Figure 13.3 The Vertical Nature of U.S. When a U.S. company conducts business in another country, it must comply with applicable U.S. law, and with the law of the foreign nation where it is located. How can the content in this section help you demonstrate mastery of the learning outcome? Do consumers have any voice in this matter? In the United States, that power rests with the president, though Congress also has important roles. The prevailing party in the arbitration could take the award to court in either Washington or China and convert it into a legally binding judgment under the treaty. If true, should these U.S. companies find another electronics manufacturer to assemble their products? A sovereign state is a political entity that governs the affairs of its own territory without being subjected to an outside authority. For this reason, many horizontal laws, like treaties, contain provisions that require the parties to the treaty to submit to a treaty-created dispute resolution panel or other neutral tribunal, such as the International Court of Justice (ICJ). Everyone within the United States, for example, is subject to the jurisdiction of certain state and federal courts, whether they voluntarily choose to submit to jurisdiction or not. However, when we look at the question of how a company might “follow the law,” we need to consider which laws we are referring to. A choice of law clause is a contractual provision that specifies which law and jurisdiction will apply to disputes arising under the contract. Figure 13.4 An Illustration of the Horizontal Nature of International Law between Nation-States. Or should Chinese law apply? Countries are sovereign states. This is because there is a legitimate authority over the business that governs its behavior. However, it is necessary to first examine of the nature of international law to understand this complexity. Ting-I Tsai, “Hon Hai Gives Workers a Raise,”, Convention on the Recognition and Enforcement of Foreign Arbitral Awards,, Figure 13.3 “The Vertical Nature of U.S. Business and the Legal and Ethical Environment, Chapter 13.1. International business law is the practice of law in the global business community. This means that a sovereign state cannot generally be compelled to submit to the authority of the international law if it chooses not to participate. Domestic Law. Compare this to a sovereign state that violates a treaty agreement. What are the key topics covered in this content? Some laws, such as international law, or law between sovereign states, are best thought of in a horizontal structure. While international law between sovereign states is relevant to business in many ways—for instance, it would be illegal for a company to ignore the terms of a treaty that its own country had ratified—the types of law that are relevant to businesses operating in the international environment are domestic laws. Choice of law clauses have consequences regarding the way the contract will be interpreted in the event of a dispute, costs associated with defending a complaint arising under a contract, and convenience. Since each state is sovereign, that means that one sovereign state is not in a legally dominant or authoritative position over the other. Try to make a distinction between the nature of international law between nation-states and the nature of law as it applies to businesses operating in the international arena. Figure 13.5 The Horizontal and Vertical Nature of Contract Relationships in the Global Legal Environment. Though it is common for treaties to set forth expectations that disputes will be heard before some predesignated tribunal, some international relations experts believe that the state of international law is one of persistent anarchy. However, it is perfectly legal for a U.S. company to contract with an overseas manufacturer for labor, without insisting that those workers are paid a wage equal to the U.S. federal minimum wage. From your seat, it may seem like an obvious point that businesses should follow the laws and behave ethically in their business dealings if they wish to be successful for the long haul. For example, if Microsoft, a U.S. company, has a contract with KYE Systems Corp., a Chinese manufacturer, to assemble its products, the contract might very well include a choice of law clause that would require any contract dispute to be settled in accordance with Washington State law. If you were creating a contract with a supplier in a different country, what types of things would you consider when deciding on the choice of law clause? A choice of law clause within the contract designates which country’s law will apply to a dispute arising under an international contract. In domestic law, or law that is applicable within the nation where it is created, some legitimate authority has the power to create, apply, and enforce a rule of law system. This means that a dispute could arise under a contract between international parties. Domestic Law”, Figure 13.4 “An Illustration of the Horizontal Nature of International Law between Nation-States”, Figure 13.5 “The Horizontal and Vertical Nature of Contract Relationships in the Global Legal Environment”, agreement-nafta,, CC BY-NC-SA: Attribution-NonCommercial-ShareAlike. International business law varies by jurisdiction. If this were the case, Apple may wish to terminate its relationship with these companies. This is because we recognize that there is some legitimate authority in domestic law that allows the U.S. government to exact punishment against convicted criminals. Compare and contrast the structure of international law with that of domestic law. In the United States, contracts laws are state law rather than federal law, so should the laws of a particular state, like California, be applied to this dispute? If Foxconn and Hon Hai disputed this allegation, which rule of law should govern the dispute? See Figure 13.3 “The Vertical Nature of U.S. Understand the difference between international law between states and law as it applies to businesses operating internationally. An obvious challenge to laws created in horizontal power structures that lie outside of any legitimate lawmaking authority “above” the parties is that enforcement of violations can be difficult. There are several reasons for this. See Figure 13.4 “An Illustration of the Horizontal Nature of International Law between Nation-States” for an illustration of the horizontal nature of international law between nation-states, using the North American Free Trade Agreement as an example. In the United States, laws are handed down by the legislative branch in the form of statutory law, by the judicial branch in the form of common law, and by the executive branch in the form of executive orders, rules, and regulations. This is why fleeing criminals can legitimately be caught and brought to justice in domestic law through extradition. The United States, Mexico, Japan, Cambodia, Chile, and Finland are all examples of sovereign states. International Business law is the scope and practice of law in the global business market. Examine the differences between vertical structure and horizontal structures of law. Domestic Law”. For example, treaties have a horizontal structure. These contracts are horizontal in nature, much like a treaty. The contract might contain such a clause because Microsoft’s headquarters are in Washington State, and it would be more convenient for Microsoft to settle any disputes arising under a contract by using the laws in the state where it is located.

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