Essay On International Business Law

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This article discusses the sources and content of the international business law. Trading nations have entered into a series of treaties and organizations to promote free trade and end discriminatory or isolationist practices. The WTO is the premier organization that negotiates and regulates agreements among nations. This article will take look at the processes that establish international business law and the general features of the law.

Keywords: Foreign direct investment; International business transactions; International Law; International Trade; Outsourcing; Treaty; World Trade Organization; Comparative advantage

Law: International Business Law


International business is a critical part of the world economy that shapes the fortunes of individuals and entire nations. This article provides an overview of the sources, content and consequences of the "International business law" that regulates business across borders. The goal is to identify major themes, mechanisms and institutions that govern international business. International business law embraces many specific fields of practice that relate to a wide array of business transactions. Each type of international commerce (export and import of goods and services, foreign direct investment, joint ventures, research and development arrangements, franchising, sale and distribution arrangements and licensing of intellectual property) has a distinct body of law.

To introduce the idea of international law it helps to start by contrasting it with domestic law. Domestic laws are law because a legislature has the power, under our political system, to pass legislation binding people within its jurisdiction. Accordingly, a court has the authority to apply the law. The power to do so comes from the sovereignty of the nation. A sovereign has supreme and ultimate authority over affairs and individuals within its borders and does not have to answer to any higher authority. Each nation is sovereign.

On the other hand, international law involves an arrangement between sovereign nations. As a matter of theory, it may seem strange that law could operate on sovereigns, when neither sovereign state has to account to any higher power and can ultimately behave as they wish. Law that does not have to be followed is no law at all, some would argue. However, despite this theoretical problem, nations do, in practice, obey international law.

International law arises from the willingness of each nation to bind itself. A nation will do so because adherence to the law is in its best interest. Generally, nations have a self interest in promoting a systematic rule of law to foster predictability and stability in international affairs over the long term. While other nations and international bodies often lack the authority to compel compliance, if a nation decides to behave contrary to an international law, there still may be consequences. The violating nation's image may be tarnished both at home and abroad, economic sanctions may be imposed; in short, the country could lose the benefit of reciprocal treatment from other nations.

When violations do occur they are rarely flagrant and not usually tolerated silently by others. Protest often breaks out due to perceived violations of international law. Violators themselves concede the authority and importance of the law by usually trying to explain their actions on legal grounds.

International law largely arises from three categories: general principles, customary international law and treaties. General principles are fundamental understandings common to the world's great legal systems. When an advocate can show that almost every nation agrees on a principle, then that principle can be elevated to a binding rule of international law. An example of a general principle would be the rule of good faith in international obligations. Of course, the more abstract a principle is, the easier it would be to find consensus, but the less useful it would be in practice to resolve a specific problem. This paradox limits the practical use of general principles to situations where a party cannot find a more concrete alternative.

Customary international law arises from the persistent conduct of international actors including nations, international institutions and international business organizations. A court may consider a practice international law if the advocate can show that the practice has been followed generally and also has been accepted by those actors as law as opposed to courtesy or convenience. Proving a customary international law is very difficult and requires extensive evidence.

While courts may recognize international law based on the methods noted above, the bulk of international business law comes from written agreements between nations called treaties. As a practical matter, treaties are international business law. As opposed to general principles and customary international law, treaties are specific and negotiated to address particular conduct. There are a huge number of treaties on a huge number of topics and are sometimes called a pacts, protocols, conventions, covenants, or declarations. Treaties are divided into two general categories. Agreements between two countries are called bilateral treaties and agreements among three or more countries are called multilateral treaties. International institutions can also enter into treaties with other organizations or with nations. A treaty once signed and ratified by the government of each host country becomes law in each country and an agreement between the countries. For example, in the United States, the executive branch negotiates and signs and the Senate must then approve it. This is called "advice and consent." Once the treaty is ratified it becomes federal law. In that way, international law is not an entirely distinct body of law that acts upon nations from the outside; it is also part of domestic law that operates within a country. Therefore, the degree of enforcement depends, in part, on the strength of a given country's legal system.

Another factor in the enforcement of international law is treaty interpretation. A leading authority on interpretation and procedure related to treaties is the multilateral treaty called the Vienna Convention on the Law of Treaties (VCLT). The interpretation of treaties determines how a country observes international law. It is very difficult, if not impossible, to draft legal documents that clearly determine the outcome of every set of facts that may occur in the future. Circumstances may arise that the drafter of a relatively simple legal document, e.g., a will or contract, may not have foreseen which cause ambiguity or vagueness as to its application. Treaties are no different and the problem is often compounded because treaties are political compromises that sometimes defer resolution of contentious issues in order to achieve some current agreement (Bederman, 2001).

The interpretation of treaties has a couple of default rules and three general perspectives. The default rules are, first, that treaties are applied prospectively, to future events, unless the parties expressly agree otherwise. Second, treaties are normally assumed to apply to the entire territorial sovereignty of a nation, unless expressly agreed otherwise. Determining how a treaty is to apply to specific set of facts can be done with a textual approach, an intentionalist approach or a teleological approach and can involve all three. The textual approach looks to the plain meaning of the text in a specific section and throughout the document. For example, whether a treaty section that uses the word "airplane" also applies to a "glider" can turn on whether the document uses the more general term "aircraft" in other sections suggesting that "airplane" should be a more inclusive term. Under the VCLT, treaty interpretation begins with the "plain language" a textual approach that is limited by shades of meaning in language particularly when a treaty is translated into different languages (Bederman 2001).

Under the VCLT, the intentionalist approach can be used to fill in the text where the text is ambiguous or leads to an absurd result. The intentionalist approach employs an understanding of the original parties that drafted the treaty in order to determine what the treaty means. To understand the intent of the drafter, the negotiating history or traveaux preparatoires is often consulted. The intentionalist approach is somewhat disfavored, in part, because many nations join a treaty regime after drafting is over and it seems unfair to bind a nation to negotiating history they did not participate in. Further, negotiating parties often have different reasons for their involvement and negotiating history can often be contradictory and difficult to establish for someone claiming its use.

The teleological approach looks to the object and purpose of a treaty as opposed to slavishly following the text or attempting to determine the intent of the drafters. For example, a written agreement can produce results counter-productive to the stated goals of the treaty; the teleological approach allows interpretations of the treaty to depart from the "plain meaning" of the text. The VCLT endorses the teleological approach by requiring that treatises be viewed in light of their object and purpose (Bederman 2001). The important point for the international trader to remember about treaty interpretation is that there are sometimes several ways to read the same words and care should be taken to fully understand the meaning and consequences of the often complex international law.

In addition to bilateral and multilateral treaties, nations join international organizations that produce rules relating to business and trade. For example, the North American Free Trade Agreement (NAFTA) is a trading block composed of the United States, Mexico and Canada whereby the members have made a number of agreements designed to promote trade within their collective borders. Many other areas of the world have likewise engaged in such agreements, for example, Association of South East Asian Nations (ASEAN), MERCOSUR includes many South American cone nations, and the Asia Pacific Economic Cooperation (APEC). The European Union (EU), is probably the most aggressive and integrated agreement between nations to encourage free trade. The EU employs a common currency, the Euro, and super-governmental institutions, like the European Central Bank, the European parliament and the Court of Justice of the European communities.

With 150 member nations, the World Trade Organization (WTO) is the largest and most comprehensive...

International Trade Law On Payment Of International Sales


To succeed in today's global marketplace, exporters must offer their customers attractive sales terms supported by the appropriate payment method to win sales against foreign competitors. As getting paid in full and on time is the primary goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer.
Key Points:
' International trade presents a spectrum of risk, causing uncertainty over the timing of payments between the exporter (seller) and importer (foreign buyer).
' To exporters, any sale is a gift until payment is received.
' Therefore, the exporter wants payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer.
' To importers, any payment is a donation until the goods are received.
' Therefore, the importer wants to receive the goods as soon as possible, but to delay payment as long as possible, preferably until after the goods are resold to generate enough income to make payment to the exporter.

With this payment method, the exporter can avoid credit risk, since payment is received prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring payment in advance is the least attractive option for the buyer, as this method creates cash flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who may be willing to offer more attractive payment terms.

Letters of Credit
Letters of credit (LCs) are among the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter provided that the terms and conditions have been met, as verified through the presentation of all required documents. The buyer pays its bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but you are satisfied with the creditworthiness of your buyer's foreign bank. An LC also protects the buyer since no payment obligation arises until the goods have been shipped or delivered as promised.
Documentary Collections
A documentary collection is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter's bank), which sends documents to a collecting bank (importer's bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. Documentary collections involve the use of a draft that requires the importer to pay the face amount either on sight (document against payment'D/P) or on a specified date in the future (document against acceptance'D/A). The draft lists instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients under collections, documentary collections offer no verification process and limited recourse in the event of nonpayment. Drafts are generally less expensive than letters of credit.
Open Account
An open account transaction means that the goods are shipped and delivered before pay-ment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intense competition for export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors. However, with the use of one or more of the appropriate trade finance techniques, such as export credit insurance, the exporter can offer open competitive account terms in the global market while substantially mitigating the risk of non payment by the foreign buyer.
Letters of credit

In any business transaction there are risks. When trading internationally, these risks increase considerably as in addition to customer risks, exporters may also be exposed to country and foreign exchange risks.
Frequently in international trade activities, buyers and sellers find themselves at opposite ends of the spectrum, where the buyer may not wish or may not be permitted to remit payment in advance for goods, and the seller may be reluctant to ship goods without any guarantee of payment.
To overcome this impasse, parties may agree that a Documentary Letter of Credit is the most appropriate method of payment, as this provides security for both parties to the transaction.
A written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the seller's or exporter's bank (called the accepting bank, negotiating bank, or paying bank).
A letter of credit guarantees payment of a specified sum in a specified currency, provided the seller meets precisely-defined conditions and submits the prescribed documents within a fixed timeframe. These documents almost always include a clean bill of lading or air waybill, commercial invoice, and certificate of origin. To establish a letter of credit in favour of the seller or exporter (called the beneficiary) the buyer (called the applicant or account party) either pays the specified sum (plus service charges) up front to the issuing bank, or negotiates credit. Letters of credit are formal trade instruments and are used usually where the seller is unwilling to extend credit to the buyer. In effect, a letter of credit substitutes the creditworthiness of a bank for the creditworthiness of the buyer. Thus, the international banking system acts as an intermediary between far flung exporters and importers. However, the banking system does not take on any responsibility for the quality of goods, genuineness of documents, or any other provision in the contract of sale. Since the unambiguity of the terminology used in writing a letter of credit is of vital importance, the International Chamber Of Commerce (ICC) has suggested specific terms (called Incoterms) that are now almost universally accepted and used. Unlike a bill of exchange, a letter of credit is a nonnegotiable instrument but may be transferable with the consent of the applicant.

Although letters of credit come in numerous types, the two most basic ones are
(1) Revocable-credit letter of credit, and
(2) Irrevocable-credit letter of credit, which comes in two versions (a) Confirmed irrevocable letter of credit and (b) Not-confirmed irrevocable letter of credit.

LC is usually subject to the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 600 (UCP 600).

Availability of Letter of Credit

Under UCP 600, an LC can be made available with:
' Payment ' Payment at sight against compliant documents.
' Negotiation ' Payment with or without recourse to the beneficiary or bona fide holder against compliant documents presented under the credit.
' Acceptance by a Drawee Bank ' Payment at a future determinable date against compliant documents. A tenor draft is normally required for presentation under an acceptance credit and is drawn on the acceptance bank rather than the issuing bank.
' Usance Credit ' Payment at a future determinable date against compliant documents. A tenor draft is normally required (but not mandatory) for presentation under a usance credit and is drawn on the Issuing Bank. Usance credit is available by Negotiation, Acceptance and Deferred Payment. A tenor draft is not required for presentation under a deferred payment credit.

Parties in Letter of Credit Transaction

LC Applicant
LC Applicant is normally the buyer under the sales contract and the party that initiates the request to the Issuing Bank to issue an LC on its behalf. The LC Applicant normally maintains banking facilities with the Issuing Bank.

LC Beneficiary
LC Beneficiary is normally the seller under the sales contract and the party who will receive payment under the LC if it can fulfill all the terms and conditions of the credit.


Issuing Bank
An Issuing Bank (or LC opening bank) is the bank that issues the LC in favour of a seller at the request of the LC applicant. The Issuing Bank is normally located in the applicant's country with established banking relationship with the applicant. By issuing an LC, the Issuing Bank undertakes to pay the beneficiary the value of the draft and/or other documents if all the terms and conditions of the LC are complied with.

Advising Bank
An Advising Bank (or sometimes known as notifying bank) is the bank that advises the LC beneficiary that there is an LC issued in his favour. Advising Bank is normally located in the seller's country and is either appointed by the Issuing Bank or LC applicant. Its primary responsibility is to authenticate the LC to ensure that the LC comes from genuine source.Confirming Bank.A Confirming Bank (normally also the Advising Bank) is the bank that adds its own undertaking to pay the LC beneficiary if all terms and conditions of the credit are complied with. Such undertaking is in addition to that given by the Issuing Bank at the request of the Issuing Bank. The Confirming Bank will only confirm an LC upon satisfactory evaluation on the conditions of the Issuing Bank and its domicile country.

Nominated Bank
A Nominated Bank is a bank authorised by the Issuing bank in the credit to pay, negotiate, issue a deferred payment undertaking or accept drafts under the LC. If the LC does not specify a Nominated Bank, the LC is deemed as freely negotiable and any banks that receive documents from the LC beneficiary are qualified to be a Nominated Bank.A Nominated Bank is not responsible to pay under the credit unless it has added its confirmation to the credit. In such a case, it will become a Confirming Bank.

Negotiating Bank
A Negotiating Bank is the bank that examines the drafts and/or documents presented by the LC beneficiary and gives values to such drafts and/or documents. Negotiation could be in the form of purchasing or agreeing to purchase the drafts and/or documents presented.

Reimbursing Bank
A Reimbursing Bank is the paying agent appointed by the Issuing Bank to honour claims submitted by the nominated or negotiating bank.



The Flow of Letter of Credit
Stage 1: Letter of Credit Issuance and Advising/Confirmation

Step 1: Buyer and seller conclude the sales contract and agreed to use an LC as the method of payment.
Step 2: Buyer approaches the Issuing Bank to issue an LC on his behalf in favour of the seller with all the terms and conditions specified.
Step 3: Issuing Bank issues the LC and requests the advising bank to advise or confirm the credit to the LC beneficiary (seller).
Step 4: Advising/confirming bank authenticates the LC and sends the LC to the LC beneficiary.
Stage 2: Presentation of Documents and Settlement (Sight LC with Reimbursing Bank)

Step 5: Seller prepares and despatches the goods to the buyer's country.
Step 6: Seller presents the drafts and/or documents to the nominated bank.
Step 7: Nominated (nominated as the negotiating bank) Bank checks documents presented
against the LC terms and conditions and seeks instructions from seller on documentary
Step 8a: Nominated Bank forwards the drafts and/or documents to the Issuing Bank.
Step 8b: If documents are free from discrepancies or discrepancies are supported by seller's
indemnity, nominated bank claims reimbursement from the appointed reimbursing bank.
Step 8c: Reimbursing Bank pays the nominated bank against a valid reimbursement authority received from the Issuing Bank and statement from negotiating bank that the documents complied with LC terms.
Step 9: Nominated Bank credits the net proceeds into the seller's account.
Step 10: Issuing Bank checks documents presented against the LC terms and conditions. If
documents are free from discrepancies, Issuing Bank reimburses the reimbursing bank.
Step 11: Issuing Bank presents documents to the buyer for payment.
Step 12: Once payment is received from the buyer, Issuing Bank releases documents to the buyer for the latter to collect his goods.
Need for checklists and flowcharts

' Letters of Credit detail dates by which certain activities must take place, e.g. ship by dates,
presentation of documents date, Letter of Credit expiry date, etc. The seller must be fully
aware of the need to ensure full compliance with these dates. Any failure in adherence will affect release of payment to him.
' The use of a checklist to aid the examination process of a Letter of Credit, and further
supported by a documentation and activity flow chart can be of great benefit in ensuring
that shipment and all other aspects of the Credit conditions are adhered to in a structured manner.

Role of Banks

Banks play a pivotal role in Letters of Credit transactions, as it is the issuing bank which makes the commitment to pay, albeit that payment may be channelled through a nominated United Kingdom bank. This release of funds by the issuing bank is entirely dependent on the seller providing documentary evidence that he has complied fully with conditions detailed in the credit.
As compliance with the terms is of paramount importance, sellers who are to be paid by means of a Letter of Credit, should examine in detail the Letter of Credit on initial receipt and highlight any discrepancies or issues to the buyer, which may be of concern to him and affect his ability to fulfill the conditions contained in the credit.
The seller may request that the buyer arranges for amendments to the Letter of Credit terms. If agreeable, the buyer should request amendments be made by the issuing bank and notification of amendments by that bank to any other bank involved in the handling of the Letter of Credit.

Bills of exchange
Nature of bills of exchange:
When goods are supplied to someone on credit ,or services performed for him, then that person becomes a debtor. The creditor firm would normally wait for payment by the debtor. Until payment is amde the money owing is of no use to the creditor firm as it is not being used in any way. The can be remedied by factoring the debtors, which involves padding the debts over to a finance firm. They will pay an agreed amount for the legal rights to the debts.
Another possibility is that of obtaining a bank overdraft, with the debtors accepted as part of the security on which the overdraft has been granted.
Yet another way that can give the creditor affective use the money owing to him is for him to draw a bill of exchange on the debtor. This means that the document is drawn up requiring the debtor to pay the amount owing to the creditor, or to anyone nominated by him at any time, on or by a particular date. He sends this document to the debtor who, if he agrees to it, is said to 'accept' it by writing on the document that he will comply with it and appends his signature. The debtor then returns the bill of exchange to the creditor. This document is then legal proof of the debt. The debtor is not then able to contest the validity of the debt except for any irregularity in the bill of exchange itself.
How bills of exchange are used:
The creditor can now act in one of three ways:
1. He can negotiate the bill to another person in payment of debt. That person may also negotiate to someone else. The person who possesses the bill at maturity, i.e. the date for payment of the bill, will present it to the debtor for payment.
2. He may 'discount' it with a bank. 'Discount' here means that the bank will take the bill of exchange and treat it in the same manner as money deposited in the bank account. The bank will then hold the bill until maturity when it will present it to the debtor for payment. The bank will make a charge to the creditor for this service, known as a discounting charge.
3. The third way open to the creditor is for him to hold the bill until maturity when he will present it to the debtor for payment. In this case, apart from having a document which is a legal proof of the debt and could therefore save legal costs if a dispute arose, no benefit has been gained from having a bill of exchange. However, action 1 or 2 could have been taken if the need has arisen.

A written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or services received. The drawee accepts the bill by signing it, thus converting it into a post-dated check and a binding contract.

A bill of exchange is also called a draft but, while all drafts are negotiable instruments, only "to order" bills of exchange can be negotiated. According to the 1930 Convention Providing A Uniform Law For Bills of Exchange and Promissory Notes held in Geneva (also called Geneva Convention) a bill of exchange contains: (1) The term bill of exchange inserted in the body of the instrument and expressed in the language employed in drawing up the instrument. (2) An unconditional order to pay a determinate sum of money. (3) The name of the person who is to pay (drawee). (4) A statement of the time of payment. (5) A statement of the place where payment is to be made. (6) The name of the person to whom or to whose order payment is to be made. (7) A statement of the date and of the place where the bill is issued. (8) The signature of the person who issues the bill (drawer). A bill of exchange is the most often used form of payment in local and international trade, and has a long history- as long as that of writing.

Essentials of a bill of exchange:

In order that an instrument may be called a bill of exchange it should satisfy the following conditions:
1. It must be in writing.
2. It must contain an unconditional order to pay.
3. It must be signed by the drawer.
4. There must be three parties to the instrument and the parties must be certain.
5. The order must be to pay a certain sum of money.
6. The instrument must contain an order to pay money and money only.
7. It must comply with the formalities as regards date, consideration, stamp etc.
A bill of exchange like a promissory note may be written in any language. It may be written in any form of words provided the requirements of the section are complied with.

The Parties to a Bill of Exchange:
: The Drawer - Is the party that issues a Bill of Exchange in an international trade transaction; usually the seller.
The Drawee - Is the recipient of the Bill of Exchange for payment or acceptance in an international trade transaction; usually the buyer.
The Payee - Is the party to whom the Bill is payable; usually the seller or their bankers.

Source: Essay UK -

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