Read this article to learn about the Legal Environment for International Business. After reading this article you will learn about: 1. Introduction to International Legal Environment 2. Judicial Independence and Efficiency 3. Legal Systems 4. Principles of International Law 5. United Nations Commission on International Trade Law (UNCITRAL).
Introduction to International Legal Environment:

Firms operating internationally face major challenges in conforming to different laws, regulations, and legal systems in different countries. The legal framework to protect small and medium enterprises (SMEs), mainly to achieve social objectives, adversely influences the expansion of manufacturing capacities and achieving economies of scale in certain countries.

International managers need to develop basic understanding of the types of legal systems followed in the countries of their operations before entering into legal contracts.

Judicial Independence and Efficiency:

The independence of a country’s judicial system from political influences of the members of governments, citizens, or firms is crucial for the fair treatment a firm receives in its overseas operations. A fair judicial system also reduces political risks in overseas markets. The level of judicial independence and efficiency differs widely among countries.

Germany had the highest level of judicial independence (Fig. 8.3) with a score of 6.5 on a 7 point scale whereas Netherlands and Australia had a score of 6.4, the UK (6.0), Singapore (5.6), Japan and South Africa (5.5), India (5.3), the US (5.1), and UAE (5.0). This was reported to be considerably lower in China (3.4), Brazil (3.1), Russian Federation (2.7) and the lowest in Venezuela (1.2).

The efficiency of legal framework for private businesses to settle dispute and challenge the legality of government actions or regulations also varies widely.

A cross­-country comparison on a 7.0 point scale as shown in Fig. 8.4 indicates that Denmark (6.5) had the highest level of efficiency of legal framework followed by Germany (6.3) and Switzerland (6.1) whereas it was considerably efficient in Singapore (6.0), Australia (5.9), the UK (5.8), Japan (5.6), South Africa (5.4), the US (4.9), and India (4.8).

The legal framework was the least efficient in Venezuela (1.5) and had relatively low level of efficiency in Russian Federation (2.8), Brazil (2.9), China (3.6), Tanzania (3.7), and Thailand (4.4).

The extent of separation of judicial powers between the judiciary and the public authorities varies considerably across nations. China, for instance, has generally followed ‘rule by man and not by law’, the tradition of which still remains despite the country developing a model legal system. The efficiency of enforcement of legal system is also lax in many low-income countries.

In countries, such as Japan, the reliance on courts for conflict resolution is much lower compared to the US which is considered to be one of the most litigious societies in the world.

On the other hand, Japan is considered to be a ‘non-contractual’ society where contracts signed represent general understanding and are subject to change depending upon the circumstance. There is heavy reliance on settling disputes through third party negotiations rather than courts.

Legal Systems in International Business:

The major types of legal systems are briefly mentioned here.
(i) Common Law:

It is based on traditions, past practices, and legal precedents set by the courts through interpretation of statutes, legal legislations, and past rulings. It depends less on written statutes and codes. Common law originated from England and it is followed in most of the former British colonies, such as India, UK, the US, Canada, Australia, and New Zealand.

In general, the greater the level of economic development of a country, the more elaborate is its legislative framework. India is an exception as it has the most voluminous income-tax legislation (Exhibit 8.3) in the world despite its relatively much lower rank in terms of GDP.

(ii) Civil Law:

Also known as code or civil law, it is based on a comprehensive set of written statutes. It is derived from the Roman law and is followed in most of continental Europe, Japan, and Latin America. The elaborate legislative codes embody the main rules of the law, spelling out every circumstance.

Laws of most countries have elements of both common and civil law. The complications in a meeting out of non-performance of a business contract also vary widely among the common- and civil-law countries.

For instance, in the common-law countries, the non-performance of a contract due to an ‘act of god’ may include floods, earthquakes, lightening, or similar happenings whereas under the civil law, non­-performance is not limited to ‘acts of god’, but also includes ‘unavoidable interference with performance, whether resulting from forces of nature or unforeseeable human acts’, including such factors as labour strikes and riots.

The distinction between the common law and civil law is more in theory rather than in practice. Many common law countries, including the US and India have adapted commercial codes to govern business. The most significant difference in the common law and the civil law countries is in the protection of intellectual property.

Ownership is established by use in common law countries whereas it requires registration in the civil law countries. It is extremely important for certain agreements in civil law countries to get registered, in order to be enforceable, whereas in common law countries, as long as the proof of the agreement can be established, an agreement is binding.

Although there is significant overlapping in practice under the two systems, laws are much more rigid in the countries with civil-law system compared to common-law systems.

In ‘civil law’ countries, judges have to strictly follow the ‘letter of the law’, giving them low flexibility in judicial decisions whereas in common-law countries, greater reliance is placed on the previous rulings and interpretations by other judges in similar cases.

Business contracts tend to be detailed and specific with all contingencies elaborated in civil-law countries whereas contracts tend to be shorter and less specific in common-law countries. The judiciary tends to be less adversarial in civil-law countries where little significance is accorded to legal precedence and traditions compared to common-law countries.

(iii) Socialistic Law:

This law is derived from the Marxist socialist system and continues to influence legal framework in former communist countries, such as the CIS, China, North Korea, Vietnam, and Cuba. Socialist law traditionally advocates ownership of most property by the state or state-owned public enterprises, prohibiting free entry to foreign firms.

(iv) Theocratic Law:

Theocratic law is the legal system based on religious doctrine, precepts, and beliefs. For instance, the Hebrew law and the Islamic law are derived from religious doctrines and their scholarly interpretations. Unlike the countries dominated by Christianity, Hinduism, and Buddhism where either common or civil law is followed, a large number of Islamic countries integrate their legal system based on the Sharia.

The legal system in a number of Islamic countries, including Saudi Arabia, and Iran is integrated with Sharia.

In Arabic, ‘Sharia’ means the clear, well-trodden path to water. In Islam, Sharia is used to refer to the matters of religion that God has legislated for His Servants. Sharia is the canonical law derived from a combination of sources, such as the Koran, the holy book of Islam, the Sunna, teachings and practices of the prophet Mohammed, and the fat was, the rulings of the Islamic scholars.

The Sharia regulates all human actions and places them in five categories, i.e., obligatory, recommended, permitted, disliked, or forbidden. Classic Sharia manuals are divided in four parts: laws related to personal acts of worship, laws related to commercial dealings, laws related to marriage and divorce, and penal laws.

Major similarities between the Sharia and secular law are that in both:

1. All people are equal before the law.

2. A person is innocent unless proved guilty.

3. The burden of proof is on the plaintiff

4. Written contracts have a sanctity and legitimacy of their own.

The salient features of Islamic law concerned to business are that

(a) Contracts should be fair to all parties. Partnership is preferred over hierarchical claims.

(b) Gharar, the transaction involving fundamental uncertainty or speculation is prohibited. Gambling is not liked in Islamic countries, but futures and currency hedging also involves speculation. International managers need to be aware of such situations.

(c) Interest on money is prohibited but allows management fees and services. All business transactions must avoid riba, i.e., excessive profit, loosely defined as interest.

(d) Business involving forbidden products or activity, such as alcohol, pork, or gambling is prohibited.

(e) Normally award of damages are in line with practicality but not as inflated as is often the case in the West. In other words, the damages to property will be actual sums relating to repair and replacement of the property. The loss of opportunity for cost of money is not compensated under the Sharia.

(f) Compassion is required when a business is in trouble. In a country with Islamic legal structure, it is not considered appropriate to put pressure in the event of bankruptcy of one’s business partner.

The major difference between Sharia law and the Western law is the idea of reference to a precedent. Under the Sharia, a ruling issued by a judge is not binding on other judges or on him in later cases. While doing business in Islamic countries, international managers need to appreciate the intertwining of religion and Islamic law and take care never to mention the Palestine-Israeli situation.

After independence from erstwhile colonial rulers, most Islamic countries have grappled with the problem of replacing colonial legal systems with the Sharia. The implications of Islamic law vary in terms of degree among the Islamic countries. In most countries, it is applied in conjunction with the common and the civil law.

Islamic finance:

Under the Islamic law, western style finance is haram, or forbidden, to devout Muslims. The interest-bearing accounts and loans, which fall under the strict ribamles, most futures and options, which are considered speculative and gharar, and insurance, because the outcome of the contract can no way be determined beforehand , are all haram.

In order to enable Islamic investors to benchmark their investment on a regional basis and give product providers the opportunity to develop structured products tailored to the Islamic market, Standard & Poor’s (S&P), brings out Sharia Indices (Exhibit 8.4) that include only those stocks that comply with Sharia law.

This provides investors with a comparable investable portfolio while adopting explicit investment criteria defined by the Sharia. All S&P indices constituents are monitored on a daily basis to ensure that the indices maintain strict Sharia compliance.

A substantial amount of oil-money is invested in Sharia-compliant funds. As the index provides for benchmarking with Sharia, some of these funds may be invested as per the Sharia Indices.

Principles of International Law:

International law is less coherent compared to domestic law since it embodies a multiplicity of treaties (bilateral, multilateral, or universal) and conventions (such as the Vienna Convention on Diplomatic Security, Geneva Convention on Human Rights, etc.) besides the laws of individual countries. International managers need to understand the basic principles that govern the conduct of international law.

(i) Principle of Sovereignty:

A ‘sovereign’ state is independent and free from all external control or enjoys complete legal equality with other states. It governs its own territory, has the right to select and implement its own political, economic, and social systems and has the power to enter into bilateral or multilateral agreements with other nations.

Thus, a sovereign state exercises powers over its own members and in relation to other countries. This also implies that courts of a sovereign country cannot be used to rectify its injustices on other countries.

(ii) International Jurisdiction:

Under international law, there are three basic types of jurisdictional principles.

Nationality principle:

Every country has jurisdiction over its citizens, irrespective of their locations. For instance, an Indian citizen travelling abroad may be given a penalty by a court in India.

Territoriality principle:

Every country has the right of jurisdiction within its own legal territory. Therefore, a foreign firm involved in illegal business practices in India can be sued under Indian law.

Protective principle:

Every nation has jurisdiction over conduct that adversely affects its national security even if such behaviour occurs outside the country. For instance, an Italian firm that sells India’s defense secrets can be booked under the Indian law.

(iii) Doctrine of Comity:

As a part of international customs and traditions, there must be mutual respect for the laws, institutions, and the government system of other countries in the matter of jurisdiction over their own citizens.

(iv) Act of State Doctrine:

Under this jurisdiction principle of international law, all acts of other governments are considered to be valid by a country’s court, even if such acts are not appropriate in the country. For instance, foreign governments have right to impose restrictions related to financial repatriation to other countries.

(v) Treatment and Rights of Aliens:

Nations have the right to impose restriction upon foreign citizens on their rights to travel and stay, their conduct, or area of business operations. A country may also refuse entry to foreign citizens or restrict their travel. As a result of rise in terrorism during the last decade, the US and many European countries have imposed restrictions on foreigners.

(vi) Forum for Hearing and Settling Disputes:

Courts can dismiss cases at their discretion, brought before them by foreigners. However, courts are bound to examine issues, such as the place from where evidence must be collected, location of the property under restitution, and the plaintiff. For instance, after the disaster of Union Carbide’s pesticide plant located at Bhopal in India, the New York Court of Appeals sent back the case to India for resolution.

United Nations Commission on International Trade Law (UNCITRAL):

The United Nations Commission on International Trade Law (UNCITRAL) was established in 1966 by the UN General Assembly (Fig. 8.5) with the aim to reduce obstacles in international trade.

Its general mandate is to harmonize and unify the laws of international trade. ‘Harmonization’ and ‘unification’ of the law of international trade refer to the process through which the law facilitating international trade is created and adopted.

The commission is composed of 60 member states elected by the General Assembly. Membership is structured so as to be representative of the world’s various geographic regions and their principal economic and legal systems. Members of the commission are elected for terms of six years, the term of half-members expiring every three years.

Presently, UNCITRAL has six working groups for areas, such as procurement, international arbitration and conciliation, transport law, electronic commerce, insolvency law, and security interests. It has prepared a wide range of conventions, model laws, and other instruments dealing with the substantive law that governs trade transactions or other aspects of business law influencing international trade.


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  2. Complainant intended to purchase a luxury car for himself and was basically inclined towards the products of other brands like Audi & BMW etc., however.executives of OP No ,1 succeeded in alluring. inducing, enticing and temptingh im to buy the GL 500 SUV Mercedes Benz Model Car. The executive of OPN0,1 gave a very rosy picture of the product being unique in itself stating that the vehicle is of the class of luxury vehicles, off-roader, powered withe legance and size with a sense of responsibility, symbol of good style and stating to have lot of other features most significantly and especially the safetyand being used world-wide.