International Business Transactions - Assignment Example

International Business Transactions Client’s Name Grade Course Tutor’s Name 21 July 2012 Question 1 Internalization of trade has made countries, individuals and organizations dependent on each other to various degrees in commercial transactions. Goods move across regions in international trade, and this has been eased by advancements in technology, transportation and international business law among other factors (Folsom, Gordon, Spanogle, & Fitzgerald, 2009). A harmonious business and working relationship must be maintained among the parties involved to ensure that trade moves smoothly in the international economy. Such a relationship can only be maintained through the setting of, and observance of rules, regulations and terms governing the interactions among different trade partners and associates. International commercial transactions are governed and regulated by individual countries’ laws, international trade treaties and agreements, trade usage and customs and the terms agreed upon by parties to a commercial agreement. International treaties such as the United Nations Convention on Contracts for the Sale of Goods set forth rules regulating international trade. However, parties, individuals or institutions are free to contract as they wish, and even exclude the application of such treaties to their agreement and conduct of their business. Business transactions are conducted under circumstances that differ, and their terms significantly rely on the needs and demands of the parties involved. It is important for parties to take into consideration, the legal and commercial implications of the terms upon which they agree when conducting business. The terms that make up a commercial contract or agreement must also comply with various laws that regulate the conduct of business (Folsom, Gordon, Spanogle, & Fitzgerald, 2009). When crafting a contract for sale of goods, the seller, buyer and other interested party such as a financier seek to protect their interest, such as their claim to the title of the goods that are the subject of the contract, the funds they invest in the deal, and other interests. An international contract for the sale of goods stipulates the duties, obligations and rights of each party to the agreement. It is not mandatory that a contract for the sale of goods to be in writing. However, the UN (2010) stipulates that a contract for the sale of goods worth $500 and above must be in writing. In addition, international sale of goods contracts present complexities that make written contracts a necessity. The terms may be so complex that the rights, duties and obligations of the contracting parties need to be in writing. This not only assists in the performance of the contract, but also when the need to resolve disputes arises. Significant in the agreement/contract are the aspects of passage of title, transfer of risk and financing. It is important for the parties to stipulate at what point the title in the goods passes from the seller to the buyer, when the risk is passes or remains with one party, and also the price to be paid. The parties must also stipulate how payments are to be made. International contracts for the sale of goods often involve huge amounts of money that may not be available to one party at the time, or he/she may not be willing to finance the deal. In such circumstances, financial institutions are called in to assist, and they end up arranging for ways of financing the projects. The scenario provided in the exam question presents a situation where the goods that are the subject of the sale of goods contract have a ready market. however, the buyer (who is also the seller in the other contract) does not have enough funds to finance the project. Michael Matson needs funds to pay for the goods and also meet other costs incidental to his business such as transportation and insurance. When crafting the contracts of sale of goods, he has to ensure that important aspects such as financing, passing of title and risk are taken care of. He has to acquire financing so that nothing goes wrong, and the goods are shipped and delivered to the final buyer. Apart from the need for funds to finance the deal and the cost of transportation and insurance, Michael must also take into consideration that the government may decide to impose countervailing duty that may affect the contract. Michael Matson (MM) is likely to encounter various problems when contracting for the sale of goods with Salazaar Steel (SS). Salazaar Steel must receive payment for the steel by 8th August. If Michael does not make arrangements with his bank or other financiers to raise the required monies by this date, he runs the risk of not clinching the deal. This poses potential perils to his intentions to resell the goods to the buyer he has already found. He may also find himself in breach of the obligation to pay under the contract of sale of goods. Builder Bay Shipbuilders (BB) are either unable, or are unwilling to provide funds for the steel until 21 August. This means that Michael will have to find ways of financing the deal on his own so that the Steel can be transported in time. Financing the deal between SS and MM is the main focus of any contract of sale between the parties, in addition to the usual terms in such a contract. There are many ways of arranging for the financing of international commercial transactions. The buyer and seller are usually located in different countries, and so are their bankers. Banks play a significant role in financing such deals. This applies to both the buyer’s and seller’s bankers (August, Mayer, & Bixby, 2009). Michael and Salaazar Steel have several options open to them in the structuring of their contract. These structuring options are discussed below. The sale of goods contract could for example be structured in such a way that the steel is shipped to Michael, but Salazaar Steels retains the title to the goods. This arrangement is known as a consignment. The usual terms of a consignment allow the buyer to access the inventory even when he/she has not made payment for the goods. The advantage of such an arrangement to the buyer is that it allows him/her to sell the goods to a third party, then pay the seller/exporter after such a sale. The seller retains title to the goods, and it will not pass until payment has been made by the buyer/importer (Camelia & Magheru, 2009). This is a method that requires a business relationship that is built on trust on both sides. It involves high risks, as the seller is not assured in any way that the buyer will pay after selling the goods to a third party. The common practice in trade is for traders to limit this kind of arrangement to highly trusted partners or subsidiaries of the trading companies. It is, however, a method that significantly facilitates international trade especially among small and medium sized companies that do not have enough funds for the transactions at their disposal. Michael has the option of negotiating for a consignment arrangement with Salazaar Steels. There is already a ready buyer for the Steel, and this should easily convince Salazaar Steels to accept this arrangement. However, this may be difficult to achieve since the seller has already stipulated that payment should be made by August. The buyer of the steel that Michael has found can only pay for the goods after August 21. Adding to the difficulties in this deal is the fact that SS and MM do not have a history of doing business together, and trust has not yet been built between the business persons. Such an arrangement does not present SS with funds until August 21, assuming that everything goes to plan. Another option open to the parties is to enter into a contract under which letters of credit will be used to finance the transaction. This method will involve both parties’ bankers. Should such an arrangement be preferred, Michael’s bank will issue a letter of credit in favor of Salazaar Steels, which is a promise to pay the stated sums to SS after presentation of the shipping documents. Michael’s bank-Citibank after issuing a letter of credit has an obligation to honor any drawings that Salazaar may make in respect to that letter, irrespective of the fact that Michael may be unable to pay those sums. This will be the case as long as Salazaar Steels complies with the terms of the Letter of credit. Such an arrangement is advantageous to the parties involved in several ways. For example, the importer is assured that the monies under the contract will be paid by the bank that issues the letter of credit. If SS is concerned that MM’s bank may not honor its undertakings since it is located in a foreign country, it can demand that a local bank confirms the letter of credit. This will ensure that foreign exchange restrictions do not affect its payments or drawings. Such a request may require the drafting of further contracts with a confirming bank. The biggest advantage to the seller is the fact that it will access the money immediately the conditions of the Letter of credit are met. Such an arrangement between SS and MM will ensure that SS gets the money by the stated date of August 8. Even if Michael does not have sufficient funds in his account to meet this payment, the bank once satisfied of his creditworthiness will still honor the exporter’s drawings. Michael will benefit from such an arrangement by having monies sent to the seller by the time that it is required. Essential terms to a contract of sale under this arrangement are terms as to the passing of title and transfer of risk. My advice to Michael would be that he should negotiate for terms that ensure that property passes to him once the bank has issued the letter of credit. This will assist him to negotiate the sale agreement between him and BB. If a sale to Builder Bay is to be effected, then the steel needs to leave New York by August 20. BB can only make payments on August 21. For this reason, the contract between MM and BB should stipulate that title remains with MM until BB makes payment for the consignment. It should also stipulate that risk passes to the buyer once the goods have been shipped. This means that BB will bear the loss in case of loss or damage of the goods while in transit. The best way of structuring the contract between MM and SS is by the use of letters of credit to finance the transaction. Letters of credit should also be used in the contract between MM and BB. This arrangement benefits both parties, and it also makes it easy to sell the goods to BB. However, the downside may be that the letters do not guarantee the quality of the steel shipped or, that it fits the description and is fit for purpose. To counter this problem, the contract for sale should have stipulations as to the quality, fitness for purpose and adherence to description. The parties should also agree on dispute resolution mechanisms and options. They should also stipulate who bears loss if the goods are damaged or destroyed in freight. This will follow the agreement on transfer of risk, since it does not automatically shift with property. Contracts for sale of goods must conform in all aspects to the requirements for valid contracts. All the elements of offer, acceptance, consideration, legality, and intention to create legal relations among others must exist. International agreements and treaties do not regulate these contracts wholly, and parties must set forth their terms to fit the specific needs of each contract. Among these terms include; payment methods, passage of title and transfer of risk. Arrangements with financial institutions like banks are made to provide funding for the transactions when parties do not have sufficient resources. The parties also need to protect themselves from fraudsters, and they, therefore, also need to provide for dispute resolution in case problems arise (Christopher, Nancy, Michael, & Mark, (2010). References August, R, Mayer, D, & Bixby, M 2009. International Business Law. Text, Cases, and Readings. Prentice Hall, Chicago. Camelia, C & Magheru, C 2009, Structure and Content of the Sale-Buy International Contract, Viewed 19 July 2012, Christopher, B, Nancy, B, Michael, B & Mark, B 2010, ‘Bribery in International Business Transactions’, Journal of Business Ethics, Vol. 92, No. 1, pp. 15-32. Folsom, R, Gordon, M, Spanogle, J & Fitzgerald, P 2009, International Business Transactions: A Problem Oriented Course book,West, Washington. Subash, J & Robert, G 2009, ‘Impact of Terrorism and Security Measures on Global Business Transactions’, Journal of Transnational Management, Vol. 14, no. 1, pp. 42-73. United Nations 2010, United Nations Convention on Contracts For the Sale of Goods, Viewed 19 July 2012, Question 2 In liberalized and free market economies, competition among market players is encouraged. A perfect market economy accommodates many players whose entry, exit and other economic activities are controlled by market forces (Ferraro, 2004). Firms compete with each other, and this is beneficial to consumers in form of reduced prices and increased variety. However, the reality is that a perfect market economy does not exist even in the most liberalized economies. Firms often engage in activities and enter into contracts that undermine or restrict competition and other trade practices. These activities at times hurt international trade and they include; dumping, anti-competitive clauses in commercial transactions and restrictive covenants (Shapiro, 2004). Anti competitive and trade restricting agreements are sometimes used by companies as strategies to penetrate into new markets, or increase market shares by reducing competition. International trade laws and the laws of most countries attempt to prevent or restrict these occurrences by making some of these practices illegal (Schafer, Agusti & Earl, 2009). For example, anti-trust and anti dumping laws in the European Union and USA penalize activities that may be termed as dumping, and restrictive covenants may in certain circumstances be unenforceable. Agreements that restrict competition are illegal except where they are subject to existing exemptions (Schafer, Agusti & Earl, 2009). The said agreements may be entered into by various parties. The most common signatories to these agreements are competitors who wish to achieve specific competitive goals (Rainer, 2011). However, when acquisitions take place in the market, the firms involved may enter into agreements that affect competition thorough price, market sharing and even sale agreements. Some agreements restrict firms from dealing with companies that are not signatories to the said agreements (Folsom, Gordon, Spanogle, & Fitzgerald, 2009).. KitchenMaid (KM) has decided to enter into agreements with its competitors that may be potentially illegal. The company is likely to encounter various difficulties and problems arising from the decisions it has taken. KM’s proposed license agreement for productions and sales with DK and NCF restricts the two competitor’s commercial and trade practices. It also proposes to set the wholesale price. The company’s decision to acquire interests in its competitor is allowed under the law. However, after acquisition has taken place, the company proposes to restrict production of competing products and also sell its products at a price lower than the fair market value in some of its markets. These are decisions from which legal problems will arise. Chapter 1 of the Competition Act makes anti competition agreements illegal. Article 101(1) of the European Union Treaty also render such agreements illegal if they affect trade among member so the European Union (Rainer, 2011). These are defined as activities which distort, restrict or prevent competition, or are designed with the intention of doing so. The prohibitions cover express agreements and extend to gentlemen’s and informal agreements. These include agreements or activities that prevent another firm from carrying out certain trade practices, those that fix prices, discriminate prices and also those that divide markets (Rainer, 2011). KM proposes to restrict the sale of competing brands in the regions in question. In this move, the products that DK and NCF are licensed by KM to sell on its behalf will only be sold in specified areas. In addition, the two licensees will be prohibited from selling their own brands in these areas. It also intends to set the wholesale price for the products that it produces. Restricting the commercial activities of DK and NCF is an anti competition practice and is, therefore, subject to the restrictions imposed under European trade laws. It affects trade among EU members, and restricts, interferes with and distorts competition. It is illegal under these laws and for this reason, the company is likely to run into difficulties with the trade commission. Competition law in the European Union prohibits any form of collusion or agreement among competitors to take actions that reduce competition among them (Rainer, 2011). Competition takes many forms in trade. Firms pursue different competitive strategies such as differentiation, lower prices, high quality products and services among others. Competition is healthy and maintains vibrancy in the market. When competitors agree to reduce competition amongst themselves either by fixing prices, restricting the sale of or agreeing not to sell competing brands, controlling supply and demand artificially among other activities, this affects trade in negative ways. In most cases, these groups of firms set prices or engage in practices that either hurt the consumers or bring other businesses to their knees. These are the consequences that trade laws are concerned about. Not all forms of agreements which may be termed as anti-competitive are prohibited by the law. Agreements that are entered into by smaller firms that have insignificant shares in the market in question are not prohibited. So are agreements that are not made among competitors. The focus of competition laws squarely falls on agreements which are made among competitors. It also falls on firms which intend to take advantage of their market leader positions to control the trade practices of other smaller firms (Nanayakkara, 2002). Agreements among competitors whose aggregate market share exceeds 15% are prohibited under Chapter 1 of the Competition Act and Article 81 of the EU treaty if they restrict competition (Rainer, 2011). KM, DK and NCF’s combined market share in the region amounts to about 20%. This automatically places their anti competition agreements within the prohibitions in the competition laws. Agreements to produce or restrain from the production of specific products may fall within the prohibitions if they are likely to have an appreciable effect on competition. In this category are also agreements under which competitors agree to share markets in particular proportions. If the agreement is crafted to enable the parties to share the market on the basis of customer type, size or territory, then that agreement contravenes the provisions of competition laws (Nanayakkara, 2002). Agreeing to sell the dishwashers only in areas specified under the agreement, amounts to a market sharing arrangement. This arrangement, in addition to the agreement to set prices at which the dishwashers will be sold is restrictive in nature. the two agreements interfere with the operation of market forces and competition in the region. They are prohibited under competition laws and, therefore, KM and the other parties should not have entered into them. This is because of the negative effects they have on trade, and the fact that the commercial activities of some parties are restricted. KM’s actions are not only illegal, they are also unethical. The company is a market leader in the dishwashers market in Europe. It holds a share of about 10% in this market, and this share is set to go up. Its competitors each have a lesser portion of the market, and KM is obviously taking advantage of its position in the market to control other players. The effect of these decisions is to restrict the capacity of its competitors to carry out trade. The agreements between KM, DK and NCF do not have to result in undesirable consequences, or be tainted with illegalities. Changing some of the agreed terms has the potential to improve the state of affairs. The license agreements should be crafted in such a way that DK and NCF have the freedom to carry out their commercial activities without unnecessary restrictions. The two firms should not be restrained from selling their own brands in areas where KM has presence. KM should also leave market forces to determine the prices at which the dishwashers should be sold. Its price fixing agreement is restrictive on competition and is potentially bad for trade practices in the region. Taking these steps will remove the illegalities that taint the commercial transactions that the firms will undertake under the agreements. KM’s other option is to acquire and form a new subsidiary. Acquisitions are common in most markets and it is a trade practice that takes place all over the world. Companies use acquisitions to achieve various economic or strategic goals. The intention of acquiring a competitor and forming a subsidiary may be to penetrate into new markets, reduce competition, increase market share or enlarge distribution channels. KM’s intention in acquiring DK is to expand its distribution channels and network, reduce competition and enlarge its market share. It already has a huge presence and a significant market share in this region, and this is what it intends to enlarge by acquiring one of its competitors. Its strategy is to take advantage of DK’s wide distribution network and existing production capacity in its factories. Under the acquisition agreement, KM will stop manufacturing some of DK’s dishwashers and continue producing its own using DK’s machinery. The new subsidiary’s products would be sold at prices that are discriminative in the region. In one part of the market, the products will be sold at a price way below their market value, as an “introduction” strategy. There is also an agreement prohibiting the resale of the chips in parts of the European and American market. These agreements give rise to different sets of legal concerns and complications. Competition law prohibits agreements to fix prices for goods that are supplied for resale. A supplier cannot make an agreement that sets the price of such goods (Mallor, Barnes, Bowers, Langverdt, 2010). KM proposes to do this by setting the price at which the wholesale goods are to be sold. There is also a proposal to restrict the resale of the chips in various parts of the region. This contravenes the provisions of competition laws. Firms are not allowed to enter into arrangements that have the potential to control supply and the availability of products in the market so as to influence prices. By restricting the resale of the chips, the companies interfere with the supply of the chips in the market, and this has undesirable effects on prices. They most definitely, will shoot up. An agreement to set or fix the minimum price under which the goods will be sold is also illegal. Anti dumping regulations provide for penalties/levies to be imposed on goods that are imported and sold below their true market value. Goods sold in the South European region will be available at half the prices that the subsidiary will charge in the Northern region. These goods will attract anti-dumping duties, since they are sold at a price that is less than the fair market value. The purpose of such duties is to mitigate the negative effects that such prices would have on goods sold in the domestic market, and curb unfair competitive practices. KM can avoid all these negative consequences of its actions by dropping its idea of price discrimination and not restricting the resale of its chips. The company should supply its products in the region and have them sold at fair prices. If this is done, then it will not attract anti-dumping duties. Neither will it run into trouble with the trade commission for selling its products at discriminating prices in the region. The global nature of international trade necessitates vigilance in the regulation of the conduct of firms carrying out trade. Their activities not only affect their businesses, but also trade activities in other countries. Some firms have such a huge market share that they can easily control the others, or take action that influence trends in the market. This is why it is essential for trade laws to restrict various activities that interfere with freedom to carry out commercial activities or inhibit competition. Competition and anti-trust laws play a significant role in ensuring that cartels are not formed in the market to interfere with the normal operation of market forces. Every firm looks out for its own interests, and its strategies are always crafted with the aim of acquiring a larger market share, higher profits and a better competitive position. The lengths to which such a firm will go to achieve this are great, and they may not always have positive impacts on the market. this is why the law has to come in and instill some order into commercial practices. References Ferraro, P 2004, ‘Poetic License? Caveats for Buying or Selling Technology: A Well-Crafted License Agreement Helps Maximize Financial and Technological Profits and Reduce Risk’, Contract Management Vol. 44, no. 7, pp. 102-113. Folsom, R, Gordon, M, Spanogle, J & Fitzgerald, P 2009, International Business Transactions: A Problem Oriented Course book, West, Washington. Mallor, J, Barnes, J, Bowers, T, Langverdt, A 2010, Business Law. The Ethical, Global, and E-Commerce Environment, McGraw-Hill, London. Nanayakkara, T 2002, ‘Negotiating Technology Licensing Agreements’, International Trade Forum. Viewed 19 July 2012 < http://www.tradeforum.org/news >. Rainer, G 2011, ‘Coherence in Shaping the Rules for International Business: Actors, Instruments and Implementation’, George Washington International Law Review, Vol. 23, no. 2, pp. 295-394. Schafer, R, Agusti, F & Earl, B 2009, International Business Law and Its Environment, Cengage, Melbourne. Shapiro, R 2004, ‘Mergers, Acquisitions and Due Diligence in International Trade’, The Metropolitan Corporate Counsel, Viewed 19 July 2012, Read More