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The book that we used Miller, R. L. (2014). Business Law Today. Texas: South Western Cengage Learning.
Q1) 8-1Letters of Credit. Antex Industries, a Japanese firm, agreed to purchase 92,000 electronic integrated circuits from Electronic Arrays. The Swiss Credit Bank issued a letter of credit to cover the transaction. The letter of credit specified that the chips would be transported to Tokyo by ship. Electronic Arrays shipped the circuits by air. Payment on the letter of credit was dishonored because the shipment by air did not fulfill the precise terms of the letter of credit. Should a court compel payment?
Explain. (See pages 223–225.)
Q2) 8–4 Sovereign Immunity. When Ferdinand Marcos was president of the Republic of the Philippines, he put assets into a company called Arelma. Its holdings are in New York. A group of plaintiffs, referred to as the Pimentel class, brought a classaction suit in a U.S. district court for human rights violations by Marcos. They won a judgment of $2 billion and sought to attach Arelma’s assets to help pay the judgment. At the same time, the Republic of the Philippines established a commission to recover property wrongfully taken by Marcos. A court in the Philippines was determining whether Marcos’s property, including Arelma, should be forfeited to the Republic or to other parties. The Philippine government, in opposition to the Pimentel judgment, moved to dismiss the U.S. court proceedings. The district court refused, and the U.S. Court of Appeals for the Ninth Circuit agreed that the Pimentel class should take the assets. The Republic of the Philippines appealed. What are the key international legal issues? [Republic of the Philippines v. Pimentel, 553 U.S. 851, 128 S.Ct. 2180, 171 L.Ed.2d 131
(2008)] (See pages 214–215.)
Q3) 23-5Loyalty. Taser International, Inc., develops and makes video and audio recording devices. Steve Ward was Taser’s vice president of marketing when he began to explore the possibility of developing and marketing devices of his own design, including a clip-on camera. Ward talked to patent attorneys and a product development company and completed most of a business plan before he resigned from Taser. He then formed Vievu, LLC, to market the clip-on camera. Did Ward breach the duty of loyalty? Could he have taken any steps toward starting his own firm without breaching this duty? Discuss. [Taser International, Inc. v.
Ward, 224 Ariz. 389, 231 P.3d 921 (App. Div. 1 2010)] (See page 605.)
Payment Methods for International Transactions
Currency differences between nations and the geographic distance between parties to international
sales contracts add a degree of complexity to international sales that does not exist
in the domestic market. Because international contracts involve greater financial risks, special
care should be taken in drafting these contracts to specify both the currency in which
payment is to be made and the method of payment.
Although our national currency, the U.S. dollar, is one of the primary forms of international
currency, any U.S. firm undertaking business transactions abroad must be prepared to
deal with one or more other currencies. After all, a Japanese firm may want to be paid in
Japanese yen for goods and services sold outside Japan. Both firms therefore must rely on
the convertibility of currencies.
Currencies are convertible when they can be freely exchanged one for the other at some
specified market rate in a foreign exchange market. Foreign exchange markets make up
a worldwide system for the buying and selling of foreign currencies. The foreign exchange
rate is simply the price of a unit of one country’s currency in terms of another country’s currency.
For instance, if today’s exchange rate is eighty Japanese yen for one dollar, that means
that anybody with eighty yen can obtain one dollar, and vice versa. Like other prices, the
exchange rate is set by the forces of supply and demand.
Frequently, a U.S. company can rely on its domestic bank to take care of all international
transfers of funds. Commercial banks often transfer funds internationally through their
correspondent banks in other countries. Example 8.6 A customer of Citibank wishes to
pay a bill in euros to a company in Paris. Citibank can draw a bank check payable in euros
on its account in Crédit Agricole, a Paris correspondent bank, and then send the check to
the French company to which its customer owes the funds. Alternatively, Citibank’s customer
can request a wire transfer of the funds to the French company. Citibank instructs
Crédit Agricole by wire to pay the necessary amount in euros.•
Letters of Credit
Because buyers and sellers engaged in international business transactions are frequently
separated by thousands of miles, special precautions are often taken to ensure performance
under the contract. Sellers want to avoid delivering goods for which they might not be
paid. Buyers desire the assurance that sellers will not be paid until there is evidence that
the goods have been shipped. Thus, letters of credit are frequently used to facilitate international
Parties to a Letter of Credit In a simple letter-of-credit transaction, the issuer
(a bank) agrees to issue a letter of credit and to ascertain whether the beneficiary (seller)
performs certain acts. In return, the account party (buyer) promises to reimburse the issuer
for the amount paid to the beneficiary. The transaction may also involve an advising bank
that transmits information and a paying bank that expedites payment under the letter of
credit. See Exhibit 8.1 on the facing page for an illustration of a letter-of-credit transaction.
Under a letter of credit, the issuer is bound to pay the beneficiary (seller) when the
beneficiary has complied with the terms and conditions of the letter of credit. The beneficiary
looks to the issuer, not to the account party (buyer), when it presents the documents
required by the letter of credit.
Typically, the letter of credit will require that the beneficiary deliver a bill of lading to the
issuing bank to prove that shipment has been made. A letter of credit assures the beneficiary
(seller) of payment and at the same time assures the account party (buyer) that payment
will not be made until the beneficiary has complied with the terms and conditions
of the letter of credit.
The Value of a Letter of Credit The basic principle behind letters of credit is
that payment is made against the documents presented by the beneficiary and not against the
facts that the documents purport to reflect. Thus, in a letter-of-credit transaction, the issuer
does not police the underlying contract. A letter of credit is independent of the underlying
contract between the buyer and the seller. Eliminating the need for banks (issuers) to inquire
into whether actual contractual conditions have been satisfied greatly reduces the costs of letters
of credit. Moreover, the use of a letter of credit protects both buyers and sellers.
Exhibit 8.1 A Letter-of-Credit Transaction
CHRONOLOGY OF EVENTS
1. Buyer contracts with issuer bank to issue a letter of credit, which sets forth the bank’s obligation to pay on the letter of credit and buyer’s
obligation to pay the bank.
2. Letter of credit is sent to seller informing seller that on compliance with the terms of the letter of credit (such as presentment of necessary
documents—in this example, a bill of lading), the bank willl issue payment for the goods.
3. Seller delivers goods to carrier and receives a bill of lading.
4. Seller delivers the bill of lading to issuer bank and, if the document is proper, receives payment.
5. Issuer bank delivers the bill of lading to buyer.
6. Buyer delivers the bill of lading to carrier.
7. Carrier delivers the goods to the buyer.
8. Buyer settles with issuer bank.
U.S. Laws in a Global Context
The internationalization of business raises questions about the extraterritorial application
of a nation’s laws—that is, the effect of the country’s laws outside its boundaries. To what
extent do U.S. domestic laws apply to other nations’ businesses? To what extent do U.S.
domestic laws apply to U.S. firms doing business abroad? Here, we discuss the extraterritorial
application of certain U.S. laws, including antitrust laws, tort laws, and laws prohibiting
employment discrimination. (Because these issues can be quite complex, consulting an
attorney may be advisable—see the Business Application feature at the end of this chapter.)
U.S. Antitrust Laws
U.S. antitrust laws (to be discussed in Chapter 32) have a wide application. They may
subject firms in foreign nations to their provisions, as well as protect foreign consumers and
competitors from violations committed by U.S. citizens. Section 1 of the Sherman Act—
the most important U.S. antitrust law—provides for the extraterritorial effect of the U.S.
The United States is a major proponent of free competition in the global economy. Thus,
any conspiracy that has a substantial effect on U.S. commerce is within the reach of the
Sherman Act. The law applies even if the violation occurs outside the United States, and
foreign governments as well as businesses can be sued for violations.
When a Foreign Government Takes Private Property The act of state doctrine can have
important consequences for individuals and firms doing business with, and investing in,
other countries. This doctrine is frequently employed in situations involving expropriation
Expropriation occurs when a government seizes a privately owned business or privately
owned goods for a proper public purpose and awards just compensation. When a
government seizes private property for an illegal purpose or without just compensation,
the taking is referred to as a confiscation. The line between these two forms of taking is
sometimes blurred because of differing interpretations of what is illegal and what constitutes
Example 8.2 Flaherty, Inc., a U.S. company, owns a mine in Argentina. The government
of Argentina seizes the mine for public use and claims that the profits that Flaherty
realized from the mine in preceding years constitute just compensation. Flaherty disagrees,
but the act of state doctrine may prevent the company’s recovery in a U.S. court.• Note
that in a case alleging that a foreign government has wrongfully taken the plaintiff’s property,
the defendant government has the burden of proving that the taking was an expropriation,
not a confiscation.
Doctrine May Immunize a Foreign Government’s Actions When applicable, both the
act of state doctrine and the doctrine of sovereign immunity (to be discussed next) tend to
immunize (protect) foreign governments from the jurisdiction of U.S. courts. This means
that firms or individuals who own property overseas often have diminished legal protection
against government actions in the countries in which they operate.
The Doctrine of Sovereign Immunity When certain conditions are satisfied,
the doctrine of sovereign immunity immunizes foreign nations from the jurisdiction
of U.S. courts. In 1976, Congress codified this rule in the Foreign Sovereign Immunities
Act (FSIA).2 The FSIA exclusively governs the circumstances in which an action may be
brought in the United States against a foreign nation, including attempts to attach a foreign
nation’s property. Because the law is jurisdictional in nature, a plaintiff has the burden of
showing that a defendant is not entitled to sovereign immunity.
Section 1605 of the FSIA sets forth the major exceptions to the jurisdictional immunity
of a foreign state. A foreign state is not immune from the jurisdiction of U.S. courts in the
1. When the foreign state has waived its immunity either explicitly or by implication.
2. When the foreign state has engaged in commercial activity within the United States or
in commercial activity outside the United States that has “a direct effect in the United
3. When the foreign state has committed a tort in the United States or has violated certain
In applying the FSIA, questions frequently arise as to whether an entity is a “foreign
state” and what constitutes a “commercial activity.” Under Section 1603 of the FSIA, a
foreign state includes both a political subdivision of a foreign state and an instrumentality
of a foreign state. Section 1603 broadly defines a commercial activity as a commercial activity
that is carried out by a foreign state within the United States, but it does not describe
the particulars of what constitutes a commercial activity. Thus, the courts are left to decide
whether a particular activity is governmental or commercial in nature.
Doing Business Internationally
A U.S. domestic firm can engage in international business transactions in a number of
ways. The simplest way is for U.S. firms to export their goods and services to markets
abroad. Alternatively, a U.S. firm can establish foreign production facilities so as to be
closer to the foreign market or markets in which its products are sold. The advantages may
include lower labor costs, fewer government regulations, and lower taxes and trade barriers.
A domestic firm may engage in manufacturing abroad by licensing its technology to an
existing foreign company or by establishing overseas subsidiaries or joint ventures.
Exporting can take two forms: direct exporting and indirect exporting. In direct exporting,
a U.S. company signs a sales contract with a foreign purchaser that provides for the conditions
of shipment and payment for the goods. (How payments are made in international
transactions will be discussed later in this chapter.) If sufficient business develops in a
foreign country, a U.S. corporation may set up a specialized marketing organization in that
foreign market by appointing a foreign agent or distributor. This is called indirect exporting.
When a U.S. firm desires to limit its involvement in an international market, it will
typically establish an agency relationship with a foreign firm. (Agency will be discussed in
Chapter 23.) The foreign firm then acts as the U.S. firm’s agent and can enter into contracts
in the foreign location on behalf of the principal (the U.S. company).
Distributorships When a foreign country represents a substantial market, a U.S.
firm may wish to appoint a distributor located in that country. The U.S. firm and the distributor
enter into a distribution agreement, which is a contract between the seller and
the distributor setting out the terms and conditions of the distributorship. These terms and
conditions—for example, price, currency of payment, availability of supplies, and method
of payment—primarily involve contract law. Disputes concerning distribution agreements.
Loyalty Loyalty is one of the most fundamental duties in a fiduciary relationship.
Basically, the agent has the duty to act solely for the benefit of his or her principal and
not in the interest of the agent or a third party. For instance, an agent cannot represent
two principals in the same transaction unless both know of the dual capacity and
consent to it.
The duty of loyalty also means that any information or knowledge acquired through the
agency relationship is considered confidential. It would be a breach of loyalty to disclose
such information either during the agency relationship or after its termination. Typical
examples of confidential information are trade secrets and customer lists compiled by the
In short, the agent’s loyalty must be undivided. The agent’s actions must be strictly
for the benefit of the principal and must not result in any secret profit for the agent.
Case Example 23.9 Don Cousins contracts with Leo Hodgins, a real estate agent, to negotiate
the purchase of an office building. While working for Cousins, Hodgins discovers that
the property owner will sell the building only as a package deal with another parcel, so he
buys the two properties, intending to resell the building to Cousins. Hodgins has breached
his fiduciary duties. As a real estate agent, Hodgins has a duty to communicate all offers to
his principal and not to purchase the property secretly and then resell it to his principal.
Hodgins is required to act in Cousins’s best interests and can become the purchaser in this
situation only with Cousins’s knowledge and approval.9•
Obedience When acting on behalf of a principal, an agent has a duty to follow all
lawful and clearly stated instructions of the principal. Any deviation from such instructions
is a violation of this duty. During emergency situations, however, when the principal cannot
be consulted, the agent may deviate from the instructions without violating this duty.
Whenever instructions are not clearly stated, the agent can fulfill the duty of obedience by
acting in good faith and in a manner reasonable under the circumstances.
Accounting Unless an agent and a principal agree otherwise, the agent has the duty
to keep and make available to the principal an account of all property and funds received
and paid out on behalf of the principal. This includes gifts from third parties in connection
with the agency. For example, a gift from a customer to a salesperson for prompt deliveries
made by the salesperson’s firm, in the absence of a company policy to the contrary, belongs
to the firm. The agent has a duty to maintain separate accounts for the principal’s funds and
for the agent’s personal funds, and the agent must not intermingle these accounts.
Principal’s Duties to the Agent
The principal also owes certain duties to the agent. These duties relate to compensation,
reimbursement and indemnification, cooperation, and safe working conditions.
Compensation In general, when a principal requests services from an agent, the
agent reasonably expects payment. The principal therefore has a duty to pay the agent for
services rendered. For instance, when an accountant or an attorney is asked to act as an
agent, an agreement to compensate the agent for service is implied. The principal also has
a duty to pay that compensation in a timely manner. Except in a gratuitous agency relationship,
in which an agent does not act for payment in return, the principal must pay the
agreed-on value for an agent’s services. If no amount has been expressly agreed on, the
principal owes the agent the customary compensation for such services.