978-1285427003 Chapter 8 Lecture Note Part 2

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International Sales Agreements

What Law Governs?

Students should note the differences in their treatment of contracts for the sale of goods between the

Uniform Commercial Code (UCC) and the United Nations Convention on Contracts for International

Sale of Goods (CISG). The CISG applies automatically to any contract for the sale of goods between

two parties from different countries if each operates in a country that is a signatory. If the parties want

to be governed by a particular law in their choice of forum for settling disputes and their choice of

language and currency, they must specify their choices in the contract.

Choice of Forum

The parties must decide not only what law governs, but also where disagreements will be resolved.

Choice of Language and Currency

The parties must select a language for the contract and a currency for payment.

Letter of Credit

A confirmed, irrevocable letter of credit is an important means of facilitating international sales

contracts, because the seller is assured of payment by a local bank as long as it delivers the specified

goods.

Case: Centrifugal Casting Machine Co., Inc. v. American Bank & Trust

Co.1

Facts: Centrifugal Casting Machine Co. (CCM) entered into a contract with the State Machinery

Trading Co. (SMTC), an agency of the Iraqi government. CCM agreed to manufacture certain cast iron

pipe plant equipment for $27 million, payment to be made by confirmed irrevocable letter of credit. The

Central Bank of Iraq then issued the letter, on behalf of SMTC (the “account party”) to be paid to CCM

(the “beneficiary”). The Banca Nazionale del Lavorov (BNL) confirmed the letter.

Following Iraq’s invasion of Kuwait on August 2, 1990, President Bush issued two executive orders

blocking the transfer of property in the United States in which Iraq held any interest. When CCM

attempted to draw upon the letter of credit, the United States government intervened. The government

claimed that like all Iraqi money in the United States, this money was frozen by the executive order.

The United States District Court rejected the government’s claim, and the government appealed.

Issue: Was CCM entitled to be paid pursuant to the letter of credit?

Decision: Yes, CCM was entitled to payment. Affirmed.

Reasoning: United States claimed that it froze Iraqi assets to punish international aggression. That is a

legitimate foreign policy argument. However, no court has the power to rewrite basic principles of

international trade.

A letter of credit has unique value for two reasons. First, the bank that issues the letter is substituting

its credit for that of the buyer. Because the bank is promising to pay with its own funds, the seller is

confident of receiving its money.

Second, the bank’s obligation to pay on the letter of credit is entirely separate from the underlying

bargain between buyer and seller. The bank must pay even if the seller has breached the contract or the

buyer has gone bankrupt. The money in this case came from the bank that issued the letter; the

government may not seize it. Any other ruling would undermine all letters of credit.

Question: The Court states that there are two key features to an irrevocable letter of credit (LOC).

What are they?

Answer: First, the issuing bank substitutes its credit for that of the account party. Second, the

Question: What does “underlying commercial transaction” mean?

1 966 F.2d 1348, 1992 U.S. App. LEXIS 13089 Tenth Circuit Court of Appeals, 1992.

Answer: “Underlying commercial transaction” refers to the sales contract that the parties made.

Question: Why is it so important that the issuing bank substitute its credit for that of the account

party?

Answer: The seller of goods often does not know an international buyer. Is the buyer

Question: Why is a confirmed LOC even more attractive to a seller than one that is not confirmed?

Answer: A confirmed LOC offers even greater assurance, because the seller of goods need not rely

on the creditworthiness of the issuing bank. Instead, the seller requires that the issuing bank’s LOC

be transmitted to the seller’s own bank, which becomes the confirming bank. If the confirming bank

Question: Besides doubts about the creditworthiness of the buyer, why else might a seller prefer

payment by LOC?

Answer: Other factors also make international trade risky. Wars, military coups, and simple

Question: In the Centrifugal Casting case, what international event made the LOC invaluable to

the seller?

Answer: Because of the Iraqi invasion of Kuwait, President Bush froze Iraqi assets in the United

Question: The Court states that “the whole purpose of a LOC would be defeated by examining the

merits of the underlying contract.” What does that mean?

Answer: The whole point of an LOC is to assure the seller that it will be paid once it has delivered

conforming goods to the buyer (or to a shipper). The seller is willing to part with its goods knowing

little about the buyer’s creditworthiness, because it knows it will be paid if the goods conform to

Question: I still don’t understand why CCM won this case. An agency of the Iraqi government was

the other contracting party, the contract obligated it to pay CCM, and the U.S. froze domestic Iraqi

assets. Why wasn’t this LOC considered to be an Iraqi asset?

Answer: Precisely because it was an LOC—an obligation independent of the underlying contract

International Trade Issues

Repatriation of profit

Repatriation of profits occurs when an investing company pulls its earnings out of a foreign

country and takes them back home.

Expropriation

Many nations, both developed and developing, nationalize property, meaning that they declare the

national government to be the new owner and pay a fair price to the previous owners. In the United

States, nationalization is rare, but local governments often take land by eminent domain, to be used

for roads or other public works. When a government takes property owned by foreign investors, it

is called expropriation

Sovereign Immunity

Sovereign immunity holds that the courts of one nation lack the jurisdiction (power) to hear suits

against foreign governments. Most nations respect this principle.

Waiver

A lawsuit is permitted against a foreign country that waives its immunity, that is, voluntarily gives

up this protection.

Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (FCPA) makes it illegal for an American businessperson to give

“anything of value” to any foreign official in order to influence an official decision.

Case: United States v King2

Facts: Owl Securities and Investments, Ltd. hoped to develop a large port in Limon, Costa Rica.

Richard King was one of Owl’s largest investors, and Stephen Kingsley its CEO. The government

charged King with attempting to bribe Costa Rican officials to obtain land and other concessions

needed for their project. At trial, several of Owl’s officers including Kingsley testified against King. A

jury convicted King of violating the FCPA. He received a 30-month sentence and a fine of $60,000. He

appealed.

Issue: Did King violate the FCPA?

Decision: Yes, taped conversations proved that King knowingly violated the FCPA.

Reasoning: The FCPA prohibits making an offer, payment, promise to pay, or authorization of the

payment of anything of value to any foreign official for purposes of influencing an official act or

decision. There was ample evidence to prove King’s knowledge and authorization of the proposed

payment to the Costa Rican officials. [The Court quoted lengthy passages from transcripts of these

recordings that support King’s conviction.]

Question: What was King’s claim on appeal?

Question: What elements must the government prove to establish a violation of the FCPA?

Answer: The government must introduce evidence to show that an American businessperson gave

Question: How did the government record the conversations introduced at trial?

Answer: Kingsley, the CEO of Owl Securities, cooperated with the government and provided

Question: Why did the Court rule the evidence was sufficient to prove King’s guilt?

Answer: As noted above, the Court believed there was sufficient evidence of King’s guilt in the

Extraterritoriality

Extraterritoriality is the power of one nation to impose its laws in other countries.

You Be the Judge: Carnero v. Boston Scienti”c Corporation3

Facts: Boston Scientific (BSC) is an American company with headquarters in Massachusetts that

manufactures medical equipment. Ruben Carnero began working at a BSC subsidiary in Argentina

(BSA). Carnero’s employment contract stated that he would be paid in pesos, and that Argentine law

2 351 F,3d 859 Eighth Circuit Court of Appeals, 2004.

3 433 F.3d 1, First Circuit Court of Appeals, 2006.

would apply. Four year later, Carnero began working for a BSC subsidiary in Brazil (BSB). Carnero

frequently travelled to Massachusetts, but did most of his work in South America.

BSB, and soon thereafter BSA, fired Carnero. Carnero claimed the firings were in retaliation for

his complaint to BSC executives about inflated sales figures and other accounting fraud at both BSA

and BSB. Carnero filed suit in Massachusetts alleging that his firing violated the Sarbanes-Oxley Act

(SOX), an American law.

SOX was passed in response to corporate fraud at Enron and Arthur Andersen. SOX includes a

whistleblower provision designed to protect employees who informed superiors or investigators of

fraud within the company. The law allows for reinstatement and back pay.

BSC argued that SOX did not apply overseas and the District Court agreed. Carnero appealed.

You Be the Judge: Does SOX protect a whistleblower employed overseas by a subsidiary of an

American company?

Holding: No, judgment affirmed. Carnero argues that the whistleblower protection in SOX should

apply to him because to hold otherwise would frustrate the purpose of the law: to prevent accounting

and other fraud in US companies. If it does not apply in this case, it would improperly protect foreign

subsidiaries of American companies.

According to the Court, while this argument has merit, it is clear from the statute that Congress did

not intend for this whistleblower provision to apply overseas. First, there is a well-established principle

that if Congress wanted this provision to apply overseas, it would have said so in the law. Congress

made no such statement for this whistleblower provision. Moreover, there is nothing in the legislative

history of SOX that indicates that Congress intended this provision to apply overseas. According to the

Court, if this provision did apply overseas, it would allow the United States to delve into the

employment relationships of foreign companies and their foreign employees. That relationship would

normally be handled by a foreign country’s court, not a US court.

Also, there is no provision in SOX for addressing the practical implications of overseas

application, such as interpreters, investigatory powers of a foreign agency, foreign personnel, etc. This

also illustrates Congress’ intent to limit the application of the whistleblower provision.

Question: Why did Cernero claim he was fired?

Question: Who was Carnero’s employer?

Question: If Carnero’s employer was BSA, why did he think American law applied to his firing?

Question: What is a subsidiary?

Question: If BSA is controlled by an American company, why doesn’t SOX apply to Cernero’s

firing?

Answer: According to the Court, Congress, when it passed SOX never intended the whistleblower

Multiple Choice Questions

1. A letter of credit is issued by a ______________________.

(a) buyer

(b) seller

(d) bank

2. Tariffs are a tax on ____________________. Treaties like NAFTA seek to _________________

tariffs.

(a) imports; increase

(b) imports; decrease

(d) exports; decrease

3. The President negotiates a defense agreement with a foreign government. To take effect, the

agreement must be ratified by which of the following?

(a) 2/3 of the House of Representatives

(b) 2/3 of the Senate

(d) A and B

(e) A, B, and C

4. Lynn owns a small printing company in Nevada. She makes a contract with a company in France to

print custom children’s books and ship them to France. The contract does not say anything about

which body of law will be used to resolve any disputes that arise. If there is a conflict, which body

of law will actually be applied to the case?

(a) Nevada law

(b) French law

(d) None of the above

5. Countervailing duties are imposed when

(a) dumping occurs

(b) goods are unreasonably subsidized

(d) none of the above

Essay Questions

1. Arnold Mandel exported certain high-technology electronic equipment. Later, he was in court

arguing that the equipment he shipped should not have been on the Department of Commerce’s

Commodity Control List. What items may be on that list and why does Mandel care?

Answer: The only items that the federal government may place on the list are exports that would

(1) endanger national security, (2) harm foreign policy goals, or (3) drain scarce materials. Mandel

2. You Be the Judge: WRITING PROBLEM Continental Illinois National Bank issued

an irrevocable letter of credit (LOC) on behalf of Bill’s Coal Co. for $805,000, with the Allied

Fidelity Insurance Co. as beneficiary. Bill’s Coal Co. then went bankrupt. Allied then presented to

Continental documents that were complete and conformed to the LOC. Continental refused to pay.

Since Bill’s Coal was bankrupt, there was no way Continental would collect once it had paid on the

letter. Allied filed suit. Who should win? Argument for Allied Fidelity: An irrevocable LOC

serves one purpose: to assure the seller that it will be paid if it performs the contract. Allied has

met its obligation. The company furnished documents demonstrating compliance with the

agreement. Continental must pay. Continental’s duty to pay is an independent obligation, unrelated

to the status of Bill’s Coal. The bank issued this letter knowing the rules of the game and expecting

to make a profit. It is time for Continental to honor its word. Argument for Continental Bank: In

this transaction, the bank was merely a middleman, helping to facilitate payment of a contract.

Allied has fulfilled its obligations under the contract, and we understand the company’s desire to be

paid. Regrettably, Bill’s Coal is bankrupt. No one is going to be paid on this deal. Allied should

have researched Bill’s financial status more thoroughly before entering into the agreement. While

we sympathize with Allied’s dilemma, it has only itself to blame and cannot expect the bank to act

as some sort of insurance company for a deal gone awry.

Answer: Allied. The whole point of a LOC is that the issuer (Continental Bank) is making an

independent promise to pay the beneficiary (Allied). Continental’s concerns about Bill’s financial

3. Jean-François, a French wine exporter, sues Bobby Joe, a Texas importer, claiming that Bobby Joe

owes him $2 million for wine. Jean-François takes the witness stand to describe how the contract

was created. Where is the trial taking place?

Answer: In Texas. In French civil trials, the parties are not permitted to testify.

4. The Kyrgyz Republic is one of the new nations that broke away from the old Soviet Union. In

September 1994, the government of Kyrgyzstan made two independent announcements: (1) it was

abolishing all taxes on repatriation; (2) the government was resigning and would shortly be

replaced. Explain the significance of these announcements for an American company considering a

major investment in Kyrgyzstan.

Answer: The announcement of the end of repatriation profits is good news. It means that for the

first time a company that successfully invests in Kyrgyzstan can theoretically take out of the

2. Does the Foreign Corrupt Practice Act seem sensible? Is fighting corruption the right thing to do, or

does the statute place American companies at an unacceptable competitive disadvantage?

3. Generally speaking, should the United States pass laws that seek to control behavior outside the

country? Or, when in Rome, should our companies and subsidiaries be allowed to do as the

Romans do?

4. Do you favor free trade agreements like NAFTA? Do you believe that free trade benefits everyone in

the long run or are you more concerned that American jobs may be lost?

5. Imagine that you read an article that reports the maker of your favorite brand of clothing uses child

labor in its overseas factories. Being realistic, would you avoid buying that kind of clothing in the

future? Why or why not?