Q1) Given the fact that changes in the doctrine of sovereign immunity in the United States would affect United States officials in other countries, are there some changes that you could think of that would place greater responsibilities on foreign officials working in the United States to follow American laws and regulations or would such changes make it more dangerous for American officials abroad?
Q2) Looking at pages 220-222, which potential international contract clause or clauses discussed do you think are most important? Why?
Q3) Without following an agent 24-7, how best can a principal assure that the agent is not exceeding the powers conferred upon the agent by the principal?
Q4) Discuss something from the Silver Nugget.
Chapter 8 & 23 Miller, R. L. (2014). Business Law Today. Texas: South Western Cengage Learning.
The Doctrine of Sovereign Immunity When certain conditions are satisfied, the doctrine of sovereign immunity immunizes foreign nations from the jurisdiction of U.S. courts. In 1976, Congress codified this rule in the Foreign Sovereign Immunities Act (FSIA).2 The FSIA exclusively governs the circumstances in which an action may be brought in the United States against a foreign nation, including attempts to attach a foreign nation’s property. Because the law is jurisdictional in nature, a plaintiff has the burden of showing that a defendant is not entitled to sovereign immunity.
Section 1605 of the FSIA sets forth the major exceptions to the jurisdictional immunity of a foreign state. A foreign state is not immune from the jurisdiction of U.S. courts in the following situations:
1. When the foreign state has waived its immunity either explicitly or by implication.
2. When the foreign state has engaged in commercial activity within the United States or in commercial activity outside the United States that has “a direct effect in the United States.”3
3. When the foreign state has committed a tort in the United States or has violated certain international laws.
In applying the FSIA, questions frequently arise as to whether an entity is a “foreign state” and what constitutes a “commercial activity.” Under Section 1603 of the FSIA, a foreign state includes both a political subdivision of a foreign state and an instrumentality of a foreign state. Section 1603 broadly defines a commercial activity as a commercial activity that is carried out by a foreign state within the United States, but it does not describe the particulars of what constitutes a commercial activity. Thus, the courts are left to decide whether a particular activity is governmental or commercial in nature.
Doctrine of sovereign immunity—when certain conditions are satisfied, foreign nations are immune from U.S. jurisdiction under the Foreign Sovereign Immunities Act of 1976. Exceptions are made when a foreign state (a) has waived its immunity either explicitly or by implication, (b) has engaged in commercial activity within the United States, or (c) has committed a tort within the United States.
Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States. Its purpose
is to reduce tariffs and improve market access among all of the signatory nations, including
the United States. Legislatures in all seven countries have approved the CAFTA-DR, despite
significant opposition in certain nations.
The Republic of Korea–United States Free Trade Agreement
(KORUS FTA) In 2011, the United States ratified its first free trade agreement with
South Korea—the Republic of Korea–United States Free Trade Agreement (KORUS FTA).
The treaty’s provisions will eliminate 95 percent of each nation’s tariffs on industrial and
consumer exports within five years. KORUS is the largest free trade agreement the United
States has entered since NAFTA, and may boost U.S. exports by more than $10 billion a
year. It will benefit U.S. automakers, farmers, ranchers, and manufacturers by enabling
them to compete in new markets.
Also in 2011, Congress ratified free trade agreements with Colombia and Panama. The
Colombian trade agreement included a provision requiring an exchange of tax information,
and the Panama bill incorporated labor rights assurances. The Obama administration spent
years negotiating these treaties in an effort to boost U.S. exports, reduce prices for U.S.
consumers, and help our sluggish economy recover. The administration also hoped that
the agreements will provide an impetus for continuing the negotiation of the trans-Pacific
trade initiative, aimed at increasing exports to Japan and other Asian nations.
Bribing Foreign Officials
Giving cash or in-kind benefits to foreign government officials to obtain business contracts
and other favors is often considered normal practice. To reduce such bribery by representatives
of U.S. corporations, Congress enacted the Foreign Corrupt Practices Act in 1977.7
This act and its implications for American businesspersons engaged in international business
transactions were discussed in Chapter 7 on page 204.
in an International Setting
Like all commercial contracts, an international contract should be in writing. For an example
of an actual international sales contract from Starbucks Coffee Company, refer to the
foldout exhibit at the end of Chapter 15.
Language and legal differences among nations can create special problems for parties to
international contracts when disputes arise. To avoid these problems, parties should include
special provisions in the contract that designate the language of the contract, the jurisdiction
where any disputes will be resolved, and the substantive law that will be applied in
settling any disputes. Parties to international contracts should also indicate in their contracts
what acts or events will excuse the parties from performance under the contract and
whether disputes under the contract will be arbitrated or litigated.
Choice-of-Language Clause A deal struck between a U.S. company and a
company in another country normally involves two languages. Typically, many phrases in
one language are not readily translatable into another. Consequently, the complex contractual
terms involved may not be understood by one party in the other party’s language.
make sure that no disputes arise out of this language problem, an international sales contract
should have a choice-of-language clause designating the official language by which
the contract will be interpreted in the event of disagreement.
Note also that some nations have mandatory language requirements. In France, for
instance, certain legal documents, such as the prospectuses used in securities offerings
(see Chapter 29), must be written in French. In addition, contracts with any departmental
or local authority in France, instruction manuals, and warranties for goods and services
offered for sale in France must also be written in French.
Forum-Selection Clause When a dispute arises, litigation may be pursued in
courts of different nations. There are no universally accepted rules as to which court has
jurisdiction over a particular subject matter or parties to a dispute. Consequently, parties
to an international transaction should always include in the contract a forum-selection
clause indicating what court, jurisdiction, or tribunal will decide any disputes arising
under the contract. It is especially important to indicate the specific court that will have
jurisdiction. The forum does not necessarily have to be within the geographic boundaries
of the home nation of either party.
Case Example 8.5 Garware Polyester, Ltd., based in Mumbai, India, made plastics
and high-tech polyester film. Intermax Trading Corporation, based in New York, acted as
Garware’s North American sales agent and sold its products on a commission basis. Garware
and Intermax had executed a series of agency agreements with provisions stating that the
courts of Mumbai, India, would have exclusive jurisdiction over any disputes relating to
the agreements. When Intermax fell behind in its payments to Garware, Garware filed a
lawsuit in a U.S. court to collect the balance due, claiming that the forum-selection clause
did not apply to sales of warehoused goods. The court, however, sided with Intermax.
Because the forum-selection clause was valid and enforceable, Garware had to bring its
complaints against Intermax in a court in India.8•
Choice-of-Law Clause A contractual provision designating the applicable law—
such as the law of Germany or the United Kingdom or California—is called a choiceof-
law clause. Every international contract typically includes a choice-of-law clause. At
common law (and in European civil law systems), parties are allowed to choose the law
that will govern their contractual relationship, provided that the law chosen is the law of a
jurisdiction that has a substantial relationship to the parties and to the international business
Under Section 1–105 of the Uniform Commercial Code, parties may choose the law that
will govern the contract as long as the choice is “reasonable.” Article 6 of the United Nations
Convention on Contracts for the International Sale of Goods (discussed in Chapter 15),
however, imposes no limitation on the parties’ choice. Similarly, the 1986 Hague Convention
on the Law Applicable to Contracts for the International Sale of Goods—often referred to
as the Choice-of-Law Convention—allows unlimited autonomy in the choice of law. The
Hague Convention indicates that whenever a contract does not specify a choice of law, the
governing law is that of the country in which the seller’s place of business is located.
Force Majeure Clause Every contract, particularly those involving international
transactions, should have a force majeure clause. Force majeure is a French term
meaning “impossible or irresistible force”—sometimes loosely identified as “an act of God.”
In international business contracts, force majeure clauses commonly stipulate that in addition
to acts of God, a number of other eventualities (such as government orders or embargoes,
for example) may excuse a party from liability for nonperformance.
Civil Dispute Resolution
International contracts frequently include arbitration clauses. By means of such clauses,
the parties agree in advance to be bound by the decision of a specified third party in the
event of a dispute, as discussed in Chapter 3. (For an example of an arbitration clause in
an international contract, refer to the foldout exhibit at the end of Chapter 15.) The United
Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (often
referred to as the New York Convention) assists in the enforcement of arbitration clauses,
as do provisions in specific treaties among nations. The New York Convention has been
implemented in nearly one hundred countries, including the United States.
If a sales contract does not include an arbitration clause, litigation may occur. If the
contract contains forum-selection and choice-of-law clauses, the lawsuit will be heard by
a court in the specified forum and decided according to that forum’s law. If no forum and
choice of law have been specified, however, proceedings will be more complex and legally
uncertain. For instance, litigation may take place in two or more countries, with each
country applying its own choice-of-law rules to determine the substantive law that will be
applied to the particular transactions. Even if a plaintiff wins a favorable judgment in the
plaintiff’s country, there is no way to predict whether courts in the defendant’s country will
enforce the judgment. (For further discussion of this issue, see this chapter’s Beyond Our
Borders feature on page 224.)
In the following case, the court had to decide whether an agreement was enforceable
even though one party was a U.S. citizen and the other may have had its principal place of
business in the United States.
the agent, agrees to represent or act for the other, called the principal. The principal has the
right to control the agent’s conduct in matters entrusted to the agent, and the agent must
exercise his or her powers “for the benefit of the principal only,” as Justice Joseph Story
indicated in the chapter-opening quotation.
By using agents, a principal can conduct multiple business operations, such as entering
contracts, at the same time in different locations. Using agents provides clear benefits to
principals, but agents also create liability for their principals. For this reason, small businesses
sometimes attempt to retain workers as independent contractors or “permalancers,”
but this strategy may lead to problems with federal and state tax authorities, as you will
read later in this chapter.
Agency relationships are crucial to the business world. Indeed, the only way that some
business entities—including corporations and limited liability companies—can function is
through their agents. A familiar example of an agent is a corporate officer who serves in a
representative capacity for the owners of the corporation. In this capacity, the officer has
the authority to bind the principal (the corporation) to a contract.
Duties of Agents and Principals
Once the principal-agent relationship has been created, both parties have duties that govern
their conduct. As mentioned previously, an agency relationship is fiduciary—one of
trust. In a fiduciary relationship, each party owes the other the duty
to act with the utmost good faith.
In general, for every duty of the principal, the agent has a corresponding
right, and vice versa. When one party to the agency
relationship violates his or her duty to the other party, the remedies
available to the nonbreaching party arise out of contract and tort
law. These remedies include monetary damages, termination of the
agency relationship, an injunction, and required accountings.
Agent’s Duties to the Principal
Generally, the agent owes the principal five duties: (1) performance,
(2) notification, (3) loyalty, (4) obedience, and (5) accounting.
Performance An implied condition in every agency contract
is the agent’s agreement to use reasonable diligence and skill in
performing the work. When an agent fails entirely to perform her or his duties, liability for
breach of contract normally will result. The degree of skill or care required of an agent is
usually that expected of a reasonable person under similar circumstances. Generally, this is
interpreted to mean ordinary care. If an agent has claimed to possess special skill, however,
failure to exercise that degree of skill constitutes a breach of the agent’s duty.
Not all agency relationships are based on contract. In some situations, an agent acts
gratuitously—that is, not for monetary compensation. A gratuitous agent cannot be liable
for breach of contract, as there is no contract, but he or she can be subject to tort liability.
Once a gratuitous agent has begun to act in an agency capacity, he or she has the duty to
continue to perform in that capacity in an acceptable manner and is subject to the same
standards of care and duty to perform as other agents.
Notification An agent is required to notify the principal of all matters that come to her
or his attention concerning the subject matter of the agency. This is the duty of notification,
or the duty to inform. Example 23.8 Lang, an artist, is about to negotiate a contract to sell a
series of paintings to Barber’s Art Gallery for $25,000. Lang’s agent learns that Barber is insolvent
and will be unable to pay for the paintings. The agent has a duty to inform Lang of this
fact because it is relevant to the subject matter of the agency—the sale of Lang’s paintings.•
Generally, the law assumes that the principal knows of any information acquired by the
agent that is relevant to the agency—regardless of whether the agent actually passes on
this information to the principal. It is a basic tenet of agency law that notice to the agent is
notice to the principal.
Basically, the agent has the duty to act solely for the benefit of his or her principal and
not in the interest of the agent or a third party. For instance, an agent cannot represent
two principals in the same transaction unless both know of the dual capacity and
consent to it.
The duty of loyalty also means that any information or knowledge acquired through the
agency relationship is considered confidential. It would be a breach of loyalty to disclose
such information either during the agency relationship or after its termination. Typical
examples of confidential information are trade secrets and customer lists compiled by the
In short, the agent’s loyalty must be undivided. The agent’s actions must be strictly
for the benefit of the principal and must not result in any secret profit for the agent.
Case Example 23.9 Don Cousins contracts with Leo Hodgins, a real estate agent, to negotiate
the purchase of an office building. While working for Cousins, Hodgins discovers that
the property owner will sell the building only as a package deal with another parcel, so he
buys the two properties, intending to resell the building to Cousins. Hodgins has breached
his fiduciary duties. As a real estate agent, Hodgins has a duty to communicate all offers to
his principal and not to purchase the property secretly and then resell it to his principal.
Hodgins is required to act in Cousins’s best interests and can become the purchaser in this
situation only with Cousins’s knowledge and approval.9•
Obedience When acting on behalf of a principal, an agent has a duty to follow all
lawful and clearly stated instructions of the principal. Any deviation from such instructions
is a violation of this duty. During emergency situations, however, when the principal cannot
be consulted, the agent may deviate from the instructions without violating this duty.
Whenever instructions are not clearly stated, the agent can fulfill the duty of obedience by
acting in good faith and in a manner reasonable under the circumstances.
Accounting Unless an agent and a principal agree otherwise, the agent has the duty
to keep and make available to the principal an account of all property and funds received
and paid out on behalf of the principal. This includes gifts from third parties in connection
with the agency. For example, a gift from a customer to a salesperson for prompt deliveries
made by the salesperson’s firm, in the absence of a company policy to the contrary, belongs
to the firm. The agent has a duty to maintain separate accounts for the principal’s funds and
for the agent’s personal funds, and the agent must not intermingle these accounts.
Principal’s Duties to the Agent
The principal also owes certain duties to the agent. These duties relate to compensation,
reimbursement and indemnification, cooperation, and safe working conditions.
Compensation In general, when a principal requests services from an agent, the
agent reasonably expects payment. The principal therefore has a duty to pay the agent for
services rendered. For instance, when an accountant or an attorney is asked to act as an
agent, an agreement to compensate the agent for service is implied. The principal also has
a duty to pay that compensation in a timely manner. Except in a gratuitous agency relationship,
in which an agent does not act for payment in return, the principal must pay the
agreed-on value for an agent’s services. If no amount has been expressly agreed on, the
principal owes the agent the customary compensation for such services.
An agent’s disclosure of confidential information
could constitute the business tort of misappropriation
of trade secrets.
Silver nugget Notes-
This week’s reading appear to be a rather eclectic mixture–international law and the principal-agent relationship. There is, however, at least one reason why these topics appear together this week. Let’s look at international law first. The first thing you need to know about international law is that it is a misnomer. There is no such thing as “international law”, at least not between countries.
Now, after that bold assertion, you may be asking yourself why the chapter was assigned in the first place. In order to answer that question, I have to back up what I said in the previous paragraph. How can there be no such thing as international law? Well, what is “law”? To my way of thinking, a “law” codifies a societal consensus on a given subject as interpreted by, at least, a majority of those individuals elected by society to represent their interests. In addition, a “law” must be enforceable–violations of “laws” should result in a range of sanctions, also representing a societal consensus therein.
What are the implications of that definition of “law”? The main conclusion that I draw is that “laws” can only be promulgated by countries or societies that have some form of representative or participatory democracy. Only then can it be said that “laws” represent any type of societal consensus because there are consequences for lawmakers who ignore such societal opinion. You might ask, what about countries like China that have assemblies that pass laws? Well, that’s not really the case. In any country in which there is not representative or participatory democracy, members of an “assembly” are not beholden to the voters. Rather, they are beholden to, usually, those in control of the mechanism of government, particularly including the military. In those societies, the main function of “legislative” bodies is to rubber-stamp the wishes of those in control of the societies, often, ironically, to try to maintain a veneer of apparent democracy. So I call “laws” promulgated in those types of societies “decrees” or something that denotes a lack of popular participation.
If you are with me so far, you understand that “laws”, as we know it here in the United States, do not exist in many parts of the world. But let’s let that go right now. Let’s turn to the second part of the definition: “laws” must be enforceable and violations of “laws” must result in sanctions. It is here that we get to the “international” part of “international law”. Even if we disregard how “laws” are promulgated, the concerns of certain groups in American society notwithstanding, there is no enforcement mechanism that is universally accepted.
Take the United Nations. For our purposes, the United Nations is comprised of two main bodies–the General Assembly and the Security Council. The General Assembly can pass resolutions. Such resolutions can call upon member nations to do, stop doing, or refrain from doing whatever. But the resolutions are not binding and, except for moral opprobrium or actions taken by individual nations on their own, the General Assembly has no way of enforcing its resolutions. On the other hand, the Security Council does have that power–as long as the member nations agree to enforce whatever sanction is imposed by the Council. There is no such thing–again, some fringe anti-governmental groups notwithstanding–as a “United Nations Armed Forces” with primary allegiance to the United Nations. (This sensitivity was understood at the very inception of the United Nations by giving veto power to the five permanent members of the Security Council, including the United States.)
Adding up where we are, we find that, in many parts of the world, there is no such thing as “laws”. Further, even if we stretch the definition to include resolutions passed by international bodies, there is no enforcement mechanism short of actions taken by individual member nations. So what are we talking about when we say “international law”? Take a look (or another look) at the principles and doctrines set forth in the textbook (pages 220-222). What do they have in common? None of them include enforcement provisions. The best example, of course, is the doctrine of comity–dependent upon such concepts as courtesy and international harmony–important concepts to be sure, but not something that can be counted on or enforced.
As with last week, why the long prologue? In law school, I took what I thought was International Law–it was called International Law and was taught by one of the most learned individuals on that subject in the world. Yet, I was vaguely dissatisfied because there were no real “black-letter law” principles that law students dearly love. Instead, what I found was that “international law” is all a matter of voluntary acquiescence to some principles and rules, an acquiescence that could be abrogated, largely without penalty, at any time.
So I was apprehensive when I was asked to teach International Law here at UIU some years back. Well, it turned out that what I was teaching was International Business Law–essentially the substance of Chapter 8. Or, to put it another way, “private” international law. The course I had taken in law school was “public” international law. I still contend that there is no such thing as “public” international law, nothing that you can hang your hat on, for example, to prevent expropriation of a foreign subsidiary by the country in which it exists. However, foreign countries have their own laws and regulations and it is necessary to understand those laws and regulations in order to be able to do business according to those laws and regulations (in addition to American laws and regulations pertaining thereto). In the realm of “international law”, things are not always what they seem. That maxim is ignored at financial and, sometimes, bodily peril. Nothing should be assumed. That is why the information in Chapter 8 needs to be absorbed, especially if the allure of international business–and there are great potential benefits to be had if done properly–is something that attracts you, or might attract you somewhere down the road.
It is the same–albeit in an attenuated sense–with the principal-agent relationship. Most principles in what is called agency law (for any principals out there, I have an idea why you lost out and why it is not referred to as “principal” law; but it does seem unfair) are easily apprehended by those seeking to learn about them. The one principle where that is not true seems to be “apparent authority” (also called “ostensible authority”). That principle can be confusing. Both principals and those dealing with agents have different pitfalls to avoid. Apparent authority can only be created by the principal and not by an agent. A third party must be careful in accepting the representations of an agent without some context that reasonably gives rise to a belief by the third party that the principal has conferred upon the agent the authority claimed by the agent. If not, the principal is not liable (and the agent is usually not collectible) if the third party acts in such a way that its interests are damaged by the misplaced reliance on the agent. A principal, however, cannot act so carelessly as to confer what appears to be the authority in question upon the agent. The standard of proof is not uniform but, in general, it could be said that if it is reasonable for a third party to come to that conclusion, the principal cannot legally deny the effects. From either perspective, things are not always what they seem. In business, you might find yourselves in the position of a third party at one time, in the position of an agent at another and in the position of a principal at yet another. Most of us–I’ve raised my hand–do not pay much attention to the nuances of agency law. But it is surprising to consider how frequently we find ourselves in one of the positions of the agency triad. I urge you all to pay close attention to the types of authority an agent may possess (pages 601-604) and ask questions in the Participation Topics sub-tab if the textbook is unclear, I am unclear, or both.
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