The General Framework For International Business Transactions

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The General Framework for International

Business Transactions
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Chapter 1
The General Framework for International

Business Transactions
Section 1: Definition of IBT and Scope of the Book

The goal of this book is to enable advanced students of the law, as well as younger practitioners, to
understand the specific legal issues related to international business transactions (IBTs) and to
provide qualified guidance and advice to large and small enterprises engaged in such transactions,
both at the stage of planning a transaction and drafting the relevant contracts, and/or at the stage of
subsequently enforcing them. By contrast to more traditional works, our approach is distinctly
practice oriented. We will neither try to cover each and every landmark case that has ever been
decided in this subject area, nor will we discuss each and every theory that has been advanced to
explain the particular problems related to international business transactions. Instead, we will
provide model contracts and check lists for every step in the implementation of the most common
IBTs. These models will be explained in detail to enable our readers to adapt and apply them to a
great variety of client issues that may be brought before them. In this way, we will try to instill the
knowledge and with it the confidence it takes to provide qualified advice in the planning stages, to
prepare or review all of the relevant documents, and, if necessary, to take charge of the settlement
of any disputes and the enforcement of any claims in the international arena. Since virtually all
business has become international, we believe that this skill set is indispensable for any lawyer in
the 21st century who by choice or default will be involved with business of any size and type.
This first Chapter provides an overview what the reader can expect in the different parts of the book.
It provides the setting of the modern IBT – a transaction between parties in different countries who
often don’t know each other and never actually meet in person – and the specific challenges this
creates for lawyers. Section 2 provides a brief discussion of the economics of international trade,
i.e. why so much business has become international and why countries shutting themselves off from
international business and trade pay a high price for doing so. However, we also acknowledge that
international trade is not always a force for good and needs to be harnessed to provide the greatest
possible benefits for the largest possible number of people. Otherwise, anti-competitive practices,
selective protectionism, a race to the bottom for the lowest level of labor and environmental pro-
tection, international tax evasion and other abusive business and trade strategies can do great harm.
We continue by introducing the different legal regimes that affect IBTs, including the question what
is international law and why and how does it matter.
Finally, the Chapter concludes with a very brief but important exploration how lawyers should
analyze a case in an exam and in practice. Although this should be something taught in the first year
of law school, we meet so many lawyers in advanced law classes and even in private practice
struggling with this issue that we have decided to dedicate an entire sub-chapter to the problem.
1 – THE GENERAL FRAMEWORK FOR INTERNATIONAL BUSINESS TRANSACTIONS
p. 2 of 60 Version as of 4 September 2017
From 1960 to 2015, the share of international trade in goods as a percentage of U.S. GDP has more than
tripled and stands at around 23% today (Worldbank). In other words, 23 cents of every dollar earned in
the U.S. is earned via IBTs. This share is even higher for many other countries. And these numbers have
been rising and continue to rise. Global trade in goods and services tripled in just 15 years from 2000 to
2014 (WTO) and nowadays exceeds 20 trillion USD per anum. Just for trade in goods, some 2.5 billion
tons of sea cargo arrive in the U.S. every year, in addition to some 4 million tons of air cargo. Around 12
million containers enter and exit the U.S. per year, equivalent to about 70,000 containers every day. On
the global scale, almost 1 million containers cross an international border every day. Fewer in number but
greater in volume are so-called bulk shipments in specialized vessels, such as crude oil, liquified natural
gas, iron ore, grain, coffee, orange juice concentrate, etc. By comparison, so-called break bulk freight on
pallets and in non-standard sizes and units contributes only a relatively minor share to modern trade but
often requires sui generis contracts and arrangements.
This gigantic business is by no means the prerogative of large multinational corporations. When the author
began advising enterprises regarding IBTs, the typical customer was a Fortune 500 company. Just 25 years
later, the typical company seeking help with IBTs has less than 50 employees and a turnover of just a few
million USD. In 2012, some 305,000 companies exported from the U.S., of which 297,995 were small and
medium sized enterprises (SMEs) with less than 500 employees (Department of Commerce).
Whether in the U.S. or around the world, each and every international business transaction, and each and
every shipment of goods and transfer of services is subject to several contracts, each and every one of
which should be drafted with an eye on the law. In fact, much grief could be avoided and much money
could be saved if more of these contracts would be negotiated, drafted, and enforced, if necessary, by
better qualified lawyers.
An international business transaction (IBT) is usually a commercial contract entered into between
two or more private parties who have their principal place of business in different nation states or
countries. The most common of these IBTs is a sales transaction where a seller in one country enters
into a sales contract with a buyer in another country. Even if seller and buyer are in the same
country, an international dimension is brought in if the contract concerns goods or services to be
imported from or exported to another country. The legal issues raised by international sales
agreements and their implementation are the main focus of our book:
Part One provides a general overview of the history of and driving forces behind international
commerce, the legal framework for IBTs, the scope and sources of international law relevant for
IBTs, the impact of WTO and other international trade laws; regional integration systems like the
European Union, NAFTA, ASEAN and Mercosur, and their impact on trade and commerce; the
impact of national law on international business transactions, conflicts of (national) laws and their
resolution via private international law, as well as additional sources of law, in particular model
codes and other optional rules.
Part Two deals in detail with the international sale of goods as the most common and most basic
form of IBT, starting with an overview of the so-called documentary sale, continuing with some
important pre-contractual documents and a model contract of sale, and then dealing in a comparative
manner with the most commonly used international sales laws, in particular the UN Convention on
Version as of 4 September 2017 p. 3 of 60
Contracts for the International Sale of Goods (CISG), the Unidroit Principles of International
Commercial Contracts (PICC), the European Common Frame of Reference (CFR), as represen-
tations of the continental European legal tradition, and the Uniform Commercial Code (UCC) of the
United States.
In Part Three we explain the most important arrangements for the financing of international trade,
i.e. the various forms of documentary credit. Letters of credit are analyzed in detail, including typical
problems that occur in practice when L/Cs are the intended form of payment. We also deal with
documentary credit as security where it is not intended to be the primary form of payment, i.e. with
standby letters of credit, and bank guarantees.
Part Four is dedicated to the next step in the implementation of an international sales contract, the
shipping of the goods. We analyze the International Chamber of Commerce (ICC) Rules for the Use
of Domestic and International Trade Terms (INCOTERMS 2010) as an easy way of determining the
distribution of risk and responsibility in international shipping, i.e. who has to organize and pay for
shipping and insurance and where does the risk of loss or deterioration of the goods pass from the
seller to the buyer. Subsequently, we look at the Bill of Lading (BoL) as the standard shipping
contract for maritime transport, as well as a variety of other waybills for other modes of transport.
Part Five deals with the insurance contract, the fourth and last of the contracts typically included
in a documentary sale. We continue to focus on maritime transport since it accounts for some 90%
of international transport. We learn the difference between hull insurance and cargo insurance and
analyze the typical terms of a cargo insurance policy.
In Part Six, we cover a number of additional documents that are often part of an IBT, starting with
a typical packing list and shipping invoice. We also look at export licenses and certificates of origin
as the two documents that may have to be procured from public authorities. Finally, we examine
typical certificates of quality which may have to be obtained from a third party inspection company.
Since electronic communication and therefore also electronic contracts are rapidly replacing more
traditional ways of exchanging signed documents via courier or fax, Part Seven is dedicated to
some of the issues specifically related to electronic contracts.
While IBTs for the most part are fully under the control of party autonomy, there are some national
and international rules and regulations that private parties to international business transactions have
to comply with. Therefore, in Part Eight, we deal with mandatory national and international trade
laws, in particular those related to customs processing.
Intellectual property rights (IPRs) play an ever increasing role in IBTs, whether it is a sale or lease
agreement, a franchise agreement, an exclusive distribution agreement, or some form of joint venture
or other foreign investment. Therefore, in Part Nine, we will provide an introduction to intellectual
property issues related to business and trade transactions.
Finally, Part Ten is focused on the enforcement of IBT contracts, both via international litigation
and/or via international commercial arbitration. Since rights are largely meaningless unless they
can be enforced, if necessary, this part is quite extensive and strongly recommended for anyone
practicing or wanting to practice in the area of IBT.
In addition to a List of Cases and Index, there is also a Glossary at the end of the book with short
definitions and explanations of key concepts.
Last but not least, reference should be made to the Documents Collection that accompanies this
Textbook.
* * *
When Marco Polo traveled from the Venetian Republic to China in the 13th century to bring silk,
gunpowder, porcelain, and tea to Europe, or when Portuguese and Arab traders were looking for
gold, slaves, and other treasures around the coasts of Africa, IBTs were done rather differently than
today. First, the traders usually had to undertake the perilous journeys themselves, with a trip to
India or China easily taking a year or two, even if the winds were favorable. Second, they had take
with them the gold or other currency, or the goods they wanted to barter, which attracted not only
customs and tax collectors along the way but all sorts of pirates, thieves and robbers. Third, once
at their destination, the traders had little or no way of knowing whether the goods they were about
to buy would survive the voyage home, nor even whether the purchase price was competitive and
would enable them to make good profit back home.
In many ways, international business in those days was hopelessly inefficient and ludicrously dan-
gerous. A single storm could mean the difference between riches and ruins for an entire trading
family or town. Unsurprisingly, the York Antwerp Rules, one of the foundations of maritime
insurance, even in their 2004 edition, speak of such voyages as “maritime adventures”. The only
reasons why traders were willing to face such perils were the general sense of adventure and dis-
covery and the huge profits that could be made by someone who had, at least for a while, a
monopoly over a certain imported good.
By contrast, international business is done very differently today. Anybody with internet access and
a credit card can go on Alibaba.com and, within minutes, compare the prices of dozens of potential
suppliers in China with wholesalers or retailers in the local market and place an order for a designer
handbag or for 100,000 of them. Shipment can be arranged by boat or by air and payment will be
made electronically. The goods will arrive within two weeks – or a mere two days if the buyer is
willing to pay extra – and can be returned for a full refund if need be. Most important, neither seller
nor buyer ever have to leave their home or business, let alone travel abroad to meet.1
However, even though more than 90% of all IBTs today are initiated and implemented smoothly and
without a glitch, not all of the adventure has been taken out of international sales agreements. Many
things can and do still go wrong in such transactions:
– although the buyer paid, the seller never ships;
1 For a practical example see Pietra Rivoli, The Travels of a T-Shirt in the Global Economy – An Economist
Examines the Markets, Power, and Politics of World Trade, John Wiley & Sons, Hoboken, 2005.
See also William Bernstein: A Splendid Exchange: How Trade Shaped the World, New York 2008; Robert
Feenstra: Advanced International Trade - Theory and Evidence, Princeton 2004; Elhanan Helpman:
Understanding Global Trade, Cambridge MA 2011; Kenneth Pomeranz & Steven Topik: The World that
Trade Created - Society, Culture, and the World Economy 1400 to the Present, 2nd ed, New York 2005.
– by mistake or negligence, the seller ships a different product or a product of different quality;
– although the seller ships as promised, the goods are lost or damaged on the way;
– although the seller ships as promised, the buyer does not accept the merchandise, with or
without reason;
– although the buyer initially accepted the goods, she now refuses to pay, claiming for example
that the quantity or quality was not as agreed or some other defect of the merchandise;
– by the time the goods arrive, the buyer has fallen into insolvency and the seller never gets paid.
These are just some examples of what can go wrong in international sales and we know all these
issues and more from Contracts 101. However, by contrast to comparable domestic or national
business transactions, IBTs raise several additional questions, for example
– since seller and buyer never meet, how can they trust each other? How can they even be sure
of each other’s identity, ability and solvency? More specifically,
– how should the seller know whether the buyer is willing and able to pay once the goods are on
their way?
– how can a buyer be sure of the quality of the goods before making payment? How does she
know whether the promised goods and quantities have indeed been shipped?
– which contract law should govern the transaction and any remedies for an injured party? seller’s
law or buyer’s law? or even a (neutral) third party/country law?
– even if an injured party has the law on her side, where should a claim be brought to court and
how do we know whether a foreign court will be impartial?
– even if an injured party has obtained a favorable judgment or award, how and where can this
be enforced against a foreign party?
These issues will be the focus of Part 2 on the international sales contract, Part 3 on financing of
international business transactions, Part 4 on shipping, Part 5 on insurance, and Part 10 on dispute
settlement. In Part 6, we will look at some additional or alternative documents sometimes used in
IBTs, and Part 7 will focus specifically on issues related to electronic contracts. While freedom of
contract is the norm for IBTs and parties can make their own rules for their contractual relations,
there are some mandatory national and international trade laws, in particular dealing with customs
rules and duties, as well as non-tariff barriers to trade, which will be explained in Part 8. All of these
elements will be required whether a lawyer is shepherding a one-off export-import transaction to its
successful completion, is helping with the initial set-up or the re-structuring of a global supply chain,
or is supporting her client in a more substantial and lasting investment abroad. Finally, Part 9
provides a brief introduction into the use of intellectual property rights in IBTs.
Section 2: The History and Motors of International Commerce

While many histories of world trade tend to start out somewhere in the 15th century,1 the history of
trade actually goes back as far as the earliest human settlements. Due to differences in climate, soil,
flora and fauna, and other natural factors and resources, each localized group of humans typically
had or was able to produce only certain types of food, clothing, tools, etc. By barter trading with
other groups who had other resources and goods, each group could overcome, at least to an extent,
its own limitations of resources and hence increase its wealth as expressed in chance of survival and
quality of life.2
This image of early human societies already introduces the first two of the three most important
motors of international commerce: absolute advantage/disadvantage and relative advantage/disad-
vantage. We may speak of an absolute advantage and disadvantage if a society or country has
plenty of a given resource or good, while another society or country has none of it at all. For
example, Saudi Arabia has a lot more oil than it can consume on its own in a very long time frame,
while Germany has virtually no oil at all. Therefore, if Germany needs petroleum for transportation
or production or any other purposes, it has to import. Conversely, if Saudi Arabia wants to make use
of its abundance, it has to export. Bringing the two together in a trade relationship should benefit
both of them.
By contrast, we may speak of a relative advantage or disadvantage if a society or country is able
to produce a certain good but only at great cost and effort, while another society or country with
different resources or skills can do it much more easily and cheaper. For example, it is certainly
possible to grow bananas in Canada or Scandinavia, provided one is willing to grow them in a
greenhouse with lots of heating energy – and indeed Iceland is doing exactly this because it has
inexpensive geothermal energy in the form of volcanic hot springs – but it probably makes more
sense to import the bananas from Central America or Africa, where they basically grow on their
own. Thus, we may say that the Nordic countries have a relative disadvantage in producing tropical
fruit, while the Tropical countries have a relative advantage. Again, bringing the two together in a
trade relationship should benefit both of them.
Advantages and disadvantages are not only based on climatic factors and natural resources but can
also be developed or squandered in the form of skills by human effort or the lack of it, as some
individuals or groups become better at making certain things than other individuals or groups. For
example, the Swiss have a relative advantage at selling expensive watches around the world after
1 The key event being the discovery of open ocean navigation by the Portuguese, and therefore the birth of
systematic long-distance maritime trade; see, for example, Hugill, World Trade Since 1431: Geography,
Technology, and Capitalism, Harrisonburg, 1993; McCusker (ed), History of World Trade Since 1450, 2005;
Pomeranz & Topik, The World That Trade Created - Society, Culture, and the World Economy 1400 to the
Present, 1999; for a more comprehensive approach, starting around 3,000 B.C., see Bernstein, A Splendid
Exchange - How Trade Shaped the World, New York, 2008.
2 For an analysis of the economies of primitive societies see Marshall Sahlins, Stone Age Economics, Routledge
1974. The idea that wealth should be measured by the access to a great many goods and services by average
citizens was formulated by Adam Smith in his book An Inquiry into the Nature and Causes of the Wealth of
Nations in 1776.
they have spent centuries at developing their watchmaking skills, as well as a reputation for
uncompromising quality.
Absolute and relative advantages and disadvantages work nicely to fuel international business and
trade, as long as each and every society can figure out a few things it is good at making, so that it
can export some goods and services, and then use the export revenue to import those goods and
services the society is not so good at making. To the extent advantages are lasting, they can provide
the revenue for sustainable trade relationships. To the extent advantages are more fleeting, a society
has to constantly re-invent itself to find something else it is good at making if an earlier advantage
is no longer valid. To give an example, Colombia has excellent climatic conditions and many years
of experience in growing high quality coffee. Potentially, the country should be able to count on
sustainable export revenue from this important commodity. However, political instability or the
plant disease leaf rust could put at risk what essentially looked like a safe bet without end date.
Unfortunately, countries and societies rarely prepare for the fading away of their advantages while
times are still good and resources flush. By the time change has become imminent, resources may
already be scarce and adjustments correspondingly harder. Saudi Arabia may become a case on point
when its oil riches run out.
Compared to absolute and relative advantages, the third motor of international commerce is a little
harder to understand but quite probably even more important today. The concept of comparative
advantage and disadvantage was first formulated by the British economist David Ricardo in 1817.1
To illustrate the idea, we shall look at Country A and Country B and their respective production of
cars and bicycles. We shall assume that both countries have to purchase the material and energy and
other input factors on the international markets at the same prices. Therefore, the only production
factor that will be different in the two countries is the cost of labor and we can disregard the rest:
Country A Country B
labor cost 20 $ / hour 15 $ / hour
productivity in bike manufacturing 12.5 hours / bike 20 hours / bike
productivity in car manufacturing 250 hours / car 500 hours / car
unit cost of bikes 250 $ / bike 300 $ / bike
unit cost of cars 5,000 $ / car 7,500 $ / car
1 See Ricardo, On the Principles of Political Economy and Taxation, London, 1817. For an accessible
introduction to the economics of international trade see William Baumol & Alan Blinder, Microeconomics:
Principles and Policy, Cengage Learning, 13th ed 2016, Chapter 21, or William Baumol & Alan Blinder,
Macroeconomics: Principles and Policy, Cengage Learning, 13th ed. 2015, Chapter 18; as well as Alan
Stockman, Introduction to Microeconomics, The Dryden Press Harcourt Brace College Publishers, 1995,
Chapter 23. For more detailed analysis see Paul Krugman & Maurice Obstfeld, International Economics:
Theory and Policy, Pearson, 10th ed. 2014.
Based on these numbers, it would seem that A and B cannot possibly have a profitable long-term
trade relationship. Country A is better at making cars and bicycles, both products are more
expensive when made by Country B. While Country B would probably like to import cars and
bicycles from Country A to get their lower prices, such a one-sided trade relationship is
unsustainable since B will soon run out of money if it only imports and cannot export.
However, what Ricardo explained for the first time is that every individual, every company, and
even a national economy, always has to work with limited resources. Even if I am better than my
secretary not only at teaching but also at typing, does that mean that I should do my own typing?
Probably not, because my day has only 24 hours and I should focus on the higher value activity or,
in other words, I should focus on what I am comparatively better at, versus what I am comparatively
less good at. In our two-country two-product model, this can be shown as follows:
Country A Country B
available resources 10 mio $ for labor / day 10 mio $ for labor / day
primary need 1'000 cars / day 1'000 cars / day
We shall assume that each country has 10 mio $ available resources to pay for labor in the combined
manufacture of cars and bicycles per day. We shall further assume that one of the products is more
important to the country than the other, i.e. that the needs for the one product – the cars – have to
be satisfied before any leftover resources can be dedicated to making the other product, the bikes.
If each country has 10 mio $ available and needs 1'000 cars per day, the overall production looks
like this:
1st scenario: independent manufacturing without specialization and/or trade

cost of 1'000 cars 5 mio $ 7.5 mio $
available resources for bikes 5 mio $ 2.5 mio $
output 1'000 cars 1'000 cars
20'000 bikes 8'333 bikes
In this 1st scenario, each country satisfies its own needs and there is no trade in cars or bicycles
between the two. We can see a total output – both countries combined – of 2'000 cars and 28'333
bicycles.
Next, we will assume that the two countries combine their resources and that each one specializes
on one product, some of which it trades with the other country in exchange for the other product:
2nd scenario: international cooperation with specialization and trade: A makes cars and B makes
bicycles, joint resources 20 mio $
resources needed to make 2'000 cars 10 mio $
funds available for bikes 10 mio $
output 2'000 cars 33'333 bikes
surplus / deficit + 5'000 bikes

What this scenario shows very nicely is an unchanged total output of 2'000 cars, to satisfy the
primary needs of both countries. However, with the same amount of total resources we can now
produce 33'333 bikes, which translates into a net gain of 5'000 bicycles per day or whatever unit of
time we apply. The reader should appreciate that these additional 5'000 bicycles are solely the result
of specialization and trade and essentially free. If the trade relationship can be implemented in this
way, both countries can share the surplus 5'000 bicycles and both countries will be more wealthy
as a result.1
Of course, the transition from the 1st scenario to the 2nd scenario is not free, since the car industry
has to shut down in B and it is unlikely that all workers who used to make cars in B can now find
equally good employment in the expanding bicycle industry in B, and vice versa in A. However, the
transition is a one-time event, while the added surplus occurs every day and potentially for ever.
Thus, some of the early surplus could be used to support re-location, re-training, or early retirement
of the workers who lose their jobs in the transition. Whether this is happening or whether the surplus
will largely be pocketed by the shareholders of the expanding industries is a question of social and
tax policies in the respective countries.
Furthermore, the surplus of 5'000 bicycles per day will be diminished not only during a limited
transition period but continuously by the costs involved with the trading transactions themselves.
High transport costs will have to come out of the 5'000 bicycles because they did not occur when
all production was domestic. Similarly, customs duties and the cost imposed by non-tariff barriers,
such as different product standards or bureaucratic red-tape, will also reduce the benefits to be
shared between the different participating countries. By contrast to the transition costs, these
transaction costs occur on a continuing basis and with each and every transaction. If we want to
maximize the gains from an open and globalized economy it is, therefore, imperative that we
minimize the transaction costs and prevent them from eating up the bulk of the 5,000 bicycles. In
Part 8, therefore, we will discuss customs and trade laws aimed at keeping the transaction costs
under control without compromising product safety, environmental standards, and other bona fide
1 The model with just two countries and two products is highly simplified, of course. However, if we would use
200 countries and tens of thousands of products and services that can be traded, the model would only become
more complicated but not substantially different. For further reading see, for example, Krugman/Obstfeld/Me-
litz, International Economics: Theory and Practice, 9th ed., Boston et al., 2009, in particular Chapter 3.
Readers who are not afraid of numbers and mathematical equations are invited to read up on the Heckscher-
Ohlin theory of trade, New Trade Theory, as well as the Ricardo-Sraffa Trade Theory.
interests of society. In addition, in Part 4, we will dedicate some of the discussion to the inefficiency
of transport up and until the middle of the 20th century and the efficiency revolution in transport
since then.
Just for fun, we shall also look at what would happen if the two countries would specialize “the other
way around”, i.e. if B would end up making the cars and A would be making the bicycles:
3rd scenario: B makes cars and A makes bicycles, joint resources 20 mio $
resources needed to make 2'000 cars 15 mio $
funds available for bikes 5 mio $
output 20'000 bikes 2'000 cars
surplus / deficit - 8'333 bikes
As can be seen, we still get 2'000 cars because we have to satisfy the primary needs of both
countries, but now we only get a total of 20'000 bikes, that is 8'333 less than if both countries would
be working independently and there would be no trade between them. The question is, therefore,
how can we make sure that countries understand their comparative advantages and disadvantages
and don’t try to specialize in the wrong products. The answer to this question depends on who makes
the decisions about the allocation of limited resources? In our example, this is the question which
industries should be shrinking or closing while others are growing and expanding. In open
economies, decisions of this kind are taken by the market. Conversely, in state controlled economies,
decisions of this kind are taken by bureaucrats somewhere in the state administration. For example,
in the COMECON, the Council for Mutual Economic Assistance, which was the regional integration
system used by the Soviet Union to impose its centralized model of state communism on its satellite
states, the decisions which of the many factories in the automotive sector across the vast Soviet
empire would be making the small cars, the medium sized cars, the large cars, the trucks, the buses,
etc. were all taken at the Communist Party headquarters in Moscow.1 We know from history that the
market economy model of the West prevailed over the communist economic model of the East but
it is useful to understand why this is so.
An obvious difference between decision making in a state controlled economy and a market
economy is the degree of centralization. In a perfect market economy, an infinite number of
individually small sellers meet with an infinite number of individually small buyers to negotiate
production and prices. None of the sellers/producers or buyers/consumers are large enough to
dominate the market and dictate the prices. All of them are “price takers” and the market is the
“price maker”. By contrast, in a state controlled economy, there is only one decision-maker, which
is the government, and it controls both production and prices. In both economies, the challenge is
to make smart decisions about who should produce what in which way and who gets to buy it at
what price, i.e. the optimal allocation of limited resources for greatest overall benefit. At least from
1 For further analysis see János Kornai, The Socialist System: The Political Economy of Communism, Princeton
University Press 1992; and Alec Nove, An Economic History of the USSR: 1917-1991, Penguin Books, 3rd ed.
1993.
a theoretical perspective, it is not immediately obvious why a large number of individually small
sellers and buyers should be inherently better at making these decisions than the government. After
all, with its superior resources and knowledge, the government will outmatch each of the small
producers and consumers, at least individually. Furthermore, the players in the market economy are
in the game for their personal benefit more than anything, while the bureaucrats in the government
should be disinterested on the personal level and pursue only the common good. Thus, the planned
economy should have the advantage. Finally, the idea of a perfect market economy is largely
theoretical while in practice many geographic and product markets are characterized by just a
handful of powerful players or even outright monopoly, which means that the crucial decisions are
controlled by very few decision-makers, similar to the state economy, except that they are openly
pursuing their personal benefit and nobody is there to protect the smaller players and promote the
common good. How can it be explained, therefore, that the communist model of state controlled
economy failed so spectacularly wherever it was systematically employed?
Frank Emmert: The Argument for Robust Competition Supervision in Developing

and Transition Economies
Journal of Governance and Regulation, Vol. 5, No. 3, 2016, pp. 67-89
1. THE ECONOMICS OF COMPETITION
It has been said that there is no end to human greed. Pretty much everything else in the world, in
particular those things that we consider positive and/or desirable, are in short supply. When
some-thing is in short supply, it means that there is not enough of it available to satisfy everyone
who would like to have it. We may be able to produce more of one thing but only at the expense of
another thing. For example, we may be able to satisfy more people who desire clean air by closing
a factory that causes pollution or by forcing it to install expensive filter equipment. However, both
of these measures, while increasing the supply of one thing, clean air, decrease the supply of one or
more other things, in this case some or all of the jobs in the factory and some or all of the goods it
is producing. One of the most important problems facing human societies, therefore, is the need to
make decisions about how much to produce of everything and how to distribute the limited
production among the many who want to have a share of it. This is called the problem of allocation
of limited resources.
Economists42 have long argued, and 20th century history has ultimately proven, that market *68
economies are more efficient than non-market economies at making these decisions.43 In a non-
market economy, decisions about allocation of scarce resources (capital, labor, goods, etc.) are either
made by the state or by a small number of private actors. If these decisions are made by the state,
we speak of a planned economy, sometimes also called a socialist or communist economy. If the
decisions are made by a small number of private actors, they have to be in a position of monopoly
or dominance or they have to collude in the form of cartels in order to have impact. By contrast, the
allocation of scarce resources in a market economy is based on large numbers of decisions made by
large numbers of buyers and sellers, who meet in the marketplace every day to negotiate deals, each
of which individually does not significantly influence the overall economy.44
42 Many lawyers – and at least some of my readers – very quickly get uncomfortable with any form of economic
analysis, in particular if it includes charts, let alone numbers. All too often, the very reason why we went to
law school in the first place is that it seemed the furthest from anything that could require mathematics. The
reality is not quite like that, however. Whether in tax law, when we have to understand the financial
implications of different ways of structuring a corporation or international business transaction, or in the
calculation of damages in tort law, a good lawyer will always think about the economic implications of his or
her advice for the client. This is all the more true in competition law, where economic analysis has become
very important for the way regulatory authorities and courts will analyze conduct or practices of corporations
potentially restricting competition [E. Cavanagh, Antitrust Law and Economic Theory: Finding a Balance,
Loyola University Chicago Law Journal 2013, Vol. 45 No. 1, pp. 123-171]. As Morgan has pointed out,
“whether or not one personally likes the implications toward which economic analysis points, a lawyer needs
to understand the analysis in order to assess what the purpose and effect of a practice might be, whether the
practice is likely to be challenged, and if so, how most courts today will react to it.” See [Morgan, T.D., Cases
and Materials on Modern Antitrust Law and Its Origins, Thomson/West, St. Paul MN, 3rd ed. 2005, at p. 5].
Fortunately, there are a number of relatively accessible books for lawyers seeking to understand economic
analysis of law and more particularly competition law. These include [D.W. Barnes & L.A. Stout, Economic
Foundations of Regulation and Antitrust Law, West Publishing, St. Paul MN, 1992; Simon Bishop & Mike
Walker, The Economics of EC Competition Law: Concepts, Application and Measurement, Sweet & Maxwell,
London UK 2010; T. Calvani & J. Siegfried, Economic Analysis and Antitrust Law, Little Brown & Co.,
Boston MA, 1988; E. Gellhorn, W.E. Kovacic & S. Calkins, Antitrust Law and Economics in a Nutshell, West
Academic Publishing, St. Paul MN, 5th ed. 2004; D. Hildebrand, The Role of Economic Analysis in the EC
Competition Rules, Kluwer Law International, Alphen aan den Rijn NL, 3 rd ed. 2009; K.N. Hylton, Antitrust
Law and Economics, Edward Elgar Publishing, Cheltenham UK, 2nd ed. 2010; as well as E.T. Sullivan & J.L.
Harrison, Understanding Antitrust and Its Economic Implications, LexisNexis, New York NY, 6 th ed. 2014].
43 The goal would be to come as close as possible to the so-called “Pareto-optimal allocation of goods and
resources.” See [Dennis C. Mueller, Public Choice III, Cambridge University Press, Cambridge, U.K., 3rd ed.
2003]. A Pareto-optimum is achieved when all production factors, such as resources and other goods, know-
how, labor, and capital, are allocated in such a way that any re-allocation making at least one person better off
would also leave at least one person worse off.
It should be noted, however, that Pareto-optimal allocation considers only the overall benefits to society.
There may be many variations of Pareto-optimal allocation, each one benefitting society equally but indivi-
duals differently. For example, a certain level of employment at a factory may be the Pareto-optimum.
Employing more workers would reduce overall efficiency. However, employing different workers could well
be the same from society’s point of view while making a huge difference for those who now have jobs and
those who do no longer.
44 Relatively small firms in competitive markets are also called price takers because they do not make the prices
by restricting or increasing their output. Rather, the prices are made by the market, i.e. the aggregate of all
buying and selling transactions by all buyers and sellers meeting in the marketplace. If one firm would reduce
The problem with all of these decisions – market economy or not – is that the decision-makers do
not necessarily pursue the public good, that they have limited information, and that the parameters
in the market place change all the time. Thus, from a point of view of economic efficiency, we can
say that the problem is that a certain number of decisions will inevitably be wrong. Either those
decisions will promote private benefit at the expense of public good, or they will try to promote the
public good but fail to do so in the best possible way because of insufficient factual information or
insufficient understanding of the optimal solution for the respective problem. Insufficient under-
standing may be an objective problem of predicting the future or a subjective problem of not
understanding the present. For the purposes of this article, both types of decisions shall be defined
as mistakes, namely those that promote short term and/or limited private gain over long term and/or
larger public gain, and those that may pursue the best overall result but turn out to be inferior at
doing that. Both types of mistakes cause overall loss to society.
In our globalizing world, national economies are no longer predominantly about the allocation of
resources on the national level. They are also competing for resources on the global level, for
example for profitable sales opportunities in foreign markets, for deals to buy natural or other
resources abroad, and for decisions about foreign direct investment. At the same time, countries have
become more interdependent, and decisions in one country may directly affect the availability and
allocation of resources, hence ultimately the level of prosperity, in another country. This magnifies
the impact of good or bad decisions and the importance of making as few mistakes as possible. To
illustrate the point, compare the strategic decisions taken by Nissan and General Motors towards the
next generation of electric automobile. While the Nissan Leaf runs entirely on electricity, which
limits its range to the life of the battery, the Chevy Volt comes with a back-up engine running on
gasoline so that it can operate beyond the life of its battery. However, the second engine in the Volt
comes at the steep price of an additional $8,000 on the sticker price. The next couple of years will
show who made the better bet and either Nissan or General Motors will sell large numbers of
automobiles not only in their respective domestic markets but potentially in many countries.
Although it is possible that the one type of car may appeal to one type of user and the other to
another and that both companies come out as winners, it is also possible that one of them will have
sunk billions of dollars in development costs into a product that does not sell (enough) and does not
recover this investment. Given the low prices of gasoline and the glut of crude oil in the market in
recent months, it is equally possible that neither of the cars will ever recover its development cost.
Needless to say, even large automobile manufacturers with deep pockets can only afford so many
of these kinds of mistakes.
It is important to understand that the problem of wrong decision-making is inherent in all economic
activities, whether in a market economy or a non-market economy. As long as decisions are taken
its output, it would not be able to sell less for more. Instead, it would just lose sales at the market price to
another firm. Only if many firms would agree to lower their output and not to pick up customers turned away
by their “competitors”, prices would go up. The latter, however, would be a cartel and not any more a
competitive market. Very nearly every decent book on competition or antitrust law contains a discussion of
price theory and competitive markets in its introductory chapters. For examples see note 42. Similar results can
also be found in the public choice literature, for example in [Maxwell L. Stearns, Public Choice and Public
Law: Readings and Commentary, LexisNexis, New York NY, 2003, at pp. 111-117].
by humans, we will encounter selfish pursuit of short term private benefit at the expense of society,
and we will encounter problems of incompetence and of *69 predicting future developments. One
may even argue that a state actor should be less incompetent, on average, than a private actor and
that governments should come up with fewer wrong decisions than companies or private investors,
simply because of the larger information base and other resources available to the government.
However, this may be countered by the problem of ownership. While private actors and investors
are using their own money and usually have to bear the consequences of their wrong decisions
themselves, civil servants in the government are usually insulated from the consequences of their
decisions and thus less motivated to do their best at avoiding mistakes.45 Whether one believes that
private individuals and investors are generally better than government officials at making the kind
of decisions we are talking about, is a question of ideology.46 However, what is beyond doubt and
ideology is the fact that both types of actors will make mistakes. Furthermore, while the future has
always been uncertain, change comes ever more quickly today, which requires that decisions are
adjusted all the time to match the needs of a changing environment and prevent a good decision from
becoming a mistake. The crucial question, therefore, is how different economic models deal with
their mistakes and how they deal with the change that is imposed on them.
The worst model at correcting its mistakes is the economy dominated by a small number of private
individuals via monopoly, dominance, or cartels. Such an economy actually rewards mistakes as
defined above. In the absence of constraints, the private individuals can and usually will pursue their
personal self-interest at the expense of public good and will prosper while society as a whole has
to pay the price. In the most extreme example of monopoly, the monopolist can and will charge
super-competitive prices for its goods or services and become extremely rich. Each individual
customer and society at large not only pay too much to satisfy their needs, but chances are that the
absence of choice, hence competitive pressure, also results in inferior quality of the goods and
services. Change, for example, in the form of technological progress, does not have to be accounted
for by the monopolist, unless the very monopoly comes under threat.47 The situation is only
45 This is one important reason why larger companies that are run by salaried CEOs rather than owners tend to tie
the compensation of their leaders to the overall performance of the company via annual bonuses and longer
term stock options. For in-depth analysis see [M. Jensen & K. Murphy, CEO Incentives – It’s Not How Much
You Pay, But How, Harvard Business Review, May-June 1990, No. 3, pp. 138-153].
46 Until recently, the answer seemed pretty obvious. After all, the Soviet Union had proven unable to compete
with the West and collapsed and even China had turned to market economy for its remarkable growth.
However, the current financial crisis has somewhat discredited Western claims of superiority and indeed, those
countries that have suffered less from the crisis seem to be the ones with more government intervention in
markets. Nevertheless, there has yet to be a planned economy or an economy with heavy government inter-
vention that reaches, let alone surpasses the level of general prosperity in the Western market economies of the
EU and North America. In this context, in can also be instructive to compare different schools of antitrust
analysis. See, for example, [Richard A. Posner, The Chicago School of Antitrust Analysis, University of
Pennsylvania Law Review 1979, Vol. 127 No. 4, pp. 925-948].
47 A good example was the supply of end-user telephone equipment in Germany in the 1970s and early 1980s.
Since Siemens was the sole – and therefore monopoly – provider licensed by the state telephone company,
Germans had to deal with large mouse-grey rotary dial phones at high prices while sleek and colorful dial tone
phones were already available in many more competitive markets at much lower prices. For background
reading see [K. Morgan & D. Webber, Divergent Paths: Political Strategies for Telecommunications in
marginally less extreme where an individual enterprise merely has a dominant position and not a full
monopoly. The case where several enterprises could compete but rather collude in the form of a
cartel may be the worst possible scenario because the monopolist at least benefits from economies
of scale even if they are not passed on to customers. The bottom line is in each of these cases that
everybody pays a higher price for lower quality, and the economic loss of the many far outweighs
the economic gains of the few.
The planned or state controlled economy is only marginally less bad at correcting its mistakes.
While this economy does not actually reward the decision-makers for their mistakes, unless there
is also corruption, it fails to adequately punish the mistakes. To the extent bureaucrats may be held
accountable for wrong decisions, this gives them an incentive to hide those decisions, for example
by deferring to committees or by suppressing data. It also gives them an incentive to avoid taking
decisions in the first place, which makes governmental structures rigid and inflexible in the face of
new data and/or external change. Simply speaking, planned economies will be slow to adopt
decisions and even slower to correct them once they turn out to be inferior. The Soviet Union was
full of examples.
This brings us to the market economy and the question why large numbers of individually small
sellers negotiating with large numbers of individually small buyers should be inherently better at
understanding how best to allocate resources in the present environment and how best to deal with
change in the future. One could even argue that the very fact that none of the buyers or sellers is
individually large naturally limits their ability to research and process today’s data and to hire the
most competent experts at predicting future trends. However, this would completely misunderstand
the power of the market. Much like a match between a grandmaster of chess and a supercomputer,
the invincible power of the market relies on its ability simply to try out every possible alternative.
We may go as far as saying that the market, compared to the experts, is not very smart at all and
makes lots of inferior choices. However, while the expert has to rely on his or her expertise to come
up with the best possible solution, one move at a time, the market relies on an infinite number of trial
and error moves to find the best possible solution. While individual buying and selling decisions in
an open market place may not look very smart at all, the aggregate result of all buying and selling
decisions in that market has proven superior to any other form or method of allocating scarce
resources today and accounting for change tomorrow.
“Throughout recorded history, there has never been a serious practical alternative to free
competitive markets as a mechanism for delivering the right goods and services to the right
people at the lowest possible cost.” (Alan S. Blinder, Princeton)
Britain, France and West Germany, West European Politics 1986, Vol. 9 No. 4, pp. 56-74].
Market economies have their own problems, however. Two of the most important shortcomings of
the market are the failure to account for *70 externalities and the trend towards concentration.48
Both of them have to be accounted for by a country that seeks to improve its economic performance,
and to promote sustainable growth, overall prosperity, and the gradual reduction of income
disparities.
Externalities are sometimes also called “spillover effects”. They occur when some of the costs or
benefits of a decision or a deal affect natural or legal persons other than the decision-maker(s) or the
partners of the deal [Don Cole, Encyclopedic Dictionary of Economics, 4th ed. 1991]. For example,
if a company is trying to reduce the cost of production by keeping the wages of the workers low, it
may experience high turnover in the form of workers leaving for better paid positions elsewhere, as
well as difficulty in recruiting skilled and motivated replacements. This would be an internality, as
it affects the situation of the decision-maker itself. By contrast, if the same company reduces the cost
of production by releasing waste water unfiltered into a nearby stream, this may have no impact on
the decision-maker itself as long as there are no governmental or other sanctions. The pollution
would be a negative externality, as it negatively affects the situation of the neighbors and other
downstream users of the water.49 As the example shows, the problem with externalities is the dis-
connect between those who take the decisions and those who suffer the consequences. In an un-
regulated market economy, there is an incentive for decision-makers to ignore negative externalities
for private profit. This, in turn, creates a justification for government interference in the market. If
there are negative externalities, corrective action should be taken in the form of financial dis-
incentives (taxation) and/or regulation and enforcement. Conversely, positive externalities, i.e.
benefits to third parties other than the decision-maker(s) or partners of a deal, can be a justification
for government subsidies.50 [Unfortunately, taxation, regulation and/or subsidies in a country trying
to take care of externalities can create unwanted incentives to trade, for example if companies from
that country seek to re-locate production facilities abroad in order to benefit from lower levels of
taxation and/or regulation. Thus, international trade liberalization may have to be combined with
a minimum level of international harmonization of environmental and other regulation, and taxation,
to prevent the proverbial race to the bottom.]
Concentration is the problem of individuals who prefer to cooperate rather than compete. The ideal
market is one of perfect competition,51 characterized by an infinite number of small sellers
48 Externalities as well as monopoly or market power are typically among the key market failures discussed in
economics and public choice literature. See, for example, [Robert D. Cooter & Thomas Ulen, Law and
Economics, Pearson, New York NY, 5th ed. 2007, at pp. 43-45.]
49 Krugman and Wells [...] dedicate an entire chapter of their well-known textbook to negative externalities using
the example of acid rain caused by coal burning power plants and other polluters. [See Paul Krugman & Robin
Wells, Economics, Worth Publishers, New York NY, 2006, at pp. 455-474].
50 An example of positive externalities could be the social benefits of education or the environmental benefits of
the installation of solar panels by homeowners. For discussion see, for example, [Paul R. Krugman & Maurice
Obstfeld, International Economics: Theory and Policy, Pearson, Boston MA, 8 th ed. 2008, pp. 267 et seq.].
51 Bob Lane defines competition as “the struggle by firms to achieve superiority over other firms in the market-
place” and competition law as “the rules limiting the freedom by which they may do so”. See [Robert Lane,
EC Competition Law, Longman, Harlow UK, 2000, at p. 6].
constantly negotiating deals with an infinite number of small buyers (see [Chart One]), where
transactions costs tend towards zero and full information transparency prevails.
In such a market,52 each individual producer/seller is in direct and open competition with every other
producer/seller and additional sales will go to those who offer the highest quality product at the
lowest price. Since transparency is a given, consumers can actually identify the highest quality and
lowest price and since transactions costs are negligible, they can then go and contract with the
supplier who offers that quality and price, regardless of distance.
Perfect competition is rarely found in reality, of course. The number of producers or sellers and the
number of consumers or buyers is rarely infinite. More importantly, transparency is limited since
products may not be entirely comparable and consumer time for price and quality research is
52 Markets are defined in terms of products, including essentially all those products that are interchangeable from
the consumer’s point of view, and in terms of geography, covering the largest possible territory that is suffi-
ciently homogenous and not subject to significant barriers to trade or transaction costs. For example, the
market for fresh bread is rarely larger than what can be reached within a 10 minute drive from the consumer’s
home and may be as small as walking distance. Consequently, it may only include two or three bakers or shops
which sell bread. Also having a fast food outlet in the area will not be a useful substitute for consumers trying
to buy bread for their breakfast at home. By contrast, the market for large passenger airplanes is a global
market and includes Boeing and Airbus as the only producers/sellers. Military transport aircraft and their
producers are not in that market because the airlines cannot avoid high prices of Boeing or Airbus by pur-
chasing transport aircraft. As we will see later, makers of military aircraft may nevertheless curb the market
power of Boeing and Airbus to charge super-competitive prices because they can be potential entrants into the
passenger aircraft market. [...]
limited.53 Finally, transaction costs usually go up when transactions are done over a distance and
involve credit financing and other complications. More realistically, therefore, is to speak of work-
able competition or effective competition54 in markets where there are more than a few producers
or sellers and more than a few consumers or buyers, where there is a reasonably good level of
transparency, and where the transaction costs have little or no influence on purchasing decisions.
The terms workable or effective competition signal that competition in these markets may not be
perfect but it is generally working or effective enough to secure the general push for producers and
sellers to offer the highest possible quality at the lowest possible price today and in the foreseeable
future.
*72 While perfect or even just workable competition is the most beneficial situation for society as
a whole, it is sub-optimal for the producers and sellers. The only way to grow in such a market is
by working harder/longer/faster and/or better/smarter than the others. Since this is hard, some
producers or sellers will seek to avoid the competitive pressures of the market place. First, they may
seek to merge with competitors to reduce the number of producers or sellers and obtain a stronger
position in a smaller crowd (see [Chart Two]).
53 Indeed, there is an opinion that a certain level of misinformation of consumers is tolerable or even desirable,
see [M.R. Darby & E. Karni, Free Competition and the Optimal Amount of Fraud, The Journal of Law &
Economics 1973, Vol. 16 No. 1, pp. 67-88].
54 For more detailed analysis see [Phillip E. Areeda, Louis Kaplow & Aaron Edlin, Antitrust Analysis: Problems,
Text, Cases, Aspen Publishers, New York NY, 6 th ed. 2004, pp. 15-32; Bishop & Walker, supra note 42, at pp.
15-50; and Eleanor M. Fox, Lawrence A. Sullivan & Rudolph J.R. Peritz, Cases and Materials on U.S.
Antitrust in Global Context, West Academic Publishing, St. Paul MN, 2nd ed. 2004, pp. 56-76].
Once a process of consolidation begins, others come under pressure to follow suit lest their smaller
size becomes a disadvantage in negotiating with suppliers or a real or perceived disadvantage
regarding economies of scale.55 In this way, a first mover can trigger an avalanche and, as a result,
a structural shift from many competitors to an oligopoly of just a few competitors. Second, once the
number of players in a market is no longer infinite,56 the remaining companies may try to form a
cartel to fix prices, limit output, or agree on some other form of anti-competitive conduct (see [Chart
Three]). [As a consequence, no matter where the consumer goes, she will get the same mediocre
quality at the same inflated price.]
In an extreme case, a single company may become so dominant that it is essentially the only
remaining significant player in a market and, hence, a monopoly (see [Chart Four]).57
55 For a recent example see Los Angeles Times, Marriott’s Plan to Buy Starwood for $12.2 Billion Could
Trigger More Hotel Mergers, Business News, Friday, 11 March 2016.
56 Cartels tend not to work well if the number of players in the respective market is too large. Either some firms
will not participate in the cartel for fear of sanctions. Or some participants may begin to cheat, i.e. try to gain
market share at the expense of other participants by undercutting the agreed upon prices or conditions. Smaller
cartels can detect cheating firms and apply their own sanctions against them. Large cartels are rarely able to
detect who is cheating. For more elaborate discussion see [A.R. Dick, When Are Cartels Stable Contracts?,
The Journal of Law & Economics 1996, Vol. 39 No. 1, pp. 241-283].
57 Since there are several paths to dominance or monopoly, including natural growth of the most innovative and
competitive company, mergers, as well as natural monopolies, in particular in network-based industries such as
railroads and utilities, size alone should not necessarily be condemned. [Instead, the focus should be on abuse
by a dominant firm.]
Even a country that is blessed with near perfect or at least workable or effective competition in a
given geographic and product market, therefore, has to undertake steps to ensure that this compe-
tition is not gradually undermined and disappearing. This is where competition law comes into the
picture.58 Unsurprisingly, economists can demonstrate that sustainable economic growth, overall
prosperity, and gradual reduction of income disparities, are all supported by the adoption and
implementation of robust competition59 oversight. Even more important, whenever a certain product
and geographic market is not sufficiently competitive, let alone when a whole country is charac-
terized by the existence of dominant firms or monopolies in many markets and/or heavy government
intervention that is not justified as a measured reaction to correct externalities, there is much to be
gained from the introduction of robust competition oversight. Furthermore, robust competition
oversight should ideally be paired with measures to promote transparency in the market and
measures to reduce transaction costs. [...]
________
58 The literature on antitrust- or competition law fills many shelves in our libraries. Books I have personally
found particularly informative are, for example, [Areeda, Kaplow & Edlin, supra note 54; Einer R. Elhauge &
Damien Geradin, Global Antitrust Law and Economics, Hart Publishing, Portland, OR, 2nd ed. 2007; Jonathan
Faull & Ali Nikpay eds., The EU Law of Competition, Oxford University Press, Oxford UK, 3rd ed. 2014;
Andrew I. Gavil, William E. Kovacic & Jonathan B. Baker, Antitrust Law in Perspective: Cases, Concepts and
Problems in Competition Policy (2d ed. 2008); as well as Peter Roth & Vivien Rose eds., Bellamy & Child:
European Community Law of Competition, Oxford University Press, Oxford UK, 7th ed. 2013].
59 Although in the United States of America, the subject is more commonly referred to as “antitrust law”, I prefer
to use the European terminology because “competition law” is wider, capturing not only the combat against
trusts or cartels but also several other components of the fight against anti-competitive practices implemented
or attempted by private parties and even public authorities. [...]
NOTES AND QUESTIONS

1) Although robust competition rules and their enforcement will be in the best interest of society as
a whole, it is often opposed by powerful economic interests who have more to gain from the
exploitation of their dominant market position. Open borders and liberal trade regimes can overcome
some of these problems by opening relatively small and parochial domestic markets controlled by
few and powerful economic interests to global competition. Does this mean that smaller countries
should be more open to international trade and that a large economy like the U.S. has little or
nothing to gain from free trade? Who in the U.S. gains and who loses if trade is (further) liberalized?
What about society at large?
2) As explained above, international trade liberalization may have to be combined with a certain
level of international regulatory and tax harmonization, to avoid the proverbial race to the bottom.
What is meant by this and how can it be accomplished? To what extent have we been successful at
this? We will return to these questions in Part 8.
3) Ever since antitrust enforcement was defanged under President Reagan as of 1986, the U.S.
economy has been going down a path of decreased competition and increased concentration of
market power.1 As we are writing this book in 2017, ever more sectors of the U.S. economy are
dominated by just a handful of enterprises that are either not competing with each other at all or at
least not very vigorously. The results are painfully obvious. While average wages have stagnated,
exchange-rate adjusted prices in the U.S. across a wide range of goods and services, including food,
housing, transportation, telecommunication, education, health care, and many more, are nowadays
higher than in comparable economies in Europe and other parts of the world. At the same time, these
higher prices typically cannot be justified by better quality and may indeed be charged for inferior
quality, compared to other advanced economies. As a result, the average American household
nowadays is worse off than 20 or 30 years ago, and certainly worse off than the average household
in countries like France or Germany. Moreover, the U.S. are nowadays characterized by unprece-
dented levels of inequality, which means that the top 1% distort the average more and more. Nobel-
prize winner Joseph Stiglitz introduces a recent book by diagnosing that “Ninety-one percent of all
increases of income from 2009 to 2012 went to the wealthiest 1 percent of Americans – the epitome
of unequal growth. [...] This combination of growth for the very wealthy and economic stasis and
anxiety for the rest of Americans is politically volatile. [...U]nless we change course, we will be a
1 Admittedly, this was not a linear path. For detailed analysis see Robert A. Sitkol, The Shifting Sands of
Antitrust Policy: Where It Has Been, Where It Is Now, Where It Will Be in Its Third Century, 9 Cornell J.L. &
Pub. Pol’y 239, Fall 1999.
country with slower growth, ever more inequality, and ever less equality of opportunity.”1 For
further analysis see Robert B. Reich, Saving Capitalism for the Many, Not the Few, New York 2015;
4) In the above mentioned book, Stiglitz postulates that “[...T]he standard model, which assumes
perfect information, perfect competition, perfect risk markets, and perfect rationality, fails to provide
an accurate description of how various markets in our economy really work. [Recent research] on
information asymmetries and imperfections, bargaining theory and imperfections of competition,
behavioral economics, and institutional analysis [provides] a whole new perspective on the
functioning of labor, product, and financial markets, and essentially show[s] that institutions and
rules are required to force markets to behave competitively, for the benefit of all.”2 What kind of
institutions and rules could Stiglitz have in mind?
5) Although competition supervision and enforcement within the United States may have declined
over the last 30 years, the same time period saw an unprecedented liberalization in international
trade. Why does increasing competition from abroad apparently not fill in the gaps produced by
decreasing domestic competition, to curb market power of certain enterprises or industries in the
U.S.? Does this mean we should not have liberalized trade (to the same extent) or even that we
should roll back some of the trade liberalization? Why or why not?
Section 3: The Legal Framework for IBTs – a To-Do List

We just learned in Section 2 that international trade is good for many reasons, as long as it is backed
up by certain basic rules to prevent the circumvention of human rights, labor- and environmental
standards, intellectual property rights, and other achievements of more highly developed societies
and countries, via re-locating production to less regulated, that is usually less developed countries.
Therefore, adequate and efficient legal rules, including their implementation and enforcement in
practice, are needed on multiple levels if we want to maximize the benefits and minimize the harm
of our globalizing economy:
1. To begin with, we need to have the kind of basic economic constitution that protects and pro-
motes private ownership of factors of production and private enterprise. This goes far beyond a mere
guarantee of the right to private property. At the national level, it requires a wide range of suitable
legal rules, for example an efficient contract law, as well as government institutions for their appli-
cation and enforcement, in particular a well-functioning system of courts. In addition to private and
criminal laws and institutions, it also requires a system of effective administrative laws and courts
to limit the power of the state, maintain taxes at reasonable levels, and manage public borrowing and
1 Joseph E. Stiglitz, Rewriting the Rules of the American Economy – an Agenda for Growth and Shared Pros-
perity, New York 2016, at pp. viii, xii and 5. A recent study by the OECD supports the notion that increasing
levels of inequality will eventually undermine economic growth and overall wealth, see F. Cingano, Trends in
Income Inequality and Its Impact on Economic Growth, OECD Social, Employment and Migration Working
Paper No. 163, 9 December 2014. See also Simon Reid-Henry, The Political Origins of Inequality - Why a
More Equal World Is Better for Us All, Chicago 2015.
2 Stiglitz, at pp. 10-11.
spending. These topics have been competently treated elsewhere1 and would go far beyond the scope
of the present work.
2. To counterbalance the forces of private, hence egotistical capitalism, and to manage externalities
of economic activity, we need adequate and effective rules and institutions to protect “the commons”
at the national and at the international level.2 This includes various forms of environmental protec-
tion. To ensure a level playing field between the economic actors, we also need rules and institutions
for the protection of employees and consumers, who tend to be the weaker parties in transactions
with larger enterprises.3 Additionally, we need adequate and effective rules and institutions for the
prevention of anti-competitive behavior by dominant firms, as well as anti-competitive collusion
by multiple firms.4
3. Finally, since the parties to an international business transaction are, by definition, located in
different countries and, therefore, subject to different national rules and institutions, we need rules
and possibly institutions to take care of the inherent conflicts between the application of one set of
national rules versus another. In other words, we need to determine in each and every case whether
an IBT shall be subject to seller’s or to buyer’s contract laws – or maybe a third and neutral
country’s rules? or an international set of rules? – and to what extent the respective home countries
of the parties to the transaction can or should apply their other legal rules, for example regarding the
protection of intellectual property rights, health and safety standards, environmental protection, etc.
1 The ideological battle over more versus less government involvement in the economy has been fought for over
a century. Among the promoters of a laissez-faire approach with minimal government regulation and inter-
vention were F.A. Hayek and Milton Friedman (see, in particular, F.A. Hayek, The Constitution of Liberty,
Chicago 1960; and Milton Friedman, Capitalism and Freedom, Chicago 1962). By contrast, the case for a
more active involvement of the state, and indeed the notion of counter-cyclical government spending, was
chiefly promoted by John Maynard Keynes (John Maynard Keynes, The General Theory of Employment,
Interest, and Money, ??? 1936). For a modern introduction to the subject see, for example, Thomas Piketty,
Capital in the Twenty-First Century, Harvard University Press, 2014.
2 For the national level see ???. The definitive work on the global commons is Elinor Ostrom, Governing the
Commons: The Evolution of Institutions for Collective Action (Political Economy of Institutions and
Decisions), Cambridge (UK) 1990.
3 For a discussion of the global implications see, inter alia, Frank Emmert, Labor, Environmental Standards and
World Trade Law, UC Davis Journal of International Law & Policy, 2003, Vol. 10, No. 1, pp. 75-167.
4 The importance of robust antitrust or (pro-)competition rules and institutions has recently been highlighted by
Robert Reich who shows that the situation in the U.S. at the beginning of the 21 st century is characterized by
severely constrained competition in many areas of economic activity. The results include a shift of investment
away from technological innovation towards political influence in an effort to protect market power. The
pollution of the political process, in turn, has fueled the highest level of inequality and a sharp right turn in the
political discourse. See Robert Reich, Saving Capitalism: For the Many, Not the Few, New York 2015. The
importance of robust antitrust or (pro-)competition rules and institutions, moreover, is acknowledged on the
left and right of the political spectrum. Even Milton Friedman, the poster boy of the laissez-faire and small
government camp, understood that only one kind of economic organization “provides economic freedom
directly, namely, competitive capitalism” and is indispensable for “political freedom because it separates
economic power from political power and in this way enables the one to offset the other.” Milton Friedman,
Capitalism and Freedom, Chicago 1962, at p. 9 (emphasis added); see also p. 16. An economic systems
without robust antitrust or (pro-)competition rules and institutions, like a political system without checks and
balances, is subject to the tyranny of the few over the many.
Last but not least, we need rules that tell us how and where a dispute between the parties about their
respective contractual rights and obligations should be settled. All of these subjects will be treated
in the current volume, although some in more detail than others.
Conflicts between public law rules of different countries are resolved by recourse to international
principles dealing with national sovereignty and jurisdiction. Pursuant to the territoriality
principle, a country can regulate all activities that take place within its borders, which include
embassies in foreign countries, as well as ships and aircraft flying the flag of the respective country.
Hence, anybody driving on U.S. roads has to observe the posted speed limits, regardless of their
nationality. Along the same lines, anybody manufacturing or selling goods inside the U.S. has to
observe U.S. federal and/or state standards for health and safety and the protection of the environ-
ment. Finally, U.S. federal law can prohibit smoking on commercial aircraft registered in the U.S.
regardless of where they may be at any given time around the globe.
On the basis of the active personality principle, countries can also regulate activities of their
citizens/nationals wherever they take place. For example, the U.S., in principle, applies its tax laws
to U.S. citizens wherever the taxable revenue is made and regardless of the place of residence of the
taxpayer. By contrast, many other countries only tax the worldwide income of individuals or
corporations that have their place of residence or incorporation within their territory, as well as any
income that is earned within their borders. Hence, Germans living abroad do not pay taxes to the
German authorities, unless they have some income source in Germany. However, Germany does
make use of the active personality principle in criminal law by subjecting criminal activities of
German citizens to its penal code, regardless of where they are committed.
Next is the so-called passive personality principle, which allows countries to apply their laws in
cases where something is done to one of their citizens, even if the act is committed abroad. To
illustrate the application of these first three principles of jurisdiction – and the potential conflicts –
we could imagine a German and a British citizen getting into a fight in a bar in Australia. If the
German causes injury to the Briton, Australia can apply its criminal law based on the territoriality
principle. However, Germany can also prosecute the offender based on the active personality
principle. Finally, the United Kingdom could exercise jurisdiction on the basis of the passive
personality principle.
In this context, we should distinguish three types of jurisdiction of a country. What we have been
talking about is the so-called prescriptive jurisdiction, allowing a country to regulate a matter. If a
country regulates a matter that does not fall under the territoriality principle or the active personality
principle, we sometimes speak of an exercise of extraterritorial jurisdiction, which is often frowned
upon by the other countries concerned. For example, the U.S. applies its antitrust laws to the conduct
of foreign companies if “such conduct has a direct, substantial, and reasonably foreseeable effect”
on U.S. domestic or international trade and “such effect gives rise to a claim under the [Sherman
Act].”1 This is more readily justifiable if the foreign companies are colluding to fix prices in the U.S.
1 See Foreign Trade Antitrust Improvements Act of 1982, 15 U.S. Code § 6a - Conduct involving trade or
commerce with foreign nations, Pub. L. 97–290, title IV, §402, Oct. 8, 1982, 96 Stat. 1246. For discussion see
Russell J. Weintraub, The Extraterritorial Application of Antitrust and Securities Laws: An Inquiry into the
Utility of a Choice-of-Law Approach, 70 Tex. L. Rev. 1799 (1991-1992); and Richard W. Beckler & Matthew
market. But how about an agreement between a Canadian and a Mexican firm that the one shall
supply only the Northern States and the other only the Southern States of the U.S.?
Having (prescriptive) jurisdiction over an issue is only the first step, however. Being able to exercise
it, is the next required step and cannot be taken for granted. In our bar fight example, the perpetrator,
presumably, would be in the hands of the Australian authorities and without cooperation of these
authorities, neither the German nor the British prosecutors would be able to get their hands on him.
Should Australia decline to intervene, it is conceivable that the crime would go unpunished, lest the
perpetrator should have the urge of relocating to Germany or the UK. To minimize such cases, the
international principle of aut punire aut dedere, sometimes also called aut dedere aut judicare was
developed, which requires a country either to prosecute or to extradite a person, if so requested. 1
Similarly, in the antitrust example, the question becomes one of enforcement jurisdiction. Large
markets like the U.S. or the EU can usually enforce their business and trade rules by denying access
to companies if they don’t comply. In this way, the extraterritorial application of U.S. antitrust laws
is something foreign companies can only avoid if they are willing to forsake access to the U.S.
market.
Finally, we distinguish the notion of judicial or adjudicative jurisdiction, which deals with the
question whether the courts of a particular country have jurisdiction over a particular dispute and,
if so, which specific court(s) in that country need(s) to be approached. This will be discussed in
some detail in Chapter 10.
The principles on prescriptive and enforcement jurisdiction primarily determine whether a country
has a legitimate basis for the exercise of national sovereignty in the form of legislative and/or
executive powers. The other side of the same coin is the goal is not to leave any geographic spaces
or activities anywhere in the world entirely outside of any country’s jurisdiction. Such lawless
spaces are undesirable because they might become safe havens for wanted individuals and illegal
activities.
Although the rules on the exercise of prescriptive and enforcement jurisdiction are reasonably well
developed and widely accepted, at least two problems can and do occur in practice. First, there are
many instances in which more than one country wishes to exercise its jurisdiction and apply its
rules, which may very well be incompatible with the rules applied by one or more other countries
to the same activity. In our tax example above, if an American lives and works in Germany, she
would be subject to income tax applied both by Germany and by the United States. Fortunately for
her, these two countries have concluded a so-called double taxation agreement pursuant to which
the jurisdictional conflict is resolved and the income is not taxed twice.2
H. Kirtland, Extraterritorial Application of U.S. Antitrust Law: What Is a “Direct, Substantial, and Reason-
ably Foreseeable Effect” under the Foreign Trade Antitrust Improvements Act?, 38 Tex. Int'l L.J. 11 (2003).
1 See, for example, Cherif Bassiouni & Edward Wise, Aut Dedere Aut Judicare: The Duty to Extradite or
Prosecute in International Law, The Hague 1995.
2 To be precise, the typical DTA provides for the country where the income is procured to tax it first, according
to its applicable tax rules. The other country, typically the country of residence, nationality or incorporation,
will then add its own taxes only if the tax rate in the first country is lower. The effect is that the income is
The opposite problem occurs when neither of the countries who can potentially exercise their
jurisdiction is interested in doing so. This could result in an activity being entirely unregulated. A
well-known example is the original tuna-dolphin dispute between the U.S. on the one side and
Mexico, as well as Thailand, on the other. Fishing vessels from Mexico and Thailand were using
the so-called purse seine fishing method to catch yellowfin tuna in the high seas of the Eastern
Pacific. Essentially, this involves encircling a large school of tuna with a huge net and roping in
everything that gets caught. Since dolphin feed on tuna, the fishermen were actually using the
dolphin, swimming at the surface, the find the tuna, and many dolphin ended up in the nets together
with the tuna. While the fishermen would discard the unwanted bycatch, including the dolphin, the
latter had typically drowned by the time the nets were roped in. This resulted in hundreds of
thousands of incidental dolphin kills every year. Since the tuna industry provided jobs and export
revenue, neither the flag state(s) of the vessels, nor the home countries of the fishermen were
interested in regulating the activity. Therefore, in 1972, on the basis of the Marine Mammal
Protection Act, the U.S. initiated a ban on the importation of tuna and tuna products from Mexico
and Thailand. Both countries then initiated the dispute settlement procedure under the General
Agreement on Tariffs and Trade (GATT) with the argument that there was nothing wrong with the
tuna itself and that the dolphin caught in the high seas did not come under the jurisdiction of the U.S.
As a consequence, the incidental killing of the dolphin was none of the U.S.’s business. This stance
was initially confirmed by the GATT dispute settlement panel. In response, the U.S. initiated
“dolphin-safe” labeling to enable consumers to shun the products that did not obtain this label. After
the entry into force of the WTO Agreements and the creation of the Appellate Body under the WTO
Dispute Settlement Understanding, which replaced anonymous experts with well-known “judges”,
a second tuna-dolphin case resulted in the recognition that the dolphins in the high seas, instead of
being nobody’s business, were everybody’s business because they qualified as “exhaustible natural
resources” under Article XX of the GATT.1 The second tuna-dolphin decision, thus, became an
example of the recognition of universal jurisdiction in exceptional cases that are either such gross
violations of international norms owed to all countries and peoples that it is for every country to
prosecute them (this applies, in particular, to crimes against humanity, such as genocide, torture,
apartheid, etc.), or that would otherwise fall outside of proper regulation and supervision altogether.
always taxed at the higher of the two applicable rates but not actually twice. For example, if country A has a
tax rate for the income in question of 25% and country B has an applicable tax rate of 35%, country A would
charge its full tax of 25% and country B would add another 10% of tax to bring the total tax burden up to its
higher rate of 35%. Without a DTA the tax payer in such a case would be subject to a total tax of 25+35=60%.
For further analysis see Roy Rohatgi, Basic International Taxation, Vols. I and II, 2nd ed 2007.
1 For detailed analysis see John H. Jackson, Dolphins and Hormones: GATT and the Legal Environment for
International Trade After the Uruguay Round, 14 UALR L.J. 429 (1991-1992). For further reading see also
Robert Howse, The Appellate Body Rulings in the Shrimp/Turtle Case: A New Legal Baseline for the Trade
and Environment Debate, 27 Colum.J.Envtl.L. 491 (2002); and Joanne Scott, On Kith and Kine (and
Crustaceans): Trade and Environment in the EU and WTO, in Joseph Weiler (ed), The EU, the WTO and the
NAFTA - Towards a Common Law of International Trade, Oxford 2000, at pp. 125-167.
Section 4: Different Levels of Legal Rules Governing IBTs

I. International Law – Its Scope and Applicability
Literally speaking, “international” law refers to the law “between nations”, i.e. the law governing
the relations between different nation states. The earliest emanations of international law can be
traced back almost 5,000 years in the form of border agreements, peace agreements, and, soon
afterwards, agreements dealing with trade. Since then, hundreds of thousands of agreements have
been concluded between different nation states on subjects ranging from war and peace, diplomacy,
trade and development, human rights, natural resources, food, the environment, science and
technology, to the use of outer space.1
The reader should note the use of the term “agreements” rather than “laws”. Indeed, since there is
no international legislature, international law, by-and-large, does not consist of laws in the
traditional sense. The principal sources of international law are defined in Article 38 of the Statute
of the International Court of Justice:
“a. international conventions, whether general or particular, establishing rules expressly
recognized by the contesting states;
b. international custom, as evidence of a general practice accepted as law;
c. the general principles of law recognized by civilized nations;” (emphasis added)
As can be seen, all three principal sources are characterized by voluntary acceptance by the respec-
tive states. The very notion of state sovereignty implies that states generally do not accept a higher
authority or higher norms to bind them. As the name suggests, “international” law is, therefore, not
only the law applicable “between” nations or states, but the law applicable on the basis of voluntary
agreement between them.
To be sure, there are exceptions to the principle of voluntary acceptance or submission. A small but
growing subgroup of international law that is binding on states even without or against their will has
been referred to as “supranational” law, with “supra” indicating some form or higher level. This
term is normally used for the law that is adopted by an international organization, regional or global,
in some form of majority voting, and becomes binding upon all member states, including those that
voted against it or abstained from voting. The exception to the principle of state sovereignty is
justified on the basis of the voluntary accession of the state to the international organization and its
acceptance of the decision-making procedures and other rules of that organization.2 Furthermore,
1 For information on who can make treaties, in addition to states, how they are made, to whom they apply, how
they should be interpreted, and how they can be avoided or terminated, see, for example, Duncan Hollis (ed.),
The Oxford Guide to Treaties, Oxford University Press, 2012.
2 Outside of this, there are very few norms of international law that are binding upon all states, regardless of
their consent. These are commonly referred to as “ius cogens”. They include the prohibition of the use of force
in international relations, the prohibition of torture, the prohibition of genocide, and the prohibition of
apartheid. For further analysis see Maarten den Heijer & Harmen van der Wilt (eds), Netherlands Yearbooks
of International Law 2015 - Jus Cogens: Quo Vadis, Asser Press, The Hague 2016, with contributions by den
Heijer & van der Wilt, Shelton, Linderfalk, d’Aspremont, Orakhelashvili, Kadelbach, Kleinlein, Santalla
even if states delegate far-reaching powers to an international organization, they do not forfeit their
sovereignty – hence their statehood – under international law, as long as they retain the right to
(jointly) reverse (some of) the delegations of powers or leave the organization altogether.
International and supranational law have in common that they are as such only binding upon a state,
i.e. for its government. The question whether or not a rule of international or supranational law is
also binding in a state, i.e. for its citizens, public authorities, and ordinary courts, is not a question
of international law but one of national (constitutional) law. At least in theory, states around the
world fall into two groups when it comes to the method applied in this respect. A few countries
generally do not distinguish between domestic and international law, as long as both have been
properly adopted or approved by the respective branch(es) of the national government. These states
are called “monist” states. By contrast, the majority of states around the world follow a “dualist”
tradition. For them, rules of international law that have been approved (= ratified) by the respective
branch(es) of government require an additional act of transformation in order to become part of the
law of the land and thus able to create rights and obligations for natural and legal persons that have
to be respected by the administrative authorities and enforced by the domestic courts. Charts 1-5 and
1-6 illustrate the monist and dualist traditions.
Vargas, Kotzé, Costello & Foster, Cottier, Vadi, Ryngaert, Schutgens & Sillen, and Krommendijk.
The importation of a rule of international or supranational law into the national legal order – i.e. into
the “law of the land” – either by a general constitutional provision (monist tradition) or by a specific
act of transformation (dualist tradition) is only the first step, however, towards the creation of
enforceable rights and obligations of individuals. The importation creates merely a potential or
possibility for the legal rule(s) to create such rights and obligations, which is called “direct
applicability” in the European legal tradition. In addition, the rule(s) have to be suitable in their
substantive provisions and choice of language to create these rights and obligations. This is called
“direct effect” in Europe. More specifically, the rules have to be i) unconditional, ii) clear and
precise, and iii) objectively suitable to be applied by national administrations or courts without a
need for (additional) legislative intervention. 1
Most countries around the world, including virtually all Member States of the European Union, as
well as Russia and the countries of the former Soviet block, and China, follow the dualist tradition.
For them, an international convention or agreement or other rule of international or supranational
law first has to be accepted or ratified as a document to have any relevance. Second, there needs to
be an act of transformation to bring that document or the specific rules in it from the sphere of
politics with rules that are only binding upon the state into the sphere of the law of the land, i.e. the
rules that are binding in the state. Once this is accomplished, the document or specific rule is
considered to have “direct applicability” in the respective state. However, rights and obligations for
individuals are created only if the specific language of a specific provision – and/or the language in
the act of transformation – is also unconditional, clear and precise, and suitable to be applied by
national authorities or courts without further legislative intervention. If this is the case, that article
or paragraph or part of the rule is considered to have “direct effect” for and against individuals.
By contrast, the United States of America, in principle, follow the monist tradition. For them, a rule
of international or supranational law also has to be accepted or ratified to have any relevance.
However, in principle, the rule automatically gains direct applicability with its acceptance or
ratification2 and the only remaining question is whether the rule is unconditional, clear and precise,
and suitable to be applied by national authorities or courts without further legislative intervention.
1 Sometimes it has been argued that the rules of an international agreement also have to be “intended” to create
rights and obligations directly for individuals. However, this would introduce a subjective element and allow
states to avoid obligations retroactively by claiming that they never intended to create rights for individuals.
Unless the intention of the state was clearly manifested one way or the other at the time when the agreement
was signed and ratified, the objective standard of suitability should be applied. For an excellent analysis of
U.S. constitutional law on the matter see Jordan J. Paust, Self-Executing Treaties, Am.J.Int’l L., Vol. 82, 1988,
pp. 760-783. The European approach is best explained by J.A. Winter, Direct Applicability and Direct Effect –
Two Distinct and Different Concepts in Community Law, Common Market Law Review, Vol. 9, 1972, pp.
425-438.
2 This is evident from the “Supremacy Clause” in Article VI (2) of the U.S. Constitution: “This Constitution,
and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which
shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges
in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary
notwithstanding.” See also Justice Marshall in Foster v. Neilson, 27 U.S. (2 Pet.) 253, 314 (1829) and the
discussion in Henkin, pp. 199 et seq. See Louis Henkin, Foreign Affairs and the US Constitution, Clarendon
Press, 2nd ed. 1997; as well as Curtis Bradley, International Law and the U.S. Legal System, Oxford University
Press, 2nd ed. 2015.
If a rule is both applicable and suitable to create rights and obligations for and against individuals,
it is considered to be “self-executing”.
The monist and dualist traditions create a tension whenever one or more monist states enter into an
international agreement with one or more dualist states. If the agreement contains unconditional and
clear and precise obligations that are suitable to create rights and obligations for and against indi-
viduals in the national legal orders, these rules become part of the law of the land in the monist state
automatically and create enforceable rights and obligations with the ratification of the agreement.
By contrast, the mere act of ratification does not create direct applicability in the dualist states and,
therefore, no enforceable rights and obligations for individuals. Only when and to the extent the
national parliaments of the dualist states adopt the necessary transformation acts, will these rights
and obligations become effective. A good illustration of the problem can be found in the practice
of the former Soviet Union to ratify all kinds of international human rights agreements without ever
adopting the domestic legislation that would have effectively provided democratic and other rights
for its citizens. To the outside world, the Soviet government played the role of the constructive inter-
national partner without, however, having to face the music domestically.
Unfortunately, international law is poorly suited to remedy this imbalance and the hypocrisy of
states that ratify international agreements and subsequently do not implement them at all into
domestic law or do so only in part or with considerable delay. The tools available to the other states,
i.e. the monist states where the new rules are automatically applicable and the dualist states that have
duly implemented them, are limited to the crude instruments of international law. Besides certain
diplomatic measures and “naming and shaming”, they mainly consist of tit for tat, i.e. reciprocal
denial of the rights and obligations. This works better in some areas than in others. Not much is
gained, for example, if one state threatens another by saying, “If you torture your citizens, I’ll torture
mine!”. And even in trade law, where retaliation by suspension of trading rights usually works for
a quick resolution of disputes between the U.S. and the EU, it is less impressive for the U.S. to be
threatened with a trade embargo by New Zealand than the other way around.
For these reasons, ever fewer states are nowadays following truly monist principles. In particular,
the United States are almost systematically adding a provision to their congressional ratification
laws pursuant to which the rules of the respective agreements can only be self-executing if
reciprocity is ensured, i.e. if the other signatory states also grant self-executing status or hold the
provisions directly applicable and directly effective. Since this is very nearly never the case,1 some
are already considering the United States to have joined the club of dualist states. 2
1 The one country that is consistently following the monist tradition is Switzerland, where even the WTO Agree-
ments, to the extent they contain clear and precise and unconditional obligations, are deemed to provide
directly enforceable rights for individuals and companies. The same is true, at least in theory, for most of the
Muslim countries, on the basis of the principle of pacta sunt servanda (contractual promises must be honored)
enshrined in the Quran, the supreme source of Islamic law (there are, in fact, numerous references in the
Quran, for example in Surah 23:8). By contrast, the majority of other countries around the world follow the
European dualist tradition, either as former colonies of the European powers or by adoption of major principles
of European law.
2 For further discussion of the U.S. approach see Chapter 10, pp. ??? and ???.
As a result, international agreements nowadays rely in almost every state around the world on an
act of transformation before they can have any effects in domestic law. This act of transformation
can take different forms. An authoritarian dictator may just need to sign an executive order.
However, democratic states usually require an (additional) act of parliament, i.e. the adoption of a
piece of legislation. Such legislation can follow one of the three following basic models:
i) First, the national legislation can be limited to a short statement pursuant to which the inter-
national agreement itself, as attached in the original form and language, becomes part of the
law of the land;
ii) second, the national legislation can refer to the international agreement but then proceed to re-
state the (translated) language of that agreement in more or less precise terms with additional
provisions about national procedures etc.
iii) third, the national legislation can proceed to bring about the required changes in different
national laws without ever referring to the international agreement.
As can be seen quite easily, only the first format of transformation ensures that different administra-
tors and different judges in different signatory states have at least the same text in front of them
when asked to enforce rights or obligations on the basis of the international agreement. The problem
that different administrators and different judges in different states have a different legal education
and different traditions in their work and, therefore, may approach identical legal language
differently, is exacerbated with the second and third format of transformation, where they are not
even given the original text of the agreement or where they may not even know that a change in the
national laws was made in response to an international obligation.
Furthermore, the rights of natural or legal persons in a state will be impaired in different ways if the
state is late in adopting the act of transformation or if the act is incomplete or incorrect in the
implementation of the international agreement. Differences between an international agreement and
an act of implementation are usually not the result of negligent or incompetent translators. Rather,
they are the result of domestic politics, for example if an international obligation would be widely
unpopular in a state, or would cost significant amounts of money or jobs, or would conflict with the
interests of powerful lobbies. However, such differences also mean that a private individual or
company who relies on the rights provided by the international agreement, for example the right not
to be discriminated against, may find those rights unavailable on the basis of the faulty trans-
formation act. In a monist state, at least in theory, the individual and her lawyer should be able to
make a direct reference to the actual agreement and overcome the defects in any acts of trans-
formation. However, in a dualist state, it may be difficult or even impossible to persuade a judge to
look at the agreement behind a legislative act of transformation to understand that the rights should
be understood in ways that are not very clear in the transformation act, not mentioned in it at all, or
even entirely different from the language of the transformation act.
These issues need to be kept in mind as we proceed to analyze the application of various inter-
national agreements and principles of international law in different countries in the context of
international business transactions. In particular, we must never take it for granted that a particular
rule of international law is going to be automatically and uniformly applicable in different countries
where the parties to an IBT may be located.
II. (Public) International Trade Law vs. (Private) International Business Law
While international trade law regulates the rights and obligations of states and their respective public
authorities, international business law deals with the rights and obligations of corporations and other
private entities engaged in international business transactions. Although our focus will be on inter-
national business law, some discussion of international trade law is important since obligations put
on states, for example to provide duty free access to certain goods or to refrain from discriminatory
taxation, can create rights for private individuals and corporations doing business in or with these
states.
International trade law consists of three major levels of agreements. First, on the global scale, the
most important originator of trade law is the World Trade Organisation (WTO). An introduction to
the WTO Agreements and their application is provided in Part 8. The United Nations Conference
on Trade and Development (UNCTAD), with its focus on the needs of developing countries, has
mostly generated research and technical assistance documents and activities. By contrast, the United
Nations Commission on International Trade Law (UNCITRAL) is an active producer of
international agreements, albeit more in the field of international business law. The most important
example of the latter is the United Nations Convention on Contracts for the International Sale of
Goods (CISG), the centerpiece of our explorations in Part 2.
Second, on the regional scale, several organizations are extremely active in generating trade laws,
either via agreements or via decisions of the organizations themselves. The most important is the
European Union, which represents its 28 member states in external trade relations, both multilateral
(in particular at the WTO) and bilateral (for example the free trade area between the EU and South
Korea or the customs union between the EU and Turkey). Examples of other regional trade
organizations with less expansive powers are the Economic Community of West African States
(ECOWAS), the Association of Southeast Asian Nations (ASEAN), the Mercado Común del Sur
(Mercosur) of five Latin American states, as well as the North American Free Trade Area (NAFTA).
Much of EU law enjoys direct applicability and direct effect with supremacy over (conflicting)
national laws and, therefore, can generate direct rights and obligations for individuals trading in and
with the EU. By contrast, trade laws generated by other regional trade organizations usually require
transformation into national law and are only applicable to the extent and in the form they have been
implemented domestically.
Third, a large and rapidly growing number of bilateral trade agreements have to be taken into
account by anyone engaged in international business transactions. For example, the U.S. currently
has free trade agreements in force with 20 countries including Australia, Chile, Colombia, Costa
Rica, Israel, Korea, Panama, and Peru. Such FTAs typically provide for duty free trade for a broad
range of goods originating in either of the two countries. Businesses wishing to benefit from these
advantages typically have to follow certain procedures, for example regarding certificates of origin.
A fourth category of rules does not, strictly speaking, come under the rubric of international trade
laws. These are the national rules about external trade, for example customs codes, export restric-
tions, and the like. For the U.S., the most important statutes regulating foreign trade are listed on the
website of the United States Trade Representative (USTR) at https://ustr.gov/about-us/trade-tool-
box/trade-laws. Another page on this website has the current information about free trade agree-
ments ratified by the U.S.: https://ustr.gov/trade-agreements/free-trade-agreements. The European
Union has similar listings at http://eur-lex.europa.eu/browse/directories/legislation.html.
III. Private International Law

The term “private international law” is somewhat of a misnomer for the issues dealt with by the rules
generally associated with this area of law. The rules are neither part of traditional private law, such
as contracts or torts. Nor are they separate international rules for relations between nations. Rather,
private international law provides rules to settle conflicts of laws between different states, i.e.
whether the national substantive law rules of one country – for example German contract law –
should apply to an international business transaction rather than the corresponding substantive law
rules of another country – for example U.S. contract law. In addition to conflicts of law, private
international law also deals with conflicts of (judicial) jurisdiction, in particular whether a dispute
between an individual or a corporation located in one country with an individual or a corporation
located in another country should be brought to the courts of the former or the latter. The only thing
“private” about these rules is the fact that they deal with legal relationships between private parties,
i.e. natural or legal persons other than government entities or international organizations. 1
The private legal relationships covered by private international law can be classified into three types.
i) the relationship is non-commercial for both sides, for example related to family law or trusts
and estates;
ii) the relationship is non-commercial for one but commercial for the other side, also knows and
business-to-consumer or B2C contracts;
iii) the relationship is commercial for both sides, also known as business-to-business or B2B
contracts.
Governments tend to have relatively far-reaching rules to regulate private relationships in the first
two categories, partly to protect the weaker side, for example the consumer in a B2C relationship
1 For further analysis see, for example, Talia Einhorn, Private International Law in Israel, Kluwer Law Inter-
national, 2nd ed. 2012; James Fawcett & Janeen Carruthers, Cheshire, North & Fawcett: Private International
Law, Oxford University Press, 14th ed. 2008; James Fawcett, Maire Ni Shuilleabhain & Sangeeta Shah, Human
Rights and Private International Law, Oxford University Press, 2014; Alex Mills, The Confluence of Public
and Private International Law: Justice, Pluralism and Subsidiarity in the International Constitutional
Ordering of Private Law, Cambridge University Press 2009; Jan L. Neels: The Nature, Objective and
Purposes of the Hague Principles on Choice of Law in International Contracts, Yearbook of Private
International Law, Vol. XV 2013/14, pp. 45-56; Symeon Symeonides, American Private International Law,
Kluwer Law International, The Hague 2008.
or the children in family law, and partly to ensure that certain procedures are followed, for example
with regard to marriage and divorce. By contrast, governments tend to leave wide discretion to the
parties of the third type of relationships or, to say it differently, the freedom of contract is very broad
in B2B transactions and includes, for example, the right to choose the applicable substantive law and
to choose the courts or arbitration services for settlement of any disputes. This is why the area of law
is sometimes also referred to as choice of laws. However, the most accurate label for the entire body
of rules would still be conflict of laws.
The most important producer of rules in the field of private international law is the Hague Con-
ference on Private International Law (HCCH), also called the World Organisation for Cross-
Border Co-Operation in Civil and Commercial Matters. 80 countries and the EU are members and
another 68 countries have signed and ratified at least some of the conventions developed by the
HCCH. Among the agreements or conventions the HCCH has developed are, for example, the 1978
Convention on the Law Applicable to Matrimonial Property Regimes, the 1973 Convention on the
Law Applicable to Maintenance Obligations, and the 1973 Convention on the Recognition and
Enforcement of Decisions Relating to Maintenance Obligations. Of interest in the context of
international business transactions and international commercial litigation are, in particular, the 2005
Conventions on Choice of Court Agreements, the 1986 Convention on the Law Applicable to
Contracts for the International Sale of Goods, the 1978 Convention on the Law Applicable to
Agency, the 1965 Convention on the Service Abroad of Judicial and Extrajudicial Documents in
Civil and Commercial Matters, the 1970 Convention on the Taking of Evidence Abroad in Civil and
Commercial Matters, and the 1971 Convention on the Recognition and Enforcement of Foreign
Judgments in Civil and Commercial Matters.1
The problem with HCCH conventions, as with all sources of international law, is the fact that states
are in no way obliged to ratify them, even if they are members of the HCCH and have participated
in the drafting of the conventions. Naturally, without ratification, states have no legal obligation, let
alone any kind of enforceable obligation, to follow the rules enshrined in a given convention.
Although its language may not be particularly controversial, a convention like the 1986 Hague
Convention on the Law Applicable to Contracts for the International Sale of Goods, as of September
2017, has only attracted ratifications by Argentina and Moldova and, since its entry into force
requires at least 5 ratifications, has not even entered into force although it has been open for
signature and ratification for 30 years.
However, it would be quite unintelligent to dismiss the work of the HCCH merely because some if
its conventions have attracted little formal support. For example, the 1971 Hague Convention for
the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters
(Documents, p. ???) has been ratified only by Albania, Cyprus, Kuwait, the Netherlands, and
Portugal. Notably absent, as with many HCCH conventions, is a ratification by the United States.
However, Sections of the 1962 Uniform Foreign-Country Money Judgments Recognition Act, as
revised in 2005 and implemented in many U.S. jurisdictions (Documents, p. ???) are largely
congruent with the 1971 Convention.
1 All HCCH Conventions and the countries having ratified them are accessible on the website of the
organization at https://www.hcch.net/en/instruments/conventions.
Thus, the significance of some HCCH conventions derives from their broad support as evidenced
by a large number of ratifications (the 1965 Hague Convention on the Service Abroad of Judicial
and Extrajudicial Documents in Civil or Commercial Matters, Documents p. ???, is a case on point).
By contrast, the significance of other HCCH conventions derives from the fact that they codify
general principles of law as recognized in their national law by a large number of states in different
parts of the world and with different legal systems. Unfortunately, it can be quite difficult to deter-
mine whether a convention with limited formal support is nevertheless reflective of widely
recognized principles. In practice, this question can become relevant in two distinct settings. First,
in case of international commercial litigation, the court where a case is brought will look at its own
national law to determine whether it has jurisdiction and, if the answer is in the affirmative, whether
its national procedural rules on service abroad, taking of evidence, etc., have been observed and
which substantive law should be applied to the case based either on an effective choice by the parties
or, if there is no such choice or the choice is ineffective, based on the national rules of private inter-
national law. We will discuss in Chapter 10 that public courts in any country around the world will
always apply their national rules of procedure and will always have a preference for the application
of their national substantive law rules. Nevertheless, they may sometimes come to the conclusion
that party choice or private international law rules force them to apply some other substantive law.
The outcome of such a procedure may then become quite unpredictable and significant additional
costs and delays may be incurred.
The second setting, if there is a valid arbitration clause or agreement between the private parties to
a transaction and dispute, would be international commercial arbitration. In this alternative to
litigation abroad, the parties can designate the applicable substantive and procedural rules quite
freely. Furthermore, in the absence of specific party designations, the arbitrators will often look at
widely accepted or particularly equitable principles of law and these may very well be found in
Hague conventions, in spite of limited numbers of ratifications.
The most dynamic entity producing rules of private international law in recent decades has been the
European Union (EU). Initially, the EU itself did not have legislative powers and the Member
States of the EU generated their common private international law rules via agreements or con-
ventions that required ratification and implementation like other agreements of international law and
also created the problems outlined above in cases of late, incomplete, or incorrect implementation
by individual Member States. However, as of 1999, the EU itself took over the legislative powers
in this area from its Member States.1 As a result, the former agreements have been recast into EU
regulations and now enjoy supremacy over national Member State law, as well as direct applicability
and – if the conditions of clarity, unconditionality and suitability of specific provisions are met –
direct effect in the Member States.2 Important examples are
1 The respective powers were first created by the Treaty of Amsterdam, signed on 2 October 1997 and entered
into force on 1 May 1999, see Articles 61(c), 65 and 67 of the consolidated EC Treaty. After the reforms
brought about by the Treaty of Nice, the respective powers are nowadays contained in Article 81 of the Treaty
on the Functioning of the European Union (TFEU).
2 For further discussion see Peter Stone & Youseph Farah (eds), Research Handbook on EU Private Inter-
national Law, Edward Elgar Publishing, 2015.
– Regulation 593/2008 of the European Parliament and of the Council of 17 June 2008 on the
Law Applicable to Contractual Obligations, the so-called “Rome I Regulation” (OJ 2008 L 177,
pp. 6-16 = Documents, p. ???);
– Regulation 864/2007 of the European Parliament and of the Council of 11 July 2007 on the Law
Applicable to Non-Contractual Obligations, the so-called “Rome II Regulation” (OJ 2007 L
199, pp. 40-49);1
– Regulation 1393/2007 of the European Parliament and of the Council of 13 November 2007 on
the Service in the Member States of Judicial and Extra-Judicial Documents in Civil or
Commercial Matters (OJ 2007 L 324, pp. 79-120);
– Regulation 1206/2001 of the Council of 28 May 2001 on Cooperation Between the Courts of
the Member States in the Taking of Evidence in Civil and Commercial Matters (OJ 2001 L 174,
pp. 1-24);
– Regulation 1215/2012 of the European Parliament and of the Council of 12 December 2012 on
Jurisdiction and the Recognition of Judgments in Civil and Commercial Matters, the so-called
“Brussels Ia” or “Ibis Regulation” (OJ 2012 L 351, pp. 1-32 = Documents, p. ???).2
For individuals and corporations outside the EU, in particular those domiciled in the U.S., these EU
rules are of interest in two kinds of situations: First, whenever a party from a third country brings
a lawsuit against a party domiciled in the EU, the Regulations have to be applied just as if the
lawsuit was brought by a party domiciled in one Member State against a party domiciled in another
Member State. The scope of application is determined by the territoriality principle and attaches to
domicile.3 The nationality of the parties is irrelevant.
1 While Rome I deals with contracts, Rome II determines the applicable law for “non-contractual obligations in
civil and commercial matters” (Article 1(1) of the Regulation). These are defined as “tort/delict, unjust
enrichment, negotiorum gestio or culpa in contrahendo” (Article 2(1) of the Regulation). Together with
property claims, these are the five possible claim bases we will revisit in ???: pre-contractual obligations (here
referred to as negotiorium gestio or culpa in contrahendo), contractual obligations, as well as claims based on
unjust enrichment, tort, and property.
2 This Regulation replaces Regulation 44/2001 which, in turn, replaced the well-known 1968 Brussels Con-
vention. It applies to the 28 Member States of the EU except for Denmark. For details see Ulrich Magnus &
Peter Mankowski (eds), European Commentaries on Private International Law - Brussels I Regulation, Sellier
European Law Publishers, 2nd ed., Munich 2012.
There is a parallel document, the 2007 Lugano Convention, successor to the 1988 Lugano Convention,
which extends many of the same principles to Denmark, as well as the member states of the European Free
Trade Area (EFTA), namely Iceland, Norway and Switzerland (OJ 2009 L 147, pp. 5-43).
An effort to extend the mutual guarantees to the United States has generated the 1999 Preliminary Draft
Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters (Documents, p. ???).
Because of disagreement in certain areas, in particular the scope of discovery allowable in these kind of cases,
finalization of the draft, let alone ratification by the U.S. and the EU, is currently not imminent.
3 For natural persons, Article 62 of the Regulation refers to the internal law of “the Member State whose courts
are seised of a matter” for the determination of domicile. This can lead to jurisdictional conflicts if more than
one Member State considers that a person is domiciled within its territory. Most EU Member States refer to
“habitual residence” in this regard, i.e. where a person de facto lives and, if a person has more than one
residence, the place where she spends most of her time and is most integrated socially.
Second, this can also work the other way around. If a U.S. corporation operates a subsidiary inside
the EU or if a corporation that is incorporated, say, in the U.S. Virgin Islands, has its principal place
of business in a Member State, it has a domicile in the EU for the purposes of the Regulation (see
note 43??? above) and can be sued there pursuant to these rules by parties from other Member States
and by third-country parties.
The Organization of American States (OAS) is also an active player in the development of private
international law at the regional level. Every 4 to 6 years, the OAS convenes a Specialized Con-
ference on Private International Law (Conferencia de Derecho Internacional Privado – CIDIP) and
since 1975, these conferences have resulted in the drafting of 26 conventions. These include the
1994 Inter-American Convention on the Law Applicable to International Contracts, the so-called
“Mexico Convention” (Documents, p. ???), and the 1979 Inter-American Convention on Conflicts
of Laws Concerning Commercial Companies. Unfortunately, similar to the conventions produced
by the Hague Conference, the record of ratifications by the OAS Member States is somewhat patchy
and, in particular, the U.S. have usually not signed, let alone ratified, these conventions.
Nevertheless, they can be an expression of regionally recognized principles of private international
law.
Another regional player active in the development of private international law is the Mercado
Común del Sur (Mercosur). This trade block composed of Argentina, Bolivia, Brazil, Paraguay,
Uruguay, and Venezuela, has generated a number of agreements on choice of law in international
contracts, as well as conflicts of jurisdiction, providing rules for IBTs between companies located
in the member countries. Argentina, Brasil, Paraguay and Uruguay have generally ratified these
agreements. However, they are not self-executing or directly applicable and will only be applied by
courts in the member countries to the extent they have been implemented by domestic legislation.
Many of the issues at the heart of private international law will re-appear in our discussion of dispute
settlement in Chapter 10.
For companies and legal persons, Article 63 of the Regulation provides an autonomous standard, namely
domicile at the place where it has a) its statutory seat; or b) its central administration; or c) its principal place
of business. If a company is incorporated in one Member State, has its central administration in another
Member State, and its principal place of business in a third Member State, it is domiciled and can be sued in all
three Member States, see Paul Vlas, in Magnus & Mankowski (eds), Brussels I Regulation, at p. 811.
IV. National Law

Contrary to what the foregoing discussion may suggest, national law remains the most important
source of law for international business transactions. In this context, we should consistently distin-
guish three types of national law: substantive law, for example the law on contracts, procedural law,
for example the civil procedure code, and mandatory rules of public law, such as the customs laws
or health and safety regulations.
In business-to-business (B2B) transactions, the parties are generally free to choose the applicable
substantive law. They could choose the substantive law applicable in seller’s country or the substan-
tive law applicable in buyer’s country. They could also choose a neutral third country for the
applicable substantive law, or even one of several international codifications, for example the United
Nations Convention on Contracts for the International Sale of Goods (CISG). Such a choice of law,
as long as it meets certain standards of effectiveness, will normally be respected by any court and
any arbitration tribunal around the world.
If the parties to the IBT have not made a choice of law or the choice is deemed ineffective or if they
have chosen a body of law like the CISG and the legal dispute falls outside of the scope of the
convention, the applicable substantive national law will be determined by the rules of private inter-
national law, i.e. the rules on conflicts of laws. However, since private international law is by and
large national law on conflicts, different courts in different countries will apply different rules to
resolve the conflict(s). A notable exception is the European Union, where many conflicts rules have
already been harmonized for the entire trading block, as outlined above. To illustrate the point, if
a dispute should arise between a seller in Switzerland and a buyer in the U.S., the applicable private
international law would depend on the place where the dispute is brought. If the seller should sue
the U.S. buyer in the U.S. for payment, the American court would apply American private
international law rules to determine the applicable law. That is easier said than done, however. There
is no actual code of conflicts of laws or private international law in the U.S. Therefore, questions
of choice of law, as they are called here, are determined by common law, and common law is
normally state law. Thus, if the case is brought at buyer’s domicile in Texas state court, the court
will apply Texas common law to determine the applicable substantive law. If, for some reason, the
case is brought in California state court, the Texas buyer can either allow the case to proceed and
the California state court will apply California common law to determine the applicable substantive
law. Or the Texas buyer can have the case removed to federal court on diversity grounds but then
the federal court located in California will still, under the Erie doctrine,1 have to apply California
state common law to determine the applicable substantive law. The good news is that state common
law throughout the U.S. tends to refer to the law of the state where the transaction took place, the
so-called lex loci ??? (check this, it may not be so easy as to refer to the place where the contract was
concluded; anyways, that place is hard to determine in electronic contracts).2 The bad news is that
1 Erie Railroad Company v. Thompkins, 58 S Ct 817; 304 US 674: 82 L Ed 1188 (1938).

2 For a classical treatment of the issue see Walter Wheeler Cook, The Logical and Legal Bases of the Conflict of
Laws, Yale L.J., Vol. 33, No. 5, 1924, pp. 457-488; as well as Elliott E. Cheatham, American Theories of
Conflict of Laws: Their Role and Utility, Harvard L.R. Vol. 58, No. 3 (1945), pp. 361-394; and the three
volume opus magnum by Joseph H. Beale, A Treatise on the Conflict of Laws, Baker, Voohis & Co., New
the relevant references to precedent differ from state to state and typically require local counsel even
if the case is pending in federal court. However, this situation explains, at least to some extent, the
significance of the work undertaken by the American Law Institute and the National Conference of
Commissioners on Uniform State Laws in the development of the Uniform Commercial Code
(UCC), which has achieved a level of harmonization of state laws and, thereby, reduced the
importance and complexity of conflict of laws analysis in the U.S. We will deal with the UCC in
some detail in Chapter 2. Of course, the UCC only reduces conflicts between the laws of different
states in the U.S. and does not address the conflict between itself and Swiss law. Interestingly,
foreign parties before American courts are largely treated the same as out-of-state American parties,
i.e. the system often does not distinguish between inter-state and inter-national cases. Through this
back-door, the elaborate construct of conflict theory comes back to haunt us.
The situation regarding the conflict of laws is massively more simple in Switzerland, although it is
also a country with a strong federal tradition. If the American buyer should sue the Swiss seller for
non-performance, any court in Switzerland with jurisdiction over the defendant, usually the cantonal
court at her domicile, would simply refer to the Swiss Federal Code on Private International Law
of 1987, where any questions of jurisdiction of judicial and administrative authorities, questions of
applicable law, as well as conditions for the recognition and enforcement of foreign judgments are
clearly regulated.1
While the question of the applicable substantive law may cause some headaches in the absence of
a clear and effective choice by the parties, the question of the applicable procedural law is generally
more easily answered. Choice of law rules generally do not apply to procedural law and each forum
generally applies its own procedural law, the lex fori. This is invariably true for public courts and
it is increasingly even true for arbitration institutions, unless the parties to an arbitration unambi-
guously selected the application of different procedural rules. Since procedural law regulates
questions of available remedies, accessible evidence, deadlines, preemption of claims, etc., as well
as enforcement, it can be decisive for the outcome of a case where it is brought, even if the parties
have chosen the substantive law they like best.
York, 1935.
An “American conflicts revolution” (Hartley) was spearheaded by Currie and his “balance of interest
analysis”; see for example Brainerd Currie, Notes on Methods and Objectives in the Conflict of Laws, Duke
L.J. 1959, No. 2, pp. 171-181. At the bottom line, this method asks whether the forum state has an interest in
the outcome of the case, for example to protect consumers, and would this interest be better served if it was
applying its own law to the case? An alternative approach was taken by Ehrenzweig who postulated the
“primacy of forum law” according to which a court should always apply its own substantive law (lex fori)
unless the court had a really good reason to apply the substantive law of another state, let alone another
country; see Albert Ehrenzweig, A Treatise on the Conflict of Laws, West Publishing, St. Paul 1962. Finally,
there is the “better law theory”, promoted by Leflar and others, according to which the courts should undertake
a comparative analysis of the outcome of the case under both or all potentially applicable laws and then select
the laws that provide the better or the best solution for the dispute; see, for example, Robert A. Leflar, Choice-
Influencing Considerations in Conflicts Law, 41 N.Y.U. L.Rev. 1966, pp. 267-???.
1 An English translation of the act is available at http://www.rwi.uzh.ch/dam/jcr:00000000-14c0-11a6-0000-
0000115fcc32/PILA.pdf. Since Article 1(2) of the Act gives precedence to international treaties, the Act does
not apply in cases coming under the Lugano Convention, i.e. disputes between a Swiss party and a party in the
EU or in Iceland or Norway, see also above, note ???.
Naturally, any mandatory rules of public law have to be applied, whether or not the parties like it.
This includes tax laws, customs laws, rules on competition or antitrust, environmental and health
and safety regulations, consumer protection laws, labor laws, etc. Problems may nevertheless arise
if more than one country wants to apply its mandatory laws to one and the same issue and the rules
cannot be reconciled. We will come back to this point ???Marc Rich case?.
V. Sub-National Law
As we have seen in the preceding section, sub-national law can play a role for IBTs if there are
differences in the contract law of the different states or provinces or cantons that make up a federal
state. This is the case primarily in the U.S. Even strongly federal systems like Switzerland,
Germany, or Brazil, have federal codes of civil or contract law that apply uniformly in all constituent
states. The same is true for India. Although India inherited the common law tradition from its former
colonial masters, the British themselves imposed the Indian Contract Act, a kind of codification of
the common law on contracts, on the entire country as early as 1872. A country that comes close to
the U.S. model is Canada, where contract law remains common law and the Sale of Goods Act
serves a function similar to the UCC in the U.S. A bit like Louisiana, which does not follow the
UCC and instead applies a contract law modeled on the French Code Civil, Quebec in Canada has
the Quebec Civil Code that follows the continental European tradition. Finally, Australia also uses
common law in contract law and does not even have a modern uniform model for the states to
follow. However, Australia has developed a kind of uniform common law via the jurisprudence of
the High Court of Australia which has appellate jurisdiction over all state and federal courts. Last
but not least, New Zealand follows the common law tradition but is not a federal system and,
therefore, also does not have sub-national differences in its contract law.
The problem of sub-national differences is more pronounced in administrative law. While this does
not usually affect the kind of IBTs we will be discussing in the present volume, investors seeking
to establish durable business organizations abroad will need to carefully evaluate regional and local
laws and ordinances in areas such as taxation, environmental protection, land-use and zoning law,
as well as labor law and health and safety regulations.
VI. Model Laws and Private Codes

As we will analyze different aspects of international business transactions, we will come across a
number of unconventional rules. We have already encountered the Uniform Commercial Code or
UCC, which is a kind of model law developed by experts on behalf of the American Law Institute
(ALI) and the National Conference of Commissioners on Uniform State Laws. These are not really
public bodies and certainly not legislatures. Therefore, “the UCC” as such does not have the force
of law. There are two ways, however, how the UCC can become the substantive law applicable to
a given IBT. First, and most important, the UCC, once adopted by the ALI and the Uniform Law
Commissioners, is recommended for adoption by the several states in the U.S. Although the state
legislatures often make some changes,1 by and large, the UCC has been enacted via state statutes in
all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. One notable
exception is Louisiana, where Article 2 has not been implemented and, instead, the Louisiana Civil
Code of 1948 applies. The latter is more similar to the French Code Civil than the American contract
law regimes of the other states. The second way the UCC can become the substantive law governing
an IBT is via a valid choice of law by the parties to the contract. In B2B transactions, the parties are
not limited to choosing the law of a country or state, they can also choose a model code or even
write their own.
The United Nations Commission on International Trade Law (UNCITRAL) has already been
mentioned above. It gathers experts from around the world into six working groups, each of which
is charged with the development of international conventions and other instruments aimed at the
regulation and facilitation of business and trade transactions. The most important convention
developed by UNCITRAL is the 1980 United Nations Convention on Contracts for the International
Sale of Goods or CISG, also called the Vienna Convention. The CISG has been ratified by 83
countries from around the world, including the U.S. and virtually all other major trading nations. We
will discuss at length in Chapter 2 how it becomes the default substantive law for many international
sales contracts and what this means for the rights and obligations of the parties. As the representative
of the UN in this area of law, UNCITRAL is today also the sponsor of the 1958 Convention on the
Recognition and Enforcement of Foreign Arbitral Awards, the so-called New York Convention.
Supported by 156 countries from around the world, this convention is the corner stone of the inter-
national commercial arbitration system. UNCITRAL is in charge of a number of additional conven-
tions but it has also ventured into the territory of model laws. One important document is the 1985
Model Law on International Commercial Arbitration, as amended. Like with the UCC, the idea is
to provide a well balanced and comprehensive model that can be enacted via national legislation.
Indeed, some 72 states have adopted national laws based on and largely congruent with the Model
Law. Another example is the 2001 Model Law on Electronic Signatures, which has so far been
implemented by 32 states from around the world. Finally, UNCITRAL also develops so-called
“contractual texts” that are not intended for adoption via national legislation but for incorporation
into private contracts. The most important example are the UNCITRAL Arbitration Rules, first
adopted in 1976 and last updated in 2013.
The next institution worth mentioning is the International Institute for the Unification of Private
Law, better known as Unidroit. This is an intergovernmental organization with 63 member
countries, seated in Rome, Italy. It relies on experts, not unlike the Uniform Law Commission, to
analyze private law differences and similarities around the world and propose model codes that
promote the harmonization of national laws. Its most successful product are called the Unidroit
Principles of International Commercial Contracts. Again, they can become relevant for an IBT either
via adoption by a state into their national law or by party choice. Since the Unidroit Principles are
also recognized as a codification of the so-called lex mercatoria, they are often cited when judges
or arbitrators have to fill gaps in contracts via general principles of law.
1 WestlawNext, in it’s database Uniform Commercial Code Local Codes Variation, provides information about
variations in different states.
Another prolific producer of rules for IBTs is the International Chamber of Commerce (ICC).
Created in 1919 by private businessmen from different continents, it has it’s seat in Paris and today
counts hundreds of thousands of individuals and companies among it’s members. Besides lobbying
at the national and international level on behalf of private enterprise, the ICC is active in developing
rules for commerce and in providing arbitration services. One of the first sets of rules we will come
across are the so-called Incoterms, which are regularly incorporated in international sales contracts
to determine whether and in how far seller or buyer have to take care of transport and insurance and
where the risk of loss or damage will pass. Another important document is the Uniform Customs and
Practice for Documentary Credits (UCP600), which is the standard for letter of credit transactions
around the world. Although we will encounter several other ICC codes and documents, the last one
to be mentioned here are the ICC Rules of Arbitration, which can be relied upon not only in arbitra-
tion proceedings organized by the ICC but also in other institutional and in ad hoc arbitrations. All
ICC documents have in common that they are not enacted via national legislation but are adopted
voluntarily by the parties to a private contract or arbitration agreement.
Last but not least, it is worth mentioning at this time also the International Bar Association. The
IBA was founded in 1947 as a global representation of lawyers and national bar associations. It has
a membership of over 80,000 individual lawyers and almost 200 bar associations and law societies
from more than 160 countries. Among the goals of the IBA are the promotion of professional ethics
and freedoms of lawyers, as well as the independence of courts and judges around the world. Among
the documents produced by the IBA that we will come across are the 2014 Guidelines on Conflicts
of Interest in International Arbitration and the 2010 Rules on the Taking of Evidence in International
Arbitration. IBA rules can be incorporated into private contracts or arbitration agreements. Guide-
lines can also play an important role as expressions of general principles recognized by lawyers from
around the world and from all different legal systems. We will return to this function shortly, when
we discuss the resolution of conflicts and the filling of gaps in the set of rules that can or must apply
to an IBT.
VII. Private Contracts

As we have already mentioned, the freedom of contract is generally broad in B2B transactions. The
parties can choose to play within the rules that apply by the force of law, and merely determine the
type and quantity of the goods, the price, and the time and place of delivery. The various rights and
obligations of the parties, as well as the applicable law and the forum for the settlement of any
disputes, will then be determined on the basis of standard legal rules. For example, if he seller is
located in New York and the buyer in the United Kingdom, chances are that the applicable law will
be the (contract) law(s) of New York and they will determine the rights and obligations, in particular
in case of problems with the performance of either side. Any claims would have to be brought in
defendant’s forum, i.e. if the buyer is unhappy with the goods, she would sue the seller at her home
in New York. Conversely, if the seller does not get paid in full, he would have to pursue the buyer
in the UK.
Alternatively, the parties to a B2B transaction can take more control of the rules they want to abide
by. They can do so first, by selecting the applicable substantive law. In our example, the parties
could opt for English law of Scottish law instead of New York law, or they could agree on a neutral
set of rules, such as the CISG. They can go much further than that, however. As long as the parties
are in agreement with each other, they could select a set of rules like the CISG and then start
deviating from it for specific questions or issues. One example would be liquidated damages for
certain types of performance problems that are not otherwise provided by statutory law. Finally, the
parties are perfectly entitled to write up a comprehensive set of rules by themselves that would leave
little or no scope of application to any default or back-up legal system.
In short, the private contract concluded by the parties can provide anywhere from almost 0% to
almost 100% of the applicable contract rules or laws. Which choices of existing laws and which
party-drafted alternatives make most sense has to be determined on a case-by-case basis. In ??? we
discuss the options and provide some advice.
VIII. Too Many Cooks Spoil the Broth? – How to Resolve Conflicts and Gaps in the Rules
Governing IBTs
It should be easy to see by now that many rules from many sources on many levels are potentially
applicable to an IBT. This poses a number of problems for lawyers and legal advisors, namely
– finding all applicable rules, on all relevant levels;
– correctly interpreting all applicable rules to understand their impact in a given case and their
relevance for the rights and obligations of the parties to an IBT, as well as any legal remedies;
– correctly dealing with potential conflicts between simultaneously applicable rules, either on the
basis of hierarchy, where a mandatory higher order rule displaces a discretionary and/or lower
order rule, or on the basis of other conflicts or choice of law rules;
– filling any gaps between different sets of rules to come up with solutions for problems or
questions for which none of the applicable rules seem to provide an answer.
These are pretty much the themes of the entire book. After working through the entire volume,
anybody should be able to handle all of these elements of shepherding an IBT from the first nego-
tiations, to the contract drafting and conclusion, to the contract implementation, all the way to the
contract enforcement, if necessary.
???say some more about conflicts and gaps
mandatory public laws as outer guardrails; general principles to fill the gaps
Section 5. Putting It All Together:

How to Analyze a Case in an Exam and in Practice
The final part of this introductory chapter is dedicated to the methodology of case analysis and brief
writing. Good lawyering depends only about 50% on good knowledge of substantive legal rules and
principles. The other 50% are the more mundane tools of our trade, gathering and organizing the
facts, finding all applicable legal rules, applying the law to the facts, and writing a persuasive brief.
Unfortunately, law schools and, in particular, first year law courses, are not always putting sufficient
emphasis on the practical aspects of our professional work. As a result, too many advanced law
students, graduate students, and even young professionals taking our IBT classes struggle with the
comprehensive analysis of a limited set of facts in an exam and the persuasive presentation of “the
solution” on behalf of their imaginary client. This is one of the main reasons why many law firms
nowadays complain that recent law school graduates are not “practice ready” and require substantial
on-the-job training. The following tips and tricks, if taken seriously and practiced until they become
second nature, should eliminate this problem and enable our readers to handle even complex IBTs
with potentially hundreds of pages of documents and factual information, and many different and
intertwined legal issues. It goes without saying that the skills are also relevant and applicable in
purely domestic contexts.
Checklist #1
8 Steps to a Winning Brief
Step 1: Gathering and Understanding the Facts of the Case

Step 2: Identifying Binary Claims: Who Wants What from Whom and Why?
Step 3: Finding All Applicable Rules for the Case
Step 4: Identifying the Claim Bases
Step 5: Isolating the Conditions for a Claim to Have Arisen, Not to Be Extinguished, and
to Be Enforceable
Step 6: Presenting a Persuasive Argument (1) – Road Map
Step 7: Presenting a Persuasive Argument (2) – Subsumtion of the Facts under the Law
and the Four Levels of Analysis
Step 8: Presenting a Persuasive Argument (3) – Conclusions
Explanations
For those accustomed to the so-called IRAC Method, Steps 1 and 2 fall into the category I =
identification of the issue(s); Steps 3, 4 and 5 are part of the category R = identification of the
applicable rule(s); Steps 6 and 7 form the core category A = application of the rule(s) to the case at
hand; and Step 8 is equivalent to the category C = conclusions.
Step 1: Gathering and Understanding the Facts of the Case

Besides the fact that students work with hypothetical cases and any triumphs and mistakes do not
affect real clients, the biggest difference between the work of a student in an exam and the work of
a lawyer in practice is that the student is working in a controlled and self-contained environment.
The student only has to deal with the information provided in the exam and the student has to take
that information at face value. She does not have to search for additional facts and she does not have
to worry about the accuracy of information, trustworthiness of witnesses, etc. One would think that
this should make Step 1 very easy for the student, gathering and understanding all relevant facts.
However, experience teaches that our students struggle with Step 1 and often overlook important
pieces of information although the entire hypothetical provided for an exam may be no longer than
a page of two. This is quite unacceptable and also entirely unnecessary. The following method can
teach anyone to gather all relevant facts and to organize them in such a way that their correct inter-
pretation and understanding is virtually guaranteed.
Learning and practicing this method is all the more important since the facts in the real world are
not delivered to the lawyer on a silver platter. Real cases may present dozens of different sources
and hundreds or even thousands of pages of information to be analyzed in a limited time. Naturally,
the information is not presented in a logical manner, at least not the way we would need it for the
legal analysis. Furthermore, even though the amount of information may be huge, critical pieces to
the puzzle may be missing and have to be obtained via additional factual research, or via interviews
with clients, witnesses, or experts. Some critical information may remain elusive. Other pieces of
information seem to or may actually contradict each other. This makes it all the more important that
students learn early and learn well how to digest and dissect information. However, in a textbook,
we can only address this issue up to a point, since we cannot include information sources such as
witnesses to be interviewed. The method presented on the following pages focuses on the analysis
of documents, such as an exam hypothetical, business correspondence and contracts in a moot court
case or in a real case, written witness statements and expert opinions, and of course judicial
decisions and statutory provisions of any kind. On its own, this method does not teach students how
to deal with people, such as clients, witnesses, jurors, judges, or arbitrators. Moot court competitions
can teach a certain measure of these skills. The rest has to be acquired by working in legal clinics
or externships as students, and by working as lawyers under a supervisor or mentor on the job itself.
The challenge in Step 1 is to get a comprehensive and correct understanding of all relevant facts.
This begins with the logical (re-)arrangement and extraction of the information. It continues with
the identification of missing information and how it may be obtained, contradictory facts or
statements and how they may be resolved. It also includes the question of who has the bear the
consequences if certain information cannot be found, or if some contradictions or disputed facts
cannot be conclusively resolved.
a) Surveying the information and making an inventory
The first step is a rather superficial reading/survey of all available information. Which documents
and materials are there? Who are the authors, who are the addresses, and what was the title or
purpose of each communication? What is the underlying story? What is the problem? Which areas
of law does it concern? What is your role and what are the expectations of your client or boss?
At this stage, you just want to understand the general idea and direction of the assignment. If there
are many different documents or pieces of information, an inventory or table of contents should
be produced. The entries in the inventory should be non-technical, for example, “letter of 15
January”, “draft contract of 30 January”, “draft letter of credit of 3 February”, “witness statement
of Mr. X of 20 April” etc. Unless a different arrangement seems indicated, for example a breakdown
into different relationships (A and B, B and C), we can already sort the documents in chronological
order. Another way could be grouping communications by sender or by the party who submitted
them to the court or arbitral tribunal (for example, “submissions by the applicant”).
Once we know what kind of sources of information we have, the next step is a fairly superficial
reading to get the main ideas and understand what was going on, who are the parties to the dispute,
and what caused the problem between them. Importantly, at this stage we also need to find out the
role we are expected to play: counsel to the seller? to the buyer? clerk or assistant to the judge or
arbitrator? From the outset, we need to avoid any actions or statements that are incompatible with
this role!
Since the analysis is still proceeding on a superficial level, qualifications should be avoided at this
stage. For example, if it is not clear when a number of offers and counter-offers actually led to the
formation of a contract, a designation such as “the contract of 5 February” or “the acceptance of 4
March” should be avoided, even if the parties used those qualifications. Instead, neutral classifica-
tions should be used, such as “buyer’s e-mail of 16 February”. At a later stage, the communications
will have to be analyzed to see whether the fax or e-mail called “acceptance” by the buyer was in
effect an acceptance.
Challenge #1: Gather and organize all relevant documents; understand the basics of the case.
b) Carefully reading of all documents with a ruler and a red pen
Having understood on a superficial level what went on and what the case or dispute is about, the
second step is a comprehensive and careful analysis of the facts as they are currently presented or
presenting themselves. To this end, all available information must be analyzed with a fine comb or
sieve. Not one relevant piece of information must be overlooked. For example, if you rely on the fact
that a particular communication was sent on 16 February to conclude that a contract was formed,
you cannot overlook the information that Friday, 16 February, was a public holiday in seller’s
country and nobody saw the communication until several days later. Did the parties modify the
written contract orally during their phone call of 30 April? What about the fact that process was
served on an office assistant, rather than an authorized representative of the company? We don’t
know at this early stage whether these facts make a difference in law but we must absolutely not
overlook them later in our analysis!
A good method for comprehensive information extraction is to go over each and every document
and read it carefully, sentence by sentence and line by line. Every single piece of information that
potentially has any legal significance should be underlined separately in this process. It is
recommended that this is done very meticulously with a ruler and a red pen. Subsequently, when the
facts are subsumed under the law and integrated into our analysis and arguments (Step 7), each and
every underlined piece of information is then ticked off with a green pen when it has been taken care
of or when you have decided that it is ultimately irrelevant. By tracking our progress in this way,
we can always see any facts or claims that have not yet been fully dealt with. The Red-and-Green
Method enables us to verify, before we finish our analysis, whether each and every potentially
relevant piece of information has indeed been taken care of and nothing has been overlooked. As
long as any information is still red and not green, you are not done.
Challenge #2: Mark all potentially relevant facts, arguments, claims, etc. in all available documents;
understand the details of the case.
c) Making a time-line
Now that we know in detail what happened, we need to organize the facts in a logical manner. In
almost all cases, we need a chronological organization because we need to understand exactly how
the story unfolded that ultimately led to the dispute between the parties. The importance of this job
should not be underestimated, in particular if there are several story lines told by several parties or
witnesses or in cases where deadlines had to be met or where the parties are arguing whether or not
certain communications were sent or received on time or were received before others. To give just
one illustration of the importance of careful organization, the author has been involved in more than
a few cases where the question whether or not something was done before the deadline depended
on the time zone(s) where seller and buyer were located. What was on time in one time zone does
not have to be on time in another!
As always in legal analysis, precision is important here. Claims of many millions of $$ may turn on
the question whether an offer was revoked before it was accepted or whether a claim was presented
within the statute of limitations. Even in cases where there are no tight deadlines that may or may
not have been missed, the organization of the information in chronological order requires us to
undertake a third reading of the facts and, in turn, promotes complete and correct understanding of
the underlying story.
Challenge #3: Make a comprehensive time line with all potentially relevant elements of the story.
d) Making a relationship chart
In particular in cases where more than two actors are involved, it is important that we include every-
body in the analysis whose statements, actions, or omissions, may be of relevance, and to understand
correctly their relationship to each other. Who are the parties to the dispute? If there are other
individuals or entities, what is their relationship to the parties? We need to understand exactly the
claims company A is bringing against company B and company C, whether counterclaims by C are
going to be presented only against A or also against B, whether A and B would potentially be joint
and severally liable for those counterclaims, and whether D, E and F were representing A, B or C
in the negotiations. If Mr. X was the managing director of subsidiary S, are his statements also
binding on the mother company M? If subsidiary S is wholly owned by M, does it mean that buyer
B can bring claims against both S and M? Although it is too early to answer the questions at this
stage, we need to be aware of all actual and potential relationships. If subsidiary S is in liquidation,
it would be professional malpractice if buyer’s lawyers did not try to bring their claims also against
M!
Another important point, as we begin to classify facts as to their relevance in law, is an under-
standing of what is and what is not (potentially) in dispute. For example, if it is not clear whether
Agent A acted on behalf of Seller S or Buyer B, we may have to make a reasoned argument for the
one or the other option. This raises two points: which of two or more solutions do we advocate?
And, how detailed and sophisticated should the argument for that solution be? The question of detail,
which is ultimately a question of dedicating time and resources to make an argument more forceful,
will be discussed below when we talk about the Four Levels of Analysis. The question of which
position to take is related but also somewhat different. On the one hand, if the answer is not very
important because it does not really matter one way or another for the final outcome whether the
Agent A acted on behalf of Seller S or Buyer B, this is an indication that we will need only a low
level of analysis and may even leave the answer open. On the other hand, and this is much more
common, if our argument on the question at hand may potentially affect the overall outcome of the
dispute, this is an indication that we will need a higher level of analysis and that we need to carefully
consider which side we should take on the issue to best advance the interests of our client. Last but
not least, if we are advising a judge or arbitrator, we should analyze both sides of the argument and
simply recommend the answer that seems more logical or better supported by the facts.
A useful rule of thumb has always been “if there are more than two dates, make a time line; if there
are more than two persons, make a relationship chart”.
Challenge #4: Make a relationship chart with all potential players; understand exactly how each of
the players is connected to any other parties and who may have claims against whom.
5) Telling an organized story
Now that we have essentially analyzed the factual information already four times (superficially,
carefully, chronologically, relationally), we should be able to summarize the facts in an organized
way for our brief. This is a particularly tricky part of the work of a lawyer and requires different
approaches depending on the position we have in the dispute at hand. If we are advising the seller
who wants to get paid in spite of some problems with his performance, we will emphasize different
parts of the story than if we are advising the buyer who does not want to pay although she does want
to keep the somewhat imperfect goods. There are important ethical considerations here: as a partisan
attorney, we do not have an obligation to point out factual elements that work against the interests
of our client but may have been overlooked by the other side. At the same time, however, we must
never misrepresent the facts or actively suppress evidence.
That being said, for our internal analysis, we always want to have the full story, with all details and
all evidentiary elements, whether friendly or hostile to the position of our client. In our brief we may
not need to say that seller’s acceptance of buyer’s terms was sent out late or that requesting a letter
of credit from the bank could be interpreted as an acceptance of the terms of the contract of sale.
However, we still need to be aware of these possibilities because they may be brought up by the
other side in their reply to our claims and we may need to warn our client in advance of certain
weaknesses in our position which, in turn, may suggest that a settlement is preferable to litigation.
Thus, you should put together a comprehensive story for yourself and then pick out from it the
elements that are common ground, those that need to be communicated to make the story coherent,
and those that are supportive of your client’s position and not in conflict with the truth, and put them
into the summary of the facts in your brief.
Finally, when telling the story of what happened, we need to include references to the documents
and other pieces of evidence that support our story. If the material has not already been provided in
a particular manner, for example a common record of 60 or 600 pages with consecutive page
numbering, we have to produce the file or files ourselves. For the other side, references may have
to be to particular dated or named documents and maybe a particular page or paragraph in those. For
our own purposes, we may want to have one master file with consecutive page numbering to make
it easy and quick to find any particular document and information. Your test whether your system
is working is a hypothetical question by a judge or arbitrator in a hearing where you are making a
particular claim: “what is the source of that information?” If you cannot find the respective
document within a couple of seconds, your system is not working.
Challenge #5: Tell an organized story that is convincing and supportive of your position in law.
6) Highlighting any contradictions, missing information, and additional research questions
In particular if a story is quite complex and at least some elements in it may not be common ground
between the different parties, we need to go over the facts again and during this fifth round of
analysis we focus on the identification of any logical breaks in the narrative, any contradictions, any
gaps. Along the way, we also highlight any information, data points, or statements of fact that have
already been disputed by the one or the other side and mark them accordingly (for example
“disputed by seller, see fax of 15 March/p. 63 of the record”).
Challenge #6: Identify facts that are missing or disputed and need to be obtained or clarified via
discovery.
7) Identifying how any contradictions, missing information or open questions may be resolved and
what happens if they are not
If information, data points, or statements are disputed or missing, this will usually have conse-
quences. Occasionally, it may turn out that it does not actually matter whether a fax was received
on a particular day or whether a witness statement is credible or supported by other evidence. In
such a case, we still need to explain why we believe that the discrepancy does not matter and say
so using one of the four levels of analysis. For example, we might say “buyer disputes seller’s claim
that the revocation of the offer arrived before or at the same time as the offer itself; however, the
question is ultimately moot because...”
More likely than not, however, discrepancies, gaps and disputed facts will be of relevance. This
raises the question who has the burden of proof, i.e. whose position in the dispute will be affected
negatively if the particular discrepancy or gap cannot be resolved. For example, if the seller wants
to collect the purchase price from the buyer, he will need to demonstrate that a contract was
concluded accordingly. If the formation of the contract is in dispute, seller’s demand for payment
is in jeopardy. If our client has the weaker position, we need to think about possible research,
discovery or fact finding options that could clarify the situation and strengthen our position in the
dispute. And we need to think about alternative legal strategies, as a contingency plan, if we should
ultimately not be able to prove our position in fact.
Challenge #7: Come up with solutions how missing or disputed facts may be clarified and how you
will adjust your strategy and arguments if they are not.
Step 2: Identifying Binary Claims: Who Wants What from Whom and Why?
In an exam, as in real life, the question may be quite clear:
1) A may say something like “I want my money back from B” or
2) “I want damages from B for the failure to perform.”
On the other hand, the question may be far less obvious along the lines of
3) “what are the rights and obligations of the parties” or
4) “who can get what from whom” or
5) “what can you do for this client?”
Even if the question(s) seem(s) straightforward, some additional thought should be invested before
we go about the answers. In example 1), there seems to be a reference to a payment made by A to
B that should be recovered. But recovery in full may not be available if A cannot return any and all
goods or property received from B in exchange for the money. On the other hand, recovery of
monies paid may not be enough if A has incurred additional damages on account of a breach of
contract or other obligations by B. Claims for damages, like in example 2), require not only
persuasive justification in law but also a persuasive calculation of the claimed amount. Finally, there
is always the question whether costs (for example for legal representation) and interest may be
recoverable on top of things or monies claimed. Thus, we should always go about a systematic
analysis of all possible claims along the 5W Formula: Who Wants What from Whom and Why?
– if there are more than two actors in the story, consider all possible binary claims, for example
“A from B” and “B from A”, but also “A from C” and “B from C” and, of course, “C from A”
and “C from B”;
– in each binary relationship, consider
i) Primary claims: These are intended to put the parties in the position as if there had been no
breach of law or promise. For example, the primary claims of the seller against the buyer are
for taking of delivery and payment of the purchase price. The primary claims of the buyer
against the seller are for delivery of conforming goods and transfer of ownership or title.
However, there are also primary claims outside of contractual relationships, for example for the
customer and potential buyer not to be harmed during pre-contractual negotiations (see Chapter
??? on p. ???), or the claim of the property owner to recover possession from the wrongful
possessor. Finally, special contracts may entail special primary obligations, for example the
claim of the beneficiary named in a letter of credit against the issuing and/or the confirming
bank to honor a complying presentation (see Chapter ??? on p. ???).
If primary claims can be brought, they should be brought. Alternatively, an explanation should
be provided why the claimant is no longer interested in the primary claim and what the claimant
wants instead. Certain (additional) conditions may need to be met before a shift from the
primary to one or more secondary claims can be made. For example, if there was a contract of
sale, it may have to be avoided before the parties are released from their primary obligations
and can claim damages instead.
ii) Damages as secondary claims: These can be claimed instead of primary claims or in
addition to them. For example, if there was a contract of sale and the seller fails to deliver or
tenders non-conforming goods, the buyer may be entitled to specific performance (primary
claim) plus damages for delay and/or loss of profit (secondary claims). In general, damages may
be due if the primary claim was extinguished (the goods were destroyed; the contract was
avoided), or if performance of the primary claim alone does not put the claimant in the same
position she would be in, had there been no breach of law or promise.
In some cases, damages may be claimed above and beyond what is necessary to put the
claimant in the same position she would be in, had there been no breach of law or promise.
These are usually referred to as punitive damages. However, punitive damages are only avail-
able if they are specifically mentioned in law. In all other cases, the party claiming damages has
to prove that it actually suffered these damages. Excessive and poorly substantiated damage
claims can lead a court or tribunal to reject any and all damage claims instead of reducing them
to the realistic level!
iii) Cost: The commercial losses and expenses caused by a breach of contract or other obliga-
tion are in general recoverable as damages. By contrast, the legal expenses have to be claimed
as cost. In principle, they include attorney fees and expenses, as well as the cost of the actual
dispute settlement procedure, such as court fees, fees of an arbitration tribunal and honoraria
of arbitrators, travel expenses and administrative expenses related to the procedure (conference
rooms, translation and interpretation expenses, secretarial services, etc.). A thorough listing of
costs incurred as a consequence of a breach of law or contract may go beyond these, however,
and also include in-house counsel expenses, in-house administrative expenses such as courier
services, and even extra work done by non-legal employees of the claimant.
Whether or not a particular cost item will be recoverable depends on a number of factors. First
and foremost, the parties may have entered into an agreement in the context of the initiation of
litigation or arbitration pursuant to which each side has to bear her own cost or only certain cost
will be recoverable. In such a case, it is usually not necessary to track (other) expenses very
carefully and try to claim them (except to claim them as business expenses for tax purposes).
However, in the absence of a party agreement or a statutory provision1 limiting claims for cost
recovery, costs imposed on one party by the breach of law or contract of the other will often be
recoverable, provided they are well documented and reasonable.
iv) Interest: This can often be claimed from the time when a payment became due to the time
when the payment is actually made. An award of interest accounts for the fact that money later
is worth less than money sooner, in terms of purchasing power, the so-called time value of
money, and in terms of opportunity cost. We sometimes distinguish between pre-judgment
interest,2 for the time from when a payment was due until the court confirms the payment
obligation, and post-judgment interest,3 until payment is effected. In such cases, the court will
typically specify the amount of pre-judgment interest as a lump-sum and specify the amount
of post-judgment interest as a daily sum or based on an average interest rate to encourage the
obligated party to make payment sooner rather than later. In many cases, interest will not be
awarded ex officio but has to be specifically claimed. If this is the case, it would amount to
malpractice for an attorney to “forget” to claim interest on behalf of her client. If the court or
tribunal does not follow specific rules regarding the calculation of interest, the claim has to
specify in a persuasive way the amount of interest that should be awarded. Typically, such a
claim can be for a certain percentage above the prime rate, depending on the actual borrowing
cost of the claimant. Excessive or unpersuasively high interest claims can lead to a rejection of
any interest instead of a reduction to a reasonable level!
Step 3: Finding All Applicable Rules for the Case

While the responsibility for the identification of all relevant facts is shared between the client and
the attorney, the identification of all applicable legal rules is entirely the attorney’s job. If it turns
out during or after a dispute settlement procedure that the client’s outcome was negatively affected
because some factual information was not brought or not brought in time to the attention of the court
or tribunal, the attorney will not be liable if she generally gathered all available information, and
asked the client and any witnesses or other sources of information for specific missing information
and any other relevant information. By contrast, if it turns out that the client’s outcome was nega-
tively affected because the attorney overlooked an applicable rule, there is normally no way the
attorney can escape responsibility because she did not know or did not have time or did not have
access to the particular rule.
1 In Germany, for example, recoverable attorney and court fees are stipulated by law as a function of the amount
in dispute. Even if a party can demonstrate that they had higher attorney expenses, these will normally not be
recoverable.
2 For a useful discussion see Michael S. Knoll: A Primer on Prejudgment Interest, Texas Law Review 1996,
Vol. 75, No. 2, pp. 293-374; as well as Anthony E. Rothschild: Prejudgment Interest: Survey and Suggestion,
Nw. UL Rev. 77 (1982), pp. 192-???; and John C. Keir & Robin C. Keir: Opportunity Cost: A Measure of
Prejudgment Interest, The Business Lawyer 1983, Vol. 39, No. 1, pp. 129-152.
3 See, inter alia, Susan Margaret Payor, Post-Judgment Interest in Federal Courts, Emory LJ 37 (1988): 495.
Rules generally come in the form of statutory law (in the broadest sense of the word, including
applicable international conventions, applicable industry codes such as the UCP 600, domestic
legislation, domestic regulations, etc.), case law, and contractual stipulations. The contract itself
is usually the most important source of rules and the easiest to identify. Based on the freedom of
contract between private parties, contractual clauses can deviate from and even comprehensively
displace most other rules that might otherwise apply. However, to the extent that a contract does not
comprehensively regulate a particular situation and/or that there are mandatory public rules (both
statutory and case law based), several types of rules will have to be applied simultaneously and
questions of hierarchy may have to be resolved.
Thus, the attorney first has to identify to what extent a particular legal relationship – for example
the rights and obligations of buyer and seller in a given transaction – are comprehensively regulated
in the contract that was validly concluded between the parties and not validly avoided or terminated.
Contractual terms are first and foremost the individually negotiated terms on the front of the
contract. By reference in the negotiated terms, general terms on the back of the contract may be
elevated to the status of contractual terms but generally only to supplement and not to contradict the
individually negotiated terms. Second, the attorney has to identify to what extent mandatory laws
(ordre public, public policy) may apply to the legal relationship and require a re-interpretation or
non-application of some contractual provisions or even cause the entire contract to be illegal and
therefore null and void. Third, the attorney has to identify to what extent optional rules of statutory
law may be applicable and regulate or at least affect (some of) the rights or obligations of the parties
in the absence of valid contractual rules on a given question or if the contractual rules about the
particular issue are unclear or otherwise in need of interpretation. Optional statutory rules may be
found in international conventions, national or sub-national laws, and even in industry codes such
as the UCP 600. They may apply by law for questions not comprehensively dealt with in the contract
between the parties, or they may apply by party agreement, i.e. by reference in the contract. Fourth,
the attorney needs to fill any remaining gaps with case law, both if there are neither contractual
stipulations nor applicable statutory rules, or if the contractual stipulations and/or any applicable
statutory provisions are less than clear and, therefore, in need of interpretation.
Obviously, comprehensive research and the identification of all applicable rules and a correct
understanding of the hierarchy of these rules in relation to each other are of crucial importance. The
three cardinal sins in this respect are
– overlooking an applicable statutory rule or an exception in a different part of the statute or in
another applicable piece of legislation or regulation; overlooking an important precedent of
persuasive, let alone binding character;
– reliance on a statutory rule that had already been amended or repealed at the time when the facts
occurred, or reliance on a persuasive, let alone a binding precedent, that has already been
overruled;
– reliance on a lower ranked provision of the law that is incompatible with a higher ranked
provision of the law, for example reliance on a contractual provision that is incompatible with
a mandatory rule in the respective jurisdiction, or reliance on an optional law that is

incompatible with a contractual provision.
Step 4: Identifying the Claim Bases

After all applicable rules have been identified and ranked in a general manner, for example the
contract, the CISG, cases x, y, and z, the analysis has to home in on specific provisions in these
different sets of rules. In statutory law this requires analysis of specific articles, or even paragraphs
or sub-paragraphs of these articles. In case law the equivalent may be a reference to a specific
passage or paragraph in a judgment.
A claim basis is a clear and unambiguous provision in a legal rule providing a right to bring
a primary claim, and/or a secondary claim (damages), and/or cost, and/or interest, if certain
specified conditions are met. A claim basis typically takes the form of “if X then Y is entitled
to/may demand/claim/require Z.”
Example 1 “The seller must deliver the goods, hand over any documents relating to them and
transfer the property in the goods, as required by the contract ...” (Art. 30 CISG)
Example 2 “If the seller fails to perform any of his obligations under the contract or this
Convention, the buyer may a) require performance ...” (Art. 45(1)(a) with Art. 46(1)
CISG)
The provision in example 1 is not a claim basis! It merely stipulates obligations of the seller but does
not stipulate rights of the buyer. By contrast, the provision in example 2 is a claim basis. The
passage in example 2 “obligations under ... this Convention” actually refers back to Art. 30, where
the primary obligations of the seller are spelled out. Thus, Arts. 45(1)(a) and 46(1) provide the claim
basis for the buyer to receive the goods and the relating documents and the property in the goods and
anything else that may have been stipulated in the contract, such as qualities of the goods, time and
place of delivery, etc. Provisions such as Art. 31 CISG about the place of delivery only become
relevant if the contract itself does not provide a rule for the place of delivery.
In particular, if a statutory provision or the relevant passages in a judgment are longer, it is of crucial
importance to refer to the exact paragraph, sub-paragraph, sentence, and/or alternative in the statute
or judicial decision. Sloppy, imprecise references do not show mastery of the subject and make your
brief less persuasive!
Step 5: Isolating the Conditions for a Claim to Have Arisen, Not to Be Extinguished, and to
Be Enforceable
Since claim basis provide rights or claims only if certain conditions are met, the next step is to
identify all applicable conditions and exceptions. These may be directly contained in the claim basis
itself, i.e. in the same article or paragraph, or they may be identifiable via references in the claim
basis, or via provisions in the chapter of the law or the surrounding passages of the judgment, where
the claim basis is provided. Again, it is of crucial importance that we identify all applicable condi-
tions as well as any and all relevant exceptions. It is simply unforgivable for an attorney to present
an elaborate argument why her client should be entitled to x, y, and z, and then be schooled by a
judge or arbitrator about having overlooked a relevant exception that invalidates most or all of her
claims. Since conditions and, in particular, exceptions, are not always provided in the immediate
vicinity of the claim basis itself, it is important to read all relevant parts of contracts, statutory
materials, and cases. Sometimes, an exception or a bar against enforceability, such as a statute of
limitations, may be found at the end of a piece of legislation or in a different piece of legislation
altogether.
Once the facts, the parties, the claims, the applicable rules, the claim bases, and the conditions and
any exceptions have been identified and understood, we can finally proceed to the presentation of
our case.
Step 6: Presenting a Persuasive Argument (1) – Road Map

Persuasive speaking and writing is often related to saying everything three times: Tell them what
you will tell them, tell them what you want to tell them, and tell them what you just told them.
Translated to legal writing, we need a road map of our arguments, the actual arguments, and a
summary of these arguments.
The road map should generally be kept short and affirmative. Thus, it may sound something like
this: “The buyer is entitled to delivery of conforming goods. Seller’s obligation arises from the
contract of 15 January, as well as Articles x, y and z CISG. Conditions a, b and c are fulfilled in the
present case. At the same time, the seller cannot rely on exception d.”
Lacking confidence, students are often inclined to avoid concrete and affirmative language and use
phrases such as “the question is whether ...” or “if this then that, however, if not then not” and the
like. Even worse, they may introduce their presentation with “I think ...,” which has never been a
strong legal basis because the attorney on the other side will probably think the opposite. It should
be obvious to anyone that none of this is conducive to making a persuasive argument and students
should diligently avoid this kind of language. If at a loss for models, students may want to consult
the Restatements of the Law, for example the Restatement 2nd of Contracts, for good examples of
the kind of clear, straightforward, and affirmative language that makes for persuasive writing.1
Step 7: Presenting a Persuasive Argument (2) – Subsumtion of the Facts under the Law and
the Four Levels of Analysis
The main part of the presentation should follow the outline presented in the road map. Each point
in the outline now needs to be taken up and discussed in a way that merges the facts and the law, or,
better, draws the facts under the law (subsumtion). This is best done in the following steps:
1 The best and most accessible book on the subject may well be Antonin Scalia & Bryan A. Garner, Making
Your Case – the Art of Persuading Judges, St. Paul 2008.
i) Leading statement: “The buyer is entitled to delivery of conforming goods.” This

should be formulated affirmatively. The use of questions, such as “whether the buyer is
entitled ...” introduces the possibility of alternative outcomes and reduces persuasiveness.
ii) Applicable rule(s) for the claim to arise: “The right of the buyer to demand delivery
of conforming goods is based on Articles x, y and z of the CISG. The CISG is applicable
because ... Articles x, y and z are conditional upon a, b and c.”
iii) Subsumtion of the facts, part 1 (positive conditions): “In the present case, condition
a is met because ...; conditions b is met because ...; condition c is met because ...”
iv) Negation of exceptions and other factors that might extinguish a claim or bar its
enforcability: “The seller cannot rely on exception d because it’s conditions e and f are
not met in the present case since.”
v) Subsumtion of the facts, part 2 (negation of exceptions or other extinguishing
factors): “Condition e is not met because ...; condition f is not met because ...”
vi) Statement of interim result: “Therefore, buyer’s claim to delivery of conforming
goods based on the contract of 15 January and Articles x, y and z of the CISG is valid and
seller cannot rely on the exception d.”
This procedure needs to be repeated for every primary claim, secondary claim, alternative claims
if the court or tribunal should not agree with any of the main claims, as well as claims for cost and/or
interest.
In addition to the correct identification of the facts, the parties, and their respective claims, and the
correct interpretation and application of any and all applicable rules and exceptions, mastery of the
subject also requires the correct allocation of time and effort to the different parts of the analysis.
This question of priorities is dictated in practice by the fact that the client has to pay several
hundreds of dollars per hour of her attorney’s time and would not want to pay for work that is not
necessary. Also, if an attorney does not clearly distinguish the important from the unimportant
arguments, the issues that really matter for a successful presentation of her client’s claims may get
buried in irrelevant elaborations. In an exam, correct prioritization is required by the fact that time
(and sometimes space) is limited. Thus, the student, just like the attorney, cannot spend an unlimited
amount of time and effort on the case and cannot afford to discuss at length issues that are either not
controversial, or not conducive to the realization of the client’s claims. Misallocation of time and
effort leads to overcharging of the client in practice and to underperformance in both exams and
practice. The problem is that as human beings, we are not naturally inclined to allocate our time and
effort correctly in these cases. Thus, students have to unlearn their natural inclinations and con-
sciously learn a system called the Four Levels of Analysis.
As we work our way through Step 7, or the equivalent part A of the IRAC Method, our natural
inclination is to write more where we feel confident and feel that we know the answers and where
our position is strong. By contrast, we will be inclined to avoid writing much with regard to points
that are difficult or controversial or weak in our arguments. However, this natural inclination is
diametrically opposed to what is required from a good lawyer because it is simply not necessary to
spend much time or effort on issues that are obvious or that the other side will concede. By contrast,
we have to invest our time and effort where the other side will try to exploit any weaknesses in our
legal or factual position to deny the claims we are making on behalf of our client.
Thus, for every single point or issue appearing in our outline, we should allocate one of the four
levels of analysis and present the point or issue accordingly as we write up our brief or exam. In
particular in exams where time is limited, we should do this early, when we still have time to think
clearly.
Level 1 = so irrelevant that readers would be surprised to see the point:
“What does this have to do with that?” => Don’t even mention it!
Level 2 = relevant but uncontroversial:
“Everybody knows that!” => Mention the point, without explaining or justifying it, if it is
necessary to understand the progression of thought, the connection between different and
more important points.
Level 3 = important and potentially controversial:
“I am not so sure about that!” => Elaborate the point with your supportive arguments, which
should end the doubt or controversy, since you have the stronger position on this point.
Level 4 = the crux of the matter:
“I don’t believe that!” => Elaborate the point with your supportive arguments as well as
obvious counter-arguments and how and why those can be disproven; try to deliver the
triple punch: i) state your main argument(s) in favor and add persuasive reasoning “because
... because ... because...”; ii) name the obvious or previously published/stated
counter-arguments and explain why they are not relevant or persuasive; iii) state your
supportive or alternative argument(s) in favor, in case your first and second point(s) have not
fully persuaded the court or tribunal. Conclude by summarizing why your arguments win,
although it may look as if the other side has the stronger position on this point.
One problem on this level is deciding which counter-arguments to anticipate and already
deal with before the other side has actually made or substantiated them. On the one hand, we
don’t want to wake up sleeping dogs by alerting the other side to weaknesses in our position
they may not be aware of. On the other hand, we don’t want to write a beautiful brief that
is then easily destroyed by an obvious counter-argument of the other side and leaves us at
a distinct disadvantage and in an up-hill battle for our reply or rebuttal. The distinction
should be made along the lines of what is obvious and what every half-way decent lawyer
would understand and what the judge(s) or arbitrator(s) will also think of immediately.
Those points definitely need to be anticipated and dealt with before the other side can even
develop them very forcefully.
Finally, how do you decide which level to apply? Just put yourself in the shoes of your opposing
counsel or a critic of your paper. Which points would the other side concede? And where would they
put in their greatest effort to prove you wrong?
Step 8: Presenting a Persuasive Argument (3) – Conclusions

In the overall conclusions, the brief should summarize or restate the outcome of the analysis of each
primary, secondary, and alternative claim, as well as any claims for cost and interest: “In
summarizing, as we have shown, our clients is entitled to ... (primary claims), as well as ...
(damages), and ... (cost), and ... (interest).”
Bryan Garner’s “10 Tips for Better Legal Writing”
1. Be sure you understand the client’s problem.

2. Don’t rely exclusively on computer research.
3. Never turn in a preliminary version of a work in progress.
4. Summarize your conclusions up front.
5. Make your summary understandable to outsiders.
6. Don’t be too tentative in your conclusions, but don’t be too cocksure, either.
7. Strike the right professional tone: natural but not chatty.
8. Master the approved citation form.
9. Cut every unnecessary sentence; then go back through and cut every unnecessary
word.
10. Proofread one more time than you think necessary.
Bryan Garner, 10 Tips for Better Legal Writing - You’ll be glad you found your mistakes before your readers do,
ABA Journal, October 2014, pp. 24-25, with additional details. For more information see Bryan Garner, Legal
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The General Framework for International

Chapter · April 2018

EU Law - Textbook View project

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The General Framework for International

Section 1: Definition of IBT and Scope of the Book

Section 2: The History and Motors of International Commerce

1st scenario: independent manufacturing without specialization and/or trade

surplus / deficit + 5'000 bikes

Frank Emmert: The Argument for Robust Competition Supervision in Developing

NOTES AND QUESTIONS

Section 3: The Legal Framework for IBTs – a To-Do List

Section 4: Different Levels of Legal Rules Governing IBTs

III. Private International Law

IV. National Law

1 Erie Railroad Company v. Thompkins, 58 S Ct 817; 304 US 674: 82 L Ed 1188 (1938).

VI. Model Laws and Private Codes

VII. Private Contracts

Section 5. Putting It All Together:

Step 1: Gathering and Understanding the Facts of the Case

Step 1: Gathering and Understanding the Facts of the Case

Step 3: Finding All Applicable Rules for the Case

a mandatory rule in the respective jurisdiction, or reliance on an optional law that is

Step 4: Identifying the Claim Bases

Step 6: Presenting a Persuasive Argument (1) – Road Map

i) Leading statement: “The buyer is entitled to delivery of conforming goods.” This

Step 8: Presenting a Persuasive Argument (3) – Conclusions

Bryan Garner’s “10 Tips for Better Legal Writing”

1. Be sure you understand the client’s problem.

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