International Business Transactions

Professor Barrett
Room 1011
Work: 530-2131
Home 531-4311
E-Mail: jbarret@pop3.utoledo.edu

January 10, 2000, Monday INTRODUCTION (Read pp. 1-48)

There is no exam. The beginning of April we will work on a negotiation problem
with 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 is
also required in a memo form. This should explain why we made the deal we
did. Can rewrite the contract, but not the memo. At that point the rewrite can be

I. The Conduct of Business in the World Community

1) 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 effect
is that goods become more expensive from exporting country
whose 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. The
New International Economic Order and a Law of Development (p.
16)
 (1) Developed Nations, Less Developed Countries (LDC), Newly
Developing Countries (NDC), Mature Developed Countries
(MDC)
(2) Growth of Trade Blocks
d) International Economic Institutions (p. 18)
e) The Role of Counsel in International Business (p. 22)
(1) Recognizing and Heeding Cultural Differences Can Be Key to
International Business Success (p. 26)
(2) Danian Zhang an Kenji Kuroda, Beware of Japanese
Negotiation 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 for
More 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, Wednesday BASIC 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
 (b) Break down large uncertain risks by creating devices which
break 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 on
shipper.
• Freight charges: FAS is charge that seller would charge to
get 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 are
given 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 there
a modification of the original offer, is this a counter offer instead.
(b) Counter Offer under UCC keeps terms that are consistent and
strikes out different terms and fills in the gaps with UCC
standard contracts.
• International Law is that the terms of the counter offer would
apply if Seller performs (They have acquiesced to the
counter 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 reputable
bank in US which is under US law.If unaware of bank. Confirmation
of irrevocable letter of credit by US bank.
(5) US Bank by confirming letter of credit agrees to pay the letter of
credit if the seller does certain things.
(6) Letter of Credit is subject to Uniform Customs and Practices for
Documentary Credits
 (7) The Bank confirms: They undertake to purchase all drafts drawn as
specified.
(8) If bank advises letter of credit, they don’t guarantee payments even
if you meet the terms of the letter of credit.

d) Seller Ships the Goods (p. 57) (Shipper is the party arranging for
shipment, 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 ultimate
destination. (e.g. send to England and know that it is ultimately
going to Iraq)
(4) Sometimes you need a license to ship items and other items don’t.
(5) Certificate of Origin is a standard document that is issued by an
entity (usually government). This is used to calculate the correct
tax rate. Most countries have different rules on this. (e.g. embargo
of Cuba by US or Arab countries embargo Israel).
(6) Carrier gets the goods and gives shipper a dock receipt that says
that the goods are here and they will be held until the ship gets into
port. (the temporary holder of goods is the baillee of the goods)
(7) Carrier now issues a bill of lading when the goods are loaded on
the 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 bill
of 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 inspection
certificate by a reputable inspection company. Buyer can reject
non conforming goods, but it is tough to sue.
Questions and Comments (p. 70)
1)
January 19, 2000 Wednesday CONTRACT FORMATION (Read pp. 75-103)
Formation of an International Transaction
1) 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 a
contract, 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 dispute
b) otherwise, country of closest connection
(a) Presumed: home base of party making characteristic
performance: (What is characteristic performance? Don’t
look at payment, look at providing the goods. It is usually
where the goods are shipped from according to
conventional 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 law
c) 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" terms
b) "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 if
parties perform on any counter-offer) subject to
b) custom of "order confirmation forms" by merchants, shifting
burden to buyer
1) (Second fact pattern): buyer's claim for corrosion damage? Seller’s
disclaimer?
(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 of
the last shot rule)
(3) International law: the Vienna Convention on International Sale of
Goods (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 to
the 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 means
according to Germany, they respect the other countries
reservation, however if both parties are signatories then the
CISG usually will apply if both countries are signatories
(B) Does it change the above analysis according to the CISG? Place of
business that is performing the K determines if CISG applies.
There is no Statute of Frauds in the CISG. U.S. and Canada (who
both have Statute of Frauds rules) could enter into an oral K and
enforce it under the CISG, because CISG trumps. CISG also
follows the last shot rule.
a) § 6: This is an opt out provision
b) § 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 where
the knowledge can be assumed. Implied warranty
e) Warranties: §36: no implied warranties. Should use language
that puts people on notice (e.g. all warranties implied or
otherwise rescinded not say that material …as is)
(C) How to avoid these uncertainties? Be clear in the K what does not
and does apply. K said we contracted out by choice of law and
indication of UCC applies. Problem is that Kansas law = Federal
law = CISG. Should argue intent governs.
January 24, 2000 Monday COMMERCIAL TERMS (pp. 104-133)
Problem 4.2 Commercial Terms, Bills of Lading and Insurance –Books to Bath
FOB Free on Board. Key is where. The obligation of the seller is to place the
goods with the shipper. At that place the goods are moved at the risk of the seller
or 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 will
arrange for carriage, but don’t want to pay for it. Technically the buyer
retains the right to arrange for the ship. Seller will get bill of lading to order
and transfer over to buyer and the buyer will arrange for insurance. (This
is a documentary sales under British law)
FOB Contract with additional Services: Shipping and insurance
arrangements are made by the seller, but this is done for the account of
the 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 documentary
sale.
United States: FOB is understood to mean FOB place of destination.
UCC 2-319: FOB the place of shipment the seller must at the place
shipment the goods and bear the expense and risk of putting them into
the possession of the carrier (if you name a vessel under the UCC this is a
documentary sale and buyer loses the rights to inspect goods)
CIF: Cost Insurance & Freight. This is a price quoted and the loss will be paid
by the insurer not the seller or buyer
FAS: Free Along Side: e.g. The shipment is on one mode of transportation and
being loaded on another mode of transportation. In this case the loss is
encumbered by the seller until it is transferred and new terms take over as to
responsibility and liability on the goods.
INCO TERMS CHAPTERS E, F, C, D
Chapter E: Least commitment by the seller. (Seller says that goods are available
at the factory and you take responsibility on pick up
Chapter F: Seller is responsible to deliver goods to a particular place or carrier
Chapter C: Title of goods transfers to the shipper at delivery, but the seller will
take on a minimum of paying for the shipping and possibly the freight
Chapter D: Seller at a minimum must take responsibility of getting products Ok’d
for export.

FOB (Sellers place) CIF

Price INCO TERMS:
Covers goods and
Packaging. Does not
Cover insurance. Buyer
Must arrange for carriage
(a ship) and tell the seller
which ship to take it to
Goods, packing, shipping and
insurance. These are to be
covered to the destination.
Insurance must be 110% of
the amount stated in the K and
must be in the currency of K.
When Pay Not technically identified
unless specific to K.
Usually construed to be
COD if nothing is
mentioned In K. (Most
of the time payment draft.)
is part of the K.)
Unless agreed otherwise, the
standard method is to pay
against documents (bill of
lading, insurance documents,
other certificates and bank draft.
Can have a cash sale instead a
letter of credit, have terms, pay
by credit card.

Right to Inspect Based on Local Law Right to inspect is after the

Not an INCO RULE: receipt of documents. The only
Basic is rule is that buyer inspection is that you have to
Can inspect before he pay. If there is a contractual
pays. Breach for non-conformity of
Goods, the buyer has the right
To reject the non-conforming
Goods according to time limits
Of local jurisdiction. Problem is
That seller already has your
money. Caveat Emptor: If the
Documents have a defect and
Buyer accepts them with defects
he is out of luck. One way to deal
with this is by certificates of
inspections by reputable
company.
Delivery: Seller delivers the goods Seller delivers the goods to the
to carrier at the place of carrier of the shipment. (Shipping
shipment. 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 shipment
Shipment
Loss Buyer at the ships rail Buyer at the ships rail
at the port of shipment at the port of shipment.

Bottom Line: Seller may be out if

Goods don’t show up.
He will want to be named
In insurance policy as
Additional insured (if
Goods are lost at sea, he
Is screwed otherwise
Because even though
buyer has title to
 goods he won’t pay if
no goods are received.

Customs: Seller is responsible for customs at sellers country and

Buyer 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 105
4) Skipped
5) See page 105
6) See page 105
7) 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 Monday

NO 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 the
performance 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 materials
in the Black Sea and take it to the India. Boat was chartered on a
time charter. When negotiating the deal they know there is a
possibility that the Suez Canal will close. Parties do not specifically
allocate the risk one way or another in the K. The ship enters the
Suez Canal and is stuck there. The owners of the ship asked the
charter holders to notify them when they got to the entry of the
Suez Canal, and they did not do that. The court found that since
the charter holders to the boat into a war zone they were in
violation of the war clause (breach of the K). The alternative was to
take the boat around the Cape of Good Hope to get the boat to
India. By going this way, the costs would go up. The British would
excuse non-performance of the K if the K is frustrated. Frustration
is a fundamental different situation for which the parties did not
make provisions. The court said that it was foreseen that the Suez
area was a possible war zone and the owners had terms that the K
could not be taken into the war zone. The court felt that the charter
 holders knew of the risk and it was foreseeable and they
deliberately did not contract for this. This is not frustration.
(b) CISG: Uniform Law for International Sales: Article 79 of the CISG is
that either party may be excused from liability for the failure to
perform any of his obligations. UCC 2-615 provides that only the
seller is excused and then only with respect to delay in delivery or
non-delivery.
(1) Must be an impediment, beyond your control and could not be
reasonably expected to take into account the impediment when
you signed the K and that you can’t reasonably overcome get
the impediment. (Economic hardship is not enough)
(2) The ultimate contractor can use a failure of a 3rd party who is
excused by an impediment.
(3) Economic Hardship: The fact that you will not make as much
money does not excuse you. At a certain level, it becomes
unreasonable to expect someone to do something.
(4) Use CISG first only use local law unless the CISG and general
principals cannot resolve (Impossibility and impracticability are
the approaches of CISG)
(5) CISG applies to all parties who are in countries who are
signatories 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 either
because the cost of a party’s performance has increased or
because the value of the performance of party receives has
diminished.
• Must be beyond the control of the disadvantaged party.
• Must not have assumed the risk (If risk has been deliberately
allocated 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 a
portion of the K then this is frustration and you do not have to
perform.
(2) Look to the British approach with impracticability. Even radical
price changes are not enough in the US. Look to the
expectations of the parties. Did someone assume the risk.
• The non occurrence of the event must have been a basic
assumption of the K. (it must have been something that
everyone assumed it would not take place)
• The occurrence must make the performance commercially
impracticable
 (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 to
both parties. (Goes back to UNIDROIT). Germany the price can
be adjusted, good faith plays a major role as to what is acceptable.

(2) Narrow view: Look at end product of K

b) 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, it
becomes easy. If there are no K terms to specify choice of law, what do
you 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 Jean’s
control?
CISG would say maybe it wasn’t K for Araby oil and Jean Val Jean was
excused from delivering only if terms of K exclude him. Could piggyback
liability from other suppliers.
2) Gulf Oil Case: What was the K for? Was it to supply Gulf Oil’s oil or someone
else’s? The court will tend to say the K was about Gulf Oil and therefore the
performance was for Gulf Oil. Court would look to reasonable diligence to
supply. Probably lets Araby off the hook. (Could argue that under CISG that
Jean Val Jean is excused if Gulf Oil is excused). UCC would say that Gulf did
not assume the risk of the fire and the non occurrence of the fire was
basically 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 bill
the suppliers. In most cases, the idea is to allow longer route. Time was of
the essence in this case. The carrier says that his deal is with Jean Val Jean
and his deal is not time sensitive, but he deal between Jean Val Jean and
Javert is time sensitive. The carrier says he is not liable. Do you look at the
entire deal or just the carriage contract?
4) Damages: These are calculated for contract breach by the reasonable
expectations (putting the party in the position in which he would have been if
the contract had been executed). Jean Val Jean will have to acquire from
someone else therefore his measure of damages will be the difference
between the contract and what he had to buy it for. (e.g. If you were going to
sell 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
 (3) When the documents of title get to the buyer (Buyer owns the ideas, he
has paid and delivery should have taken place – historical English
approach); or
(4) Date the goods were to delivered by the carrier to the buyer; or
WHEN DID THE BUYER LEARN?
(5) Modern approach (used in the US now) look at the actual price of
cover (price to substitute) (There is a point when the buyer knew there
was a breach and he had to try to make himself whole) Must act
without reasonable delay.
(6) If you do not cover they go back to when the buyer learns of the
breach 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 ARE
ENFORCEABLE. PROBLEMS:
(1) There are industry standard force majeure clauses. The standard trade
clause could be renegotiated, but this is hard.
(2) Could put into K: I am excuses if others don’t perform In their contracts
with me”
a) 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 questionable
suppliers 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 your
buyer 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 it
costs – some jurisdictions differ on the insurable interest). Could by an
option in the commodity market when the contract is entered into if you
are worried about a rise in prices or any other insurable interest.) (Go
long or short based on where you think the price will go). Write off the
option and let it go if the price does not go up, but take the option is the
prices are higher than your optioned price.
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 a
signature?)
c) Pedro used his brother’s credit card number (assume with permission) to
pay for the purchase
2) Pedro’s purchases drained rhein.com’s inventory on the titles he ordered
a) Inventory control computer noticed the inventory had gone below
acceptable levels
b) Computer was programmed to automatically purchase replacements
c) 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 query
e) Rhein.com’s computer selected the best offer according to criteria that
was built into its programming.
3) Rhein’s computer issued a book order for $10,0000 work of books from East
Publishing in the United States.
a) East Publishing’s computer received the book order, mechanically
retrieved the books from East’s inventory, packed then in a box, printed a
label with rhein’s address on it, sealed and labeled the box and delivered
the 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 they
arrive?
B) Rhein.com (a German company which is owned by an American
parent corporation – River.com) and East (an American owned
company)
• 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 accept

occurs through human agency, through the exercise of human choices
and discretion (p. 169)
- Intent is measured by objective manifestation (cannot say that not what
I meant) The same is held true by what a computer does by how it is
programmed.
- A completely automated acceptance does not indicate that there has
been no adequate acceptance of the electronic offer.
- There must be some indication that the automated system was intended
to signify acceptance, rather than merely to confirm receipt.
(Confirmation and acceptance is sent)
- Under the Model Laws from UNCITRAL the notion that a person is
bound if a message is sent “by an information system programmed by,
or on behalf of, the originator to operate automatically. Article 2B calls
this an electronic agent and in 1996 UETA (Uniform Electronic
Transaction Act) heightened the legal effect of an electronic signature.
- The question is how do you associate a person’s identity with an
electronic 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 a
writing 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 writing
requirement because all messages in the Data log are stored w/o any
modification.
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 that
constitutes a signature though the code is entirely in an electronic form
F) 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 book
purchased.
a) River produces lists from this data of individuals who are interested in
particular subjects
A) 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 knowingly
divulging the contents of communications in that service while in
electronic storage to another unless the service provider is authorized
by the service agreement to access the content of the messages.
5) Professor Pedro received several communications from a Bahamas based
bookmaker urging him to bet on the World Soccer Games. Brazil has a
privacy law similar to the EU
a) 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 for
the statute of frauds and redefined signed for electronic records as the
use of a symbol or action adopted with a present intent to authenticate
the writing.
(3) Several States have enacted differing Digital Signature Acts
b) International
(1) UNCITRAL (United Nations Commission on International Trade
Laws) has adopted a Model Law on Electronic Commerce (several
nations including Germany have adopted differing digital signature
statutes.
c) WHAT LAW IS APPLICABLE TO ANY CONTRACTUAL RELATIONS
FORMED 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 of
information on the net be resolved?

February 9, 2000 Wednesday

3) Privacy Issue Notes (p. 185)
a) EU Directive on Data Protection is based on a philosophy that the
government should intervene to protect the privacy of its citizens.
(1) A Company that gathers personal information must first obtain the
individual’s permission and explain how it will be used. It cannot be
used 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 level of protection
b) 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 any
person from operating an electronic communications service from
knowingly divulging the contents of communications in that service
 while in electronic storage to another unless the service provider is
authorized by the service agreement to access the content of the
messages.
(2) American businesses do not have the same “privacy” regulations of
information in the US.
(3) Companies in the US cross sell by using information gathered
about 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 to
8 privacy guidelines: To qualify for safe harbor, a company would have
to:
(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 is
released 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 credit
reporting)
(g) Provide effective enforcement mechanisms, including affordable
independent recourse mechanisms which have sanctions to
individuals for resolution disputes.
c) Individuals have a private right of action against those who misuse that
data.
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 payment
should be made on a letter of credit
B) Rule is a rule of strict adherence (must have exactly what is asked for or
the 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 a”foul 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 don’t 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
 (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) Broker
uses this and leverages one letter of credit off of another (Money he is
to receive from the person he is selling to is the basis for the letter of
credit 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. The
person who puts the bond up takes a percentage for putting a
larger sum up against the competition of the duties to be
performed.
(a) US Banks cannot issue performance bonds, they are called
stand by letters of credit if issued by a bank. The tricky thing
with this is what documents would show that the performance of
the duties were not completed within the time allocated in the
contract?
(b) Over time people are put on open account or use a stand by
letter of credit (if you pay within 30 days the seller does not go
to the bank, and the letter of credit is not used (Seller is slightly
overdisposed / don’t need if long term relationship)
b) Confirmed and Advised: The letter of credit buyer goes to the bank
and issues a letter of credit the seller goes to his bank and he either
confirms or advises that the letter of credit is issued.
c)
(16) d

February 14, 2000

2) 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 bank’s telex
machine malfunctioned and printed “ICD” rather than “LCD”, confirmation and
delivery documents proceed without question “ICD”; issuing bank refuese to
honor 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-up
notice.

STRICT COMPLIANCE RULE

 Is our issuing bank justified in dishonoring the documents because of this
discrepancy?
JH RAYNER AND COMPANY, LTD v. HAMBRO’s BANK LTD. (p. 263): The
case states that in the letter of credit that calls for one description and the
documents presented have a different description and the document is rejected.
Bank is sued for non payment. The court found that banks cannot be held
responsible 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. common
trade terms, freight collect v. freight prepaid) Specialized terms are not necessary
to 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 is
called for)
CONFIRMING BANK PAYS with a discrepancy, it pays at it’s own risk.
UCP: approach is that banks must use reasonable means to establish that the
documents 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 a
confirming letter)
US Bank was negligent because the Telex ribbon was mis-aligned. (However
every L in the text were not mis-aligned, and this would have been a pretty strong
argument that the US Bank would be at fault.
IF all the L’s 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 the
machine for the bank’s personnel’s use, and actually
transmitted to the beneficiary?
RESPONSIBILITY FOR ERRORS IN TRANSMISSION
 As between the two banks, which is responsible for the error in the
transmission? Which, if any, is in the best position to catch and correct the
error?
 Do the UCP and/or the UCC help this case?
French Bank (Article 18 UCP and UCC) is acting for the buyer. Buyer is
ultimately at risk for any non-conformity between the letter of credit and the
contract. 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 electronic
transmissions. 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 good
argument that the buyer will be left holding the bank.
Buyer is responsible for errors in the transmission, because they chose the bank
to deal with.
PROBLEM HERE IS THAT IT JUST PRINTED THE WRONG WAY: US Bank
problem with Telex, French Bank should have confirmed, Buyer indemnifies the
French 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 act
of dishonor?
Article 14 UCP says you only get one shot at discrepancies
UCC says you can add discrepancies provided that the beneficiary of the letter of
credit (seller) gets a chance to cure the defects.
This means that the type of deficiency may affect if there is a discrepancy.

 Case law:
Banker’s TRUST CASE says that 9 days would be too long.
 Old version of the UCP:and UCC
UCP reasonable time
UCC 10 days
 New versions of the UCP and UCC:
UCP banking 7 days
UCC 7 banking days

February 16, 2000 Class

Distributorship (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 control
Independent Sales Employee Sales
Distributor Agent Representative

Person / entity Person / entity Person

TRANFER OF TITLE
RISK REGARDING SALE
Mfg. 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 agency
relationship)

WHO CONTROLS WHO

YOU SELL TO
(Can they bind you in
a contract)
Dist. Cannot bind you Agent can bind if same as agent
 Given the scope of (Could be taxed if
authority allowed to make
(Usually cannot bind) K in country)

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

PROFIT
Distributor markup Commission on the sale Salary + Commission
(May get a salary)
What happens if there is a credit?
WHO SETS PRICE
& CURRENCY OF SALE
1) Mfg. to distributor Company makes the deal Same as agent
(mfg) and must negotiate each
2) Distr. to customer time
(dist)

DOMESTIC LABOR LAW

Probably not Agency law applies Domestic labor
Subject to labor law (Country you are law you are selling
But may be subjected working in) in
To distributor law

JURISDICTION
Might have jurisdiction Probably have enough Yes wll be under
In terms of transactions of a relationship with jurisdiciton
With distributor. Agent to be in
If there is a law suit, how jurisdiction
Can they enforce?
Limited jurisdiction over
Mfg.

APR
Can sell where ever then Agency law give more Much more control
Want unless limits to K control to the Mfg. over the line
Are enforceable

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

Anti trusts law may not Agency law could go Empoyee is you
Allow you to interfere w/ as with distributor or therefore not anti
The market see agent as mfg. so trust
 No anti trust violations
LEGALITY
Some countries do Generally allowed Generally allowed
Not allow

FOREIGN OWNED?
Many countries May need to use a same as agent
Majority must be natonla
National owned

CREATION OF SUB AGENTS

Probably can do this Probably cannot Cannot delegate
W/I limits of enforceable delegate agency power
Contract to others

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

February 21, 2000 Monday Class

Distributorships (contd.) (pp. 223-250)
Checklist of handouts reviewed
A) Countertrade (p. 247)
1) Agreement 1: for the original sale and the countertrade
2) 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 contract
3) Agreement 3: called the “protocol” and consists of a relatively brief
agreement that links the first two agreements in an overall contractual
aggregate.
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 whole
benefits with less cost. 3rd world countries do not like to protect, they do not
want 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. Legally
protected intellectual property in one country may not be protected similarly in
 another country. Patents can be granted, but some countries lack effective
forms of relief.
 What constitutes a “patent” and how it is protected in any country
depends 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 patented
invention w/o the permission of the patentee.
 The United States grants patents to the “first to invent” not (as in
many countries) the “first to file.”
 In the U.S. patents must be applied for within one year of when it is
introduced (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 in
the world within 1 year)
 Patent application includes the application (specs and drawings
and 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, registration
and examination.
• Patent is granted upon registration (accompanied by
appropriate documents and fees, without making an inquiry
about the patentability of the invention. The validity of such a
patent grant is most difficult to gauge until a time comes to
defend the patent against alleged infringement in an
appropriate tribunal.
• Patents grant is made following a careful “examination” of
the prior art and statutory criteria on patentability or a
“deferred examination” is made following public notice given
to 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 functional
a) 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 death
of th author, 95 years for a corporation
  The author also controls derivative works such as movies made
from books.
 Exists as soon as fixed in a tangible medium. (Suggestd
 Federal registration nto required unless trying to sue for
infringement
 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 trade
secret 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 Market
Rockers Tapes and CDs (p. 801)

February 21, 2000 Wednesday Class

The same IS exists everywhere. The idea is how to lockout a competitor in a
foreign country since each
 How is IP protected?
Country by country basis. Must get in country
 Ownership in a country
Gives rights to use IP in that country and does not allow anyone else to import or
use it in that country. (EU allows EU wide trademark and working on EU wide
patent)
• Issue is that if anyone has your trademark in one of the
countries then cannot use in EU
•
 Timing is major element in copyright, trademark, patent. First in time usually
wins.
 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 and
pharmaceuticals)
 Many jurisdictions don’t 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 of
years (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 the
franchiser 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 be
single 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 legitimate
reasons 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 mechanism
b) 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 violation
d) Price fixing is a violation
 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 in
5) Where will you franchise
a) Distance: Harder to have quality control the farther away the franchise will
be.
b) Cultural differences: Hamburg in Australia “Hungry Jacks” looks similar to
Burger 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 Contracts
1) Control the drafting of a contract (you get to set your own operating
conditions)
2) You set up the basis for negotiations
3) 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:
DON’T EVERY MAKE BOTH LANGUAGES OFFICIAL)
Response to a Contract
1) Draft your ideal contract
2) Put what you want into the contract
3) Introduction of the parties and date
4) Recitals (This sets forth a road map why the parties are doing what they are
doing (page 868)DRAFT LICENSE AGREEMENT
a) 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 payment
c) What types of activities constitute a default
d) What remedies does the other side have if there is a default
e) 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 if
misrepresentation)
(2) Warranty is a standard to which I am obligating myself to make right
(gives time to cure)
 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) d
Patent & Know-how (pp. 865-895)
REVIEW CONTRACT STARTING ON PAGE 868
Problem 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 technology
and 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 the
license. In 1991 Mexico Industrial (intellectual) Property must fegister license,
mandatory exploitation of the product (can’t register to lock up the market and not
pursue it). If there is not enough for the demand and it is critical the government
can say that iin the public interest they can have others produce. General right
that if someone else tries to import what you protected, then you can block.
E.U: Doesn’t like monopoly powers and restricts anti-competitive practices
exception are in Art. 85 of Rome Convention. Can place restriction to develop
new technologies.
Open License: Agreement between the parties (limit yourselves but not 3rd
party. (OK) Can limit yourself in license, but not limit others
Closed 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 patnet
and British patent on same product can be limited in a territory) you can produce
as German company under German patent in germany, but they cannot use that
same 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 trademark
Cannot require a complete grant back (If someone makes the product with an
improvement, the licensor cannot requre the new patent holder to give it back to
the original patent holder (joint ownership is OK)
Minimum royalty, production rights, non-exclusive grant back
Confidentiality clause OK as long as they are not public information.

February 28, 2000 Class (Monday)

Review license on pp. 626-630
Chapter 10: Issues in Investing Abroad (pp. 1029-1064)
Transfer Pricing: When the allegations of a complaint are sufficient to raise
question as to whether the directors have violated their duty to the corporation
and whether that corporation is guilty of the wrongful acts charged, those
questions 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 immune
from the jurisdiction of federal and state courts, unless the foreign state has
explicitly or impliedly waived its immunity or the action is based upon commercial
activities of the foreign sovereign carried on in the United States or causing a
direct effect in the United States. (Verlihnden BV v. Central Bank of Nigeria.)
Litigation: Sovereign Immunity and the Act of State: Absent a treaty, courts will
not examine the validity of a taking by a foreign government within its own
territory, 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 arise
when a court must decide the effect of an official action by a foreign sovereign
(W.S. Kirkpatrick & Co. , Inc. v. Environmental Tectonics Corporation
International)

Problem 10.5: Issues Confronting the Established Investment –

Privatization, Transfer Pricing, Currency Controls, and Company
Withdrawal: Domestic Goods, Inc. Five Years Later (p. 1029)
§1: The Setting: DGI formed wholly owned subsidiaries in a number of countries
including in in an East European Nation, one in Asia, and one in South America.
East Europe: New investment. State owned company producing the same
product line and having a distribution network was put up for privatization, and
DGI thought it would acquire the company. Avoided involuntary joint venture in all
three countries and mandated performance requirements in each investment.
Asia: Allowed some local investment (15%) in return for contribution of a mfg.
facility and investor’s 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 owned
company (POLSK) for sale. DGIEE would like to acquire the company and
would like to know what problems this could create. It especially is concerned
that POLSK seems to have too many employees for its level of production
and the company lacks good accounting records that will assist in determining
value.
(b) Rinisia and transfer pricing: DGIA, S.A. (DGI’s investment in a former French
colony of Asia) has pricing problems with the way DGI priced technology and
exports from the U.S. to the Rinsia subsidiary. Both the government tax
authorities in Rinisia and private minority shareholders of DGIA are
challenging several of the DGI ordered intra-company transfer prices
(c) Nusimbaland and currency control: DGIN, Ltd. (DGI investment in a former
British colony in Africa) confronted problems in repatriation of capital.
 Nusimbaland controls its currency, the Shilling, because of limited hard
currency reserves. The country has had very high inflation over the past
decade. The government has indexed salaries to inflation, and prices are
quickly raised with inflation. Dealing with shortage of currency, multiple
exchange rates, inflation, and indication are all new to DGI.
(d) Riotina and withdrawal: DGI investment in a former Portuguese colony in
South America. Should the investment discontinue d.b.a. DGI. DGI had
accepted the opportunity in Riotina to purchase two plants from a European
conglomerate, which was withdrawing from Latin America. DGI came to
acquire 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 the
losses in this plant.
Riotina government has sometimes been responsive to demands of labor in
allowing wages to increase, but at the same time has opposed price
increases for almost all basic food products. This plant came with the deal. To
obtain the company compatible with its line of products (factory 1) DGI has to
take this factory (factory 2).
§2: Focus of Consideration (p. 1031)
§3: Reading’s (p. 1031)
A) Acquisition Through the Process of Privatization (p. 1031): Focus is on
some of the issues arising when a company acquires a local, state
owned enterprise through the process of privatization.
Privatization: Alters the status of a business from public to private controls or
ownership.
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: An
International 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 shareholder’s derivative action, alleging that
Standard dominated and controlled Creole to its financial detriment by selling
Creole’s production principally to Standard itself or it’s subsidiaries at prices
substantially less than the current market prices for those products. Price (P)
sought a judgement directing Standard to account for and pay over to Creole the
difference between the actual price paid for its petroleum and the current market
prices at the transaction time. Standard moved to dismiss the complaint for legal
insufficiency.
Issue: When the allegation of a complaint are sufficient to raise questions as to
whether the directors have violated their duty to the corporation, and whether that
corporation 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 world
market price for crude oil. The comparatively small volume produced by Creole
could have been and should have been sold at world market prices as
established by reference to Texas posted prices. The determination of the
charges must await a trial. But enough has been set forth in the complaint to
sustain its legal sufficiency and to require Standard and Creole to make answer.
Motion to dismiss was denied
Analysis: The court declared that the allegations of the complaint took the
charged 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 Creole’s crude oil from market prices has been
as much as $.3230 per barrel. On the basis of Creole’s annual production, this
differential, if maintained would amount to “the sum of $10,000,000 in a single
year.”

R. Folsom & M. Gordon IBT (p. 1047)

National Plan of Nusimbalaind to Eliminate Corruption, Lower Inflation and
Modernize the Economy (p. 1051)
C) Considers some issues arising when inflation may impact on the
company’s profits, reducing profits to a loss when currency becomes
available 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 company’s subsidiaries (a food processing
plant) fails and is in bankruptcy, including possible affect of the
bankruptcy on the other enterprises in the country, and the parent DGI
in 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 Wednesday

Contract (p 868)
Elements of a Contract
1) Explanation of an agreement
2) Recitals
a) Several recitals
 b) Consideration Clause
3) Grant (gives exclusive license in Germany) (What do they get and give)
These are usually broad
a) Check Art. 85 & 86
b) 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 translation
6) Separate Technical Assistance
7) 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 keep
the prices
9) 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 production
runs are specific
11)Grant Back: This gives the original licensor rights to the unit. EU does not
allow this in EU. They will allow a non-exclusive right in the EU and an
exclusive contract in the rest of the world.
12)Marketing Rights: Making them use trademark
13)Confidential Relations: Not complex. Does not deal with anything that might
be disclosed or partially disclosed or what one party already knows. (What if I
can prove that I already knew it.) Look at end of booklet from Barret. Can go
beyond 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 have
proof of payment and can be audited and confirmed by auditing firm. If paying
late can be checked out. Who is paying for this. If auditor reveals that there is
a discrpancy over certain $$$ who pays. What is done with payments and
returns 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 for
accuracy. If not accurate books who pays for the audit, and what about
interest payments. Take a percentage of a set prices. Defining net profits
is 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
 infringement and assist in enforcing rights of licensor, licensor must pursue
infringement. Licensee may want a representation and warranty that licensor
has rights and owns the IP.
17)Government Approval Taxes: Who pays for taxes (exclude income tax) Who
is responsive for fees, permits. What happens if approvals are not attained
and who is responsible for getting the approval
18)Termination: how long does license last
a) Terms: Terminations, notice, time, rights to cure, and exceptions. Are
listed here. Not paying on time terminates immediately. List activities that
constitute defaults with list of timing and cures. “material breach by other
party”
b) Continuing Rights, Obligations:
c) Surrender of Rights: Know-how:
19)U.S. Laws and Regulations: NEVER USE THIS CLAUSE Licensee agrees to
comply 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 you
product and you stop paying this is not a force majeure. If government is
party to the contract, then
c) Arbitration: Keep info confidential, pick a company’s rule. (look at Barret’s
book – 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. licensing
d) Haven’t created a competitor (a license is that you are eventually
setting up a competitor)
2) PROBLEMS WITH INVESTING ABROAD
a) Greater risks / more exposure
b) Local rules are not known
3) COULD JOINT VENTURE WITH LOCAL PARTNER
a) 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
partner
c) Sharing the cost, expertise in market
d) Losing some control, decreasing exposure
e) 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
 b) Colors shapes
c) Understand negotiations and being on time.
d) Reputation is a big deal
LOOK AT:
1) Applicable law
a) US LAW
(1) Don’t regulate most foreigners in this country (exceptions are
nuclear 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, repatriation
of money you make, convert to hard currency, local content into
product, 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 a
good local partner
c) Applicable Foreign Agreements and multilateral laws
(1) GATT
(2) EU regulations
(3) UN aspirational regulations
2) Risks
a) Cost of production
b) Trade area
c) Infrastructure available or will it cost too much
d) Cheap and adequate supply of raw materials
e) 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 more
efficiently
a) Governments get higher technology.
b) Transition: (e.g. Russia has no concept of profit/ no experience with
capitalism v. Latin America)
 c) Other businesses are not their yet. Lack of competition, no well
developed distribution problems
d) Legal infrastructure: What are the rules. Russia does not have this
structure. Predictability in all areas.
e) Massive unpaid pension funds / Environmental liabilities (indemnify
yourself from existing liabilities) /
f) Inefficient workers/ what can workers participate in
g) Bids: do nationals get a reduced price
h) Limits on foreign ownership
i) 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 decides
to pay it.
j) Asset sales v. stock sales.
(1) Tax consequences and liability issues
k) 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 have
board 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 are
calculated on sales price. Income tax is based on profits. Governments
tend to regulate.
3) Currency controls
4) withdrawal

Chapter 10: Issues in Investing Abroad (pp. 1029-1064)

Transfer Pricing: When the allegations of a complaint are sufficient to raise
question as to whether the directors have violated their duty to the corporation
and whether that corporation is guilty of the wrongful acts charged, those
questions 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 immune
from the jurisdiction of federal and state courts, unless the foreign state has
explicitly or impliedly waived its immunity or the action is based upon commercial
activities of the foreign sovereign carried on in the United States or causing a
direct effect in the United States. (Verlihnden BV v. Central Bank of Nigeria.)
Litigation: Sovereign Immunity and the Act of State: Absent a treaty, courts will
not examine the validity of a taking by a foreign government within its own
territory, 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 arise
when a court must decide the effect of an official action by a foreign sovereign
(W.S. Kirkpatrick & Co. , Inc. v. Environmental Tectonics Corporation
International)

Problem 10.5: Issues Confronting the Established Investment –

Privatization, Transfer Pricing, Currency Controls, and Company
Withdrawal: Domestic Goods, Inc. Five Years Later (p. 1029)
§1: The Setting: DGI formed wholly owned subsidiaries in a number of countries
including in in an East European Nation, one in Asia, and one in South America.
East Europe: New investment. State owned company producing the same
product line and having a distribution network was put up for privatization, and
DGI thought it would acquire the company. Avoided involuntary joint venture in all
three countries and mandated performance requirements in each investment.
Asia: Allowed some local investment (15%) in return for contribution of a mfg.
facility and investor’s 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 owned
company (POLSK) for sale. DGIEE would like to acquire the company and
would like to know what problems this could create. It especially is concerned
that POLSK seems to have too many employees for its level of production
and the company lacks good accounting records that will assist in determining
value.
(f) Rinisia and transfer pricing: DGIA, S.A. (DGI’s investment in a former French
colony of Asia) has pricing problems with the way DGI priced technology and
exports from the U.S. to the Rinsia subsidiary. Both the government tax
authorities in Rinisia and private minority shareholders of DGIA are
challenging several of the DGI ordered intra-company transfer prices
(g) Nusimbaland and currency control: DGIN, Ltd. (DGI investment in a former
British colony in Africa) confronted problems in repatriation of capital.
Nusimbaland controls its currency, the Shilling, because of limited hard
currency reserves. The country has had very high inflation over the past
decade. The government has indexed salaries to inflation, and prices are
quickly raised with inflation. Dealing with shortage of currency, multiple
exchange rates, inflation, and indication are all new to DGI.
(h) Riotina and withdrawal: DGI investment in a former Portuguese colony in
South America. Should the investment discontinue d.b.a. DGI. DGI had
accepted the opportunity in Riotina to purchase two plants from a European
 conglomerate, which was withdrawing from Latin America. DGI came to
acquire 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 canning
and 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 in
allowing wages to increase, but at the same time has opposed price
increases for almost all basic food products. This plant came with the deal. To
obtain the company compatible with its line of products (factory 1) DGI has to
take this factory (factory 2).
§2: Focus of Consideration (p. 1031)
§3: Reading’s (p. 1031)
F) Acquisition Through the Process of Privatization (p. 1031): Focus is on
some of the issues arising when a company acquires a local, state
owned enterprise through the process of privatization.
Privatization: Alters the status of a business from public to private controls or
ownership.
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: An
International 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 shareholder’s derivative action, alleging that
Standard dominated and controlled Creole to its financial detriment by selling
Creole’s production principally to Standard itself or it’s subsidiaries at prices
substantially less than the current market prices for those products. Price (P)
sought a judgement directing Standard to account for and pay over to Creole the
difference between the actual price paid for its petroleum and the current market
prices at the transaction time. Standard moved to dismiss the complaint for legal
insufficiency.
Issue: When the allegation of a complaint are sufficient to raise questions as to
whether the directors have violated their duty to the corporation, and whether that
corporation 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 world
market price for crude oil. The comparatively small volume produced by Creole
could have been and should have been sold at world market prices as
established by reference to Texas posted prices. The determination of the
charges must await a trial. But enough has been set forth in the complaint to
sustain its legal sufficiency and to require Standard and Creole to make answer.
Motion to dismiss was denied
Analysis: The court declared that the allegations of the complaint took the
charged 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 Creole’s crude oil from market prices has been
as much as $.3230 per barrel. On the basis of Creole’s annual production, this
differential, if maintained would amount to “the sum of $10,000,000 in a single
year.”

R. Folsom & M. Gordon IBT (p. 1047)

National Plan of Nusimbalaind to Eliminate Corruption, Lower Inflation and
Modernize the Economy (p. 1051)
H) Considers some issues arising when inflation may impact on the
company’s profits, reducing profits to a loss when currency becomes
available for repatriation.
Repatriation: To restore to the original country (no $$$ to remit any profits are
repatriated)
I) Bankruptcy and Claims on Foreign Parent (p. 1058): Considers
problems when one of the company’s subsidiaries (a food processing
plant) fails and is in bankruptcy, including possible affect of the
bankruptcy on the other enterprises in the country, and the parent DGI
in 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 Monday

Investing 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 from
an American Perspective (p. 945)
Codetermination by Workers in German Enterprises (p. 949)
Germany’s Requiring of Workers on Boards Causes Many Problems (p. 953)
European Union Company Law (p. 957)
European Union Company Law (p. 961)
Investing in North America (pp. 964-994)

Tax Planning (Handouts)

Tariffs (pp. 322-360)

Most Favored Nations Tariffs: Government intervention preventing performance
may terminate a contract unless the intervention was undertaken in order to
avoid liability (Czarnikow Ltd.)
Tariff Preferences for Developing Nations: Under the Generalized System of
Preferences, the president may withdraw, suspend, or limit the duty free
treatment of any item from any country. (Floresheim Store, Co. Division of
Interco, 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 to
the assembly process and does not substantially change the article, the article
has not been further fabricated so as to bar specialized import treatment. (Oxford
Industries v. United States)

Customs Classifications (pp. 361-403)

Product Classification: A vehicle designed to transport both goods and persons
may be categorized, for tariff purposes, as a passenger vehicle. (Marubeni
America Corp. v. United States)
Place of Origin Classification: An item will retain the designation of the country
where its components were originally processed, unless it is substantially
transformed in another country. (Superior Wire v. United States)
Non-Tariff Barriers (pp. 404-447)
Buy American Procurement: A state requirement that governmental units
purchase supplies form American businesses does ot violate the GATT. (K.S.B.
Technical Sales Corp. v. North Jersey District Water supply commission of the
State of New Jersey)
Buy American Procurement: If a department head determines that it would be
inconsistent with e public interest to “Buy American,” it may purchase material
from non-American suppliers (Self-Powered Lighting, Ltd. United States)
Buy American Procurement: When considering a foreign contract bid, the
government does not need to apply the Buy American price surcharges to the
cost of any U.S. goods and services included in the bid. (Allis-Chalmers
Corporation v. Friedkin)
GATT and Government Procurement: A state requirement that governmental
units purchase supplies from American businesses does not violate that GATT.
(K.S.B. Technical Sales Corp. v. North Jersey District Water supply commission
of the State of New Jersey)

FTAs/CUs/CMs (pp.448-478)
Free Trade Areas and Custom Unions: Prohibitions on the intra-Community
marketing of products containing additives must be restricted to what is actually
necessary 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)