The International Legal Environment
International
Legal Environment
Private international law governs
relationships between persons and organizations engaged in international transactions and
addresses which laws will apply when the parties are in a legal dispute. Foreign law is a law enacted by a foreign country.
Legal environment consists of rules
and regulations, framed by the Parliament, under which business must operate.
To exist and grow, business is required to follow all the rules and regulations
that constitute this environment.
Introduction to International Legal Environment:
Firms
operating internationally face major challenges in conforming to different
laws, regulations, and legal systems in different countries. The legal
framework to protect small and medium enterprises (SMEs), mainly to achieve
social objectives, adversely influences the expansion of manufacturing
capacities and achieving economies of scale in certain countries.
International
managers need to develop basic understanding of the types of legal systems
followed in the countries of their operations before entering into legal
contracts.
Legal
Systems in International Business:
The
major types of legal systems are briefly mentioned here.
(i) Common Law:
It
is based on traditions, past practices, and legal precedents set by the courts
through interpretation of statutes, legal legislations, and past rulings. It
depends less on written statutes and codes. Common law originated from England
and it is followed in most of the former British colonies, such as India, UK,
the US, Canada, Australia, and New Zealand.
In general, the greater the level of economic development of
a country, the more elaborate is its legislative framework. India is an
exception as it has the most voluminous income-tax legislation in the world
despite its relatively much lower rank in terms of GDP.
(ii) Civil Law:
Also
known as code or civil law, it is based on a comprehensive set of written
statutes. It is derived from the Roman law and is followed in most of
continental Europe, Japan, and Latin America. The elaborate legislative codes
embody the main rules of the law, spelling out every circumstance.
Laws
of most countries have elements of both common and civil law. The complications
in a meeting out of non-performance of a business contract also vary widely
among the common- and civil-law countries.
For
instance, in the common-law countries, the non-performance of a contract due to
an ‘act of god’ may include floods, earthquakes, lightening, or similar
happenings whereas under the civil law, non-performance is not limited to
‘acts of god’, but also includes ‘unavoidable interference with performance,
whether resulting from forces of nature or unforeseeable human acts’, including
such factors as labour strikes and riots.
The
distinction between the common law and civil law is more in theory rather than
in practice. Many common law countries, including the US and India have adapted
commercial codes to govern business. The most significant difference in the
common law and the civil law countries is in the protection of intellectual
property (Patents, Trademarks, Copy right & Trade secrets).
Ownership
is established by use in common law countries whereas it requires registration in
the civil law countries. It is extremely important for certain agreements in
civil law countries to get registered, in order to be enforceable, whereas in
common law countries, as long as the proof of the agreement can be established,
an agreement is binding.
Although
there is significant overlapping in practice under the two systems, laws are
much more rigid in the countries with civil-law system compared to common-law
systems.
In
‘civil law’ countries, judges have to strictly follow the ‘letter of the law’,
giving them low flexibility in judicial decisions whereas in common-law
countries, greater reliance is placed on the previous rulings and
interpretations by other judges in similar cases.
Business
contracts tend to be detailed and specific with all contingencies elaborated in
civil-law countries whereas contracts tend to be shorter and less specific in
common-law countries. The judiciary tends to be less adversarial in civil-law
countries where little significance is accorded to legal precedence and traditions
compared to common-law countries.
(iii) Socialistic Law:
This
law is derived from the Marxist socialist system and continues to influence
legal framework in former communist countries, such as the CIS, China, North
Korea, Vietnam, and Cuba. Socialist law traditionally advocates ownership of
most property by the state or state-owned public enterprises, prohibiting free
entry to foreign firms.
(iv) Theocratic Law:
Theocratic
law is the legal system based on religious doctrine, precepts, and beliefs. For
instance, the Hebrew law and the Islamic law are derived from religious
doctrines and their scholarly interpretations. Unlike the countries dominated
by Christianity, Hinduism, and Buddhism where either common or civil law is
followed, a large number of Islamic countries integrate their legal system
based on the Sharia.
The
legal system in a number of Islamic countries, including Saudi Arabia, and Iran
is integrated with Sharia.
In
Arabic, ‘Sharia’ means the clear, well-trodden path to water. In Islam, Sharia
is used to refer to the matters of religion that God has legislated for His
Servants. Sharia is the canonical law derived from a combination of sources,
such as the Koran, the holy book of Islam, the Sunna, teachings and practices
of the prophet Mohammed, and the fat was, the rulings of the Islamic scholars.
The
Sharia regulates all human actions and places them in five categories, i.e.,
obligatory, recommended, permitted, disliked, or forbidden. Classic Sharia
manuals are divided in four parts: laws related to personal acts of worship,
laws related to commercial dealings, laws related to marriage and divorce, and
penal laws.
Major
similarities between the Sharia and secular law are that in both:
1.
All people are equal before the law.
2.
A person is innocent unless proved guilty.
3.
The burden of proof is on the plaintiff
4.
Written contracts have a sanctity and legitimacy of their own.
The
salient features of Islamic law concerned to business are that
(a)
Contracts should be fair to all parties. Partnership is preferred over
hierarchical claims.
(b)
The transaction involving fundamental uncertainty or speculation is prohibited.
Gambling is not liked in Islamic countries, but futures and currency hedging
also involves speculation. International managers need to be aware of such
situations.
(c)
Interest on money is prohibited but allows management fees and services. All
business transactions must avoid riba, i.e., excessive profit, loosely defined
as interest.
(d)
Business involving forbidden products or activity, such as alcohol, pork, or
gambling is prohibited.
(e)
Normally award of damages are in line with practicality but not as inflated as
is often the case in the West. In other words, the damages to property will be
actual sums relating to repair and replacement of the property. The loss of
opportunity for cost of money is not compensated under the Sharia.
(f)
Compassion is required when a business is in trouble. In a country with Islamic
legal structure, it is not considered appropriate to put pressure in the event
of bankruptcy of one’s business partner.
The
major difference between Sharia law and the Western law is the idea of
reference to a precedent. Under the Sharia, a ruling issued by a judge is not
binding on other judges or on him in later cases. While doing business in
Islamic countries, international managers need to appreciate the intertwining
of religion and Islamic law and take care never to mention the
Palestine-Israeli situation.
After
independence from erstwhile colonial rulers, most Islamic countries have
grappled with the problem of replacing colonial legal systems with the Sharia.
The implications of Islamic law vary in terms of degree among the Islamic
countries. In most countries, it is applied in conjunction with the common and
the civil law.
Islamic
finance:
Under
the Islamic law, western style finance is haram, or forbidden, to devout
Muslims. The interest-bearing accounts and loans, which fall under the strict
ribamles, most futures and options, which are considered speculative and
gharar, and insurance, because the outcome of the contract can no way be
determined beforehand , are all haram.
In
order to enable Islamic investors to benchmark their investment on a regional
basis and give product providers the opportunity to develop structured products
tailored to the Islamic market, Standard & Poor’s (S&P), brings out
Sharia Indices (Exhibit 8.4) that include only those stocks that comply with
Sharia law.
This
provides investors with a comparable investable portfolio while adopting
explicit investment criteria defined by the Sharia. All S&P indices
constituents are monitored on a daily basis to ensure that the indices maintain
strict Sharia compliance.
A
substantial amount of oil-money is invested in Sharia-compliant funds. As the
index provides for benchmarking with Sharia, some of these funds may be
invested as per the Sharia Indices.
Principles
of International Law:
International
law is less coherent compared to domestic law since it embodies a multiplicity
of treaties (bilateral, multilateral, or universal) and conventions (such as the
Vienna Convention on Diplomatic Security, Geneva Convention on Human Rights,
etc.) besides the laws of individual countries. International managers need to
understand the basic principles that govern the conduct of international law.
(i) Principle of Sovereignty:
A
‘sovereign’ state is independent and free from all external control or enjoys
complete legal equality with other states. It governs its own territory, has
the right to select and implement its own political, economic, and social
systems and has the power to enter into bilateral or multilateral agreements
with other nations.
Thus,
a sovereign state exercises powers over its own members and in relation to
other countries. This also implies that courts of a sovereign country cannot be
used to rectify its injustices on other countries.
(ii) International
Jurisdiction:
Under
international law, there are three basic types of jurisdictional principles.
Nationality
principle:
Every
country has jurisdiction over its citizens, irrespective of their locations.
For instance, an Indian citizen travelling abroad may be given a penalty by a
court in India.
Territoriality
principle:
Every
country has the right of jurisdiction within its own legal territory.
Therefore, a foreign firm involved in illegal business practices in India can
be sued under Indian law.
Protective
principle:
Every
nation has jurisdiction over conduct that adversely affects its national
security even if such behaviour occurs outside the country. For instance, an
Italian firm that sells India’s defense secrets can be booked under the Indian
law.
(iii) Doctrine of Comity:
As
a part of international customs and traditions, there must be mutual respect
for the laws, institutions, and the government system of other countries in the
matter of jurisdiction over their own citizens.
(iv) Act of State Doctrine:
Under
this jurisdiction principle of international law, all acts of other governments
are considered to be valid by a country’s court, even if such acts are not appropriate
in the country. For instance, foreign governments have right to impose
restrictions related to financial repatriation to other countries.
(v) Treatment and Rights of
Aliens:
Nations
have the right to impose restriction upon foreign citizens on their rights to
travel and stay, their conduct, or area of business operations. A country may
also refuse entry to foreign citizens or restrict their travel. As a result of
rise in terrorism during the last decade, the US and many European countries
have imposed restrictions on foreigners.
(vi) Forum for Hearing and
Settling Disputes:
Courts
can dismiss cases at their discretion, brought before them by foreigners.
However, courts are bound to examine issues, such as the place from where
evidence must be collected, location of the property under restitution, and the
plaintiff. For instance, after the disaster of Union Carbide’s pesticide plant
located at Bhopal in India, the New York Court of Appeals sent back the case to
India for resolution.
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