International Business Risks - Essay Example

Running Head: INTERNATIONAL BUSINESS RISKS International Business Risks of Since thebirth of humans, the systems of laws, rules and regulations have always been present in some or the other form. However, they continued to evolve as the humans themselves developed, depending upon cultures and religions. It is for this reason that today we have different legal systems. As these legal systems were meant for its own developers they lacked the capabilities to sum up all of the various legal systems that could govern international business transactions. Therefore various conventions and acts were brought by countries jointly, of which The U.N. Sales Convention and UNIDROIT Principles of International Commercial Contracts are quite prominent. International Business Risks Introduction For the understanding of the international business the legal system of a country is essential, as the business practices of a certain county are being regulated by its laws. These business regulations set out the ways in which the business transactions are to be carried out and also define the liabilities and privileges to the parties involved in the transaction (contract). Systems of law around the world There are broadly four basic legal systems that are being practiced around the world. Firstly it is the Islamic Law, secondly the Common Law, thirdly the Civil or Coded Law, and lastly the Marxist Legal System. They are discussed as follows: 1. The Islamic Law The Islamic law is developed from the interpretation of the Holy Book Quran Majeed and the Hadith i.e. practices of the Prophet Mohammad P.B.U.P. The philosophy of law in Islamic community is greatly different from the one that is practices in the Western Countries. One the most important aspect of the Islamic law is the undesirability of payment or receipt of interest. This prohibition of interest had also largely influenced the business and banking practices, though, the sanctity of contracts, risk sharing, individual's rights and duties, and property rights are welcomed. Moreover, investments in casinos, gambling and alcohol are strictly prohibited. Due to the restrictions discussed above, the Muslim financial institutions were compelled to develop substitute financial arrangements for the purposes of the financing of capital. Instead of money borrowing, businesses have evolved to rely on leasing arrangements for the acquisition of fixed assets. In case of banks largely in Iran and also Pakistan fixed service charges are being charged rather than the interest charge, while the depositors on the other hand are being provided with shares rather than interest payments. (Aswathappa, 2003) 2. Socialist Law This system of law has developed from the Marxist socialist system and is being practiced in the former communist countries in some or the other forms. A crucial is being played by ideology. In contrast to the civil law code those are being incorporated by governments of different point of views, the socialist codes are meant for the societal and personal transformation. This system is not a decided set of rules, but actually intends to attain a Communist society. China and Russia are the two countries which come to ones thought when talking of Communism. As there is no set of rules, both of the countries have adopted dissimilar paths for their respective economic and political development. 3. Common Law The fundamental principles of the Common law come from the English law. The common law has evolved over the years from the collective opinion of the judges and from decisions given in individual cases. A majority of commercial law such as contracts, agency and torts are construed from the principles that emerged from individual quarrels that were resolved in antagonist procedure. One of the key aspects of the common law is this that it is being maintained that similar decisions should be given out for similar cases. Due to this reliance on the decisions of the earlier cases enables the businessmen to shape their advancements with greater scope of stability. But there can be problems as well, as the regulations relating to the business it common law countries are largely varying thus creating problems for those who aren't quite well informed. For example the sale of defective goods is less vulnerable to court proceedings in New Zealand than in the U.S due to the evolutionary discrepancies in the laws of professional negligence in two countries. In addition to the case law the legislation is also a prominent source of law in the common law countries. These two sources work alongside as the case law provides regulations for the specific situations and while the comprehensive rules are governed by the legislation. (Cry, 2006) 4. Civil Law The civil law is also often referred to as the codified legal system, and the detailed set of laws are the fundamentals of the civil law that make up a code. Regulations for conducting business are part of the code. The key aspect that differentiates the civil law from the common law is the significant role of the judges. In case of the common law the judge is neutral reference who defines points of rulings and laws that are being put forward by the lawyers of the two parties, while the rest of the development of the case and arrangement of evidence are dealt with by the lawyers. In case of civil law the much of the tasks of the lawyers are being performed by the judges, for instance the extent of evidence that is to be presented before the court is determined by the judges. There are other significant differences also. (Mcrae, 2005) So far we have discussed the main law systems that are being practiced over the world. Now we shall discuss the specific conventions or advancements across the nations which have tried to limit risks associated to international businesses. The U.N. Sales Convention and the UNIDROIT Principles of International Commercial Contracts are the most prominent advances that have been achieved for the reduction of business risks internationally. These are discussed as follows: The U.N. Sales Convention The convention is meant for the trade that is being done internationally. Based on the parties to the contract the rules for appliance are being provided by Article 1, where the exceptions that circuitously define 'goods' intended by the conventions are dealt with Article 2. As per Article 1 the application of the Convention two situations can arise: a) An agreement between the two parties for the sale of goods that are situated in different nations and the these respective states are contracting states to the Convention b) An agreement between the two parties for the sale of goods that are situated in different nations and the regulations of private international law of these nations direct to the incorporation of the law of a contracting nation. Moreover it is important to note that the terms 'good' or 'goods' isn't defined clearly anywhere in the Convention. However, following sales of goods are excluded from the scope of the Convention as per Article 2: a) Sale of electricity; b) Sale of goods for household, personal or family use; c) Sale aircraft, hovercraft, vessels or ships; d) Sale on execution or otherwise by authority of law; e) Sale of negotiable instruments or money, stocks, investment securities and shares f) Sale by auction. In addition to the above, Article 3 explains that the Conventions doesn't includes the manufacturing of the goods, for the manufacture of which the substantial materials are being provided by the buying party. Formation of the Contract The details of the formation of contracts are being explained in Articles 19 and 24. It is important to know that the principles set out in the common law for the formation of contracts are being largely followed by the Convention; there has to be an offer and acceptance and the offeror should have the intention to be bound by the contract. In addition to the above determinants, the goods should be indicated along with express provisions for the determination of price and quantity. Moreover, instead of the famous mailbox rule the Convention seeks to apply the 'receipt rule'. Moreover the inquiry for the details of the goods doesn't constitute for acceptance, and a counter offer makes the initial offer void thus after a counter offer has been made the original offer can't be accepted (as per the common law regulations). Remedies for the breach of Contract Remedies are an essential part of the Convention and the remedies mentioned have been deduced from the damages approach from the Common law and the specific performance approach from the Civil law. As per Article 46(1) unless the buyer has been reinstated to an incoherent remedy, a buyer may entail specific performance by the seller or according to Article 62, in an opposite situation the buyer may be required to take the delivery, pay the price or perform other obligations if the seller is not being reinstated to an inconsistent remedy. Moreover, upon the 'fundamental' breach of the contract the innocent party may choose between specific performance or damages, in addition to this, upon the fundamental breach, according to Articles 64(1)(a) and 49(1)(a), the innocent party may declare the contract being dissolved. In general the Convention seeks to provide damages to the innocent party the amount up to the actual loss or the loss in profits that occurred due to the breach by the breaching party, and limits it to this loss which was expected if the contract had not been breached. Moreover it is important to note that, upon the avoidance, the damages the innocent party can ask can be the difference between the contract price and the market price at the time of the contract being avoided or the difference between the contract price and the alternate transaction. Matters of breach as per the Convention are dependent on the time limits and procedures. Though, the buyer has realistic period of time for the inspections of goods, but should inspect th goods within a practical time period. If as a result of inspection the goods are 'non conforming' the seller must be notified again within a practical time limit, however, if not agreed not more than two years time. Excuse for Nonperformance The excuse that can be given for nonperformance by either of the parties and accepted under the Convention (as per the Article 79) can only be the excuses which clearly states that it wasn't under the control of the nonperforming party to perform his part of the contract thus this treatment is also somewhat similar to the Common law. Thus it is quite eminent that it doesn't speaks for impracticability and impossibility however, it is important to note that here the important factors are the foresee ability and the scope of control of the performing party. In addition the excuse has to be given within a reasonable time. UNIDROIT Principles of International Commercial Contracts The principle outlined by UNIDROIT are the result of years of hard work of the member of the Working Group; these members were largely the representatives of major socioeconomic and legal systems of the world and leading experts in the in fields of international trade law and contract law. Freedom of Contract It is quite usual to almost all contract laws according to most of the legal systems that parties are free to enter into a contract on any terms they feel like. So is the case with UNIDROIT principles, as is clearly mentioned in Article 1.1. Openness to Usages This is another key aspect of the UNIDROIT principles, as Article 1.8 states that parties to the contract are not only bound by the usages to which they themselves have agreed upon, but also from the ones which are widely known and observed in international trade in case of a certain kind of a trade, but with the exception where it results to be unreasonable. Favor Contractus This aspect of the principles is probably the most basic aspect and intends the endurance of the contracts, as it states that even if there are limitations in the performance and formation of the contract, it is always or largely in the best interests of the contracting parties that they must take all possible steps to sustain the original agreement or look for alternate agreement elsewhere in the market. Fair dealing and Good faith This notion is common to almost all of the determinants of the Principles and is explained in Article 1.7, in following context that parties to the contract must always act in good faith and must deal fairly until the end of contract irrespective of the way in which the contract comes to its end. The terms 'good faith' and 'fair dealing' here do not refer to what comes to a layman's mind, but it actually refers to the 'reasonable commercial standards of fair dealing'. Conclusion As it has been discussed that there are a number of legal systems that co exists across the world of which the most prominent are the Islamic Shariah, the Socialist legal system, the Common and Civil law. These individual legal systems have evolved over the years for their respective nations or people. Therefore they also had prominent and unclear features. For instance the Islamic Shariah strictly prohibits the incorporation of interest in its financial and economic system and the Shariah's regulations are not manly created rules but based on the holy revelations from the God i.e. the Holy Quran, on the other hand the Common law and Civil law encourage the use of interests in business dealing and the these two systems of law have originated not from anything from the God but from the opinions that were generally acceptable to the whole society. In addition to the above the Socialist legal system does not defines a particular way of the formation of it regulations as a socialist or communist society is tried by the rules of the government which themselves vary between different socialist nations. Therefore it was due to these contradictions that these different legal systems had, it was quite difficult for the people doing businesses across the world or the MNC's that which of these legal systems were applicable when doing business internationally. Therefore it was due to the intensive efforts of experts around the world which created appropriate acts and concentions for international trade such as UN Sale Convention and UNIDROIT Principles of International Commercial Contracts. References Aswathappa, A. ( 2003). International Business, Tata McGraw-Hill, p. 128-131 Cry, J. (2006). 'The arm of US law is very long indeed and non-US multinationals need to be aware of the risks'. Lawyer, Vol. 20 Issue 6, p. 20 Mcrae, H. S. (2005). 'Reducing Legal Risks to Marketing in Multiple Country Operations', Columbia Journal of World Business, Vol. 13 Issue 1, p. 50-58 Read More