International Business Transactions Outline Part II

Waived 90% If discrepancies found 7 day limit includes time to contact B for waiver and notifying S of discrepancies and wait for responses  Art 14d-Bank is required to state all discrepancies that it will rely upon in its notice to doc presenter  Art 14e-Failure to state all discrepancies precludes bank from claiming non-compliance due to any unstated discrepancy without necessity of proving waiver or estoppel; only one chance Rationale-inform beneficiary of all discrepancies at once in order to determine cost efficiency of curing  Seven days not “reasonable” in all transactions; especially simple o Liability of confirming bank separate of liability of issuing bank  Art 9-Confirming-docs may be presented by beneficiary creating liability without opportunity to examine docs  Art 42-LOC must specify place and expiration for presentment, do confirming bank will try to insist it be place for presentment Electronic Letters of Credit o Electronic-dominates issuance process in bank to bank communications; sometimes applicants  Bank to beneficiary communication is still paper based but electronic increasing  UCP rules now written with teletransmissions which facilitates electronic practices o Haven’t yet created entirely paperless transaction  Beneficiary still wants paper receipt committing bank to pay on specified conditions  Electronic BOL not accepted in most trades as transferable docs of title o SWIFT-Society for Worldwide Interstate Finc Telecommunications-routing system for bank to bank communication LOC  Requires all msgs to be structured in uniform format and uses standardized elements for allocating msg space and text; can be communicated to other machines without retyping  Only transmit LOC, authorizations and requests; don’t effect settlement or transfer funds Not a clearing house like CHIPS and must use some way for settlement  Relies on encryption and authentication for user security Regional processor checks authentication trailer Receiving bank used authentication key provided by issuing bank System has several security procedures in place and retains records of transactions  SWIFT Process Issuing bank communicates issuance to nearest SWIFT access point Msg routed on dedicated data transmission line to regional processor; validated Routed over dedicated line to switches (EU or US) then regional to access pt o Rcving bank need not reply; need only perform by advising, negotiating, or paying LOC and entitled to reimbursement by issuing bank  SWIFT Issues Delays of 2hrs are possible (usually only few minutes); When is issuer of electronic LOC bound? o UCC Art 5-msgs effective and enforceable upon transmission o §5-106a and SWIFT rules ≠ required reply Belgian law governs all relationships between SWIFT and its users  SWIFT liable or negligence and fraud of its employees and agents and parts of the system that it controls including switches, regional processors, and lines o Limited to direct damages (loss of interest); no consequential Disclaims liability for parts it doesn’t control such as bank terminals and lines  Beneficiary desire for hard copy so recving bank will convert SWIFT into written form Problem: doesn’t bear signature though authenticated so allows for doubt Issue: Is SWIFT msg operative credit instrument as far as beneficiary concerned? o SWIFT rules-msgs are binding obligation and authentication is signature o Beneficiary not SWIFT user-can only rely paper issued and signed o UCC 5-104-LOC may be issued in any form, but not specific to SWIFT o UCP Art 11aii-if msg states “full details to follow” or that mail confirm will be operative credit instrument-then following doc is operative o Art 11ai-other authenticated electronic msgs to advise or amend are SWIFT-generated transcriptions may not be subject to UCP (electronic are) o Art 1-UCP governs where incorporated in text of credit  express reference may be needed in msg to beneficiary Standby Letters of Credit o Used to provide financial assurances to govs that foreign firms that undertake supply K or construction projects will do so competently and in accordance with K  Used in place of performance bonds since can’t be issued by US banks  In Europe they are called “bank guarantee on first demand.” o Involves LOC issued by SB in favor of B; payable against writing certifying nonperformance  Used as guarantee of seller’s performance and not prohibited by law  Seller contracts to have bank issue irrevocable LOC for beneficiary for pmt upon presentation of docs by beneficiary that S has failed to perform under K (suicide credit) Docs do not control goods and have no independent value o Options for avoiding wrongful payments:  Insist upon detailed documentary requirements and conditions, which can lay a foundation for lawsuit  Credit could require independent confirmation of party default  Insist that final payment be conditioned upon presentation of a final judgment or arbitral award  Requirements in the credits should be as detailed and extensive as possible (avoid suicide credit) o UCP Art 1-may govern standby LOC to the extent it may be applicable  If docs conform to LOC, then banks are obligated to pay  Beneficiary not subject to defenses arising out of underlying sales transaction Conformity of the goods is irrelevant to banks; doc conformity to LOC only o UCP and UCC Art 5 to apply independence principle to standby LOC New International Rules for Standby Letters of Credit o UCP and UCC impose many unnecessary requirements on standbys since not designed for them  UCP-requires transport and installment docs (NA here); doesn’t help fraud, choice of law o UNCITRAL-Convention on Independent Guarantees and Stand-by Letters of Credit  Limited to intl undertakings by issuing bank so at least 1 party must be in another nation  Provides choice of law provisions, allowing parties to choose; default issuer’s nation  Rules for allegations of fraud and seeking injunctive relief Pmt can be withheld if doc not genuine; ct can issue order o ICC-Rules on Intl Standby Practices (ISP 98)  Deletes all provisions concerning transport docs; but requires docs be certified  Info requirements and magic words for certificate of default; no fraud or injunctive relief  Not a statute; merely trade terms incorporated into K by reference; no choice of law The Fraud Defense o Public interest in discouraging fraud is counter principle to independence principle for LOC  Generally recognized doctrine-there is fraud exception to independence principle o Fraud exception-available where credit expressly subject to UCP  Since UCP silent to fraud cts held UCC provisions govern as gap filling provisions  Not widely used in documentary LOC; but more so in standby since doc is allegation o UCC §5-109-limitations on availability of fraud by beneficiary  Issuer shall honor presentation, if honor is demanded by nominated person who has given value in good faith without notice of material injury or fraud Confirming bank who pd against docs in good faith entitled to reimbursement UCC requires bank to pay if docs conform even if there is fraud  If docs presented by anyone else issuing bank may still pay even if notified of fraud as long as it acts in good faith; not likely to refuse pmt  Account party narrow power to obtain ct order against pmt if can prove fraud If obtained, issuing bank permitted to dishonor presentment; few successful o Art 5 provision limits  Fraud must be material, but material not defined  Account party must present sufficient evidence of fraud, not just allegations  All procedural requirements for injunctive relief must be met  Relief can be denied if 3rd parties not adequately protected; no relief if any banks have pd  §5-109-fraud in docs may permit injunction if perpetrated by anyone; but fraud in underlying transaction cognizable only if committed by beneficiary (CL scienter needed) United City Merchants v Royal Bank of Canada-no protection for buyer if fraud committed by 3rd party without seller’s knowledge, even if banks knows of altered document o Concern for standby beneficiary requiring pmt for bad faith or arbitrary reasons  Some cts willing to issue notice injunctions requiring issuer to give notice (3-10 days) before transferring money to beneficiary after demand for pmt  UN Convention on Standbys Art 19-permits ct to issue provisional order blocking pmt to beneficiary if applicant can show docs fake, no pmt due, or no basis for demand Other Letters of Credit: Back to Back and Revolving Credits o LOC can be revocable-but UCP Art 6 says LOC irrevocable unless expressly stated o General LOC doesn’t restrict beneficiary’s right to transfer its rights o Can be fixed if it can become exhausted either when drafts for pmt are drawn by beneficiary in full or when time has expired o Back to Back credit-Broker-buy and sell same goods; acts as beneficiary in one and account party in other; docs required are identical, broker can assign its rights; facilitated if credits specify the use of time drafts to allow broker to finance his buy with his sell  Unworkable if one of credits is amended and other is not; banks prefer assignment or transferable LOC o Transferable LOC-states can be transferred by original to 3d party; new or substitute Art 48b  Partial transfers allowed but necessary docs must be presented to account party: show ID o Beneficiary may assign portion of proceeds to 3rd party irrevocable  Bank notifies assignee of assignment-doesn’t change LOC parties-pmt only with conforming docs; governed by applicable K law, not UCP Art 49 o Revolving LOC-vehicle for ensuring contractors are given progress pmt promptly as initial construction phases are completed and permit further construction phases to begin  Usually clean (no docs required) sight letters that work like fixed LOC  Differences: importer pay with LOC to import services and raw materials; then importer restores the amt by pmt to issuer for further pmt to beneficiary after drawn on  To facilitate, usually docs not required but only allow small amts at a time III. Technology Transfers TRIPS Agreement-Trade Related Intellectual Property Rights o Binding on 145 member nations of WTO; requires national and MFN treatment among parties o Copyright-protection for computer programs and databases, rental authorization controls for software and recordings; 50yr motion picture and sound recording; obligation to comply Berne o Patents-Paris Convention prevails-product and process patents available for pharmaceuticals and agricultural chemicals, limits on compulsory licensing, general 20yr patent term from app date  US law was 17yr, but amended to conform o Trademarks-intl prominent marks recv enhanced protection; linking local marks prohibited; service marks are registerable; compulsory licensing banned o Trade secret protection assisted by TRIPS enabling owners to prevent unauthorized use o Infringement and anti-counterfeiting remedies are included for domestic and intl trade Patent Protection o Patents granted to inventors based on national law and are territorial grants of exclusive right  Most countries have protections but may be different; some only nominal so no relief o Expense causes holders to gamble and limit applications only to markets they foresee demand o US patent protection-grants right for 20yrs to exclude everyone from making, using, selling patented invention without permission of patentee (first to invent)  Infringement can result in injunctive and damages relief in US cts  Exclusion orders against foreign-made patent infringing goods also available Issued by Intl Trade Commission §337 of Tariff Act 1930; enforced by customs  Short-term legal but not necessarily econ monopoly-eg Xerox still has competitors  Must demonstrate invention is novel, useful, and non-obvious o Types of patent systems  Examination-careful examination of prior art and stat criteria or deferred following public notice to permit opposition; validity more likely sustained if alleged infringement (US) International Recognition of Patents o Patent Cooperation Treaty 1970 (PCT)-achieve greater uniformity and less cost in intl patent filing process, and examination of prior art  Filings done in selected countries (JAP, SWE, RUS, US) in Intl Searching Authorities (ISA) and European Patent Office Hague and Munich  Intl application with search report communicated by ISA to each office sought Each nation est substantive conditions of patentability and infringement remedies  Applicant may arrange for intl preliminary exam to formulate non-binding opinion on whether claimed invention is novel, involves inventive step and is industrial applicable o Convention of the Union of Paris 1883-basic intl agreement dealing with treatment of foreigners under national patent laws  Administered by Intl bureau of World Intellectual Property Org (WIPO)  Right of national treatment prohibits discrimination against foreign holders  Right of priority granted provided they file in foreign state within 12mos of home app Doesn’t overcome prior filings in first to file jurisdictions  Obviates need to file simultaneously every country where intellectual protection is sought o European Patent Convention-single office at Munich and Hague issue patents to all treaty parties o European Union Patent Convention-single patent valid throughout EU Knowhow-commercially valuable knowledge; may or may not be patentable or trade secret o Legal protection varies by country and is limited; can’t get exclusive legal rights by registration o Business strategy is to preserve confidentiality; like coke recipe o Protection is function of K, tort, and trade secret law thought may not be useful against employee o Economic Espionage Act of 1996 creates criminal penalties for misappropriation of trade secrets for benefit of foreign govs or anyone  Trade secret-finc, business, sci, tech, econ, or engineering info that owner has taken reasonable measures to keep secret and whose econ value derives from being closely held  Act authorizes criminal fines, forfeitures, jail, and seizures of proceeds from misapp Trademark Protection-derived from use of marks on goods in commerce; long recognized o Intl protection requires separate registration under law of each nation o US-TM protected at CL and state and fed registrations (US TM office)  Permitted for all marks capable of distinguishing goods from others unless forbidden  Can register when there is bona fide intent to use within 12mos; good cause delay 24mos  Injunctions, damages, seizures of goods by customs penalties for infringement  Trademark Counterfeiting Act of 1984-criminal offense and private treble damages o Some countries marks must be used on goods first others allow speculative registration o National TM schemes differ but generally valid TM (not canceled or abandoned) protected o May be renewed continuously unlike patents and ©; may be licensed to registered user; assigned o Lanham Act of 1946-construed to apply extraterritorially to foreign licensees engaging deceptive o Foreigners seeking registration may need to prove home registration and may not be independent International Recognition of Trademarks o Paris Convention  Reflects effort to intl TM rules  Extends principle of natl treatment in Art 2 and provides for right of priority 6mos also mitigates frequent national requirement for foreigners to prove pre-existing valid reg  Art 6-gives owners of well know TM right to block or cancel unauthorized registration o Arrangement of Nice Concerning Intl Classification of Goods and Services-Nice Agreement  Addresses question of registration by class of goods which varies by country  Art 1-adopts single classification system for goods and services o TM Registration Treaty at Vienna 1973  Contemplates intl filing and exam scheme like that for patents under Patent Coop Treaty o Madrid Agreement for Intl Registration of Marks-permits intl filings to get 60 natl TM by WIPO Copyright Protection o Berne and Universal Copyright Convention-attempt to est uniformity or 80 nations author’s work o US-Copyright Act of 1976-protects all original expressions fixed in tangible medium including literary, musical, dramatic, choreographic, graphic, audiovisual, sound, and computer wks  Not necessary to obtain US ©-sufficient that wk is original and fixed in tangible medium  Protection extends from creation to 70yrs after death of author; includes derivative wks  Only author can make copies, display, perform, and first sell wk  Registration not required but important for federal remedies including criminal and civil o Marketing of © accomplished through agency clearinghouses o Other countries may vary-eg computer software undermined by fair use theme o US-Copyright Felony Act of 1992-criminalized all © infringements o US-No Electronic Theft Act 1997 (NET)-removed need to prove finc gain as element o US-Digital Millenium © Act 1998 (DMCA)-brought US into compliance with WIPO; 2 offenses  Circumventing technological measures used by © owners to protect (hacking)  Tampering with © mgmt info (encryption) International Recognition of Copyrights o © registrations must be acquired in each country recognizing; but recv national treatment; translation rights under Univ © Convention (UCC) of 1952; excuses foreigners from registration requirements provided notice of claim adequately given  Minimum term protection is 25yrs after publication, prior registration or death of author o Berne Convention-like UCC suspends reg reqs for holders from participating states; unlike UCC allows for local © protection independent of protection granted in country of origin≠ req notice  Est minimum term of life of author + 50yrs; exclusive translation rights of authors  US ratification-eliminated requirements for foreign holders and required protection of the moral rights of authors; integrity-object to distortion; paternity-acknowledge authorship Franchising in the United States o Franchising-business technique permits rapid flexible penetration of markets, growth, and capital  Product franchise-manufacturers produce goods distributed through agreement (eg coke)  Business format-franchisor licenses intellectual property rights in conjunction with “formula for success” of the business (eg McD’s) o US regulation-federal and state level-Federal Trade Commission Franchising Rule; state franchise disclosure duties, federal antitrust law International Franchising o License or Franchise K-holder of info in one country acquires legally protected right to own info in another country; then licenses the right for a fee to someone in that country; raises risk that proprietary control will be lost or at minimum competitor created  Need to specify: fees and royalties, provision of services, training, control by franchisor, term, area (master franchises-rights to whole geographic area), accounting, standards, advertising, insurance, taxes, liabilities, dispute settlement  TM licensing clause conveying local TM rights to franchisee for royalty pmts  Pronuptia (in ECJ)-legality of franchise agreements under competition law-departs from American antitrust law on market division arrangements for distributors-lead to comprehensive regs EU Reg No. 2790/1999 on vertical restraints o Laws to protect cultural impact of foreign franchises-adding cultural marks, local materials  Disclosure requirements franchisors in registered prospectus before agreement complete Disclosure violation remedies: rescission, injunction, and damages   Advertising must conform to local law; taxation-double tax treaties affect royalty pmts Tying: arrangement under which a seller agrees to sell one product only on the condition that the buyer also purchases a 2nd product. Tying product: trademark license, tied product: products from franchisor (such as cooking machines) Antitrust-tying arrangements that involve coercion of franchisees to take supplies from franchisor or designated sources Sherman Antitrust Act, Art 81 and 82 of Rome Treaty US case law-equipment and paper products not ok; core products have to meet specifications; others viewed as same to license like baskin robbins; McD’s suggests that anything comprising formula for success may be tied o Licensing may be combined with trade agreement for necessary supplies  Transfer pricing-marking price up or down to reallocate revenues to preferred places o US- TM and © holders may register with customs service and seek blockade of pirated goods  Lanham TM Act of 1946; Copyright Act of 1976;  Tariff Act of 1930 §337-unfair import practices-prohibitions on importation of articles infringing US patents, ©, or TM provided US industry relating to such articles exists or being established; proof of injury not required in IP cases Intl trade commission determines violations and recommends remedies to Pres Any patent infringement amounts to unfair import practices; results in exclusion permitting seizure of patent counterfeits For seizure remedy to work-holder must notify customs of shipment  Infringement and treble damages actions can be brought in US ct against importers but difficult with process and jurisdictional problems; or they change names and have to find Goods seized in US can be destroyed upon ct order  WTO agreement on TRIPs not proven effective; Pres can sanction offending nations Leading to legislation abroad but yet to see if enforced as loss of local jobs and $ Transborder Data Flows (TBDF) o OECD-14 principles as Guidelines on Protection of Privacy and TB Flow of Personal Data o European finalized data privacy directive that is much more protective of individual privacy  Info relating to natural persons must be secure, current, relevant, ≠ excessive; consent needed and individuals have rights of disclosure, access, correction, and erasure  Transfer of data to non-EU prohibited unless recipient has adequate protection too; to remove liability safe harbors created by EU-US agreement for firms abiding; involves participation in self-regulating privacy groups supervised by US fed trade commission  EU law on data privacy has become a global industry standard since it is so high  EU Directive Art 25 Within EU full transfer of date US needed to create a safe harbor program because didn’t meet standard (although exact standard not defined) or have similar protections. o Safe harbor is voluntary o US Company is eligible only if their regulator (FTC or DoT) agrees to enforce commitments o Financial services (including insurance) aren’t covered o See regular notes p. 13 if need more info  It’s a directive not EU law. IV. Foreign Investment Transactions Defining the Foreign Investment o Investment involves ownership of some equity in a business and control o If investor owns all equity in foreign investment has all control; foreign ownership=control issue o Ownership of majority of voting equity usually means entity is subsidiary under investor control o Half of equity-control issues unresolved; who controls proxies? o Joint venture-foreign owner often limited to 49% but often with assurances of control and mgmt o As developing nations join intl trade orgs required to reduce or abolish restrictions on for inv Beyond Ownership and Control o Foreign investment-involves ownership and control of some form of service or productive industry located in another country; differences legally, currency, language, worker’s participation and rights, gov intrusiveness, cultures, expropriation risk, compensation Reasons for Establishing a Foreign Investment o When market is sufficient to sustain entrance-local foreign production will reduce transport costs and allow use of local resources available o Foreign investment may follow successful period of export sales or foreign production from licensing agreement of the technology domestic firm in country  May fear licensing for fear of loss of technology or inability to control production quality o Investment that follows tends to be voluntary in that decision isn’t result of laws and policies  Involuntary- Some countries with balance of payment problems gov makes it difficult for other nation’s businesses to export to the country and investment done to circumvent Where to Establish the Foreign Investment o Not a legal issue-but what is legal climate of country; incentives and timeframe; operational code Who Governs Foreign Investment? o Host nation is source of governance where affiliate or subsidiary is located o May or may not be express foreign investment law; but law on labor, environment, bankruptcy... o Home nation may govern multinational activity abroad, such as antitrust, bribery, securities… o Multi-national orgs may also regulate; UN, EU, NAFTA, GATT/WTO Restrictions on Foreign Investment at Various Stages o Some nations have many obstacles for approval: mandatory joint ventures, export mandates, import substitution, use of subsidiary rather than branch, limits on foreign directors o Obstacles to operation: currency controls, shorter work weeks, worker participation in mgmt, limits on profit transfer and pmt for technology o Restrictions on withdrawal-inability to repatriate capital, difficult insolvency laws Restrictions on Foreign Investment-Developing Nations o Acquisition of existing business caused concerns and led to limitations  Acquisition of host nation enterprises limited or prohibited  New investment required to allow percentages of local equity participation  Several industries reserved to the state or nationals (banking, communications, etc.)  Participation limited to certain percentage of ownership  Government agency had to approve acquisitions or new investments Factors: assisting econ development, agreeing to number of employees, effect on national businesses, effect on balance of pmt, mandate domestic materials, finc from abroad, acquisition of advanced technology, location, R&D o New investment laws in non-market econ intended to attract foreign investment but only up to 49%  In developing nations-intended to restrict new investment and coerce existing into selling o Impact of laws on existing co not retroactive but limited no new products or locations unless JV  Strategically new subsidiaries for new products so old ones could remain as is o Requirements for local mgmt-had to limit to same 49% thought often would get votes of locals to  Except in decisions to close or move business o Limits soon lifted at realization that local mgmt acts same as foreign; so allowed majority foreign ownership in exchange for modern tech or develop needed area, high exports, etc. o After economic downturn in 80’s nations started doing more to promote foreign investment  Total ownership usually allowed, some areas still restricted for state ownership, joint ventures encouraged but voluntary, land ownership may be restricted o Other potential issues: mandatory joint ventures, export mandates, import substitution, etc. Restrictions on Foreign Investment-Non-Market and Transition Economy Nations o Non-market economy-based on political beliefs in forms of economy (socialism); changed in 80s  Attempted to get new technology but failed without IP protections for owners  Poor communication with nationals and labor with government interference  Market econ didn’t send technology to non-market and they were unable to access o When developed; 2 facets of share ownership (mgmt and profits) had to be part of JV K since no share certificates and no law to govern public ownership  Countertrade-Profits taken from production sold western market-compensation, buy-back Impacted by quality issues and competition in home market  Control-used to be in state hands; JV K provided for sharing mgmt decisions but not dominated by foreigners; workers participate in ownership and control o Most significant changes in rules regarding foreign investment have occurred in nations with changes to free-market elements in domestic tradeera of privatization Privatization: The Focus of the 1990s o Privatization-lessening of state ownership of the means of production and distribution  Occurring in market economies as much as non-market economies as state enterprises unable to operate at a profit and draining state resources; Privatization stops drain, raises revenues and infrastructure, creates future revenue o Based on law policy mix; policy is pro-privatization but backed with weak laws  Laws deal with: what to sell, role of workers in approving, value, participation allowed, etc.  Issues are not resolved with written laws; must be dealt with in negotiations with gov o How to value the business? Little value other than right to participate; obsolete equipment, technology, knowhow, need new markets, worker training, acct practices must be negotiated  Once decided gov may still favor nationals like workers and require foreign investor to over pay in order to partake in the deal Policy Versus Law: Dealing With the Operational Code of the Way Things Work o Written laws of developing nation are principal framework for regulating foreign investor  Not exclusive, there is another level of law that is unwritten-operational code o Unwritten-consists of unpublished regs and rulings that investors can not gain access to Restrictions on Foreign Investment in Developed, Market Economy Nations o Several developed countries are putting limits on their markets to foreigners (JAP, CAN, EU) o US-long promoted to be open and encouraging of investment-only few areas subject to control limitations such as natl defense, nuclear energy and domestic air transport  Occasional proposals for limits but usually defeated as restrictive of job creating invest  CFIUS-Committee on Foreign Investment in US-monitors foreign investment o Exon-Florio- gives Pres or designee (CFIUS) authority to investigate effects on natl security from mergers, acquisitions and takeovers which might result in foreign control; if natl security is threatened Pres may prohibit action; review must occur if purchaser is foreign gov  Statutory guidelines: Pres must find 1) credible evidence that foreign control might impair natl security and 2) that other US law doesn’t provide adequate and appropriate authority for President to protect natl security Industries impacting natl security: 1) domestic production needed for projected natl defense 2) capability and capacity of domestic industries to meet reqs and 3) affects capability and capacity of US to meet requirements of natl security Allows Pres to give appropriate relief and his findings aren’t review-able  Cases: Partly response to proposed acquisition of defense company Fairchild Corp by JAP Fujitsu; reviewed by CFIUS to be natl security risk; lacked authority to stop Congressional dissatisfaction with president and CFIUS- proposed takeover of LTV by FR conglomerate-congress had to intervene as agency failed strict action China’s Natl Aero-Tech CATIC-proposed acquisition of MAMCO (aircraft parts manufacturer)-investigation showed CATIC previously violated US export law; concerns about efforts to get technology to build jets to refuel in air and covert ops for Chinese govt; only case to lead to presidential order to block acquisition  Considered to be an administrative annoyance and not a serious hurdle; not used often  Abuses: used by US target corps whose mgmt is hostile to proposed takeover; target company uses post-notification review period to delay takeover even misleading CFIUS to undertake investigation to discourage foreign would-be acquirer  Congress could use to further limit DFI-acquisition of critical technologies, econ test vs. natl security; concentration in the industry, has co recvd gov funds, CFIUS to commerce  EU Companies consider this simply an administrative annoyance. Financing the Foreign Investment o New sources of funding available such as intl development banks and agencies like World Bank’s Intl Finance Corp (IFC) or US Overseas Private Investment Corp (OPIC)  Some want to invest primarily in infrastructure-of interest to US construction businesses The Affect of a Different Currency on the Foreign Investment o When a business invests in country with different currencies, many issues arise:  Issues: Readily convertible into USD, what if currency collapses, how much local to be retained for business  Hedging-buying K that assure later conversion at determined rate Transfer Pricing o If restrictions on repatriating profits to parent, but transfers allowed to pay for technology, parent will simply raise price charged to foreign subsidiary for technology and operate without showing profits that would be frozen in non-transferable foreign currency if shown  Would also mean no taxes since no profits to tax (disguised)  Usually done to avoid onerous and unfair rule changes in host nation  Disfavored by host nation as loss in tax revenues, loss of divd to equity partners Role of Bilateral Investment Treaties o UN drafted Code of Conduct for multinational enterprises didn’t include provisions for hosts o Bilateral Investment Treaties (BIT)-are providing help; US has been using since 80’s to promote national treatment and protect US investors abroad; address investment issues  Elimination of foreign investment screening and imposition of perf requirements object of BIT program, have been weakened in treaties currently in force  Benefit is that provisions prevail over domestic law, although usually allow for exceptions to investment protection when in interests of natl security  Don’t prohibit nations from enacting investment laws, but cant interfere with treaty rights  US sought provision-prompt, adequate and effective concept of compensation after expropriation; investment should be compensated soon after the taking, based on fair valuation, and in a realistic form  Often provide for arbitration, without recourse to prior exhaustion of local remedies  Establishes ground rules for investment on bilateral, treaty basis which shouldn’t be unilaterally altered by host nation to impose restrictions on investments o Friendship, Commerce, and Navigation Treaty (FCN)-BIT framed on these but more emphasis on investment related issues such as employment of one’s nationals in foreign subsidiary o Bilateral trade agreement-tended to deal only with tariff and nontariff barriers to trade Foreign Investment Under NAFTA o Chpt 11-covers foreign investment o Based on concepts of national treatment and most-favored-nation status; each party must grant investors treatment no less favorable than to domestic investors and no less favorable than it grants to any other nation outside NAFTA o Performance requirements prohibited but nation may impose measures to protect life and safety or environment; incentives may be conditioned on location, services, training, facilities, research Foreign Investment Under GATT/WTO o GATT didn’t used to include rules on investment until Uruguay Round led to TRIMS o TRIMS (Trade Related Investment Measures)-not as comprehensive  National treatment principal-essence of TRIMS is to establish same principle of national treatment for investments as has been in effect for trade  Considered inconsistent with WTO obligations The OECD (Organization for Economic Cooperation and Development) and the Multilateral Agreement on Investment (MAI) o OECD-dominated by developed nations, though less so now than previously o MAI-likely to focus on concerns of the multinational corps that aspirations of developing nations  Most members hope to include limits on extraterritorial application of law Opposed by the US The Settlement of Investment Disputes: General o Investment disputes often involve claims by foreign investor that host nation interfered with investment and constitutes a taking of property o Intl law-unclear if a taking is a violation of intl law and is debated o ICJ-disappointment in establishing rules for expropriation o Host nation domestic law may include how to resolve investment disputes  Often provide for stages: mediation, then arbitration, then cts; but may seem to favor host national so more neutral forum is usually preferred Property Takings and remedies o Investments in for nations create risks that host gov may take property and refuse to provide proper compensation. o What constitutions the intl law of expropriation isn’t easy to discern; but US has several laws disclosing a national position that expropriation must be accompanied by compensation or the US will use its powers to deny various benefits to the nationalizing country.  Sometimes these laws are limited by BITs o OPIC (overseas private investment corp) is a US national insurance program against for investment risks: loss due to 1. inconvertibility 2. expropriation or confiscation 3. war or political violence  Investor must exhaust all remedies before OPIC becomes obligated to pay any claim o MIGA (Multilateral investment guarantee agency) is backed by World Bank. Risks covered include: inconvertibility, deprivation of ownership or control by gov actions, breach of contract by gov where there is no recourse to a judicial or arbitral forum, and loss from military action or civil disturbance.  Investor must be from a member country and only for investors qualify  Highest coverage in Latin America, lowest in Africa  Has yet to face claims experience EU Business Competition Rules-Extraterritorial Antitrust Laws o Treaty of Rome has a mandatory effect upon intl trade in EU.  Both Art 81 & 82 are similar to US Sherman Antitrust Act & can effect transactions occurring in US, just as US applies Sherman Act abroad  Art 81(1) prohibits “arms length” competitors from agreeing between themselves to prevent, restrain or distort competition Exclude certain vertical purchasing, distribution and franchise agreements, categories of research and development agreements, specified agreements in the technology area, and horizontal agreements among smaller firms for product specialization  Art 81(3) and Reg 2790/1999 supply and distribution agreements from firms with less than 30% market shares are generally exempt. Vertical agreements containing hard core restraints aren’t exempt: resale price maintenance territorial and customer protection leading to market allocation exclusive dealing covenants that last more than 5 years  Art 82 prohibits dominant enterprises from abusing their position to the prejudice of competitors or consumers o Mergers Regulation: gives the Commission the power to oppose large-scale mergers and acquisitions of competitive consequence to the EU.  Duty to notify commission if combined worldwide turnover of at least 5B Euros AND 2 companies have aggregate region-wide turnover of 250M Euros.  Member states may also challenge some mergers: for public security, preserve plurality in media ownership, financial institutions are involved if invoked, Commission has 1 month to decide to investigate or not. If yes, then aprox. 4 months to investigate. Resolution of International Disputes: Litigation and Arbitration Dispute Settlement in National Courts Recognition and Enforcement of Foreign Judgments o In nearly 2/3 of the world, judgments of US cts are either not enforceable at all or are enforceable if only certain conditions are met. Consider for fed ct: 1. the governing law is for the most part state rather than federal 2. enforcement first requires recognition 3. direct enforcement is unusual—the process to expect is reduction of the foreign judgment to a judgment of the enforcing ct in the US AND 4. there is little statutory law on the subject. One in a US ct, success is dependent upon whether 1. the foreign ct had juris over the person or subject matter 2. adequate notice was given 3. there was no fraud in obtaining the judgment AND 4. public policy of the US wasn’t harmed 5. Reciprocity may be raised. Contract Provisions About Dispute Forum and Governing Law The Forum Selection Clause: should state both the ct with juris and state that ct has exclusive juris. o Are presumed valid if they will not deny one party effective remedy, cause substantial inconvenience, are not the product of fraud or unconscionability or contravene US policy o COGSA forum selection clauses selecting a foreign forum are held valid in US cts The Choice of Law Clause o In common law parties can choose the law they wish to govern their contract. UCC §1105 permits parties to chose the law provided it has a reasonable relation to the contract. EU allows unlimited party autonomy choosing this. International Commercial Arbitration o Model Arbitration Clauses o International Arbitral Rules: UNCITRAL and ICSID Enforcement of Arbitral Awards: The New York Convention o Article II, 1 & 3 of NY Convention covers mandatory arbitration  Or issues that raise or respect a legal relationship, whether contractual or not, may be covered by the convention o Article V- defenses  1(a-e)- defenses incapacity or invalidity of the agreement containing the arbitration clause lack of proper notice of arbitration proceedings or appointment of arbitrator arbitral award outside the scope arbitration not done according to arbitration agreement or applicable law non-finality of arbitral award  2- (a) subject matter not arbitrable, (b) contrary to public policy  There is also the FSIA and Act of State Doctrine that can come into play on certain cases. 1. See reservations on supp p. 48-49: reciprocity and only applies to commercial relationships o Article VI- (U.S.) court may ajourn the decision based on enforcement o Mitsubishi Motors- whether to enforce an arbitration that involves anti-trust. Arbitration should be enforced. Dissent says that Anti-Trust is federal law and that convention should not be applied on an issue of solely federal law (Sherman Act), a public right Mandatory Rules and Law o Mitsubishi even if you can contract around (anti-trust) law, the government may still bring suit through FTC or DOJ still has authority to bring civil or criminal claims o Manifest disregard of law provides a circuit split of whether arbitrations may be unenforceable  Remember that the Convention doesn’t recognize a manifest disregard of the law as a basis for denial of enforcement. o In US parties can’t refer a dispute to a ct while an arbitration is in progress. Arbitration Agreements, Arbitrators and Awards Under US Law- Federal Arbitration Act o Many cts will stretch the limits of the convention to uphold an arbitration clause in US o Section 202- Agreement or Award falling under the convention  Normally, Convention would not apply between 2 US citizens; however, foreign arbitral award may fall under convention o Section 207- Confirming and enforcing the award  US court can choose not to enforce arbitration, but it should not VACATE the judgment. That’s for the country court that entered the judgment. Differences between arbitral awards and judgments o Foreign arbitral award is a federal question -NY convention o Foreign court judgments can be in state court or federal court because they will tend to be in federal court because of diversity. Law applied in enforcing a foreign court judgment is a post-Erie state law, even though generally the court will be Federal, sitting in diversity. Export Regulations o US products controlled by Export Administrative Act (EAA) [regs=EAR], Arms Export Control Act, Intl Emergency Economic Powers Act (IEEPA), and Trading with the Enemy Act  EAA expired in 1994, but the EAR have been continued under Pres IEEPA authority  EAR establishes 2 sets of duties: obtain property type(s) of licenses and inform US gov whenever the exported goods are diverted to impermissible uses or users  Exporters are strictly liable for compliance with product eligibility controls Exporter will be required to submit a shipper’s export declaration or SED at the time of export from the US. If a license is required, the exporter must submit a formal application and received the gov. approval prior to exporting. Even when no license is called for based upon the ECCN classification and destination, a license requirement may still be triggered if the customer is ineligible.  knowledge based control=licensing depends on the exporter’s awareness of the customer’s activities o blacklists=required to trigger licensing requirements for specific customers or end-users,  can be used as a punishment by Comm. dept for not following rules.  another punishment besides blacklists are revoking the license. o knowledge includes things you know and should reasonably know (846 supp) List of red flags see supp. p. 810. See p. 811 for explaination of dual use exports. Commerce Dept controls have the broadest coverage and are those most frequently encountered by exporters. List of more controls on p. 658. Commerce Control List (CCL) is divided into 10 general categories and then subcategories are given Export Commodity Control Numbers (ECCN). Possible consequences of US extraterritoriality on the policies of for gov regarding US controlled companies following export control laws:  For gov inclined to nationalize private industry  For gov less inclined to support the export activities of US owned subsidiaries  For gov tendency to favor nationally-owned company in their procurement policies  For cts may not uphold US laws and then company is subject to conflicting laws and enforcement Ways that countries use for currency controls: 1. restrictions on foreigners’ access to domestic borrowings, even in local currency 2. restrictions on any access to local borrowing of foreign hard currency holdings 3. restrictions on access to and transfer of local foreign hard currency holdings 4. mandated transfers from abroad into the country to obtain approval of investment projects 5. requirements that a percentage of borrowing of foreign currencies by a resident be deposited locally 6. requirements that the proceeds of sales or services abroad be returned to and deposited in local institutions 7. requirements that earnings of residents in foreign currencies be deposited in domestic accounts 8. requirements that above deposits of foreign hard currencies be converted to domestic currency accounts 9. requirements that a foreign investor’s demands for hard currency be met by hard currency earnings from exports. Transfer pricing and currency controls are closely related. There is a clear incentive for transfer prices to be arranged so that income is maximized in countries with low tax rates. Project Finance Sponsor in project finance wants the benefit of the project but with no effect on its credit or balance sheet. Project financing are debt instruments, which are supported by collateral. Collateral may include fixed assets, payments due to the project from purchasers of its output, and guarantees of interested financial institutions. Sometimes need comfort assurances: statements by participants which are required as non-binding statements of intent. Where can sponsors get funds: commercial lenders, private placement investors (very large like Carlyle group), International institutions, such as IMF, etc. Documentation:  Basic loan or credit agreements  Documents of security and mortgage instruments  Assignments  Consent to assignment of project documents  Real property conveyance instruments o Rights to minerals or to land  subordination agreements  depository, disbursement, fiscal agency  Construction contract  Purchase/sales contract(s) Issues with most/all project finance:  Documentation and negotiations needed for that  environmental issues (hazardous material, very negotiable up to the limits in the other countries protections)  potential human rights issues  Force majeure risk (more significant in less developed countries) o such as expropriation and re-nationalization of the project property o Does the country recognize impossibility doctrine for this risk?  Foreign gov corruption Types of purchase and sales contracts used for these types of transactions. See p. 1047. Benefits of project finance: Lender relies solely on the project collateral in enforcing rights and obligations in connection with the project finance loan. Debt in such circumstances isn’t reported on the parent company’s financial statement. Ability to finance a project using highly leveraged debt without a dilution of existing equity. Project sponsor can avoid restrictive covenants such as debt coverage ratios, in existing loan agreements and indentures. Disadvantages of project finance: Protracted negotiations and increase costs to compensate 3rd parties for accepting risks. Interest rates charged are typically higher than direct loans made to the project sponsor. Start up of a project is the most important risk-shifting phase of a project financing since achievement of the performance guarantees through performance tests signals the end of the contractor risk period and the beginning of the risk period for the operator and project owner. 9 categories of reasons attributed to failed projects: see p. 1034. Foreign Corrupt Practices Act:  The basic prohibitions on payment to foreign officials extends to any foreign political party or official and to 3rd parties who make such payments while knowing or having reason to know that some or all of the money will be paid as a bribe.  Corporation (or officials) can’t evade criminal sanctions under FCPA by purposely avoiding knowledge that his agent paid a bribe.  DOJ hasn’t issued guidelines, but did establish a FCPA review procedure to respond to specific questions. In addition to being able to enforce FCPA, there are usually many related charges they can bring: RICO, conspiracy, Travel Act violations, Mail Fraud, Wire Fraud, etc.