This Document Contains Chapters 5 to 9 Chapter 5 The Documentary Sale and Terms of Trade CASES IN THIS CHAPTER Banque de Depots v. Ferroligas Lite-On Peripherals, Inc. v. Burlington Air Express, Inc. Biddell Brothers v. E. Clemens Horst Co. Basse and Selve v. Bank of Australasia St. Paul Guardian Ins. Co. v. Neuromed Medical Systems & Support, GmbH Kumar Corp. v. Nopal Lines, Ltd. TEACHING SUMMARY International contracts must also address the exchange of goods for money, transportation of these goods, title, and risk of loss. Documentary sales are a common method for transmitting title to goods and, through a negotiable instrument, creating an obligation to pay. The essential document for cross-border trade is the bill of lading. Described as the key that permits the holder to unlock the door to where the goods are held, the bill of lading is a receipt for the goods shipped, the contract of carriage, and title to the goods. Although these documents are also used in domestic sales, their use is much less common, as domestic trading partners are in a superior position to ascertain the credit standing, integrity, and reputation of one another. Foreign trading partners must also contemplate responsibility for delivery and the passing of risk of loss for goods. Often, abbreviations are used to describe the time and place of delivery, financial responsibility for delivery, and the passing of risk. Although similar terms, such as FOB and CIF, are used in the United States, INCOTERMS, an international convention, defines these terms globally. Consequently, international and domestic shipping terms may look identical but have different meanings. Over the last decade, however, documentary sales have declined in popularity. B2B exchanges via the Internet have remodeled international trade. Traditionally, international trade was burdened by divergent country rules and the limited number of credit institutions able to intermediate these dealings. Letters of credit are now being customized for the Internet, increasing the efficiency and security of cross-border trade. Intermediary companies are providing on-line letters of credit for B2B transactions. These permit buyers and sellers to apply for, negotiate, and obtain letters of credit on-line in real time. A bank continues its traditional role as a financier/ collection agent. CASES AND QUESTIONS Banque de Depots v. Ferroligas 1. Why did the court not permit Banque de Depots to seize the cargo Bozel shipped? Answer: Seizures of goods in transit are not permitted when the title to the goods is represented by a bill of lading and the bill itself has not been seized pursuant to court order. 2. What are the policy reasons for not allowing a creditor, such as Banque de Depots, to seize cargo that is being shipped to a buyer under a bill of lading? Answer: A holder of a bill of lading possesses title to the goods, thus had Bozel presently been the holder or had not transferred it to the purchasers, the bank could have seized the cargo or enjoined further transfer of the bill. This result also protects carriers who relinquish possession of goods to persons holding bills of lading. 3. What are the expectations of a good faith purchaser of a bill of lading? Answer: The holder of a bill of lading in good faith and through due negotiation is entitled to possession of the goods. Supplemental Internet Activity The court, here, did not rely on the UCC but on Louisiana state law. Have students peruse the UCC posted at the Legal Information Institute’s Web site at http://www.law.cornell.edu/ucc/ucc.table.html. Ask them to find the particular potions of the UCC that would address this issue, apply the UCC law, and compare and contrast the UCC outcome with that under Louisiana law. Lite-On Peripherals, Inc. v. Burlington Air Express, Inc. 1. Why did the court not permit Burlington to diverge from the terms of the bill of lading? Answer: There was no reason to look beyond its term. It was clear that it had to be exchanged before the purchaser was to be paid. 2. What are the policy reasons for not allowing a carrier, such as Burlington, to disregard the terms of a bill of lading? Answer: The terms of the B/L represent the contract between the parties. The court is enforcing their contract which Lite-On relied on as its agreement. 3. When combined with the opinion in Banque de Depots v. Ferroligas, what does this case tell you about the legal nature and effect of the bill of lading to trade? Answer: The bill of lading is the crucial document that constitutes the contract between the parties. The law enforces the rights of the holder of the bill of lading over other parties. Biddell Brothers (Buyer) v. E. Clemens Horst Co. (Seller) 1. Why did the court rule that the buyer was not entitled to inspect the goods prior to paying for them? Answer: The contract at issue was a CIF contract, which implies a documentary sale. A CIF sales contract implies a documentary sale. The seller's responsibility is to obtain a bill of lading from a carrier and tender it to the buyer for payment. The buyer has a corresponding responsibility to pay for it. 2. What assurance did the buyer have that conforming goods were actually shipped? Answer: The purchase of a marine insurance policy by the seller in order to protect the interest of the buyer. 3. What terms could the buyer have negotiated in the contract to assure that the goods shipped would be as ordered? Answer: The buyer could have included a term providing for inspection prior to payment. This term could not be inferred from a silent contract. Furthermore, here, the CIF term said quite a lot to the contrary: under a CIF contract, the buyer is obligated to pay upon tender of the appropriate documents. Had the buyer wished to ensure that they could inspect the goods prior to payment, he needed to include such a clause in the contract and avoid using the contract CIF term. 4. Assume that the documents arrive well ahead of the ocean cargo and that they were purchased by the buyer. A day later, the ship and cargo go down at sea. Assuming that the carrier was not at fault, what is the buyer’s recourse? Answer: The buyer might have access to the proceeds of any marine insurance policy purchased for the goods. 5. In a CIF contract, which party assumes the risk of changes in the cost of ocean freight after the signing of the contract but before shipment? Answer: The seller as CIF requires it to prepay freight charges to the foreign port. Basse and Selve v. Bank of Australasia 1. Why do buyers in international transactions often use inspection firms? Answer: If the contract is on documentary terms, the buyer may not have the opportunity to inspect the goods prior to payment. Otherwise, they are confined to paying for the goods and then suing the seller for breach (due to non-conformity). 2. If the seller fails to provide an inspection certificate as required in the contract, can the buyer refuse to accept the documents? Answer: Yes, although here the buyer can waive the defect and condition payment on actual inspection at the place of delivery. 3. Give examples of industries or products that would benefit from the following: health certificates, ingredients certificate, fumigation certificate, inspection certificate, certificate of chemical analysis, certificate of quantity of weight, social compliance audit certificate. Answer: This question calls for independent research by students. St. Paul Guardian Ins. Co. v. Neuromed Medical Systems & Support, GmbH 1. If the contract stated that it was governed by the laws of Germany, why did the court apply the law of the CISG? Answer: The CISG governs the transaction because: (i) both Germany (Seller’s country) and the United States (Buyer’s country) are signatories to the CISG, and (2) although the parties could have opted out of the CISG provisions, the parties chose not to do so. The CISG is an integral part of German law. Kumar Corp. v. Nopal Lines, Ltd. 1. In what way did the wording of the contract contradict the CIF term? Answer: Under CIF contract, the seller bears the risk of loss once goods are delivered to the carrier. This contract, however, provided that payment was not due until the purchaser had actually re-sold the goods, suggesting that actual delivery was a prerequisite of payment and, therefore, that risk of loss had not yet passed. 2. If the court said that the parties may vary the terms of their contract to meet their own requirements, why did the court not recognize the contradictory wording? Answer: Where the shipping terms and contractual language are contradictory, they will not be interpreted as amending one another, but, rather, a court will decide the intention of the parties. Where contact language eviscerates the essence of a CIF contract, that contract ceases to be a CIF contract. 3. Assume that a seller fails to procure insurance on a shipment as required by contract and that the shipment is lost at sea. As between buyer and seller, which party will bear the loss? Answer: If a seller under a CIF contract fails to provide insurance then the risk does not shift to the buyer. Thus, the seller remains the real party-in-interest with standing to bring this action against the carrier for cargo loss. (See York-Shipley Inc. v. Atlantic Mutual Insurance Company, 474 F.2d 8 (1973)). ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: In Barclay's Bank, Ltd. v. Commissioners of Customs and Excise, the court ruled for the bank. The bill of lading effectively transferred title in the property to the bank, thus putting the property beyond the reach of Bruitrix's creditors. Lord Justice Diplock stated, "In the present case, the contract of carriage evidenced by the bills of lading, had not been discharged on June 2, 1961, when Bruitrix purported to pledge the goods to the Bank by deposit of the bills of lading as security for advancement of money to them. The goods were in constructive possession of the ship owners being held in the physical possession of the British Transport Commission on behalf of and to the order of the ship owners who had power to control any physical dealing with them. No bill of lading had, at that date, been produced to the ship owners. The ship owners were under no obligation to surrender their constructive possession and control to deal with the goods, except on production of the bill of lading and had no intention of doing so. In those circumstances it seems to me beyond argument that the bills of lading were at all material times effective documents of title for the goods by deposit of which to the Bank a valid pledge of the goods for security on advances could be make. In my opinion, the pledge made on June 2, by deposit of the bill of lading was a valid pledge and as a consequence I think that I can give judgment for the plaintiffs in this case." 2. Answer: This focuses on the responsibilities of buyer and seller under a CIF sales contract. The court held that Colorado's responsibility was to properly ship, not necessarily to deliver, and, therefore, that the risks of the voyage rest with the buyer in India. The court also addressed the responsibility of a seller who might have known that a strike was imminent. It noted that although there was indication prior to shipment that labor negotiations were in jeopardy of breaking down, the seller could not have known whether a strike would actually occur or what its full impact or duration would be. In holding that the seller was correct in shipping, the court notes that "To say otherwise would mean that shippers when aware that there might be a strike would have to forego all business until the situation became crystal clear….We do not mean to hold, nor do we, that if, in the face of an impending labor disturbance affecting a shipment under contract, a seller ships having good reason to know that the shipment will not meet the dates contracted for he would be absolved of liability for damages….[T]here has been no proof of fraud at all in this case….Colorado…acted in good faith and under the circumstances exercised reasonable business prudence….For us to require sellers to know with foresight how long a strike will last and to stop their commercial operations until the shipping picture is completely clear is just too much tightrope walking to require of any one.” 3. Answer: The court determined that this was a shipping contract, consistent with the CIF shipping term. Although a shipping term in the face of contradictory language is not dispositive, it is strong evidence of intent. Here, the substance of the agreement did not show that the parties intended otherwise, and, in fact, the additional language did not alter the essential character of the CIF term. 4. Answer: A force majeure clause in a sales contract does not operate to relieve the buyer from paying on the documents under a C & F or CIF contract. The court stated that "We also look to the basic purpose of force majeure clauses, which is in general to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated. The burden of demonstrating force majeure is on the party seeking to have its performance excused, and . . . the non-performing party must demonstrate its efforts to perform its contractual duties despite the occurrence of the event that it claims constituted force majeure. With these principles in mind, we cannot agree that Phillips' performance was excused by its invocation of force majeure. Even if the detention of the ship by the Coast Guard constituted force majeure, and we are inclined to agree with Judge Carter that it did not, that detention did not frustrate the purpose of the contract or prevent Phillips from carrying out its obligation under the terms of the parties' contract to make payment. Indeed, to hold that the force majeure clause may be interpreted to excuse the buyer from that obligation, as Phillips urges, would be to wholly overturn the allocation of duties provided for in C & F sales. We do not find any evidence that the parties intended such a result." 5. Answer: Under INCOTERMS, F.O.B means that the risk of loss passes when the goods cross the ship's rail. Therefore, the seller (Buenavista) assumes responsibility for the crate of glass. Under the UCC, once the seller has placed the goods in the possession of the carrier, the risk of loss passes to the buyer. Consequently, under the UCC, the buyer would bear risk of loss for the mishap. 6. Answer: The court held this was a shipment contract. The plaintiff-buyer Pestana, a resident of Mexico, entered into a contract with defendant-seller Karinol, a Florida export company, to purchase 64 watches. The contract between the parties stipulated only the location where the goods sold were to be sent by carrier. It did not contain information about allocation of risk of loss while the goods were in the possession of the carrier, not did it reference common shipping terms such as F.O.B. or C.I.F. A 25% down payment on the purchase price of the goods sold was made prior to shipment. A notation was printed at the bottom of the contract that, translated into English, read: "Please send the merchandise in cardboard boxes duly strapped with metal bands via air parcel post to Chetumal. Documents to Banco de Commercio De Quintano Roo S.A." The goods were lost in shipment before they reached the buyer. Florida UCC allows for either a shipment or a destination contract. A shipment contract is the normal contract when a seller ships via a carrier but does not guarantee delivery at a particular destination and the risk of loss passes to the buyer when the goods are tendered to the carrier for shipment to the buyer. On the other hand, in a destination contract, the seller expressly agrees to ship the goods to a particular destination and he bears the risk of loss until the tender of delivery to the buyer. This is typically accomplished with customary terms such as F.O.B. (destination). The parties must expressly agree to a destination contract; otherwise the contract is a shipment contract. In the instant case, based on the facts, the court found the contract was a shipment contract and the risk of loss passed to the buyer when the goods were tendered to the carrier. 7. Answer: The appellate court affirmed the district court’s judgment in favor of the shipper. The court held that the ocean carrier improperly delivered the goods to a party that did not have the original bill of lading. According to the court, this was a violation of the carrier’s duties. Additionally, delivery to the port authority was a violation of the carrier’s duty pursuant to the Carriage of Goods at Sea Act (COGSA). 8. Answer: In a CFR contact, the risk of loss passes once the goods pass over the ship’s rail at the point of shipment. Thus BP fulfilled its contact. The buyer should inspect the goods at the point of shipment, before loading onto the ship, not after the ship reaches its destination. BP could be liable if it knew or should know the goods had a hidden defect in the gum contact. The court sent the case back to the lower court on that issue. MANAGERIAL IMPLICATIONS This chapter shows the importance of documents in the international sale of goods. International business managers should be familiar with essential trade terms and how they are used as they will be found in all significant contracts and associated documents. Differences with the UCC should be noted by students wrongly assuming the UCC terms will apply internationally. In preparing an invoice, students may need ocean freight and insurance costs, ground transportation costs, port charges, customs fees, forwarder's fees, and communications expenses. These are available from local sources, such as freight forwarders, inter-modal terminal operators, steamship representatives, bankers, and export management consultants, as well as on-line. ETHICAL CONSIDERATIONS The answer to this question calls for an opinion by students. In formulating their opinions and contemplating options, students should review the materials relating to delivery risk, specifically, the risk to the buyer that the seller will fail to ship the goods as called for in the contract. The buyer’s risk in this hypothetical is exacerbated by its absence of knowledge with respect to the seller. Additional caveats with respect to this transaction include the inability to locate the seller’s factory in Pakistan, the difference between the agreed date of shipping and the bill of lading, the discounted price for the merchandise and, finally, the inability to locate the ship. These are hardly minor technicalities and should motivate the buyer to re-examine the transaction in light of its ethical duties to shareholders to maximize profits while minimizing risk. The risks inherent in this transaction are substantial enough to motivate the seller to avoid this transaction or request a purchase on open credit terms. TEACHING SUGGESTION / COOPERATIVE LEARNING ACTIVITY Like Chapter 4 (contracts), this chapter provides an excellent opportunity for experiential education. Students, working alone or in groups, can draft the documents necessary for a documentary sale, such as a bill of lading, and write contracts (or rewrite contracts they had negotiated under Chapter 4) to include shipping terms. Ideally, groups can negotiate with one another in drafting contracts that include shipping, delivery, and loss terms. Supplemental Case: Miller v. Race , England, Court of King’s Bench (1758), English Reports, vo. 97, p. 398 (stolen bearer paper, i.e., bill of exchange or promissory note). Finney purchased a note, payable to bearer and drawn on the bank of England. He attempted to mail it to Odenharty, but it was stolen. The next day, Miller, not implicated in the theft, came in possession of the note. Finney then applied to the Bank of England to stop payment on the note (due to the robbery) and the bank agreed. Consequently, when Miller presented the note for payment, Race (a ban clerk) refused payment. Miller brought this action to compel payment by the bank and was successful. 1. What is bearer paper? Answer: A document that, on its face, contains an order to pay or that contains a blank endorsement, i.e., the signature of the payee or last endorsee named in a special endorsement (e.g., “pay to the order of George Bush”). Whereas order paper is negotiated (transferred) by delivery and endorsement, bearer paper is negotiated by delivery alone. It is equivalent to cash. 2. When would a bill of exchange be bearer paper? Answer: If the bill was “payable to bearer” or to “cash.” 3. Why, then, was the bank obligated to pay? Answer: Miller had obtained the note legitimately, and, since this was a bearer instrument and Miller was the bearer, the bank was obligated to pay. Chapter 6 The Carriage of Goods and the Liability of Air and Sea Carriers CASES IN THIS CHAPTER El Al Israel Airlines, Ltd. v. Tseng Olympic Airways v. Husain J. Gerber & Co. v. S.S. Sabine Howalt Z.K. Marine, Inc. v. Archigetis Prima U.S. Inc. v. Panalpina, Inc. Shaver Transportation Co. v. The Travelers Indemnity Co. TEACHING SUMMARY Once the buyer and seller have negotiated the contract for the sale of goods, and even, perhaps, how those goods will get from point A to point B, an air, marine or land carrier must actually transport those goods. While generally governed by a private contractual relation, in aviation and maritime law there is greater uniformity than in other areas because international conventions and treaties have helped to harmonize the effect of national laws. The chapter focuses on the liability of air carriers for death or bodily injury to passengers on international flights (Recall the 2013 summer crash of a flight from Korea that landed in San Francisco after crashing into the seawall and then erupting in flames). Also examined are the loss or damage to baggage and air cargo as well as the liability of marine carriers or transport intermediaries (trucks, rail, etc.) for loss or damage of cargo. Some issues of insurance law are also noted. Additional Background: Perils of Sea. The concept of a peril of sea is not uniform among nations. In fact, the Anglo-Australian notion is different from the U.S. and Canadian conception. In the U.S. and Canada, a peril of sea must be of an extraordinary nature “or arise from an irresistible force or overwhelming power” and cannot be guarded against through ordinary prudence. This is described by the 2nd Circuit in The Guila, 218 Fed. 744 (2d Cir. 1914) and The Rosalia, 264 Fed. 285 (2d Cir. 1920). The U.K. and Australia, however, do not require that such a burden be met. Instead, they require only that losses be extraordinary. Therefore, sea and weather conditions that could reasonably be foreseen and guarded against may constitute a peril of sea. (Great China Metal Industries Co. Ltd. v. Malaysian International Shipping Corp., High Court of Australia Reports, vol. 98, no. 65 (1998)). Nevertheless, because the Hague rules are intended to apply widely in international trade, courts strive for a relatively uniform construction of them. CASE QUESTIONS El Al Israel Airlines, Ltd. v. Tseng 1. Why was Tseng not able to pursue a remedy under New York state law? Answer: The Warsaw Convention was applicable in this case. Under the Warsaw Convention, an international passenger may not bring a cause of action under local law against an airline when there is no bodily injury that satisfies the convention. 2. What policy reasons does the Court give for holding that the air liability convention should preclude remedies under local or state law? Answer: The primary policy reasons are to ensure uniformity in the rules governing claims arising from air transportation and shield carriers from national differences in liability laws. 3. Why would Tseng not be successful in an action against the airline in federal court under the Convention? Answer: Tseng did not suffer bodily injury as required by the Convention. Olympic Airways v. Husain 1. Why were the events in this case deemed “unexpected or unusual”? Answer: The events were deemed “unexpected or unusual” in this case because the failure to move the passenger was contrary to accepted industry practice. This diversion from industry practice was external to the passenger and was a link in the causal chain that led to his death. 2. Why did the Court reject Olympic’s contention that the term “accident” refers only to affirmative acts? Answer: The Court rejected Olympic’s contention that the term “accident” refers only to affirmative acts because it was too narrow of a construction of the terms “events” or “happenings.” A failure to act, especially in contravention of industry standards, is an event or occurrence. According to the Court, the Warsaw Convention was not limited to affirmative actions. 3. What is the significance of the attendant’s failure to move the asthmatic passenger away from smoke when that was contrary to airline industry procedures? Answer: According to the Court, the Warsaw Convention was not limited to affirmative actions. Thus, a carrier could be liable for a failure to act as long as it was “unexpected” or “unusual” and was external to the passenger. 4. How does this case differ from Air France v. Saks and the British “deep vein thrombosis” cases, cited in the text? Answer: The opinion is consistent with Air France v. Saks with respect to the definition of accidental injury. The case is also consistent with the deep vein thrombosis cases as the condition is not an accident but rather is associated with usual, normal and expected operation of an aircraft. By contrast, the failure to move the passenger in Husain was not associated with the usual, normal and expected operation of an aircraft. J. Gerber & Co. v. S.S. Sabine Howalt 1. What is a “peril of the sea”? Why do you think maritime law relieves a carrier from liability for damages resulting from a “peril of the sea”? Answer: Generally, perils “are peculiar to the sea, and which are of an extraordinary nature or arise from irresistible force or overwhelming power, and which cannot be guarded against by the ordinary exertions of human skill and prudence” The Giulia, 218 F. 744, 746 (2d Cir. 1914). A similar definition phrased a little differently is: “a fortuitous action of the elements at sea of such force as to overcome the strength of a well found ship or the usual precautions of good seamanship” Gilmore & Black, The Law of Admiralty 3 32 at 140 (1957). 2. Describe the sea and weather conditions here and explain whether they amounted to an exculpatory peril of the sea. Answer: Here, the Sabine Howaldt encountered dangerous cross seas, hurricane-strength winds, and suffered extensive damage. Although the lower court believed the ship unseaworthy because it could not withstand this weather and had negligently failed to cover the hatches, the Court of Appeals found that no ship could be expected to withstand such unpredictable “destructive forces.” Furthermore, it was not regular maritime practice to cover hatches with tarpaulins. Therefore, the ship was deemed seaworthy and the loss was determined to have resulted from a peril of the sea. 3. If an insurance company pays a claimant for goods damaged during ocean transit, may the insurance company bring the action against the carrier under COGSA? Answer: Yes. Insurance companies are frequent litigants in these cases. Z.K. Marine, Inc. v. Archigetis 1. Why might an unknowing or unadvised shipper have failed to properly value marine cargo? Answer: Reading COGSA literally, a shipper may not completely understand the definition of a package pursuant to COGSA. For example, in this case, the plaintiffs asserted that the slip was not really a “package” (something in which cargo is wrapped) as contemplated by COGSA. Since it wasn’t a package but rather a cradle, the per package limitation did not apply. The court, however, explained that package refers to a class of cargo, not necessarily a package in which the goods are enclosed. 2. What is the proper role of the shipper’s freight forwarder in giving advice and in arranging transport for ocean cargo? Answer: Freight forwarders act as agents for shippers in contracting air, land or sea carriers for the transportation of goods to a place of destination. One of their primary duties is to advise shippers on packaging of goods including determining the proper number of packages for purposes of COGSA. 3. How could the shipper avoided the result of this case? Answer: By declaring a higher value on the bill of lading. Prima U.S. Inc. v. Panalpina, Inc. 1. Explain the difference between a carrier, a freight forwarder and a NVOCC. Answer: A carrier is the entity responsible for the actual transportation of goods by air, land or sea. A freight forwarder is an agent of the shipper in contracting air, land or sea carriers for the transportation of goods to a place of destination. A NVOCC is responsible for the issuance of bills of lading to each shipper. 2. How does their liability differ for damage or loss to goods? Answer: A carrier may be liable for damage to or loss of cargo pursuant to COGSA. A NVOCC issues the bill of lading to the shipper and is, therefore, liable should loss occur. A freight forwarder simply secures a place on the ship for the cargo and arranges for its movement. 3. Why did Panalpina’s contractual assurance that the shipment would “receive door to door our close care and supervision” not subject them to liability? Answer: Because the extent of legal liability is determined by virtue of the role that Panalpina played, freight forwarder or carrier. Here, the facts made clear that Panalpina was merely a forwarder who would have no liability. Shaver Transportation Co. v. The Travelers Indemnity Co. 1. Tell whether coverage was awarded or denied under each of the following insurance provisions, and why or why not: the perils clause; the shore clause; the “Inchmaree” clause; and the negligence clause. Answer: Coverage was denied under the perils clause as the loss contamination occurred at the time of loading and was not the result of forced disposition or jettison. Coverage was denied under the shore clause as the loss occurred on board rather than in a shore accident. Coverage was denied under the Inchmaree clause as the loss was caused by fault in the care, custody and control of the cargo. Coverage was denied under the negligence clause as the possibility of the barge sinking as a result of the presence of the caustic soda were too far removed from one another to fall within the clause. 2. How could the shipper have avoided this problem? Answer: The court noted that the plaintiff could have covered itself by purchasing more expensive insurance coverage that could have covered its specific loss. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: Yes. The plaintiff was injured on board an international flight and the Montreal Convention provides the exclusive remedy for such injuries. The court did not determine if mental injuries were recoverable but as the mental injury here was a part of a bodily injury the plaintiff suffered, damages for such injuries likely would also be recoverable 2. Answer: Yes. The court said the domestic legs of an international trip are considered a part of that trip even if there is a short layover. Because the plaintiff was returning from London to Washington, D.C. her layover in Denver and Chicago were considered a part of the international trip and thus by the convention she had to bring suit for injuries within 2 years. 3. Answer: The district court granted in part and denied in part United Airlines’ motion to dismiss. The court held Article 29 of the Montreal Convention leaves it to domestic law to specify what harm is cognizable. Thus, California tort law applies to this question and, as such law permits compensatory damages for loss of consortium, the same is permitted pursuant to the Montreal Convention. However, awards of punitive damages are not permitted pursuant to the Montreal Convention, and damages for emotional distress are limited to recovery for such distress flowing from the plaintiff’s physical injuries. The plaintiff may be entitled to recovery of damages if the injuries were the result of the aircraft plunging into the Pacific Ocean. Such an event would clearly be an accident within the meaning of the Montreal Convention as it would be an “unexpected or unusual event or happening external to the passenger” as set forth in Saks and Husain. 4. Answer: The court limited the carrier’s liability to 39 “big packs.” The court defined a package as “a class of cargo, irrespective of size, shape or weight, to which some packaging preparation for transportation has been made which facilitates handling, but which does not necessarily conceal or completely enclose the goods.” Any grouping demonstrating some preparation may be considered a package. However, the number of packages must be fully and accurately disclosed and easily discernible by the carrier to prevent the incurrence of unforeseen liability. The touchstone of analysis is the parties’ contractual agreement as set forth in the bill of lading. The bill of lading in this case referenced “39 Big Packs.” This statement was consistent with the customs declaration form. Neither form nor the cargo manifest utilized Fishman’s unit of measurement. Thus, Fishman’s recovery was limited to $19,500, which represented the number of “big packs” multiplied by $500. 5. Answer: It is not an accident if the passenger’s injury is caused by reaction to the usual, normal expected operation of the airplane. The presence or lack of a defibrillator would be an external event. Industry practice or legal requirements would determine if the presence of a defibrillator was unexpected or unusual. It is not clear how courts would rule in a case based on these facts. 6. Answer: COGSA does apply because it is a shipment from the U.S. to a foreign port. The court said to look at the bill of lading to determine the number of COGSA packages. The bill of lading said 1320 cartons (packages?). COGSA limits the damages to $500 per package. Therefore, Sony would recover $500 * 1320. 7. Answer: COGSA applies because of the clause paramount. This reasoning is reflected in Gerber, which explains that a clause paramount states that COGSA will apply in a defined situation where it normally would not. 8. Answer: In the first case, the court notes that the ship’s crew must help to save merchandise if the ship is in danger. If they do so, they are to be paid and returned back to their homes. If they do not help, they get zero and also lose their wages. This helps merchants by making sure all hands on deck will try to save their merchandise. In the second case, if some goods are tossed overboard to save the ship, it is not just the owners of those goods who are affected. All owners of goods will lose a part of the value of what was lost as the proceeds from sale of saved goods are shared among all merchants. In the final case, the merchants also help to bear losses incurred by the ship’s owner. If the mast is cut or parts of ship sacrificed to save the goods, the merchants are to reimburse the ship’s owner. MANAGERIAL IMPLICATIONS 1. Answer: The pallets may qualify as packages as the furniture was placed on such pallets, wrapped with heavier cardboard and fastened with steel bands. Students should recall that the definition of a package is very broad and includes any “class of cargo, irrespective of size, shape or weight, to which some packaging preparation for transportation has been made which facilitates handling, but which does not necessarily conceal or completely enclose the goods.” In this case, the pallets may thus qualify as packages. The shipper made two primary mistakes in this case. First, the shipper should have declared the value of the furniture before shipment and inserted this value into the bill of lading. The silence of the bill of lading as to the value of the furniture favors the limitation of liability to $500 per pallet. Second, the shipper should have insisted upon a clear statement of the number of packages prior to shipment if it disagreed with the method of equating the number of packages with the number of pallets. The number of packages should have been fully and accurately disclosed and easily discernible by the carrier to prevent the incurrence of unforeseen liability. 2. Answer: The information needed will depend on the degree of risk assumed by the importer. Whereas many risks can be insured against, some cannot. For instance, if supplies of raw materials or component parts are interrupted, this may disrupt the firm’s manufacturing or assembly process. Certainly the importer would want to be aware of this potential and plan accordingly. Moreover, some risks would not be covered under usual marine provisions. Students should consider what additional coverage this firm might need, whether war-risk insurance would be required, would the seller incur additional or unexpected war-risk surcharges above the ordinary freight rates, and what affect will this have on the importer's future shipments. ETHICAL CONSIDERATIONS The importance of ocean shipping to international trade cannot be overstated; it is its lifeblood. Any threat to shipping can have global economic, and often political, ramifications, whether it is caused by the closure of a canal by war, a hurricane or tsunami, or piracy off the coast of Africa. Another threat is maritime crime. One form of maritime crime that often goes unmentioned to the public is that of marine insurance fraud, a befitting topic for this chapter. In the spirit of Sherlock Holmes, and other great detective mysteries, we thought this would be a fun question for students. Some may know more about ocean shipping than others, and some of our readers have become merchant mariners, and others insurers. But this should be challenging and educational for all. The story is completely hypothetical, but is based on compilations of many actual reported cases. What happened? O. L. Salt knew the sea, the shipping business, marine insurance, and how to scam the system – and had it all planned – a retirement on the Greek Island of Corfu. He picked an old ship, but one capable of being insured and carrying cargo, at least for a short time. Her name is a giveaway, named for a ship belonging to another pirate, Blackbeard’s Queen Anne’s Revenge. The voyage charterer in Venezuela had no idea that the oil would never make its destination in Houston. Once out to sea, Salt painted over the name of the ship, changing it to “Corfu Sunset,” another clue, and hoisted a Liberian flag, to disguise her as she entered a Cuban oil port by night. There Salt sold the oil for cash, refilled the ship with seawater to give the appearance that she was still loaded with oil, removed her false markings, and set sail. The next morning the ship was seen by sailors on a passing ship “setting low in the water” – typical for a ship laden with “cargo.” Salt scuttled her in the Cayman Trench, the deepest part of the Caribbean Sea, where she could never be raised. It’s a giveaway that he and the crew were all found dry and safe, “suitcases in hand,” in a Jamaican hotel. In the end, Salt not only sailed away to Corfu with suitcases of cash, but also a check from his “hull and machinery” insurance carrier. Ask students to research the case of the super tanker, Salem, lost at sea in 1980. Examine the problem of maritime hull and cargo frauds. What other maritime crimes threaten the shipping industry? As noted in the text, students might begin their research with the International Maritime Bureau of the International Chamber of Commerce. The Journal of Commerce is an excellent source of daily information on current events affecting international shipping, insurance, and maritime issues, and students who are interested in the subject must at least be familiar with the Journal. If you would like to dramatically illustrate the magnitude of all types of ocean and air losses, consider recommending that students look at the website, http://www.cargolaw.com, presented by the law firm of Countryman and McDaniel. Look for the Photo Gallery of Cargo Loss, a shocking photo compilation of recent air and ocean disasters. Students will quickly realize the importance of cargo insurance! Chapter 7 Bank Collections, Trade Finance and Letters of Credit CASES IN THIS CHAPTER Maurice O’Meara Co. v. National Park Bank of New York Courtaulds North America, Inc. v. North Carolina National Bank Sztejn v. J. Henry Schroder Banking Corp. Semetex Corp. v. UBAF Arab American Bank TEACHING SUMMARY Just as international buyers and sellers must contract to move their goods from country to country, they must also devise methods to pay for those goods. This must take into account different currencies, ensuring that sellers will actually be paid for their goods, and, practically, how money will move from one country to another. The documents used in foreign sales are also used in domestic sales but are less common. A common negotiable instrument, the draft (also known as a bill of exchange) is a key document used in international transactions. A documentary draft is used to expedite payment in a documentary sale. The word draft is more frequently used in U.S. law and banking practice, while the term bill of exchange is more frequently used outside the United States, particularly in England. Generally, the term draft is used in this text except when referring specifically to an English bill of exchange. The draft/ bill of exchanges serve two purposes: (1) they act as a substitute for money and (2) they act as a financing or credit device. Where buyers and sellers are separate distance and different home regulations or customs pertaining to financial practices, the formality of these documents helps to assure the parties that the sale will proceed as agreed. Additional Background: On-Line Letters of Credit. The different rules and regulations across the globe can make financing international trade difficult. Although it is estimated that letters of credit are used on 45% of all international trade, the form of a letter of credit is not standardized internationally, and institutions use different methods to process them. Obviously, this is inefficient. Consequently, intermediary companies are now providing Internet-based trade financing products to facilitate international B2B exchanges. Such on-line financing options permit buyers to apply for letters of credit and allow either party to initiate discrepancy requests. Bank payment partners can then conduct all collection and transfer of data within the B2B site. This one-stop on-line format can be accessed in real time by all relevant banking and trading partners and g-time role as a trusted third party. For more information, see B.J. Handal, “Are On-in Letters of Credit in Your Future?” World Trade 68 (January 2001). CASE QUESTIONS Maurice O’Meara Co. v. National Park Bank of New York 1. Had the bank been aware that the newsprint shipment did not conform to the requirements of the underlying sales contract, would it have still been required to pay under the letter of credit? Answer: Yes. The bank is not a party to the underlying contract. The bank pays on the presentation of documents, not on the underlying contract. There are at least two contracts in every letter of credit situation: the sales contract between buyer and seller, and the letter of credit contract between the buyer (account party) and the issuing bank. If the bank pays on conforming documents, the bank has no liability to the buyer, even if goods turn out to be non-conforming. This illustrates the independence principle that is at the heart of letter of credit law. As the court in O’Meara says, the letter of credit was “in now way involved in . . . the contract for the purchase and sale of the paper mentioned.” 2. If the bank pays for documents that conform to the letter of credit, but the goods themselves turn out to be nonconforming, is the buyer legally justified in refusing to reimburse the bank? Answer: No. The independence principle holds that the bank’s concern is documents, not goods. The only liability the bank would have to its account party (the buyer) is where it pays on non-conforming documents. Thus, the “strict compliance” principle is invoked by banks (and backed by courts): if documents do not strictly conform to the requirements set forth in the letter of credit, the bank can (and should, ordinarily) refuse to pay (unless instructed otherwise by its account party and held harmless from payment under non-conforming documents). 3. Do you think under current law and banking practice, that bankers should physically inspect the goods when they arrive before honoring their customer’s letter of credit? Answer: This question calls for student opinion. Courtaulds North America, Inc. v. North Carolina National Bank 1. Why did the bank refuse to accept the draft upon presentation of the documents? Answer: While the LC is a “definite undertaking of the issuing bank” (UCP), it is conditional upon presentation of the correct documents. It may have been irrevocable, but it was not unconditional. 2. Had the bank known that the yarns described in the invoice as “imported acrylic yarns” were actually 100% acrylic, as was called for in the LC, would the outcome have been affected? Answer: No. Their independent knowledge as to the nature of the goods shipped is irrelevant to their responsibility under the LC. According to the UCP, “banks deal in documents and not in goods.” Of course, under normal circumstances where the buyer wants to pay for and take possession of the goods, this may bear on his or her willingness to waive the defect in the documents. 3. What is the liability of a bank for paying or accepting a draft when the documents contain a discrepancy? Answer: The issuer will be liable to the account party. Sztejn v. J. Henry Schroder Banking Corp. 1. What basic principle of letter of credit law does this decision challenge? Answer: The independence principle. Under traditional letter of credit law (and custom) the letter of credit was a contract entirely separate from the underlying sales contract between buyer and seller. Banks deal in documents, not goods. If the documents comply with the letter’s instructions, then the bank is ordinarily obligated to pay, whether the documents may be correct, forged, fraudulent, or in error. This lends a certain amount of efficiency to the process and allows banks to serve buyers and sellers without undue complexity. If, however, banks must also investigate whether there is fraud or deception in the underlying contract, its job is more complicated and time consuming, and letters of credit become less easily available (or, more costly). 2. How would the result be different if the draft and documents had been sold and negotiated to a holder in due course who took with no knowledge of the fraud, and who then presented the documents to the issuing bank for payment? Answer: According to the holder in due course rule, such a holder takes the document free from disputes that might arise between the original parties to the transaction. 3. Explain the misrepresentation that took place in this case. How was this “fraud in the transaction”? Can you think of other examples of how fraud could occur in a documentary letter of credit transaction between foreign parties? Answer: The misrepresentation that occurred in this case went to the heart of the transaction and involved an intentional failure by the seller to ship the goods ordered by the buyer. 4. What steps could a buyer and seller take to avoid falling victim to an international fraud? How could they learn more about each other, and what sources could they consult? Answer: This question calls for additional student research. The importance of due diligence and knowing one’s sellers and customers may be emphasized to students. This includes conducting extensive research regarding one’s sellers and customers. The Internet makes such research easier to conduct. Nevertheless, it may be difficult to obtain information on some foreign entities. In such circumstances, sellers and buyers must realistically evaluate the risk before proceeding. Semetex Corp. v. UBAF Arab American Bank 1. What basic principle of letter of credit law does this decision challenge? Answer: . Whether there was intentional fraud in the letter of credit. 2. Is the court’s decision correct given the many problems with the documentation as prepared by the freight forwarder and the additional complication of the Iraqi government asset freeze? Why or why not? Answer:. Yes. It leaves the parties with what they bargained for. Neither had any knowledge of the Kuwait invasion of Iraq. 3. Is the court’s definition of “outright fraudulent practice” too restrictive? What would be the consequences for letter of credit law if the court adopted a more liberal interpretation of fraud? Answer:. No. A restrictive definition means that minor discrepancies in the LoC are overlooked and not considered an excuse to change the LoC obligations. A more liberal interpretation would lead to parties seeking any minor discrepancy as a means to get out of what later is seen as a bad bargain and no one certain whether or not a LoC would be enforced. It would significantly change the reliance and stability behind a Loc. 4. What could UBAF have done in the negotiation and drafting process to prevent the ultimate outcome in this case? Answer:. If UBAF had made the date of delivery to the carrier an important part of the LoC, there would be no obligation to pay if the date was missed. They would have the make the details re delivery more important.. QUESTIONS AND CASE PROBLEMS 1. Answer: Wade’s documents were non-conforming. Conforming documents must be submitted at the presentment deadline (not up until the expiry date of the credit); otherwise it would effectively change the deadline. Therefore, Wade is not entitled to payment. 2. Answer: Smith/Smitth or McDonald/MacDonald, the same remains the same and can reasonably be understood to be the same, but misspelled. Soran and Sofan could, however, easily be different names, referring to different individuals. 3. Answer: J.H Rayner and Company, Ltd. v. Hambro's Bank, Ltd is a classic English case. The bank refused to pay because the letter of credit called for a shipment of “Coromandel groundnuts” while the bill of lading stated “machine shelled groundnuts kernels.” The court held that the bank was correct in denying payment. The bank is not held to know the customs and usages of the trade. 4. Answer: This circumstance differs from the facts in Sztejn as the sellers were unaware that the bill of lading had been misdated. Furthermore, the inaccuracy contained on the bill of lading was not material. A misstatement in a stipulated document in a confirmed letter of credit transaction is only material if it causes a reduction in the price which the goods would have brought if, failing reimbursement by the buyer, the bank found it necessary to realize its security. 5. Answer: If damages are in “contemplation” of parties, the argument exists for obtaining consequential damages. 6. Answer: With regard to the issuing bank, Barclay's cannot receive payment on the documents, since the buyer and seller are both in Brazil. Consequently, it would seek to refuse payment if requested by Deutsche Bank. Nonetheless, it contracted to pay on presentation of documents. This is a separate contract. It issued a letter of credit to its account party, and the account party is no longer in business. If the seller was still in business but the buyer had closed up entirely, the seller would still be entitled to payment; the bank would have to honor its separate letter of credit obligation. With regard to the advising bank, it has agreed to take the documents from the seller and forward them to the issuing bank. As an advising bank, it has no liability, since it is only collecting a small fee for forwarding the documents to the issuing bank. If it is a confirming bank, however, then it would also pay the seller. If it paid the seller, or someone presenting conforming documents, it would have possible recovery against the issuing bank if the issuing bank refused to pay on the documents. This appears to be a “scam” in which buyer and seller conspire to set up a revolving letter of credit and pretend to send pharmaceuticals from Germany to South Africa. The carrier does not check the contents of the containers but issues a bill of lading to the German seller. The German seller presents the documents to Deutsche Bank, and gets paid. The conspiring South African firm pays under the letter of credit agreement with Barclay’s Bank, and this chain of events happens often enough that the banks figure it’s entirely legitimate. They are collecting fees for their work, and all is well until both buyer and seller close up shop after the “sting” on Deutsche Bank. Banks should make clear determinations about whom they are dealing with and make every effort (with due diligence) to identify the individual and corporate personalities involved in each letter of credit transaction. The letter of credit contract with the account party could specify that if there is fraud in the transaction, punitive damages and attorney’s fees could be collected. Yet that may be of little help if buyer and seller are in cahoots and on another continent. MANAGERIAL IMPLICATIONS 1. Answer: These different regions reflect different risks to U.S. exporters. Generally, the credit risk (as assessed using international credit reporting agencies, such as Dun and Bradstreet or TRW) of the developed countries of North America and Western Europe will be superior to that of countries in other regions. Students should also consider factors beyond just the buyer's ability to pay. What is his reputation for reliability? Will the order be canceled before shipment? If the buyer agrees to pay on the documents, will he keep his promise or weasel out? Under what circumstances would you consider selling to firms in these countries without a letter of credit? For new accounts, probably only smaller sales to larger, secure customers located in a developed country with a stable political and economic system. Confirmed letters of credit may be required when political risk is a factor or the foreign banking system presents risks. This substitutes the confirming bank's political risk analysis for that of the exporter. If the bank refuses to confirm, the exporter has an idea of what he's getting into. 2. Answer: (a) There is a discrepancy; the trucker's document is no substitute for the ocean bill of lading as called for in the credit. (b) There is no discrepancy (UCP Article 41c), as the description in the invoice corresponds to the description in the credit. The bill of lading describes the goods in more general terms not inconsistent with the description in the credit. (c) There is no discrepancy under usual circumstances. This is not so with currencies. (d) A discrepancy exists: The goods may not have been insured at the time of loading. ETHICAL CONSIDERATIONS 1. Answer: The buyer’s primary contention was that it was fraudulently induced into entering into this transaction. This fraud was so extensive as to vitiate the entire transaction and thus mandate an order enjoining enforcement of the letter of credit. Support for the buyer’s position may be found in the holding in Sztejn v. J. Henry Schroder Banking Corp. Furthermore, the buyer contended an action for fraud without the equitable relief requested would not be an adequate legal remedy. Such an action would not be as prompt, efficient and practical as an injunction issued in a single action. Furthermore, such an action would require a multiplicity of suits against a number of defendants in different jurisdictions posing complex problems with respect to the calculation of damages. By contrast, the seller contended that injunctive relief was not appropriate as the commission of fraud, if any, occurred in the underlying sales transaction. Injunctive relief was only proper if fraud occurred in the credit transaction itself such as the presentation of forged or fraudulent documents under the letter of credit. As such, the sales and credit transactions were independent from one another. Furthermore, the buyer accepted the risk of pursuing damages in other national courts as a result of its decision to engage in an international business transaction. The buyer’s behavior throughout this transaction demonstrated a certain degree of naïveté with respect to international commerce. This is practically evident in the failure to ascertain the meaning of the “DA/2C” designation until well after the transaction was underway, the lack of suspicion about the quality of the merchandise in light of the significant discount offered by the seller, the considerable delay in the closing of the transaction and the buyer’s succumbing to pressure to pressure to obtain the letter of credit despite reservations it may have had with the transaction. These concerns may be explored during discussion of what students would have done differently had they been in the buyer’s position. The Ohio Supreme Court reversed the court of appeals and ordered the enjoining of enforcement of the letter of credit on the basis that it was used by the seller as a “vehicle for fraud” in a manner similar to the letter of credit at issue in Sztejn. Furthermore, the court held that it would be “pointless and unjust” to permit the seller to draw the money. The seller’s conduct “so vitiated the entire transaction that the only purpose served by invoking the independence principle . . . would be to transform the LC into a fraudulent seller’s Holy Grail, which once obtained would provide cover for fraudulent business practices in the name of commercial expedience.” The case may have been decided in favor of the buyer if the documents had not strictly complied with the letter of credit as this would have provided an additional basis for rejecting the credit. On the other hand, it may have been unnecessary for the court to issue injunctive relief under such circumstances as there a existed a clear basis for dishonor outside of the extraordinary circumstances that supported the issuance of injunctive relief. Given the Ohio Supreme Court’s finding with respect to the fraud that infected the totality of this transaction, it appears that the vast majority of losses arising from this transaction should fall upon the seller. 2. Answer: In addressing the ethical issues here, let us make the following assumptions: (a) that the seller - after contracting but before performing - now has access to very low-priced silk and is in a position to profit far more than he ever thought of profiting; (b) that the buyer knows perfectly well that the goods are conforming. If so, several ethical theories might be advanced to prescribe behavior for the parties to the contract. Kantian deontology would use the categorical imperative to universalize rules of behavior. Nonetheless, there are several candidates for such rules that prescribe ethical behavior for parties in this situation. For example, “Keep your promises!” suggests that the parties should stick to the bargain, no matter what. But being fair or just seems to require that the parties consider the other party’s position and make adjustments, treating the other as they would wish to be treated. Which rule should have priority is not clear, but the buyer would consent to deviate from a strict rule of promise-keeping where fairness seems to require it. Contract law recognizes the same pattern: promises are to be kept except where inequities result. This shows a congruence between Kantian ethics and the positive law ethic (see Fisher and Phillips, The Legal, Ethical, and Regulatory Environment of Business, 6th Edition, pp. 6-14). To some extent, the positive law ethic reflects custom and culture and - to that extent - reflects a social contract approach to ethics that emphasizes the importance of norms prevailing in a given community (See Donaldson and Dunfee, Integrative Social Contracts Theory, Academy of Management Review, April 1994). Here, if the seller realizes a windfall, prevailing norms and customs in the silk sales community might well point to a satisfactory ethical path. Thus, if all participants in the silk trade understand the risks of commodities fluctuations, participants can perhaps plan for the kind of market flooding that has drastically lowered the price. But if the events are unprecedented, historic community norms may be a miserable guide. Instead, a buyer or seller might consider value or virtue ethics, identifying central or core values that are a matter of general consensus, values like honesty, promise-keeping, integrity, respect, fairness, caring, and responsibility. If the buyer instructs the issuing bank to reject the documents because of a minor discrepancy, the strict compliance rule would seem to back him up. Nevertheless, from a core values perspective, the buyer fails to keep his promise to buy and is being less than honest (straightforward) about his rejection. He does not respect the seller enough to tell him the real reason and hides behind a technicality. On the other hand, given our assumptions above, the seller is taking advantage of a windfall situation to the detriment of the buyer, and is thus not respectful, caring, or fair toward the buyer. So, under the assumptions made, core values are being ignored where the buyer rejects on a technicality and the seller insists on the buyer taking what have become over-priced goods. On a long-term basis of dealing, both buyer and seller would benefit if there were sufficient trust, honesty, respect, and fairness that the seller were willing to renegotiate a fair price and profit. Overall, the seller may lose more in the near term by the drastic lowering of prices, but if fluctuations continue, any seller will be better off with loyal customers. The higher prices to be charged when supplies are tight may be far more credible to customers who have benefited from excess supply and low prices. Again using a core values analysis, the situation may be somewhat different if we assume that the seller has just bought goods for resale to the buyer, and the market price suddenly becomes drastically lower. The seller may well be “stuck” with high-priced silk if the buyer’s bank rejects the documents as non-conforming. Again, buyer’s behavior is not entirely honest, breaches a promise, and is not entirely fair toward the seller. The law may allow this, but long-term trade relationships may be damaged by such short-term opportunism. If supplies ever become tight again (and the Chinese certainly seem capable of trickling the market as well as flooding it), the opportunistic buyer may find a rueful day of reckoning. INTERNET EXERCISE: UCP AND LETTERS OF CREDIT Ask students to draft a letter of credit compliant with the standards of the UCP. Students can look at the information on: www.lexmercatoria.org or http://www.iccwbo.org/ TEACHING SUGGESTION / COOPERATIVE LEARNING ACTIVITY: CREDIT As an extension of the contract negotiation exercise, instructors may also require students to finance the transaction. Several student groups can be assigned the roles of sellers/buyers and banks (buyer’s and seller’s), etc., and required to draft the appropriate documents for a transaction (this may be limited to financing aspects or include the bill of lading/air waybill, insurance policies, letter of credit). For example, students may be required to draft a letter of credit (perhaps pursuant with a student bank’s requirements) for presentation. A student bank that improperly honors the draft will lose points in the exercise. Chapter 8 Nationale Lawmaking Powers and the Regulation of US Trade CASES IN THIS CHAPTER Dole v. Carter Youngstown Sheet & Tube v. Sawyer Star-Kist Foods, Inc. v. United States Arizona v. United States Japan Line, Ltd. v. County of Los Angeles TEACHING SUMMARY The U.S. Constitution and federal laws affect U.S.-based global trade in many ways. The Constitution describes the role of the president and congress in regulating global relations as well as their power to develop nationally-binding regulations. International agreements include executive agreements and international treaties. Congress authorizes the president to negotiate trade agreements which then are submitted to Congress for its approval. Numerous federal agencies such as the International Trade Commission, the Department of Homeland Security and the Unites States Trade Representative make regulations and engage in negotiations that affect businesses in their domestic actions as well as in their actions in foreign countries. Additional Background: Friendship, Commerce, and Navigation Treaties. It might seem obvious that domestic employment discrimination law applies to foreign companies doing business in the U.S., as domestic law generally applies to everyone within a jurisdiction. The application of employment discrimination law to foreign companies, however, has been affected by a series of treaties negotiated and signed by the U.S. throughout the world. After World War II, the United States began negotiating a series of Friendship, Commerce, and Navigation (FCN) treaties with its international trading partners. These treaties sought to prevent discriminatory treatment against a foreign national doing business in one of the signatory countries and to encourage business to invest overseas. At present, the U.S. has negotiated FCN treaties with approximately 25 nations. In drafting such treaties, the U.S. has included provisions to prevent U.S. companies operating abroad from being required to hire a quota of citizens (from the host country) in management positions. This "was necessary for the limited purpose of securing to foreign investors [and U.S. investors acting overseas] the freedom to place their own citizens in key management positions, thus facilitating their operational success in the host country." These “employer choice” provisions have provided a basis for foreign companies and their U.S. subsidiaries to claim that they are exempt from the restrictions of Title VII and other U.S. discrimination law. Though the treaties are very similar and based on the same underlying concerns, their specific wording varies. The Korean FCN Treaty specifies that "Nationals and companies of either Party shall be permitted to engage, within the territories of the other Party, accountants and other technical experts, executive personnel . . . and other specialists of their choice." The comparable provision, Article VIII, of the Japanese FCN Treaty is essentially identical, while the Greek FCN Treaty guarantees foreign companies "employees of their choice among those legally in the country and eligible to work." CASE QUESTIONS AND ANSWERS Dole v. Carter 1. Why did the president use a sole executive agreement resolving this issue with Hungary instead of relying on the treaty power? Answer: With an executive agreement, the president did not need Congress’s approval or consent. He also may have thought this type of matter was for the President to decide. 2. Was the president's action required to be authorized by the Congress? Answer: No. It was a part of the president’s inherent powers. 3. What kinds of agreements are usually reserved for treaties, and what kinds are handled through executive agreements? Answer: Treaties are reserved for actions that involve significant U.S. commitments or significant risks or ones that by custom or international law have usually been the subject of treaties. None of those are involved here. Executive agreements often deal with topics that can be addressed in a short time period and without complicated analysis. Youngstown Sheet & Tube v. Sawyer 1. On what grounds did Justice Black reject President Truman’s seizure order? Answer: According to Justice Black, the president’s power must stem either from an act of Congress or from the Constitution itself. In this case, there was no statute expressly authorizing the seizure of private property as contemplated in President Truman’s order. Second, there was no federal statute from which such power could be fairly implied. Finally, there was no support for the order within the Constitution. The commander-in-chief of the armed forces status conferred by the Constitution upon the president was applicable matters concerning the “theatre of war” rather than the taking of private property in order to end a domestic labor dispute. Furthermore, the Constitution requires the president to faithfully execute federal laws. The Constitution does not confer upon the president the authority to make law (as contemplated in President Truman’s order) but rather execute laws adopted by Congress. Thus, while Congress was free to adopt a statute similar in substance to President Truman’s order, the president was not free to act on his own without underlying statutory authority. 2. How did Justice Jackson characterize the sources of presidential power? Answer: Justice Jackson described presidential authority as emanating from three sources. First, when the president acts pursuant to an express or implied authorization of Congress, his authority is at its maximum as he possesses power to act in his own right as well as power that may be lawfully delegated by Congress. When the president acts in the absence of a congressional grant of power, the president may only rely on his independent powers and may share authority with unexercised congressional power. The president’s power is at its lowest ebb when the president acts in contravention of the express or implied will of Congress. Under such circumstances, the president may only rely upon his own constitutional powers minus any constitutional powers of Congress over the matter. In this case, the president’s power was at its lowest ebb as the seizure of private property was the subject matter of three separate federal statutes. The president’s assertion of his power as commander-in-chief was unable to overcome Congress’ previous exercises of power in this field. 3. Considering that the United States was engaged in a brutal war in Korea, and that steel was needed for the war effort, do you agree with the decision (three justices dissented)? If the Court had permitted the seizure of a private business in this case, could that have led to a “slippery slope” and ultimately future seizures on somewhat lesser grounds? Answer: This question calls for student opinion. It does bear to note that students should address the questions of tensions between various provisions of the Constitution (private property rights versus national security for example) and whether constitutional rights should be suspended in times of national emergency. Star-Kist Foods, Inc. v. United States 1. What was the constitutional authority for the agreement with Iceland? Answer: The president's delegated authority under the act. 2. What was the policy objective of Congress in enacting the Reciprocal Trade Agreements Act noted by the court? How was the president to implement this policy? Answer: To expand foreign markets “by regulating the admission of foreign goods into the US … so that foreign markets will be made available to those branches of American production which require and are capable of developing such outlets by affording corresponding market opportunities for foreign products in the United States.” 3. Why was the congressional delegation of authority constitutional? Answer: Because it had enunciated sufficiently clear standards to make it clear when action would be proper. Arizona v. United States 1. Where does the federal government derive its authority to regulate immigration? Answer: Art. I, sec.8, cl. 4 gives national government the power to establish unform rules of nationalization. Additionally, a sovereign government has the inherent power to conro and conduct relations with foreign governments. 2 What policy arguments does the court give for the federal government’s regulation of immigration? Answer: First, states cannot regulate in areas where Congress has determined that regulation is exclusive to the federal government. Second, even in areas where state regulation is permitted, federal regulation pre-empts a conflicting state regulation. 3. On what grounds did the Court strike down three parts of the Arizona statute? Answer: Sec. 3 Federal law, not state law, determines the consequences for violation of federal laws. Sec. 5 (c) Congress chose not to penalize aliens who seek unauthorized employment so a state law that does penalize aliens conflicts with the federal enforcement method. Sec. 6. A state officer is given authority to arrest when federal immigration officers have no such authority; this conflicts with federal law. 4. Why did the court uphold the fourth part of the Arizona statute (2B)? Answer: The state officers are allowed to check with the federal immigration authority on the status of someone who may be subject to arrest. Federal law does not prohibit such contact. Japan Line, Ltd. v. County of Los Angeles 1. What rule does the Court espouse for the state taxation of cargo containers and other instrumentalities of foreign commerce? Answer: The rule forbids multiple taxation: taxes may be apportioned among taxing jurisdictions, but then no jurisdiction can tax the instrumentality in full. 2. How does this case affect taxation by foreign countries? Answer: Although the U.S. can ensure compliance with and enforce this rule in the U.S., it cannot do so with regard to foreign nations. Thus, foreign countries are free to proceed as they see fit. 3. What effect would multiple taxation have on international commerce? Answer: It would eliminate federal uniformity, as foreign commerce into different states may be taxed at different rates. Countries seeking to retaliate against a state (for its taxation) would probably enact retaliatory measures not against a single state, but against the nations as a whole. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: Trade promotion authority has not been renewed at the time of the preparation of the textbook. For materials relating to the expiration of Trade Promotion Authority in 2007, students may review the Council on Foreign Relations Backgrounder entitled Fast-Track Trade Promotion Authority and its Impact on U.S. Trade Policy on the Council’s website: http://www.cfr.org/ and Public Citizen’s discussion of the expiration entitled Long Overdue, Fast Track Finally Passes into History at http://citizen.typepad.com/eyesontrade/2007/06/long-overdue-fa.html. 2. Answer: Because these states are attempting to regulate international commerce, which, under the Constitution, is the exclusive purview of the federal government, this action is suspect. 3. Answer: In the case noted in the question, Consumer's Union of the U.S. v. Kissinger, the court held that the voluntary restraint agreement entered into between the president and private foreign producers was valid without express authorization of Congress. Because such agreements are voluntary, not enforceable import restrictions, and made between the president and a private party (as opposed to a foreign government), they do not require congressional authority. This falls within the inherent power of the President of the United States. 4. Answer: Yes. The language grants the president discretion in the method used to adjust imports, thus he may set quotas and use monetary methods, including license fees. 5. Answer: Fast-track authority is now called “Trade Promotion Authority,” handled by the U.S. Trade Representative Office: http://www.ustr.gov/. One of the major trade issues in the 107th Congress was whether or not Congress would approve trade promotion authority (formerly called fast-track authority) for the president to negotiate trade agreements with expedited procedures for implementing legislation. Under this authority, Congress agrees to consider legislation to implement the trade agreements (usually nontariff trade agreements) under a procedure with mandatory deadlines, no amendment, and limited debate. The president is required to consult with congressional committees during negotiation and notify Congress at major stages. The president was granted this authority almost continuously from 1974 to 1994. After that, the authority lapsed. In 2001, the House passed Trade Promotion Authority (TPA) bill H.R. 3005 by a vote of 215-214. An important issue was the designation of labor and the environment as negotiating objectives. On May 23, 2002, the Senate wrapped TPA into a comprehensive trade bill, H.R. 3009, “the Trade Act of 2002.” The bill included TPA (in title XXI), reauthorization of Andean trade preferences, extension of the Generalized System of Preferences, and trade adjustment assistance (TAA). President Bush signed the bill into law (P.L. 107-210) on August 6, 2002. The TPA provisions in P.L. 107-210 cover tariff and non-tariff agreements entered into before June 1, 2005 (possible two-year extension). For expedited procedures to apply to legislation to implement a trade agreement, the agreement would have to “make progress” toward meeting the outlined negotiating objectives and satisfy other specified conditions. Any changes to trade remedy laws would be subject to greater congressional scrutiny. The president would have to consult with congressional bodies, including the newly established Congressional Oversight Group. Congress could withdraw expedited procedures if consultation requirements were not met. See http://fpc.state.gov/documents/organization/16806.pdf 6. Answer: No, the U.S.-Canadian agreement was void because it was contrary to U.S. national policy. As a result, no action for damages can be brought by the federal government. “The power to regulate foreign commerce is given to Congress, not in the executive or the courts; and the executive may not exercise the power by entering into executive agreements and suing in the courts for damages resulting from breaches of contracts made on this basis of such contracts” U.S. v. Capps, 204 F.2d 655 (1953). The court concluded that the president acted unlawfully in signing the contract. If the president was concerned about agricultural imports, Congress did give the president the power to conduct an investigation via the U.S. Tariff Commission, with the findings of fact presented to Congress for action. 7. Answer: Xerox Corp. manufactured parts for copy machines in the U.S. that were shipped to Mexico for assembly. The copiers were designed to be sold to Latin America and did not operate on U.S. electric current. The copiers after assembly were kept in U.S. customs warehouses pending sale to Latin America. These goods were free of import duty by federal law. The city of Houston, Texas, assessed these copiers with a local property tax. Xerox sued to have this tax declared unconstitutional. The court held that the law was pre-empted by federal law. If the goods were destined for domestic use, U.S. tariff and tax laws would apply. 8 Answer: The Tennessee law was attacked under the Commerce Clause. Tennessee responded that it was a valid exercise of the police power of the state to protect consumers from fraud and deception. The court decided that the burden on commerce outweighed the state's interest in protecting the public health, safety, or welfare, and, therefore held the Tennessee law unconstitutional. MANAGERIAL IMPLICATIONS Students should identify the erroneous assumptions underlying Day-O’s action: first, that the United States would “tough it out” and maintain the embargo until it was successful in restoring the elected government; second, that other firms would also think that the embargo would hold and would be forced to cease operations, giving Day-O a competitive advantage. Additionally, students should recognize that Day-O acted both ethically and within the letter and spirit of the law but made a strategic miscalculation. ETHICAL CONSIDERATIONS This ethical consideration calls for an opinion. Students may access the information regarding the Obama administration’s record with respect to free trade agreements, the environment and labor rights at the U.S. Department of State’s website and U.S. Department of Labor’s website. TEACHING SUGGESTION/ COOPERATIVE LEARNING ACTIVITY As noted above, many of these treaties differ slightly in their language. Additionally, open questions exist regarding the application of these treaty provisions to U.S. subsidiaries. Divide students into small groups (or allow students to act individually). Either assign a foreign company or a foreign country of origin to each group (e.g., group #1 is a company from Greece doing business in the U.S.). Have students find the U.S. FCN Treaty that applies to their country. See if the students can find a company in that country that trades with the U.S. that twould be affected by the treaty’s provisions. INTERNET EXERCISE In conjunction with the above activity, have students view the country report or country commercial guidelines pertaining to their assigned country. This information is available at: http://www.state.gov. Current information regarding doing business in Asia may also be found at: www.asiaweek.com. Based on the information in these reports, might there be legal or political problems doing business with these countries? Supplementary Case: Sumitomo Shoji America Inc. v. Avagliano, 457 U.S. 177 (1982). Female employees filed a class action suit alleging gender discrimination. In defense, Sumitomo, the U.S. subsidiary of a Japanese company, asserted that the Japanese FCN Treaty exempted the company from gender discrimination provisions of Title VII. The District Court ruled that Sumitomo was not protected by the FCN Treaty since it was a U.S. citizen formed under the laws of the United States. Article XXII (3) of the Japanese FCN treaty provided that "Companies constituted under the applicable laws and regulations within the territories of either party shall be deemed companies thereof …." The Supreme Court, therefore, concluded that since Sumitomo was formed under the laws of New York, "it is a company of the United States, not a company of Japan." Therefore, as a U.S. company, Sumitomo was required to comply with the requirements of U.S. employment discrimination law, i.e., Title VII. Furthermore, in dicta, the Court stated that FCN treaty rights were available as a defense to Title VII claims only to Japanese companies operating within the U.S. Chapter 9 Gatt Law and the World Trade Organization: Basic Principles CASES IN THIS CHAPTER European Economic Community—Import Regime for Bananas Japan–Taxes on Alcoholic Beverages India—Quantitative Restrictions on Imports of Agricultural, Textile, & Industrial Products European Communities—Regime for the Importation, Sale & Distribution of Bananas TEACHING SUMMARY International trade has grown dramatically since World War II when countries began to seek trading partnerships with each other, realizing that such partnerships could inure to the benefit of both. Thus, they began to craft international treaties and organizations to eliminate barriers to trade, including tariffs, quotas, and restrictive unilateral or bilateral practices. Two of the primary organizations and instruments in effect today are GATT and the World Trade Organization (WTO), the latter of which the U.S. is a member. Each favors reciprocity and mutual advantage among countries and transparency of rules. This principle is expressed in GATT through Article I’s most favored nation and national treatment rules, which require equal tariff treatment of member nations (and, thus, non-discrimination). The WTO now handles many disputes between countries regarding trade barriers. Russia has recently joined GATT and a case has been filed against it in the WTO by the U.S. on behalf of its automakers. It might be of interest for students to see how this case progresses. CASE QUESTIONS AND ANSWERS European Economic Community—Import Regime for Bananas 1. What action did the EEC take that violated its tariff concessions? Answer:. It changed the rates on bananas imported from Latin American countries. 2. Why is it important that countries maintain their tariff commitments? Answer: There, for example, the producers in Latin America made strategic decisions involving land to be cultivated and market ties in the EEC to arrange based on the existing tariff commitments. Changing the tariffs adversely affects these firms and the countries where they operate. 3. What is the GATT basis for their objections? Answer: Article III’s National Treatment clause. The specific tariffs applied by the EEC on imports of bananas since 1993 were clearly “less favorable” than treatment accorded to like products from other member nations. Article II, Schedules of Concessions: Individual tariff concessions are to be applied to all other contracting parties. Article I, General Most Favored Nation Treatment: the EU must give the non-ACP nations who are GATT members the same “advantage, favor, privilege or immunity granted...to any product originating in…any other country....” Japan–Taxes on Alcoholic Beverages 1. What is the purpose of GATT’s Article III and how is that purpose ensured? Answer: The broad and fundamental purpose of National Treatment on Internal Taxation and Regulation is to avoid protectionism in the application of a nation’s internal tax and regulatory measures. It also ensures that member nations do not apply internal measures to imported or domestic products so as to afford protection to domestic products. Under Article III, member nations are obliged to treat imported products in the same way as the like domestic products. A nation may still apply a tariff to imported products as long as the tariff is consistent with bindings and concessions. Yet, once that product has cleared customs and entered the domestic stream of commerce, any tax differential on like products violates Article III. 2. Is it necessary that the complaining party show that a discriminatory tax has a negative effect on trade? Is a remedy possible even where the discrimination has no adverse impact on the sales volume of the imported products? Answer: No. Adverse impact to trade need not be shown in order to prove a case of nullification and impairment. In GATT 1994, the Understanding on Rules and Procedures Governing the Settlement of Disputes states that an infringement of GATT is considered a prima facie case of nullification and impairment. Thus, a breach of a trade agreement concluded under GATT is presumed to have an adverse trade impact on other members. In this case, if imported products are taxed in excess of like domestic products, that tax measure is inconsistent with Article III. Under such circumstances, a remedy may be available. 3. How does a WTO Panel determine whether two products are “like products” for purposes of the first sentence of Article III(2) or “directly competitive or substitutable products” that fall within the domain of the second sentence of Article III(2)? Answer: The panel cautions that “like products” should be narrowly construed and determined on a case-by-case basis to determine whether the products are similar. Factors to consider include: the product’s end uses in a given market, consumers’ tastes and habits, and the product's properties, nature and quality. Uniform tariff classifications can be used unless they are too broad to be reliable criterion. If the imported and domestic products are not similar enough to be “like products,” Article III:2 might still apply if the goods fall into the broader category of “directly competitive or substitutable products.” How much broader this category is than the first is fact driven. In this case, the panel considered physical characteristics, common end-uses, tariff classifications, and the relevant market for the products. India—Quantitative Restrictions on Imports of Agricultural, Textile, & Industrial Products 1. Compare the system of import licensing in effect in India during that time to what you know in the United States today. Are there any industries you can think of in the United States that are subjected to import licensing? What industries are so highly regulated? Answer: Some products in highly regulated industries would include a few agricultural products like sugar, certain pharmaceutical products such as selected drugs or devices and likely some firearms. 2. Why did the licensing scheme violate Article XI? Answer: The licensing was not based on rules but was applied in a discriminatory manner. 3. What causes a balance-of-payments problem, and why can this be a critical problem for many developing countries? Answer: If a country is too dependent on imports, too much money leaves the country and essential items that are needed for basic survival can become too expensive. 4. Why did the panel not accept India’s balance-of-payments argument? Answer: India has over $25 billion in reserves when an adequate level was about $16 B; it had enough extra to cover emergency situations. European Communities—Regime for the Importation, Sale & Distribution of Bananas 1. When may a member bring a complaint against another member of the WTO? Answer: Under Article XXIII, a member nation has broad discretion in bringing a case against another member under the DSU. 2. What was the basis for the EC’s argument in this case? Answer: Fundamentally, the EC is making a “standing” argument. The U.S. had claimed nullification and impairment due to the EC’s Import Regime on Bananas. The EC opposed the claim arguing that in any system of law, including international law, a claimant must have a legal right or interest in the claim and the U.S. didn’t have such an interest since it was not an exporter of bananas. The appellate body rejected the EC’s argument that ICJ and PICJ judgments establish a general rule that in all international litigation the complaining party must have a “legal interest.” Further, the body pointed out that the question of standing under the dispute settlement provisions of a multilateral treaty is determined by referring to the terms of the treaty. 3. The EU-Latin America banana dispute did not end until 2012. What was the ultimate conclusion to this WTO issue? Answer: .The EU and the U.S., the later acting on behalf of the U.S.-based multinational banana growers from Latin America, ended their wars—abandoning tariffs and retaliatory measures. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: This answer is a tutorial that requires the student to visit the WTO Web site. 2. Answer: This answer requires outside legal and Web research. 3. Answer: This answer requires outside legal and Web research. 4 Answer: Although nations may enact consumer protection-motivated laws or those addressing the health, safety, or morals of its population, the nature of the protection regarding beef is unclear, other than that this law seeks to “protect” consumers from mistakenly purchasing non-Korean beef. For example, a labeling requirement for irradiated foods or those from the U.K. (which has demonstrably diseased cattle) might be justified, but this regulation is overly restrictive even for its intended use, and, indeed, the intended use suspect. Obviously, these regulations will favor domestic beef as they reduced the likelihood that stores will choose to comply with the multiple demands of imported beef sales. 5. Answer: If a member does not abide by its WTO obligations, other affected member countries are not supposed to retaliate unilaterally, but should file a complaint with the WTO. In the past, however, nations have retaliated unilaterally. More effective and binding trade dispute resolution procedures under the WTO may result in fewer cases of unilateral retaliation. 6. Answer: A U.S. quota on imported cars would be problematic. GATT both seeks to eliminate all quotas and requires members to use the least restrictive means possible for correcting trade imbalances. Although under some circumstances, GATT allows quotas (such as to relieve food shortages), this is not such an instance. Further, even a permissible quota would have to be evenly applied. Therefore, it would have to apply to all foreign imports. The most frequently used justification for the imposition of quotas (other than with trade in textiles) is the balance-of-payments exception to the GATT agreement that allows the temporary use of quotas to correct a balance-of-payments emergency. In such an instance, justification must be given to the Balance of Payments Committee of the WTO, which subjects the restrictions to surveillance and periodic review. The means must be transparent and must include a time schedule for removal of the restrictions. 7. Answer: The WTO is committed to liberalizing trade and reducing trade barriers. Countries that are members of a free trade area agree to reduce the tariff barriers to zero. They may or may not reduce non-tariff barriers to trade. As long as members of a FTA continue to honor commitments to their non-member trade partners, they are consistent with the WTO. Some free trade areas are more developed—into customs unions and common markets. They agree on some non-trade related matters, such as investments and labor standards, that are not within the topics covered by trade agreements. The WTO has noted that more favorable trade treatment can be agreed to by FTA members if they also agree to continue to enforce and not make worse their WTO commitments to all WTO members. MANAGERIAL IMPLICATIONS A trade war or loss of MFN will certainly affect the ability of the firm to obtain its 35% from China or at the tariff rate that it now does. The goods could be forbidden or taxed at such a high rate as to make their import obscenely expensive. Students might consider whether the firm should anticipate such problems and act now to find another country (such as Mexico, under NAFTA) in which to produce these products. In this way, it could reduce its substantial reliance on the Chinese production facility/products. Question 6 calls for research on the differences between conducting business in China and Taiwan. The customs classifications of a firm’s products may offer managers ways to make minor product changes and reduce trade barriers (see Teaching Suggestion note). ETHICAL CONSIDERATIONS This ethical consideration calls for an opinion. Students may access the Convention on the Protection and Promotion of Diversity of Cultural Expressions on the website of the United Nations Educational, Scientific and Cultural Organization at http://portal.unesco.org. Students may also wish to review the U.S. position with respect to this Convention. Two such sources are interviews with Louise Oliver, the U.S. ambassador to UNESCO on October 21, 2005 and available at http://www.state.gov and Dana Giola, Chairman of the National Endowment for the Arts on September 27, 2005 and available at http://www.fpc.state.gov. TEACHING SUGGESTION / COOPERATIVE LEARNING ACTIVITY: CUSTOMS CLASSIFICATION OF SUVS Instructors interested in offering students a greater understanding of customs classifications as well as the practical effect of such classifications and how seemingly neutral classifications can in fact be discriminatory may wish to introduce students to the following problem. Two decades ago, the problem was the classification of vans -- the boxes on wheels design: were they cars or trucks? This issue has reinvented itself in the form of the SUV -- are they trucks or cars? Instructors may present the following scenario and the two Customs Classifications and ask students to advocate on behalf of either classification. Alternatively, instructors may wish to share this episode with students as additional background. In 1989, Nissan began importing SUVs into the U.S. Its SUV, the Pathfinder, however, used the “Hardbody” truck line as its basis for design, incorporating the Hardbody’s frame, side rails, cab, and front suspension. There were two possible classifications for the vehicles: Section 8704.31.00: Motor vehicle for the transport of goods. Section 8703.23.00: Motor cars and other motor vehicles principally designed for the transport of persons, including station wagons and racing cars. The “transport of persons” tariff was 2.5%, but the “transport of goods” duty was 25%. The Customs Service concluded that the Pathfinder was similar to a pick-up truck, declared it a “transport of goods” vehicle, imposing the 25% duty. Since this would significantly cut into any hopes for profits, Nissan appealed to the Court of International Trade in Washington. The CIT trial included test drives of the Pathfinder and comparison vehicles (including the Hardbody), videotapes of competing vehicles, and expert testimony about engineering, design, and marketing. The CIT reversed the Customs Service, declaring the Pathfinder a passenger car. The Customs Service appealed to the federal court of appeals. That court held that, indeed, the Pathfinder was basically derived from Nissan’s Hardbody truck line, yet the Pathfinder was based upon totally different design concepts than a truck. The mere fact that the vehicle was derived in part from a truck, without more, was not determinative of its intended principal design objectives: passenger transport and off-road capability. Indeed, substantial structural changes were necessary to meet the design criterion of transporting passengers: the spare tire and the rear seat when folded down intrude upon the cargo space; the cargo area is carpeted; a separate window opening in the pop-up tailgate accommodates passengers loading and unloading small packages without having to lower the tailgate. For example, the addition of the rear passenger seat required that the gas tank be moved to the rear and the spare tire relocated, reducing the cargo carrying capacity. By contrast, the Hardbody truck bed can accommodate loading with a forklift, clearly a design feature for cargo. Also, to provide a smooth ride for passen¬gers, a new rear suspension was developed for the SUV. Solution Manual for International Business Law and Its Environment Richard Schaffer, Filiberto Agusti, Lucien J. Dhooge 9781285427041
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