International Business Transactions and the Doctrines of Sovereign Immunity and Act of State - Coursework Example

International Business Transactions and the Doctrines of Sovereign Immunity and Act of State The management of international business, according to Schaffer et al, is the management of risk and such risk could include transactions risk, the risk of exposure to foreign laws and courts and political risk. 1 The greatest of these risks vis-à-vis international business transactions is political risk, which is largely underpinned by the inherent conflict between the goals of the state and that of international entities, such as TNCs and MNEs, conducting business within the former’s territory. Foreign business entities seek to take advantage of the host country by exploiting the host state’s capacity for lowest production cost, highest sales turnover and repatriating their profits to their respective home states whilst the host state aim to make the most of the foreign entities’ operations in its territory to benefit its economy and resist, as far as practicable, repatriation of profits. 2 Even the advent of globalisation and free trade, states remain possessed, although diluted, of inherent powers under legal principles and doctrines that can pose as sources of political risks and instability for international business transactions. These legal principles and doctrines, that transcend national boundaries, are underpinned by the right of the state to protect itself and its citizens. 3 The ability to anticipate and manage risks and potential conflicts is crucial in the management of international business transactions and economic success largely depends on it. Albeit good contractual planning significantly minimises these potential risks and inevitable conflicts, it is never an absolute security from future risks. This is because contract planning is always encumbered by future uncertainties posed not only by economic but, also political and legal changes, such as war, revolution, civil unrest, nationalisation and government acts that can greatly affect the conduct of business.4 I Principle of State Sovereignty and International Business Transactions One of the legal precepts that international business entities must contend with is the principle of state sovereignty. This principle provides that a state has a right to self-determination and thus, has exclusive control over its territory, property ownership and economy. It is synonymous to state independence allowing the state to fully exert its power, authority, order and legitimacy without being subjected to a higher or external power. As can be gleaned from such a description of the precept, state sovereignty has two aspects: internal and external. The first refers to a state’s ultimate dominion over the fate of its territory and everything within it and is also called political sovereignty whilst the second, also called juridical sovereignty, refers to its equal standing with other states in the global stage. 5 Internal sovereignty presupposes state monopoly over internal affairs and possession of “undisputed right to determine the framework of rules, regulations and policies within a given territory and to govern accordingly.”6 The essence of the political risk engendered by the principle of state sovereignty to international business transactions lies in the self-interest of the state, which underpin the goals of governance. International business entities, which nurture their own selfish interest, must contend with and adopt methods to lessen the negative impact of government goals on their business transactions. Dieter Grimm remarked that “every area of life open to human influence has also been the target of human activity” but, governance goals cover broader perspectives such as: security, which implies freedom from internal and external threats to its citizens and territory; rule of law; participation or the establishment of a system that encourages and develops participation in collective decision-making and promotes self-identity, and; social welfare, or the promotion of economic growth that benefits the entire society, in general, by limiting social inequality. 7 In the exercise of its sovereignty, for example, the state may enact strict regulations that have the goal of restricting remittances by international business entities from the host country to the latter’s home country. States may assess higher or special tax rates for income repatriation and other tax regulations that are particularly more stringent to international business transactions. In addition, these regulations may extend as well to other type of activities that MNEs or MNCs perform. State regulations may impose funding constraints by prohibiting borrowings from overseas sources for host-country businesses as well barring international business entities from receiving funds from specific overseas sources. Such prohibition may force business entities to borrowing exclusively from local sources, which may be accompanied by disclosure, reporting and other operating requirements. Such political risks however, vary from country to country. 8 Some countries have higher political risks than others. For example, totalitarian governments are known to pose more risks to international business activities than do democracies as illustrated by the case of Indonesia when Suharto resigned in the late 1990s. From a totalitarian form of government, which had imposed a highly centralised system, the country shifted to decentralisation, which created a lot of difficulties for businesses because the change was not accompanied by strong structural reforms that precluded bureaucratic and judicial corruption. As opposed to this, the defeat of the Congress Party in India in 1999 by the BJP in a democratic contest did not reverse the wave of economic reforms initiated. 9 II Doctrine of Act of State and International Business Transactions The doctrine of act of state is a domestic law principle that proscribes courts from other countries and jurisdictions to pass judgment on the validity and legality of the executive or legislative acts of another. The rationale of the doctrine is two-fold: courts are not as equipped to deal with the acts of another country as the executive branch, which has all the diplomatic resources at its disposal, and; courts cannot possibly impose their own decisions on foreign governments. 10 The doctrine therefore, protects a state from being reviewed by the courts of another, and in the conduct of international business within its jurisdiction, the state is free to take expropriatory measures in the guise of nationalisation. 11 In the United States, the precedent case applying this doctrine is US case of Underhill v Hernandez, 12 where the Complainant’s claim for recovery damages against the Venezuelan government, which had detained him after the previous government was expelled by a coup, was refused on the ground of the doctrine. The act of state doctrine is recognised as well in the UK, Germany, France, Italy, Japan, among others. 13 Under English jurisdiction, the House of Lords in the case of Williams and Humbert Ltd v W & H Trade Marks (Jersey) Ltd 14 applied the act of state doctrine in deciding the claims against the compulsory acquisition effected by Spain against the complainant without even considering the merits of the case. Under this doctrine, certain international business entities’ assets are at risk of expropriatory or compulsory acquisition by the host-state. Some of these assets are: cash, whether of domestic or foreign currency; securities and other commercial investments; financial instruments like negotiable instruments, bonds and securities that may be transferred through delivery; real estate and other immovable assets; cargoes in transit; ships, and; property rights over industries. 15 III Managing Political Risks Borne out of the Doctrines of State Sovereignty and Act of State Risks posed by the exercise of states of their prerogatives under the principles of state sovereignty and the doctrine of act of state may be minimised by various approaches that would ensure the least interference to international business transactions. The following are the possible approaches to such political risks: joint venture with a local partner; insuring the political risk; dependence on the supply of basic materials on its other units located in other countries; using names and symbols that conceal the real origin of the business; employing local labour force, and; influencing political policy in the host-state. 16 Two of the best ways to diminish the impact of the state actions made under the doctrines of state sovereignty and act of state, such as nationalisation and expropriation, is to enter into a joint venture with a local counterpart and to insure the risks themselves. A local partner could facilitate political lobbying and gives the business a local face, which may work to preclude it from being the target of nationalist extremists. However, local partners may also pose a disadvantage especially on the aspects of profits and economic efficiency but this is offset by the advantages. On the other hand, the business entity may resort to directly insuring the aforesaid risks either from governmental agencies or private insurance companies. As an example, the Multinational Investment Guarantee Agency (or MIGA), which is an arm of the World Bank, issued a political insurance policy to Avon Cycles Ltd worth $7,100,000 in 1999 for the latter’s investments in Tanzania against war and civil disturbance. The same agency also offers insurance covers against currency transfer, expropriation, and contract violation by a host-state. 17 In addition, an international business entity engaged in international business transaction could opt to use signs and symbols that do not associate the business with its real origin or take steps to develop rapport with the host country and its people. Bridgestone, owner of Firestone Tire, for example, is American sounding as they come, but is actually a Japanese company. Moreover, 25% of the banks operating in the state of California are likewise Japanese-owned but their names do not sound Japanese at all. On the other hand, particularly cultivating rapport with the host-state and its people can be done by employing locals, raising capital locally and developing friendly relations with local politicians. These approaches give business entities a local feel, which could initially deflect hostility created by the impression that the economy of the host-country is being ruled by foreign organisations. 18 Other approaches are utilising raw materials of other business branches located outside of the host-country and influencing local policies by lobbying and exerting political pressure. In the first instance, using the technical skills, raw materials, supply of technology and other components of the business outside the host-state is a hedge against nationalisation, such as in the case of international oil companies in the Middle East that were able to operate in that region for a very long time. On the other hand, lobbying and political pressure should be made during the policy-making stage or that stage when policy decision-makers are building policy consensus by holding meetings with constituents and other stakeholders. In addition, the business entities can also lobby in their home-state to use it to influence host-states such as the case of 200 multinationals operating in China that lobbied in the US for normal trade relations with that country. 19 III Conclusion The doctrines of state sovereignty and act of state have the potential of greatly affecting the conduct of international business transactions. These two doctrines, one of which originated from customary international law and the other, essentially a domestic law but is acknowledged internationally, may be used by host-states to regulate or expropriate businesses owned by foreign entities. The state sovereignty principle, which essentially endows a state autonomy and independence in steering the direction of the country, gives the host-state the prerogative to implement regulatory policies that can limit and define the conduct of international business within its territory. Business entities and the state have an unspoken inherent conflict of interest, with each aiming to get most out of the other, but the state sovereignty doctrine normally gives the host-state the edge. On the other hand, the doctrine of act of state additionally allows the host-state not only to implement regulatory policies but go to the extent of expropriating the assets and property of business entities in the guise of nationalisation. The advent of rapid globalisation and free trade in the 20th century, however, has diluted the powers of states and greatly affected the doctrines of state sovereignty and act of state, so that it is international business entities threatening the continued viability of these doctrines rather than the other way around. Globalisation is making states “face alterations in exercising their sovereignty” and “imposes new boundaries and practical constraints.” These realities have made some quarters refer to the present condition of statehood as denationalised. Albeit nation-states remain to be the primary global actors, international business entities such as transnational corporations, global financial markets, and other international organisations have reined in the conventional uses of the doctrines of state sovereignty and act of state. 20 Despite the perceived denationalisation of states brought about by the advent of globalisation and free trade, state sovereignty and the desire of states to wield control over every aspect of state life, especially economy, is expected to continue. After all, the reason why the nation-state has successfully sustained itself, as opposed to other political institutions such as the empire and the city-state, is that it has shown to be more effective in providing goods and is therefore, seen as more politically effective. “Formal sovereignty, in the absence of material resources and the capacity to govern, is always extremely precarious,” which implies that statehood is the interplay not only of recognition by the international community but also by the elements of resources and success of governance goals. 21 Bibliography: Appelbaum, R and Felstiner, W and Gessner, V, Rules and Networks: the Legal Culture of Global Business Transactions (Hart Publishing, 2001) Ajami, R and G J Goddard, International Business: Theory and Practice (M.E. Sharpe, 2006) Brand, R A, Fundamentals of International Business Transactions (Kluwer Law International, 2000) Burt, E, ‘Developing Countries and the Framework for Negotiations on Foreign Direct Investment in the World Trade Organization’ (AM. U.J. Int’l L and Pol’y) 1020, http://www.auilr.org/pdf/12/12-6-3.pdf Kobrin, S ‘The Architecture of Globalization: State Sovereignty in a Networked Global Economy’ Governments, Globalization and International Business by Dunning, H (Oxford University Press, 1999) Jennings, M, Foundations of the Legal Environment of Business (Cengage Learning, 2008) Lynch, K, The Forces of Economic Globalization: Challenges to the Regime of International Commercial Arbitration (Vol. 7, Kluwer Law International, 2003) McKendrick, E and Rose, N Commercial Aspects of Trusts and Fiduciary Obligations (Oxford University Press, 1992) 204-205 Misra, S and Yadav, P K. International Business: Text and Cases (PHI Learning Pvt. Ltd., 2009) Plappert, S Sovereignty and Globalisation: Are Nations Political and Economic Sovereignty Threatened by the Forces of Globalisation?(GRIN Verlag, 2010) Schaffer, R and Agusti, F and Earle, B, International Business Law and Its Environment (7th Ed., Cengage Learning, 2008) Steers, R M and Nardon, L Managing in the Global Economy (M.E. Sharpe, 2006) Thakur, M and Srivastava, B M, International Management (Tata McGraw-Hill, 2001) Underhill v Hernandez 168 US 250 (1897) Williams and Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1985] 3 WLR 501 Read More