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 SystemThere 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 re-exported 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 DoctrineThe 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 solving expropriation disputes:

• litigation in national courts

• international arbitration

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.