Legal Aspects of International Business Transactions: An Overview

Published on September 4, 2015

International trade is increasing day by day, small and big countries alike are mutually engaging in the transfer of huge quantities of goods and services. As with any contractual relationship, these mutual actions between the trading partners may at times create legal challenges and problems.

However, due to the international nature of these undertakings, potential difficulties are exacerbated if and when they do become present. The issues which tend to give rise to the most complications are the formation of contracts, distribution agreements, joint ventures, and the setting up of foreign companies or subsidiaries. Such transactions can pose a wide range of legal uncertainties and it is trite that uncertainty does not bode well in contractual undertakings. For example, determining appropriate jurisdictions, interpreting applicable legal norms such as promissory estoppels and the enforcement of bilateral or unilateral promises are particularly troublesome.

As per international trade practices, goods are sold against bills of exchange, delivery of documents, letter of credits, bank guarantees, merchant leasing, post arrival payments or through barter trade.

Globally, bills of exchange are governed by two legal families. These are the Geneva system founded on the Geneva Conventions and the Anglo American system which applies in the UK, much of the Commonwealth and the United States. The distinctions between the two families can be traced back to different origins of law – thus the Geneva system is adopted in civil law jurisdictions whereas the latter applies to countries under the common law system.

All these segments of trade create legal complexities and therefore can give rise to conflict. Where the legal instruments, relating to such transactions are properly drafted and executed, no adverse cause arises, but where there are mistakes, errors or shortcomings particularly in the bilateral trade instruments, these faults or oversights may lead to dispute and litigation.

These contractual disagreements so arisen, pose manifold problems of jurisdiction, applicability of law, enforcement of judgments and the interpretation of the parties’ actions and the instruments involved. Adequate understanding and correct advice is essential. When a problem does arise it will not necessarily only relate to individual businesses, but may also encompass conflicts between respective states on bilateral trade matters. A degree of uncertainty in these dealings is evident, perhaps no more so than when prior to executing an investment, promises made by a state to foreign investors are withdrawn. This change of policy leads to conflict both at domestic and international levels. Therefore conscientious decision making by the parties in these international regards are crucial, as ultimately this will affect their rights and obligations. When conflicts do occur, they are often settled either through municipal courts lex fori or by mutually agreed international tribunals.

The disputes so arising are settled through arbitration either by the International Chamber of Commerce (ICC) or through the International Centre for Settlement of Investment Disputes (ICSID) as the case may be. The states in such disputes give their consent for settlement through arbitration. Particular reference is invited towards Bilateral Investment Treaties (BIT’s). There are thousands of such bilateral treaties between different countries which govern the rules for Foreign Direct Investment (FDI). For example, the ICSID tribunal has, in many cases, found there to be violations of such bilateral or multilateral treaties by the states, thereby violating treaty provisions.

The issues relating to trade laws are generally governed by conflict of laws where the principle of lex domicilii determines the issue of jurisdiction and the application of law in such disputes. It is desirable for the parties when reaching an agreement to specify which country and which court has the jurisdiction to settle a potential dispute. This explains why the trading parties are required to be more vigilant in respect of their international business transactions. Businesses must show attention to detail whilst agreeing to the terms and conditions of the contracts. Litigation is never without problems, yet understandably, such problems are magnified when they present international ramifications. It is advised that particular regard and diligence is afforded to the specification of jurisdiction and the application of law and the clauses for the settlement of disputes.

The International Chamber of Commerce (ICC) plays an important role in the settlement of such disputes through arbitration, yet another important institution is the United Nations and its instruments such as the Convention on Contracts for the International Sale of Goods.

In addition to the said convention, the Uniform Commercial Code (UCC) and the UNIDROIT principle of international commercial law, also become applicable where disputes arise from transactions involving the international sale of goods. One has to be vigilant to compare the said conventions; the UNIDROIT principles and Article ii of the Uniform Commercial Code are noteworthy for understanding the complexities arising from the bilateral relationship between trading partners.

In addition to merchant trading, contractual relationships also exist between private businesses and the state i.e. agreements with the state in respect of foreign direct investments etc. In such cases, the disputes arise from a violation of bilateral treaties, restrictions imposed on the transfer of technologies, creating licensing requirements, and the imposition of technical fees. Regarding the bilateral relationship between the states, grievances are settled by way of arbitration either through the International Chamber of Commerce or the tribunal constituted under the ICSID.

The tribunal under the ICSID has so far arbitrated and decided many important cases in relation to foreign investments particularly where the terms of agreement between the parties stood changed, e.g. where certain facilities extended earlier were withdrawn. Such events generally happen in developing and underdeveloped countries.

The WTO, under the 1994 General Agreement on Tariffs and Trade (GATT) is another important institution which defines the limits of international business transactions in the framework of international agreements agreed among states. The issues under the trade laws of various countries relate to import controls, customs controls, anti-dumping, countervailing, origin of goods, and export controls. One of the striking features of GATT’s forty-five-year history, however, is that a rather elaborate dispute settlement procedure has evolved. In recent years this has resulted in a fairly rigorous approach to the legal obligations of the GATT. In fact, an argument can be made that the GATT jurisprudence which now exists and consists of almost 200 reported cases, is the largest significant body of case law experience developed through a major multilateral treaty of broad purpose and application.

Among the many issues raised in this jurisprudence are those of institutional power distribution, treaty compliance, the role of tribunals in settlement negotiations, the use of prior reports as a sort of “precedent,” legal authority of an organization to interpret its own charter, and third party interests in a procedure between two other disputants, to say nothing of the headline grabbing questions such as those of the 1991 Tuna Dolphin case, which involved mediating a clash between international trade and environment treaties. World Trade Organization tribunals have also decided many other important principles of international law.

Another leading case relates to the dispute between Panama and Columbia, which involved the wrong application of Article vii of the GATT and the WTO Customs Valuation Agreement. The restriction and wrong application of GATT vii, were made by Columbia in violation of GATT principles.

It is worth noting that in many cases, the principle of promissory estoppel does not apply against the state. There are many vague areas relating to commercial trade such as quantity restrictions, application of the rules of origin, technical specifications, and health regulations. All these have been used to restrict or bar the flow of trade in order to afford protection to the domestic industry.

Legal disputes, disputed regulations, unethical state policies, and powerful domestic lobbies, create barriers to trade by applying laws and regulations that are contrary to GATT principles.

There is another aspect of trade as well, that is where import traders indulge in unethical practices either by misdeclaring the values of imported goods, or by hiding the quantity, or description or by violating the state regulations with regard to fitness of the goods so imported.

To sum up, it is observed that the flow of trade in goods and services across borders faces legal issues relating to: (a) licensing (b) quality (c) fitness (d) quantity (e) specification (f) value (g) importability (h) contractual obligation (i) origin of goods (j) state policies which often change without prior notice and which do not consider the contractual obligations between the parties as a final step towards commercial bargain.

Furthermore, there can be disputes between a state and the individual relating to promises made at an earlier time and withdrawn subsequently. There may be issues relating to public policy, where the investor can be denied the contractual obligations in the name of public policy.

One can imagine the existing complexities of the legal aspects of international business transactions. Trading partners are advised to be careful while considering the impact of trade laws and regulations which govern international trade. Showing laxity in understanding the legal aspects of international business transactions is likely to result in loss or damage.

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The Author

Zafar Iqbal graduated from the University of Punjab, University of Southern California, Thomas Jefferson School of Law, and Washington University in St. Louis School of Law. He practices law and his area of interest includes International Taxation and Financial Services, Corporate and Commercial Law, Banking Law and International Law You can download the article with the footnotes by clicking here.