Answer 3 of the 5 International Legal Challenges File

Learning Topic

International Dispute Resolution

by Robert C. Goodwin, Collegiate Professor, University of Maryland University College

Applicability of Foreign Law

It is important for those of us interested in international business to understand the nature of legal responsibilities when conducting business in foreign countries and the power of countries to impose rules that will influence business activities in another country. It would be useful for you to be familiar with a few basic concepts in this area.  First, each country has a sovereign right to define the legal rules for activities within its territory, and the principles of international law are supposed to respect that sovereignty.

There are several areas where this simple statement runs into problems. One is where a country is undertaking actions that violate international law, such as allowing genocide. Another is where one country (state A) attempts to regulate activity that occurs in a foreign country (state B) because the activity has a direct effect in state A.  The best example of this situation is US antitrust laws. If UK companies conspire in London to fix prices on goods exported to the United States, the United States will attempt to sue these UK companies in spite of the fact that their actions might have been legal in the UK.  

But, aside from these exceptions, the general rule that each country has the right to set its own legal rules for activities within its borders still holds pretty well. The corollary to this rule is that foreign companies are bound to obey the laws of the country where they are doing business. For the most part this rule does not create conflict between the laws of the home country (e.g., the United States) and the host country because countries usually do not give their laws extraterritorial application. Thus, the United States does not typically attempt to regulate the activities of US-owned companies that are operating in foreign countries.  

There are, however, a few instances where the United States does regulate the activities of US entities operating abroad, and these types of situations are increasing. But if there is no conflict with the local law then there might not be a problem. For example, bribery, a common problem in international business, is outlawed in all countries. Therefore, an American company has no legal problem in complying with the US Foreign Corrupt Practices Act, which prohibits bribery, even though it is a case of US law affecting activities taking place inside a foreign country. Another tricky area is employment discrimination; the US Congress has made prohibitions on discrimination applicable not only to US corporations abroad but also to subsidiaries controlled by US corporations, unless compliance with the US antidiscrimination law would cause a violation of the law of the country that the workplace is located in.

Where a conflict does exist between US law and local law, there often is an ad hoc solution negotiated between the countries. Keep in mind that the US company operating abroad is clearly subject to local law. A subsidiary established in country B is a country B company, not a US company, even though it may be 100 percent owned by a US company. A GM subsidiary in China is a Chinese company and must follow Chinese rules regarding its board of directors, etc. Fundamentally, though, there is no good international system for solving conflicts involving the legal rules of different countries. Suppose that you are a US company with subsidiaries in Japan and China, and suppliers in China fail to honor some contract commitments. If the goods were supposed to be delivered to Japan, does Japanese law apply? If a Japanese court ruled on the dispute would a Chinese court honor the decision? These are difficult questions and arbitration can be useful in such situations.  

Choice of Law

Once we know what court will hear a case, we do not necessarily know what law will be applied by that court. While courts in some countries prefer only to apply their own law to any case which is heard in their court, in the United States that is often not true. If a court in Maryland hears a case about a contract entered into between a Maryland corporation and a California corporation which was negotiated in California and performed in California, then the Maryland court will apply California law to the case. The short answer is that, absent a choice by the parties, a US court applies the law of the state that has the most significant relationship to the transaction and the parties.

Ability of Parties to Select the Forum

What if the parties themselves want to decide in advance that a particular forum will be the location for any possible lawsuits? Can they do that? The short answer is yes, in the United States, but maybe not so readily in other jurisdictions. (Read the 1972 US Supreme Court case of M/S Bremen v. Zapata Offshore Co., 407 U.S. 1.)

Recognition and Enforcement of Foreign Judgments

In the United States there is a provision in the US Constitution that requires each state to give full faith and credit to the judicial decisions of any of the other sister states. But internationally there is no similar structure, and the extent to which each country will recognize the judgments of other nations depends upon the law of the country that is asked to enforce a foreign judgment. This type of enforcement is in stark contrast to arbitration, where there is an international agreement whereby countries promise to enforce arbitral awards made in other countries. We will discuss arbitration more in the section below

Many business people might be surprised to discover that if they were to be sued in a foreign country they could be at serious risk of having any judgment that might be rendered in that country brought here to the United States and enforced against them. The United States, unlike many countries, is willing to accept judgments issued by the courts of other nations provided that certain standards have been met. Courts will apply the following tests to determine whether the foreign judgment should be accepted and enforced:

1. Did the foreign court have jurisdiction over the person and subject matter? The question of whether the foreign court had jurisdiction is evaluated using US standards of jurisdiction, not the standards as expressed in the law of the foreign country. This takes us back to the standard reflected in US court decisions that there be minimum contacts between the defendant in the dispute and the jurisdiction or that a company has purposefully availed itself of the privilege of doing business in the jurisdiction. Also, a reasonableness overlay is part of the analysis. That is, the assertion of jurisdiction must be reasonable under the circumstances of the case.

2. Was the defendant given adequate notice? Here adequate can refer to lead time as well as the language of the notice.

3. Was the judgment rendered under a system that provides impartial tribunals or procedures compatible with the requirements of due process of law?

4. Was there fraud in obtaining the judgment? If fraud existed, of course, the US court will not enforce the judgment.

5. Is enforcement of the foreign judgment consistent with US public policy?

6. Does the judgment conflict with another final judgment or is it contrary to an agreement between the parties providing for arbitration or some other alternate dispute settlement mechanism? The foregoing principles are contained both in court decisions and in a uniform law that has been adopted by some states, called the Foreign-Country Money Judgements Recognition Act

Arbitration

Arbitration is a nonjudicial proceeding designed to settle disputes. Our focus here is arbitration of disputes between two private parties to a contract, not the arbitration of disputes between a private party and a government. Many people confuse arbitration with mediation. They are not the same at all. In mediation, a neutral third party tries to bring the two disputing parties together. A mediator serves as a facilitator and the parties themselves eventually reach an agreement. Arbitration, on the other hand, involves the neutral third party (or parties) acting as a decision maker in the same way that a judge does. Each party presents its point of view to the arbitrator, who then makes a decision that the parties have agreed in advance they will honor.

There is no requirement as to how an arbitration will proceed—it is dictated by whatever is in the contract between the parties. There are several organizations that provide arbitration services and that have rules detailing how they conduct arbitrations, what procedures are applied, etc. The International Chamber of Commerce (ICC) in Paris, for example, is a popular center for arbitration, and many people draft contracts with an arbitration clause providing that arbitration will be conducted in accordance with the rules of the ICC. The American Arbitration Association (AAA) also provides arbitration services pursuant to its rules. Generally, in addition to specifying the rules that will apply, parties to the contract should specify the location of the arbitration, the language of arbitration, and the number of arbitrators. Sometimes one arbitrator will make more sense than three. Keep in mind that arbitrators must be paid, so there may be an advantage from a cost perspective for having a single arbitrator.

Arbitration has a number of advantages, including efficiency and confidentiality. But the most important benefit is enforceability. Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (usually referred to as the New York Convention), most of the world’s trading nations have agreed to have their courts enforce arbitral awards issued in foreign nations. There are limited circumstances where a nation could refuse to enforce a foreign arbitral award. These are set forth in Article V of the Convention.

Review the text of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Search for Article V in the pdf using the "Ctrl F" search function.

Important Takeaways for Your International Contracts

In terms of the important issues to keep in mind related to dispute resolution in contracts, with a particular focus on international contracts, the following major issues are important:

1. US courts now have a strong bias for allowing the parties to determine their own dispute resolution approach and are reluctant to allow a party to bypass a contractual commitment to resolve disputes through arbitration. This view is bolstered by the US Arbitration Act, which contains limited bases for overturning an arbitral award in the United States.

2. Internationally, those nations that have signed the Convention on the Enforcement of Arbitral Awards (called the New York Convention) have also agreed to enforce arbitral awards and to allow them to be overturned by their courts in only very limited circumstances, similar to the circumstances set forth in the US Arbitration Act.

3. There is a major difference between enforcement of arbitral awards and court judgments. In the United States, courts are liberal in enforcing judicial awards made by the courts of other countries. However, other countries do not follow the US practice. Thus, as a businessperson, you might win a lawsuit but not be able to enforce the award in another country. However, if you win an arbitration your chances of enforcing it are far greater because of the New York Convention, which obligates those countries that have signed it to enforce arbitral awards. As a businessperson doing business internationally, you will more likely than not want to include an arbitration clause in your contracts.

4. Note that many US lawyers like to put into contracts that both parties agree that the courts of New York or some other state will be used to settle disputes. But if you are doing business with a foreign company that doesn't have any assets in the US, what good does it do you to have a US judgment? Courts overseas won't honor the judgment and there are no assets in the United States to execute against. You would be better off with an arbitral award that can be enforced overseas, so long as the country has signed the New York Convention.

5. For sales contracts, use letters of credit to ensure that you receive payment. The true advantage of a letter of credit is that it involves a bank in the process so the seller is not relying on the buyer to pay the invoice, but rather on the bank.

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