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LEGAL ENVIRONMENT
Purpose of Law
To protect consumers, competitors,
employees, suppliers, investors,
society, and the environment from
possible unfair treatment or
exploitation by the businesses and
each other.
Legal System
There are two types of legal systems:
1) Common Law
2) Code Law
However, in most countries, a
combination of the two is usually
practiced.
Common Law
Common law is a tradition-based
practice.
The interpretation of what the law
means on a given subject is influenced
by previous court decisions.
If there is no specific precedent or
statute, common law requires a
court to make a decision that, in
affect, will create a new law.
Common law is practiced in the
United States of America.
Code Law
Code law (also known as Civil law) is
based on a comprehensive set of laws
organized into a code.
Rather than rely on precedent or court
interpretation, the code is intended
to spell out the law in all possible
situations.
Code law is practiced in countries
including Germany, France, Japan
and Russia.
Mixed
Most countries have legal systems
that rely on a mixture of both Code
and Common law.
Usually , the source of Code is
based on tradition and/or religion.
Both Code and Common law
countries recognize the enforceability
of mutual promises.
Under Code law, however, contracts
carry with them a number of implicit
promises that are enforceable,
whereas under the Common law
contract a promise must be part of
the contract to be enforceable.
International Legal
Environment
All countries realize that business
flourishes when there exists mutual
trust, orderly conduct, and
enforceability of contracts, and,
thus they seek to provide such an
environment.
The trouble, however, is that though
law and order exists in the domestic
setting of countries, the same cannot
be applied outside their political
environment.
Multinational firms, therefore, face
legal systems of a multitude of
countries, each one of which is
independent of the other.
Ironically, this situation also leads to
flourishing business.
Due to lack of unifying legal system
that applies across political
boundaries, multinational
corporations have the ability to
utilize the laws of a variety of
nations in a way that they are
unaffected by any one country’s
laws.
Example: Crude oil from Iran.
For most firms, however, lack of a
uniform legal framework creates
problems in promoting cross-border
trade and investment.
Example: Performance bonds of U.S.
firms in Iraq
International Law
Is a set of international agreements
(bilateral and multilateral) between
sovereign countries that represent the
most deliberate form of prescription
in which governments cooperate with
one another in explicitly formulating
and undertaking commitments.
The main purpose of these agreements
is to devise consistent rules that can
facilitate, among other things, travel,
stay, investment, crime prevention
between countries.
Some important types of international
agreements made by countries include:
• Treaties of friendship, commerce, and
navigation
• Treaties on taxation
• Agreements for transfer of technology
and for exchange of technical personnel
• Conventions for the protection of
human rights
One of the problems, however, is that
unlike the domestic legal system, the
international legal system is
decentralized.
Each country becomes a power center
and no country or no multilateral
agency has sufficient authority and
resources to make, apply, and
enforce law and adjudicate disputes.
In a broader sense, securing
compliance depends largely on
reciprocity, retaliation and relevant
expectations.
The real policing and stabilizing
power comes from the shared
perception of common interests.
When countries realize that they have
more to gain through cooperation
than through arbitrary claims, they
learn to act with restraint.
Friendship , commerce and
navigation treaties
These pertain to entry of individuals,
goods, ships and cargoes, capital,
acquisition of property, protection of
persons and property and transfer of
funds.
Tax treaties:
Tax treaties (usually bilateral) are
designed to provide relief from
double taxation and prevent evasion
of tax liability.
The objective of these treaties is to
specify the obligations of each
contracting country toward the other
country’s citizens, firms, and their
assets.
The ideal situation is to achieve
“national” treatment of foreign
nationals of the contracting countries.
National Treatment
National treatment implies that
foreign citizens and their properties
must receive the same legal
protection that the citizens of the
country granting the “national”
treatment receive.
There are many areas where national
treatment can create problems,
especially if the laws of the foreign
country granting ”national”
treatment are less stringent than the
laws of the other country.
For example, if a particular country
has a rule that says that no inventor,
whether national or foreign, is
entitled to receive a patent on a
pharmaceutical invention, all other
countries should accept the rule
because it provides “national”
treatment.
Another area where “national”
treatment creates problem is taxation.
The national treatment suggests that a
foreign individual or firm must pay
taxes to the country where it operates.
However, they are also subject to their
home country taxes, thus ending up
with double taxes.
Host Country Laws on
Business
Even if the legal systems are similar on
two countries, it does not mean that the
laws in those countries will be similar.
• Laws relating to entry of goods
• Laws relating to entry of firms
• Laws relating to business operations
• Laws relating to competition
Home Country Laws
Until the goods or capital has left the
country, it is subject to the
regulations of the home country.
•Laws relating to export
•Laws relating to outgoing investment
•Laws relating to competition
•Laws relating to corporate conduct
Some countries may, however enforce
their laws on their firms overseas as
well.
This is called Extra-Territorial
Enforcement.
Extra-Territoriality of
U.S. Export Laws
Any product of U.S. origin that is reexported from the original importing
country must obtain an export license from
the U.S. government.
The same applies in case a product is made
overseas but contains U.S. made
components or incorporates U.S.
technology.
This law applies not only to the
subsidiaries of U.S. firms but to
foreign firms as well.
Extra-Territoriality of
U.S. Anti-trust Laws
U.S. government can prevent any
U.S. firm acquiring another firm,
domestic or foreign, that may, in
turn, provide the U.S. firm a
dominant competitive position in a
particular industry.
Extra-Territoriality of
U.S. Corporate Conduct
Prohibits American firms from the use of
telephone and mail in furtherance of a
payment, or even an offer to pay “anything of
value” directly or indirectly, to any foreign
political party or foreign political candidate,
if the purpose of the payment is the “corrupt”
one of getting the recipient to act (or refrain
from acting), retaining business for or with,
or directing business to, any person.
The term “foreign official” does not
include any government employee
whose duties are “essentially clerical”.
Payments made to such minor officials
are called “grease” or “facilitating”
payments when they are made to get
them to perform customary services
that they might refuse to perform, or
perform very slowly, in the absence
of such payments.
The word “corruptly” is used to make
clear that the offer, payment,
promise, or gift is intended to induce
the recipient to misuse him or her
official position to wrongfully direct
business to the payer or to obtain
preferential legislation for the payer.
Resolving Disputes
In international setting, two types of
disputes are common:
1- Those over contract rights and duties
2- Those arising from governmental
attempts to alter the contract through a
change in operating rules
It should be noted that a change in
rules that merely makes the business
less profitable is not a violation of
international law.
If the actions of host governments
are more intensive, for example,
expropriation of assets, the foreign
investor may seek to recoup losses
in a foreign court (other than the
host country).
However, the investor may confront
two international law doctrine:
- The act of state doctrine and
- The doctrine of sovereign immunity
The Act of State Doctrine
The government has the right to exercise
its sovereign power.
In doing so, it urges the foreign courts to
not examine the validity of act of state that
results in expropriation.
If the doctrine is deemed applicable, the
foreign court will not examine and decide
the claims on its merits.
The Doctrine of Sovereign
Immunity
The concept of sovereign immunity
calls into question whether the
domestic court has jurisdiction over a
foreign state (or its conduct) at all.
Accordingly, a sovereign country can
not, without giving consent, be made
to answer in the courts of another
nation, especially in matters relating
to public acts (as opposed to private
acts).
Other alternatives for
expropriation disputes:
• litigation in national courts
• international arbitration
solving
The litigation of an international
dispute involves the application of
both domestic and international law
by a domestic court.
The purpose of the private
international laws is to:
• Prescribe the conditions under which a
particular domestic court may hear
such a suit.
• Determine the particular system of law
by which the rights of the parties must
be decided.
• Specify the circumstances in which
foreign judgement can be recognized of
enforced.
Litigations are usually very
expensive. Court room battles can:
• damage business relations
• provoke unfavorable publicity
• absorb countless hours of
management time
Due to these difficulties, many
firms are subscribing to
alternate forms of dispute
resolution.