs created or maintained by exports
is certainly a positive indicator for any states economy. Various groups
(including the AFL-CIO) could provide information as to whether jobs have so
far been gained or lost through the ratification of NAFTA and the Uruguay
Round of GATT.
State departments of commerce often sponsor trade
missions and other export-encouraging seminars, workshops, and programs to
educate state businesses about the opportunities existing beyond U.S.
borders.
9.
Answer: This question calls for general discussion among students.
It might help to analyze which franchise operations have sold well in foreign
countries generally and developing countries in particular. Which brands and
products are so well known that they have customer acceptance in different
cultures?
What has the role of advertising been in establishing that
success?
Are there any problems with protecting franchise logos (as
trademarks) in any foreign countries?
10. Answer: At a minimum, managers must be aware that the laws of
the host country must be strictly observed. As the question suggests,
however, the laws in foreign host countries often differ markedly from the
domestic legal and ethical environment and may allow for actions otherwise
prohibited at home. Before taking advantage of those differences in
ways that maximize shareholder profit, companies may reasonably choose to
ask whether polluting or bribing (or using child labor, slave labor, or labor
exposed to unsafe or unhealthy working conditions) is consistent with best
practices for multinationals or is consistent with emerging global moral
minimums. Bribery is often officially illegal (de jure illegal) but actively
practiced anyway (de facto legal).
Where bribery is not illegal, U.S.
multinationals must still take the U.S. Foreign Corrupt Practices Act into
account and may well question whether the money paid guarantees the work
or contract desired or is in fact worth the price demanded.

11

M ANAGERIAL I MPLICATIONS

Students should acknowledge the threshold problem of obtaining the buy-in of

an organizations decision makers to make the necessary long-term
commitment to enter a foreign market as well as the strategic importance of
competing internationally. For instance, what will the long-term effect be of
simply abandoning foreign markets to the competition? Students might also
address the firm's choice of its foreign market entry strategy, such as
whether it should export, license its technology, or invest in a production
facility abroad. The factors to be considered might include the nature of the
firm's products or services, its capitalization and financial resources, its
human talent, its technological edge, its sources of raw materials and
component parts, barriers to one entry method or another (such as the
potential that tariffs and import barriers may make exporting to Europe
impractical in the future, or that freight costs will eat up all profits), and its
willingness to absorb the risks associated with increasing market penetration.
Further, the firm should assign its best and most experienced people to the
project to help assure success.

S UPPLEMENTAL A CTIVITY :

C ASE B RIEF A SSIGNMENT

Instructors who want to hone the writing and analytical skills of students may
wish to require students to write a case brief on a supplemental case and
answer a series of questions. This first example is relatively simple, while
later examples become more complex. For briefing a case, you may suggest
a style of your own, borrowing one from a legal writing text, or hand out
the example here.
Briefing a Case
A case brief reduces a case to its essential components: what it is about
and what it means in terms of the law. Case briefs generally comply with the
following format:
Case Name and Citation: include the name of the case, the year decided,
the court that decided the case
Facts: a brief recitation of the relevant facts giving rise to the dispute
(this may also include a relevant statute or legal rule and a lower courts
decision)

12

Plaintiff and Defendant Arguments: outline the complaint of the plaintiff

and defendant and any defenses raised
Issue: what is the essential issue before the court (the question the court
must answer); phrase in the form of a question (e.g. does U.S. antidiscrimination law apply to U.S.-based businesses operating outside the U.S.?)
Answer: a simple answer to the question (e.g. yes, U.S. anti-discrimination
law applies extra-territorially
Rule: explain the legal reason provided by the court for its decision; note any
law relied upon
Decision: who won; what was the remedy

Supplemental Case: Eckert International, Inc. v. Government of the

Sovereign Democratic Republic of Fiji. Have students find, read, and brief
Eckert International, Inc. v. Government of the Sovereign Democratic Republic
of Fiji, 834 F.Supp. 167 (ED Va. 1993). This case appears in the context of
the sometimes precarious nature of newlyindependent states and the concept
of sovereign immunity (addressed in greater depth in the next chapter).
Here, Fijis new prime minister, who rose to power through a coup, sought
to terminate a pre-existing commercial contract with Eckert International, an
American corporation. Eckert sued Fiji for breach of contract, and Fiji
asserted sovereign immunity. Concluding that the contract was commercial in
nature, the court found sovereign immunity inapplicable.

Studying qustions
1. Briefly describe, giving two examples, how comparative advantage is
applied to promote international economics.
2. Explain the differences between comparative advantage and absolute
advantage, giving three examples.
3. Define 'opportunity cost' and identify its main features.
4. Outline three reasons why a state imposes tariffs.
5. List and explain three basic forms of international business.

13

6. What industries in your province are the leading exporters? Who are
the leading export firms? What do you think is the impact of exports on your
province s economy? What role does your provincial government play in
promoting exports?
Reading booklist
1. International Business Law, 1 e by Zuoli Jiang, English edition
Copyright 2004 by Law Press.
2. International Business Law , 3 e by Ray August, English reprint
edition Copyright 2002 by Pearson Education North Asia Limited and
Higher Education Press.
3.Chatterjee, C., Legal Aspects of Transnational Marketing and
Sales, London,Cavendish, 1996
Chapter Two

International Law and Organizations

Emphases on Through this chapter studying, we can understand the

concept, history and sources of international business law, grasp the
knowledge about international organizations and Comparison of Municipal
Legal Systems.
Hard parts1. History of International Business Law. 2. Sources of
International Business Law. 3. International Organizations. 4.Comparison of
Municipal Legal Systems
Contents
I . What is International Business Law?
II. History of International Business Law
III. Sources of International Business Law
A. National Law
B. International Treaties and Conventions
C. International Model Law
D. International Trade Customs and Usages

14

IV. International Organizations

A. Organizations Affiliated with the United Nations
B. Other International Organizations
V . Comparison of Municipal Legal Systems
A. The Roman-Germanic Civil Law System
B. The Anglo-American Common Law System
VI. International Business Law and China

C ASES IN T HIS C HAPTER

The Paquette Habana, p. 48.

United Sates v. Alvarez-Machain, p. 50.
Liechtenstein v. Guatemala (Nottebohm Case), p. 53.
Matusevitch v. Telnikoff, p. 63.

T EACHING S UMMARY

This chapter addresses the global context of cross-border interactions, be

they business oriented, political, or criminal in character. By citing the many
international covenants, treaties, and uniform rules, a strong case can be
made that international law truly does exist, although it may fundamentally
differ from the American notions of law found in state and federal codes and
cases. The corpus of international law consists of treaties, conventions,
customs, generally accepted principles among nations, and learned expositions
(such as international tribunals and respected scholars). In many ways,
international law and its cross-international legal understandings reflects its
European roots. The chapter also explains the difference between private
and public international law, the former referring to rules regulating affairs
of private individuals and the latter referring to regulation of conduct
between and among states.

15

C ASE Q UESTIONS AND A NSWERS

The Paquette Habana , p.48.

1.

2.

What are the sources of international law?

Answer: International law may be found in treaties, judicial decisions
and learned writings, customs, and general principles of law.
For
example, civilized nations have agreed that fishing vessels are exempt
from capture as prizes of war. Similarly, Article 38 of the statute of
the International Court of Justice presents the hierarchy of sources
of international law as (1) conventions; (2) customary law; (3) general
principles; and (4) teachings of jurists.
Why did the court review the history of the conduct of the nations
during war time?
Answer: To show the
"established rule" of law.

3.

general

acceptance

of

this

principle

or

Which international custom applied to this dispute?

Answer: That fishing vessels and their cargo are exempt from capture
during times of war.

4. Why did the court review the history of the conduct of nations during
war?
Answer: To demonstrate that the principle on which they relied was a
generally accepted principle or established rule of law.
Supplemental Exercise: Have students locate and read the dissent
(either in the official reporter or by using Westlaw):
a)

Why would the dissenters have affirmed the seizure under the U.S. Law
of Prize?
b) Why were they not persuaded by customary practices under
international law?
c) Do you find their assertion regarding the power of the president
persuasive?

16

United States v. Alvarez-Machain , p.50

1.

Where countries are party to an extradition treaty, what is the

normal method for obtaining extradition of an individual?
Answer: Usually, one nation will make formal request to the officials of
the other nation to extradite the alleged criminal. This is done through
diplomatic channels, e.g., the U.S. Ambassador to Mexico would deliver a
formal request to the appropriate authorities in Mexico. The specific
treaty between the nations would provide more detailed procedures.

2.

If Alvarez-Machain had personally tortured the U.S. DEA agent in

Mexico, would the United States have had jurisdiction over the crime?
Answer: No. Ordinarily, a nation has power to make and enforce laws
territorially (within its borders) or extraterritorially (when exercising
jurisdiction over its citizens abroad or over non-citizens whose actions
cause a direct effect within its territory). Here, the basis for
extra-territorial jurisdiction is absent, since the alleged crime was
committed by a foreign national in a foreign nation.

3.

Could the protections of the U.S. Constitutions Fourth Amendment

(prohibiting unreasonable searches and seizures) be invoked by AlvarezMachain?
Answer: The protections of the U.S. Constitutions Bill of Rights (which
would include the Fourth Amendment) apply to the People of the
United States, (Preamble to the Constitution) so that when, for
example, the Fourth Amendment speaks of the right of the people to
be secure in their persons, houses, papers, and effects against
unreasonable searches and seizures, it implies the Framers intended
these protections for U.S. citizens or other people physically located
within U.S. borders. In the instant case, the search occurred outside of
the U.S. where constitutional protections would not apply.

4.

How would you evaluate the majoritys argument against AlvarezMachain that the treaty should not be interpreted so as to allow one
country to violate general principles of international law?
Answer: The majority opinion assumes the treaty provisions should be
interpreted free from any context of customary international law. It
seems doubtful that either the U.S. or Mexico negotiated these treaty
17

provisions without having in mind the general context and content of

customary international law. The right of sovereignty, for example, is a
basic subtext of any agreement between nations. Underlying any two
countries extradition agreement is the understanding that the
sovereign rights of each should be respected (under customary
international law), and that self-help measures, such as one nations
kidnapping of citizens of another, is directly disrespectful of the other
nations sovereignty. Thus, while no specific treaty provision forbids
it, the treaty itself would not be necessary if self-help measures were
the customary norm.

Liechtenstein v. Guatemala ( Nottebohm Case), p.53.

1.

On what basis did Liechtenstein file this action if only states are to be
parties before the I.C.J.?
Answer: Liechtenstein filed this action on behalf of Nottebohm because
it alleged Guatemalas disregard of Nottebohm's Liechtenstein
citizenship was an affront to it as a sovereign state.

2.

Does it interfere with Liechtenstein's sovereignty to have a court

disregard its conferral of citizenship on Nottebohm?
Answer: Yes. Although states have the right to establish their own
rules for the granting of citizenship, "real and effective" nationality is
the test used by most, and reflective of "well established principles of
international law."
Further, Nottebohms nationality would be
recognized within Liechtenstein but not for the purpose of this case.

3.

4.

Did the court find this general principle of international law in a treaty?
Answer: No. Again, legal writings and customary international law were
analyzed.
In light of the courts decision, could Nottebohm claim to be a
Liechtenstein citizen under that countrys domestic law?
Answer: Yes. Liechtenstein
citizen under their domestic
citizenship on Nottebohm for
to treat him as if he were a

could consider whomever they wished a

law; they could not, however, confer
the purpose of requiring other countries
Liechtensteiner.

Matusevitch v. Telnikoff, p.63.

18

1.

Despite the shared common law heritage of the U.S. and the U.K., from
what does the difference in their libel laws emanate?
Answer: The critical distinction, and the greater protection, comes
from the U.S. First Amendment of the Federal Constitution. From a
comparative perspective, the First Amendment is among the most
protective free speech provisions internationally. Thus, it permits
speech that in many other countries, even countries with similar legal
systems and cultures, could be forbidden (such as hate speech). Even
within the U.S. conditional free speech protections, the common law
cause for defamation may be maintained, but it is subject to the
protections of the First Amendment.

2.

If Matusevitch made his statements while living in London, the courts of

the U.K. would clearly have jurisdiction to make and prescribe laws
applicable to his conduct. What if he had made the statements in a
letter written in the United States and sent to the London newspaper?
Would the courts of the U.K. still have jurisdiction?
Answer: The U.K. would not have territorial jurisdiction, but an argument
could be made that the foreseeable injury of his comments would take
place in the U.K. and that (therefore) jurisdiction based on direct
effects (or what is known as objective territoriality jurisdiction)
would be justified.

3.

What is the effect of this decision on the judgment of the U.K. court?
Answer: Although the U.K. judgment cannot be enforced in the U.S., it
still stands in the U.K.

4.

Although the judgment is not enforceable in the U.S., is there a way in

which the plaintiff could obtain the proceeds from the judgment?
Answer: Yes. If the defendant has assets, or ever amasses assets, in
the U.K., the plaintiff can enforce the judgment in the U.K. against the
U.K. assets.

A NSWERS TO Q UESTIONS AND C ASE P ROBLEMS

1. Answer: Public international law is a body of rules binding nation

states in their mutual and global relationships.
Recently, this has been
extended to cover international organizations. Private international law is the

19

body of rules binding individuals of different nations in their interactions. This

falls into one of two categories: (1) mechanisms for resolving disputes
between individuals or corporations from different countries or (2) treaties
that apply to individuals or businesses subject to different legal systems.
International Business Law would borrow from both and pertain to the
international body of rules that have developed to order business
relationships.
2. Answer: While several important treaties affecting global business
relationships exist (such as CISG), the often divergent business interests
among countries creates an obstacle to drafting a treaty broad enough to
elicit the support of a substantial number of countries. For instance, in
recent years, the U.S. has been at odds with the interests of other
countries regarding e-commerce.
3. Answer: The power of the U.S. Constitution depends upon the context
in which it is sought to be applied. A United States citizen must comply with
local laws and, therefore, with regard to her comments about a foreign
citizen in that citizens country, may be subject to less speech protection
than she would enjoy under the U.S. First Amendment.
The U.S. Constitution cannot be applied to events occurring in other
countries, as it would violate that countrys sovereignty.
Nevertheless,
case law does clarify that U.S. citizens working abroad for U.S. businesses
continue to enjoy 1st Amendment protections.
Also, as demonstrated by
Matusevitch v. Telnikoff, a judgment abroad resulting from speech that would
not result in liability in the U.S., will not be enforced by a U.S. court.
Most
totalitarian and restrictive, countries have some constitutional provision
related to freedom of expression, censorship, and/ or freedom of the press.
These protections, however fall on a continuum from being very protective of
speech to being very restrictive of it. The U.S. First Amendment is among
the most protective.
4. Answer: Typically, such individuals are speaking from a legal
egocentric understanding of law or are speaking in shorthand. Those who
claim that international law is non-existent may mean that international law
does not possess the characteristics of American law: there is no
international constitution; there is no legislatively drafted code; there is no
one court system with supreme authority to interpret law, decide disputes,
and issue binding decisions.
Nonetheless, there is, very clearly, international law. There exist a
multitude of international treaties, essentially contracts, between nations
setting out standards and legal rules. There exist a variety of adjudication
mechanisms, including courts and arbitration venues. There is also a welldeveloped body of legal understandings, such as those found in customary law
20

and The Law of Nations, that, while not codified, are accepted and enforced
globally.
5. Answer: The Halliburton Ethical Business Practices statement is
short and to the point. The code stresses adherence to the law. The code
exhorts employees to observe high standards of personal ethics honesty
and integrity in dealing with all parties. The code expressly addresses that
employees should not confuse loyalty or profitability as a reason to break
the law or company policy. The question is whether the company
operationalizes the policy. Recently, Halliburton uncovered through an audit
that several employees of a subsidiary may have accepted improper
payments from a Kuwaiti subcontractor in a contract dealing with
reconstruction in Iraq. Halliburton referred the matter to the Pentagon for
investigation and fired the employees. It also offered to compensate the
government $6.3 million dollars. Some would argue that this shows that the
Ethical Business Practices commitment has worked. Others would argue
that this incident is only the tip of the iceberg, and many more irregularities
will be discovered proving that the statement is merely window dressing.
The Johnson and Johnson Company have a Credo that according
to
their
Web
site
is
over
sixty
years
old.
See
http://www.jnj.com/ourcompany/ourcredo. The focus of the credo is on high
quality for the many different customers. There is also reference to the
commitment to reasonable prices and fair treatment of employees, community,
and stockholders. It may be easier to operationalize the credo because of
the clarity of values. It also appears that the credo is more than just words
because the company has implemented costly recalls in the past, putting a
priority on customer safety.
6. Answer: Yes. A corporation is a legal entity subject to suit and
prosecution. Students have likely heard about the recent actions of
universities against corporations such as Nike for alleged human rights abuses
of foreign workers.
7. Answer: Although President George W. Bush does not favor the
treaty, the White House has not given specific objections to it. The Clintonappointed delegation (and some members of the U.S. Senate) feared certain
procedural aspects of the treaty. For instance, the United States wants a
check to power, believing that the ICC should act only with the approval of
the UN Security Council.
Under this procedure, the U.S. (as one of the
permanent members) could prevent a prosecution through its veto power.
Additionally, the U.S. believed that peacekeeping forces, which are often
comprised of U.S. forces, could be subject to prosecution. Others favor ad
hoc tribunals, such as those used in Nuremberg, Tokyo, Rwanda, and the
former Yugoslavia, that allow the flexibility to respond to unique
circumstances. Some prefer to alter the Statute of the existing International
21

Court of Justice to cover these issues.

8. Answer: This focuses on the ownership of the trademark.
It is
important to recognize that registering a trademark in one country does not
effectively register it in all countries. Consequently, if the question is asking
whether Bacardi can purchase the rights to use the name in the U.S., that is
governed by U.S. law (which would permit U.S. use).
9. Answer: Yes.
As witnessed most prominently in the Nuremberg
Tribunal and Eichmann Trial, crimes against humanity transcend national
borders. Consequently, any country, including ones non-existent at the time
of the commission of the crimes (as in the case of Israel prosecuting
Eichmann), can try a defendant. Thus, the U.K. could try Pinochet, although
they declined to do so, just as Chile could try Pinochet. That Chile could try
Pinochet for crimes against humanity is distinct from whether they would
choose to do so.
10. Answer: France may control the actions of an entity operating within
their borders in the same way that the U.S. can regulate businesses within
our borders.
The extent of this power, however, was put to the test in
the later case filed in U.S. District court by Yahoo! Yahoo argued that
Frances action, as it relates to Yahoos Web site, which is maintained in
the United States, amounts to a violation of their First Amendment rights.
The French court ruled according to French law whereas the U.S. court ruled
according to U.S. case precedents. An international treaty would be helpful
but it is not likely in the near future. This is because there are underlying
differences among countries about how the internet should be regulated as
well as on issues like defamation, damages, etc.
11. Answer: This answer calls solely for opinion.
12. Answer: The U.S. and British legal justification for the second Iraq
war was based on alleged violations of international law, including Iraqi
manufacture of weapons of mass destruction. In addition, the White House
proposed a link between Iraq and Al-Qaeda, which was likely responsible for
the 9-11 attacks on the World Trade Centers. The attack on Iraq was
based on a preemptive strike to avert the immanent threat of Iraqi WMD.
The United States argued that Saddam Hussein possessed weapons of mass
destruction and had aided and abetted terrorist organizations. Because
Hussein would not cooperate with the UN Inspectors, he was in violation of
previous UN resolutions, and that Security Council should take action. The
Security Council did pass Resolution 1441 in 2002 finding Iraq in material
breach for failing to disarm and warned that Iraq would face serious
consequences. The Security Council could not agree on any action to take
22

after this, so the U.S., U.K., and others argued that based on the previous
resolutions, including 678 (1990) (which stated that nations could use all
necessary means ... to uphold and implement Security Council Resolutions to
restore peace and security to the area), there was no need for another
resolution. They argued that under Article 51 of the UN Charter, they had
the right to exercise self defense in the event of an armed attack and
that terrorism and its threat was an armed attack. They argued that this
justified a preemptive strike to prevent subsequent armed attacks and to
remove Saddam Hussein from power.
Germany, France, and Russia argued that before the U.S. could act,
there needed to be another resolution. They argued that without another
resolution, any action was in violation of international law. They did not agree
that preemption was a form of self-defense permitted under the UN
Charter.
13. Answer: No, but it may try to weigh in and begin a dialogue about
some of the contentious jurisdictional issues.
14. Answer: While the U.S. believes that it has a right under its national
law to deal with persons who violate the law and are tried and convicted and
sentenced to death (could be sentenced by either state court or federal
court), the U.S and subsequently the state may now be more sensitive to
public opinion and choose to delay these executions. As of this date,
February 2004, fifty-two Mexican citizens have been sentenced to death in
eight U.S. states. Mexico argues that they were deprived of their rights
under the U.S. Constitution of consultation with a representative of the
Mexican government. A final ruling from the ICJ is expected in Spring of
2004. While states have delayed execution as one attorney general
commented out of courtesy to the International Court, it is unclear
whether states will agree to vacate the death sentences or to postpone
indefinitely its imposition.

S UPPLEMENTAL E XERCISE ; I NTERNET E XERCISE

1. Using constitutionfinder or some other electronic resource, have

students locate the U.S. and U.K. constitutional provisions pertaining to free
speech and press.
Also ask students to compare and contrast these
provisions with the constitutional provisions (i.e., the First Amendment
counterparts) of other countries and to analyze the facts of the case under
these provisions. Some examples that demonstrate a variety of protections
and models include the constitutions of Germany (the German Basic Law),

23

Romania, and Canada. Would the result be different? Why?

M ANAGERIAL I MPLICATIONS

1. Students should recognize that the U.S. FCPA included exceptions

where payments would not be considered bribery in other countries or did not
involve high-level officials.
OECD, however, demonstrates that these two
countries, at least in theory, acknowledge that certain actions do, indeed,
constitute bribery.
Thus, OECD will broaden the types of payments now
impermissible.
2, 3.
Students should distinguish between legal and ethical ramifications,
particularly in developing countries that are largely unregulated.
Ones
domestic law, however, may still restrain certain business practices abroad.
Furthermore, regardless of whether regulations exist, business practices
considered unethical may invite negative customer response at home.

C OOPERATIVE A CTIVITY ; I NTERNET A CTIVITY

In light of the U.S.s belief that there should exist some international legal
mechanism for addressing international crimes (such as crimes against
humanity) but its disagreement with the present ICC draft, have students
draft a new statute.
This may be done through two complimentary
mechanisms. In one group, students will use the existing statute as a guide
and correct it, so to speak. In another group, students will work without the
language of the statute, drafting clauses to address jurisdiction, specific
procedures, parties, checks and balances, and appeal.

S UPPLEMENTAL A CTIVITY : C ASE B RIEF A SSIGNMENT

Trans-Orient Marine Corp. v. Star Trading & Marine, Inc., 731 F.Supp. 619
(S.D.N.Y. 1990).
Have students find, read, and brief Trans-Orient.
This case is in the
context of a change of Sudanese government via military coup.
Questions:

24

1.
2.

3.
4.

What was the critical international legal issue addressed by the court?
What is the difference between a succession of state and a
succession of government?
How does this effect contracts to which the state is a party?
How is this political situation the same or different than that in the
Fiji case (Supplemental case in Chapter 1)?

Reid v. Covert, 354 U.S. 1 (1957).

To further investigate the hierarchy and connection between the U.S.
Constitution and international law, have students locate and read Reid v.
Covert, 354 U.S. 1 (1957).
In Reid, two civilian wives were accused of killing their husbands, members of
the U.S. army. Defendant Covert killed her husband on a military base in the
U.K. and defendant Smith killed her husband on a base in Japan. Pursuant to
Status of Forces (SOF) Agreements between the U.S. and those countries,
the wives were prosecuted by military tribunals. The defendants claimed that
they could not be tried by the military courts. The court agreed, noting that
when the U.S. acts against its citizens abroad, those citizens continue to be
protected by the Constitution and the Bill of Rights.
1. What was the SOF agreement and what was its import in the instant
case?
Answer: The SOF, or a Status of Forces Agreements, was an
executive agreement (entered into by the president) between the U.S.,
Japan, and the U.K. providing that crimes committed on foreign military
posts would be tried and punished by U.S. military authorities.
2.

What specific constitutional rights were the wives allegedly deprived of?
Answer: The right to a jury trial and a public trial by ones peers,
pursuant to the Fifth and Sixth Amendments.

3.

To which portion of the Constitution did the court point in laying out
the hierarchy of the SOF and the Fifth and Sixth Amendments?

25

Answer: Article VI, the Supremacy Clause.

Studying qustions
1. What is meant by the term ' International Model Law' ? Briefly list
three of its main features.
2. Explain international treaties, using two examples.
3. Outline three circumstances in which international trade customs and
usages are effective to the parties to a contract.
4. Compare and contrast the Roman-Germanic Civil Law System and the
Anglo-American Common Law System.
5. Briefly describe how and why China came to accept international
business law.
6. The CISG contains no provisions that a contract for the sale of goods
be supported by consideration. Further, the CISG does not address questions
related to the validity of the contract, including legality, mistake, fraud,
duress, or undue influence. How will national courts handle these issues in
cases that they might be called upon to decide under the CISG? In
common law countries? In civil law countries? How has this been
addressed by courts in China?
Reading booklist
1.Goode, R., Commercial Law, London, Penguin, 1994
2. International Business Law, 1 e by Zuoli Jiang, English edition
Copyright 2004 by Law Press.
3. International Business Law , 3 e by Ray August, English reprint
edition Copyright 2002 by Pearson Education North Asia Limited and
Higher Education Press.

Chapter Three

The Resolution of International Disputes.

Emphases onThrough this chapter studying, we can understand and

grasp common knowledge of the international commercial dispute settlement
law, including the settlement of disputes through municipal courts, the

26

international tribunals, the alternative dispute resolution (ADR) and

arbitration of the international commercial dispute.
Hard parts1. Alternative Dispute Resolution. 2. Commercial Arbitration.
Contents
I . Settlement of Disputes through Municipal Courts
A. Jurisdiction and Venue
Case 141 In Re Union Carbide Corporation Gas Plant Disaster at
Bhopal
B. Enforcement of Foreign Judgment
II . International Tribunals
A. International Court of Justice
B. International Center for the Settlement of Investment Disputes
III. Alternative Dispute Resolution
A. Negotiation
B. Mediation
C. Mini-trial
IV. Commercial Arbitration
A. Definition and Special Features
B. The Applicable Procedure Law
C. The Applicable Substantive Law
D. Arbitration Agreement and Arbitration Clauses
E. Recognition and Enforcement of Awards
F. Enforcement of Foreign Arbitral Awards in the People's Republic of
China

27

C ASES IN T HIS C HAPTER

Scherk v. Alberto-Culver, p.78.

Asahi Metal Ind. v. Superior Court of California, Solano, p. 81.
Graduate Management Admission Council v. Raju, p. 83.
Iragorri v. United Technologies Corp. & Otis Elevator Co., p.88.
M/S Bremen v. Zapata Off-Shore Co., p. 91.
Finnish Fur Sales Co., Ltd. v. Juliette Shulof Furs, Inc., p.94.
Manches & Co. v. Gilby, p. 98.

T EACHING S UMMARY

Dispute resolution in international disputes must be cognizant of various

cultures, legal systems, and mechanisms for resolution.
In terms of
procedure, international legal disputes begin with questions of jurisdiction,
venue, and conflict of laws.
The recent popularity of the Internet
(advertising items on Web sites and on-line ordering and contractnegotiation) have added a wrinkle to these issues.
Alongside procedural issues are practical choices of which available mechanism
or forum is best suited for the parties involved. In business disputes, parties
may choose suit in their home or foreign court, or mediation arbitration, or
inquiry. Traditionally, tribunals such as the International Court of Justice are
available to hear disputes involving states, non-governmental, and
intergovernmental organizations.

C ASE Q UESTIONS AND A NSWERS

Scherk v. Alberto-Culver , p.78.

1.

Why did Alberto-Culver try to rescind the contract?

28

Answer: After the purchase, he discovered that the trademarks were

encumbered allegedly by conflicting claims.
2.

How did the Court distinguish this case from the previous precedent in
Wilko?
Answer: In Wilko, both parties were American, and it was clear that
U.S. federal security law applied. Hence, no international conflict of
law problems existed.

3.

What would the ramifications have been had the court not enforced
the arbitration agreement?
Answer: As noted by the court, it might "imperil the willingness and
ability of businesses to enter into commercial agreements," particularly
international ones.

Asahi Metal Ind. v. Superior Court of California, Solano , p. 81.

1.

Why was the court sympathetic to Asahi's complaints about the burden
of defending in California?
Answer: Asahi was located in Japan. It had no offices or agents
property in California.
The court also noted that submitting to a
foreign court's jurisdiction was burdensome.

2.

Name several factors that persuaded the court to reverse and remand
the case.
Answer: The injured California resident had already been compensated
by Cheng Shin.
As the court said, "considering the international
context, the heavy burden on the alien defendant and the slight
interests of the plaintiff and the forum state, the exercise of
personal jurisdiction by a California court over Asahi in this instance
would be unreasonable and unfair."

3.

What was the courts assessment of the interests of the plaintiff

and the forum?
Answer: The court found that Californias assertion of jurisdiction
over Asahi was slight as the instant claim was one of indemnification
rather than tort (e.g., safety of consumers).
The claim on which
indemnification was based took place in Taiwan, the components were
29

shipped from Japan to Taiwan, not California, Asahi was not a

California resident, it was not clear that California law would govern
the dispute, and it was not shown that California was a supremely
convenient forum for litigation.

Graduate Management Admission Council v. Raju , p. 83.

1.

Which precedent did the court rely on to assert jurisdiction over the
defendant, Raju, located in India?
Answer: The court used the Zippo sliding scale case to determine
whether the defendant purposefully availed himself of the privilege of
conducting business in the U.S. In the Zippo case, the court noted, on
the one hand, passive websites in which courts typically do not
exercise jurisdiction and, on the other hand, active websites in which
business is conducted. Given the defendants interactive website
that sold GMAC materials over the Web and the ample evidence that
the defendant targeted customers in the U.S., the court found
personal and specific jurisdiction over Raju.

2.

What was the courts conclusion?

Answer: The court concluded that Raju had minimum contacts under the
International Shoe case because he had targeted the entire worldwide
market of potential GMAT test-takers to market his materials,
specifically those in the U.S. and Canada because the website supplied
toll-free numbers for those countries.
The defendant did in fact
accept money from, and ship materials to, test-takers in the U.S.

Iragorri v. United Technologies Corp. & Otis Elevator Co., p.88.

1.

Why did the plaintiffs file their case in Connecticut?

Answer: The plaintiffs believed that Connecticut was the proper forum
for their case because defendants principal place of business was
Connecticut and because plaintiffs were permanent, long-time
residents of Florida.

2.

What arguments did the defendants make to have the original case
dismissed?
Answer: Defendants argued that the U.S. was forum non conveniens in
30

that plaintiffs were residents of Columbia and were only trying to gain
tactical advantage or increased sympathy by filing in a U.S. court.
3.

What was the courts reasoning in reversing the lower courts

decision?
Answer: The appeals court agreed with plaintiffs contention that
Connecticut was the proper forum. The court noted that heightened
deference must be given to the plaintiffs choice of forum when
there is no evidence that plaintiffs had engaged in forum-shopping and
when plaintiffs were concerned for their physical safety in Cali,
Columbia. Moreover, because the claims were based on product
liability, Connecticut was convenient for the defendants because all
design, manufacturing, and operations of the elevators was in
Connecticut.

M/S Bremen v. Zapata Off-Shore Co., p.91.

1.

Why did Zapata try to circumvent the arbitration agreement?

Answer: It was thought that Zapata's claim would be better received
in a U.S. court. In the full version of the case, it is clear that Zapata
has taken the lowest bidder - Unterweser - and that Unterweser has
put a number of provisions in the contract that benefits them. One
was an "exculpatory clause," which would severely limit or even negate
the possibility of Zapata recovering for negligent acts by Unterweser
in towing the drilling rig.
The English courts have enforced such
provisions, while U.S. courts (as a matter of public policy) do not.
Justice Douglas, in dissent, was greatly concerned that the case would
go to London, and that Zapata would have its "day in court" but be
denied any recovery whatsoever because of the likely choice of U.K.
law in deciding the case there.

2.

Why did the lower U.S. courts deny the motion to stay despite the
forum selection clause?
Answer: There was a history of judicial hostility to forum selection
clauses because it was perceived that they usurped judicial power.
Moreover, due process and public policy concerns over the likely
enforcement of the exculpatory clause inclined the Court of Appeals
to leave the case in Tampa.

3.

Why did the court find it relevant that this was an international
31

contract?
Answer: The Supreme Court noted that "we cannot have trade and
commerce in world markets and international waters exclusively on our
terms governed by our laws and resolved in our courts."
As a
practical matter, if U.S. companies were to do business internationally,
foreign businesses must
know that U.S. courts will make U.S.
businesses stick to their bargains, however unwise. Zapata was here
characterized as a "sophisticated" company that should have been
aware of the risks it was taking.

Finnish Fur Sales Co., Ltd. v. Juliette Shulof Furs, Inc., p.94.
1.

What was Shulofs defense?

Answer: Shulofs defense was arguably a valid defense. He defended
by stating in the transaction he was acting as an agent for JSF, Inc.
and was therefore not personally liable on the corporate debt.

2.

How did the court find Shulof personally liable?

Answer: The court analyzed the Conditions of Sale, which
expressly states that Shulof shall stand surety as for his own
debt. If he has made the bid on behalf of another person, he is
jointly and severally liable with the person for the purchase. The
transaction was governed by Finnish law.
In other words, by participating in the auction, Shulof agreed to the
conditions of sale and the application of Finnish law to the transaction.
According to the courts analysis, this did not offend New York
policy because Finland had substantial contact with the transaction and
found Shulof personally (jointly and severally) liable for the debt.

Manches & Co. v. Gilby , p.98.

1. The court has three "rules" to choose from.
differences?

Why and what are the

Answer: Because this is a case of "first impression," the court is not

bound by any precedent. "There is no guiding Massachusetts law on
this point. The decided cases in this country have adopted various
positions." The three positions are: (a) breach day rule, (b) judgment
day rule, and (c) payment day rule. Defendant could be awarded the
32

dollar value of the judgment in pounds for any of those days; the
breach day would be first, followed by the judgment, followed by
payment on the judgment (there is often considerable time between
the docketing of a judgment and its payment or satisfaction).
2.

If the British pound had continually appreciated in value against the

U.S. dollar, which rule would Manches & Co. have favored: the judgment
day rule, the breach day rule, or the payment day rule?
Answer: If the pound appreciated, Manches & Co. would favor the
payment day rule, because collecting on the judgment in Great Britain
would be later in time than either breach day or judgment day. Since
the debt (and, subsequently, the judgment) was expressed in pounds,
then it would take increasingly more dollars to pay the debt as the
dollar continually depreciated against the pound.

3.

What are the provisions and philosophy underlying the Restatement

(Third) of Foreign Relations Law and how might they apply?
Answer: The philosophy behind the Restatement is to make the creditor
whole and avoid rewarding a debtor who has delayed in carrying out
the obligation. Thus, if a foreign country's currency is slipping badly
against the U.S. dollar, a U.S. debtor would want to delay payment in
U.S. dollar equivalence to the foreign currency for as long as possible
- well beyond breach or date of judgment, to date of payment. With
the pound slipping year by year against the dollar, fewer and fewer
dollars are needed to satisfy a judgment expressed in pounds. It is
not certain, however, that this will make the creditor whole; on
payment day, the creditor still receives the same number of pounds
(plus interest) to which he was entitled to at the time of breach, but
its purchasing power is now limited.
As to domestic items, the
purchasing power of the same number of pounds (plus interest) is
probably the same from one year to another. (This would not,
however, be true of all currencies.) Nonetheless, it appears that the
debtor is somewhat rewarded by the court's allowing her to pay the
dollar equivalent of 30,138.35 pounds at a date subsequent to the
breach, the English judgment, or the Massachusetts certification of
that judgment - in effect, the debtor pays far fewer dollars than she
would have if she had paid her bill promptly, or even if she paid dollar
equivalents as of the date of the English judgment.

4.

Does the English court have jurisdiction over Gilby just because the
contract for legal services stipulates that English law shall govern?

33

Answer: No. Choice of law clauses do not determine the forum for
resolving disputes (those are called forum selection clauses). Here,
the choice of law also reflects a substantial relationship with England
itself, since the services were provided there. But parties to a
contract may (by contract) choose any
nation-state's law that
bears a reasonable relation to the transaction.

Q UESTIONS AND C ASE P ROBLEMS

1. Answer: Jurisdiction refers to the power of a particular court to

hear and decide a dispute. In order for a court to hear a case, it must
posses both personal and subject matter jurisdiction. Minimum contacts refer
to a sufficient connection between the party and the forum before a court
may constitutionally exercise jurisdiction. This concept is derived from U.S.
Constitutional principles of due process.
2. Answer: The Starr Fireworks case was a case of first impression for
the South Dakota Supreme Court. Defendant Starr Fireworks, a South
Dakota company, was originally sued in the Hong Kong High Court by plaintiff
Kwongyuen Hangkee Company (Hangkee). The Hong Kong court rendered a
verdict for Hangkee who attempted to enforce the judgment in South Dakota
against Starr by filing a petition for Registration and Enforcement of Foreign
Judgments. Starr moved to strike the petition, but Starrs petition was
denied and Starr appealed. The South Dakota Supreme Court analyzed the
record of the Hangkee trial and affirmed the lower courts decision to
enforce the Hong Kong judgment against Starr Fireworks on the grounds of
the common law doctrine of comity.
From the domestic perspective, comity is the full faith and credit
doctrine found in the U.S. Constitution so that the official and final judgment
of a sister state is enforceable in another state.
Similarly, on the
international level comity has been recognized and upheld by the U.S. Supreme
Court with the comity of nations doctrine. In Hilton v. Guyot, 159 U.S.
113, 163-164 (1895), the U.S. Supreme Court set forth four requirements
that must be met before the comity of nations doctrine can be applied:
(i) the foreign court must have had both personal and subject matter
jurisdiction, (ii) the decree was not obtained fraudulently, (iii) due process
(reasonable notice and fair hearing) was given to both parties, and (iv) the
judgment did not violate the public policy of the state where judgment was
sought.
3.

Answer: This question requires students to go beyond the material in

34

the text.
Noonan would look to federal law (and, hence, litigate in U.S.
federal court) to dispute the use of his likeness for profit in France, by the
French company, as well as by the British company. Noonan would argue that
the use of his likeness is an injury against him wherever he is, and also that
he is a U.S. citizen protected by the laws of his nation.
4. Answer: The Panalpina court held that there was neither personal
jurisdiction nor a convenient forum in the U.S. (hence, dismissed the action).
Most of the repairs occurred in Africa and Switzerland, and the parties
contemplated only minimal contact with the U.S.
Indeed, none of the
performance occurred in the U.S.
5. Answer: Often, consenting to arbitration divests parties of the ability
to appeal the decision, even if that decision is inconsistent with wellestablished legal principles. Conversely, arbitration carries the risk that a
losing party will refuse to accept or ignore an arbitral decision.
In
instances where arbitration has not previously been chosen pursuant to a
contractual arbitration clause, a party may even go through arbitration only
later to bring the dispute to court, thus bringing uncertainty to the process.
Nevertheless, arbitration also possesses several benefits. Parties will
know in advance how and where their differences will be settled. It is also
considered to be speedier, less costly for the parties involved, more private,
and more flexible with regard to potential remedies than litigation. Some
literature even suggests that arbitration awards are lower than those after
trial, thus favoring defendants. Consequently, a plaintiff with a strong case
seeking traditional remedies, such as monetary damages might prefer
litigation, whereas a defendant business seeking to stave off future copy-at
litigation or to reduce a likely award might prefer arbitration.
6. Answer: A choice of law clause would clarify and limit the precise
legal rules to be applied by an arbitrator. A clause delineating the powers of
the arbitrator would constrain the arbitrator to act only as contemplated by
the parties, thus giving effect to their wishes.
7. Answer: Companies assert many reasons to monitor an employees
e-mail.
Often, productivity is cited, but an employee who communicates
through customers or other individuals through company e-mail will be
representing the company and, perhaps unknowingly, create a presence of the
company on a foreign jurisdiction.
8. Answer: The favorability of a suit in U.S. courts depends on the
interests of the litigants. Often times, litigants may favor the use of juries,
the possibilities of jury awards, punitive damages, and procedural rules, which
are part of the U.S. system. Other times, it represents a single forum to
which business partners can agree. European consumers, however, would not
35

likely favor suit in U.S. courts (although U.S. businesses would) due to
decreased consumer protections.
9. Answer: Yes. In Southwest Livestock & Trucking Co. v. Ramon, the
Fifth Circuit Court of Appeals reversed the U.S. District Courts decision
for Southwest Livestock.
Ramon, a Mexican national, and Southwest, a
Texas company, had signed promissory notes that did not expressly state the
amount of interest to be charged, although Ramon charged Southwest 52%
interest per annum. Southwest defaulted and Ramon sued in Mexico, winning
a verdict with money damages.
Ramon then attempted to enforce the
judgment against Southwest under the Texas Uniform Country Money
Judgment Recognition Act. Southwest filed a motion for summary judgment,
claiming that the 52% interest rate violated Texas public policy and the
Texas constitution.
The District Court granted Southwests Motion for
Summary Judgment and Ramon appealed. The Fifth Circuit reversed, holding
that the collection of a debt on a promissory note is not against public
policy, even when there is an arguably usurious interest rate. The Court
noted that usury statutes are designed to protect unsophisticated
borrowers from unscrupulous lenders. In the instant case, the court found
Southwest was managed by sophisticated borrowers with significant business
experience who negotiated the contract in good faith and at arms length.
10. Answer: Typically, the party who inserts a mandatory arbitration
clause has done so to further their own interest. In other words, the clause
or likely arbitral outcomes favor them. Consequently, a mandatory arbitration
clause may favor a business at the expense of the consumer.
In some
instances, due to the disparity of bargaining power between consumer and
business, such contractual clauses are found to be adhesive and, if
profoundly unfair, unenforceable. Indeed, in several European countries, such
clauses, though enforceable in B-to-B contracts, are not enforceable in
consumer-to-business transactions.
11. Answer: Foreign parties may face several obstacles to collecting
evidence against foreign adversaries. Rules of discovery are unique to the
various legal systems.
For example, the United States Federal Rules of
Evidence are far more liberal than the state-controlled discovery rules in
Japan. Additionally, the 1970 Hague Convention on the Taking of Evidence
Abroad and the Hague Convention on the Service Abroad of Judicial and
Extra-Judicial Documents may assist a party to collect evidence through
letters of request or rogatory, diplomatic channels, and an appointed
commissioner.
12. Answer: The Alfadda v. Fenn & SEIC case involves issue
preclusion. The plaintiffs, who were all Saudi nationals, chose France as the
original forum to file the original lawsuit against SEIC (Saudi European
36

Investment Corporation) and French banks who were doing business in France.
The French courts held for the defendants. Plaintiffs appealed to the U.S.
District Court for the Southern District of New York alleging the defendant
French banks that were registered to do business in New York were engaged
in RICO activities. The defendants filed a motion to dismiss based on: (i) lack
of recognition and (ii) issue preclusion. In Alfadda, the court first analyzed
whether the French judgment should be recognized in New York and held that,
yes, the French judgment was a valid judgment. Second, the court analyzed
whether issue preclusion should apply.
Relying on Central Hudson Gas v.
Empresa Naviera Santa, 56 F.3d 359, 368 (2d Cir. 1995) the court found
four elements were necessary for issue preclusion (collateral estoppel) to
apply: (1) the issues of both proceedings must be identical, (2) the relevant
issues were actually litigated and decided in the prior proceeding, (3) there
must have been "full and fair opportunity" for the litigation of the issues in
the prior proceeding, and (4) the issues were necessary to support a valid
and final judgment on the merits. Plus, since this was a foreign judgment,
there were additional factors to be considered, including whether the venue
was barred by the forum non conveniens doctrine.
The district court
granted the defendants motion and dismissed the plaintiffs lawsuit. The
Alesayi v. Canada Dry case was also tried in the U.S. District Court for the
Southern District of New York. Alesayi was a bottler in Saudi Arabia and
contracted with Canada Dry to use its trademarked logos. The contract
between the parties stipulated that New York law applied to the transaction.
Alesayi initiated a breach of contract action against Canada Dry in Saudi
Arabia and New York.
Canada Dry defended on the grounds of issue
preclusion. In contrast to the Alfadda case, the court held that the case
was not precluded by the decision in Saudi Arabia because of the choice of
New York law provision in the contract.
13. Answer: Presumably, given the large investment of $20 million, the
parties signed an investment contract. Whether Wyser-Pratter can bring
suit in New York depends on the choice of law and forum provisions of that
contract.
M ANAGERIAL I MPLICATIONS

1. Answer: Yes, I would include mandatory, binding arbitration provisions

in the contract with United States law and venue governing the transaction.
My plans would not change. If I am a U.S.-based corporation, I want to
negotiate for the choice of law and forum. However, I would also negotiate
to have a foreign court automatically recognize and enforce the arbitration
verdict under the various international treaties, such as the Convention on

37

the Recognition and Enforcement of Foreign Arbitral Awards.

2. Answer: The existence of a Web site, alone, will not confer foreign
jurisdiction in Alaska.
The question, however, makes it appear that the
consumer has now purchased the product from the company. Depending upon
the essence of the consumers claim (and the facts related to the
purchase), there may be other reasons that subject the business to
jurisdiction in Alaska.
Students should note that, if clearly stated, a B2B forum selection clause
is enforceable, but B2C clauses are sometimes enforceable in the U.S., but
not abroad. They should also note that while permitting on-line ordering may
increase sales, it will also increase the likelihood of being subjected to the
jurisdiction of a foreign court. The more interactive a Web site becomes,
the more it will subject its owner to jurisdiction in the fora of foreign
customers.
Additionally, recognizing that New York has become an international hub,
the New York State Rules of Civil Procedure provide that parties, regardless
of any connection to New York, may choose New York as their forum.
Generally, however, a forum chosen must have some reasonable connection to
the dispute. Therefore, unless Tibet has some reasonable connection to the
claims (i.e., the customers targeted and sold to are Tibetan), this selection
of forum will not be enforced.

T EACHING S UGGESTIONS AND A CTIVITIES

1.

Internet Jurisdiction
An interesting issue of late is whether a company that maintains an
Internet presence is, by virtue of that presence, subject to the jurisdiction
of various fora. While the law is still evolving, courts have begun to follow a
spectrum analysis.
The spectrum analysis considers the extent of
interactivity and affirmative commercial aspects of sites
Provide students with the names of two-four Web sites, or make up
your own, that fall on this spectrum of activity (i.e., an informational site
that does not allow on-line orders, a site that provides an e-mail address
and answers questions, an on-line store, such as http://www.amazon.com).
a)
Ask students to assess whether a customer in Germany could sue
the respective businesses in Germany.
b)

Do any of the sites include forum selection or choice of law

38

clauses?

Internet Exercises

1. Arbitration continues to enjoy popularity as a method of international

dispute resolution. Nonetheless, the arbitration process will be only as good
as the arbitration clause drafted agreeing to it.
Dividing students into
groups (perhaps as part of a larger contract negotiation exercise), ask
paired groups to negotiate and draft an arbitration clause. One helpful link
to various international ADR sites is:
http://www.cpradr.org/Euromenu.htm

2. Once a party obtains a foreign arbitral award, it still must be

able to enforce that award. As apparent from jurisdictional cases concerning
due process and minimum contacts, countries may enforce awards to differing
extents and under differing circumstances. To provide some clarity, several
countries adhere to the UN Conventions on Arbitral Recognition and
Enforcement. Using http://www.google.com, find the text of U.N.C.A.R.E. and
apply it to one of the cases discussed in Chapter 3 or one of your own. Ask
students to research and consider whether the arbitration award would be
enforced under this convention.

Studying qustions
1. Define jurisdiction and-venue, giving at least two examples.
2. Explain minimum contacts. What applications do they have in
international disputes?
3. State A sues State B in the International Court of Justice. The ICJ
hands down a judgment that is adverse to State B. State B refuses to
comply with the judgment, what can State A do to get State B to comply?
4. How is a foreign court judgment usually enforced? Give two examples.
5. Compare and contrast 'negotiation', 'mediation' and 'mini-trial' and
list their advantages respectively.

39

6. Define ' international commercial arbitration' and state its main

features.
7. What are the risks associated with and advantages of arbitration?
Give two examples.
8. How would a choice of law clause and a clause clearly delineating the
power of the arbitrator help to address some of a party's concerns?
9. List and explain the doctrines of choice of procedure and substantive
law, giving at least three examples.
10. Describe briefly the scope of an arbitration agreement.
11. How can a company minimize the possibility of coming under a
particular court's jurisdiction? Should this issue be a concern to a
business?
12. Give two examples to illustrate how foreign arbitral awards are
recognized and enforced in China.
Reading booklist
1. International Business Law, 1 e by Zuoli Jiang, English edition
Copyright 2004 by Law Press.
2. International Business Law , 3 e by Ray August, English reprint
edition Copyright 2002 by Pearson Education North Asia Limited and
Higher Education Press.

Chapter Four

Sales Contracts and Excuses for Nonperformance.

Emphases onThrough this chapter studying, we can understand

definition and form of contract, grasp the knowledge of International
Sale of Contracts, including validity, formation, misrepresentation,
mistakes, fraud and duress, undue influence and unconscionable (unjust)
conduct of the contract.
Through this chapter studying, we also can understand and grasp
common knowledge of the contract, including the remedies for breach,
anticipatory breach, liquidated damages, obligations of the seller and
the buyer, passing of risk and excuses for non-performance.

40

Hard parts
1 . Validity and Formation of International Sale of Contracts.
2. Misrepresentation , Fraud and Duress.
3. Remedies for Breach of Contract.
4. Anticipatory Breach of Contract and Exceptio non Adimpleti.
5. Obligations of the Seller and the Buyer.
Contents
I . Definition and Form of Contract
A. Definition of Contract
B. Form of Contract
II . Validity and Formation of International Sale of Contracts
A. Invitation Offer
B. The Offer
C. The Acceptance
D. Battle of the Forms
Case 41

Filanto v. Chilewich International Corporation

E. Consideration in Common Law

Case 42 Hamer v. Sidway
Case 43 Fiege v. Boehm
III. Misrepresentation
A. Fraudulent Misrepresentation
B. Innocent Misrepresentation
C. Negligent (innocent) Misrepresentation

41

IV. Mistakes
A. Common Law
B. Civil Law
C. The UNIDROIT PICC
D. China Contract Law
V. Fraud
A. Common Law
Case 44 Stambovsky v. Ackley
B. Civil Law
C. The UNIDROIT PICC
D. China Contract Law
VI. Duress
A. Common Law
B. Civil Law
C. The UNIDROIT PICC
D. China Contract Law
VII. Undue Influence and Unconscionable (unjust) Conduct
A. Common Law
Case 45 Commercial Bank of Australia Ltd. , v. Amadio
B. Civil Law
C. The UNIDROIT PICC
D. China Contract Law
VIII. Remedies for Breach of Contract

42

A. General Principles of Remedies

Case 51 Prutch v. Ford Motor Company
B. Buyer's Remedies
C. Seller's Remedies
D. Remedies Available to Both Buyers and Sellers
Case 52 Delchi Carrier, SpA v. Rotorex Corporation
IX. Anticipatory Breach of Contract and Exceptio non Adimpleti
Contractus in Civil Law
A. Anticipatory Breach in Common Law
B. Exceptio non Adimpleti Contractus in Civil Law
X. Liquidated Damages
A. Common Law
B. Civil Law
C. The UNIDROIT PICC
D. China Contract Law
XI. Obligations of the Seller and the Buyer
A. Seller's Obligations
B. Buyer's Obligations
Case 53

The Natural Gas Case

XII. Passing of Risk

A. Common Law
B. The CISG
C. China Contract Law

43

XIII. Passing of Property

A. Common Law
B. The CISG
C. China Contract Law
XIII. Excuses for Non-performance
A. Common Law
Case 54 Transatlantic Financing Corporation v. United States
B. The UNIDROIT PICC
C. The CISG
D. Force Majeure Clauses

C ASES IN T HIS C HAPTER

Asante Technologies, Inc. v. PMC-Sierra, Inc., p. 111.

Tarbert Trading, LTD. v. Cometals, Inc., p. 113.
Chateau des Charmes Wines Ltd. v. Sabat, p. 119.
Schmitz-Werke GmbH & Co. v. Rockland Industries, Inc., p. 129.
Medical Marketing International, Inc. v. Internazionale Medico Scientifica, S.R.L.,
p. 132.
Delchi Carrier, SpA v. Rotorex Corp., p. 135.
Harriscom Svenska, AB v. Harris Corp., p. 142.

T EACHING S UMMARY

Historically, law was first the province of merchants.

Indeed, businessmen

44

are credited with developing one of the first bodies of law, via Lex
Mercatoria, a necessary creation to manage trade with far-off individuals.
Nevertheless, the domestic laws of various countries often continued to
develop along different lines. Thus, legal rules pertaining to the creation and
completion of contracts differ from country to country. In the more recent
past, as international merchants have sought to take advantage of global
sales opportunities, the differences have sometimes created problems.
Consequently, countries came together to create the CISG to standardize
certain international contract principles. Countries may choose to be parties
to this convention, although private merchants continue to have the choice of
opting out or opting into the agreement.
Today, many businesses are in such a rush to go on-line that they overlook
potentially serious legal ramifications. For example, businesses often erect
Web sites without being aware that these may subject them to the jurisdiction
of a foreign court. For example, if an Akron, Ohio company maintains a Web
site advertising its product and that site is accessed by an Argentinean who
points, clicks, and buys, the Akron company may suddenly be selling in
Argentina. Conversely, the Argentinean who has never left her office, may, in
fact, be creating a contract in Akron. Because the Internet eliminates physical
barriers and permits domestic sellers and foreign buyers to consummate
commercial transactions, it concomitantly dissolves the traditional methods for
determining jurisdiction and which countrys law applies.
A body of law has developed that speaks to the issue of whether a Web site
operated in the U.S. by a U.S. company is sufficient to establish jurisdiction in
a foreign land.
Generally, courts have constructed a spectrum analysis.
Under the spectrum analysis, the extent of jurisdiction that can be exercised
is directly proportional to the nature and quality of the commercial activity
that a business conducts over the Internet. The greater the connectivity or
interactivity between the site and the customer, the more the seller injects
or places itself (via its on-line presence) into the land of the buyer, thereby
subjecting itself to jurisdiction. The lowest level of Internet presence
describes instances where a business merely advertises over the World Wide
Web or maintains a basic, passive Web site.
Jurisdiction will not be
bound under these circumstances. Therefore, a business can post banner ads
or maintain an informational Web site describing products and company
contact information without ever entering (hence, establishing), the foreign
jurisdiction. At the opposite end of the spectrum are instances where a
company affirmatively conducts its business over the Internet and/or utilizes
a highly interactive Web site.
This includes companies that use econtracts (such as those decried in the EU Directive or contemplated under
the UCC Article 2C), utilize contracts involving the knowing and repeated
transmission of computer files over the Internet, or take and respond to
45

orders almost exclusively on the Web. Here, jurisdiction will be found.

Businesses can seek to manage these risks (in B2B transactions) of suit
under foreign law in a foreign land through click-wrap agreements. These
are merely jurisdictional/ choice of law clauses that appear in electronic form.

C ASE Q UESTIONS AND A NSWERS

Asante Technologies, Inc.(Buyer) v. PMC-Sierra, Inc.,(Seller) p. 111.

1.

Why did Asante believe the CISG applied to the transaction?

Answer: The CISG only applies between parties whose places of
business are in different States (nations). Asante was based in
California and PMC was based in Canada.
According to Asante,
because PMCs U.S. distributor, Unique Technologies of California, was
an agent of PMC, PMCs place of business was really the U.S. because
all business between Asante and PMC occurred via Unique Technologies.

2.

What was the courts reasoning in ruling against Asante?

Answer: The court was not persuaded that Unique Technologies was an
agent of PMC, holding that a distributor of goods for resale is
normally not treated as an agent of the manufacturer. As a result,
Asantes dealings with Unique did not establish PMCs place of
business in the U.S..
The court ruled that the federal court had
concurrent jurisdiction with the state court and that the CISG applied
because the opt out provision in the contract to use U.S. law was
legally inadequate.

Tarbert Trading, LTD. (Seller) v. Cometals, Inc (Buyer)., p. 113

1.

Why is Tarbert Trading suing Cometals?

Answer: Cometals has refused to accept delivery on the beans, claiming
they are of poor quality and (moreover) that Cometals intended to
resell the beans to a buyer in Columbia, where that buyer needed a
certificate of origin from the EEC that could not (without fraud) be
provided since the beans originated in Africa even though they were
being stored in the Netherlands.

46

2.

Assume the goods are of decent quality, as specified in the contract. If

the agreement to fraudulently procure a certificate of origin is illegal
and, hence, void under contract law, how can Tarbert argue that
Cometals is required to go through with the deal?
Answer: Generally, void contract provisions do not act to void the
entire contract, but to void that clause. The void clause would then be
severed from the otherwise valid contract provisions. Here, Tarbert
would argue that the essence of the contract does not require the EEC
origin certificate and that the remainder of the contract should be
enforced.

3.

Why does the court disagree with this argument?

Answer: The court finds that the illegality is inseparable from and
goes to an essential ingredient of the bargain between the parties,
because Cometals insisted upon the EEC certificate in the requested
form. This is essentially a finding of fact by the trial court, which will
ordinarily not be disturbed on appeal unless it is clearly erroneous. The
trial court, having heard all the evidence, simply concludes that the EEC
certification was vital and that Cometals communicated the importance
of this certification in making the contract to purchase the beans.

Chateau des Charmes Wines Ltd.(Buyer) v. Sabat (Seller), p. 119.

1.

Why is the buyer suing the seller?

Answer: The buyer is suing the seller for a breach of warranty.
Included in the oral contract was the express warranty that the cork
would not affect the taste of the wine.
The seller, however, is
counter-claiming the buyer, claiming that France is the proper venue
for the case.

2.

Did the oral agreement for the order of corks create a valid
enforceable contract under the CISG?
Answer: Yes. The CISG recognizes that contract of sale need not
be...evidenced by writing, and so the oral agreement between the
parties as to the kind of cork, the quantity, and the price were
sufficient to create a binding contract.

3.

Why wasnt this case a battle of the forms case since there was
a conflicting term involved?
47

Answer: The conflicting term before the court was the forum selection
clause. Defendant-Seller Sabat claimed that France was the proper
forum for the breach of warranty claim. The court held that the oral
contract did not include any agreement as to forum selection.
Defendants attempt to add the forum selection clause on the invoices
for the corks was a new and material term to the agreement that the
Plaintiff-Buyer Chateau did not agree to. The defendant claimed that
by receiving the shipments of corks the buyer agreed to the new term.
The court rejected that argument and held for Plaintiff-BuyerChateau.

Schmitz-Werke GmbH & Co. (Buyer) v. Rockland Industries, Inc. (Seller),

p. 129.
1.

Why is the buyer bringing the lawsuit under the CISG?

Answer: The Plaintiff-Buyer Schmitz, a German company, is alleging
that the Seller-Defendant Rockland, a U.S. company, sold it defective
fabric and is therefore claiming a breach of warranty. The CISG, which
governs the sale, provides great latitude with regard to disclaiming
warranties.

2.

What did the buyer have to do to prevail in a breach of warranty claim

under CISG?
Answer: According to the court, the buyer must show that the fabric
was unfit for the purpose for which it was warranted and purchased,
i.e., transfer printing. The court further found that the buyer must
show that the transfer printing process was performed in a normal and
competent way, and that the result was unsatisfactory. The court
found that indeed the buyer prevailed on its claim that the fabric was
not fit for transfer printing and that the seller had breached its
warranty.

Medical Marketing International, Inc. (Buyer) v. Internazionale Medico

Scientifica, S.R.L., (Seller) p. 132.
1.

Why was the claim originally submitted to arbitration?

Answer: Buyer-Plaintiff MMI submitted the claim to arbitration to have
the sales contract terminated because the Seller-Defendant IMS
48

fundamentally breached its contract with the buyer by selling

mammography units that failed to conform to U.S. federal (FDA) law.
The arbitrator agreed with the Plaintiff that the units were nonconforming and awarded damages.
2.

What was the Defendants argument before the U.S. District Court?
Answer: Defendant-Seller IMS, relying on the CISG and a German CISG
case, set forth the rule that the sellers products are not required to
comply with public laws and regulations at the buyers place of
business.
As a result, Defendant argued that there was no
fundamental breach. The rule, however, set forth three exceptions,
and the arbitrator rested his decision on the third exception to the
rule, viz., special circumstances in which the seller knew or should
have known about the regulations. The court affirmed the arbitration
panels decision for the Plaintiff-Buyer.

Delchi Carrier, SpA (Buyer) v. Rotorex Corp. (Seller), p.135.

1. Did the Plaintiff-Buyer Delchi give timely notice of the non-conforming
goods?
Answer: Yes.
Under the CISG, the buyer must examine the goods
within as short a period as is practicable after they are received.
Delchi did so and promptly notified Rotorex. At the other extreme, a
buyer who failed to notify the seller of non-conforming goods within
two years of the goods being handed over would lose the right to
assert the breach by seller.
2.

Is Defendant-Seller Rotorexs performance a minor breach or a

fundamental breach?
Answer: It appears to be a fundamental breach, since Delchi spent
several million lire to replace problem grommets, inspect, repair, and
retest the compressors in an effort to make them usable.

3.

Must Delchi find another buyer for the non-conforming goods?

Answer:
No, not if the non-conformance represents a fundamental
breach under the CISG.

4.

How, generally, could Delchi better protect itself in such purchases?

49

Answer: Delchi might consider adding a contract clause providing for

liquidated damages and attorneys fees. As a practical matter, it
might also include an arbitration provision that required the arbitration in
Italy or Switzerland and instructing the arbitrator(s) to decide the case
ex aqueo et bono (meaning that the arbitrators would decide based on
fairness and equity rather than with reference to a particular nations
laws or even international law, in which case the arbitrator(s) would not
decide the case according to CISG provisions, but would be free to
impose any settlement that seemed fair and just).

Harriscom Svenska, AB v. Harris Corp., p.142.

1.

What was the force majeure, here?

Answer: The U.S. governments prohibition against all sales of military
equipment to Iran.

2.

Why didnt RF Systems negotiated voluntary withdrawal from the

Iranian market demonstrate that they were not subject to any force
majeure but, rather, their own whim?
Answer: The court found that, while this withdrawal might have been
labeled voluntary, it was obvious that RF Systems was caught in and
compelled to comply by the U.S. government. Hence, it was not truly
voluntary.

A NSWERS TO Q UESTIONS A ND C ASE P ROBLEMS

1. Answer: The non-delivery of the boots was not excused. Such an

occurrence was foreseeable but was not noted in the contract. In any event,
the defendant could not show that the boots on the train were the boots
specified in the contract. The contract did not make clear that the boots had
to come from any particular Korean manufacturer.
2. Answer: The court found for the distributor.
Just because the
currency exchange fluctuation would make the contract far more costly for
the importer, it did not render the contract impracticable or invalid, as
contemplated by CISG. Rather, it is merely a risk incidental to international
business. International trading partners are expected to be aware of such
risks and plan for them accordingly.

50

3. Answer: The CISG is a treaty, and in countries that adopt it, it is

legally binding. In the U.S., treaties are equivalent to federal statutes and
would have (implied) a pre-emptive effect on state common law or stateadopted UCC law where the UCC or common law was inconsistent with the
CISG. Where the common law or UCC merely enhanced aspects of the CISG,
the CISG would not have pre-emptive effect.
As a practical matter,
however, in contracts between parties from different countries, courts
adjudicating international disputes would probably not substitute U.S. common
law contract principles (as seen in, say, the Restatement of Contracts) in
place of international contracts principles such as those reflected in CISG.
4. Answer: Article 72 of the CISG states that if, prior to the date of
performance, one of the parties will commit a fundamental breach of contract,
the other party may declare the contract avoided. Section (2) of Art. 72
requires the non-breaching party - if time allows - to give reasonable notice
to the other party of an intent to declare the contract avoided. Section (3),
however, makes clear that this is not necessary in cases where the other
party has declared that it will not perform its obligations.
In this case, Mexicana announces its intention to breach. AES must
give reasonable notice of its intent to declare the contract avoided unless
subsection (3) applies.
From AESs perspective, it would be prudent to
declare the contract avoided at an earlier time, putting Mexicana on notice
under Section (2).
Mexicana (if it were bluffing) could then decide to
provide adequate assurance of his performance (section 2). If Mexicana
does not, then mitigation of damages under Article 77 should proceed, rather
than waiting for Dec. 1. As the facts are stated, Mexicana can argue that
AES failed to declare the contract avoided and failed to take such reasonable
measures as would mitigate damages. Under Article 77, Mexicana could then
claim a reduction in damages in the amount by which the loss should have
been mitigated.
As AES could have covered as late as September for Dec. 1 delivery,
at $55,000, the loss could have been limited to $5,000.00. That would reduce
the $14,000 additional cost plus the $2,000 loss of profit.
In short,
reasonable and timely action by AES could have limited damages to $5,000
rather than $16,000; Mexicana can argue for a reduction of $11,000 from the
claimed $16,000 in damages.
5. Answer: The price quotation is the initial offer. Fun N Gamess
response of forty pieces of track, a 25% increase of track, would materially
alter the contract under the CISG and UCC rules and would fail to comply with
the mirror image rule of common law.
Therefore, under any scenario, it
constitutes a counter-offer and will be valid only if accepted by the German
toy maker. If the German toaster ships thirty pieces of tract, this can be
seen as an affirmative action accepting the offer. Since the most recent
offer is that for 40 pieces of track, the German toaster must provide 40
51

pieces of track.
6. Answer: Under common law, the offer is valid on June 2, when
received. Under the mailbox rule, the acceptance is valid upon dispatch when
placed in the mail on June 12. With a valid offer and acceptance, the contract
comes into being on June 12. The June 8 revocation has no effect, as it is
not received (or communicated) prior to acceptance.
Under the CISG, the offer is also valid on June 2, the date received,
but while a contract will result, the timing of its creation is different. The
CISG does not follow the mailbox rule but requires the acceptance to be
received to be valid. Consequently, the acceptance is not valid until June 17.
Under these circumstances, however, the June 13 receipt of the revocation
will have no effect. The CISG limits the offerors right to revoke -- once
the acceptance is put into the mail, the offerors right to revoke is
extinguished. Therefore, the end result is the same under both laws (there is
a contract) but the reasoning and the dispositive dates are different.
7. Answer: Neither the 250% increase in the price of raw materials nor
the delay in shipping caused by a longshoreman's strike will act to release
Acme Widgets from its promised performance. The risk of a price increase
should be contemplated by a business. Further, it is very possible that a
strike was certainly foreseeable, although it is possible that one could make
an argument that under particular facts, one could not and should not have
foreseen a strike. Instructors might want to ask students how a force
majeure clause might have altered the outcome of this case.
8. Answer: No.
The contract between the parties included an
exhaustive list of force majeure circumstances that would discharge the
parties from the contract (and rescue them from liability).
That the
buyers lack of foreign currency, however, was among those exculpatory
forces, therefore, does not apply here. Furthermore, it is the buyer who is
obligated to send instructions to the bank to pay the seller. The buyer here
did not do so and thus its failure to pay is not discharged. The Tribunal
ordered the buyer to pay the seller.
9. Answer: No. The chaptalized wine did not conform to the contract.
The wine ordered by the French merchant was obviously intended for sale as
drinking wine, and, thus, the goods delivered were non-conforming.
10. Answer: Yes. While the CISG allows the price of the goods to be
determined by the parties later, here the parties agreed that they needed to
reach agreement on the future price of the goods and they did not do so.
The failure to include a price term in the contract or later to agree on a
price term, as they agreed they would do, meant the parties did not have a
52

valid contract.

M ANAGERIAL I MPLICATIONS

Students might consider: 1) differences in negotiating contracts with the

Japanese, Chinese, and Germans; 2) strategies for reducing risk to both
buyer and seller, particularly the buyer's risk of receiving nonconforming
goods (use of laboratory analysis and inspection reports from independent
firms); 3) the use of standard forms for purchase orders and confirmations;
4) the potential for a force majeure; and 5) the rights of the parties on
breach.

A CTIVITIES / C OOPERATIVE L EARNING E XERCISES

This chapter provides an excellent opportunity for experiential education.

1. Students, working alone or in groups representing various countries
(both members and non-members of CISG), can negotiate and/or draft an
international contract for the sale of some item (cases of scotch, cans
of beans, clothing).
Ultimately, the two groups would deliver a single
contract. An instructor may enact several guidelines (such as all contracts
must include a choice of law clause, must contemplate future disputes) for
students or may leave students to their own devices.
2. If the instructor chooses the option of contract negotiation between
groups or students representing two countries, the instructor can require
students to present their work in the form of a portfolio.
Within this
portfolio, student groups would log all negotiations, including written or verbal
offers, the time, place of negotiations, other content discussed, and the final
contract. Instructors may also wish to forbid face-to-face negotiations
between groups, so as to underscore some of the problems that may arise in
international negotiations when parties must communicate via e-mail or letter.
This will teach students to be very precise in their communications. This may
be accomplished through a course chat room or through e-mail (with students
including copies of all letters or printouts of all e-mails).
3. Instructors may also wish to require students to negotiate with
partner students also taking International Business Law at another institution.
This, also, would require/ensure long-distance negotiations (as all documents

53

would pass by fax, e-mail, or mail, and all negotiations through these means
or phone) and implicate the trust issues that such businesses commonly face.

4. Finally, after reviewing contracts, instructors may wish to create

a contract dispute (perhaps goods were not delivered, were damaged, or
were not of the type contemplated by one party). Student groups would
then respond to questions with reference to both their contract and CISG.
Studying qustions
1. What is meant by the term ' contract' in common law?
2. Explain the differences between an offer and an invitation offer,
giving examples.
3. Briefly describe how the CISC attempts to resolve problems of 'battle
of forms'.
4. Compare and contrast the provisions of the UCC and of the CISG on
'battle of forms'.
5. Outline main theories of the validity of ' acceptance'.
6. Outline and discuss the differences and similarities between
fraudulent misrepresentation, innocent misrepresentation' and 'negligent
misrepresentation'.
7. Give two examples of 'mistakes' in the UNIDROIT PICC.
8. Explain the main differences between ' duress' and ' undue influence
and unconscionable conduct', giving three examples.
9. Identify the key legal rules involved in deciding whether mistaken
identity will make a contract void or voidable.
10. Julie is moving to a better job in a different city and offers to sell
her 'surround-sound' stereo system to Marcia for $900. Marcia says she will
pay $ 800 for it. Julie says that is not enough. Marcia then says she will pay
the original asking price of $ 900. Julie has since discovered that similar
systems are selling for a lot more and asks you whether she has to sell to
Marcia for $ 900. What would your advice to Julie be?
11. Stan returns home from work to discover his house surrounded by
police. His wife is being held hostage and threatened by her captor. Stan
54

pleads with the police to rescue her and offers $ 5,000 to the policeman who
brings her uninjured to safety. A police officer, Peter, eventually talks the
captor into releasing the woman hostage and he leads the woman to safety.
When Peter goes to collect his $ 5,000, Stan says, 'Thank you very much
but I have no intention of paying. ' Would Peter succeed in a court action
against Stan?
12. You read that modern contract law has expanded the circumstances
under which a contracting party has the duty to disclose facts material to
the contract. Keep in mind that the facts that he is required to disclose
would almost always harm his bargaining position-otherwise, he would have
been only too happy to have volunteered the information. What are some
ethical and public policy justifications for requiring an individual to volunteer
information that is contrary to his interests.
13. List and explain, giving examples where possible, the general
principles of remedies.
14. Briefly outline the remedies of the buyer and the seller
respectively.
15. Under what circumstances will a court be reluctant to award
specific performance? Why?
16. What criteria will be used to determine if a party has
breached?
17. If nothing is said in the contract, where must the seller deliver
the goods? When must delivery be made? Where and when must
documents of title be turned over?
18. How does a court determine the amount of damages to be
awarded in accordance with the CISG?
19. Outline and discuss the differences and similarities between '
anticipatory breach of contract' and ' Exceptio non Adimpleti
Contractus '.
20. How is ' fundamental breach of contract' defined in the CISG?
Give two examples.
21. Define the term 'liquidated damages' and identify its main
features.

55

22. What are the obligations of the buyer and the seller under the
CISG?
23. Explain the rules of 'passing f risk' under the CISG, giving
examples.
24. Compare and contrast the 'excuses for non-performance'
systems of the common law and civil law.
25. A (an American company) entered into a contract with B (a
Japanese company). The contract provided that A delivers 1, 000
personal computer housings by December 1 to B in Tokyo, for a total
price of $ 50,000. On July 1, A faxed B that due to a rise in prices
they could not deliver for less than $ 60,000. B replied that it would
insist that A deliver at the $ 50,000 price. From July 1 through
September, B could have bought the housings from other suppliers for
$ 55,000 for December 1 delivery. On December 1, B covered and
purchased the housings for $ 64,000 for delivery on February 1.
Because of the delay until February 1 B suffered additional damages
$2,000. What is the measure of B's damages? Was B under any duty to
mitigate damages? Why or why not? (the answers must be done under
the CISG)
26. X (a Chinese company) concluded, acting as an agent of Z (a
Chinese factory), a contract with Y (an American company) to
purchase ten machines. Upon the arrival of the machines in Qingdao, the
carrier handed over the machine to Z who showed a certificate by a
municipal organ, failing to make the delivery to X who held the bill of
lading but (the relevant businessman) was away in Guangzhou at a
meeting. X sued Z for damages. Who should X sue for damages? Has
the Property of the goods passed to Z? Was the carrier liable for the
damages? What liabilities of X?

Reading booklist
1.Schimitthoff, C., Schimmitthoffs Export Trade: The Law of
International Trade,London, Stevens, 1996
2. International Business Law, 1 e by Zuoli Jiang, English edition
Copyright 2004 by Law Press.

56

3. International Business Law , 3 e by Ray August, English reprint

edition Copyright 2002 by Pearson Education North Asia Limited and
Higher Education Press.

Chapter Five Sales Contracts and Excuses for Nonperformance

Emphases onThrough this chapter studying, we can understand the

legal system of international business, grasp the knowledge about United
Nations Convention on Contracts for the International Sale of Goods (CISG),
UNIDROIT Principles of International Commercial Contracts (PICC) and
International Rules for the Interpretation of Trade Terms (Incoterms).
Hard parts1. CISG. 2. Incoterms 2000
Contents
I . United Nations Convention on Contracts for the International Sale of
Goods (CISG)
A. The Development of International Business Law
B. The Drafting of the CISG
C. Applicability of the CISG
D. Interpreting of the CISG
Case 3 1

Raffles v. Wichelhaus and Another

II . UNIDROIT Principles of International Commercial Contracts (PICC)

A. Origin and Preparation of the UNIDROIT PICC
B. Structure and Scope of the UNIDROIT PICC
C. General Principles of the UNIDROIT PICC
D. The purposes of the UNIDROIT PICC
E. Comparison of the UNIDROIT PICC and CISG

57

III. International Rules for the Interpretation of Trade Terms

A. Concept and Role of Trade Terms
B. Contentss of Incoterms 2000
C. FOB (free on hoard) (port of shipment)
D. CIF (cost, insurance and freight) (port of destination)
E. Modification of Trade Terms
Case 32

Kumar Corporation v. Nopal Lines, Ltd.

C ASES IN T HIS C HAPTER

Banque de Depots v. Ferroligas, p. 156.

Biddell Brothers v. E. Clemens Horst Co., p. 157.
Basse and Selve v. Bank of Australasia, p. 161.
St. Paul Guardian Ins. Co. v. Neuromed Medical Systems & Support, GmbH , p.
168.
Kumar Corp. v. Nopal Lines, Ltd., p. 174.
T EACHING S UMMARY

International contracts must also address the exchange of goods for money,
transportation of these goods, title, and risk of loss. Documentary sales are
a common method for transmitting title to goods and, through a negotiable
instrument, creating an obligation to pay. The essential document for crossborder trade is the bill of lading. Described as the key that permits the
holder to unlock the door to where the goods are held, the bill of lading is a
receipt for the goods shipped, the contract of carriage, and title to the
goods. Although these documents are also used in domestic sales, their use is
much less common, as domestic trading partners are in a superior position to
ascertain the credit standing, integrity, and reputation of one another.
Foreign trading partners must also contemplate responsibility for delivery and
58

the passing of risk of loss for goods. Often, abbreviations are used to
describe the time and place of delivery, financial responsibility for delivery,
and the passing of risk. Although similar terms, such as FOB and CIF, are
used in the United States, INCOTERMS, an international convention, defines
these terms globally. Consequently, international and domestic shipping terms
may look identical but have different meanings.
Over the last decade, however, documentary sales have declined in
popularity. B2B exchanges via the Internet have remodeled international
trade.
Traditionally, international trade was burdened by divergent
country rules and the limited number of credit institutions able to
intermediate these dealings. Letters of credit are now being customized
for the Internet, increasing the efficiency and security of crossborder trade. Intermediary companies are providing on-line letters of
credit for B2B transactions. These permit buyers and sellers to apply
for, negotiate, and obtain letters of credit on-line in real time. A
bank continues its traditional role as a financier/ collection agent.

C ASES AND Q UESTIONS

Banque de Depots v. Ferroligas , p. 156.

1.

Would Article 2 of the UCC have been relevant had this dispute been
in another state?
Answer: Yes.
The UCC covers negotiable instruments and bills of
lading. The UCC, in whole or in significant part, has been adopted by all
other states of the union. Historically, however, Louisiana law did not
develop along the lines of English common law but, rather, the French
Civil Law. Consequently, it did not adopt much of the UCC and, thus,
had to look to its state law.

2.

Had Bozel been the holder of the bill of lading or had the bank sought
to seize the bill of lading prior to transfer, how would the result have
been different?
Answer: A holder of a bill of lading possesses title to the goods, thus
had Bozel presently been the holder or had not transferred it to the
purchasers, the bank could have seized the cargo or enjoined further
transfer of the bill.

59

3.

Does this leave the bank without recourse against Bozel?

Answer: Of course not. The bank simply cannot obtain goods to which
Bozel no longer possessed title.

4.

Had the purchasers/holders of the bill of lading known of a prior

seizure or lien on the goods, would they still have been protected?
Answer: No. The law provides special protection to the purchaser of
a bill of lading who are free from the adverse claims of other parties,
provided the purchaser/ holder had no notice of adverse claims. Thus,
the courts comment that it would not expect the purchaser/holder
to have searched every jurisdiction through which the goods may have
passed searching for some adverse claim.
Yet, where the
purchaser/holder is aware of the defect, he, too, suffers that defect.

Supplemental Internet Activity

The court, here, did not rely on the UCC but on Louisiana state law.
Have students peruse the UCC posted at the Legal Information Institutes
Web site at http://www.law.cornell.edu/ucc/ucc.table.html. Ask them to find
the particular potions of the UCC that would address this issue, apply the
UCC law, and compare and contrast the UCC outcome with that under
Louisiana law.
Biddell Brothers (Buyer) v. E. Clemens Horst Co. (Seller), p. 157.
1.

Why did the court reject the buyers argument that it was entitled
to inspect the good prior to payment?
Answer: The contract at issue was a CIF contract, which implies a
documentary sale. A CIF sales contract implies a documentary sale. The
seller's responsibility is to obtain a bill of lading from a carrier and
tender it to the buyer for payment. The buyer has a corresponding
responsibility to pay for it.

2.

Here, the buyer wished to ensure a right to inspect the goods prior to
payment. Was there any way that he could have arranged to have
done so?
Answer: Yes. As the court noted, inspection prior to payment is not
the type of term that can be inferred from a silent contract.
Furthermore, here, the CIF term said quite a lot to the contrary:
under a CIF contract, the buyer is obligated to pay upon tender of
the appropriate documents. Had the buyer wished to ensure that they
60

could inspect the goods prior to payment, he needed to include such a

clause in the contract and avoid using the contract CIF term.
3.

Had the cargo been lost at sea, would the buyer of the bill of lading
have had any protection?
Answer: Yes. Here there was a CIF contract. Thus, the contract
included not only cost and freight, but insurance on the goods.
Insurance of this type is common in documentary sales.

4.

Is the tender of a bill of lading covering the shipment of goods called

for in the sales contract a guaranty to the buyer that conforming
goods were actually shipped?
Answer: No.
The goods may prove to be defective, otherwise
nonconforming, or damaged in transit.
Note the "said to contain"
language on the example of a bill of lading in the text. The seller may
still maintain an action for breach of contract.

5.

Ocean bills of lading are usually issued in sets of several copies, each
signed as an original. What is the effect of this?
Answer: Only one signed copy is adequate to obtain possession of the
goods from the carrier.
Banks that accept these documents as
collateral for the goods usually wish to have all original copies in its
possession.

6.

Which party assumed the risk of a change in freight and insurance

rates?

Answer: The seller: if shipping costs go down, the seller will benefit.
Basse and Selve v. Bank of Australasia , p. 161.
1.

In light of Biddell, how can a buyer suing a documentary sale ensure

inspection?
Answer: Although the bill of lading does not compel inspection, a buyer
can require that the bill of lading be accompanied by a certificate of
inspection or analysis from an inspection company.

2.

Why do buyers in international transactions like to use inspection firms?

Answer: If the contract is on documentary terms, the buyer may not
have the opportunity to inspect the goods prior to payment.
61

Otherwise, they are confined to paying for the goods and then suing
the seller for breach (due to non-conformity).
3.

If the seller fails to provide an inspection certificate as required in the

contract, can the buyer refuse to accept the documents?
Answer: Yes, although here the buyer can waive the defect and
condition payment on actual inspection at the place of delivery.

4.

What is the obstacle to a banks refusing goods due to nonconformity?

Answer: The bank has no privity of contract -- with regard to this
issue -- with the seller.

St. Paul Guardian Ins. Co. v. Neuromed Medical Systems & Support,
GmbH , p. 168.
1.

Does the CISG apply to this transaction?

Answer: Yes. CISG governs the transaction because: (i) both Germany
(Sellers country) and the United States (Buyers country) are
signatories to the CISG, and (2) although the parties could have opted
out of the CISG provisions, the parties chose not to do so. The CISG
is an integral part of German law.

2.

What does the term CIF mean under INCOTERMS and CISG?
Answer: In its common usage, CIF literally means cost, insurance and
freight. As defined in INCOTERMS, which are incorporated in the
CISG, CIF means that seller is responsible to pay the cost, freight,
and insurance to the named port of destination, where the risk of loss
passes from the seller to the buyer.

3.

What was the holding of the court?

Answer: The parties agreed that the product would be shipped CIF
New York Seaport.
The court granted Neuromeds Motion for
Summary Judgment and dismissed St. Pauls claim because, as defined
as a matter of the law of INCOTERMS and CISG, the term CIF means
that the risk of loss passed from the seller (Neuromed) to the buyer
(Shared Imaging) when the MRI machine was delivered to the carrier
undamaged and in good order at the New York Seaport.

62

Kumar Corp. v. Nopal Lines, Ltd., p. 174.

1.

Can the words of the contract alter the meaning of the CIF term?
Answer: Generally, no.
Where the shipping terms and contractual
language are contradictory, they will not be interpreted as amending
one another, but, rather, a court will decide which was the intention
of the parties. Where contact language eviscerates the essence of a
CIF contract, that contract ceases to be a CIF contract.

2.

What was the contradiction here?

Answer: Under CIF contract, the seller bears the risk of loss once
goods are delivered to the carrier. This contract, however, provided
that payment was not due until the purchaser had actually re-sold the
goods, suggesting that actual delivery was a prerequisite of payment
and, therefore, that risk of loss had not yet passed.

3.

On what basis was this decision made?

Answer:
Although the court determined that the evidence did not
conclusively show that the contract remained a CIF contract, it
shifted its focus to the sellers failure to obtain insurance. If a seller
under a CIF contract fails to provide insurance then the risk does not
shift to the buyer. Thus, the seller remains the real party-in-interest
with standing to bring this action against the carrier for cargo loss.
(See York-Shipley Inc. v. Atlantic Mutual Insurance Company, 474 F.2d 8
(1973)).

A NSWERS TO Q UESTIONS AND C ASE P ROBLEMS

1. Answer: In Barclay's Bank, Ltd. v. Commissioners of Customs and
Excise, the court ruled for the bank. The bill of lading effectively transferred
title in the property to the bank, thus putting the property beyond the reach
of Bruitrix's creditors. Lord Justice Diplock stated, "In the present case, the
contract of carriage evidenced by the bills of lading, had not been discharged
on June 2, 1961, when Bruitrix purported to pledge the goods to the Bank by
deposit of the bills of lading as security for advancement of money to them.
The goods were in constructive possession of the ship owners being held in the
physical possession of the British Transport Commission on behalf of and to
the order of the ship owners who had power to control any physical dealing
with them. No bill of lading had, at that date, been produced to the ship
owners.
The ship owners were under no obligation to surrender their

63

constructive possession and control to deal with the goods, except on

production of the bill of lading and had no intention of doing so. In those
circumstances it seems to me beyond argument that the bills of lading were at
all material times effective documents of title for the goods by deposit of
which to the Bank a valid pledge of the goods for security on advances could
be make. In my opinion, the pledge made on June 2, by deposit of the bill of
lading was a valid pledge and as a consequence I think that I can give judgment
for the plaintiffs in this case."
2. Answer: This focuses on the responsibilities of buyer and seller under a
CIF sales contract.
The court held that Colorado's responsibility was to
properly ship, not necessarily to deliver, and, therefore, that the risks of the
voyage rest with the buyer in India. The court also addressed the responsibility
of a seller who might have known that a strike was imminent. It noted that
although there was indication prior to shipment that labor negotiations were in
jeopardy of breaking down, the seller could not have known whether a strike
would actually occur or what its full impact or duration would be. In holding
that the seller was correct in shipping, the court notes that "To say
otherwise would mean that shippers when aware that there might be a strike
would have to forego all business until the situation became crystal clear.We
do not mean to hold, nor do we, that if, in the face of an impending labor
disturbance affecting a shipment under contract, a seller ships having good
reason to know that the shipment will not meet the dates contracted for he
would be absolved of liability for damages.[T]here has been no proof of
fraud at all in this case.Coloradoacted in good faith and under the
circumstances exercised reasonable business prudence.For us to require
sellers to know with foresight how long a strike will last and to stop their
commercial operations until the shipping picture is completely clear is just too
much tightrope walking to require of any one.
3. Answer: The court determined that this was a shipping contract,
consistent with the CIF shipping term. Although a shipping term in the face
of contradictory language is not dispositive, it is strong evidence of intent.
Here, the substance of the agreement did not show that the parties intended
otherwise, and, in fact, the additional language did not alter the essential
character of the CIF term.
4. Answer: A force majeure clause in a sales contract does not operate
to relieve the buyer from paying on the documents under a C & F or CIF
contract. The court stated that "We also look to the basic purpose of force
majeure clauses, which is in general to relieve a party from its contractual
duties when its performance has been prevented by a force beyond its control
or when the purpose of the contract has been frustrated. The burden of
demonstrating force majeure is on the party seeking to have its performance
64

excused, and . . . the non-performing party must demonstrate its efforts to

perform its contractual duties despite the occurrence of the event that it
claims constituted force majeure. With these principles in mind, we cannot
agree that Phillips' performance was excused by its invocation of force
majeure. Even if the detention of the ship by the Coast Guard constituted
force majeure, and we are inclined to agree with Judge Carter that it did not,
that detention did not frustrate the purpose of the contract or prevent
Phillips from carrying out its obligation under the terms of the parties'
contract to make payment. Indeed, to hold that the force majeure clause may
be interpreted to excuse the buyer from that obligation, as Phillips urges,
would be to wholly overturn the allocation of duties provided for in C & F
sales. We do not find any evidence that the parties intended such a result."
5. Answer: Under INCOTERMS, F.O.B means that the risk of loss passes
when the goods cross the ship's rail.
Therefore, the seller (Buenavista)
assumes responsibility for the crate of glass. Under the UCC, once the seller
has placed the goods in the possession of the carrier, the risk of loss passes
to the buyer. Consequently, under the UCC, the buyer would bear risk of loss
for the mishap.
6. Answer: The court held this was a shipment contract. The plaintiffbuyer Pestana, a resident of Mexico, entered into a contract with defendantseller Karinol, a Florida export company, to purchase 64 watches. The
contract between the parties stipulated only the location where the goods sold
were to be sent by carrier. It did not contain information about allocation of
risk of loss while the goods were in the possession of the carrier, not did it
reference common shipping terms such as F.O.B. or C.I.F.
A 25% down
payment on the purchase price of the goods sold was made prior to shipment.
A notation was printed at the bottom of the contract that, translated into
English, read:
"Please send the merchandise in cardboard boxes duly strapped with
metal bands via air parcel post to Chetumal. Documents to Banco de
Commercio De Quintano Roo S.A."
The goods were lost in shipment before they reached the buyer. Florida UCC
allows for either a shipment or a destination contract. A shipment contract is
the normal contract when a seller ships via a carrier but does not guarantee
delivery at a particular destination and the risk of loss passes to the buyer
when the goods are tendered to the carrier for shipment to the buyer. On
the other hand, in a destination contract, the seller expressly agrees to ship
the goods to a particular destination and he bears the risk of loss until the
tender of delivery to the buyer. This is typically accomplished with customary
terms such as F.O.B. (destination). The parties must expressly agree to a
65

destination contract; otherwise the contract is a shipment contract. In the

instant case, based on the facts, the court found the contract was a
shipment contract and the risk of loss passed to the buyer when the goods
were tendered to the carrier.

M ANAGERIAL I MPLICATIONS

In preparing an invoice, students may need ocean freight and insurance costs,
ground transportation costs, port charges, customs fees, forwarder's
fees, and communications expenses.
These are available from local
sources, such as freight forwarders, inter-modal terminal operators,
steamship representatives, bankers, and export management consultants,
as well as on-line.

A CTIVITIES / C OOPERATIVE L EARNING E XERCISES

Like Chapter 4 (contracts), this chapter provides an excellent opportunity

for experiential education. Students, working alone or in groups, can draft
the documents necessary for a documentary sale, such as a bill of lading, and
write contracts (or rewrite contracts they had negotiated under Chapter 4)
to include shipping terms. Ideally, groups can negotiate with one another in
drafting contracts that include shipping, delivery, and loss terms.
Supplemental Case: Miller v. Race , England, Court of Kings Bench (1758),
English Reports, vo. 97, p. 398 (stolen bearer paper, i.e., bill of exchange or
promissory note). Finney purchased a note, payable to bearer and drawn on
the bank of England. He attempted to mail it to Odenharty, but it was
stolen. The next day, Miller, not implicated in the theft, came in possession
of the note. Finney then applied to the Bank of England to stop payment on
the note (due to the robbery) and the bank agreed. Consequently, when
Miller presented the note for payment, Race (a ban clerk) refused payment.
Miller brought this action to compel payment by the bank and was successful.
1.

What is bearer paper?

Answer: A document that, on its face, contains an order to pay or
that contains a blank endorsement, i.e., the signature of the payee or
last endorsee named in a special endorsement (e.g., pay to the order
of Bill Clinton). Whereas order paper is negotiated (transferred) by
delivery and endorsement, bearer paper is negotiated by delivery alone.

66

It is equivalent to cash.
2.

When would a bill of exchange be bearer paper?

Answer: If the bill was payable to bearer or to cash.

3.

Why, then, was the bank obligated to pay?

Answer: Miller had obtained the note legitimately, and, since this was
a bearer instrument and Miller was the bearer, the bank was obligated to
pay.

Studying qustions
1. Outline three reasons that helped the international business law
develop, giving examples if possible.
2. Under what circumstances arise the conflicts between the
applicability of the CISC and national law of a CISG member state?
3. State three ways in which the UNIDROIT PICC was prepared.
4. Briefly describe the differences and similarities between the CISG and
the UNIDROIT PICC.
5. What are the main principles of the UNIDROIT PICC?
6.How is 'trade term' defined under the Incoterm 2000?
7. List and explain the roles of trade terms in international trade
practices.
8. Compare and contrast ' FOB' and ' GIF', and list the main differences
between them.
9. Seller agreed to ship 10,000 tons of potatoes FOB Tacoma,
Washington, to Buyer in Japan. Buyer designated the SS Russet to take
delivery at pier 7 in Tacoma. On the agreed date for delivery, Seller
delivered the potatoes to pier 7, but the ship was not at the pier. Because
another ship using the pier was slow in loading, the Russet had to anchor at
a mooring buoy in the harbor and Seller had to arrange for a lighter to
transport the potatoes in containers to the ship. The lighter tied up alongside
the Russet and a cable from the ship' s boom was attached to the first
container. As the container began to cross the ship' s rail the cable snapped.
67

The container then fell on the rail, teetered back and forth for awhile, and
finally crashed down the side of the ship and capsized the lighter. All of the
potatoes were dumped into the sea. Buyer now sues Seller for failure to
make delivery. Is Seller liable?
10. Buyer and seller entered into a contract for the sale of sugar from
the Philippines to New York on GIF terms. They added language to the
contract that delivery was to be " at a customary safe wharf or refinery at
New York, Philadelphia, or Baltimore to be designated by the buyer." Before
the sugar arrived, the United States placed a quota on sugar imports. The
sugar was not allowed to be imported and was placed in a customs
warehouse. The buyer refused the documents and the seller sued, claiming
that the import restriction was no excuse for the buyer' s nonpayment. The
buyer argued that the language calling for delivery to a U. S. port converted
a shipment contract into a destination contract. Was this a GIF contract or a
destination contract? What was the effect of the additional shipping language
used by the parties? Why should the parties not attempt to modify a trade
term or add other delivery language?
Reading booklist
1. International Business Law, 1 e by Zuoli Jiang, English edition
Copyright 2004 by Law Press.
2. International Business Law , 3 e by Ray August, English reprint
edition Copyright 2002 by Pearson Education North Asia Limited and
Higher Education Press.

Chapter Six
Sea Carriers.

The Carriage of Goods and the Liability of Air and

Emphases onThrough this chapter studying, we can understand and

grasp common knowledge of the carriage of goods by sea and marine cargo
insurance, including the charterparties, bills of lading, and marine cargo
insurance.
Hard parts1. Bills of Lading. 2. Marine Cargo Insurance.
Contents
I . Charterparties
A. Voyage Charterparties
68

B. Time Charterparties
C. Charterparties by Demise
II. Bills of Lading
A. Laws of Bills of Lading
B. Characteristics of the Bills of Lading
C. Transfer of Property under A Bill of Lading
D. Carrier's Duties under A Bill of Lading
E. Carrier's Immunities
F. Delayed Bills of Lading
G. Frauds on Bills of Lading
III. Marine Cargo Insurance
A. Marine Insurance Policies and Certificates
B. Perils and Losses
C. Insurance Cover

C ASES IN T HIS C HAPTER

Allied Chemical International Corporation v. Companhia De Navegacao Lloyd

Brasileiro, p. 179.
El Al Israel Airlines, Ltd. v. Tseng, p. 183.
J. Gerber & Co. v. S.S. Sabine Howalt, p. 191.
Westway Coffee Corp. v. M.V. Netuno, p. 194.
Z.K. Marine, Inc. v. M/V Archigetis, p. 196.
Prima U.S. Inc. v. Panalpina, Inc., p. 200.

69

Shaver Transportation Co. v. The Travelers Indemnity Co., p. 206.

T EACHING S UMMARY

Once the buyer and seller have negotiated the contract for the sale of
goods, and even, perhaps, how those goods will get from point A to point B,
a carrier must actually transport those goods. This is also governed by a
private contractual relation, but, in many instances is also enhanced by the
regulations of international treaties concerning liability for loss, misdelivery,
and monetary damages.
Additional Background: Perils of Sea. The concept of a peril of sea is not
uniform among nations. In fact, the Anglo-Australian notion is different from
the U.S. and Canadian conception. In the U.S. and Canada, a peril of sea must
be of an extraordinary nature or arise from an irresistible force or
overwhelming power and cannot be guarded against through ordinary
prudence. This is described by the 2nd Circuit in The Guila, 218 Fed. 744 (2nd
Cir. 1914) and The Rosalia, 264 Fed. 285 (2nd Cir. 1920). The U.K. and
Australia, however, do not require that such a burden be met. Instead, they
require only that losses be extraordinary.
Therefore, sea and weather
conditions that could reasonably be foreseen and guarded against may
constitute a peril of sea. (Great China Metal Industries Co. Ltd. v. Malaysian
International Shipping Corp., High Court of Australia Reports, vol. 98, no. 65
(1998)). Nevertheless, because the Hague rules are intended to apply widely in
international trade, courts strive for a relatively uniform construction of them.

70

C ASE Q UESTIONS

Allied Chemical International Corporation. v. Companhia de Navegacao

Lloyd Brasileiro , p.179.
1.

Why is Lloyd being sued when Banylsa took the goods without paying
for them?
Answer: Lloyd is being sued because Lloyd gave Banylsa a carta
declaratoria, which stated the Brazilian import fees had been paid
when in fact they had not. Perhaps more importantly, Lloyd is being
sued because (a) Banylsa is bankrupt and (b) Lloyd is easier to find
anyway, since they do business out of Norfolk.

2.

How is there a conversion here?

Answer: Lloyd remains responsible for the proper delivery of the
goods. A bailee is absolutely liable for misdelivering cargo (unless
the mistake was induced by the bailor). Since Banylsa got possession
without payment, Lloyd would be enabling the conversion and thus
become liable to the bailor.

El Al Israel Airlines, Ltd. v. Tseng, p. 183.

1.

Why is El Al appealing the decision to the United States Supreme Court?

Answer: The passenger was searched before boarding the plane from
New York to Israel but was not physically injured. Passenger filed suit
but the claim was dismissed by the trial court. The appeals court
concluded that no accident (bodily injury) had occurred during the
search but New York tort law allowed the passenger to sue El Al. El
Al appealed.

2.

What was the holding of the United States Supreme Court (1999)?
Answer: The court held for El Al. Under the Warsaw Convention, an
international passenger may not bring a cause of action under local law
against an airline when there is no bodily injury that satisfies the
convention.

71

3.

Does the recent case Olympic Airways v. Husain, 2004 WL 329950

(2004) affect the El Al case?
Answer: In Olympic Airways v. Husain, an asthmatic passenger died
from an allergic reaction to second hand smoke aboard the aircraft.
The United States Supreme Court ruled that the flight attendants
refusal to move him away from the smoke was an unusual and
unexpected event external to the passenger and thus an
accident under the Warsaw Convention. The Husain case defined an
accident during a flight as one in which an unusual and unexpected
refusal that is external to the passenger and not to the passengers
internal reaction to otherwise normal circumstances.
However, the
Husain case does not overrule or affect the El Al or Air France v.
Saks cases.

J. Gerber & Co. v. S.S. Sabine Howalt , p.191.

1.

Describe the respective burdens of production of the plaintiff and

defendant (carrier).
Answer: Initially, the plaintiff must establish that the cargo was loaded
in good condition and was unloaded in damaged condition at the port of
destination. The burden then shifts to the carrier to show that it used
due diligence in providing a seaworthy ship and that the cause of the
loss was attributable to one of the exceptions listed in COGSA. Here,
the carrier met its burden.

2.

Why did the carrier argue that the damage to the steel resulted from a
peril of the sea?
Answer: Because perils of sea exempt a carrier from fault. Therefore,
as long as the carrier had used due diligence to provide a seaworthy
ship, and if the loss was caused by a peril of the sea, the carrier
would be exonerated.

3.

What is a peril of the sea?

Answer: Generally, perils are peculiar to the sea, and which are of an
extraordinary nature or arise from irresistible force or overwhelming
power, and which cannot be guarded against by the ordinary exertions
of human skill and prudence The Giulia, 218 F. 744, 746 (2nd Cir. 1914).
A similar definition phrased a little differently is: a fortuitous action
of the elements at sea of such force as to overcome the strength of a
72

well found ship or the usual precautions of good seamanship Gilmore &
Black, The Law of Admiralty 3-32 at 140 (1957).
4.

Describe the conditions here and explain whether they amounted to an

exculpatory peril.
Answer: Here, the Sabine Howaldt encountered dangerous cross seas,
hurricane-strength winds, and suffered extensive damage. Although the
lower court believed the ship unseaworthy because it could not
withstand this weather and had negligently failed to cover the hatches,
the Court of Appeals found that no ship could be expected to withstand
such unpredictable destructive forces. Furthermore, it was not
regular maritime practice to cover hatches with tarpaulins. Therefore,
the ship was deemed seaworthy and the loss was determined to have
resulted from a peril of the sea.

5.

If an insurance company pays a claimant for goods damaged during

ocean transit, may the insurance company bring the action against the
carrier under COGSA?
Answer: Yes. Insurance companies are frequent litigants in these cases.

73

6.

Which party can rightfully bring an action under COGSA for damage to
cargo: the buyer or seller?
Answer: Generally, the party whose rights stem from ownership of the
bill of lading. If the shipper tenders the bill of lading for payment
subsequent to the destruction of the goods, the buyer and owner of
the bill (or his insurer) will be entitled to bring the action against the
carrier.

Westway Coffee Corp. v. M.V. Netuno , p.194.

1.

Briefly, what were the facts of the underlying dispute?

Answer: Although a Brazilian government official had counted 1,710
cartons being placed into six larger containers and a chain of custody
could be established, when the padlocked containers were opened, 419
cartons were missing.

2.

How did Netuno seek to use the bill of ladings disclaimer?

Answer: The disclaimer stated that the containers were said to
contain the quantity of cargo described by the shipper, that was
the shippers load and count.

3.

Is the load and count provision effective in relieving liability?

Answer: The notation alone does not relieve the carrier from liability
for cargo shortages; rather, the weights recited in the bill establish a
prima facie receipt by the carrier of the entire shipment.

4.

Is the carrier relieved by the application of a COGSA exception?

Does the Q-Clause defense exonerate the carrier?
Answer: No. The Q-Clause defense provides that the carrier is
not liable for any other cause arising without the actual fault . . . of
the carrier . . . but the burden of proof shall be on the (carrier) to
show that neither the actual fault (of the carrier) . . . nor the fault
or neglect of the agents or servants of the carrier contributed to the
loss or damage. Here the carrier could not meet its burden of
proving that it was free from fault in the disappearance of the
coffee.

74

5.

What additional facts would the carrier have had to show in order to
prove that it had exercised due care in shipping the goods?
Answer: The court suggested that the defendant could have
demonstrated the security measures it had in effect to prevent
pilferage.

75

Z.K. Marine, Inc. v. M/V Archigetis , p.196.

1.

How could a shipper avoid the result of this case?

Answer: By declaring a higher value on the bill of lading.

2.

Why did the plaintiff argue that this should not apply to it?
Answer: Because although the shipper cold declare a higher value, the
plaintiff merely purchased the bill of lading, thus, could not amend the
value.

3.

Why did the plaintiffs argue that the yacht slips were not packages,
and were they successful?
Answer: Reading COGSA literally, the plaintiffs asserted that the slip
was not really a package (something in which cargo is wrapped) as
contemplated by COGSA. Since it wasnt a package but rather a
cradle, the per package limitation did not apply. The court, however,
explained that package refers to a class of cargo, not necessarily a
package in which the goods are enclosed.

4.

The COGSA liability limitation does not apply to goods carried above
deck. How did the clause paramount affect this rule?
Answer: The clause paramount, a provision in the bill of lading, stated
that despite the yachts being carried above deck, COGSA would apply.

Prima U.S. Inc. v. Panalpina, Inc ., p.200.

1.

Why wasnt a bill of lading used?

Answer: It was not industry custom to do so.
Westinghouse and Panalpina had a ten-year history.)

2.

(Additionally,

Which would you prefer to be and why: a freight forwarder or a nonvessel operating common carrier?
Answer: If my concern was exposure to liability, I would prefer to be
a freight forwarder. Whereas a NVOCC issues the bill of lading to the
shipper and is, therefore, liable should loss occur, a freight forwarder
simply secures a place on the ship for the cargo and arranges for its
76

movement.
3.

Why did Panalpinas contractual assurance that the shipment would

receive door to door our close care and supervision not subject
them to liability?
Answer: Because the extent of legal liability is determined by virtue of
the role that Panalpina played, freight forwarder or carrier. Here,
the facts made clear that Panalpina was merely a forwarder who
would have no liability.

Shaver Transportation Co. v. The Travelers Indemnity Co. , p.206.

1.

Why did Travelers claim that this was an non-covered loss?

Answer: Because it was not a result of one of the events described in
the marine insurance policy

2.

What is an inchmaree clause?

Answer: This clause (named after a well-known British case) expands
insurance coverage beyond that of the perils clause.

3.

What does the court suggest that the plaintiff is attempting to do by

advancing a number of theories?
Answer: The court noted that the plaintiff had refused more expensive
insurance coverage that could have covered its specific loss, so is
now attempting to recast the loss in terms covered by the policy.

A NSWERS T O Q UESTIONS AND C ASE P ROBLEMS

1. Answer:
The recent case Olympic Airways v. Husain, 2004 WL
329950 (2004) helped clarify what constitutes an accident under the
Warsaw Convention. In Husain, the United States Supreme Court held that a flight
attendant's unexpected and unusual conduct in three times refusing to move an
asthmatic passenger to another seat farther away from the smoking section of
airplane constituted an "accident" within meaning of Warsaw Convention. In
distinguishing Husain from Air France v. Saks and El Al Israel Airlines, Ltd. v.

Tseng, the court noted:

77

Article 17 of the Warsaw Convention (Convention) imposes liability on

an air carrier for a passenger's death or bodily injury caused by an
"accident" that occurred in connection with an international flight. In
Air France v. Saks, 470 U.S. 392, 105 S.Ct. 1338, 84 L.Ed.2d 289
(1985), the Court explained that the term "accident" in the
Convention refers to an "unexpected or unusual event or happening
that is external to the passenger," and not to "the passenger's own
internal reaction to the usual, normal, and expected operation of the
aircraft." The issue we must decide is whether the "accident"
condition precedent to air carrier liability under Article 17 is
satisfied when the carrier's unusual and unexpected refusal to assist a
passenger is a link in a chain of causation resulting in a passenger's preexisting medical condition being aggravated by exposure to a normal
condition in the aircraft cabin. We conclude that it is (emphasis added) * *
*.
The relevant "accident" inquiry under Saks is whether there is "an unexpected or
unusual event or happening" (emphasis added). The rejection of an explicit request
for assistance would be an "event" or "happening" under the ordinary and usual
definitions of these terms that is external to the passenger, which in this case caused
the passenger bodily injury.

2. Answer: Historically, the maritime laws of the U.K. and U.S. held
carriers of cargo strictly liable for loss or damage of cargo in their
possession. This rule was adopted since cargo was under the exclusive care
and control of carriers and, as a practical matter, the shipper of the cargo
would have method to prove the reason for the loss. Hence, in some ways,
this rule resembled the tort concept of res ipsa loquitur. As global trade
grew, however, carriers obtained greater power in the marketplace and
began including clauses that relieved them from all legal responsibility. The
COGSA rules seek to balance the competing interests of carrier and cargo
shipper.
3. Answer: In West India Industries v. Tradex Petroleum Services the
court ruled that the bill of lading prevailed and that the carrier could not
collect the higher sum. Relying on general principles of contract law, the
court stated that although the original letter was a contract, that contract
could be altered or rescinded by mutual agreement. The many additional terms
of the bill of lading, a contract of carriage, supply the consideration for the
new contract. The court found that by entering into the contract embodied
in the bill of lading, Tradex at least assumed even a slight additional duty' in
exchange for the lower shipping charge (citing J. Calamari & J. Perillo, The
Law of Contracts, 1977).
78

4. Answer: COGSA does apply because it is a shipment from the U.S. to

a foreign port. The court said to look at the bill of lading to determine the
number of COGSA packages.
The bill of lading said 1320 cartons
(packages?). COGSA limits the damages to $500 per package. Therefore,
Sony would recover $500 1320.
5. Answer: COGSA applies because of the clause paramount.
This
reasoning is reflected in the case of J. Gerber above, which explains that a
clause paramount states that COGSA will apply in a defined situation where it
normally would not.
6. Answer: Note that this is not a documentary sale. The carrier is
liable for misdelivery. The carrier may deliver the goods to the consignee
only and not to the notify party.
7. Answer: In C-Art, Ltd, v. Hong Kong Islands Line America, S.A., the
defendant carrier received cargo and issued the bills of lading to the order
of C-Art, the shipper. This case differed from the usual documentary sale in
that the carrier in the past had always released the goods upon NYMCO's
presentment of a bank guarantee. This history of dealing notwithstanding, the
court held that the carrier was liable for misdelivery.
(The court also
concludes that the carrier is liable for misdelivering the goods in its capacity
as a bailee.) The carrier's arguments are all flawed.
8. Answer: The U.S. Court of Appeals for the Ninth Circuit affirmed the
decision of the lower court that dismissed Dazos claim against defendant
Globe Airport Security. The Warsaw Convention is an international treaty
governing the liability of air carriers engaged in the international
transportation of passengers and cargo which creates a presumption of
liability for an air carrier and its agent(s) but, in turn, substantially limits the
carriers liability. The court extended the application of the Warsaw
Convention to Globe, who was acting as the air carriers agent at the time
of Dazos theft. Therefore, Globe was a Warsaw Convention carrier
and the convention caps applied to Dazo.

79

M ANAGERIAL I MPLICATIONS

The information needed will depend on the degree of risk assumed by the
importer. Whereas many risks can be insured against, some cannot. For
instance, if supplies of raw materials or component parts are interrupted,
this may disrupt the firms manufacturing or assembly process. Certainly the
importer would want to be aware of this potential and plan accordingly.
Moreover, some risks would not be covered under usual marine provisions.
Students should consider what additional coverage this firm might need,
whether war-risk insurance would be required, would the seller incur
additional or unexpected war-risk surcharges above the ordinary freight
rates, and what affect will this have on the importer's future shipments.
Studying qustions
1. Outline and discuss the main differences between Voyage
charterparties and time charterparties.
2. Define a bill of lading and state its main features.
3. Explain, giving examples where possible, the immunities of a carrier
under the Hague Rules.
4. Under what circumstances will there be delayed bills of lading? How to
resolve the problems caused by delayed bills of lading?
5. Explain briefly the causes of frauds in bills of lading and discuss
possible ways to resolve their relevant problems, giving three examples based
on arbitration and court practices.
6. Briefly describe the reforms on the nature of bills of lading.
7. What are the new developments of the Hamburg Rules? Give two
examples.
8. Briefly define particular average and general average.
9. Briefly describe the differences between 'free from particular
average insurance', with particular average insurance' and 'all risks insurance'
.

80

10. New York Merchandising Company (NYMCO) imported goods produced

by C-ART in Hong Kong. The goods were shipped on the Hong Kong Island
Lines (carrier). The parties prior course of dealings had been for the carrier
to release the goods to NYMCO on its presentation of a "bank guarantee. "
These bank guarantees released the carrier from liability for any misdelivery.
On this occasion, however, the carrier released the goods upon NYMCO's
corporate guarantee of payment. Soon thereafter, NYMCO filed for
bankruptcy. C-ART sued the carrier to recover the money owed for the
goods. The carrier argued that it was not liable for misdelivery because
NYMCO had good title to the goods from the time they were shipped in Hong
Kong. Do you agree with this argument? The carrier also claims that
the bills of lading are not valid because the importer NYMCO was
insolvent. What is wrong with this argument?
Reading booklist
1. International Business Law, 1 e by Zuoli Jiang, English edition
Copyright 2004 by Law Press.
2. International Business Law , 3 e by Ray August, English reprint
edition Copyright 2002 by Pearson Education North Asia Limited and
Higher Education Press.

Chapter Seven

Bank Collections, Trade Finance, and Letters of

Credit

Emphases onThrough this chapter studying, we can understand and

grasp common knowledge of the finance of international trade, including the
bill of exchange, collection of documentary bills through banks, Letters of
Credit (L/C) and international factoring.
Hard parts1. The Bill of Exchange. 2. Letters of Credit (L/C).
Contents
I. The Bill of Exchange
A. Origin of Bills of Exchange
B. The Law Governing Bills of Exchange
C. Types of Bills of Exchange

81

D. General Requirements and Rights of the Holder in Due Course

E. Common Procedures in Handling Bills of Exchange
II. Collection of Documentary Bills Through Banks
A. Types of Collection
B. Advantages of Collection
III. Letters of Credit (L/C)
A. Law Applicable to Letters of Credit
B. Types of Letters of Credit
C. The Stages of Arranging and Advising A Letter of Credit
D. Independence Principles and Rule of Strict Compliance
E. Fraud Exception in Letters of Credit Transaction
Case 71 Sztejn v. Henry Schroeder Banking Corp.
IV. International Factoring
A. Definition and Historical Development
B. Obligations of the Parties
C. Advantages of International Factoring for Chinese Merchants

C ASES IN T HIS C HAPTER

Maurice OMeara Co. v. National Park Bank of New York, p. 221.

Sztejn v. J. Henry Schroder Banking Corp., p. 223.
United City Merchants (Investments) Ltd. v. Royal Bank of Canada, p. 224.
Courtaulds North America, Inc. v. North Carolina National Bank, p. 229.

82

American Bell International Inc. v. Islamic Republic of Islam, p. 235.

T EACHING S UMMARY

Just as international buyers and sellers must contract to move their goods
from country to country, they must also devise methods to pay for those
goods. This must take into account different currencies, ensuring that sellers
will actually be paid for their goods, and, practically, how money will move
from one country to another. The documents used in foreign sales are also
used in domestic sales but are less common. Yet, where buyers and sellers
are separate distance and different home regulations or customs pertaining
to financial practices, the formality of these documents can help assure the
parties that the sale will proceed as agreed.
Additional Background: On-Line Letters of Credit. The different rules
and regulations across the globe can make financing international trade
difficult. Although it is estimated that letters of credit are used on 45% of
all international trade, the form of a letter of credit is not standardized
internationally, and institutions use different methods to process them.
Obviously, this is inefficient. Consequently, intermediary companies are now
providing Internet-based trade financing products to facilitate international
B2B exchanges. Such on-line financing options permit buyers to apply for
letters of credit and allow either party to initiate discrepancy requests.
Bank payment partners can then conduct all collection and transfer of data
within the B2B site. This one-stop on-line format can be accessed in real
time by all relevant banking and trading partners and g-time role as a
trusted third party. For more information, see B.J. Handal, Are On-in
Letters of Credit in Your Future? World Trade 68 (January 2001).

83

C ASE Q UESTIONS

Maurice OMeara Co. v. National Park Bank of New York , p.221

1.

Had the bank been aware that the newsprint shipment did not conform
to the requirements of the underlying sales contract, would it have still
been required to pay under the letter of credit?
Answer: Yes. The bank is not a party to the underlying contract. The
banks pays on the presentation of documents, not on the underlying
contract. There are at least two contracts in every letter of credit
situation: the sales contract between buyer and seller, and the letter of
credit contract between the buyer (account party) and the issuing bank.
If the bank pays on conforming documents, the bank has no liability to
the buyer, even if goods turn out to be non-conforming.
This
illustrates the independence principle that is at the heart of letter of
credit law. As the court in OMeara says, the letter of credit was
in now way involved in . . . the contract for the purchase and sale of
the paper mentioned.

2.

If the bank pays on the documents (which are conforming) and the
shipment turns out to be non- conforming, can the buyer sue the bank
for paying the seller for non-conforming goods?
Answer: No. The independence principle holds that the banks concern
is documents, not goods. The only liability the bank would have to its
account party (the buyer) is where it pays on non-conforming
documents. Thus, the strict compliance principle is invoked by banks
(and backed by courts): if documents do not strictly conform to the
requirements set forth in the letter of credit, the bank can (and should,
ordinarily) refuse to pay (unless instructed otherwise by its account
party and held harmless from payment under non-conforming documents).

Sztejn v. J. Henry Schroder Banking Corp ., p.223.

1.

Why might a bank not want to withhold payment under their letters of
credit? Why in certain instances would a bank want its customer to
obtain an injunction against it?
Answer: A bank's international reputation for honoring its letters of

84

credit could be threatened by its refusal to do so. If it is under court

order not to pay on a letter of credit, then it can say to the
international banking community, we had no choice.
2.

What basic principle of letter of credit law is challenged by this

decision?
Answer: The independence principle. Under traditional letter of credit
law (and custom) the letter of credit was a contract entirely
separate from the underlying sales contract between buyer and seller.
Banks deal in documents, not goods. If the documents comply with the
letters instructions, then the bank is ordinarily obligated to pay,
whether the documents may be correct, forged, fraudulent, or in
error. This lends a certain amount of efficiency to the process and
allows banks to serve buyers and sellers without undue complexity. If,
however, banks must also investigate whether there is fraud or
deception in the underlying contract, its job is more complicated and
time consuming, and letters of credit become less easily available (or,
more costly).

United City Merchants (Investments) Ltd. v. Royal Bank of Canada ,

p.224.
1.

What was the fraudulent act, here?

Answer: Because the letter of credit required a bill of lading dated no
later than December 15, the loading brokers dated the bill December
15, although they had loaded the goods on December 16.

2.

Here, the documents conform on their face.

does the bank refuse payment?

Under what legal theory

Answer: The bank seems to be applying elements of tort. Indeed, it is

required to examine with reasonable care the documents presented.
Essentially, the bank is interpreting its exercise of reasonable care
broadly, so that since it knows that the documents are false, it must
have some ability if not duty to refuse payment.
3.

Why is the court uninfluenced?

Answer: Because the banks contractual duty, and that under Article
9, is clear: if the ace of the document is copasetic, then the bank must
pay. Furthermore, Article 9 relieves banks from any liability due to the
85

falsification of such documents.

4.

How does the English court distinguish the Sztejn case and narrow the
application of fraud exception?
Answer: The court first confirms the independence of contract principle
and then states the fraud exception. The court distinguishes Sztejn as
a case in which the sellers knowingly replaced the hog bristles with
rubbish.
In this case, the court found no fraud.
The element of
knowledge is missing.
Fraud in the transaction only applies if
perpetrated by the beneficiary. Interestingly, the court points out that
there is no English case in which the fraud exception has been applied.

Courtaulds North America, Inc. v. North Carolina National Bank , p.229.

1.

Why did the bank refuse to accept the draft upon presentation of the
documents?
Answer: While the LC is a definite undertaking of the issuing bank
(UCP), it is conditional upon presentation of the correct documents. It
may have been irrevocable, but it was not unconditional.

2.

Had the bank known that the yarns described in the invoice as
imported acrylic yarns were actually 100% acrylic, as was called
for in the LC, would the outcome have been affected?
Answer: No.
Their independent knowledge as to the nature of the
goods shipped is irrelevant to their responsibility under the LC.
According to the UCP, banks deal in documents and not in goods.
Of course, under normal circumstances where the buyer wants to pay
for and take possession of the goods, this may bear on his or her
willingness to waive the defect in the documents.

3.

What is the liability of a bank for paying or accepting a draft when the
documents contain a discrepancy?
Answer: The issuer will be liable to the account party.

American Bell International. v. Islamic Republic of Iran , p. 235.

1.

What is a standby letter of credit, and how does it serve as a

performance guarantee?
86

Answer: A standby letter of credit is generally used to guarantee

performance under consulting and performance contacts, although they
are also use to guarantee repayment of a loan.
2.

What was the political mood in the United States during the time of this
litigation?
In lieu of this, do you find the result of the court
surprising?
Answer: Fewer and fewer of today's college students can remember
the 1979 Iranian crisis and the taking of American hostages. This is a
good time to recount the events and illustrate the impact of world
political events on international business including the methods by which
the U.S. government sought to protect U.S. geo-political and economic
interests there.

3.

Why was American Bell willing to the terms demanded by Iran?

Answer: Profit motive and bargaining power.

87

Q UESTIONS AND C ASE P ROBLEMS

1. Answer: Wades documents were non-conforming.

Conforming
documents must be submitted at the presentment deadline (not up until the
expiry date of the credit), otherwise it would effectively change the
deadline. Therefore, Wade is not entitled to payment.
2. Answer: Smith/Smitth or McDonald/MacDonald, the same remains the
same and can reasonably be understood to be the same, but misspelled.
Soran and Sofan could, however, easily be different names, referring to
different individuals.
3. Answer: The New York courts fully support the UCP rules where the
letter of credit, by its own terms, is subject to the UCP. If the letter of
credit had not specified the UCP, or if the parties have indicated in the
letter of credit contract that they intend to be governed by the UCC, the
UCC (with its warranty provisions) would prevail, and the bank could sue the
beneficiary for presenting non-conforming documents.
That was not the
case here, where the letter of credit specified the UCP, and where,
moreover, the bank had waited over a month to assert its claim.
Under the UCP, the issuing bank has a reasonable time to examine
the documents presented to it in order to determine whether to take up
such documents or refuse them. If it refuses them, it must give notice to that
effect without delay to the beneficiary, stating the discrepancies on which
it bases its refusal. Unless it refuses and follows such a procedure, the bank
...shall be precluded from claiming that the documents are not in accordance
with the terms and conditions of the credit (UCP Article 16[e]).
4.
Answer: J.H Rayner and Company, Ltd. v. Hambro's Bank, Ltd is a
classic English case. The bank refused to pay because the letter of credit
called for a shipment of Coromandel groundnuts while the bill of lading
stated machine shelled groundnuts kernels. The court held that the bank
was correct in denying payment. The bank is not held to know the customs
and usages of the trade.
5. Answer: If damages are in contemplation of parties, the argument
exists for obtaining consequential damages.
6. Answer: Lotsa Music may seek an injunction against First Faithful for
payment of the letter of credit due to the fraud in the transaction by

88

Phoney. According to United Bank Limited v. Cambridge, they could enjoin if

they could prove fraud and if the holder of the draft that is to be paid under
the letter of credit is not a holder in due course. If Phoney's bank confirms
(i.e. pays), then Phoney's bank is a holder in due course and is entitled to
payment (assuming conditions for holder in due course status are met). The
classic holder in due course question turns on when Phoney's bank will pay.
Phoney cannot be a holder in due course if they know of the fraud.
7. Answer: With regard to the issuing bank, Barclay's cannot receive
payment on the documents, since the buyer and seller are both in Brazil.
Consequently, it would seek to refuse payment if requested by Deutsche
Bank. Nonetheless, it contracted to pay on presentation of documents. This
is a separate contract. It issued a letter of credit to its account party,
and the account party is no longer in business. If the seller was still in
business but the buyer had closed up entirely, the seller would still be entitled
to payment; the bank would have to honor its separate letter of credit
obligation.
With regard to the advising bank, it has agreed to take the
documents from the seller and forward them to the issuing bank. As an
advising bank, it has no liability, since it is only collecting a small fee for
forwarding the documents to the issuing bank. If it is a confirming bank,
however, then it would also pay the seller. If it paid the seller, or someone
presenting conforming documents, it would have possible recovery against the
issuing bank if the issuing bank refused to pay on the documents.
This appears to be a scam in which buyer and seller conspire to
set up a revolving letter of credit and pretend to send pharmaceuticals from
Germany to South Africa. The carrier does not check the contents of the
containers but issues a bill of lading to the German seller. The German seller
presents the documents to Deutsche Bank, and gets paid. The conspiring
South African firm pays under the letter of credit agreement with Barclays
Bank, and this chain of events happens often enough that the banks figure
its entirely legitimate. They are collecting fees for their work, and all is
well until both buyer and seller close up shop after the sting on Deutsche
Bank.
Banks should make clear determinations about whom they are dealing
with and make every effort (with due diligence) to identify the individual and
corporate personalities involved in each letter of credit transaction. The
letter of credit contract with the account party could specify that if there
is fraud in the transaction, punitive damages and attorneys fees could be
collected. Yet that may be of little help if buyer and seller are in cahoots
and on another continent.
8. Answer: This problem presents a great exercise, but requires
diagramming on the blackboard. Actually, a much greater study of the UCP is
89

necessary to resolve the problem, if it can be resolved at all. Indeed, the

answer may well lie in a legal interpretation of the applicable provisions of
the UCP. The confirming bank argues that they confirmed the credit as it
was received by them and that they are entitled to reimbursement. The
issuing bank argues that under the UCP they are not liable for errors in
transmission.
Whatever the arguments, banks usually attempt to resolve
these disputes amicably.

M ANAGERIAL I MPLICATIONS

1. Answer: These different regions reflect different risks to U.S.

exporters. Generally, the credit risk (as assessed using international credit
reporting agencies, such as Dun and Bradstreet or TRW) of the developed
countries of North America and Western Europe will be superior to that of
countries in other regions. Students should also consider factors beyond just
the buyer's ability to pay. What is his reputation for reliability? Will the
order be canceled before shipment? If the buyer agrees to pay on the
documents, will he keep his promise or weasel out?
Under what circumstances would you consider selling to firms in these
countries without a letter of credit?
For new accounts, probably only
smaller sales to larger, secure customers located in a developed country with
a stable political and economic system. Confirmed letters of credit may be
required when political risk is a factor or the foreign banking system
presents risks. This substitutes the confirming bank's political risk analysis
for that of the exporter. If the bank refuses to confirm, the exporter has
an idea of what he's getting into.
2. Answer: (a) There is a discrepancy; The trucker's document is no
substitute for the ocean bill of lading as called for in the credit.
(b) There is no discrepancy (UCP Article 41c), as the description in
the invoice corresponds to the description in the credit. The bill of lading
describes the goods in more general terms not inconsistent with the
description in the credit.
(c) There is no discrepancy under usual circumstances. This is not so
with currencies.
(d) A discrepancy exists:
the time of loading.

The goods may not have been insured at

90

3. Answer: In addressing the ethical issues here, let us make the

following assumptions: (a) that the seller - after contracting but before
performing - now has access to very low-priced silk and is in a position to
profit far more than he ever thought of profiting; (b) that the buyer knows
perfectly well that the goods are conforming. If so, several ethical theories
might be advanced to prescribe behavior for the parties to the contract.
(1) Kantian deontology would use the categorical imperative to universalize
rules of behavior.
Nonetheless, there are several candidates for
universalizable rules that prescribe ethical behavior for parties in this
situation. For example, Keep your promises! suggests that the parties
should stick to the bargain, no matter what. But being fair or just seems to
require that the parties consider the other partys position and make
adjustments, treating the other as they would wish to be treated. Which
rule should have priority is not clear, but the buyer would consent to deviate
from a strict rule of promise-keeping where fairness seems to require it.
Contract law recognizes the same pattern: promises are to be kept except
where inequities result. This shows a congruence between Kantian ethics and
(2) the positive law ethic (see Fisher and Phillips, The Legal, Ethical, and
Regulatory Environment of Business, 6th Edition, pp. 6-14). To some extent,
the positive law ethic reflects custom and culture and - to that extent reflects a (3) social contract approach to ethics that emphasizes the
importance of norms prevailing in a given community. (See Donaldson and
Dunfee, Integrative Social Contracts Theory, Academy of Management
Review, April 1994.) Here, if the seller realizes a windfall, prevailing norms
and customs in the silk sales community might well point to a satisfactory
ethical path. Thus, if all participants in the silk trade understand the risks of
commodities fluctuations, participants can perhaps plan for the kind of market
flooding that has drastically lowered the price.
But if the events are
unprecedented, historic community norms may be a miserable guide. Instead,
a buyer or seller might consider value or virtue ethics, identifying central or
core values that are a matter of general consensus, values like honesty,
promise-keeping, integrity, respect, fairness, caring, and responsibility.
If the buyer instructs the issuing bank to reject the documents
because of a minor discrepancy, the strict compliance rule would seem to
back him up. Nevertheless, from a core values perspective, the buyer fails
to keep his promise to buy and is being less than honest (straightforward)
about his rejection. He does not respect the seller enough to tell him the
real reason and hides behind a technicality. On the other hand, given our
assumptions above, the seller is taking advantage of a windfall situation to
the detriment of the buyer, and is thus not respectful, caring, or fair toward
the buyer. So, under the assumptions made, core values are being ignored
where the buyer rejects on a technicality and the seller insists on the buyer
taking what have become over-priced goods.
On a long-term basis of dealing, both buyer and seller would benefit
91

if there were sufficient trust, honesty, respect, and fairness that the seller
were willing to renegotiate a fair price and profit. Overall, the seller may
lose more in the near term by the drastic lowering of prices, but if
fluctuations continue, any seller will be better off with loyal customers. The
higher prices to be charged when supplies are tight may be far more credible
to customers who have benefited from excess supply and low prices.
Again using a core values analysis, the situation may be somewhat
different if we assume that the seller has just bought goods for resale to
the buyer, and the market price suddenly becomes drastically lower. The
seller may well be stuck with high-priced silk if the buyers bank rejects
the documents as non-conforming. Again, buyers behavior is not entirely
honest, breaches a promise, and is not entirely fair toward the seller. The
law may allow this, but long-term trade relationships may be damaged by
such short-term opportunism. If supplies ever become tight again (and the
Chinese certainly seem capable of trickling the market as well as flooding it),
the opportunistic buyer may find a rueful day of reckoning.

Internet Exercise: UCP and Letters of Credit. Ask students to draft a

letter of credit compliant with the standards of the UCP. Students can look
at
the
information
on:
http://www.jus.uio.no/lm/toc.html
or
http://www.jccwbo.org/
Cooperative Learning Activity: Credit. As an extension of the contract
negotiation exercise, instructors may also require students to finance the
transaction.
Several student groups can be assigned the roles of
sellers/buyers and banks (buyers and sellers), etc., and required to draft
the appropriate documents for a transaction (this may be limited to financing
aspects or include the bill of lading/air waybill, insurance policies, letter of
credit). For example, students may be required to draft a letter of credit
(perhaps pursuant with a student banks requirements) for presentation. A
student bank that improperly honors the draft will lose points in the exercise.
Studying qustions
1. Briefly define 'a bill of exchange' and state its main features.
2. What is meant by the term 'holder in due course'? And outline its'
general requirements and rights.
3. Under what circumstance can D/P and D/A be used to promote trade?
4. Define 'a standby letter of credit' and identify the circumstances
where it can be used in international trade practices.

92

5. Explain, giving examples where possible, the principle of independence

and the rule of strict compliance.
6. Outline and discuss the causes of fraud in letter of credit and state
the rationality of doctrine of fraud exception.
7. State briefly the historical development of international factoring.
8. Discuss the advantages and disadvantages of international factoring to
Chinese merchants.
9. Habib Bank issued a letter of credit on the instructions of its account
party calling for the payment of drafts upon the presentation of documents
showing shipment by a certain date. The bank examined the documents and
paid the beneficiary's draft. The account party refused to take the
documents and reimburse the bank because the shipping date was incorrectly
stated in the documents. The bank sued the beneficiary for a return of its
money for presenting nonconforming documents. The bank brought its action
under the UCP 500. The beneficiary claims that under the UCP the bank was
precluded from complaining about the discrepancies because the bank had
failed to object to the documents in a timely fashion. UCP 500, article 14,
states that an issuing or nominated bank must notify the beneficiary (or
another bank from which it is receiving the documents) of the rejection
without delay but no later than the close of the seventh banking day
following the day of receipt of the documents. Judgment for whom and why?
10. Your firm has contracted to purchase silk from overseas suppliers on
letter of credit terms. After contracting, before presentment of the seller's
documents, some developing countries expand their production and flood the
market with raw silk. The price of silk plummets on world market. Comment on
whether you should try to find a minor discrepancy in the documents to
justify rejecting the documents. Is it ethical for a buyer to reject documents
presented under a letter of credit that contains only a minor discrepancy
between the documents and the credit? Do the reasons matter? Does
it matter that the buyer may know that the shipment actually conforms
to the requirements of the contract and of the letter of credit?
Reading booklist
1. International Business Law, 1 e by Zuoli Jiang, English edition
Copyright 2004 by Law Press.

93

2. International Business Law , 3 e by Ray August, English reprint

edition Copyright 2002 by Pearson Education North Asia Limited and
Higher Education Press.

Chapter Nine

GATT Law and the World Trade Organization: Basic

Principles

Emphases onThrough this chapter studying, we can understand and

grasp common knowledge of the GATT and the WTO law, including the
GATT1947 and the GATT1994, the major principles, legal structure and
dispute settlement procedures of the WTO.
Hard parts
1. Major Principles of GATT 1994.
2. WTO Dispute Settlement Procedures.
Contents
I. The Founding of GATT
A. Trade Barriers
B. Trade Liberalization Through Cooperation
C. Scope and Coverage of GATT 1947 and GATT 1994
II. Major Principles of GATT 1994
A. Multilateral Trade Negotiations
B. Most-favored-nation Treatment
C. National Treatment
D. Tariff-based Import Restriction
III. The World Trade Organization (WTO)
A. The WTO and the Economic Globalization
B. Legal Structure of the WTO

94

C. WTO Antidumping Agreement

IV. WTO Dispute Settlement Procedures
A. Deficiencies in the GATT 1947 Dispute Process
B. WTO Dispute Settlement Procedures

C ASES IN T HIS C HAPTER

European CommunitiesRegime for the Importation, Sale & Distribution of

Bananas, p. 294.
European Economic CommunityImport Regime for Bananas, p. 299.
JapanTaxes on Alcoholic Beverages, p. 305.
IndiaQuantitative Restrictions on Imports of Agricultural, Textile, & Industrial
Products, p. 309.

T EACHING S UMMARY

International trade has grown dramatically since World War II.

Following
World War II, countries sought trading partnerships with each other, realizing
that such partnerships could inure to the benefit of both. Thus, they began
to craft international treaties and organizations to eliminate barriers to
trade, including tariffs, quotas, and restrictive unilateral or bilateral
practices. Two of the primary organizations and instruments in effect today
are GATT and the World Trade Organization (WTO), the latter of which the
U.S. is a member.
Each favors reciprocity and mutual advantage among
countries and transparency of rules. This principle is expressed in GATT
through Article Is most favored nation and national treatment rules, which
require equal tariff treatment of member nations (and, thus, nondiscrimination).

C ASE Q UESTIONS AND A NSWERS

95

European Communities Regime for the Importation, Sale & Distribution

of Bananas, p. 294.
1.

When may a member bring a complaint against another member of the

WTO?
Answer: Under Article XXIII, a member nation has broad discretion in
bringing a case against another member under the DSU.

96

2.

What was the basis for the ECs argument in this case?

2.

Answer: Fundamentally, the EC is making a standing argument. The

U.S. had claimed nullification and impairment due to the ECs Import
Regime on Bananas. The EC opposed the claim arguing that in any
system of law, including international law, a claimant must have a legal
right or interest in the claim and the U.S. didnt have such an interest
since it was not an exporter of bananas. The appellate body rejected
the ECs argument that ICJ and PICJ judgments establish a general
rule that in all international litigation the complaining party must have a
legal interest. Further, the body pointed out that the question of
standing under the dispute settlement provisions of a multilateral
treaty is determined by referring to the terms of the treaty.

European Economic Community Import Regime for Bananas , p. 299.

1.
why?

Which countries can import bananas to the EU duty-free, and

Answer: Former colonies of Britain and France located in Africa, the

Caribbean, and the Pacific (ACP countries).
It may be that the
former colonial powers still felt some residual responsibility for
economic development of their former possessions; but it is more likely
that multinational businesses owned (at least in part) by these former
colonial powers continue to profitably do business in these former
colonies, and that it is politically and economically preferable to
discourage competition from other countries. It is very unlikely that
the reason for the EUs increased barriers for non-ACP banana
exporting countries has anything to do with quality.
2.

Which countries object to the change in the consolidated tariff rate on

bananas that took effect in 1993?
Answer: The non-ACP countries, who are also GATT members
(Colombia, Costa Rica, Guatemala, Nicaragua, and Venezuela). These
countries are trying to export bananas to the EU nations but, since
1993, the consolidated tariff rate on bananas increased the duties by
20% for a limited quantity of bananas and imposed a much higher tariff
rate quota (ECU 850 per ton) beyond that. A complex licensing scheme
also made it inevitable for importers to favor ACP bananas.

3.

What is the GATT basis for their objections?

97

Answer: Article IIIs National Treatment clause. The specific tariffs

applied by the EEC on imports of bananas since 1993 were clearly
less favorable than treatment accorded to like products from other
member nations. Article II, Schedules of Concessions: Individual tariff
concessions are to be applied to all other contracting parties. Article I,
General Most Favored Nation Treatment: the EU must give the non-ACP
nations who are GATT members the same advantage, favor, privilege
or immunity granted...to any product originating inany other
country....
Japan Taxes on Alcoholic Beverages , p. 305.
1.
ensured?

What is the purpose of Article III and how is that purpose

Answer: The broad and fundamental purpose of National Treatment on

Internal Taxation and Regulation is to avoid protectionism in the
application of a nations internal tax and regulatory measures. It also
ensures that member nations do not apply internal measures to
imported or domestic products so as to afford protection to domestic
products.
Under Article III, member nations are obliged to treat
imported products in the same way as the like domestic products. A
nation may still apply a tariff to imported products as long as the
tariff is consistent with bindings and concessions.
Yet, once that
product has cleared customs and entered the domestic stream of
commerce, any tax differential on like products violates Article III.
2.

What impact does substantive evidence of the trade effects of

the tax differential have on Article III analysis?
Answer: None. Adverse impact to trade need not be shown in order
to prove a case of nullification and impairment. In GATT 1994, the
Understanding on Rules and Procedures Governing the Settlement of
Disputes states that an infringement of GATT is considered a prima
facia case of nullification and impairment. Thus, a breach of a trade
agreement concluded under GATT is presumed to have an adverse
trade impact on other members. In this case, if imported products are
taxed in excess of like domestic products, that tax measure is
inconsistent with Article III.

3.

How does a WTO Panel determine whether two products are like
products for purposes of the first sentence of Article III(2) or
directly competitive or substitutable products that fall within the
domain of the second sentence of Article III(2)?
98

Answer: The panel cautions that like products should be narrowly

construed and determined on a case-by-case basis to determine
whether the products are similar. Factors to consider include: the
products end uses in a given market, consumers tastes and habits,
and the product's properties, nature and quality.
Uniform tariff
classifications can be used unless they are too broad to be reliable
criterion. If the imported and domestic products are not similar enough
to be like products, Article III:2 might still apply if the goods fall
into the broader category of directly competitive or substitutable
products. How much broader this category is than the first is fact
driven.
In this case, the panel considered physical characteristics,
common end-uses, tariff classifications, and the relevant market for
the products.\

India Quantitative Restrictions on Imports of Agricultural, Textile, &

Industrial Products, p. 309.
1.

What was Indias Negative List?

Answer: Goods on Indias negative list could only be imported by
special license, which was only granted to the actual user, not a firm or
company.

2.

What was the issue before the Panel of the WTO?

Answer: The United States contended that the Indian process to issue
import licenses was arbitrary and not fair to foreign exporters. India
defended its license-issuing policy because its economy was still
developing, consumer demand was unpredictable, and it could not
precisely estimate the kind or quantity of items that could or should be
imported. As a result, discretionary licensing on a case-by-case
basis was reasonable for India.
The panel concluded that Indias
licensing regimes did in fact damage U.S. trade interests and
recommended that the laws quickly be phased out.

A NSWERS TO Q UESTIONS AND C ASE P ROBLEMS

1.
Answer: This answer is a tutorial that requires the
student to visit the WTO Web site.

99

2.

Answer: This answer requires outside legal and Web

3.

Answer: This answer requires outside legal and Web

research.

research.
4.
Answer: While some believe that MFN status, due to its
value, should be used to influence the human rights, labor, and political polices
of other countries, others believe that trade is trade and business is
business, thus such ethical overlays are inappropriate. Moreover, attempting
to do so necessarily opens up a gray area of what is and is not correct.
Indeed, this was a hotly contested issue underlying Chinas attempt to gain
entry to the WTO. Some individuals, countries, and NGOs believed that China
should not be gifted with the reward of WTO membership in light of their
human rights abuses and political policies. Others saw the carrot of WTO
membership as a method to make China comply with certain policies.
5.
Answer:
Although
nations
may
enact
consumer
protection-motivated laws or those addressing the health, safety, or morals
of its population, the nature of the protection regarding beef is unclear,
other than that this law seeks to protect consumers from mistakenly
purchasing non-Korean beef.
For example, a labeling requirement for
irradiated foods or those from the U.K. (which has demonstrably diseased
cattle) might be justified, but this regulation is overly restrictive even for its
intended use, and, indeed, the intended use suspect.
Obviously, these
regulations will favor domestic beef as they reduced the likelihood that
stores will choose to comply with the multiple demands of imported beef
sales.
6.
Answer: This answer requires outside research, beginning
with a review of the noted Web site. Nevertheless, developed countries
represent the majority of disputing parties, but also account for the
greatest share (approximately 75%) of the worlds trade. Both developing
and developed countries are using the WTO because the new procedures
ensure that a complaint will be heard and that sanctions could be imposed
(though they rarely are). Both developed and developing countries have won
several disputes. This is an indication that the WTO panels and Appellate
body decide based on the particular facts and the interpretation of the
agreement. It is also an indication that under WTO, unlike GATT 1947, the
DSU virtually ensures the adoption of panel and appellate decisions. The 1994
agreement requires the Dispute Settlement Body (DSB), a special assembly of
the WTO General Counsel that includes all WTO members, to adopt a panel
report or appellate decision automatically and without amendment unless it is
rejected by a consensus. This inverted consensus requires all members of
100

the DSB including the member who prevailed in the dispute to reject the
dispute resolution decision. That is, the report or decision will be adopted
unless no member is formally in favor of the decisions. This is unlikely to
happen since at least one member would be in favor of the decision.
7.
Answer: If a member does not abide by its WTO
obligations, other affected member countries are not supposed to retaliate
unilaterally, but should file a complaint with the WTO. In the past, however,
nations have retaliated unilaterally. More effective and binding trade dispute
resolution procedures under the WTO may result in fewer unilateral retaliations.
8.
Answer: A U.S. quota on imported cars would be
problematic. GATT both seeks to eliminate all quotas and requires members to
use the least restrictive means possible for correcting trade imbalances.
Although under some circumstances, GAAT allows quotas ( to relieve food
shortages), this is not such an instance. Further, even a permissible quota
would have to be evenly applied. Therefore, it would have to apply to all
foreign imports. The most frequently used justification for the imposition of
quotas (other than with trade in textiles) is the balance-of-payments
exception to the GATT agreement that allows the temporary use of quotas to
correct a balance-of-payments emergency. In such an instance, justification
must be given to the Balance of Payments Committee of the WTO, which
subjects the restrictions to surveillance and periodic review. The means must
be transparent and must include a time schedule for removal of the
restrictions.
9.
Answer: Although it may appear that regional customs
unions or free trade zones violate the non-discrimination principles of GATT,
they are permitted under Article XXIV.
That provision states that the
agreement shall not prevent:
as between the territories of contracting parties, the formation
of a customs union or of a free-trade area or the adoption of
an interim agreement necessary for the formation of an interim
agreement necessary for the formation of a customs union or of
a free trade area; Provided that: (a) with respect to a customs
union. . . the duties and other regulations of commerce imposed
at the institution of any such union or interim agreement in
respect of trade with contracting parties or parties to such
union or agreement shall not on the whole be higher or more
restrictive than the general incidence of the duties and
regulations of commerce applicable in the constituent territories
prior to the formation of such union or the adoption of such
interim agreement, as the case may be.
101

This section of the GATT has been used to lower the rates of
the external tariff, thus achieving the goals of GATT for the benefit of GATT
members.
Thus, NAFTA nations, as a collective group, must meet GATT
obligations, but may economically integrate further than GATT requires.
Arguably, having examples of greater integration could - in the long run - help
GATT to overcome hurdles to further integration. Allowing closer customs
unions to develop may encourage trade arrangements regionally, thus
accelerating global integration.

M ANAGERIAL I MPLICATIONS

A trade war or loss of MFN will certainly affect the ability of the firm to
obtain its 35% from China or at the tariff rate that it now does. The goods
cold be forbidden or taxed at such a high rate as to make their import
obscenely expensive.
Students might consider whether the firm should
anticipate such problems and act now to find another country (such as Mexico,
under NAFTA) in which to produce these products.
In this way, it could
reduce its substantial reliance on the Chinese production facility/products.
Teaching Suggestions/ Additional Background: Customs Classification of
SUVs. Instructors interested in offering students a greater understanding of
customs classifications as well as the practical effect of such classifications
and how seemingly neutral classifications can in fact be discriminatory may
wish to introduce students to the following problem. Two decades ago, the
problem was the classification of vans -- the boxes on wheels design: were
they cars or trucks? This issue has reinvented itself in the form of the SUV
-- are they trucks or cars?
Instructors may present the following scenario and the two Customs
Classifications and ask students to advocate on behalf of either
classification. Alternatively, instructors may wish to share this episode with
students as additional background.
In 1989, Nissan began importing SUVs into the U.S. Its SUV, the Pathfinder,
however, used the Hardbody truck line as its basis for design,
incorporating the Hardbodys frame, side rails, cab, and front suspension.
There were two possible classifications for the vehicles:
Section 8704.31.00: Motor vehicle for the transport of goods.
Section 8703.23.00: Motor cars and other motor vehicles principally

102

designed for the transport of persons, including station wagons and

racing cars.
The transport of persons tariff was 2.5%, but the transport of
goods duty was 25%. The Customs Service concluded that the Pathfinder
was similar to a pick-up truck, declared it a transport of goods vehicle,
imposing the 25% duty. Since this would significantly cut into any hopes for
profits, Nissan appealed to the Court of International Trade in Washington.
The CIT trial included test drives of the Pathfinder and comparison vehicles
(including the Hardbody), videotapes of competing vehicles, and expert
testimony about engineering, design, and marketing. The CIT reversed the
Customs Service, declaring the Pathfinder a passenger car. The Customs
Service appealed to the federal court of appeals.
That court held that, indeed, the Pathfinder was basically derived from
Nissans Hardbody truck line, yet the Pathfinder was based upon totally
different design concepts than a truck. The mere fact that the vehicle was
derived in part from a truck, without more, was not determinative of its
intended principal design objectives: passenger transport and off-road
capability.

Indeed, substantial structural changes were necessary to meet the design

criterion of transporting passengers: the spare tire and the rear seat when
folded down intrude upon the cargo space; the cargo area is carpeted; a
separate window opening in the pop-up tailgate accommodates passengers
loading and unloading small packages without having to lower the tailgate. For
example, the addition of the rear passenger seat required that the gas tank
be moved to the rear and the spare tire relocated, reducing the cargo
carrying capacity. By contrast, the Hardbody truck bed can accommodate
loading with a forklift, clearly a design feature for cargo. Also, to provide a
smooth ride for passengers, a new rear suspension was developed for the
SUV.
Studying qustions
1. Briefly explain the historical development of GATT.
2. List and explain trade barriers, giving examples where possible.
4. Do you agree to the idea that trade liberalization promotes economic
globalisation? Explain.
5. List and explain major principles of GATT 1994.

103

6. Outline and discuss the advantages and disadvantages of the economic

globalisation, giving examples.
7. Explain and discuss national treatment in GATT 1994 and its practice
in China.
8. Define dumping' in the WTO law and discuss China's counter-measures
against antidumping suits of other WTO members under the WTO antidumping
agreement.
9. Compare and contrast the dispute settlement procedures in the GATT
1947 and WTO, giving two examples based on the judgments of DSB.
10. One of the central obligations of WTO membership is a limit on
tariffs on particular goods according to a nation's tariff commitments. If a
member does not abide by its agreement, can another WTO member
unilaterally raise its agreed-upon tariff? Describe the dispute settlement
mechanism in the WTO. Reports of the dispute settlement panels are available
in WTO website.
Reading booklist
1. International Business Law, 1 e by Zuoli Jiang, English edition
Copyright 2004 by Law Press.
2. International Business Law , 3 e by Ray August, English reprint
edition Copyright 2002 by Pearson Education North Asia Limited and
Higher Education Press.
3.Ramberg, ICC Guide to Incoterms 2000 (1999)
4.Castel, The Canadian Law and Practice of International Trade
(1997)

104