Managing the International Legal Environment - Essay Example

MANAGING THE INTERNATIONAL LEGAL ENVIRONMENT Context: Export trade transaction. Legal Systems: An Introduction The exporter is faced with very different, challenging situations and constraints in pursuing his business in foreign countries. First of all he has to understand the legal system of the country he is dealing with – whether the prevailing legal system is common law, civil law, or theocratic law. These shall be discussed below. The common law system is based on tradition, precedent, and custom and is found in Great Britain and its former colonies, and in the United States. Judges here interpret the law in such a way that the particular circumstances are considered in each case in the light of tradition, precedent and custom of the country in question. The civil law system is based on a detailed set of legal codes and is adopted in many countries including Japan, France, Germany, among other countries. There is less flexibility in the application of the law because, unlike in the case of the common law system, the judge is limited to applying the provisions of the law as embodied in written codes. It must be noted, however, that the decisions of the courts form part of the jurisprudence of these countries and are also applied in the individual cases brought before the court. The Islamic law system is the most widely applied legal system of theocratic law in the world, and governs nearly all aspects of life in Islamic countries. Its application to business is most commonly known to be in the realm of lending where interest is considered illegal land outlawed by the Koran. The exporter must come to grips with evolving and designing contracts applicable to his commercial situation. Where common law prevails, contracts have to be very detailed with all contingencies spelled out because no written codes can be referenced. However, in civil law systems, contracts can be shorter because many issues covered in such contracts are already covered in the civil code. The exporter has to be sensitive to the differences of legal systems in countries where he exports his goods because in case of a contract dispute, the strength of his position in court can be affected depending on the legal system that obtains. Where international trade transactions result in a dispute, the question raised is always that of which countrys laws apply. For some countries the issue has been resolved with the establishment of the United Nations Convention on Contracts for the International Sale of Goods (CISG), which was adopted in 1980 by ll countries, including the United States, and took effect in 1988. The CISG establishes a uniform set of rules governing certain aspects of the formulation and performance of commercial contracts between buyers and sellers who have their places of business in different countries. For those whose countries ratified the convention, the provisions of CISG are adopted as its laws with application to contracts involving sale of goods between firms, unless the parties explicitly opt out. As of 2002, only 61 have ratified the convention, and the rest, including Japan and the United Kingdom, have not. If the firms parties to a dispute do not accept the CISG, they may select arbitration by a recognized arbitration court. What comes to mind is the International Court of Arbitration of the International Chamber of Commerce based in Paris. Party autonomy is the rule. This means that parties can always choose the applicable law, the nation for court jurisdiction to resolve disputes, and the remedies. Traders from countries that do not use the CISG should be familiar with the commercial laws of countries where they have business transactions. The use of contract forms from ones home country, with its own set of legal concepts, may not be applicable in other countries, and can be risky. Jennings (1997) suggests the certain guidelines to avoid pitfalls in international transactions, and these are shown in condensed form below: 1, If possible, use simple contracts. In some countries such as Germany, they prefer short contracts but with reference to the terms and conditions of one of the parties. 2. Watch for unconscionability protection. An unconscionable contract is one that gives all the benefits to one side and all the burdens to the other party. Other countries apply unfairness protections also to commercial transactions, not just on consumers as is found in the United. States. 3. Some disclaimers commonly found in the United States are void in some other countries. In some countries, liability attaches for at least gross negligence. 4. One contractual partys unilateral attempt to limit liability may be void in other countries. Any liability limitation must be specifically addressed and negotiated. 5. Price increase limitations are typical in non-US contracts. 6. In other countries, parties can refuse to pay on a current contract if performance on an earlier contract was less than satisfactory and damages are owed. Property rights. Foreign countries legal systems have laws protecting property rights; however, they differ in terms of how they are enforced by the authorities. Property rights refer to the bundle of legal rights over the possession and use of a resource or property, including income derivable from such resource. Resources include land, buildings, businesses, and intellectual property (patents, trademarks, and copyrights), among others. Property rights, when not properly enforced abroad, can be violated - either through private action or through public action (Hill, 2005) Private action refers to theft, blackmail, piracy, etc., committed by foreign individuals or groups. A weak legal system can make ones property vulnerable in some countries where law is not properly enforced. Public action refers to violation of property rights through the action of public officials, such as politicians and government functionaries by extorting money or property from owners. This can be done through legal mechanisms such as excessive taxation, expensive permits or licenses, or expropriation of private property without compensation. Public action can also take an illegal form - through corruption and bribery where public officials and government bureaucrats extract benefits from foreign business persons in return for the right to operate in a country. Transparency International regularly publishes a list of countries ranked according to the prevalence of corruption. Countries high on the list (those scoring low points in the ranking) significantly discourage foreign direct investment as well all sorts of business transactions with foreigners. The Foreign Corrupt Practices Act has been implemented by the United States since the 1970s. This law does not totally condemn acts that can be construed as irregular because it allows for certain exceptions. One of these is the payment of money to expedite or secure the performance of a routine government procedure. Examples are payments to speed the issuance of permits or licenses, process paper work, or just to get the goods be release to its destination (Hill, 2005). This is evidently a gray area which the US government considers to be tolerable because the harm of doing nothing greatly exceeds the benefits, and is also a way of coping with the realities in foreign cultures. Intellectual Property Rights Ownership of intellectual property is established through patents, copyrights, and trademarks. Intellectual property is a very important resources for some businesses. If it is not protected, investments in research and development and the creation of innovation would stop. Thus a patent would give a pharmaceutical company 20 years of exclusive use as a reward for the often expensive, difficult and time-consuming task of doing research. In countries such as China, this has become a problem particularly for goods that can be copied and distributed via pirated CDs,or over the Internet. Even with the signing of the Paris Convention for the Protection of Industrial Property by some 96 countries, weak enforcement in some countries has made a mockery of its provisions Product safety and liability There are certain safety standards that must be followed with regard to the trade and use of products. Product liability refers to holding a party responsible for product that causes injury, damage or death. An exporter has to know and understand product liability laws in countries he is trading with in order to prepare counter-measures in case liability suits arise. Macroeconomic factors. The exporter is faced with numerous risks that includes not only legal risks but also political and economic. Before going into a trade transaction, he must study the political situation because a violent change in government, for example, can result in huge losses. Or a new government can nationalize certain assets owned by foreigners, and doing so without due compensation. Well this scenario is less common than other kinds of risk, the macroeconomic situation deserves a closer look. The exporter may, for example, expose himself to the risk that currency movements of the foreign country with which he has trading relationship might work to his disadvantage and loss. If an American, for example, has a contract whereby the export proceeds are denominated in Japanese yen to be paid by the Japanese importer, the devaluation of the Japanese currency can cause him problems. A depreciation or devaluation of the yen can cause the dollar value of his export receipts to be less in US dollar terms. On the other hand, if the yen appreciates or is revalued, he can gain in the sense that the yen received can be be converted into US dollars at a higher exchange rate. A trader who wants to avoid currency risk must do certain things to protect himself (See Krugman and Obtsfeld, 1991). One strategy the American exporter can adopt to protect himself is to have his trading counterpart pay him in the US currency. In this way, whatever happens to the Japanese yen, he stands to receive the whole amount of his export income in US dollars. The less pleasant side, of course, is the chance that the US dollar could depreciate, and he would regret that did not use the yen as the denomination of his contract. If his contract is denominated in a currency other than the US dollar, then he should consider going to bank and arrange for a forward contract to protect himself in case the other currency drops in value. He will have to pay a premium for such an arrangement, with the forward price higher than the spot rate. Another alternative is to go the futures market and buy a futures contract buying the US dollar (= selling they yen) that assumes that the Japanese currency will depreciate. Still another alternative is for the exporter to buy a call option on the US dollar against the yen or a put option on the Japanese yen. In this way he can profit from the drop in the value of the Japanese yen and yet if the market moves against him, he stands to lose only the premium that he had paid as he did not exercise the option. Conclusion The legal strategies discussed in this paper pertained to steps that would ensure that the exporter takes advantage of opportunities as well as avoid the pitfalls that can stem from the legal system and practices in a foreign country. This involved first of all an understanding of the legal systems before embarking on a trade transaction, and then utilizing them to his advantage. However, not all legal or legally related risks can be avoided or hedged. Contracts are especially important, and the exporter should make sure that the contracts he enters into are equitable and advantageous and provides protection in case of adverse events. One of these is the currency risk: The trader must make sure that his currency is used as the denomination in the contract, and if this is not possible for any reason, he should be able to undertake appropriate action to protect himself from financially injurious currency movements. BIBLIOGRAPHY Baron, D.P. (2003). Business and its environment, 4th edn, Prentice Hall, Upper Saddle River, NJ Hill, C. W. L. (2001). Global Business Today (2nd ed.). New York: Irwin/McGraw Hill _____________(2005). International business: Competing in the global marketplace, McGraw-Hill, New York. Jennings, M.M. (1997). Business: Its legal, ethical, and global environment, 4th edn, South- Western College Publishing, Cincinnati, OH. Krugman, P. R. & Obstfeld, M. (1991). International economics: Theory and policy (2nd ed.). New York, NY: HarperCollins Publishers. Read More