Research Paper on International Business Transactions

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Executive Summary

The issue at hand relates challenges that international companies when conducting cross-border transactions. This report provides an analysis and evaluation of the various legal requirements for international businesses. Specifically, the report aims at providing knowledge, awareness, and alternative means of developing a sustainable business environment for the government of Madripoare to help organizations such as The World Commerce Operations (WCO), an American-incorporated company.

One key area of report addresses concerns the responsibility of various parties handling international transactions. Due to lack of clarity, businesses are bound to overlook certain crucial procedures. Therefore, it is important for organizations to understand its contractual obligation in the context of international business. Since laws and practices are different in various countries, it is important for the company to have clear information of the business regulations in each region. For a start, this report contains the facts of some of the transactions that WCO has engaged in, as well as their legal, financial, and reputational implications.

The discussion section of the report contains an in-depth analysis of each of the international transactions the company undertook and their legal implication on all the parties involved. Moreover, the report highlights some of the loopholes that the company can avoid in future. As the report indicates, some of the loopholes and managerial oversights can result in significant financial losses. Lastly, there is a list of recommendations that the government and the company can adopt during future business dealings.

The Facts

            The government of Madripoare is keen in promoting foreign direct investment in the country. In addition, the government is committed to ensuring that the existing multinational companies operate without any hindrances. One such company, World Commerce Operations, have a number of subsidiaries in Madripoare. In line with its strategic business plan, the American-incorporated company also wants to expand its operations in other countries. Consequently, the directors plan to use the company’s manufacturing plants in Dalawi to produce goods for sale in the Pacific Rim and other regions.

In the first scenario, WCO need to export hard-disk drives to a Chinese and Filipino manufacturer of videogame consoles. However, the company is undecided on the terms of delivery of the goods between the Cost Insurance and Freight (CIF) and Free On Board (FOB). The only certainty the directors have is that of the payment currency. For example, the Chinese can pay for the consignment in euros or dollars, but the Filipino organization can only use their local currency as a result of recent government regulations.

In the second scenario, the organization needs to contend with the instances of loss of goods while in transit. In this case, WCO entered into an agreement with a Thai buyer to supply cars under the FOB terms. WCO contracted an English Freight Company, Portsmouth World Transporter (PWT) to load the cars onto the ships. In the process, 25 cars got completely damaged after falling into the sea.

In the third scenario, WCO decides to engage the services of its former sales representative for crucial business leads in the Pacific Rim. The sales representative enters into contractual agreements with local organizations in the region and supplied them with WCO goods manufactured in Dalawi. However, the sales representative did not have any formal agreement with WCO to supply the goods. When a customer detected a fault in one consignment, he threatened to sue the sales representative. However, the sales representative argued that he was simply an agent of WCO, thus not liable. However, WCO argued that there was no formal agreement between the sales representative and the company.

Lastly, the company entrusted the captain of a ship to inspect an oyster consignment destined for the Japanese port of Niigata. The captain randomly inspected the consignment, which he found to have been smelly, hence unsuitable for shipment. However, the captain authorized the shipment and issued a bill of lading. The incident has a significant implication on the issue of responsibility.

Discussion

Each of the four scenarios represents varying implications on the business, both financially and legally. In each case, the company evidently committed significant oversights in the way it dealt with its partners and other parties. Certainly, there is a clear lack of procedure, which resulted in financial and reputational loss.

Issue 1: The Hard-Disk Exportation Business

Whenever businesses engage in export business, it important that they understand the various terms of transportations, their implications, and the risks involved. At the same time, organizations must take into consideration the means of payment for the goods, including currency difference and terms of shipment. First, WCO needed to differentiate the difference between FOB and CIF. Both are contractual agreements that are involved in export transactions to maintain uniformity, certainty, and predictability in international trade. CIF and FOB are also important in international export sales contracts because they stipulate the obligations of the parties to the transactions with regards to price, delivery, and other incidental charges.

Under the FOB contractual terms, the seller is under no obligation to insure the consignment of goods. However, it is the seller’s obligation to place the goods aboard a nominated vessel and port of shipment. In this case, it was the responsibility of the Chinese and Filipino importers to take control of the goods once WCO put them on board a ship. In other words, the importer pays for insurance, cost of freight, and any other incidental charges under FOB terms. WCO was only supposed to pay carrier charges up to the point of loading. In addition, the seller’s price in FOB is lower than in CIF terms since the costs entail transport of goods up to the port of dispatch.

However, under the CIF contractual terms, the seller is responsible for carriage, insurance, and handling charges of goods up to the time when the consignment reached the port of the buyer. In addition, the seller must obtain a bill of lading, procure contract for carriage, produce a commercial invoice, and tender the documents to the buyer. Under CIF terms, the responsibilities and risks of the exporter increase considerably than under FOB contract. Before deciding on the most suitable term, it is important for the exporter to consider factors such as value of the goods, risks in involved, and the duration of shipment.

In addition, the directors of WCO must take into consideration the payment currency to avoid losses arising from cross-currency fluctuation. One of the greatest risks in international transaction is currency fluctuation. Since WCO deals in dollars, the transaction with the Chinese importer does not represent any considerable loss because it does not entails currency conversion. However, the transaction with the Filipino importer may present a substantial risk of loss due to two reasons. First, the Peso may fluctuate wildly due to governmental involvement. Second, the Peso may appreciate in value, leading to a loss to WCO.

Issue 2: Loss of Goods in Transit

In international transactions, there is always a significant risk of loss of goods. Some of the main causes of losses of goods include careless handling, theft, accidents, and natural calamities such as typhoons. However, the responsibility of the loss depends on the terms that exist between the buyer and seller. The Uniform Commercial Code’s section regarding Risk of Loss is a good example that WCO can follow before deciding on the best approach to ship goods. For example, there is evidence that the cars reached the port of export and got damaged due to careless handling by the assigned transporter. The law stipulates that if the exporter opts for the FOB terms, his or her responsibility ends when the goods cross the carrier’s rails. In contrast, the exporter is fully liable until the goods reach the port of the buyer under the CIF terms. Since WCO contracted the transporter to load the cars onto the ship, then the company was liable under the CIF terms. However, the Thai importer would have been liable for the loss if the agreement had been under FOB terms.

Issue 3: Actions of Unauthorized Agent

In the context of cross-border transactions, contractual agreements between parties may exist in various forms. In the case of WCO, the contract between the company and the Sales Representative was implied. An implied contract entails one party executing an obligation on behalf of another on account of previous relationships. WCO contacted its former sales representative with the hope of establishing a business presence in the Pacific Rim. Such agreements are usually based on trust rather than any official engagement between contracting parties. However, the agent in the WCO case engaged in express contract with local customers for the supply of computer parts. Formal or written agreements constitute express contracts because they involve significant degree of formality.

Both express and implied contracts are enforceable in the event of a breach. Thus, the sales representative was liable for the supply of defective computer parts since the terms of the contract was that he would only supply goods in acceptable conditions. At the same time, WCO, having entered into an implied contract with the agent, was also liable for the supply of defective products. Even in implied contracts, the parties to the agreement are under the obligation to perform their part of the obligation. Another key factor in determining the validity of a contract is through conduct. Through conduct, a party can enter into a legally-binding contract with counterparty . Therefore, both the sales representative and WCO were liable for the supply of defective items because they were party to the contract trough conduct.

Issue 4: Inspection of the Oysters Consignment

It is a legal requirement for businesses involved in international trade to ensure that they inspect their consignments before shipping them to the buyer. Before a bill of lading is issued, a quality control official must randomly inspect the consignment to ensure that it is in good condition. The bill of lading is a statutory document that signifies that goods have been duly inspected at the port of shipment. One aspect of a bill of lading is that the person named as the shipper or consignee can only be bound as such if the person completing the document has considerable authority. The captain, who inspected the oyster’s consignment, committed an act of falsification because he knowingly authorized for the production of a bill of lading document after declaring the goods as in apparent good order and condition. Although the captain was not an authorized inspector, the law stipulates that he represented the shipper, thus the company was liable for exporting a defective consignment.

Recommendations

            To mitigate the risks involved in international transactions, WCO can take several measures. First, there is a need to have a clear policy with regards to the type of contract to adopt during shipment. The safest shipment contract is FOB the business is not liable once goods leave the port of the seller. Second, the organization should appoint agents in the regions it intend to have a business presence in order to minimize ambiguity. Such agents will be under direct authorizations to act for and on behalf of the organization. Third, the organization should ensure that it uses qualified quality control personnel to inspect perishable goods before shipment. As a result, the company will eliminate the potential of lawsuits and having to pay damages to affected customers.

Conclusion

            Evidently, WCO is an international company whose transactions may result in legal implications. The company’s mode of engagement results in ambiguity and lack of clarity. For example, it is unsure on the best shipment terms to use. In addition, the business fails to appoint recognized agent or a qualified inspect. Instead, the company adopts highly informal channels to conduct some of its business operations. Such actions give rise to a potential of legal actions due to breach of agreements. Some of the recommendations include formal appointment of agents, use of qualifies inspection personnel, and establishment of clear shipment terms.

 

 

 

 

 

Author: Patricia Leblanc