Globalization is a term of art. The past decade has seen a dramatic change in political, economic, and business relationships across the world. Technology and the rise of the Internet have provided an extraordinary acceleration of these trends. While globalization has many advantages, it also provides some significant challenges to the business community. The demands on the business community, as it operates within a variety of cultures and legal traditions, will only continue to require that students of business and business professionals have an understanding of international law and its impact.
Despite the fact that there are numerous global political and economic organizations, none has clear preeminence over what we would consider the traditional aspects of creating law. For example, there is no single legislature, court, or executive that has jurisdiction over all aspects of international law. This Chapter examines some of the more important areas of international law, especially those influencing businesses operating increasingly in a globalized environment.
Sources of International Law
International law consists of rules that have been generally accepted by the international community, including international treaties, conventions, and other agreements; the application of custom between nations; the writings of certain renowned and well-respected publicists or writers; general principles of law recognized by “civilized nations” and which are found in the major legal systems; and, in limited circumstances, decisions of international courts and tribunals. The sources of international law may be found in Article 38 of the Statute of the International Court of Justice.
United States and International Law
In the United States, the U.S. Constitution grants most of the power over international relations to the federal government. The Commerce Clause (Article I, Section 8) specifically grants Congress the power to “regulate commerce with foreign nations.” Article II, section 2 grants the president “the power, by and with the advice and consent of the Senate to make treaties, provided two thirds of the senators present concur.” The Supremacy Clause accords treaties the status of “law of the land.” The United States Supreme Court underscored this view in Missouri v. Holland, 252 U.S. 416 (1920), holding that a treaty takes precedence over a conflicting state law.
The case of The Paquete Habana provides an early glimpse into the U.S. perspective on the incorporation of principles of international law into the broader development of American law.
The Paquete Habana.; The Lola
Supreme Court of the United States, 175 U.S. 677 (1900)
Claimant shipmasters each appealed from the decrees of the District Court of the United States for the Southern District of Florida condemning two fishing vessels and their cargoes as prizes of the Spanish-American War, where the evidence showed that each vessel, sailing under a Spanish flag, had been engaged in fishing off the coast of Cuba before being captured by blockading squadrons.
Claimants were masters of a sloop and schooner, with crews of three and six. While they were out to sea, fishing along the coast of Cuba and near Yucatan, the United States imposed a blockade of Cuba and declared war against Spain. When the vessels returned with their catches of fresh fish, they were seized and a libel of condemnation of each vessel as a prize of war was filed. The district court entered a final decree of condemnation and public sale at auction. Claimants appealed. The Supreme Court first ruled that, pursuant to 26 Stat. 826 (1891), it had appellate jurisdiction over the controversy without regard to the amount in dispute and without certification from the district court, as required by prior statutory law. In reversing, the Court ruled that, under the law of nations, in each case the capture was unlawful and without probable cause. It was a rule of international law that coast fishing vessels, pursuing their vocation of catching and bringing in fresh fish, were exempt, with their cargoes and crews, from capture as prize of war. Although not reduced to treaty or statutory law, courts were obligated to take notice of and give effect to that rule.
The decrees condemning the vessels were reversed and, in each case, it was ordered that the proceeds of the sales of each vessel and cargo be restored to the respective claimant, with compensatory damages and costs.
“Comparative Law” examines the similarities and differences between national legal systems. International law governs the relationships between or among nations [public international law] or governs the conduct of certain actors in the international business environment [private international law] in such areas as taxation and contracts. Comparative law is the study of legal systems of different nations.
There are four significant legal systems in operation in the world today: civil law, common law, socialist law, and Islamic law. The common-law system was discussed extensively in Chapter 1.
Civil Law Systems
Civil law systems find their origins in Roman law and were strongly influenced by the French and German Civil Codes of the nineteenth century. Civil codes were the collected legal principles of those nations. Civil codes have a positive view of the protection of private property, individual rights, and freedom of contract. Civil law generally included areas of private law, typically encompassing tort, property, and contract law. Juries are rarely used in adjudicating civil cases in the civil law system.
Since civil law systems rely on a code or written law, the legislature is the preeminent player. While courts may be called upon to interpret a code, it is not empowered to make new law, as in the common-law system. Civil law systems include most Western and Eastern European nations, much of Latin America, Japan, and South Korea. Interestingly, the legal system of the State of Louisiana had its origins in the French civil law system found in the Napoleonic Code, reflecting its traditions that developed because of its French origins. The United States is considered to have a “mixed system,” including both civil and common law. The Uniform Commercial Code is an example of an important code in the American legal system that is often interpreted by decisions of judges.
Socialist Law Systems
A significant subset of civil law is socialist law. While the source of socialist law often may be found in a code, issues of property ownership, individual rights, and limits on governmental power are not viewed in the same way as they are in the broader civil law societies or in those legal systems based in common law.
Socialist law finds its underpinnings in the political and economic philosophy of socialism: an economic system in which the factors of production (land, labor, capital, and entrepreneurial ability) are owned or tightly controlled by the state. Countries that espoused socialist law experienced significant political and economic challenges as a result of the fall of the Berlin Wall and the collapse of communism in the period following 1989. These challenges have had a dramatic impact on the legal system. In socialist countries, bureaucrats (also referred to as apparatchiks or members of the nomenklatura) and not judges or members of the legislature exert significant powers in settling disputes between parties. Many nations that practiced socialist law have converted their legal systems to more conventional civil law systems in line with economic transformation to some form of capitalism or private ownership. Interestingly, China has faced the dilemma of incorporating the common law system previously found in Hong Kong into its civil law system which still finds attributes of social law.
Islamic Law Systems
The Islamic legal system known as Shari’a (God’s Rules) finds its roots in the Koran, the Sunna (the traditional teachings and practices of the Prophet Mohammed), the writings of Islamic scholars, and the consensus of the Moslem legal community. Islamic law is the primary source of law in Saudi Arabia and is followed, at some level, in most nations in the Middle East, North Africa, and parts of southern Asia. Under Islamic law, religious figures exert great influence in the legal system, as well as in civil society.
A significant challenge in Islamic law jurisdictions emanates from a traditional and conservative view of Islam made in the 10th Islamic scholars that the law had been sufficiently interpreted and any need for independent reasoning or additional development was unnecessary. Given the reality of commercial developments since the 10th century, the reconciliation of the requirements of Shari’a and modern commerce can be a significant challenge. Shari’a law also greatly impacts on business association forms and the charging of interest in traditional loan arrangements. Lending practices in Islamic banking result in a sharing of risks more common in a partnership rather than in a more conventional banking arrangement
Principles of International Law Impacting on the Commercial Environment
The doctrine of sovereign immunity requires the domestic courts of a country decline to hear cases brought against other nations out of deference to their status as independent and sovereign nation-states. The historical significance of this doctrine dates to a time when a state’s ruler (its “sovereign”) personified the nation itself. The practical application of the doctrine of sovereign immunity is that countries are granted immunity from suits filed in other countries.
In 1976, however, the United States Congress passed the Foreign Sovereign Immunities Act, effectively creating a narrower view of the absolute nature of sovereign immunity. This statute continues to support the theory that a nation-state is immune from suits involving injuries resulting from governmental action. The significant change represented by the FSIA, however, is that governments are not immune from suit when damages arise because of commercial or nongovernmental activity. For example, the “commercial activity” exception under the FSIA specifically excludes the state from the protection of sovereign immunity when the state is acting as a private party and enters into a commercial contract with another private party.
The case of The Schooner Exchange provides an insight into the fundamentals of sovereign immunity and an interesting look at how the newly created Supreme Court of the United States developed and applied principles of law in its formative period.
The Schooner Exchange v. M’faddon, et al
Supreme Court of the United States, 11 U.S. 116 (1812)
Libellants, two Maryland citizens, filed an action in district court to reclaim defendant vessel and were denied. On appeal, the Circuit Court of the United States for the District of Pennsylvania ordered the vessel restored to the citizens, who claimed to be the vessel’s sole owners. The French, through its reigning emperor, Napoleon, had an interest in the vessel and sought review.
Two Maryland citizens owned a vessel that was forcibly seized under the decrees of Napoleon, the French emperor. The vessel sailed into an American port and the citizens filed a libel action to reclaim it. The district court denied the libel for lack of jurisdiction. The appellate court reversed. The court found that the vessel was a national armed vessel commissioned by, and in the service of the emperor of France. The court found that the United States was at peace with France and permitted the vessel to enter the ports as a friendly power. The court held that when the vessel entered American territory, it did so under the implied promise that the vessel was exempt from United States jurisdiction and enjoyed sovereign immunity.
The court reversed the sentence of the Circuit Court and affirmed the order of the district court that dismissed the libel.
Act of State Doctrine
The nature of sovereign authority extends to activities undertaken by the government within its own borders. The Act of State doctrine provides that the courts of one country cannot challenge the appropriateness or legitimacy of actions undertaken by another government within its own territory. The act of state doctrine has particular relevance to property seizure cases accomplished through expropriation, confiscation, and nationalization — with or without compensation.
The Kirkpatrick case provides an interesting view into the underlying theory supporting this doctrine and its application in a modern case.
W. S. Kirkpatrick & Co., Inc., et al. v. Environmental Tectonics Corp., International
Supreme Court of the United States, 493 U.S. 400; 110 S. Ct. 701 (1990)
Respondent, an unsuccessful bidder for a Nigerian contract, filed suit against petitioners, a contractor awarded a Nigerian contract, a Nigerian citizen, and others, claiming that the award of the contract was achieved through bribery. The district court ruled that the action was barred by the act of state doctrine. The United States Court of Appeals for the Third Circuit reversed the district court ruling. Petitioners sought review.
Petitioner contractor sought a government construction contract with Nigeria and paid bribes in the form of “commissions” to entities owned by the Nigerian citizen who aided in obtaining the contract. Respondent, an unsuccessful bidder, learned of the “commission” and brought the matter to the attention of the Nigerian and the United States governments. Charges were brought against petitioner contractor, who pleaded guilty to them. Respondent then brought a civil action in federal court against petitioner, and others, seeking damages under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.S. § 1961 et seq., and the Robinson-Patman Act, 49 Stat. 1526, 15 U.S.C.S. § 13 et seq. Petitioners moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6) on the ground that the action was barred by the act-of-state doctrine. The court treated the motion as one for summary judgment and granted it. On appeal, the judgment was reversed and remanded for trial. Certiorari was granted and the court affirmed the appellate court and held that the act-of-state doctrine had no application to the case because the validity of no foreign sovereign act was at issue.
The court affirmed the appellate court and held that the act-of-state doctrine had no application to the case because the validity of no foreign sovereign act was at issue.
International Economic and Political Organizations
International organizations are classified as either intergovernmental organizations (IGOs) or nongovernmental organizations (NGOs). NGOs may be either nonprofit or for-profit organizations. Nonprofit NGOs serve private national groups involved in international relations. Prominent examples of nonprofit NGOs are the International Red Cross, Amnesty International, and Doctors Without Borders. For-profit NGOs include multinational enterprises (MNEs) or multinational corporations (MNCs) that are businesses functioning in two or more countries.
IGOs are sponsored by two or more nation-states to coordinate activities of mutual interest. IGOs are becoming an increasingly important mechanism for states to work together to manage complex interactions between them. Arguably, the best known and most significant IGO is the United Nations.
The United Nations was established in 1945 as the “brainchild” of President Franklin Roosevelt when its Charter was adopted by founding member states. The Charter of the United Nations establishes the United Nation’s goals of maintaining peace and security, promoting economic and social cooperation, and protecting human rights. Each of the member states is a sovereign nation and is treated as an equal member of the organization.
The organs of the UN are the General Assembly, the Security Council, the Secretariat, the International Court of Justice, the Trusteeship Council, and the Economic and Social Council (ECOSOC).
The General Assembly is a quasi-legislative body made up of representatives of all member states. The General Assembly is the main deliberative organ of the United Nations.
The functions and powers of the General Assembly include:
- to consider and make recommendations on cooperation in the maintenance of international peace and security, including disarmament and arms regulation;
- to discuss any question relating to international peace and security, and except where a dispute or situation is being discussed by the Security Council, to make recommendations on it;
- to discuss, and with the same exception, make recommendations on any question within the scope of the Charter or affecting the powers and functions of any organ of the United Nations;
- to initiate studies and make recommendations to promote international political cooperation; the development and codification of international law; the realization of human rights and fundamental freedoms for all; and, international collaboration in economic, social, cultural, educational, and health fields;
- to make recommendations for the peaceful settlement of any situation, regardless of origin, which might impair friendly relations among nations;
- to receive and consider reports from the Security Council and other United Nations organs;
- to consider and approve the United Nations budget and to apportion the contributions among Members;
- to elect the non-permanent members of the Security Council, the members of the Economic and Social Council, and those members of the Trusteeship Council that are elected;
- to elect jointly with the Security Council the Judges of the International Court of Justice; and, on the recommendation of the Security Council, to appoint the Secretary-General.
The Secretary-General is the “chief administrative officer” of the United Nations and is empowered to perform in that capacity “such other functions as are entrusted” to him or her by the Security Council, the General Assembly, the Economic and Social Council, and other United Nations organs. The Charter also authorizes the Secretary-General to “bring to the attention of the Security Council any matter which in his opinion may threaten the maintenance of international peace and security.” In many ways, the Secretary-General also represents the moral authority of the United Nations.
The Security Council is composed of representatives of 15 member states, five of which are “permanent member.” Since the Security Council is responsible for the maintenance of international peace and security, the Security Council is the only organ of the United Nations with the authority to use armed force. The five permanent members of the United Nations exercise what is called a “veto power” over substantive matters. The five permanent members of the Security Council are the United States, France, the United Kingdom, Russia, and China — the victorious parties of World War II.
The functions and powers of the Security Council are:
- to maintain international peace and security in accordance with the principles and purposes of the United Nations;
- to investigate any dispute or situation which might lead to international friction;
- to recommend methods of adjusting such disputes or the terms of settlement;
- to formulate plans for the establishment of a system to regulate armaments;
- to determine the existence of a threat to the peace or act of aggression and to recommend what action should be taken;
- to call on Members to apply economic sanctions and other measures not involving the use of force to prevent or stop aggression;
- to take military action against an aggressor;
- to recommend the admission of new Members;
- to exercise the trusteeship functions of the United Nations in “strategic areas”;
- to recommend to the General Assembly, the appointment of the Secretary-General, and together with the Assembly, to elect the Judges of the International Court of Justice.
The Secretariat is the administrative arm of the United Nations. The Secretary General, elected by the General Assembly, is the leader of the Secretariat.
The duties carried out by the Secretariat include:
- administering peacekeeping operations and mediating international disputes;
- surveying economic and social trends and problems;
- preparing studies on human rights and sustainable development;
- inform the world’s communications media about the work of the United Nations;
- organizing international conferences on issues of worldwide concern;
- interpreting speeches and translating documents into the Organization’s official languages.
International Court of Justice
The International Court of Justice or ICJ was established in 1945 under the Charter of the United Nations. As the principal judicial organ of the United Nations, it is based at The Hague in the Netherlands. The Court decides disputes submitted by states, through the application of international law discussed earlier. States, not individuals, are parties to disputes before the ICJ.
In addition to settling disputes, the International Court of Justice also issues advisory opinions when requested to do so by specific international organs and agencies. The only bodies at present authorized to request advisory opinions of the Court are the five organs of the United Nations and sixteen specialized agencies of the United Nations family.
The Trusteeship Council administers any trust territories placed under the legal authority of the United Nations. One of its functions was to oversee the process of decolonization after World War II. It suspended its operation in 1994.
International Monetary Fund
The International Monetary Fund (IMF) is an IGO consisting of 189 member countries (as of July 2016). It was established to promote international monetary cooperation, exchange (currency) stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and, to provide temporary financial assistance to countries.
The purposes of the IMF are:
- to promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems;
- to facilitate the expansion and balanced growth of international trade; to contribute thereby to the promotion and maintenance of high levels of employment and real income; and, to the development of the productive resources of all members, as primary objectives of economic policy;
- to promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation;
- to assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions, which hamper the growth of world trade;
- to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity;
- in accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.
The operations of the IMF involve surveillance, financial assistance and technical assistance. Surveillance is a process of monitoring and consultation through the maintenance of an information flow with its member countries regarding the national and international consequences of the economic and financial policies of member states.
Financial assistance provided by the IMF is a mechanism by which loans are made available to countries experiencing balance-of-payments and other currency problems. The restoration of conditions for sustainable economic growth enables countries to rebuild their international reserves, stabilize their currencies, and continue paying for imports without having to impose trade restrictions, severe budget cuts, or capital controls on their own citizens.
Technical assistance offered by the IMF adds to the “development of the productive resources of member countries by enhancing the effectiveness of economic policy and financial policy.” The IMF provides advice on fiscal and monetary policy, and financial matters relating to strengthening human and institutional capacity, including providing guidance how to design and implement effective macroeconomic and structural policies.
The World Bank is the name that is commonly used for the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The World Bank Group is comprised of five financial organizations, namely the IBRD, the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Center for Settlement of Investment Disputes (ICSID). Its members include the 189 member states of United Nations (as of July 2016). The World Bank is a significant development resource, providing financing to member national governments to support economic development by financing specific development projects. (Since 1947, the World Bank has sponsored 11,690 projects in 172 countries.) Member states are jointly responsible for both the financing of the Bank and the distribution of its resources, supported by contributions (subscriptions) from member states based on the relative strengths of their economies. The website of the World Bank contains a full roster of current and prior projects supported by funding from the Word Bank.
World Trade Organization
The World Trade Organization (WTO) was established in 1995. The WTO is the global organization broadly dealing with the rules of trade between nations.
The primary goals of the WTO is to help producers of goods and services, exporters, and importers conduct their business by:
- Administering trade agreements;
- Acting as a forum for trade negotiations;
- Settling trade disputes;
- Reviewing national trade policies;
- Assisting developing countries in trade policy issues, through technical assistance and training programs;
- Cooperating with other international organizations.
The headquarters of the WTO is located in Geneva, Switzerland. The WTO has 162 members (as of July 2016), including both states and customs territories. WTO agreements, which are considered as “binding contracts between member states,” form the foundation of the global trading system. These agreements have been negotiated, signed, and ratified by the legislatures or parliaments of the majority of the world’s trading nations. The WTO is an important part of the global trading system that provides stability in trade to its member nations.
The WTO was created through a series of trade negotiations, or rounds, originally held under the General Agreement on Tariffs and Trade (GATT). The GATT was initially adopted at Geneva in 1947; since then eight additional rounds have been conducted. The first five rounds dealt mainly with tariff reductions. The last three rounds included non-tariff issues such as trade in services and the impact of trade on the environment in the negotiations. The last completed round, the 1986-94 Uruguay Round, led to the creation of the WTO. Doha Round negotiations have been conducted over the past decade and have been marked by sharp disagreements between developed and developing countries on such issues as intellectual property rights, compulsory licensing, and environmental issues.
The WTO agreement is entirely institutional and procedural creating a framework that permits the various trade agreements negotiated since 1947 to be in effect “managed” structurally by the WTO. The WTO has five main organs: the Ministerial Conference, the General Council, a Council for Trade in Goods, a Council for Trade and Services, and a Council for Trade Related Aspects of Intellectual Property Rights. Unlike its predecessor, the WTO maintains an extensive dispute resolution mechanism.
Find some information about the “Bhopal Disaster” on the web. Why did Union Carbide wish the case to be tried in India? Why did the Indian government want their claim to be heard in the United States? Who has the stronger ethical argument?
The government of Indonesia makes a contract with the Kelly Corporation, a New Jersey Corporation, who will supply them with building materials for new airport construction in Jakarta. The government fails to make the last payment on their obligation in the amount in the amount of $1.8 million. Kelly initiates a suit in Newark, New Jersey for full payment, interest, and attorney’s fees. Indonesia counters that the court must dismiss the suit based upon the doctrine of sovereign immunity. Should the court dismiss Kelly’s suit? When can a country invoke sovereign immunity?
- The establishment of the WTO has led to controversy and concern across the world. What are the broader implications for the development global trading systems under the WTO?
- Describe the sources of international law.
- The U.S. Constitution grants most of the power for the conduct of international relations to the federal government. What are the specific areas of constitutional authority that address this issue?
- What is the significance of the doctrine of sovereign immunity?
- What is the impact of the Foreign Sovereign Immunities Act on the doctrine of sovereign immunity?
- What is the difference between a NGOs and an IGO?
- What is the source of the authority of the United Nations? Discuss.
- Explain the Act of State Doctrine and the ruling in the Kirkpatrick case.
- What is the significance and purpose of the World Bank?
- How did the Court deal with the issue of sovereign immunity Schooner Exchange?
- What did the Court rule in the Paquete Habana case?
- Does membership in international political and economic organizations compromise the sovereignty of the United States?