Tuesday, August 11, 2009

A Bit Of International Law

A reader has asked about laws governing international transactions, and particularly what law controls if vendor is in one nation and customer is another. While international transactions are not one of my strengths, I've done a few and can offer some insights.

To begin, the transaction must be legal in each nation. While that would seem obvious in theory, in practice it an yield many surprises. Years ago I ordered some rare earth magnets from a well known and well respected vendor of woodworking supplies located in Canada. Rare earth magnets are very powerful for their size, and woodworkers use them in all sorts of ways. I glue them to the wall of my workshop and hang tools from them. A few days later I received a call from a very nice, but rather embarrassed fellow at vendor, who advised that it was (then, at least) illegal to ship such magnets across the US/Canadian border. He apologized for the inconvenience, the rest of my order arrived in due course, and to this day I wonder why magnets, of all things, should receive such treatment from government. The moral however, is that government restrictions can pop up in the most unexpected locations. IT, of course, often receives special scrutiny from regulators. I sometimes think one could make a career simply dealing with US government controls on the export of technology.

Assuming the transaction is permitted in both nations, the next question is how to enforce the agreement. If I, as an American, hire a German company to build a factory in Mongolia, where do I file suit if something goes wrong? Despite all the progress of globalization, there is no “international commercial court” to hear such disputes. My choices would appear to be the US, Germany or Mongolia.

Although Mongolia has long fascinated me, I have no knowledge of their system of commercial law. Perhaps their courts would not even hear a case between two foreigners over a project that just happened to be located in Mongolia. Indeed, if the money is merely flowing between the US and Germany, the Mongolian courts may not have effective jurisdiction. Even if I were to win in the Mongolian courts, I would still have to locate the bank accounts (or other assets) of my German vendor and persuade a court there to enforce the Mongolian judgment.

If we presume the contract was signed in the US, I would have a good case for filing suit in that nation. Again, even if I were to win, I would have to find assets to satisfy the judgment. That could be difficult if my vendor only has a small sales force. In that case my US judgment would be useful only if I can enforce it in Germany.

There are, of course, treaties between most nations promising to respect the judgments of one another's courts. But that does not guarantee success. The German judge might discover some defect in the American proceedings and refuse to confirm the judgment. That would leave me with one option – filing suit in Germany.

In this case I have made at least three mistakes:

  • I did not insist that the contract specify what law would apply;
  • I did not insist that the contract specify where any litigation would be filed;
  • I did not make certain that vendor had assets where I could reach them easily (assuming I won my case).

As a result, I condemned myself to play hide and seek across the world with my vendor.

A better course would have been to:

  • Hire a US attorney skilled in this type of transaction and the applicable government regulations;
  • Hire an attorney in Mongolia to ensure compliance with all local laws;
  • Reach an agreement with the foreign vendor regarding where any disputes will be heard, and what law should apply;
  • Require the vendor to set up assets or other security within my reach (Vendor, of course, will want similar protection in the event they have to bring suit against me.).
Better to plan and agree how disputes will be handled than to leave the question open and creating something additional to argue about.