Foxconn, which is part of the Taiwan-based Hon Hai Precision Industry Co., operates a large electronics assembly complex in China. 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? However, businesses are required to abide by their own applicable domestic laws as well as the laws of the foreign country in which they are conducting business. There is a legitimate law-creating authority at the “top,” and the people to be governed at the “bottom.” The law might be conceived of as being “handed down” to the people within its jurisdiction. These government branches have legitimate authority to create a rule of law system, and this authority is derived from the U.S. Constitution. Could a U.S. state enter into a treaty with a sovereign nation outside the United States? For example, the Senate must ratify a treaty before the treaty binds the United States and before its provisions become law for the people within the United States. 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. 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. Figure 13.3 The Vertical Nature of U.S. 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). The criminal can be prosecuted by the laws of the United States (federal or state, depending on the jurisdiction of the offence) and, if convicted, will have to submit to the authority of the United States for punishment. 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. Or should Chinese law apply? Since each state is sovereign, that means that one sovereign state is not in a legally dominant or authoritative position over the other. Domestic Law” for a simple illustration of the vertical nature of domestic law in the United States. Do consumers have any voice in this matter? Since in the international arena there is no overarching power “above” the parties to a treaty, enforcement of treaty agreements can be difficult. 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. Another common challenge in international law is that the laws are applicable only to parties who voluntarily choose to participate in them. What learning outcome relates to this content? That means Microsoft and KYE Systems Corp. could agree in a predispute arbitration clause, perhaps in a purchase order or invoice, to arbitrate their disputes in Washington, using Washington contract law, and in English. Understand the difference between international law between states and law as it applies to businesses operating internationally. International Business law is the scope and practice of law in the global business market. 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. The United States, Mexico, Japan, Cambodia, Chile, and Finland are all examples of sovereign states. However, it is unlikely that the Asian companies would agree. 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. Consider the case of a criminal in the United States. For example, perhaps a member of a treaty has broken its treaty promise to refrain from fishing in a certain fishery. International business law varies by jurisdiction. Compare this with domestic law. How can the content in this section help you demonstrate mastery of the learning outcome? Why or why not? Figure 13.5 The Horizontal and Vertical Nature of Contract Relationships in the Global Legal Environment. Domestic Law”. This is a vertical structure of law, because there is some “higher” authority that imposes a rule of law on the people. 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. This is because the parties to international treaties are sovereign states. Imagine that Apple alleged that labor conditions were not contractually satisfied and, therefore, Foxconn and Hon Hai Precision Industry Co. breached the agreement that they had made with Apple. What are the key topics covered in this content? Imagine hearing allegations that your company’s products are being assembled overseas in working conditions that have resulted in extreme despondency among workers, including several suicides. It’s important to note, however, that not all law can be conceived as a vertical structure. 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. Countries are sovereign states. This is precisely the situation that Apple, Dell, Hewlett-Packard, and others find themselves in. Indeed, the sovereign states themselves have the only power to conduct foreign affairs. 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. If this were the case, Apple may wish to terminate its relationship with these companies. As noted in the example concerning U.S. companies doing business with Foxconn and Hon Hai Precision Industry Co., international business can involve creating contracts between parties from different nations. For example, treaties have a horizontal structure. When domestic laws apply to businesses operating internationally, that is a vertical legal structure, such as is illustrated in Figure 13.3 “The Vertical Nature of U.S. Compare this to a sovereign state that violates a treaty agreement. A sovereign state is a political entity that governs the affairs of its own territory without being subjected to an outside authority. This means that a dispute could arise under a contract between international parties. 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. A choice of law clause is a contractual provision that specifies which law and jurisdiction will apply to disputes arising under the contract. Some laws, such as international law, or law between sovereign states, are best thought of in a horizontal structure. See Figure 13.5 “The Horizontal and Vertical Nature of Contract Relationships in the Global Legal Environment” for an illustration of the horizontal and vertical nature of contract law in international business. 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. It includes a focus on economics and the law, international commercial transactions, licensing, tariffs and taxes, and many other topics. In the case of Hon Hai and Foxconn, none of the U.S. companies can get into legal trouble regarding the fact that, until very recently, the average worker there made the equivalent of $132 per week, which is, of course, far below the U.S. federal minimum wage.Ting-I Tsai, “Hon Hai Gives Workers a Raise,” Wall Street Journal, May 29, 2010, (accessed September 27, 2010). This probably would be terribly inconvenient for KYE Systems Corp., but the benefits of obtaining a Microsoft contract probably outweigh the potential inconvenience of resolving disputes in the Washington State court system. Allegations have arisen that harsh working conditions have led to a string of suicides. This can be a complicated question for several reasons. This is because there is a legitimate authority over the business that governs its behavior. 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. Additionally, a well-established United Nations treaty, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, provides for the enforcement of arbitral awards among member states.