International Business Transactions Outline

Intl Business Transactions

Meyer Fall 2011

I. Intro

A. Basics

1. Ways a Transaction Can Be Intl

a. Parties are in separate states

b. Goods or services being moved to another state even if parties are from same state

c. Transactions between two parties in the same state but that has effects in another state

2. 4 Mechanisms of Trade

a. Trade in goods

b. Trade in services

c. Technology transfer

d. Trade in capital (FDI)

3. Recent History: Huge Growth in Intl Trade

a. Globalization reflects a huge surge in the 4 types of trade

i. Causes of Globalization

a. Birth of modern intl trade law

i. Instead of beggar thy neighbor policies that caused economic turmoil that caused serious poltical strife and tension leading to war in early 20th century

b. Bretton Woods Conference created many of the modern trade institutions

i. IMF, World Bank, GATT

b. Opening of markets to intl trade

i. End of Cold War, rise of Asia

c. Rise of Multilateral corps (large multi-national companies)

4. Sources of Law

a. Multilateral treaties

b. Bilateral treaties

c. Supranational legislation

d. Model laws

B. Focus of Class

a. Managing Risk

b. Constraining choice of law provisions

C. Problems Posed by Making a Transaction International

1. Limited potential damage to a company’s reputation for not acting appropriately

a. Harder for a foreign company to influence the reputation of a company in another country that doesn’t fulfill its obligations

2. Limited info on a foreign small to medium firm (doesn’t apply to huge companies)

3. 3rd Party Risks

a. More people involved pose more potential problems or people that are hard to deal with

b. Banks, govts

D. Contract Specific Risks

1. Capital flow

a. When does the money change hands, when are the supplies purchased to make the product or give to the purchaser

2. Shipment risks

3. Generally want to give the risk to the lowest cost avoider

E. Treaty Problems

1. Is the treaty self executing or not

II. International Sale of Goods

A. Breaking Down the Transaction into Parts

1. Transaction (Sales Contract)

a. Basic Contract form

i. Offer

a. Purchase order

ii. Acceptance

a. Acknowledgement

i. Managing Risk

a. Seller wants to be able to control contract formation

b. Which is why seller requires a written acknowledgement so the buyer cant change the terms of the K

c. Makes the invoice prices the terms of the K

iii. No Parol Ev Rule in this forum

a. Prior Docs lay out material terms and show discussions of what is going to be in K

b. Reflects how people actually do business and negotiate

b. CISG often governs these types of contracts

c. Terms

i. Essential Terms

a. Price

b. Goods

ii. Commercial Terms

a. FOB

i. Buyer becomes responsible at buyer’s port

b. CFR

i. Seller is responsible for cost plus freight (part of purchase price buyer pays)

c. CIF (most common)

i. Seller covers freight plus insurance and then charges the buyer

d. Buyer wants to see how well the seller can do in terms of shipping price because it will often be a repeat shipper and have better access to better prices than the buyer would buying and paying the shipping on its own

e. Managing Risk

i. Covers who will cover risks

iii. Payment Terms

d. How these Contracts are actually created

i. Often made without lawyers present, usually based on some forms

a. Often done with purchasing agents or contract specialists

b. Lawyers might be monitoring only if there is a problem

ii. Agency Problem

a. How do you get self reporting procedures within a company so the firm knows its time to bring in a lawyer

b. Potential Ways

i. Require deals that are large enough have to be reviewed by counsel

2. Letters of Credit or Financing

a. Seller’s Motivation: Control Risk

i. Creates independent obligation for buyer to pay

ii. Risk shifts to bank because the bank pays out first and then gets the money from the buyer

a. Advantages

i. Local bank better at investigating the creditworthiness of a buyer in that place rather than the seller’s bank

ii. Banks are better at determining creditworthiness than companies

iii. Issuing Bank

a. Pays back the confirming bank

iv. Confirming Bank

a. Seller’s local bank adds another obligation to pay on LOC for buyer

b. Undertakes the same obligation and pays the seller if the conditions of LOC are satisfied

v. Big Picture

a. Buyer has obligation to pay issuing bank

b. Issuing bank has obligation to pay confirming bank

c. Confirming bank actually gives the money to the seller

b. When LOC isnt as attractive

i. Preexisting relationship between buyer and seller

ii. Don’t want to add the transaction costs of using banks

c. Independence Principle

i. Banks aren’t flexible

a. The documents required in the LOC must be exact to get the money

ii. Bank doesn’t want to be involved in a potential dispute

iii. Banks aren’t good at investigating whether things worked out, the transaction costs go way up

a. This would defeat the purpose of LOC: easy to get payment

d. Risks

i. Currency risk: what currency will the K be done in

ii. K could fix the exchange rate and specify different currencies

iii. Could use currency options or currency swaps

3. Shipping

a. Bill of Lading