International Bus

8/8/2019 International Bus

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International Business TransactionsProfessor Barrett

Room 1011Work: 530-2131Home 531-4311

E-Mail: [email protected]

January 10, 2000, MondayINTRODUCTION (Read pp. 1-48)There is no exam. The beginning of April we will work on a negotiation problemwith another student. We will be negotiating a deal and drafting a contract.Contract is 45% of class grade. 55% Memo of why we decided what we did isalso required in a memo form. This should explain why we made the deal wedid. Can rewrite the contract, but not the memo. At that point the rewrite can be

I. The Conduct of Business in the World Community1) Commerce or Isolation: The Decision to Trade (p. 2)

a) Trade Barriers:(1) Tariffs: Taxes(2) Quotas on the number of imports(3) Labeling/Inspection/Emission Standards etc. (Product

Standards hardest to enforce, becomes a major barrier)b) Trade Imbalances

(1) Trade deficits makes a free floating currency devalue. The effectis that goods become more expensive from exporting countrywhose currency is worth more.

c) Defaults on Loans to Developing Nations(1) Debt for equity swaps (interests in companies and other

property were swapped)d) Investments Abroad(1) Avoids many trade barriers(2) Lower production costs(3) Investment in the foreign country and transfer of technology and

employment of citizens(a) Restrictions of pulling assets out of the country(b) Restriction of foreign ownership(c) Governments nationalize the businesses.

2) The Actors: The Nations and Institutions of International Trade (p. 12)a) Who Are the Foreign Traders? (p. 12)b) Non-market Economies and State Trading Organizations (p. 15)

(1) Socialistic Governments: Control all aspects and like counter-trade (barter)

c) Dependent, Developing and Advanced Developing Countries. TheNew International Economic Order and a Law of Development (p.16)


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(1) Developed Nations, Less Developed Countries (LDC), NewlyDeveloping Countries (NDC), Mature Developed Countries(MDC)

(2) Growth of Trade Blocksd) International Economic Institutions (p. 18)

e) The Role of Counsel in International Business (p. 22)(1) Recognizing and Heeding Cultural Differences Can Be Key toInternational Business Success (p. 26)

(2) Danian Zhang an Kenji Kuroda, Beware of JapaneseNegotiation Style: How to Negotiate With Japanese Companies(p. 30)

(3) Robert S. Vineberg, Globalisation of the Legal Profession:Workshop at the Paris Conference (p. 33)

(4) Detlev F. Vagts, The International Legal Profession: A need forMore Governance? (p. 35)

3) Forms of International Business (p. 41)

a) Trading Goods Across Borders: Exports and Imports (p. 41)b) Licensing Production Abroad (p. 43)c) Foreign Investment (p. 45)

January 10, 2000, WednesdayBASIC DOCUMENTS (Read pp. 48-74)4) Agreements for the International Trading of Goods (p. 48)The Basic Transaction: Toys to Greece (p. 48)a) Factors to Consider How is an International Commercial

Transaction Different From A Domestic One? (p. 48)(1) Sellers Risks:

(a) Will they get paid(b) Shipping costs(c) Getting through customs(d) TRUST

(2) Buyers Risks:(a) Will they get what they ordered?(b) Quality(c) TRUST

(3) Currency / Payment:(a) What currency will it be paid in(b) How will fluctuations in currency be handled?(c) How to protect against unforseen events that can interrupt

payment(4) Jurisdiction:

(a) What law applies(b) Is there a convention or treaty that deals with this(c) What US law may apply

(5) Risk Reduction:(a) Assignment of the forseeable risks of transactions as clearly as

possible in the contracts involved. Special language and rules


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(b) Break down large uncertain risks by creating devices whichbreak them down into small measurable risks.

The sale contract between buyer and seller

The letter of credit contract between buyers bank and seller

Bill of lading contract between seller and carrier.

b) The Sales Contract (p. 50)(1) Initial contact is request of price quotation(2) Seller sends a pro forma invoice as a quote (offer)

FOB: Free on Board: The material is yours once it is put onshipper.

Freight charges: FAS is charge that seller would charge toget to port of shipment

C & F: Cost and Freight: Cost if seller ships to buyers port.

CIF: Includes insurance of material(3) Negotiations to reduce risks outlined above(4) Documentary Sales is set up in some case: Payment against

documents (title of goods) You give payment when documents aregiven to you.(a) Problem is that there is no requirement to pay this way. How do

you enforce in another court.(5) Purchase Order (Acceptance)

(a) This could have different terms than pro forma invoice. Is therea modification of the original offer, is this a counter offer instead.

(b) Counter Offer under UCC keeps terms that are consistent andstrikes out different terms and fills in the gaps with UCCstandard contracts.

International Law is that the terms of the counter offer would

apply if Seller performs (They have acquiesced to thecounter offer by performance)

This is mirror image or common law approach.(6) Now have a completed contract

c) The Letter of Credit (p. 55)(1) Letter of Credit: If you do certain things, we will pay you.(2) Guarantees payment in a way that just a documentary sales does

not. Irrevocable v. Revocable letters of credit.(3) Banks do this because they are in the local country of buyer and

are informed about credit worthiness of buyer.(4) Bank opens letter of credit for the benefit of the buyer. They make

arrangement with US bank. Seller would accept from reputablebank in US which is under US law.If unaware of bank. Confirmationof irrevocable letter of credit by US bank.

(5) US Bank by confirming letter of credit agrees to pay the letter ofcredit if the seller does certain things.

(6) Letter of Credit is subject to Uniform Customs and Practices forDocumentary Credits


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(7) The Bank confirms: They undertake to purchase all drafts drawn asspecified.

(8) If bank advises letter of credit, they dont guarantee payments evenif you meet the terms of the letter of credit.

d) Seller Ships the Goods (p. 57) (Shipper is the party arranging forshipment, carrier is the party that actually moves the goods)(1) Freight Forwarder is hired to take care of paper work.(2) Seller gives details to forwarder with letter of instructions as to

required documents, etc.(3) What is the good, where is it going? Many goods have multiple

uses. Cannot ship to an intermediary who then ships to ultimatedestination. (e.g. send to England and know that it is ultimatelygoing to Iraq)

(4) Sometimes you need a license to ship items and other items dont.(5) Certificate of Origin is a standard document that is issued by an

entity (usually government). This is used to calculate the correcttax rate. Most countries have different rules on this. (e.g. embargoof Cuba by US or Arab countries embargo Israel).

(6) Carrier gets the goods and gives shipper a dock receipt that saysthat the goods are here and they will be held until the ship gets intoport. (the temporary holder of goods is the baillee of the goods)

(7) Carrier now issues a bill of lading when the goods are loaded onthe ship. Bill of lading is:(a) A contract of carriage(b) A contract of bailment (rules of bailor / bailee apply)(c) If a negotiable bill of lading the seller still has control of the

goods (Yellow). This is a to the order of type of transaction.(d) Straight bill of lading (White) is not a documentary sale and just

goes to the person who is the consignee(8) Clean Bill of lading: There was no evidence of breakage or damage

to the material. If Bill of lading indicates damage, it is a fouled billof lading and the buyer may reject the goods.

e) Payment of Seller(p. 68)(1) Sight Draft is presented to the US Bank by seller and is paid

according to the terms of the Letter of Credit.(2) US Bank gives bill of lading and draft to Foreign Bank(3) Foreign bank gives buyer bill of lading and pays US Bank(4) Buyer takes bill of lading to the carrier and receives goods(5) Downside is that the buyer does not see the goods until they arrive,

but after he pays. Many buyers may require an inspectioncertificate by a reputable inspection company. Buyer can rejectnon conforming goods, but it is tough to sue.

Questions and Comments (p. 70)1)


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January 19, 2000 Wednesday CONTRACT FORMATION (Read pp. 75-103)Formation of an International Transaction1) Traditional (pre-treaty) analysis: conflicts of law, or "choice of law"

DETERMINE WHOSE LAW APPLIES BY THE CONFLICT PRINCIPLE

A) CONFLICTS OF LAW RULES(First fact pattern): Do the parties have acontract, after seller sends Order Acknowledgement Form?(1) Whose law of contracts applies: Germany or Kansas?

(A) Whose choice-of-law rules? Those of the forum state!(B) Assume action brought in Germany (EEC Approach) , German

conflicts rules:a) law chosen by the parties will govern the disputeb) otherwise, country of closest connection

(a) Presumed : home base of party making characteristicperformance: (What is characteristic performance? Dontlook at payment, look at providing the goods. It is usually

where the goods are shipped from according toconventional wisdom)c) Validity : Whichever law validates K. One of 3 can probably

validate K.(a) law that parties chose or,(b) where characteristic performance takes place or(c) place of contracting,

d) To which law do these rules point in our case?(C) Assume action brought in Kansas : Restatement: Conflicts of Law

(Second) (1971) (p. 80)a) "most significant relationship to the transaction and the parties":

multi-factor balancing test (6 factors, 5 contacts)b) Rule of thumb : if place of negotiating and of performance

coincide, then presumptively that lawc) Contacts : what result after weighing?

(a) place of contracting(b) place of negotiating(c) place of performance (Is performance where the goods are

shipped or paid for)(d) party connections

(2) What terms are included in the contract? ("battle of the forms")(A) Kansas law : UCC 2-207(Battle of the forms) (p. 80)

a) "additional" vs. "differing" termsb) "Materially altering" terms: disclaimer of warranty? Choice of

law?(B) German law : 360 of German Commercial Code (1979) (p. 87)

a) "mirror image" rule (EEC Approach) , (last shot rule applies ifparties perform on any counter-offer) subject to

b) custom of "order confirmation forms" by merchants, shiftingburden to buyer


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1) (Second fact pattern): buyer's claim for corrosion damage? Sellersdisclaimer?

(1) Kansas Law :(A) Contract formed by the writings. Implied warranties: merch'bility

or fitness?

(B) Contract formed by conduct.(2) German law :(A)Contract formed by writings.(B)Contract formed by conduct. (constitutes an acceptance ofthe last shot rule)

(3) International law: the Vienna Convention on International Sale ofGoods (CISG):(A) Does the Convention in fact apply as between U.S. and Germany?

(p. 29 of Supplement)a) Art. 1(1)(a): The CISG applies when the States are Contracting

States, or

b) Art. 1(1)(b): when the rules of private international aw lead tothe application of the law of a Contracting State.(a) U.S. reservation: Art. 1(1)(a) applies only(b) German declaration in response is that if there is a

reservation that the CISG does not apply. What this meansaccording to Germany, they respect the other countriesreservation, however if both parties are signatories then theCISG usually will apply if both countries are signatories

(B) Does it change the above analysis according to the CISG? Place ofbusiness that is performing the K determines if CISG applies.There is no Statute of Frauds in the CISG. U.S. and Canada (whoboth have Statute of Frauds rules) could enter into an oral K andenforce it under the CISG, because CISG trumps. CISG alsofollows the last shot rule.a) 6: This is an opt out provisionb) 18: CISG follows the last shot rule (mirror image rule)

Contract based on performance.c) 19:d) Warranties: 35: Warranty is that the goods are fit for the

purpose stated, or for the special use made known to the seller,unless the buyer was relying on the sellers knowledge wherethe knowledge can be assumed. Implied warranty

e) Warranties: 36: no implied warranties. Should use languagethat puts people on notice (e.g. all warranties implied orotherwise rescinded not say that material as is)

(C) How to avoid these uncertainties? Be clear in the K what does notand does apply. K said we contracted out by choice of law andindication of UCC applies. Problem is that Kansas law = Federallaw = CISG. Should argue intent governs.


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January 24, 2000 Monday COMMERCIAL TERMS (pp. 104-133)Problem 4.2 Commercial Terms, Bills of Lading and Insurance Books to BathFOB Free on Board. Key is where. The obligation of the seller is to place thegoods with the shipper. At that place the goods are moved at the risk of the selleror buyer. (FOB Destination is risk of loss is to the seller / FOB Shipping Point is

risk of loss to the buyer)United Kingdom: FOB: is understood to mean FOB vessel.Classic: Seller puts goods on ship and contracts for shipping. (seller willarrange for carriage, but dont want to pay for it. Technically the buyerretains the right to arrange for the ship. Seller will get bill of lading to orderand transfer over to buyer and the buyer will arrange for insurance. (Thisis a documentary sales under British law)FOB Contract with additional Services: Shipping and insurancearrangements are made by the seller, but this is done for the account ofthe buyer.FOB Contract(Buyer contracts with carrier). The Buyer enters a K of

carriage by seal directly or through an agent. This is not a documentarysale.United States: FOB is understood to mean FOB place of destination.

UCC 2-319: FOB the place of shipment the seller must at the placeshipment the goods and bear the expense and risk of putting them intothe possession of the carrier (if you name a vessel under the UCC this is adocumentary sale and buyer loses the rights to inspect goods)

CIF: Cost Insurance & Freight. This is a price quoted and the loss will be paidby the insurer not the seller or buyerFAS: Free Along Side: e.g. The shipment is on one mode of transportation andbeing loaded on another mode of transportation. In this case the loss isencumbered by the seller until it is transferred and new terms take over as toresponsibility and liability on the goods.INCO TERMS CHAPTERS E, F, C, DChapter E: Least commitment by the seller. (Seller says that goods are availableat the factory and you take responsibility on pick upChapter F: Seller is responsible to deliver goods to a particular place or carrierChapter C: Title of goods transfers to the shipper at delivery, but the seller willtake on a minimum of paying for the shipping and possibly the freightChapter D: Seller at a minimum must take responsibility of getting products Okdfor export.

FOB (Sellers place) CIFPrice INCO TERMS:

Covers goods and Goods, packing, shipping andPackaging. Does not insurance. These are to beCover insurance. Buyer covered to the destination.Must arrange for carriage Insurance must be 110% of(a ship) and tell the seller the amount stated in the K andwhich ship to take it to must be in the currency of K.


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When Pay Not technically identified Unless agreed otherwise, theunless specific to K. standard method is to payUsually construed to be against documents (bill ofCOD if nothing is lading, insurance documents,

mentioned In K. (Most other certificates and bank draft.of the time payment draft.) Can have a cash sale instead ais part of the K.) letter of credit, have terms, pay

by credit card.

Right to Inspect Based on Local Law Right to inspect is after theNot an INCO RULE: receipt of documents. The onlyBasic is rule is that buyer inspection is that you have toCan inspect before he pay. If there is a contractualpays. Breach for non-conformity of

Goods, the buyer has the right

To reject the non-conformingGoods according to time limitsOf local jurisdiction. Problem isThat seller already has yourmoney. Caveat Emptor: If theDocuments have a defect andBuyer accepts them with defectshe is out of luck. One way to dealwith this is by certificates ofinspections by reputablecompany.

Delivery: Seller delivers the goods Seller delivers the goods to theto carrier at the place of carrier of the shipment. (Shippingshipment. Obligation is much more, must

deliver to port of buyer.Title Transfer Title transfers at the time Title transfers at th time and

and place of the place of the shipmentShipment

Loss Buyer at the ships rail Buyer at the ships railat the port of shipment at the port of shipment.

Bottom Line: Seller may be out if Goods dont show up.He will want to be namedIn insurance policy asAdditional insured (ifGoods are lost at sea, heIs screwed otherwiseBecause even thoughbuyer has title to


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goods he wont pay ifno goods are received.

Customs: Seller is responsible for customs at sellers country andBuyer is responsible for customs at buyers country unless

agreed otherwise by terms.1) Buyer arranges for carriage (p. 105)2) Seller has responsibility (p. 105)3) See page 1054) Skipped5) See page 1056) See page 1057) Negotiable for CIF, Non-negotiable for FOB unless COD (however open

account is most common way)8) Is the bill of lading fouled. (Next class)

January 31, 2000 MondayNO CLASS

January 26, 2000 & February 2, 2000 Wednesday FRUSTRATION (pp. 134-165)1) When can a person be excused from performance?

a) Each K calls for a specific act. One of the crucial issues is: What is theperformance to be excused? Is it one specific act or is it all of the acts?(1) Broader view: Whole transaction is viewed as several small

transactions(a) British Approach : Ocean Tramp Tankers Co. v. V/O Sovfracht

(The Eugenia)(p. 139) The situation was fundamentally different

from when the contract was negotiated. K was to pickup materialsin the Black Sea and take it to the India. Boat was chartered on atime charter. When negotiating the deal they know there is apossibility that the Suez Canal will close. Parties do not specificallyallocate the risk one way or another in the K. The ship enters theSuez Canal and is stuck there. The owners of the ship asked thecharter holders to notify them when they got to the entry of theSuez Canal, and they did not do that. The court found that sincethe charter holders to the boat into a war zone they were inviolation of the war clause (breach of the K). The alternative was totake the boat around the Cape of Good Hope to get the boat toIndia. By going this way, the costs would go up. The British wouldexcuse non-performance of the K if the K is frustrated. Frustrationis a fundamental different situation for which the parties did notmake provisions. The court said that it was foreseen that the Suezarea was a possible war zone and the owners had terms that the Kcould not be taken into the war zone. The court felt that the charter


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holders knew of the risk and it was foreseeable and theydeliberately did not contract for this. This is not frustration.

(b) CISG : Uniform Law for International Sales: Article 79 of the CISG isthat either party may be excused from liability for the failure toperform any of his obligations. UCC 2-615 provides that only the

seller is excused and then only with respect to delay in delivery ornon-delivery.(1) Must be an impediment, beyond your control and could not be

reasonably expected to take into account the impediment whenyou signed the K and that you cant reasonably overcome getthe impediment. (Economic hardship is not enough)

(2) The ultimate contractor can use a failure of a 3rd party who isexcused by an impediment.

(3) Economic Hardship: The fact that you will not make as muchmoney does not excuse you. At a certain level, it becomesunreasonable to expect someone to do something.

(4) Use CISG first only use local law unless the CISG and generalprincipals cannot resolve (Impossibility and impracticability arethe approaches of CISG)

(5) CISG applies to all parties who are in countries who aresignatories of the CISG

(c) UNIDROIT Approach:(1) Non-Performance : Standards are the same as the CISG to

consider non-performance. If you only have a hardship then:(2) Hardship : There must be a

Fundamentally altering the equilibrium of the contract eitherbecause the cost of a partys performance has increased or

because the value of the performance of party receives hasdiminished.

Must be beyond the control of the disadvantaged party.

Must not have assumed the risk (If risk has been deliberatelyallocated then you have assumed the risk).

(d) Uniform Commercial Code :(1) 2-265 excuses the seller only. We make it very hard to excuse

performance. If there is a new government regulation banning aportion of the K then this is frustration and you do not have toperform.

(2) Look to the British approach with impracticability . Even radical

price changes are not enough in the US. Look to theexpectations of the parties. Did someone assume the risk.

The non occurrence of the event must have been a basicassumption of the K. (it must have been something thateveryone assumed it would not take place)

The occurrence must make the performance commerciallyimpracticable


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(e) France : It is an absolute unforseeability and impossibility rule.Otherwise you must perform the K.

(f) Germany : Most flexible of all countries. Adjusts the K to be fair toboth parties. (Goes back to UNIDROIT). Germany the price canbe adjusted, good faith plays a major role as to what is acceptable.

(2) Narrow view: Look at end product of Kb) If you have a contract, there are different standards of excuse. Therefore,

it takes you back to choice of law. If there are K terms to specify this, itbecomes easy. If there are no K terms to specify choice of law, what doyou do then?

2) What kind of damages can be exercised if there is no excuse?Problem 4.3 (p. 134)Javert did not K for specific oil. CISG applies.1) Jean Val Jean and Javert K: Was this an impediment beyond Jean Val Jeans

control?

CISG would say maybe it wasnt K for Araby oil and Jean Val Jean wasexcused from delivering only if terms of K exclude him. Could piggybackliability from other suppliers.

2) Gulf Oil Case: What was the K for? Was it to supply Gulf Oils oil or someoneelses? The court will tend to say the K was about Gulf Oil and therefore theperformance was for Gulf Oil. Court would look to reasonable diligence tosupply. Probably lets Araby off the hook. (Could argue that under CISG thatJean Val Jean is excused if Gulf Oil is excused). UCC would say that Gulf didnot assume the risk of the fire and the non occurrence of the fire wasbasically assumed and therefore it was commercially unable to supply oil.Impediment was beyond the control.

3) Carriage contracts: Should the carrier be able to take the longer route and billthe suppliers. In most cases, the idea is to allow longer route. Time was ofthe essence in this case. The carrier says that his deal is with Jean Val Jeanand his deal is not time sensitive, but he deal between Jean Val Jean andJavert is time sensitive. The carrier says he is not liable. Do you look at theentire deal or just the carriage contract?

4) Damages: These are calculated for contract breach by the reasonableexpectations (putting the party in the position in which he would have been ifthe contract had been executed). Jean Val Jean will have to acquire fromsomeone else therefore his measure of damages will be the differencebetween the contract and what he had to buy it for. (e.g. If you were going tosell it to me $10 and I had to buy for $15 you owe me $5)a) What date do you use?

FIXED DATES:(1) Date that the goods were suppose to be delivered to the carrier for

shipment (this is when the breach occurred); or(2) Where title was going to pass (US historical FOB approach);or


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(3) When the documents of title get to the buyer (Buyer owns the ideas, hehas paid and delivery should have taken place historical Englishapproach); or

(4) Date the goods were to delivered by the carrier to the buyer; orWHEN DID THE BUYER LEARN?

(5) Modern approach (used in the US now) look at the actual price ofcover (price to substitute) (There is a point when the buyer knew therewas a breach and he had to try to make himself whole) Must actwithout reasonable delay.

(6) If you do not cover they go back to when the buyer learns of thebreach and look at the market price at that time.

TO AVOID TRY TO GET A FORCE MAJEURE CLAUSE IN ALL CONTRACTS,SO IF OUT ONE CONTRACT, THEN NONE OF THE CONTRACTS AREENFORCEABLE. PROBLEMS:

(1) There are industry standard force majeure clauses. The standard tradeclause could be renegotiated, but this is hard.

(2) Could put into K: I am excuses if others dont perform In their contractswith mea) Others will no go for this, no protection, what constitutes an inability

to perform?b) There is no incentive for the seller to enforce the underlying

contract. There is actually an incentive to use questionablesuppliers to maximize profit by using unreliable suppliers.

(3) I am excused if the others are excused: Too vague(4) Be precise about what is being sold, so if that specific product cannot

be supplied you can get out of the contract. (Concern is if you tell yourbuyer too much they can go directly to the direct supplier)

(5) Try to get insurance: This could be insurance against loss, damages,against delays, except on a rise in price, (Buyer could do this but itcosts some jurisdictions differ on the insurable interest). Could by anoption in the commodity market when the contract is entered into if youare worried about a rise in prices or any other insurable interest.) (Golong or short based on where you think the price will go). Write off theoption and let it go if the price does not go up, but take the option is theprices are higher than your optioned price.


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February 7, 2000 Wednesday E-COMMERCE (pp. 166-195)Problem 4.4 Electronic Commerce: Professor Pedro Buys a Book (p. 166)1) Professor Pedro from Rio de Janeiro, Brazil bought a dozen books over the

Internet from rhein.com a book retailer based in Germany.a) This was a non paper-based contract (Was there a writing?)

b) Pedro furnished no identification other than his mailing address (was this asignature?)c) Pedro used his brothers credit card number (assume with permission) to

pay for the purchase2) Pedros purchases drained rhein.coms inventory on the titles he ordered

a) Inventory control computer noticed the inventory had gone belowacceptable levels

b) Computer was programmed to automatically purchase replacementsc) Computer automatically contacted the computers of several book

distributors/publishers looking for price/terms/delivery.d) Distributor/publisher computers automatically responded to rhein.com

computers querye) Rhein.coms computer selected the best offer according to criteria thatwas built into its programming.

3) Rheins computer issued a book order for $10,0000 work of books from EastPublishing in the United States.a) East Publishings computer received the book order, mechanically

retrieved the books from Easts inventory, packed then in a box, printed alabel with rheins address on it, sealed and labeled the box and deliveredthe box to a mail pick up point (with no human intervention).

Are there enforceable contracts between:A) Pedro and rhein.com

Can Pedro refuse to accept delivery of the goods when theyarrive?B) Rhein.com (a German company which is owned by an American

parent corporation River.com) and East (an American ownedcompany)

Must East ship the goods and must rhein.com pay for them?C) In both cases, is there an assent or meeting of the minds?

- Traditional contract law assumes the decision to accept or not acceptoccurs through human agency, through the exercise of human choicesand discretion (p. 169)

-

Intent is measured by objective manifestation (cannot say that not whatI meant) The same is held true by what a computer does by how it isprogrammed.

- A completely automated acceptance does not indicate that there hasbeen no adequate acceptance of the electronic offer.

- There must be some indication that the automated system was intendedto signify acceptance, rather than merely to confirm receipt.(Confirmation and acceptance is sent)


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- Under the Model Laws from UNCITRAL the notion that a person isbound if a message is sent by an information system programmed by,or on behalf of, the originator to operate automatically. Article 2B callsthis an electronic agent and in 1996 UETA (Uniform ElectronicTransaction Act) heightened the legal effect of an electronic signature.

-

The question is how do you associate a persons identity with anelectronic record. Digital Signatures (p. 177)

February 9, 2000 Wednesday- WHAT CONSTITUTES AN ACCEPTANCE(P. 180) Mirror Image Rule for

Pedro?D) Is the statute of frauds writing requirement satisfied?

- Does an electronic message satisfy the statute by providing both awriting and signature?

- This is unclear unless the writing has been printed out (i.e. telex or fax)

in a tangible form and not just stored on the computer.- One way is if a data log is kept per the EDI Standard Interchange

Agreement developed in the UK may meet the statute of frauds writingrequirement because all messages in the Data log are stored w/o anymodification.

E) What kind of signature can be sent over the net?- A signing by a party under the UCC is any symbol executed or adopted

by a party with present intention to authenticate a writing.- Authentication indicates that the signor assents to the writing and

adopts it as his own.- Electronic transmission does not find that a signature occurred unless a

code is adopted for authentication and security purposes thatconstitutes a signature though the code is entirely in an electronic formF) In both transactions, what are the terms of any contract formed, and

where should they look for them?- What are the effective terms of the contract?

- What law applies to each transaction?4) Rein sends daily reports of all sales to River.com, specifying the name and

address of each purchaser, and the title and subject matter of each bookpurchased.a) River produces lists from this data of individuals who are interested in

particular subjectsA) Can River continue to generate this kind of list under the EU Privacy

Directive?- Electronic Communications Privacy Act of 1986 prohibits any person

from operating an electronic communications service from knowinglydivulging the contents of communications in that service while inelectronic storage to another unless the service provider is authorizedby the service agreement to access the content of the messages.


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5) Professor Pedro received several communications from a Bahamas basedbookmaker urging him to bet on the World Soccer Games. Brazil has aprivacy law similar to the EUa) Can Pedro bring a cause of action against anyone under these facts?

CONSIDERATION FOCUS:1) Does the fact that commerce is electronic create any new legal issues?a) United States

(1) Uniform Electronic Transactions Act (UETA) in the US(2) Revisions to the UCC Article 2B

- UCC Article 2B has adopted the term record in place of writings forthe statute of frauds and redefined signed for electronic records as theuse of a symbol or action adopted with a present intent to authenticatethe writing.

(3) Several States have enacted differing Digital Signature Actsb) International

(1) UNCITRAL (United Nations Commission on International TradeLaws) has adopted a Model Law on Electronic Commerce (severalnations including Germany have adopted differing digital signaturestatutes.

c) WHAT LAW IS APPLICABLE TO ANY CONTRACTUAL RELATIONSFORMED BY AN EXCHANGE OF ELECTRONIC MESSAGES.

2) What Jurisdiction has the power to regulate what occurs on the Internet?a) Specifically the issue of privacy of personal information concerning

individuals.b) How should a dispute between the EU, which gives primacy to protection

of individual privacy, and the US, which gives primacy to the free flow ofinformation on the net be resolved?

February 9, 2000 Wednesday3) Privacy Issue Notes (p. 185)

a) EU Directive on Data Protection is based on a philosophy that thegovernment should intervene to protect the privacy of its citizens.(1) A Company that gathers personal information must first obtain the

individuals permission and explain how it will be used. It cannot beused for purposes other than those disclosed

(2) Unless the company says that the information will be sold to others,the company cannot sell its mailing lists.

(3) Germany enacted the first data privacy act(4) Article 25 of the Directive prohibits Member States from transferring

data to a third country unless it ensures adequate levelof protectionb) In the United States, individuals have a right under the Fair Credit

Reporting Act to see information on file and correct or delete it.(1) Electronic Communications Privacy Act of 1986 prohibits anyperson from operating an electronic communications service fromknowingly divulging the contents of communications in that service


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while in electronic storage to another unless the service provider isauthorized by the service agreement to access the content of themessages.(2) American businesses do not have the same privacy regulations ofinformation in the US.

(3) Companies in the US cross sell by using information gatheredabout customers, this is only allowed with the customers consent in EU(4) Data exchanges the target to marketing globally to the US.(5) The EU Directive has possible extra-territorial effect.(6) Safe harbor is proposed for American companies which adheres to8 privacy guidelines: To qualify for safe harbor, a company would haveto:(a) Notify individuals about what types of info it collected about them,

and the types of orgs to which it discloses that information(b) Allows individuals to choose whether and how information is used

by company for purposes not related to the original disclosure

(c) Allow individuals to choose whether and how information isreleased to 3rd parties(d) Take reasonable measures to assure the reliability and security of

info gathered(e) Keep only the data which is relevant to its purpose(f) Provide access for individuals to information about them held by the

company and allow them to correct the info if inaccurate (fair creditreporting)

(g) Provide effective enforcement mechanisms, including affordableindependent recourse mechanisms which have sanctions toindividuals for resolution disputes.

c) Individuals have a private right of action against those who misuse thatdata.

FINANCE- LETTERS OF CREDIT (pp. 251-285):1) Letters of Credit (p. 251)

A) Bank pays when the documents are brought in that verifies that paymentshould be made on a letter of credit

B) Rule is a rule of strict adherence (must have exactly what is asked for orthe bank will not pay the letter of credit)

C) Terms:(1) Clean Credit: is one which requires no bill of lading(2) Documentary Credit(3) Clean Bill of lading: requinre cannot be net by afoul bill of lading(4) On Board Bill of Lading: Shows that the goods had(5) Goods must be described on an invoice (precisely)(6) Revocable letter of credit: Bank can say they dont want to adhere to

the letter of creidt(7) Irrevocable letter of credit: Based on time(8) Site Draft: Can get paid on demand(9) Time Draft: Get specified times


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(10) General letter of credit: can be transfereed(11) Specific letter of creidt cannot be transferred(12) Fixed Line of Creidt: This limist the amount of credit for the letter of

credit.(13) Revolving Line of Credit: This can be replenished. (Used over an

extended time, where payor wants to pay as he goes(14) Back to Back Credit: 2 letters of credit (broker approach) Brokeruses this and leverages one letter of credit off of another (Money he isto receive from the person he is selling to is the basis for the letter ofcredit he is getting from the bank to pay the person he is buying from)

(15) Bonds:a) Performance Bond: The notion is that we will pledge $XXX for

performance. If you do not perform, you will forfeit the $XXX. Theperson who puts the bond up takes a percentage for putting alarger sum up against the competition of the duties to beperformed.

(a) US Banks cannot issue performance bonds, they are calledstand by letters of credit if issued by a bank. The tricky thingwith this is what documents would show that the performance ofthe duties were not completed within the time allocated in thecontract?

(b) Over time people are put on open account or use a stand byletter of credit (if you pay within 30 days the seller does not goto the bank, and the letter of credit is not used (Seller is slightlyoverdisposed / dont need if long term relationship)

b) Confirmed and Advised: The letter of credit buyer goes to the bankand issues a letter of credit the seller goes to his bank and he eitherconfirms or advises that the letter of credit is issued.

c)(16) d

February 14, 20002) Problem 5.1 The Letter of Credit and Electronic Communication: Gold Watch

Pens for France (p. 253)Telex LC to confirming bank without follow up letter, confirming banks telexmachine malfunctioned and printed ICD rather than LCD, confirmation anddelivery documents proceed without question ICD; issuing bank refuese tohonor on two grounds:

(a) designation of goods as ICD is non-conforming(b) commercial invoice stamped Proforma s non-conforming

The second ground is not stated in the first notice of dishonor, but in a follow-upnotice.

STRICT COMPLIANCE RULE

Is our issuing bank justified in dishonoring the documents because of thisdiscrepancy?


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JH RAYNER AND COMPANY, LTD v. HAMBROs BANK LTD. (p. 263): Thecase states that in the letter of credit that calls for one description and thedocuments presented have a different description and the document is rejected.Bank is sued for non payment. The court found that banks cannot be heldresponsible for knowing what the industry would use as terms. The documents

must strictly conform.MARINE MIDLAND (p. 270) There are things that bank must know (e.g. commontrade terms, freight collect v. freight prepaid) Specialized terms are not necessaryto know.UCC: Banks has no duty to investigate the accuracy of the document (e.g.Sellers fraud). Only need to investigate the authenticity of the documents.OTHER TERMS: (e.g. Second hand is non-conforming unless second hand iscalled for)CONFIRMING BANK PAYS with a discrepancy, it pays at its own risk.UCP: approach is that banks must use reasonable means to establish that thedocuments presented are authentic

> Who bears the risk for the screw up? Which document controls the one sent pr the one

received?Article 12 UCP: French bank should have sent a confirming letter.

(This is not an industry custom, most banks do not send aconfirming letter)

US Bank was negligent because the Telex ribbon was mis-aligned. (Howeverevery L in the text were not mis-aligned, and this would have been a pretty strongargument that the US Bank would be at fault.IF all the Ls were there, then less negligent?

if the latter, is it the electronic one received by the confirming

banks telex machine, or the printout produced by themachine for the banks personnels use, and actuallytransmitted to the beneficiary?

RESPONSIBILITY FOR ERRORS IN TRANSMISSION

As between the two banks, which is responsible for the error in thetransmission? Which, if any, is in the best position to catch and correct theerror?

Do the UCP and/or the UCC help this case?French Bank (Article 18 UCP and UCC) is acting for the buyer. Buyer isultimately at risk for any non-conformity between the letter of credit and thecontract. French Bank decided the use the Telex v. sending a letter, and

therefore buys into the liability of the buyer.Article 16 UCP says that the bank is not responsible for errors in electronictransmissions. The problem here is that the argument is between two banks.They could ultimately try to have the buyer take the fall. There is a pretty goodargument that the buyer will be left holding the bank.Buyer is responsible for errors in the transmission, because they chose the bankto deal with.


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PROBLEM HERE IS THAT IT JUST PRINTED THE WRONG WAY: US Bankproblem with Telex, French Bank should have confirmed, Buyer indemnifies theFrench Bank. Who wins? Who knows?

Proforma stamp

Case law, UCP, and UCC provisions dealing with rights and

duties of issuers Whose law applies to the dispute presented here?

TIME FOR DISHONOR: must each claimed ground be treated as a separate actof dishonor?Article 14 UCP says you only get one shot at discrepanciesUCC says you can add discrepancies provided that the beneficiary of the letter ofcredit (seller) gets a chance to cure the defects.

This means that the type of deficiency may affect if there is a discrepancy.

Case law:Bankers TRUST CASEsays that 9 days would be too long.

Old version of the UCP:and UCCUCP reasonable timeUCC 10 days

New versions of the UCP and UCC:UCP banking 7 daysUCC 7 banking days

February 16, 2000 ClassDistributorship (p. 223-250)

Term used to describe someone will not control the law. The duties performed

will actually control. In some civil law countries the description may controlIndependent Sales Employee Sales

Distributor Agent Representative

Person / entity Person / entity Person

TRANFER OF TITLERISK REGARDING SALEMfg. sells to distributor Title remains in the company Same as Ind.Risk is at the distributor Sale is made by the company Sales agent(This agency does not to the customer

create an agencyrelationship)

WHO CONTROLS WHOYOU SELL TO(Can they bind you ina contract)Dist. Cannot bind you Agent can bind if same as agent


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Given the scope of (Could be taxed ifauthority allowed to make(Usually cannot bind) K in country)

PAYMENT

Made by distributor Customer Customer (Exception: del crenerae agent)

PROFITDistributor markup Commission on the sale Salary + Commission

(May get a salary)What happens if there is a credit?

WHO SETS PRICE& CURRENCY OF SALE1) Mfg. to distributor Company makes the deal Same as agent

(mfg) and must negotiate each

2) Distr. to customer time(dist)

DOMESTIC LABOR LAWProbably not Agency law applies Domestic laborSubject to labor law (Country you are law you are sellingBut may be subjected working in) inTo distributor law

JURISDICTIONMight have jurisdiction Probably have enough Yes wll be underIn terms of transactions of a relationship with jurisdicitonWith distributor. Agent to be inIf there is a law suit, how jurisdictionCan they enforce?Limited jurisdiction overMfg.

APRCan sell where ever then Agency law give more Much more controlWant unless limits to K control to the Mfg. over the lineAre enforceable

ANTITRUST ISSUES(Only can sell our productsor only in this territory)

Anti trusts law may not Agency law could go Empoyee is youAllow you to interfere w/ as with distributor or therefore not antiThe market see agent as mfg. so trust


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No anti trust violationsLEGALITYSome countries do Generally allowed Generally allowedNot allow

FOREIGN OWNED?Many countries May need to use a same as agentMajority must be natonlaNational owned

CREATION OF SUB AGENTSProbably can do this Probably cannot Cannot delegateW/I limits of enforceable delegate agency powerContract to others

TERMINATION

Many countries use various ways of termination (Terminatino fees based onexpected profits, but can hold persons to performance standards)

February 21, 2000 Monday ClassDistributorships (contd.) (pp. 223-250)Checklist of handouts reviewedA) Countertrade (p. 247)

1) Agreement 1: for the original sale and the countertrade2) Agreement 2: for the sale to domestic company from foreign company for

a fixed price, in most cases the same total value as the first contract3) Agreement 3: called the protocol and consists of a relatively brief

agreement that links the first two agreements in an overall contractualaggregate.

Licensing Franchises & Trademarks (pp. 758-800)1) Introduction (p. 758): People need a reason to invent, a monopoly is

temporary and eventually as the protection goes away society as a wholebenefits with less cost. 3rd world countries do not like to protect, they do notwant to pay for this.a) Licenses : usually country by country basis. Can sell ownership of license

the use. 3 types of license.(1) Non-exclusive license: Both the author and the licensee have the right

to issue sub-licenses.(2) Exclusive license: It is yours and you are the only one who can use this

in the territory agreed on for a term of years. (Fee Simple)(3) Sole license: I will not license it to anyone else in the territory, but I can

compete with you in the territory.2) Patent Protection (p. 759): Patents are granted to inventors according to

national law. Patents represent territorial grant of exclusive rights. Legallyprotected intellectual property in one country may not be protected similarly in


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another country. Patents can be granted, but some countries lack effectiveforms of relief.

What constitutes a patent and how it is protected in any countrydepends upon domestic law.

U.S. Patent Office will grant the right for 20 years from the date of

application to exclude everyone from making, using or selling the patentedinvention w/o the permission of the patentee.

The United States grants patents to the first to invent not (as inmany countries) the first to file.

In the U.S. patents must be applied for within one year of when it isintroduced (rest of the world says you must file before you make it public also once you have filed in one place you must file in all other places inthe world within 1 year)

Patent application includes the application (specs and drawingsand description and claims (description in legal terms) Filing is $375.

Item must be useful, unique, and non-obvious for it to be

patentable. Two types of patent systems in the world community, registrationand examination.

Patent is granted upon registration (accompanied byappropriate documents and fees, without making an inquiryabout the patentability of the invention. The validity of such apatent grant is most difficult to gauge until a time comes todefend the patent against alleged infringement in anappropriate tribunal.

Patents grant is made following a careful examination ofthe prior art and statutory criteria on patentability or a

deferred examination is made following public notice givento permit an opposition.

a) International Recognition of Patents (p. 760):(1)

b) Know-how (p. 762):3) Trademark Protection (p. 763):

Federal registration expands the scope to nationwide

The first to use gets the protection

To file register 3 copiew with $325 fee.

Federal registration lasts 10 years

Trade dress may not be functionala) International Recognition of Trademarks (p. 764):4) Copyright Protection (p. 765):

Protects the form of the expression, not the idea

Have exclusive use of it including derivative works.

Fair use w/o infringing (limited use w/o making money off of it.)

U.S. Copyright protection extends life plus 70 years after the deathof th author, 95 years for a corporation


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The author also controls derivative works such as movies madefrom books.

Exists as soon as fixed in a tangible medium. (Suggestd

Federal registration nto required unless trying to sue forinfringement

Pre-registration allows Registration is 2 copies of the work with registration and $20 fee

a) International Recognition of Copyrights (p. 765)5) Trade Secrets:

Anything that is valuable to a business

Has to be secret information of value to the company

Disclosure of a trade secret is a tort and a disclosure is a breach

Can seek damages in tort

Governed by State Law

If the disclosure is limited use and further disclosure can be injunctive relief

Trade Secrets last as long as they are trade secrets. (better to have a tradesecret if no one can find out what the secret is)

Make sure that employees understand that it is a secret

Have employees sign a trade secrets agreement.6) The GATT/WTO and Intellectual Property (TRIPs) (p. 767)

a) WTO Reduces Tariffs on Information Technology (p. 767)7) Problem 9.1 Franchising and Trademark Licensing: Colonel Chicken Goes

Abroad (p. 769)Colonel Chicken wants to set up franchises abroad.

8) Readings, Questions, Comments (p. 769)a) Preparing to Franchise Abroad (p. 769)

(1) An Introduction to International Franchising (p. 769)(2) Cultural Variations Affecting Franchising Abroad (p. 771)(3) Legal and Commercial Aspects of International Franchising

Problems in their Negotiations (p. 775)b) Regulation of the International Franchise Agreement (p. 781)

(1) The Franchise Act, Alberta, Canada (p. 781)(2) Pronuptia de Paris GmbH v. Pronuptia de Paris IRMGARD

Schillgalis (p. 787)(3) Typical Franchise Agreements (Fast Food Franchise) (p. 793)

9) Problem 9.2 Protection of Intellectual Property: Pirated and Gray MarketRockers Tapes and CDs (p. 801)

February 21, 2000 Wednesday ClassThe same IS exists everywhere. The idea is how to lockout a competitor in aforeign country since each

How is IP protected?Country by country basis. Must get in country

Ownership in a country


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Gives rights to use IP in that country and does not allow anyone else to import oruse it in that country. (EU allows EU wide trademark and working on EU widepatent)

Issue is that if anyone has your trademark in one of thecountries then cannot use in EU

Timing is major element in copyright, trademark, patent. First in time usuallywins.

Registration gives rights in many countries, not just use

Have 1 year to file everywhere else once he have initial filing. Filing does not take much time. (Trademark less than an hour for Mexico,

Patent takes 20-30 hours)

2 concepts are national treatment and most favored nation treatment for IP.Equal protection for foreign inventors and most favored nations

Some countries do not allow patents in certain areas (e.g. bioengineering andpharmaceuticals)

Many jurisdictions dont have injunctions. Tough to stop. Trademark/ Tradename usually are protected. Must register in every country

you will be selling in. (NO RUSH HERE).

Registration (where required) is usually done by category for set number ofyears (usually 10 yrs.) some countries want you to

February 28, 2000 Class (Monday)Problem 9.1:Franchising and Trademark Licensing: Colonel Chickens Goes Abroad(p. 768)1) Watch Anti-trust (IP creates a monopoly) this is a big area in franchising

a) Most common problem is tied products: These are products that thefranchiser supplies to the franchisee(1) Franchiser wants to control consistency in the franchise(2) Get around this by allowing the franchisee to pick from or present a

potential supplier and give approval. (Franchisee does not want to besingle source.)

(3) Objective specifications are another alternative to tied products.(4) Take least restrictive means to assure quality.

b) Two types of restraint in anti tryst(1) Horizontal restraint: Restrains trade. This is an agreement between

two or more organizations of the same level(2) Vertical restraint: Mfg. affects competition at a different level. (APRs)

These are easier to pass antitrust restraints. There are legitimatereasons for this. (Tied products are generally vertical restraint)

2) E.U. Art. 85 & 86 of the Treaty of Rome:a) No problems if this is just a quality control mechanismb) Price controls are a vertical restraint. (U.S. allows mfg. to suggest a price,

not mandate) Price guidelines are OK in Europe.c) Forcing a lease is violationd) Price fixing is a violation


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e) Fixed territories are anti-competitive.f) Art. 85 allows a review and/or block exemption if product fits in certain

areas.3) Registration / Prospectus Requirements in certain countries

a) Will the franchisee truly have a chance of success.

b) Prospectus is an offering document. This gives adequate disclosure.4) What type of business are you going to be in5) Where will you franchise

a) Distance: Harder to have quality control the farther away the franchise willbe.

b) Cultural differences: Hamburg in Australia Hungry Jacks looks similar toBurger King. (Cheese, Fried egg, and beet root).

c) Local law and local taste (no beef in India)6) Know-how: Must have a very good confidentiality agreement. Sign a personal

confidentiality agreement.7) Area of master franchise:

a) Area: smaller area (Milwaukee)b) Master: larger area (U.S.)

Drafting Contracts1) Control the drafting of a contract (you get to set your own operating

conditions)2) You set up the basis for negotiations3) This is not creating a wheel it is cutting and pasting from other contracts and

borrowing their wisdom. Be consistent about terms.4) Same term in different countries or multiple languages may mean very

different things. (What is the controlling language Spanish or English:DONT EVERY MAKE BOTH LANGUAGES OFFICIAL)

Response to a Contract1) Draft your ideal contract2) Put what you want into the contract3) Introduction of the parties and date4) Recitals (This sets forth a road map why the parties are doing what they are

doing (page 868)DRAFT LICENSE AGREEMENTa) Recitation of the consideration

5) Body of the Contract:a) Terms of performance for each party (include grants of license of powers)b) Terms of paymentc) What types of activities constitute a defaultd) What remedies does the other side have if there is a defaulte) Termination (What happens on termination/ what if it is early)\f) Representations and warranties (major source of default)

(1) Representation is a statement of fact (this is default ifmisrepresentation)

(2) Warranty is a standard to which I am obligating myself to make right(gives time to cure)


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g) Dispute resolution, choice of language choice of law.

A) Preparing to Franchise Abroad (p. 769)B) Regulation of the International Franchise Agreement (p. 781)Pronuptia De Paris GmbH v. Pronuptia De Paris Irmgard Schillgalis (p. 787)

C) dPatent & Know-how (pp. 865-895)REVIEW CONTRACT STARTING ON PAGE 868Problem 9.4:Patent and Know-how Licensing: Oil Drilling Bits in Germany and Mexico(p. 865):Reasons for Licensing:1) Other nation may not have hard currency to pay for the goods. Can then

afford to sell in the 3rd world country.Mexico like most 3d world countries are worried about licensing (old technologyand usefulness of the product, or the licensee will not have anything (licensor will

build their own plant)Breach by the Mexican party (rightful termination) Mexican would still own thelicense. In 1991 Mexico Industrial (intellectual) Property must fegister license,mandatory exploitation of the product (cant register to lock up the market and notpursue it). If there is not enough for the demand and it is critical the governmentcan say that iin the public interest they can have others produce. General rightthat if someone else tries to import what you protected, then you can block.E.U: Doesnt like monopoly powers and restricts anti-competitive practicesexception are in Art. 85 of Rome Convention. Can place restriction to developnew technologies.

Open License: Agreement between the parties (limit yourselves but not 3 rd

party. (OK) Can limit yourself in license, but not limit othersClosed License: Agreement that limits 3rd party participation (only one

person can sell in country. (NOT OK)Can limit the exploitation to where the patent rights exist. (e.g. German patnetand British patent on same product can be limited in a territory) you can produceas German company under German patent in germany, but they cannot use thatsame patent in Britain (parallel country) Patent lasts 20 years.Know-how lasts forever (under block exemptions this last 10 years)Passive sales can be limited for 5 years in a new technology.Can require licensee to use your trademarkCannot require a complete grant back (If someone makes the product with animprovement, the licensor cannot requre the new patent holder to give it back tothe original patent holder (joint ownership is OK)Minimum royalty, production rights, non-exclusive grant backConfidentiality clause OK as long as they are not public information.

February 28, 2000 Class (Monday)Review license on pp. 626-630


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Chapter 10: Issues in Investing Abroad (pp. 1029-1064)Transfer Pricing: When the allegations of a complaint are sufficient to raisequestion as to whether the directors have violated their duty to the corporationand whether that corporation is guilty of the wrongful acts charged, thosequestions may not be determined by a motion to dismiss for legal insufficiency.

(Standard Oil Case)Litigation: Sovereign Immunity and the Act of State: A foreign state is immunefrom the jurisdiction of federal and state courts, unless the foreign state hasexplicitly or impliedly waived its immunity or the action is based upon commercialactivities of the foreign sovereign carried on in the United States or causing adirect effect in the United States. (Verlihnden BV v. Central Bank of Nigeria.)Litigation: Sovereign Immunity and the Act of State: Absent a treaty, courts willnot examine the validity of a taking by a foreign government within its ownterritory, even if the taking violates customary international law. (Banco Nacionalde Cuba v. Sabbatino)Litigation: Sovereign Immunity and the Act of State: Act of state issues only arise

when a court must decide the effect of an official action by a foreign sovereign(W.S. Kirkpatrick & Co. , Inc. v. Environmental Tectonics CorporationInternational)

Problem 10.5: Issues Confronting the Established Investment Privatization, Transfer Pricing, Currency Controls, and CompanyWithdrawal: Domestic Goods, Inc. Five Years Later(p. 1029)1: The Setting: DGI formed wholly owned subsidiaries in a number of countriesincluding in in an East European Nation, one in Asia, and one in South America.East Europe: New investment. State owned company producing the sameproduct line and having a distribution network was put up for privatization, andDGI thought it would acquire the company. Avoided involuntary joint venture in allthree countries and mandated performance requirements in each investment.Asia: Allowed some local investment (15%) in return for contribution of a mfg.facility and investors contacts with government.Problems:(a) Eastvia and privatization : Expansion and acquisition of existing distribution

channel. DGI has invested in Eastiva (DGIEE) and found a state ownedcompany (POLSK) for sale. DGIEE would like to acquire the company andwould like to know what problems this could create. It especially is concernedthat POLSK seems to have too many employees for its level of productionand the company lacks good accounting records that will assist in determiningvalue.

(b) Rinisia and transfer pricing : DGIA, S.A. (DGIs investment in a former Frenchcolony of Asia) has pricing problems with the way DGI priced technology andexports from the U.S. to the Rinsia subsidiary. Both the government taxauthorities in Rinisia and private minority shareholders of DGIA arechallenging several of the DGI ordered intra-company transfer prices

(c) Nusimbaland and currency control: DGIN, Ltd. (DGI investment in a formerBritish colony in Africa) confronted problems in repatriation of capital.


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Nusimbaland controls its currency, the Shilling, because of limited hardcurrency reserves. The country has had very high inflation over the pastdecade. The government has indexed salaries to inflation, and prices arequickly raised with inflation. Dealing with shortage of currency, multipleexchange rates, inflation, and indication are all new to DGI.

(d) Riotina and withdrawal: DGI investment in a former Portuguese colony inSouth America. Should the investment discontinue d.b.a. DGI. DGI hadaccepted the opportunity in Riotina to purchase two plants from a Europeanconglomerate, which was withdrawing from Latin America. DGI came toacquire after some local nationalistic opposition in Riotina, 2 factories.(1) The first factory makes similar products to that of DGI (home use

products)(2) Alimentos Riotina is a food processing plant, primarily engaged in meat

canning and processing. These products are sold abroad and in Riotina.This plant is not profitable. Price controls in Riotina may contribute to thelosses in this plant.

Riotina government has sometimes been responsive to demands of labor inallowing wages to increase, but at the same time has opposed priceincreases for almost all basic food products. This plant came with the deal. Toobtain the company compatible with its line of products (factory 1) DGI has totake this factory (factory 2).

2: Focus of Consideration (p. 1031)3: Readings (p. 1031)

A) Acquisition Through the Process of Privatization (p. 1031): Focus is onsome of the issues arising when a company acquires a local, stateowned enterprise through the process of privatization.

Privatization: Alters the status of a business from public to private controls orownership.

R. Folsom & M. Gordon, International Business Transactions (p. 1032)State Enterprise Privatization Act (p. 1034)B) Transfer pricing (p. 1037): involves intra-company-pricing practices,

engaging in what is known as transfer pricing.Regulation of Transfer Pricing in Multinational Corporations: AnInternational Perspective (p. 1039)Wheeler, an Academic Look at Transfer pricing in a Global Economy (p.1041)

Price v. Standard Oil Co. (p. 1042):Facts: Creole Petroleum Corp (D), a wholly owned subsidiary of Standard Oil(DP, was managed by individuals who were employees of Standard. Standard,as majority stockholder was able to maintain complete control of Creole. Price(P), a Creole shareholder, brought shareholders derivative action, alleging thatStandard dominated and controlled Creole to its financial detriment by sellingCreoles production principally to Standard itself or its subsidiaries at pricessubstantially less than the current market prices for those products. Price (P)sought a judgement directing Standard to account for and pay over to Creole thedifference between the actual price paid for its petroleum and the current market


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prices at the transaction time. Standard moved to dismiss the complaint for legalinsufficiency.Issue: When the allegation of a complaint are sufficient to raise questions as towhether the directors have violated their duty to the corporation, and whether thatcorporation is guilty of the wrongful acts charged, may those questions be

determined by a motion to dismiss for legal insufficiency?Holding: No. From the allegations, it would appear that there is a definite worldmarket price for crude oil. The comparatively small volume produced by Creolecould have been and should have been sold at world market prices asestablished by reference to Texas posted prices. The determination of thecharges must await a trial. But enough has been set forth in the complaint tosustain its legal sufficiency and to require Standard and Creole to make answer.Motion to dismiss was deniedAnalysis: The court declared that the allegations of the complaint took thecharged conduct of Standard outside the sphere of the exercise of business

judgement, with which the court would not interfere. The complaint alleged that

the divergence of the sale price of Creoles crude oil from market prices has beenas much as $.3230 per barrel. On the basis of Creoles annual production, thisdifferential, if maintained would amount to the sum of $10,000,000 in a singleyear.

R. Folsom & M. Gordon IBT (p. 1047)National Plan of Nusimbalaind to Eliminate Corruption, Lower Inflation andModernize the Economy (p. 1051)

C) Considers some issues arising when inflation may impact on thecompanys profits, reducing profits to a loss when currency becomesavailable for repatriation.

Repatriation: To restore to the original country (no $$$ to remit any profits are

repatriated)D) Bankruptcy and Claims on Foreign Parent (p. 1058): Considers

problems when one of the companys subsidiaries (a food processingplant) fails and is in bankruptcy, including possible affect of thebankruptcy on the other enterprises in the country, and the parent DGIin the United States.

Gordon: Argentine Jurisprudence Deletec Update (p. 1059)Compania Swift de la Plata, S.A. Froprofoca (p. 1059):

Gordon: Argentine Jurisprudence Deletec Update (p. 1062)E) d

March 1, 2000 Class WednesdayContract (p 868)Elements of a Contract1) Explanation of an agreement2) Recitals

a) Several recitals


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b) Consideration Clause3) Grant (gives exclusive license in Germany) (What do they get and give)

These are usually broada) Check Art. 85 & 86b) Price collusion

c) Exclusive territory (This goes after 3rd

parties)d) Absolute territory protection violates Art. 85(1)4) No competition agreement: This is OK because it is between the two parties

agreeing not to do something.5) Know-how: What is company giving/ receiving. What are the limits on this? Is

there a duty to translate and who pays for the translation6) Separate Technical Assistance7) Separate Engineering Development: This may raise an issue. What rights if

any does the licensee have to modify the product. Is there a grant back.a) Both are agreements to agree and at the may give a good faith obligation

to negotiate. These generally do not mean much.

8) Inter-Party Sale of Products or Components: Selling between the parties keepthe prices9) Mfg. and Sales Responsibility: This sets the ground to what constitutes a

breach. Vigorous promotion, warranty terms approved, etc. these are vague.List obligations in an appendix in the contract

10)Quality Control: Some oversight. Rights to inspection and test productionruns are specific

11)Grant Back: This gives the original licensor rights to the unit. EU does notallow this in EU. They will allow a non-exclusive right in the EU and anexclusive contract in the rest of the world.

12)Marketing Rights: Making them use trademark13)Confidential Relations: Not complex. Does not deal with anything that might

be disclosed or partially disclosed or what one party already knows. (What if Ican prove that I already knew it.) Look at end of booklet from Barret. Can gobeyond life of agreement.

14)Royalty: What is it payable in? When will currency conversion be determined?Pick a systematic date. 1st day of each month. Process of paying: Must haveproof of payment and can be audited and confirmed by auditing firm. If payinglate can be checked out. Who is paying for this. If auditor reveals that there isa discrpancy over certain $$$ who pays. What is done with payments andreturns of profit. 17% annually or monthly etc.a) Initial Payment: Straightforward area.b) Sales Royalty: This uses an objective price. FOB would be wrong term for

sale between Germany and US. Should be able to audit books foraccuracy. If not accurate books who pays for the audit, and what aboutinterest payments. Take a percentage of a set prices. Defining net profitsis very tough. What is that determined from?

15)Records: Licensee needs to keep records. Which records are needed.16)Trademarks and Patents: Must be used, in an approved way, discontinue use

if necessary, licensees cannot contest ownership, licensee will advise of any


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infringement and assist in enforcing rights of licensor, licensor must pursueinfringement. Licensee may want a representation and warranty that licensorhas rights and owns the IP.

17)Government Approval Taxes: Who pays for taxes (exclude income tax) Whois responsive for fees, permits. What happens if approvals are not attained

and who is responsible for getting the approval18)Termination: how long does license lasta) Terms: Terminations, notice, time, rights to cure, and exceptions. Are

listed here. Not paying on time terminates immediately. List activities thatconstitute defaults with list of timing and cures. material breach by otherparty

b) Continuing Rights, Obligations:c) Surrender of Rights: Know-how:

19)U.S. Laws and Regulations: NEVER USE THIS CLAUSE Licensee agrees tocomply with all applicable laws. Governed by US law / New york Law

20)General:

a) Assignment: This is good if a competitor buys your partner out.b) Force Majeure: 1) do not accept unlimited force majeure (give a time limit)(2) Want my performance suspended if yours is (3) if I am sending youproduct and you stop paying this is not a force majeure. If government isparty to the contract, then

c) Arbitration: Keep info confidential, pick a companys rule. (look at Barretsbook biggies are American Arbitration Association and ICC (Paris-- )London Court of Arbitration

1) WHY INVEST ABROAD:a) Make more money

b) Cheaper production costs (could license)c) More control over the business v. licensingd) Havent created a competitor (a license is that you are eventually

setting up a competitor)2) PROBLEMS WITH INVESTING ABROAD

a) Greater risks / more exposureb) Local rules are not known

3) COULD JOINT VENTURE WITH LOCAL PARTNERa) May be able to get into the market (restrictions on foreign ownership)b) If deal goes sour, how do you undo the contract or find a substitute

partnerc) Sharing the cost, expertise in marketd) Losing some control, decreasing exposuree) Biggest downside is you have a partner!!!!!!f) What you are doing is attacking his baby!!!!!!g) Could be political benefits. Getting permits/ keeping the heat off/

understand issue first.4) CUSTOMS

a) Ways of passing cards


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b) Colors shapesc) Understand negotiations and being on time.d) Reputation is a big deal

LOOK AT:1) Applicable law

a) US LAW(1) Dont regulate most foreigners in this country (exceptions arenuclear energy, TV, etc.

(2) Boycott laws(3) Sensitive technologies(4) Tax laws

b) Foreign Law (Host country)(1) How permanent is the law going to be? Do the laws tend to

change?(2) What is the law when you make the investment? (Prohibitions on

foreigners or % of equity: can be exceptions for technology or job

creation)(3) Regulations during operations: inspections, permits, repatriationof money you make, convert to hard currency, local content intoproduct, max that can be exported, labor law.

(4) Regulations in withdrawal. Limitation of foreign ownership,repatriation of capital,

(5) Unwritten operational code: how do things really work? Get agood local partner

c) Applicable Foreign Agreements and multilateral laws(1) GATT(2) EU regulations

(3) UN aspirational regulations2) Risksa) Cost of productionb) Trade areac) Infrastructure available or will it cost too muchd) Cheap and adequate supply of raw materialse) What are the chances of:

(1) Expropriation: government takes over.(2) Changes in legal restriction:

3) Benefit

ISSUES GONG ABROAD:1) Privatization : All governments run the private sector and sell them off to

raise capital to pay off debt and hope that the business will run moreefficientlya) Governments get higher technology.b) Transition: (e.g. Russia has no concept of profit/ no experience with

capitalism v. Latin America)


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c) Other businesses are not their yet. Lack of competition, no welldeveloped distribution problems

d) Legal infrastructure: What are the rules. Russia does not have thisstructure. Predictability in all areas.

e) Massive unpaid pension funds / Environmental liabilities (indemnify

yourself from existing liabilities) /f) Inefficient workers/ what can workers participate ing) Bids: do nationals get a reduced priceh) Limits on foreign ownershipi) How do you value the company?

(1) Be wary of accounting and depreciation issues.(2) Auctions are inefficient(3) What is the value: Shot gun buy sell. One cuts the cake the other

picks. One company decides what the price is, the other decidesto pay it.

j) Asset sales v. stock sales.

(1) Tax consequences and liability issuesk) Limits on foreign ability(1) If you cannot own the majority of the stock, how do you keep

from being shafted?(a) create a mechanism that restores power to me (require super

majority to approve(b) create different classes of stock with different powers

(different classes can appoint board directors)(c)

(2) Have vital decisions made by management committee and haveboard disapprove the management committee

(3) IF we cannot agree last year plan remains in force(4) Mandatory dividend agreement(5)

2) Transfer Pricing: What price do you sell to yourself at? Duties arecalculated on sales price. Income tax is based on profits. Governmentstend to regulate.

3) Currency controls4) withdrawal

Chapter 10: Issues in Investing Abroad (pp. 1029-1064)Transfer Pricing: When the allegations of a complaint are sufficient to raisequestion as to whether the directors have violated their duty to the corporationand whether that corporation is guilty of the wrongful acts charged, thosequestions may not be determined by a motion to dismiss for legal insufficiency.(Standard Oil Case)Litigation: Sovereign Immunity and the Act of State: A foreign state is immunefrom the jurisdiction of federal and state courts, unless the foreign state hasexplicitly or impliedly waived its immunity or the action is based upon commercial


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activities of the foreign sovereign carried on in the United States or causing adirect effect in the United States. (Verlihnden BV v. Central Bank of Nigeria.)Litigation: Sovereign Immunity and the Act of State: Absent a treaty, courts willnot examine the validity of a taking by a foreign government within its ownterritory, even if the taking violates customary international law. (Banco Nacional

de Cuba v. Sabbatino)Litigation: Sovereign Immunity and the Act of State: Act of state issues only arisewhen a court must decide the effect of an official action by a foreign sovereign(W.S. Kirkpatrick & Co. , Inc. v. Environmental Tectonics CorporationInternational)

Problem 10.5: Issues Confronting the Established Investment Privatization, Transfer Pricing, Currency Controls, and CompanyWithdrawal: Domestic Goods, Inc. Five Years Later(p. 1029)1: The Setting: DGI formed wholly owned subsidiaries in a number of countriesincluding in in an East European Nation, one in Asia, and one in South America.

East Europe: New investment. State owned company producing the sameproduct line and having a distribution network was put up for privatization, andDGI thought it would acquire the company. Avoided involuntary joint venture in allthree countries and mandated performance requirements in each investment.Asia: Allowed some local investment (15%) in return for contribution of a mfg.facility and investors contacts with government.Problems:(e) Eastvia and privatization : Expansion and acquisition of existing distribution

channel. DGI has invested in Eastiva (DGIEE) and found a state ownedcompany (POLSK) for sale. DGIEE would like to acquire the company andwould like to know what problems this could create. It especially is concernedthat POLSK seems to have too many employees for its level of productionand the company lacks good accounting records that will assist in determiningvalue.

(f) Rinisia and transfer pricing : DGIA, S.A. (DGIs investment in a former Frenchcolony of Asia) has pricing problems with the way DGI priced technology andexports from the U.S. to the Rinsia subsidiary. Both the government taxauthorities in Rinisia and private minority shareholders of DGIA arechallenging several of the DGI ordered intra-company transfer prices

(g) Nusimbaland and currency control: DGIN, Ltd. (DGI investment in a formerBritish colony in Africa) confronted problems in repatriation of capital.Nusimbaland controls its currency, the Shilling, because of limited hardcurrency reserves. The country has had very high inflation over the pastdecade. The government has indexed salaries to inflation, and prices arequickly raised with inflation. Dealing with shortage of currency, multipleexchange rates, inflation, and indication are all new to DGI.

(h) Riotina and withdrawal: DGI investment in a former Portuguese colony inSouth America. Should the investment discontinue d.b.a. DGI. DGI hadaccepted the opportunity in Riotina to purchase two plants from a European


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conglomerate, which was withdrawing from Latin America. DGI came toacquire after some local nationalistic opposition in Riotina, 2 factories.

The first factory makes similar products to that of DGI (home use products)Alimentos Riotina is a food processing plant, primarily engaged in meat canningand processing. These products are sold abroad and in Riotina. This plant is not

profitable. Price controls in Riotina may contribute to the losses in this plant.Riotina government has sometimes been responsive to demands of labor inallowing wages to increase, but at the same time has opposed priceincreases for almost all basic food products. This plant came with the deal. Toobtain the company compatible with its line of products (factory 1) DGI has totake this factory (factory 2).

2: Focus of Consideration (p. 1031)3: Readings (p. 1031)

F) Acquisition Through the Process of Privatization (p. 1031): Focus is onsome of the issues arising when a company acquires a local, stateowned enterprise through the process of privatization.

Privatization: Alters the status of a business from public to private controls orownership.R. Folsom & M. Gordon, International Business Transactions (p. 1032)State Enterprise Privatization Act (p. 1034)G) Transfer pricing (p. 1037): involves intra-company-pricing practices,

engaging in what is known as transfer pricing.Regulation of Transfer Pricing in Multinational Corporations: AnInternational Perspective (p. 1039)Wheeler, an Academic Look at Transfer pricing in a Global Economy (p.1041)

Price v. Standard Oil Co. (p. 1042):Facts: Creole Petroleum Corp (D), a wholly owned subsidiary of Standard Oil(DP, was managed by individuals who were employees of Standard. Standard,as majority stockholder was able to maintain complete control of Creole. Price(P), a Creole shareholder, brought shareholders derivative action, alleging thatStandard dominated and controlled Creole to its financial detriment by sellingCreoles production principally to Standard itself or its subsidiaries at pricessubstantially less than the current market prices for those products. Price (P)sought a judgement directing Standard to account for and pay over to Creole thedifference between the actual price paid for its petroleum and the current marketprices at the transaction time. Standard moved to dismiss the complaint for legalinsufficiency.Issue: When the allegation of a complaint are sufficient to raise questions as towhether the directors have violated their duty to the corporation, and whether thatcorporation is guilty of the wrongful acts charged, may those questions bedetermined by a motion to dismiss for legal insufficiency?Holding: No. From the allegations, it would appear that there is a definite worldmarket price for crude oil. The comparatively small volume produced by Creolecould have been and should have been sold at world market prices asestablished by reference to Texas posted prices. The determination of the


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charges must await a trial. But enough has been set forth in the complaint tosustain its legal sufficiency and to require Standard and Creole to make answer.Motion to dismiss was deniedAnalysis: The court declared that the allegations of the complaint took thecharged conduct of Standard outside the sphere of the exercise of business

judgement, with which the court would not interfere. The complaint alleged thatthe divergence of the sale price of Creoles crude oil from market prices has beenas much as $.3230 per barrel. On the basis of Creoles annual production, thisdifferential, if maintained would amount to the sum of $10,000,000 in a singleyear.

R. Folsom & M. Gordon IBT (p. 1047)National Plan of Nusimbalaind to Eliminate Corruption, Lower Inflation andModernize the Economy (p. 1051)

H) Considers some issues arising when inflation may impact on thecompanys profits, reducing profits to a loss when currency becomes

available for repatriation.Repatriation: To restore to the original country (no $$$ to remit any profits arerepatriated)

I) Bankruptcy and Claims on Foreign Parent (p. 1058): Considersproblems when one of the companys subsidiaries (a food processingplant) fails and is in bankruptcy, including possible affect of thebankruptcy on the other enterprises in the country, and the parent DGIin the United States.

Gordon: Argentine Jurisprudence Deletec Update (p. 1059)Compania Swift de la Plata, S.A. Froprofoca (p. 1059):

Gordon: Argentine Jurisprudence Deletec Update (p. 1062)J) d

March 13, 2000 Class MondayInvesting in the EU (pp. 931-963)Problem 10.2: Investing in the European Union: Home Products in Germany(p. 931)Starting Business Operations in Germany (p. 933)Introduction of a Small Stock Corporation in Germany (p. 934)The New EC Merger Control Regulation (p. 937)The Future of Merger Control in Europe (p. 940)Procedures in Merger Cases (p. 941)Worker Participation in the U.S. and West Germany: A Comparative Study froman American Perspective (p. 945)Codetermination by Workers in German Enterprises (p. 949)Germanys Requiring of Workers on Boards Causes Many Problems (p. 953)European Union Company Law (p. 957)European Union Company Law (p. 961)


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Investing in North America (pp. 964-994)

Tax Planning (Handouts)

Tariffs (pp. 322-360)Most Favored Nations Tariffs: Government intervention preventing performancemay terminate a contract unless the intervention was undertaken in order toavoid liability (Czarnikow Ltd.)Tariff Preferences for Developing Nations: Under the Generalized System ofPreferences, the president may withdraw, suspend, or limit the duty freetreatment of any item from any country. (Floresheim Store, Co. Division ofInterco, Inc. v. United States)U.S. Tariff Preferences for Good Incorporating American-made Components: If

additional processing performed outside the United States is both incidental tothe assembly process and does not substantially change the article, the articlehas not been further fabricated so as to bar specialized import treatment. (OxfordIndustries v. United States)

Customs Classifications (pp. 361-403)Product Classification: A vehicle designed to transport both goods and personsmay be categorized, for tariff purposes, as a passenger vehicle. (MarubeniAmerica Corp. v. United States)Place of Origin Classification: An item will retain the designation of the countrywhere its components were originally processed, unless it is substantiallytransformed in another country. (Superior Wire v. United States)Non-Tariff Barriers (pp. 404-447)Buy American Procurement: A state requirement that governmental unitspurchase supplies form American businesses does ot violate the GATT. (K.S.B.Technical Sales Corp. v. North Jersey District Water supply commission of theState of New Jersey)Buy American Procurement: If a department head determines that it would beinconsistent with e public interest to Buy American, it may purchase materialfrom non-American suppliers (Self-Powered Lighting, Ltd. United States)Buy American Procurement: When considering a foreign contract bid, thegovernment does not need to apply the Buy American price surcharges to thecost of any U.S. goods and services included in the bid. (Allis-ChalmersCorporation v. Friedkin)GATT and Government Procurement: A state requirement that governmentalunits purchase supplies from American businesses does not violate that GATT.(K.S.B. Technical Sales Corp. v. North Jersey District Water supply commissionof the State of New Jersey)FTAs/CUs/CMs (pp.448-478)


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Free Trade Areas and Custom Unions: Prohibitions on the intra-Communitymarketing of products containing additives must be restricted to what is actuallynecessary to protect health (Commission v. Federal Republic of Germany)

Tariff Preferences for Developing Nations (pp. 479-511)

Export Licenses and Other Regs. (pp. 609-637)

Economic Boycotts (pp. 638-684)

Bribery (pp. 685-723)

Subsidies / Countervailing Duties (pp. 542-579)

Antidumping (pp. 580-608)

Disputes Court Jurisdictions (pp. 1155-1188)

Arbitration (pp. 1140-1155, 1255-1271)

Enforcement of Judgements (pp. 1280-1323)