Elements of international trade law

International trade law is a complicated subject as it involves transnational transactions; it derives its sources from customary international law, international conventions, bilateral treaties, and multilateral treaties. These instruments of transnational relationship create duties, liabilities and mutual responsibilities. The trade law encompasses duties under international custom, and trade practices.

These practices or usages are part of customary international law. Efforts are being made to harmonise trade practices; for example commercial disputes in the US are governed by uniform commercial code, European Union has its own procedures made applicable through its directives; many countries follow UCP-600, Inco terms, general rules of letter of credits, and provisions of international conventions on carriage of goods by sea land and air. Convention on International Sale of Goods (CISG) also provides for some binding rules.

The most important convention governing international trade law is the GATT 1994 to which most of the countries are signatories. This convention provides for non-discrimination in international trade, reciprocity, liberalisation and transparency. It provides that nations should desist from levying technical barriers to trade (TBT) and provides for protective measures through anti-dumping and anti-subsidy regulations. Under the convention a mechanism to settle dispute has been provided, the first forum is the panel and its decisions are subject to review by an appellate body. This dispute settlement process institution under GATT is known as DSB. The decisions of DSB become binding once its recommendations are agreed and accepted by member states who are parties to the dispute. An example of such a dispute settlement can be found in the well-known shrimp-turtle case contested by US and South-east Asian countries. The convention also lays down rules for mutually agreed free trade agreements (FTAs). There are many such agreements in place like EU-Chile and EU-South Korea free trade agreements.

International conventions refer to agreements between two or more countries, also commonly called treaties. Customary international law results from a general and consistent practice of state followed by them from a sense of legal obligation. Two particular important examples of custom are the rules governing the expropriation of foreign owned property and the rules limiting prescriptive jurisdiction that is the authority of nations to prescribe rules for particular persons or conduct, sometimes outside their own borders.

The best evidence of customary international law is the actual practice of states. It is often convenient, however to refer to secondary sources that have collected and examined the primary evidence such as the writings of scholars or known as publicists in the words of Article 38(1) (d) of the statute of International Court of Justice. Customary International law must be distinguished from the general principles of law to which Article 38(1) (c) refers. The idea of general principles refers to practices by states with respect to their internal law, as distinguished from custom which is behaviour vis-à-vis other states. General principles have largely been referred to by international tribunals in relation to such issues as estoppel and other procedural matters. Where national courts could estop a complainant in a given case an international court might do likewise.

Customary international law and treaties are grouped together under the heading of public international law. One may note that the term private international law is used in two distinct ways. It generally refers to the rules for resolving private disputes having a significant relationship to more than one jurisdiction, this branch of international law is also known as conflict of laws. Private international law is divided into three parts, it deals with the question when a court can take jurisdiction over a party or property identified as foreign, it deals with the extent to which the judgement of court in a country A is entitled to recognition or enforcement by the courts of country B, and it deals with the choice of law question, that is, what rule are to be applied in resolving a trans-border dispute .For example, if the case is being tried in Country A’s courts, should that court apply its own law or the law where the contract was made or is to be performed. From this perspective, customary international law consists of two elements-general practice or the material element and the acceptance as law or the psychological element known as opinio juris sive necessitatis.

An important question which attracts us is if customary international law is a collection of practices of the nations, then what do we mean by the term “practice ” . The term is quite wide, as it includes decision of the state to prosecute or not to prosecute criminal cases, protests against actions of other states, statutes and decrees, and judicial opinions. So disparate a variety of activities is hard to locate; life is made easier by those states who publish their practice at regular intervals.

The psychological element of customs come into play when one asks the reasons for state behaviour whether they pursue these rules being bound under the international norms or because of prudential considerations. Thus a state might not prosecute somebody because the action may violate rules of international expected behaviour or because it could not obtain jurisdiction over the intended defendant or because a trial would be too expensive or because the proceedings might irritate close allies.

Thus an important aspect of the customary international law is the state responsibility for injury to the nationals of other states. It was a subject of considerable controversy during the 20th century. The permanent court of international justice in the case of factory at Chorzow observed that expropriations required “the payment of fair compensation “(P.C.I.J, Ser. A, No 17 at 46(1928). In recent years these protections have been incorporated in bi-lateral investment treaties and individual investors have been authorised to pursue their rights before international tribunals constituted for this purpose such as ICSID. Sir Herasch Lauterpacht in this regard observed that: “State is bound to respect the property of aliens … in cases in which fundamental changes in the political system and economic structure of the State or far reaching social reforms entail interference, on a large scale, with private property … it is probable that, consistently with legal principle, such solution must be sought in the granting of partial compensation.” (I.L.Oppenheim, International Law, s 155 at 352(8th edition 1955).

In 1974, the General Assembly of the United Nations adopted Resolution 3281(xxix), and it reviewed the concept of:” appropriate compensation” and stated that rather than making a future promise of payment it should be paid immediately by the concerned state. Although some countries like United States who wanted it to be more meaningful, but the proposed amendment was rejected.

The second most important element or source of international trade law is the law of treaties, there are diverse forms of treaties, for example, bilateral treaties, multi-lateral treaties or free trade agreements. The body of rules, now codified in the Vienna Convention on the Law of Treaties (1156 U.N.T.S 331), these rules address questions such as the validity of a treaty on grounds of fraud, mistake or coercion, the rights of state not a party to the treaty, the effect on rights under a treaty of unforeseen events, the rights of state parties to denounce it etc. These are some of the questions which make the life of attorneys engaged in the practice of international law more stressful. In fact for understanding such treaties some of the important aspects for consideration are, distinction between treaty and executive agreements, internal effect of a treaty, the interpretation of the treaty, and the weight to be given to the interpretation of the treaty as proposed by the executive branch of the state.

The treaty law also poses the problem of extraterritorial application of national law as nations are often legitimately concerned with conduct outside their borders. The Permanent Court of International Justice considered the question of extra-territorial application of domestic law in the perspective of rules of customary international law in the case of S.S, “Lotus,”(P.C.I.J;Ser.A.No 10 (1927). The court observed: “It does not, however, follow that international law prohibits.

State from exercising jurisdiction in its own territory, in respect of any case which relates to acts which have taken place abroad, and in which it cannot rely on some permissive rule of international law. Such a view would only be tenable if international law contained a general prohibition to States to extend the application of their law and the jurisdiction of their courts to persons, property and acts outside their territory ,and if ,as an exception to this general prohibition, it allowed States to do so in certain specific cases. But this is certainly not the case under international law as it stands at the moment. For from laying down a general prohibition to the effect that States may not extend the application of their laws and the jurisdiction of their courts to persons, property and acts outside their territory, it leaves them in this respect a wide measure of discretion, which is only limited in certain cases by prohibitive rules; as regards other cases, every State remains free to adopt the principles which it regards as best and most suitable.” The court went on to note that many countries “interpret criminal law in the sense that offences, the author of which at the moment of commission are in the territory of another State, are nevertheless to be regarded as having been committed in the national territory, If one of the constituent elements of the offence, and more especially its effects, have taken place there.” Of course, the fact that the nation in which the effects are felt may exercise jurisdiction under international law does not prevent the nation in which the conduct occurs from doing the same.

The jurisdiction of a nation to apply its law to activities or persons, with which Lotus case principally deals is often referred to as “legislative jurisdiction” or “jurisdiction to prescribe”. It may be noted that at times a country’s anti-trust laws might interfere with other country’s system, by imposing different remedies or by undercutting incentives to participate in foreign amnesty program.

The international trade system is presently governed by GATT 1994 which is the product of a post-war revulsion against the excesses of national separatism. The original version of GATT is generally referred to as GATT 1947 to distinguish it from amended version of GATT 1994 which emerged from the Uruguay Round negotiations. The preamble to agreement states its cardinal objectives, particularly the” substantial reduction of tariffs and other barriers to trade” and the “elimination of discriminatory treatment.” The GATT aims not at totally free trade, but at freer trade. In several instances, it states potent principles, followed by potent exceptions. These couplings of rules and qualifications reflect necessary compromises between competing objectives: on the one hand, pursuit of more open trading climate permitting each nation to compete with its neighbours with fewer artificial trade barriers; on the other, and the varied domestic policies which point towards some degree of protection of domestic industry and agriculture.

The Most Favoured Nation (MFN) clause embodied in article 1 of the GATT was initially thought to be the principle objective and accomplishment, since it prescribes certain limits to tariff rates and proposes to displace it through bilateral reciprocal trade agreements by keeping an assurance of non-discrimination amongst the contracting parties .But there are exceptions to this rule, for example, article XXIV, which provides for customs unions and free trade agreements.

GATT article II imposes obligation to accord to the commerce of the other contracting parties’ treatment no less favourable than that provided for in the GATT agreement and its article II in this manner implements obligations flowing from article I. Article VI and XIX permit departure from these tariff rules by allowing the states to impose anti-dumping and counter-veiling duties, and in this way article XIX becomes an escape clause by allowing the states to impose tariffs in case of unforeseen developments .Articles XX and XXI also provide exceptions and permit the states to take measures to safeguard their interests, however article III to IX bar a variety of national measures which serve , directly or indirectly ,to curb importation. Article XI (1) bars import restrictions other than duties like quotas, and licensing etc.

In case of complaints the matter is decided by the DSB of the GATT .These rulings however lack direct effect on domestic law, and the decisions do not bind domestic courts in the way as the decisions of the domestic superior courts.

In the transnational business environment, the nationality of corporations may be important for a number of reasons. The rights and duties of a corporation’s directors, managers, and shareholders are determined by the law of its domicile or where its principle place of business resides, for example, Germany refused, and until recently to recognise the corporate status of a company managed from Germany unless it was also incorporated under German law. The rights of a corporation under international law may depend upon its nationality. In the Barcelona Traction case, 1970 I.C.J. 3(February 5) (Belg. v Spain), the international court of justice held that only Canada had standing to bring a claim of expropriation on behalf of a company incorporated in Canada and having its registered office there, despite the fact that 88% of the corporation’s shareholder were Belgian nationals. The nationality of a corporation may also determine whether it is entitled to claim rights under a treaty. A corporation may incur obligations under national law by reason of its nationality. Corporations organized under US law, for example, are subject to US taxation on their world-wide income, while foreign corporations are subject to US taxation only on their US source income. Restriction on a corporation’s activity may be imposed by reason of its foreign nationality.

In determine a corporation’s nationality for purpose of deciding what law will govern its internal affairs, countries have looked almost exclusively to the state of incorporation or to the place of management. While these tests have also been important in determining a corporation’s nationality for other purposes, thefollowing factors have sometimes also been considered pertinent or conclusive: (a)nationality of shareholders;(b)nationality of directors;(c)nationality of officers;(d)nationality of employee;(e)nationality of holders of debt obligations;(f)nationality of the owners of patents or trademarks which the corporation is licensed to use;(g) the nation in which t industrial or commercial activities of the corporation are entered; and (h) the nation with which under some all-embracing standards, the corporation is more significantly identified. In choosing among these factors, or a combination of them a number of consideration must be borne in mind. The resulting standard must be administerable. The outcome of any official determination must be predictable. The test should be reasonably evasion proof.

In order to settle commercial dispute International Chamber of Commerce (ICC) has produced the Uniform Customs and Practice for Documentary Credits (UCP) to sell out the agreements represented by bank letter of credit. The UCP and Incoterms constitute part of a modern version of lex mercatorio, the customary rule that governed international transactions before the rise of legal positivism .They are codification of international commercial practice, and may be applied by courts or arbitrators because the parties have expressly incorporated them into their agreement or an evidence of custom or trade usage that is allowed to supplement the parties written agreement under ICSG and many other bodies of contract law.

Which party is responsible for arranging transportation depends on the party’s agreement. Use of an incoterm beginning with “E” or “F” “Makes the buyer responsible. Under a “C” or “D” Incoterm, the seller must arrange for transportation. It is important to note, however, that certain delivery terms such as FOB, CFR, and CIF are not appropriate to air, land or multimode transportation, and parties who plan to use such transportation should employ their non-maritime equivalents, namely, FCA, CPT, and CIP.

Where goods are shipped by sea, a bill of lading is issued by the shipper, and it serves several functions, it is a receipt showing that the goods have been delivered for shipment and describes their quantity and condition. A clean bill of lading indicates that the goods show no apparent damage. An on board bill of lading further indicates that the goods have been loaded on the ship, the bill of lading carries the right to receive physical delivery of goods. If it is made out to order then the bill of loading is negotiable and may be transferred to another party, thereby transferring the right to receive the goods. Banks typically require negotiable bills of lading as security in the letter of credit transactions.

The bill of lading is the contract with the carriers and either contains its terms or incorporates them by reference to another document .These contracts are heavily regulated by national law and international conventions. There are three separate and sometimes conflicting international regime governing carriage and bills of lading; 1924 Hague Rules which have been adopted by 80 countries, the 1960 Hague-Visby Rules ,an amendment of the Hague Rules adopted by more than 30 countries; and the 1978 Hamburg Rules which have been adopted by relatively few important trading countries.

The contract of sale usually provides for the price to be paid in agreed currency and the currency regime exposes to exchange risks. This is simply the risk that the exchange rate between two currencies will shift to a party’s disadvantage. There are several ways for a buyer to hedge its currency risk. One is for the buyer to purchase enough of the seller’s currency at the time the contract is made. Another option available to buy for some currencies is to buy a forward contract typically with a bank at a specified rate for buy to be made in future. A closely related alternative is the no deliverable forward contract under which there is no physical delivery of the foreign currency and the bank instead pays or receives an amount reflecting the difference between the agreed exchange rate and actual exchange rate on the forward date. Currency hedge can be made in the same ways. Similarly there is a default risk for seller. The buyer’s government might impose currency control that prevent or delay payment or the buyer might run into financial difficulties independent of its government. In order to control these type of risks a standard vehicle has been the letter of credit or documentary credit, a devise that is not common in domestic transactions .A letter of credit provides that a seller will be paid by the bank upon the presentation of certain documents, including a bill of lading showing that the goods have been shipped. The letter of credit is a promise by the issuing bank to pay to the seller specified amount of the letter of credit upon presentation of certain documents. These documents include the seller’s draft or bill of exchange, which is simply the seller’s demand for payment; the bill of lading; a commercial invoice ; a packing list; a certificate of origin; an insurance certificate and an inspection certificate where needed.

In international trade system there are two basic sorts of trade representative namely, agents and distributor. The fundamental difference among them is that an agent only arranges sale and title to the goods never passes to him whereas a distributor buys goods from its principle and then resells them to the customer. This difference in the structure determines their receivables from the principle. There are legislation on the role of commercial agents both by US and EU (see for example, EU council directive no.86/653/EEC of December 18 1986 on the co-ordination of the laws of Member States relating to self-employed commercial agents).

Issues can also arise on the legality of exclusive distributorship contracts under national laws, for example, exclusivity right may infringe certain constitutional rights of one’s competitor. The rights under competition law may also stand infringed through commercial contracts (see Articles 81 and 82 of the EC Treaty, 1997 O.J.(C 340) 178).

Then there are questions of taxation under domestic law, double tax treaties, bilateral and multi-lateral treaties where problem of residence, permanent establishment, place of management, etc; may arise. Licensing agreements and establishment of an operation abroad also require to consult domestic law and international instruments. Mergers and Acquisition is another area for examination. Likewise International Joint Venture Agreements, Development Agreements and International Debt Instruments require special attention in international trade law.