INTERNATIONAL BUSINESS TRANSACTIONS

Week 2 – Prof. Levone

Seller - carrier - Buyer.
The sales contract is between the seller and the buyer and the shipping contract is
between the seller and the carrier. This is because they are more familiar with the
process of shipping and know the right carriers, can get better prices.
Once the carrier receives the goods, a bill of lading is issued. There are two types of
BoLs:
1. Straight BoL – This is non-negotiable and it just shows the person it is going to be
shipped to.
2. Negotiable BoL – Here, the particular name of the receiver is not mentioned in the
BoL. This is where you can transfer the BoL to another party, basically negotiate the
BoL to multiple parties, and in the end, whoever has the BoL retains the right to take
possession of the goods.
There are two functions of a BoL. It is a receipt of the documents (Straight) or the
transfer of the rights of possession of goods (Non-negotiable).
The money moves through a letter of credit. It is essentially a promise of payment and
key to a LoC is that the payment will be made upon the receipt of other certain
documents. In this stage, the buyer’s bank will issue this document, and the seller’s bank
will confirm it.
The documents required to be shown along with a LoC are:
 Bill of Lading
 Commercial Invoice
 Proof of insurance
 Inspection Certificate
The LoC must be issued before the goods are actually shipped, because the Bill of Lading
is the most important document here for the seller to be paid from the buyer’s bank.
It is important that the bill of lading be a negotiable one because in case the buyer’s
bank cannot recover the money from the buyer’s account, the BoL can be negotiated
from the Seller to the Seller’s Bank and then to the Buyer’s Bank, who will then have the
right to the possession of the goods and sue the Buyer for the due payment.
Incoterms
It is short for International Commercial Terms. They govern the allocation of risk and
responsibility for the delivery of goods:
 Who arranges and pays for the transport?
 Who is responsible for export and import clearance?
 Who gets the insurance?
 Who bears the risk of loss and damage of the goods during transit?
These Incoterms are not law and are binding only when the parties adopt them
contractually. This way, they do not have to negotiate and spell out all these commonly
used commercial terms and provisions, there’s lesser misunderstandings and much
easier for the parties. The key benefit of Incoterms is standardization.
Parties can:
1. Use generally recognized terms.
2. Agree based on a common understanding of those terms, without having to negotiate.
3. Avoid misunderstanding in the use of these terms.
4. Save a lot of drafting in their sales contracts.
Incoterms 2020 – 2 Groups, 4 Types and 11 Rules
E Terms: The seller’s minimum obligation to make the goods available at the seller’s
premises (EXW).
F Terms: The seller’s obligations to hand over the goods to a carrier nominated by the
buyer (FCA, FAS, FOB). Most commonly used are FOB.
C Terms: The seller’s obligation to hand over the goods to a main carrier chosen and
paid for by the seller (CFR, CPT) together with insurance against risks in transit (CIF,
CIP).
D Terms: The seller’s maximum obligation: to deliver the goods at the destination (DAP,
DDP).
7 for any mode of transport
ExWorks (EXW): Seller delivers by making goods available to buyer.
Free Carrier (FCA): Seller delivers goods to carrier or buyer-appointed agent.
Carriage Paid To (CPT): Seller delivers goods to carrier or buyer-appointed agent and
pays for international carriage.
Carriage & Insurance Paid To (CIP): Seller delivers goods to carrier or buyer-appointed
agent and pays for international carriage and insurance.
Delivered at Place Unloaded (DPU): New to 2020, formerly called Delivered at Terminal
(DAT). Seller delivers by making goods available to buyer by unloading goods at a
named place.
Delivered at Place (DAP): Seller delivers by making goods available to buyer at a named
place.
Delivered Duty Paid (DDP): Seller delivers by placing goods at buyer’s disposal, cleared
for import with duties paid and ready for unloading at named place.
4 for ocean and inland waterway transport
Free Alongside Ship (FAS): Seller delivers by placing goods alongside a vessel
nominated by buyer.
Free on Board (FOB): Seller delivers when goods are on board a vessel nominated by
buyer.
Cost & Freight (CFR): Seller pays for costs and freight to named destination and delivers
when goods are on board a vessel nominated by buyer.
Cost, Insurance & Freight (CIF): Seller pays for costs, freight, and insurance to named
destination and delivers when goods are on board a vessel nominated by buyer.

Problem 2.2: Incoterm FOB

Who pays for transportation to NY? (Seller’s Responsibility)
Who is responsible for the storage of books? (Buyer’s Responsible – B5)
Does the buyer still have to pay for the books? (B9 – Buyer’s Obligation)
Who should have paid for the insurance to cover the books? (Ideally, the buyer as he has
the most to lose. But the seller may have an insurance until the shift of risk)
Contracts of Affreightment:
A contract of affreightment is used by the Seller to arrange for the transportation of the
goods to the named destination. Seller is called the shipper and the party transporting
the goods is the carrier.
The bill of lading also usually serves as the contract of affreightment. On the reverse side
of the bill of lading are standard terms that govern the rights and obligations of the
parties concerning the shipment of the goods?
Multi-modal transportation: The use of multiple modes of transport for the export of
goods.
VOCC: Vessel Operating Common Carrier – It is a company that owns and operates a
vessel and they transport goods.
NVOCC: Non-Vessel Operating Common Carrier – Intermediary. They don’t own a
vessel and are just a logistics company and make the arrangement between the seller
and the VOCC.
The common rules that govern affreightment were developed in order to establish fair
liability between the exporter and the carrier.
COGSA Basics:
This is not applicable to the chartered contracts, which are basically private contracts. It
can be applicable only if such a contract has a Paramount Clause – then COGSA will
apply to such transactions.
Himalaya Clause: Extends the COGSA to the third parties to the transactions.
Period of Responsibility Clause: Critical because COGSA covers only tackle to tackle,
unless you include this clause which says that COGSA will be applicable throughout the
journey, even the land transport. From the loading dock to the final destination, despite
the goods not being on sea for particular legs of the journey.
Norfolk Southern Railway v. Kirby – SCOTUS CASE
Primarily, the Himalaya Clause in the ICC Bill of Lading had to be interpreted under
ordinary principles of contract interpretation. It extended to “any” servant, agent…. And
therefore provided protection to Norfolk as well.
Second question: whether the COGSA liability limitation imposed in the Hamburg Sud
Bill (applicable to Hamburg, its agents and ICs), which ICC negotiated, prevents Kirby
from suing Norfolk (Hamburg Süds independent contractor) for more?
Answer: Yes, Norfolk is protected by the liability limitation in the Hamburg Bill, as
when the intermediary enters into a liability limitation with a third (downward stream)
party, they act as an agent of the cargo owner and bind the latter to the limitation. Here,
ICC is Kirby’s agent for a single, limited purpose --- when it contracts with subsequent
carriers for limitation of liability.
Rule: When an intermediary contracts with a carrier to transport goods, the cargo
owner’s recovery against the carrier is limited by the liability limitation to which the
intermediary and carrier agreed.
If the court ruled that COGSA would not apply here, the process would be too slow and
inefficient. In that case, each leg of the transportation would have different liabilities
applicable. This would mean that each part of the journey would mean different
amounts of liabilities on different carriers. The agency law was bent out of shape here to
make sure international trade law is not disrupted.
The ‘K’ Lines Case: SCOTUS CASE
Question: Whether the terms of a through bill of lading issued abroad by an ocean
carrier can apply to the domestic part of the import’s journey by rail carrier, despite
prohibitions or limitations in another federal statute (Carmack Amendment)?
The application on Carmack on the through Bills of Lading undermines the purpose of
Carmack as well as of COGSA. It also disrupts and confuses the dispute resolution
process and leaves no uniformity in international trade. Thereby, COGSA applies in a
through Bill of Lading.
While the narrow issue here was the forum selection clause in the BoL, the broader issue
is how much the liability of the train company was, because if the COGSA applies, they
are liable for $500 per unit but under the Carmack Amendment, they would be liable for
the full amount. In order to facilitate international trade, one scheme must be applicable
to the entire journey of transportation. Hence, the SCOTUS did a very forced reading of
the Amendment and ruled that with a through bill of lading, the COGSA will be
applicable throughout the transportation, regardless of the method of transportation
used.
Anvil Knitwear v. Crowley:
Here, Anvil sued Crowley or damages resulting from the hijacking and theft of cartons of
Anvil’s cotton tee-shirts while in the custody of Crowley’s agents.
The Court used the last exception of liability to say that Crowley was not negligent in
this case and that they were not liable for the hijacking that occurred. The disclaimer on
the BoL did not apply however.
Key Clauses in a Bill of Lading:
 Clause Paramount: COGSA applies to the contract. This can be used for private
carrier contracts.
 Responsibility Clause: Extends coverage of COGSA to the land part of the
transportation.
 Himalaya Clause: Extends coverage of COGSA to agents of the main carrier.
 Exceptions Clause: Carrier is not liable damages that have happened due to the
exceptions under COGSA.
Steel Coils Inc. v. M/V Lake Marion:
COGSA Burden-Shifting
1. Plaintiff’s Initial Burden: A prima facie case that must show that goods were not
damaged when loaded, but were damaged when they were unloaded. Here, the BoL
works as a prima facie evidence that the goods were loaded just fine, and they got an
inspection done when the goods were unloaded to show that they were damaged due
to the seawater at the time.
2. Shift of burden of proof to the Carrier: Here, there are two possible defenses. The
first one is that they were not negligent and they exercised due diligence while
shipping the goods. The next one was that the damage occurred due to one of the
exceptions to liability mentioned in the COGSA. In this case, the defendant did not
get past this step as they were negligent in handling the coils.
 In this particular BoL, the carrier did not give the seller the option to opt out of
COGSA, hence the liability limitation did not apply. (Check with somebody about
this.)
3. Burden back to the Plaintiff: If the defendant does prove that an exception applies,
then the plaintiff must show contributory negligence by the defendant.
4. Burden shifts back to the Defendant: If the plaintiff establishes the defendant’s
contributory negligence, then the burden of proof shifts back to the defendants to
segregate the portion of damage caused by negligence and the damage caused under
the exception.
Marine Insurance:
It covers physical damage and loss of goods while in transit. The three key principles are
indemnity, insurable interest and utmost good faith which is full disclosure. The insurer
is subrogated to all claims against the carrier.

Week 3 – Prof. Duffy

CISG by the UNCITRAL
Today, we are exploring only sales contracts for goods. This does not include services or
anything else. The term ‘widget’ is used to represent a unit of a good.
When a dispute from a contract arises, the first question is what is law applicable here?
In order to determine the law, the parties can either:
 Agree to the applicable law by contract
 Leave it to the domestic law
The issue with the choice of law analysis is that it creates unpredictability in situations
where parties want certainty. For example, the US (Restatement) says that the law most
applicable and pertinent to the parties will apply. This is a very subjective standard,
leading to unpredictability. To curb this issue, the CISG was formed after some
procedural history. (Refer to the PPTs.)
Significant Aspects of the CISG:
 The CISG is not a mandatory public law but a supplementary private one.
 It is limited in scope, it covers formation of the contract (Part I) and the obligations
and rights of the buyers and sellers (Part II). It does not govern issues such as
validity of the contract, third-party rights and property rights in the goods.
 Sphere of Applicability: It applies to contracts of sale of goods between parties
whose places of business are in different States and when the States are Contracting
States or when the rules of private international law lead to the application of the law
of a Contracting State.
It does not apply to:
Art. 2: consumer/household goods, securities, ships or aircraft, electricity. Basically
any area where there is state interest or is difficult to legislate.
Art. 3: Carve‐out for services: contracts for supply of goods to be manufactured or
produced except if party ordering goods “undertakes to supply a substantial part of
the materials necessary for such manufacture or production.”
Art. 4: Excluded:
– validity (capacity of parties, fraud, mistake, public policy)
– effect that contract may have on the property interest of goods sold
(transfer/retention of title, bona fide purchaser)
Art. 5: Exclusion for Personal Injury: CISG does not apply to “liability of the seller
for death or personal injury caused by the goods to any person.”
 Thereby, the choice of law analysis may still be necessary when the parties have
chosen to be governed by the CISG but have not explicitly agreed upon a domestic
law.
 When the CISG applies, it displaces the domestic law. In the case of the US, it
displaces the UCC.
 It is less formal than the Anglo-American common law.
 Parties have the freedom of contract and can exclude the application of the CISG
(Art. 6)
 It is to promote uniformity in its application and the observance of good faith in
international trade.
 It has a ‘reasonable person’ standard – basically how a reasonable person in the
shoes of the parties would have behaved in that situation.
 It considers the course of dealings between the parties. It basically means that it will
see the standards that the parties have set amongst themselves and have behaved in
their past dealings.
Refer to the textbook for examples of choice of law analysis in instances of Article 1(1)
(a) and Article 1(1) (b) applying. Page 368 onwards.
Article 95: Allows a party to make a reservation at the time of ratification that it will
not be bound by Article 1(1) (b). The US has made such a reservation because this Article
allows for the displacement of the domestic law more frequently than that of foreign
law.
Prime Start Ltd. v. Maher Forest Products Ltd. + Problem 3.2
Refer to the class handout for the outline of the choice of law analysis to check
application of the CISG.
There were no choice of law clauses included in the agreements at issue in this case. The
Plaintiff asserts that CISG is applicable. Plaintiff was a corporation of British Virgin
Islands (Not a signatory to CISG) and Defendants were American Corporations
(Signatory to the CISG). Plaintiff seeks to apply the Article 1(1)(b) of the CISG to assert
that it applies, and a choice of law analysis conducted under it would result in either the
Canadian, US or Russian law applying. All 3 are signatories, thereby CISG applicable.
The Court DISAGREES. The US has made the reservation under Article 95 – thereby
precluding Art. 1(1)(b) from applying to this case.
Amco Ukrservice & Prompriladamco v. American Meter Co.
There was a breach of 2 joint venture agreements, Plaintiffs are Ukrainian corporations
seeking over $200 million in damages.
Holding: CISG does not apply to the joint venture agreements. Although the CISG may
have governed discrete contracts for the sale of goods that the parties had entered
pursuant to the joint venture agreements, it does not apply to the agreements
themselves.
American Meter argues that the CISG governs the plaintiffs’ claims because, at bottom,
they seek damages for its refusal to sell them the goods and that, under the CISG, the
supply provisions of the agreements are invalid because they lack sufficient price and
quantity terms.
CISG does not define what constitutes a ‘contract for the sale of goods’, this ‘gap’ has
created in issue in determining whether distributorship agreements are governed by it,
as they do contemplate a future sale but do not set forth set quantity and price.
(Germany concluded it does not)
Defendant tried to separate the relationship and supply provisions of the Agreements
and argued that since the Plaintiffs are seeking damages on the supply provisions, CISG
must be applicable. Court does not agree with this division of agreement.
Gap v. Exclusion in the CISG
The difference between a gap and an exclusion in the CISG. In case of a gap (which are
questions governed by the CISG), the general principles of which it is based on will
apply, before applying the principles of private international law. The exclusions are
basically issues that are not within the scope of the CISG and are not governed by the
Convention.
Gaps: Article 7(2): Questions concerning matters governed by this Convention which
are not expressly settled in it are to be settled in conformity with the general principles
on which it is based or, in the absence of such principles, in conformity with the law
applicable by virtue of the rules of private ‐ international law.
A gap refers to an issue that is governed by the CISG but on which the CISG is silent,
whereas an exclusion refers to an issue that is not governed by the CISG but which must
be governed by some other substantive law.
Forestal Guarani S.A. v. Daros International Inc.
Plaintiff is from Argentina and Defendant is from the United States. Entered into an oral
agreement, Defendant breached by refusing to pay.
Defendant contends that lack of written agreement precludes the claim as CISG requires
a written agreement. Plaintiff argues that the lack of writing is inconsequential in light
of the parties’ course of dealing, where deliveries were made and part payments were
done.
While CISG dispenses with the requirement that an agreement must be in writing, the
Contracting states may choose to make a declaration under Art. 96 to exclude itself from
the Article 11, Article 29 and Part II. Argentina has made such a declaration, US has not.
This is a gap in the CISG, as there is no measure provided to settle such a conflict. The
Court then applied Article 7 and tried ‘filling in the gap’ using founding principles of the
CISG. These did not help resolve the dispute, the ‘rules of private international law’
under Article 7 are triggered.
Court remanded the case back to the District Court to do a choice of law analysis and
determine whether the NJ law or Argentina law applies to this matter and then apply
that law to this case.
PART II OF CISG: FORMATION OF THE CONTRACT
Is there a contract?
This is the threshold question. An offer and an acceptance makes it a contract.
The factor of a valid offer is if the person intended to be bound by the person? The
elements of such intent is:
- Definiteness of the proposal – the price and quantity
- Number of people to whom the offer is extended (Specific persons preferred)
Article 15: Seller can withdraw the offer at any time before the offer reaches the
offeree, even if it was supposed to be irrevocable.
The factors of a valid acceptance (Article 18) are:
- Assent to the offer.
- Assent communicated within the time fixed (if any) or a reasonable time.
Silence is never acceptance, it has to be communicated for it to be valid.
- Withdrawal or revocation of the offer?
- Withdrawal of the acceptance?
- Acceptance materially altering the terms of the offer – Mirror Image Rule and if the
altered acceptance results in a rejection or counteroffer. The alteration cannot be of
material terms, if not, it is acceptance. If material terms are altered, rejection and a
counteroffer.
Article 19: An assent that contains alterations or modifications of the terms of the
offer.
Battle of the Forms: Reply to an offer must be a precise ‘mirror image’ of the offer, no
deviations from the offer in the response. Any additional terms that materially alter
the terms of the offer in the reply is to be considered as a rejection of the offer and a
counter offer. Even if not material, the offeror can object to the changes, and if such an
objection is raised, the offer is said to be rejected and the response is a counteroffer.
Material changes: Price, payment, quality and quantity of goods, delivery, liability and
dispute settlement.
Filanto, S.p.A. v. Chilewich International Corp.
The Court had to determine if a sufficient “agreement in writing” to arbitrate disputes
exists between these parties. Yes, there was as no objection was raised within a
reasonable period of time by Filanto. (Given the nature of their course of dealings)
An offeree who, knowing that the offeror has commenced performance, fails to notify
the offeror of its objection to the terms of the contract within a reasonable time will,
under certain circumstances, be deemed to have assented to those terms
Conformity of the goods and packaging
Art. 35(1): The seller must deliver goods which are of the quantity, quality and
description required by the contract and which are contained or packaged in the manner
required by the contract. If there is no such requirement by the contract, we move on the
Art. 35(2).
- Fit for the purpose of the goods
- Fit for the specific purpose of the contract
Problem 3.13
The seller has a duty to mitigate the damages to the extent possible.
Medical Marketing International, Inc. v. Internazionale Medico
Scientifica, S.r.l.
Plaintiff filed for an Order confirming arbitral award and entry of judgment in the US
District Court of Louisiana. Plaintiff is an American corporation and Defendant is an
Italian corporation – entered into a licensing agreement. FDA seized medical goods sent
by Defendant for non-compliance with administrative procedures. The issue was who
bore the obligation of ensuring that the equipment were compliant with the procedures?
Referred to arbitration, who found damages payable to plaintiff.
Defendant quoted a German CISG case that held that under CISG Art. 35, a Seller is not
generally obligated to supply goods that conform to public laws and regulations
enforced at the Buyer’s place of business. The exceptions to this general rule are:
(1) If the public laws and regulations of the buyer’s state are identical to those enforced
in the seller’s state;
(2) If the buyer informed the seller about those regulations; or
(3) If due to “special circumstances,” such as the existence of a seller’s branch office in
the buyer’s state, the seller knew or should have known about the regulations at issue.
The Arbitrators found that the third exception applied to this case and thus, the general
rule did not apply. The Court agreed with the arbitrators’ decision and granted the
Order confirming arbitral award.
[Read on Damages Article 74-76 from PPT]

Week 4 – Prof. Duffy

LETTERS OF CREDIT
A letter of credit is an unconditional undertaking by an issuer (usually a bank) to pay
certain amounts if certain documents are presented. (Bill of Lading, commercial invoice,
insurance certificate and packing list)
Types of LoC:
1. Documentary Credit
2. Standby Credit: This guarantees the performance of some obligation.
Sources of law for a LoC:
- Uniform Customs and Practice for Documentary Credits (UCP) 600, 2007 – For
trade and commercial LoCs. It is issued by the International Chamber of Commerce.
- International Standby Practices 1998 (ISP 98) – Mostly for Standby LoCs
- The Uniform Civil Code (UCC) Article 5 – The domestic law of US governing LoCs
Elements of UCP 600:
1. Parties must incorporate it (Article 1). The UCC, by Section 5-103(c), recognizes that
parties to a letter of credit that is otherwise governed by the UCC may exclude the
UCC in favor of the UCP.
2. There may still be the need to resort to domestic law, especially because the UCP is
silent on the issue of fraud as a defense to payment of the letter of credit.
3. The LoC is generally irrevocable in commercial transactions and the UCP 600 has
incorporated this into it.
Relevant definitions: [Check textbook (pg. 471) and PPT for additional definitions]
Issuing Bank: The two risks that an issuing bank undertakes are being sued for
wrongful dishonor of the LoC brought by the seller or wrongful payment to the seller
brought by the buyer.
Confirming Bank: It is the bank that adds its own undertaking/confirmation to pay
the letter of credit issued by the Issuing Bank. It assumes all the obligations of the
Issuing Bank as an independent undertaking. This is to ensure that if the IB goes
bankrupt, this Bank can assume the risk. Further, this is usually the parent bank/bigger
bank and is chosen as a safety measure.
Nominated Bank: It is the bank authorized by the IB to pay the letter of credit.
However, it is not required to do so unless it is also a CB, which it often is. If they accept
the draft and the documents from the seller and it endorsed over to them, they will then
be required to make the payment and demand reimbursement from the IB, thus
becoming the Beneficiary there onwards.
Advising Bank: The conduit for the presentation of the documents, it does not assume
any of the risks or makes the payment. Think of it as the administrating bank.
Draft: Unconditional order in writing requiring the bank to whom it is addressed to
make payment, either on demand or at a future date, to the order of a specific person or
to ‘the bearer’. It is a negotiable instrument and type of bill of exchange.
Draft is the demand for payment on the Confirming/Issuing Bank pursuant to the Credit
(whereas the Credit is the undertaking by the Issuing Bank to pay)
‐ Draft is negotiable instrument
‐ A form of the draft will often be attached to the Letter of Credit
Independence Principle
This principle basically lays down that the letter of credit is separate and apart from the
underlying contract and transaction. The UCP has made it very clear, as this principle is
what ensures that the letters of credit work in international commercial transactions.
UCP Article 4(a) and Article 5 (banks deal with the documents and not the
goods/services/performance to which the documents relate) embed this principle in the
UCP.
This principle serves 2 important functions in International Commerce:
1. The seller is provided an assured method of payment. As long as the seller presents
the conforming documents, the seller will receive prompt payment.
2. Bankers act as ‘document merchants’ and their role is of mechanically dealing with
the documents. This assures that LoCs are paid at the earliest and at minimal
expense and gives the LoC its utility in financial transactions.

Urquhart Lindsay and Company, Ltd. V. Eastern Bank, Ltd.

Here, the Plaintiff is the seller and Defendant is the Issuing Bank. The Court does not
get into the underlying transaction and the issue that arose there. It just said that the
correct documents were presented by the seller, and thereby the payment must be made
by the IB and the buyer must reimburse the IB. The remedy available to the buyer is to
sue the seller for the excess amount paid. The obligation of the issuing bank to pay
under a LoC is independent of the rights of buyer and seller under the sales contract. If
the documents presented under the LoC conform to the LoC requirements, the bank
must pay.
Any adjustment must be made by way of refund by the seller, and not by way of
retention by the buyer.
Maurice O’Meara Co. v. National Park Bank of New York
Plaintiff’s assignor sustained damages when Defendant refused to pay three sight drafts
against a confirmed irrevocable letter of credit.
The Court held that the IB does not have to examine any underlying stipulations of the
contract and need to just make the payment on the correct documents presented. The
court held it was wrongful dishonor. Any requirement that says that the bank must
examine kills the efficiency of the entire process.
Whether the paper was what the purchaser contracted to purchase did not concern the
bank and in no way affected its liability. It was under no obligation to ascertain, either
by a personal examination or otherwise, whether the paper conformed to the contract
between the buyer and seller.
If the drafts, when presented, were accompanied by the proper documents, then it was
absolutely bound to make the payment under the letter of credit, irrespective of whether
it knew, or had reason to believe, that the paper was not of the tensile strength
contracted for.
Justice Cardozo dissents, and kind of foreshadows the fraud exception to this rigid rule,
and draws comparison to rags and paper. The fraud exception is however, narrower
than J. Cardozo’s approach – which does not take into account the Seller’s intention.
Problem 4-7
1. KNB will have to pay the entire cost.
2. No, KNB should not stop the second payment
3. The LoC must mention that the certification provided must be by trained staff or by a
specific company/appoint someone
4. It is an irrevocable credit – basically silence in the LoC indicates that it is
irrevocable.
Strict Compliance Principle
The documents submitted for the payment must conform to the terms of the Letter of
Credit. This is included in the UCP 600 in Article 14. The idea is that the bank is not
required to look behind the documents and look at them for their face value and leave it
at that. Basically, examine the documents presented on their face to see if they
constitute a complying presentation.
J.H. Rayner and Company, Ltd. v. Hambro’s Bank, Ltd.
“Coromandel Groundnuts” case. The Plaintiff presented the required documents to the
Defendant, who refused to issue payments on their basis on the ground that the terms of
the LoC called for an invoice and bill of lading both covering a shipment of “Coromandel
Groundnuts” whereas the presented documents described the goods as something else.
There must be exact compliance with the LoC and banks must issue payments when the
accompanying documents are in strict accord with the credit as opened. Here, the words
in the BoL were not exactly the same as required by the LoC. Bank had the right to
refuse payment as if they accepted it, it would be on their risk due to non-compliance.
The IB has no obligation to possess special knowledge of the industry terms, only to
mechanically examine the documents for discrepancies.
Hanil Bank v. PT. Bank Negara Indonesia
The beneficiary “Sung Jun Electronics Co.” was misspelled as “Sung Jin” in the LoC and
the beneficiary did not request amendment of the LoC to change the name.
Consequently, BNI rejected the documents tendered by Hanil and refused to pay under
the LoC, giving 4 grounds for the refusal:
1. Name of Beneficiary: This was a material discrepancy and not one that was
obviously a typographical error. Beyene case. Further, the beneficiary is
responsible for inspecting the LoC and is responsible for any negligent failure to
discover that the credit does not achieve the mutual commercial ends. Further,
there was no internal inconsistency or ambiguity in the LoC.
Hence, properly rejected.
2. The Packing list: Did not show contents of each carton
3. Export Quality: Failed to specify
4. The Bill of Lading: Freight instead of Ocean
The UCP applies here, and there must be strict compliance with the essential
requirements of the LoC by the beneficiary to draw upon the LoC. There is no room for
‘almost the same’.
In this case, the court only examined the fact that the name of the seller was misspelled
by the IB and this discrepancy was brought up by the seller when it was given to them.
The typo here is not something that makes obvious what the actual name was to be
(Smith//Smithh). Thereby, the IB was not obligated to make the payment, other issues
not necessary to be examined.

Fraud Exception to the Independence Principle

The UCP is silent on the issue of fraud as the drafters believed it should be left to
domestic law. The doctrine of fraud established by Sztejn has been codified in the UCC
in Section 5-109 – the domestic law of the US governing fraud. This section also goes on
the lay down conditions when the issuer must honor the payment despite fraud. In the
second case, they may honor or dishonor.
In the case of Sztejn, the court held that the IB need not have made the payment as it
was clear case of fraud. It further went on to say that when the seller’s fraud has been
called to the bank’s attention before the presentation of the LoC, the principle of
independence should not be extended to protect the unscrupulous seller. This is a
narrow exception to the principle of independence of the LoC.
Sztejn v. J. Henry Schroder Banking Co.
The sellers sent waste material instead of the actual goods, and the documents
presented before the bank were fraudulent. The Buyer found out about this before
payment was made. The Court held that where the seller’s fraud has been called to the
bank’s attention before the drafts and documents have been presented for payment, the
principle of independence of the bank’s obligation under the letter of credit should not
be extended to protect the unscrupulous seller. Further, there was no innocent third
party, such a confirming bank or negotiating bank that relied on the LoC. Therefore, the
fraud exception is a very narrow and limited one in scope.
Sources of Law for Fraud:
In the US, Section 5-109 of the UCC govern cases of fraud in letters of credit. It divides
case of fraud into two categories:
1. Cases where the honor is demanded by certain third parties who have given value
in good faith and without notice of the fraud;
2. All other cases. In such cases, the bank is protected if it chooses in good faith to
either honor or dishonor the LoC. Most banks choose to honor as it is the lesser
cumbersome option and involves lesser risks.
In the first case, the issuing bank must reimburse the confirming bank, and the buyer-
applicant must, in turn, reimburse the issuing bank. (Higher risk on the part of the
Buyer-Applicant). The buyer’s remedy is to sue the seller for fraud. The section does not
protect all innocent third parties, but only those who were brought into contact with the
fraudulent seller directly or indirectly by the applicant of the credit. (Nominated party,
confirming bank, assignee of issuer).
Mid-America Tire, Inc. v. PTZ Trading Ltd.
In this case, the Court held that the LoC in contention is governed by both the UCP and
the domestic law. When a LoC is expressly subject to the UCP but the UCP is silent as to
the issue in controversy, the domestic law governs. The UCP does not displace the
domestic law.
“Material fraud” under R.C. 1305.08(B) means fraud that has so vitiated the entire
transaction that the legitimate purposes of the independence of the issuer’s obligation
can no longer be served. The Court held PTZ’s actions in this case to be sufficiently
egregious to warrant injunctive relief under the ‘material fraud’ standard.
Standby Letters of Credit
In a documentary LoC, the LoC flows from the Buyer to the Seller, to secure the Buyer’s
obligation to pay. The Seller often chooses its bank as the confirming bank.
Payment under the standby letter of credit occurs as follows:
(1) Buyer submits a pro forma declaration and a demand for payment (such as a sight
draft) to Buyer’s Bank;
(2) Buyer’s Bank pays Buyer upon the Bank Guarantee;
(3) Buyer’s Bank forwards the documents and a demand for reimbursement to Seller’s
Bank;
(4) Seller’s Bank reimburses Buyer’s Bank under the Standby Letter of Credit;
(5) Seller’s Bank forwards the documents to Seller;
(6) Seller reimburses Seller’s Bank.
However, in a standby LoC, the LoC flows from the Seller to the Buyer, to secure the
Seller’s obligation to perform. The Buyer here, chooses its bank as the confirming bank.
Standby LoCs are also subject to UCC Article 5 and the UCP 600. They are also governed
by ISP 98, Uniform Rules of Demand Guarantees (URDG) and domestic law. There is
also the UN Convention on Independent Guarantees and Standby Letters of Credits but
it does not have a legal effect in the US as it has not been ratified in the US yet.
Difference between the two are:
- The standby letter is payable upon some nonperformance
- Performance: The Buyer-Seller title changes
- Risk: The shift in the risks undertaken by the Buyer/Seller’s Banks
- Documents: The kind of documents to be submitted and by and to whom.
The Two Iranian Cases
1. US Telecommunications firm supplying hardware/services to Iranian govt.
counterparty;
2. Interrupted or affected by the 1979 Iranian Revolution;
3. Project suspended or unfinished;
4. The Iranian party called on the Standby LoC.
American Bell International, Inc. v. Islamic Republic of Iran
The Court found that the Plaintiff did not meet the criteria for the grant of a preliminary
injunction and rejected their motion.
SDNY:
– Irreparable injury – No; failure to show that it could not sue in US courts
– Success re: fraud– No; commercial decision by Iran to repudiate
– Hardship – On balance worse for MH
Harris Corporation v. National Iranian Radio & Television
The Court granted the motion for preliminary injunction.
11th Circuit:
– Irreparable injury – Yes; Iran is hostile to US
– Success re: fraud – Yes; evidence that NIRT mispresented Harris’ performance
– Hardship – Yes; Harris would clearly suffer
– Public Interest – US Government’s interest in maintaining status quo
How are Standby LoCs different from Guarantees?
– Unlike a guarantee, a letter of credit must have a maximum stated amount.
– Unlike a guarantee, a letter of credit must have a stated expiry date.
– Unlike a guarantee, a letter of credit must be stated to be payable solely against
presentation of documents.
– Unlike a guarantee, a letter of credit must be backed by a valid
reimbursement obligation on the part of the issuing bank's customer (the
applicant).

Week 5 –Notes
Non-Establishment Forms of International Business
It is a progression for the seller, which is a US Company, from actions that are least
integrated in the foreign country to the actions of the business that make it the most
integrated. In the case of non-establishment forms, the seller hires an agent, a
distributor or a contract manufacturer (third party who is authorized to manufacture the
seller’s products in the foreign country for sale) in a foreign market. These methods
allow the US seller to gain more control over the foreign market than the direct selling of
its products there but less control than partially/totally acquiring a business in that
market.
If these agency/distributor relationships are successful (“testing the water”), the US
seller may choose to proceed to the next step, which is contract manufacturing. Moving
on, if contract manufacturing is successful, the parties will deepen their business
relationship by forming a joint venture. It may also be the case that the US Seller may
acquire a foreign manufacturer or set up its wholly owned foreign subsidiary.
In short, the progression is as follows:
1. Agency/Distributorship
2. Contract Manufacturing – Licensing a foreign entity to manufacture its products in
the foreign market. This is the use of the Seller’s IP and the transferring of IP is
critical here. In case of services, franchising is also a form of contract manufacturing.

3. Joint Venture/Acquisition/Subsidiary – FDI. This is the deepest

commitment/highest risk of the seller in the foreign market and is very dependent
on the relations, finances and the current situation of the seller’s business entity.
Independent Foreign Agent: It is an entity in a foreign country that solicits orders for
the goods but does not take title to the goods, and thus does not bear the risk that the
local buyer will not pay for the goods. The risk remains with the seller. They just obtain
sales orders from buyers in the foreign market and pass it along to the seller. The seller
and the buyer ultimately deal on their own, and pay a commission to the agent.
The main issue that arises here is whether this agent can bind the seller by its actions.
This question is answered on the basis of the law of the foreign country.

Week 5 – Prof. Levone

Non-Establishment Forms of International Business/Types of Cross-Border
Transactions:
The three steps of penetration into a foreign market:
1. No foreign presence
Remote sale of goods.
2. Indirect foreign presence (Agent/Distributorship)
Franchising, technology transfer or licensing, contract manufacturing.
3. Direct foreign presence (FDIs)
Subsidiary, wholly owned company etc.
These steps are on the basis of the level of commitment of finances and resources of the
company and their actual presence in that market.
 Difference between a foreign agent and a foreign independent distributor. (Pg. 573
and 574 of textbook.) The factors for distinguishing the two are:
- Control. In the case of an agent, the seller-principal retains control over the price of
the goods and to whom the goods are sold. However, an ID takes title to the goods
for resale and thus exercises control over the price and customers. With an agent,
seller needs to be aware of the local employment and agency laws, but it is not
necessary with an ID as there is no element of control.
- Competition Law Issues. Both agent and ID might look to obtain individual
exclusive rights to the territory they are selling the seller’s goods in. With a
distributor, an exclusive agreement may result in a competition or antitrust law issue
(division of markets). Another issue that may arise is if the distributor is prohibited
from selling any competing products.
- Termination. Check for local laws and whether termination without cause is
allowed, many countries don’t allow it to protect local businesses.
- Intellectual Property Issues. Seller must first protect their IP under the local
laws of the nation before they start selling through their agent or ID.
Antitrust/Competition Law:
They regulate and prohibit the following:
- Price fixing and market allocation agreements
- Monopolization/abuse of dominant power
- Unfair methods of competition
- Unfair or deceptive practices (Contd. In PPT)
Market Power
- Defining the relevant market
- Assessing market share in that market
- Review challenged conduct and whether it is large enough
Collusive Action
- Vertical Agreements: Different levels of the distribution chain
- Horizontal Agreement: Same levels of the trade/industry
Anti-Competition Laws in the EU (Pg. 601 to 604)
Technology Transfer and Licensing
Types of Intellectual Property:
- Patents, TMs, Copyrights, Trade Secrets, etc.
Licensing is a non-establishment form of doing business. Owner of technology gives
access to its technology to another. It is a way to transfer the IP of the seller to the
agent/distributor.
- Vertical: Between undertakings at different levels of trade. From the owner to the
user – Distribution technique
- Horizontal: Between undertakings on the same level of trade. For example, cross-
licensing for a new product – alternative to a JV, easier and cheaper.
This is a valuable step of the company saying that we can do more by transferring the IP
into the foreign market and increase sales/reduce costs. Important to maintain a
balance between the expectations of the licensee (wide access to the technology and
information) and the licensor (sufficient access and protect its rights).
Franchising:
In the US, both federal and state laws govern the franchise relationship. The US FTC has
jurisdiction over the federal disclosure rules for franchisors, defines three elements
that must be present for the relationship to be a franchise:
- Must license trade name or trademark that the franchisee operates under, or
franchisee must sell products or services identified by this trademark;
- Franchisor must exert significant control over operations or provide significant
assistance to the franchisee;
- Franchisee must pay at least $500 to the franchisor within the first 6 months of
operations.
There are federal laws and also state laws pertaining to franchising. And sometimes,
there are laws for franchising in different industries as well. The concept of inadvertent
franchising. A license agreement may unknowingly become a franchise in cases of
trademarks.
FDD: Franchise Disclosure Document – An enormous disclosure document to a
prospective franchisee, and they have 14 days to change their mind even after signing
the franchise agreement. It covers the following information:
- Major Issues (Non-financial)
 Protection of Franchisor’s IP, goodwill, reputation
 Ensuring quality of services offered by Franchisee
 Location
 Exclusivity
 Term and termination

- Major Financial Issues

 Franchisee fee, which is the initial lump sum
 Royalty based on revenues
 Advertising fees
Traditional Franchise v. Business Franchise (PPT)
Business Format Franchise:
In a business format franchise, the franchisee operates its business under the
franchisor’s trade name and under the franchisor’s business identity. The franchisee is
identified as part of a select group of dealers and is generally required to assume a
standard appearance and to follow standardized methods of operation.
Certain obligations of the franchisee to protect the franchisor. (Pg. 671)

Pronuptia Case
The court explains why the certain mentioned restrictions are necessary for a franchise
to work. In short, mutually exclusive territorial restrictions are not considered to be
necessary to maintain a franchise system and run afoul of the restrictions against
market sharing.
Schillgalis is a franchisee carrying on business under the name of Pronuptia in
Hamburg. Franchisor is the German Subsidiary of the French company of the same
name. Franchisee claims that she does not owe royalties to the German subsidiary
because the franchise agreement is in violation of Article 101(1) of the EU Competition
laws.
The issue was whether franchise agreements (such as the one in question), which have
their object as the establishment of a special distribution system would be governed by
Article 101(1) of the TFEU?
Held: Such a system that allows the franchisor to profit from their own success, does not
in itself interfere with competition. There are two conditions to be met for a franchise
arrangement to be successful:
1. Franchisor must be able to communicate his know-how to the franchisee and
provide them with the necessary assistance in order to enable them to apply the
methods without running the risk of that information reaching their competitors.
Measures taken to this extent and to preserve this do not constitute competition.
2. Franchisor must be able to take the measures necessary for maintaining the
identity and reputation of the network bearing their business name or symbol.
Any provision that allows for such means of control is not a restriction on
competition under the scope of Article 101(1). [Refer to pg. 689 for examples of
such measures.]
 3. Provisions that share markets between the franchisor and the franchisees or
between franchisees constitute restrictions of competition for the purposes of
Article 85(1). Franchise agreements for the distribution of goods which contain
provisions sharing markets between the franchisor and the franchisees or
between franchisees are capable of affecting trade between Member States.
After this case, the EC issued Regulation No. 4087/88 in 1989 that was specifically
directed at distribution and service franchises. Superseded by Commission Regulation
330/2010.

Week 6 – Prof. Levone

Foreign Direct Investment: Break it down into its words:
Foreign: Country other than the investor’s own/incorporation country.
Direct: Long term interest in management and control.
- Not sales of goods and services
- Not portfolio investments
Investment: Capital (Equity) – not always equity, but money at risk in some form or
another.
Why choose FDI?
 The need to have direct management and control with their consumers.
 Better market penetration
 Protect their intellectual property
 Research and Development
 Global Competition
Types of FDI:
 Private Capital
- Venture Capital – It tends to be money invested in start-ups. Investors look for early
stage company with potential growth and cutting edge technologies. They are high
risk, will invest small amounts in many companies to keep a diverse portfolio. The
ownership interest ranges from 10-20%.
- Private Equity – Money invested in more mature, developed companies. Sectors
such as telecom, software etc. Usually take full ownership of the company, make it
private, improve and better it and then issue another IPO and sell it publicly again.
 Joint Ventures and Consortia: Two or more parties come together for a project.
Consortia is for when public companies come together to bid together for a
development project, where each party brings a different expertise to the table and
get the project together. This is seen a lot in infrastructure deals.
 Inter-company investments
 Mergers and Acquisitions
 Debt Financing: Corporate Finance or Project Finance
Formation of a foreign subsidiary:
(Certain factors to consider mentioned in the presentation)
Challenges:
- Macroeconomic instability
- Legal uncertainty
- Access to qualified personnel
- Access to financing
- Corruption
- Infrastructure capacity
- Limited market opportunities
Political Risks (Check the Presentation for these risks)
Market Risks
- Workforce
- Supply of raw materials
- Demand for products/services
- Business competition
Other Risks:
- Corruption
- Extortion/Cyber-extortion
- Hijacking; Kidnapping; Wrongful Detention
Risk Mitigation Tools and Strategies
 Parties involved
 Deal Structures
 Local Counsel
 Governing Law Choices
 Bilateral Investment Treaties
 Foreign Exchange Tools
 3rd Party Credit Enhancements
 Political Risk Insurance – Very important tool. The World Bank has an agency
(MIGA) that is specifically an insurer for these kinds of risks.
 Offshore Collateral
Protection of Foreign Investment
Expropriation under international law: State responsibility to compensate foreign
investors.
HULL FORMULA: No government entitled to expropriate private property, for any
purpose, without payment of prompt, effective and adequate compensation.
CALVO DOCTRINE: 100 years before the above one. State has the right to nationalize
private property. Compensation need not be prompt and may be determined by the law
of the State, which can take equities into account.
There are two different world views here, where the heavily industrialized countries and
the developing countries have completely different preferences. Basically, the latter
want to retain control, rightfully, over their industries, while the former are usually the
investors and are protecting their rights and assets.
CREEPING EXPROPRIATION: Indirect way of getting to the same result.
A slow and incremental encroachment on one or more of the ownership rights of a
foreign investor that diminishes the value of its investment.
Basically, subject the particular investor to very harsh, expensive and hard to meet
regulations and make them leave instead of taking over. This is discriminatory and
excessively harsh, more than just strict.
Bilateral Investment Treaties (BITs)
The most common provisions of these are:
- National Treatment – Treat the foreign investors like you treat your own citizens,
don’t discriminate on the basis of nationality.
- Most Favored Nation (MFN) Treatment – Don’t treat our citizens any worse than
you treat the citizen of any other country. This is used in other contracts as well,
where it basically says don’t give us a worse deal thank you give others.
- Fair and Equitable Treatment: Each party will treat the other equally and provide
full protection and security.
- Expropriation – Prompt, adequate, equivalent to the fair market value of the
expropriated investment and effective compensation. One of the most important
concerns of a foreign investor.
- Transferability of funds
- No local content requirements or export quotas
- Dispute resolution (ICSID)
LANCO INTERNATIONAL, INC v. ARGENTINE REPUBLIC
There was a consortium in this case, to construct and operate a port terminal in
Argentina. This case is about ICSID deciding whether they had the authority to resolve
the actual dispute at hand. It held that a company need not have controlling interest for
it to constitute an investment, an investment, no matter the amount, is an investment
and shall be subject to its jurisdiction.
WENA HOTELS LTD. v. ARAB REPUBLIC OF EGYPT
The issue was whether the ICSID Tribunal had jurisdiction to hear the dispute?
LG&E ENERGY CORP. v. ARGENTINE REPUBLIC
Did Argentina violate the Argentina-US BIT’s obligation of “Fair and Equitable
Treatment”?
Argentina raised the defense of “State of Necessity”. This defense can be raised when
there is:
- Danger to the survival of the State
- Not caused by the State
- Danger is serious and imminent, and there are no other means to avoid it.
In these circumstances, whatever the State needs to survive is a valid defense. In this
period, things were so bad that Argentina cannot be held financially liable. This shows
that there is a limit to the protection afforded by the BITs. However, this is only for a
certain period of time.
Equity Investment Transactions:
www.nvca.org – For model legal documents
Refer to the PPT to review Shareholder’s Agreement provisions.
- Supermajority Voting: Anything more than a majority – you can define by contract
what it would be. Maybe 80%, two-thirds of one class and other number of other
class. It is a protection for minority shareholders.
- Pre-emptive Rights: This is combined with a concept called anti-dilution. Basically,
the shares are first offered to the party before making them public/offering it to the
general public.
- Right of First Offer: The right to have the first opportunity to purchase
shares/interest that a co-owner wants to sell. Only if the party declines can the
interest be offered to someone else. It has to be offered at the same price as was
offered to the party. It cannot be offered to party at $20 and then to somebody else
for $15.
- Right of First Refusal: Third-party makes an offer to buy shares, but the person has
to offer the shares to their co-investors for the same price before accepting third-
party offer. It is very limiting and makes it hard to sell shares.
- Tag-along Rights: It is again for the benefit of the minority shareholders. Basically, if
some third-party offers to buy co-investor’s shares, this investor will also be able to
sell to third party. If not, the first party also cannot sell. Very strong protection to the
minority shareholders.
- Drag-along Rights: If one (majority shareholder usually) wants to sell their shares to
a third-party, they will have the right to “drag” every other shareholders to sell their
interest to the third-party, if the majority shareholder wants.
- Put Option: Right to ‘put’ your shares to somebody else and they have the obligation
to purchase them. Usually the company, another or multiple shareholders. The price
may be pre-determined or valued by a third party.
- Call Option: Opposite of put-option. When called, shareholders HAVE to sell their
shares.

Week 7 – Holiday

Week 8 – Prof. Levone

What is a joint venture?
It is a very broad term and the basic idea is a joint undertaking of two existing
businesses. There is shared risk (losses, liability), shared regard (profits) and shared
management, control, governance and decision-making. It can be more than two
businesses but that is very rare.
It could be an entity joint venture, where a new company is formed with the resources of
the two already established businesses for the particular purpose. More common.
Contractual joint venture, where there is no entity but the parties agree to work
together by way of a contract. Easier to terminate as there is no separate entity.
Advantages of Joint Ventures:
- Local Partner and local knowledge
- Some industries and sectors in certain countries require local ownership
- Pre-existing network and relationships with customers, suppliers and professional
advisers
- Reduce investment risk and exposure
- Foreign capital and expertise
- Knowledge sharing/transfer
- Brand Recognition
Disadvantages of Joint Ventures:
- Long-term commitment
- Imbalanced relationship
- Loss of management/control
- Intellectual property – different interests and concerns
- Conflicting expectations and business norms
- Less risk and less gain
Key Documents:
- Summary of commercial terms: It could be any of the following documents. It is not
necessarily a binding legal document but it could have a legal effect because the
 parties write down what their basic understanding of their partnership is. You
cannot agree to agree, so there is no agreement in these documents – it is just their
intent and what they want. The definitive agreement is what binds the parties.
However, some parts are binding – confidentiality and exclusivity.
 Letter of Intent
 Memorandum of Understanding
 Heads of Agreement
- Joint Venture Agreement:
- Shareholders’ Agreement:
- Non-disclosure Agreement: Between the two joint ventures parties.
- Organizational/Formation Document: The certificate of incorporation or something
similar for the newly formed joint venture entity.
- Assignment or Licensing of Assets and IP: The limits of what each party
- Service Agreements: If they are contracting any third party to provide and services or
materials in order to carry out the joint venture.
- Employment Agreements: Not necessary in the US, but basically the agreement to
hire employees for the newly formed entity in furtherance of the joint venture.
- Distribution/Supply Agreements: Parties they sell to, receive materials from.
- Budget and Operating Plan: Basically a business plan, not a legal document.
Key issues in a Joint Venture Agreement:
- The structure and organization of the JV entity . This is dependent on the countries of
the parties, tax issues and the nature of the JV/services or materials sold.
- Regulatory approvals required. It could be anti-competition related, for bring capital
in and taking it out, insurance/banking/financial services would require a lot more.
- Timing. When do the parties plan on starting the JV business and how long it would
take to set all the operations up?
- Ownership. DON’T do a 50/50 joint venture, as it requires unanimous approval of
everything and makes it harder for the parties to agree.
- Management.
 Day-to-day officers – maybe the CEO/President/Managing Director, who
makes the day-to-day decisions. The issue is who the person represents, and
this always has to be Joint Venture, not either of the parties but the particular
entity.
 Major Decisions – The long term, strategic decisions for the entity. Basically a
board of directors or equivalent. What’s the line between major and day-to-
day decisions? So it is prudent to define what would constitute a major
decision (pecuniary, nature or consequential factors) in the JV agreement.
 Reserved Decisions - Among the major decisions, a subset of these decisions
are super important. This is where supermajority of the Board can come in, or
maybe the shareholders themselves will vote in on these. Examples of such
are: Changing the bylaws, incorporation documents, selling majority of shares
of the company
  Quorum.
- Employees. Who and how many to hire, from where and the hiring criteria.
- Non-Competition. Parties promise their exclusivity to each other and cannot engage
in any business that is in competition with the Joint Venture. (duh!)
- Ancillary Agreements (licensing, services). What happens if the main agreement is
followed through but an ancillary agreement is breached?
- Financing Issues.
 Initial Funding – Who puts in how much of the cash, assets and the IP must
be laid down and clearly specified.
 Ongoing Funding – Equity or Debt. The different ways of raising more capital
without the parties themselves contributing could be getting a loan, getting a
third party investor.
 Distributions: Having a distribution policy is very important, when and how
much cash you can take out and who makes the decision. There could a
distribution waterfall, with an order of priority. Maybe one of the JV parties
gave a LOAN to the JV entity – that would get priority, and then to other
parties and so on.
- Recordkeeping and Information Rights. Basically that the JV parties have the right
to inspect the financial records of the JV entity.
- Transfer of Interests. Maybe a party wants to get out or reduce their risk by selling a
few shares to a third-party. This is heavily negotiated because it could result in the
JV parties and their control being changed due to such transfers.
- Termination/Dissolution/Exit. What happens to the assets of the JV entity once one
of the parties wants to get out and is done with the venture? Mention the intent of
the parties to avoid complications later.
- Dispute Resolution.
 Deadlock: When a major decision needs to be made that requires a
supermajority and it does not pass – this is what is called a deadlock, where a
decision is stuck. The agreement must provide for a way to address a
deadlock. There are mechanisms like – if over financial issues, Party A has
power to decide, or get somebody from outside as a member of board and they
will have the deciding vote.
 Buy-Sell: This is a very good dispute resolution mechanism. Send a notice,
trigger a buy-sell mechanism. Give them the valuation of each share of the
company. The other party can either buy that party’s share for that valuation
amount or sell their own shares for that valuation amount. It is a fair
mechanism because the person setting that value will have to set a reasonable
market value for it. Go separate ways and one party ends up with 100% of the
JV entity and the other just gets out. If the entity, because of its structure and
local laws, needs more than one owner, the owner can set up a subsidiary and
make that one of the partners of the JV entity.
 It may not always be fair however, because if one party is a big established
company and the other is a small one, one can easily afford to buy them out
no matter the price.
 Put-Call: The smaller party will usually have the put right and the larger
investor will have the call right. Think of it as a dispute-resolution mechanism
although it is a financial mechanism.
 Forum, governing law and dispute resolution options.
MERGERS AND ACQUISITIONS
Merger: Take two separate entities and make a new entity. A+B = AB.
Acquisition: There are different types, but basically one entity takes over another. The
acquired entity may or may not cease to exist.
The buyers in M&A:
- Strategic: There is a business motive behind these buyers in an M&A transaction.
This could be to eliminate competition, acquiring new knowledge or entering new
markets.
- Financial: Like private equity companies, to buy the company, turn it around and sell
it back/go public to turn a profit.
- Hybrid: When strategic buyers backed by private equity.
The sellers in M&A:
- Exit: Sometimes sell the company to a bigger one to take it to the next level, and then
stay on with the company as an employee or such. Maybe to cash out, and if it is a
hedge – to make money for their own investors.
- Regulatory requirement: Maybe it got too big for that particular market and to
diversify. Or maybe return to the core business and sell off the frill.
- Capitalization: Raise money for the business and continue it under the parent
company.
- Spinoff of division/unit.
- Change of control or management.
Acquisition structures:
- Equity Purchase: Basically the shares and the interests of the company.
- Asset purchase: Buy all the assets but not actually the company itself. All the IP,
know-how, information, employees and property goes over to the acquiring
company. The decision on which one to go with depends on the nature of the sector
and the tax consequences.
- Merger: An acquisition that is structured as a merger. Forward triangular merger
and a reverse triangular merger. Refer PPT.
The M&A Transaction: Timeline of a Deal – Refer to the PPT.
Week 9 – Prof. Duffy
Debt Financing: Loan Agreements, Project Finance, Security Package
Debt: Funds raised by borrowing money to be repaid, plus interest.
- There is an obligation to repay and it is comparatively short term.
- Collateral is often required to secure a loan.
- Lender – Loan, debentures, bonds etc.
- Fixed and regular, but lesser risk than equity.
Key Parties: Lender, Borrower, Guarantor (Downstream: Comes from the Parent,
Upstream: Money borrowed from Subsidiary – it must be getting some sort of
incentive/interest from giving the money, if not, Court may void the guarantee), Agents
(Administrative: Coordinate and schedule the payment, etc., Security: Collateral agent,
Inter-creditor Agent.)
Equity: Funds raised by selling interests in the company.
- Ownership in the company and it is long term
- Collateral not required.
- Returns are in dividends.
- The interest is by way of stocks, shares, etc.
- It is irregular and variable but the risks are high, because if the company gets
liquidated, the creditors are paid before the shareholders.

Key Financial Terms of a Loan Agreement

The commitment is the total amount they can take in loan, and the lender draws down
on the commitment, and the amount drawn on is added to the principal amount.
Revolver type of loan: You can draw down an amount, repay it and then borrow it again.
This is against the fixed type of loan, where this is not allowed.
Floating Interest Rate: LIBOR is the benchmark interest rate at which major global
banks lend to one another. LIBOR is administered by the Intercontinental Exchange,
which asks major global banks how much they would charge other banks for short-term
loans.
SOFR for derivatives?
Amortization: Schedule for paying back the loan.
- Straight: Same payment of principal amount, difference in interest amount.
- Mortgage: Both amounts are the same for certainty
- Bullet: The principal amount is paid in one go upon maturity.
Terminology: A loan agreement is also called Credit Agreement, Finance Agreement,
Common Terms Agreement or Facility Agreement.
Forms:
- Lender Forms
- The Loan Syndications and Trading Association (LSTA) – New York. – Not as
common.
- The Legal Marketing Association (LMA) – England – More frequently used.
“Market”: The negotiating technique to be used here: It is a lender requirement and
then it’s hard to negotiate back with that.
Key Elements of Project Financing:
Purpose: Financing the construction of a clearly defined Greenfield (new)/brownfield
(existing/refurbished) project in the following industries:
- Power and Energy
- Transportation and Infrastructure
- Public service and government facilities
Borrower: Special purpose entity that is legally and economically independent from the
project sponsors.
Phases:
1. Development/Contracting:
[Refer to PPTs]

Week 10 – Prof. Levone.

Legal Opinions
If you are working with US lawyers, ‘legal opinions’ would actually mean a heavy,
comprehensive report with a tremendous amount of work and layers of review.
Why? Due diligence is the principal reason for requesting opinion letters in most
business transactions. It is usually to satisfy a third party. A legal opinion is not
intended to be an insurance or risk policy – not have the law firm pay money in case
anything goes wrong. The law firm attaches their name to the legal opinion which gives
the party a sense of comfort that they have done their research and it is an honest
opinion.
- Address whether an intended course of action is legal.
- Satisfy contractual requirements. (condition precedent to closing)
- Satisfy regulatory requirements. (SEC requirements, IPO requirements)
- To satisfy Rating Agencies.
Basic Opinions
The borrower’s outside counsel usually gives the standard legal opinion for the benefit of
the Bank. In some cases, it could be the borrower’s in-house counsel, or in some rare
instances, the bank’s outside counsel also is involved at the expense of the borrower.
Due Authorization: Authorizing the agreement.
Execution: It is signing the document.
Delivery: Sending it to the other party.
Enforceability of the underlying (maybe loan) agreement: That is a legal risk a bank
does not want to take. So they ask the borrower’s lawyer to give a legal statement that it
is in fact, enforceable.
No Conflict: With any other agreements that the borrower has entered into prior to the
loan agreement.
- All this might have been given by the borrower in the representations and warranties
in the loan agreement, but that is not sufficient and the bank needs the comfort and
security of it being confirmed by a law firm.
All Consents: Governmental consents, all relevant/necessary third party consents.
Compliance with Laws:
No Litigation: Difficult one to due diligence on because too many jurisdictions/courts.
Key Elements
- Covered Law
- Assumptions: Most legal opinions are given on a few factual assumptions.

Week 11 – Prof. Levone

Why corruption?
- Overly bureaucratic system, where each and every simple task requires extensive
paperwork and multiple systems to go through, companies look for a faster and
easier way to get all the necessary permissions.
- Lack of enforcement of the law against bribery and corruption.
- Weak or unstable economy.
- Weak legal and court systems in the country and weak governmental institutions.
- Accepted culture of bribery.
- Governmental prioritization of anti-corruption measures.
- Unclear hierarchy of governmental authority between national and local levels.
The FCPA anti-bribery provisions prohibit:
- Issuers, domestic concerns and any person
  Issuers are companies who are subject to the SEC regulations and their
officers, directors, employees, agents and shareholders.
 Domestic concerns are US companies, partnerships, foreign company
qualified to do business in US (not US subsidiaries in other countries) and all
their officers, directors, employees, agents and shareholders.
 Other persons and entities are companies, persons who are engaged in these
acts within the United States – very broad category. When in doubt, assume
that the FCPA will apply. It is applied very broadly and aggressively by the
DOJ using the FCPA. If there is any link, however remote, to the US, the FCPA
will apply.
- From making use of interstate commerce (can be a server or an email as well)
- Corruptly (there needs to be intent/mens rea)
- In furtherance of an offer or payment of anything of value (there need not be any
actual payment made, even the act of approving it shall violate the FCPA)
- To a foreign official, foreign political party or candidate for political office
- For the purpose of influencing any act of that foreign official or secure any improper
advantage in order to obtain or retain business.
Commercial bribery is not covered by the FCPA – basically bribes made to any private
persons or companies in a foreign country. Further, the foreign person who accepts the
bribe is not subject to the jurisdiction of the FCPA.

Week 12 – Prof. Duffy

Dispute Resolution – Arbitration
Choice of Law: NY has a bright-line statute NY GOL Section 5-1401 that, if met, the NY
Courts will enforce the choice of law clause of the Parties. The condition is if the dispute
arises out of a transaction covering $250,000. Even if the parties have no relation to the
State of New York (few exceptions apply).
This was likely enforced because the State wants to be conducive to business in NY,
further the Courts will get experience in business disputes when more such cases are
brought before the Court. Makes NY law more binding and attractive to businesses.
Negotiation: Not binding until you come to a documentary resolution.