Businesses are not involved in signing treaties or in creating law that applies between sovereign states. Indeed, the sovereign states themselves have the only power to conduct foreign affairs. In the United States, that power rests with the president, though Congress also has important roles. For example, the Senate must ratify a treaty before the treaty binds the United States and before its provisions become law for the people within the United States.
However, businesses are required to abide by their own applicable domestic laws as well as the laws of the foreign country in which they are conducting business. When domestic laws apply to businesses operating internationally, that is a vertical legal structure, such as is illustrated in Figure 13.3 "The Vertical Nature of U.S. Domestic Law". This is because there is a legitimate authority over the business that governs its behavior.
As noted in the example concerning U.S. companies doing business with Foxconn and Hon Hai Precision Industry Co., international business can involve creating contracts between parties from different nations. These contracts are horizontal in nature, much like a treaty. However, they are also subject to a vertical legal structure, because the parties to the contact will have chosen which laws will apply to resolve disputes arising under the contract. For example, if Microsoft, a U.S. company, has a contract with KYE Systems Corp., a Chinese manufacturer, to assemble its products, the contract might very well include a choice of law clause that would require any contract dispute to be settled in accordance with Washington State law. A choice of law clause is a contractual provision that specifies which law and jurisdiction will apply to disputes arising under the contract. The contract might contain such a clause because Microsoft’s headquarters are in Washington State, and it would be more convenient for Microsoft to settle any disputes arising under a contract by using the laws in the state where it is located. This probably would be terribly inconvenient for KYE Systems Corp., but the benefits of obtaining a Microsoft contract probably outweigh the potential inconvenience of resolving disputes in the Washington State court system. Additionally, a well-established United Nations treaty, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, provides for the enforcement of arbitral awards among member states. That means Microsoft and KYE Systems Corp.could agree in a predispute arbitration clause, perhaps in a purchase order or invoice, to arbitrate their disputes in Washington, using Washington contract law, and in English. The prevailing party in the arbitration could take the award to court in either Washington or China and convert it into a legally binding judgment under the treaty. Choice of law clauses have consequences regarding the way the contract will be interpreted in the event of a dispute, costs associated with defending a complaint arising under a contract, and convenience. See Figure 13.5 "The Horizontal and Vertical Nature of Contract Relationships in the Global Legal Environment" for an illustration of the horizontal and vertical nature of contract law in international business.
KEY TAKEAWAYS
While international law between sovereign states is relevant to business in many ways—for instance, it would be illegal for a company to ignore the terms of a treaty that its own country had ratified—the types of law that are relevant to businesses operating in the international environment are domestic laws. A choice of law clause within the contract designates which country’s law will apply to a dispute arising under an international contract.
EXERCISES
- If you were creating a contract with a supplier in a different country, what types of things would you consider when deciding on the choice of law clause?
- Check out http://www.ustr.gov/trade-agreements/free-trade-agreements/north-american-free-tradeagreement-nafta. How might this international law present opportunities for businesses in the United States that might wish to export or import products to or from Canada or Mexico?
- Could a U.S. state enter into a treaty with a sovereign nation outside the United States? Why or why not?
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