978-1285427003 Chapter 8 Lecture Note Part 2

subject Type Homework Help
subject Pages 7
subject Words 3522
subject Authors Jeffrey F. Beatty, Susan S. Samuelson

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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.
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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
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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.
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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
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(c) shipping company
(d) bank
2. Tariffs are a tax on ____________________. Treaties like NAFTA seek to _________________
tariffs.
(a) imports; increase
(b) imports; decrease
(c) exports; increase
(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
(c) The Supreme Court
(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
(c) The Convention on the International Sale of Goods
(d) None of the above
5. Countervailing duties are imposed when
(a) dumping occurs
(b) goods are unreasonably subsidized
(c) both A and B
(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?
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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
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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?

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