Multinational Corporations and Enterprises and Philippine Law (Public Law Aspect)

By Atty. Juris Bernadette M. Tomboc

The author is grateful to Prof. Sedfrey M. Candelaria for his advice in the preparation of this report. The author is also thankful to her classmates at the San Beda Graduate School of Law for their inputs and contributions.

I. Introduction
The course on Multinational Corporations and Enterprises (referred to in this report as MNEs) and Philippine law (public law aspect) focused on three themes: legal personality of MNEs in international law, the problem of determining nationality of MNEs, and international legal responsibility of MNEs. The reports included a discussion of cases involving foreign entities as well as application to the Philippine situation.

Of the articles posted in the Legal Management Journal (Part II), “Legal Personality of Multinational Corporations in International Law” (Barlis 2006) and “Corporate Social Responsibility and the Philippine Experience” (Antiquiera 2006) comprised the written reports submitted for the first theme on legal personality of MNEs in international law, “Jurisprudential Basis of Nationality of Multinational Corporations in International Law” (Raro 2006) and “Settlement of Disputes involving Multinational Enterprises: A Report” (Tomboc 2006) comprised the written reports presented in relation to the second theme on nationality of MNEs, while “International Legal Responsibility of States over MNEs” (Manicad 2006), “A Case Study in Multinational Corporate Accountability: Ecuador’s Indigenous People’s Struggle for Redress” (Valencia 2006), “International Corporate Responsibility: The Problem of Enforcing Liability on Multinational Corporations” (Yalao-Villegas 2006), and “The Saipan Workers’ Lawsuit” (Caigoy-Barroga 2006) comprised the written reports on the presentation on the international legal responsibility of MNEs.

II. Statement of Issues
This paper intends to provide a synthesis of the questions, issues and recommendations concerning the regulation of MNEs. The following are the issues and questions regarding enforcement of liability over MNEs that will be discussed in this report:

A. Do MNEs have legal personality in international law?

B. What is the significance of nationality in relation to MNEs?

C. What are the consequences of MNEs legal personality under Philippine law?

D. When may the veil of corporate fiction/legal entity be pierced?

E. What does forum non coveniens refer to and what are its consequences in the settlement of disputes involving MNEs in municipal courts?

F. May judgments rendered by municipal courts be enforced in another jurisdiction?

The last section under Discussion gives some instances when municipal (local) laws have been applied extraterritorially to regulate MNEs.

III. Discussion
A. Legal Personality of MNEs in International Law
In general, only states have legal personality in international law. Recognition or non-recognition of a state is a political act dependent on the national policy and interests of recognizing states. Important legal consequences flow from recognition. Only states can enter into diplomatic relations and international agreements with recognizing states and sue in international tribunals.

MNEs although in many instances possessing the financial power and might comparable to that of states are not recognized as legal persons in international law. An important consequence of the non-recognition is that MNEs cannot sue nor be sued in international tribunals without their consent. A general conception is that MNEs may not be subject to international law since to do so would dispossess their respective states of domestic jurisdiction over them. Article 2(7) of the United Nations Charter states thus:

“Nothing contained in the present Charter shall authorize the United Nations to intervene in matters which are essentially within the domestic jurisdiction of any State or shall require the Members to submit such matter to settlement under the present Charter; but his principle shall not prejudice the application of enforcement measures under Chapter VII.”

Thus, although international law presently includes norms to address the conduct of MNEs, it has no power to directly regulate the conduct of MNEs but can only exhort states to impose its norms.

B. Nationality of MNEs in Philippine Law
In Philippine law, MNEs may be incorporated as domestic corporations under the provisions of the Batas Pambansa Blg. 22 otherwise known as the Corporation Code (CC) of the Philippines. Domestic corporations being Philippine nationals are subject to its jurisdiction.

In addition, foreign corporations defined as those “formed, organized or existing under any laws other that those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state” (Section 123, CC) authorized or licensed to transact business in the Philippines “shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, save and except such only as provide for the creation, formation, organization or dissolution of corporations or such as fix the relations, liabilities, responsibilities, or duties of stockholders, members or officer of corporation to each other or to the corporation” (Section 129, CC). Thus, by applying for and obtaining a license to do business in the Philippines, a foreign corporation gives its consent to jurisdiction by Philippine courts over its local operations.

C. Consequences of the Legal Entity Doctrine
A significant consequence of the legal entity doctrine is that stockholders are not personally liable for corporate debts. This general rule is deeply entrenched in American jurisprudence, thus:

“Unless the liability is expressly imposed by constitutional or statutory provisions, or by the charter, or by special agreement of the stockholders, stockholders are not personally liable for debts of the corporation either at law or equity. The reason is that the corporation is a legal entity or artificial person, distinct from the members who compose it, in their individual capacity; and when it contracts a debt, it is the debt of the legal entity or artificial person – the corporation – and not the debt of the individual members.” (13A Fletcher Cyc. Corp. Sec. 6213)

Thus, generally, the liability of a parent company of an MNE organized as a domestic corporation in the Philippines extends only to its investment. However, this rule may give unduly limit the liability of an MNE for example for damage arising from the conduct of its local operations if its investment will not be sufficient to cover its liabilities although it may be owned and its business controlled by another MNE with more resources.

The legal entity doctrine does not apply to branch offices or foreign corporations authorized to transact business in the Philippines because they are not organized as separate juridical entities but merely as extensions of the legal personality of their parent companies. In short, branch offices’ assets outside the Philippines are technically not exempt from execution for liabilities that they may incur in their local operations. However, Philippine courts and injured parties may be hindered in claiming and enforcing liability against them since their own states may assert domestic jurisdiction. Presently, there is no treaty or international agreement for the recognition and enforcement in foreign tribunals of judgments rendered by Philippine courts.

D. Exception to the Legal Entity Doctrine: Piercing the Veil of Corporate Fiction
Assuming arguendo that decisions rendered by Philippine courts may be recognized and enforced in foreign jurisdictions, there could be occasion for piercing or disregarding the veil of corporate fiction to make parent MNEs liable for the acts of domestic MNEs. The foregoing doctrine also known as the “instrumentality rule” has been stated in American jurisprudence and applied by Philippine tribunals, thus:

“Where one corporation is so organized and controlled that its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the ‘instrumentality’ may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.”

Further,

“In any given case, express agency, estoppel, or direct tort, three elements must be proved:

1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents ‘piercing the corporate veil’. In applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation.” (1 Fletcher Cyc. Corp., p. 490) (Avelina G. Ramoso et. al. v. General Credit Corporation et. al., SEC AC No. 295, October 6, 1992)

It may be useful to mention the reason for the notion of legal entity as explained by Chief Justice Marshall in determining when the corporate veil should be pierced as opposed to the legal entity doctrine, thus:

“A corporation is an artificial being, invisible, intangible and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its existence. These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality, and, if the expression may be allowed, individuality; properties by which a perpetual succession of so many persons are considered as the same and may act as a single individual. They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity, of perpetual conveyances for the purpose of transmitting it from hand to hand. It is chiefly for the purpose of clothing bodies of men, in succession, with these qualities and capacities, that corporations were invented, and are in use. By these means, a perpetual succession of individuals are capable of acting for the promotion of the particular object, like one immortal being.” (Dartmouth College v. Woodward 2 Wheat 518, 636 4L Ed 629)

In other words, the legal entity doctrine was intended to facilitate the conduct of business by corporations. As stated by the Supreme Court, “the corporate fiction of the notion of legal entity may be disregarded when it is used to defeat public convenience, justify wrong, protect fraud, or defend fraud.” (Remo. Jr. v. Intermediate Appellate Court, 172 SCRA 406, April 18,1989 and Villanueva v. Adre, 172 SCRA 876) Thus, it may be said that the veil of corporate fiction can be disregarded when a corporation commits acts that are beyond the limited authority it needs to be able to engage in business.

Although there have been many instances when Philippine courts have disregarded the corporate veil in connection with contractual obligations by corporations, considering the difficulty of enforcing judgment by Philippine courts in foreign jurisdictions, it may be simpler for the meantime to limit negotiation of international agreements for the regulation of and enforcement of judgments on MNEs to violations of generally accepted international standards such as those that apply to labor and to the environment.

E. The Rule of Forum Non Conveniens
Since generally in international law as it now stands only municipal courts have jurisdiction over MNEs and further since laws regarding liability, capacity to sue and damages in an MNE’s home state may be favorable to a plaintiff than those of its home state, claimants often prefer to initiate suit in the former (Reyno v. Piper Aircraft Company, United States District Court, Middle District of Pennsylvania, Federal Supplement, vol. 479, p. 727 (1979)). Another reason for their preference is the uncertainty in whether judgment rendered by a court in the host state would be enforceable in the MNE’s home state in instances when the MNE’s local investment is insufficient to cover its liabilities.

However, common law courts may decline to exercise jurisdiction on the ground of forum non conveniens (‘inconvenient forum’). Mr. Justice Brandeis formulated the foregoing rule in Canada Malting Co., Ltd., v. Paterson Steamships, Ltd (285 U.S. 413 422, 423, 52 Supreme Court 413, 415) as follows:

“Obviously, the proposition that a court having jurisdiction must exercise it, is not universally true; else the admiralty court could never decline jurisdiction on the ground that the litigation is between foreigners. Nor is it true of courts administering other systems of our law. Courts of equity and of law also occasionally decline, in the interest of justice, to exercise jurisdiction, where the suit is between aliens or nonresidents, or where for kindred reasons the litigation can more appropriately be conducted in a foreign tribunal.”

The United States Supreme Court further elucidated on the rule of forum non conveniens in Gulf Oil v. Gilbert (United States Reports, vol. 330, p. 501 (1947)) thus:

“The principle of forum non conveniens is simply that a court may resist imposition upon its jurisdiction even when jurisdiction is authorized by the letter of a general venue statute. These statutes are drawn with a necessary generality and usually give a plaintiff a choice of courts, so that he may be quite sure of some place in which to pursue his remedy. But the open door may admit those who seek not simply justice but perhaps justice blended with some harassment. A plaintiff sometimes is under temptation to resort to a strategy of forcing the trial at a most inconvenient place for an adversary, even at some inconvenience to himself.”

Courts’ determination of whether or not to accept jurisdiction is influenced by both the parties’ private interests, such as, the ease and cost of access to documents and witnesses, and public interests, such as the interests of the forum state, the burden on the courts and judicial comity (August 2004).

Hence, there is a high probability that claims filed against MNEs in their home state may be dismissed on the ground of forum non conveniens. Further, assuming that the case will be tried in another jurisdiction, the next question would then be whether the court in the MNE’s home state will recognize and enforce the judgment of a foreign court.

F. Enforcement of Foreign Judgments in the United States
There is no treaty or international convention in force between the United States and another country on reciprocal recognition and enforcement of judgments. A principal issue seems to be the perception by other states that money judgments in the United States are excessive, e.g. punitive treble damages.

Under international law principles, the court in which the judgment is sought to be recognized has the right to examine the latter to determine whether: the court had jurisdiction, the defendant was properly served, the proceedings were not vitiated by fraud, and the judgment is not contrary to the public policy of the foreign country. Thus, if the complainant intends to enforce judgment rendered by a court in the host state in the MNEs home state it will advisable to consult with legal counsel in the latter state to ensure that their requirements such as those for serving process, discovery and trial will not be inadvertently violated. Judgments that do not involve multiple or punitive damages may generally be enforced but subject to reciprocity.

G. Extraterritorial Application by the United States and the European of their Municipal Laws over MNEs
Recently, there have been moves in the United States and in the European community to extend regulation of MNEs beyond their territorial jurisdiction including regulation of competition, extraterritorial imposition of products liability and prohibition of fraudulent or corrupt business practices (August 2004).

1. The Sherman Antitrust Act
The Sherman Antitrust Act prohibits monopolies or attempts to monopolize trade in international commerce affecting the United States. However, due to criticism that the application of the Act may interfere with another state’s sovereign right to control acts within its territory, judicial legislation has imposed two tests in determining it shall assume jurisdiction, namely, the “minimum contacts test” and the “jurisdictional rule of reason test”. (August 2004)

The “minimum contacts test” allows a court to assume jurisdiction only if the defendant purposely availed itself of doing business in the forum and the defendant could have reasonably anticipated that it would have to defend itself there (August 2004). Thus, in Asahi Metal Industry Co., Ltd. v. Superior Court of California, Solano County (United States Supreme Court Reports, vol. 480, p. 102 (1987)), the Court ruled that Asahi is not liable since even assuming that Asahi was aware that some of the valves that it had sold to Cheng Shin, which were suspected to have contributed to the cause of a motorcycle accident, would be incorporated into tire tubes sold in California, the opposing parties were not able to demonstrate any action by Asahi to purposely avail itself of the California market. Thus the exertion of personal jurisdiction over Asahi by the Superior Court of California was considered to have exceeded the limits of due process.

On the other hand, the “jurisdictional rule of reason test” requires that the alleged conduct must affect the foreign commerce of the United States and further that the assumption of jurisdiction by courts will not breach international comity and fairness (August 2004). Thus, in Metro Industries v. Sammi Corp. (United States Ninth Circuit Court of Appeals, Federal Reporter, Third Series, vol. 82, p. 839 (1996)), the court ruled that it had no jurisdiction over the subject matter since although Metro’s claim that Sammi has an exclusive right to export mixing bowls of a certain pattern design pursuant to its membership in the Korea Holloware Association constitutes a Sherman Act violation, the same has no impact on competition in the United States.

2. Products Liability Laws
Aside from its antitrust laws, courts in the United States have applied its domestic products liability laws extraterritorially. In determining whether it has jurisdiction, courts consider personal jurisdiction that requires the application of the “minimum contacts test” discussed earlier and forum non conveniens. (August 2004)

3. The Foreign Corrupt Practices Act (FCPA)
The United States’ FCPA makes domestic companies, foreign companies registered with its Securities and Exchange Commission, or their officers, agents, or employees who knowingly bribe a foreign government official, a foreign political party official, or a candidate for foreign political office criminally liable. A bribe refers to the giving of, or the promise to give anything of value to influence a foreign official to allow a firm or individual to engage in a new business or to continue an existing business. (August 2004)

4. The Alien Tort Claims Act (ATCA)
The Alien Tort Claims Act (ATCA) of 1789 grants jurisdiction to federal courts in the United States over "any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States."

ATCA has recently been used to charge MNEs for violations of international law in countries outside the United States. Recently, the United States district court in the Talisman case held that aiding or abetting or “secondary liability” is actionable under the ATCA (June 2005). The Canadian company, which spent four years as one of several companies carrying out oil explorations in Sudan, has been accused of complicity in the genocide allegedly committed by the government of that country. The plaintiffs are the Presbyterian Church of Sudan and various Sudanese individuals.

If the suit will be allowed to proceed, ATCA may become a powerful tool in increasing accountability of MNEs. However, a broad policy concern is that the imposition of an expansive conception of liability on MNEs might discourage them from further investing in developing countries and thus slowdown the latter’s economic growth.

IV. Summary
In general, only states but not MNEs have legal personality in international law. Thus, MNEs may not be sued in international tribunals without their consent. In Philippine law, MNEs organized as domestic corporations are subject to domestic jurisdiction and so are branches of foreign companies licensed to do business in the Philippines.

A consequence of domestic incorporation is the application of the legal entity doctrine providing that in the absence of grounds to justify piercing the veil of corporate fiction, the parent company and stockholders of an MNE will not be liable beyond their investment.

Further, with regard to MNEs with authority to transact business in the Philippines, there is also the perceived difficulty of enforcing liability in their home state since neither the Philippines, nor the United States, for that matter, have any agreement with other countries for the reciprocal recognition of judgments rendered by their respective municipal courts.

Should a claimant file suit in the latter’s home state the rule of forum non conveniens may allow the court to decline jurisdiction. Further, should a claimant envision to request for recognition of judgment rendered by a home state court in a another court, the issues would be that the latter may assert domestic jurisdiction or may apply the rule of forum non conveniens. In addition, the same may be both complicated and costly since the claimant has to consider possible conflicts of laws and/or rules of procedure between the different jurisdictions and therefore needs to consult with legal counsel from both states.

Recently, there have been moves in the United States and in the European community to extend regulation of MNEs beyond their territorial boundaries including regulation of competition, extraterritorial imposition of products liability and prohibition of fraudulent or corrupt business practices. Further, courts in the United States had occasion to exert jurisdiction on ATCA claims involving MNEs for alleged acts committed extraterritorially.

V. Recommendations
Considering the potential impact of MNEs on the inhabitants of a state and their environment and difficulty of enforcing liability on the former, developing countries as host states have the responsibility to closely monitor and regulate MNEs' operations in line with their efforts to provide a climate that will promote foreign investment.

Further, states must begin to look into the possibility of entering into individual treaties or international cooperation agreements for the reciprocal recognition and enforcement of judgments. It has been suggested in World Trade Organization (WTO) discussions that emphasis should be given to developing better coordination between the United Nations and the WTO’s specialized agencies such as the International Labor Organization (ILO) and the United Nations Environment Programme/Convention on Biological Diversity (UNEP/CBD) for more coherence.

Finally, it is advisable for parties to an investment to agree in advance to resolve their disputes using existing guidelines by an international arbitration organization. Unlike judgments rendered by municipal courts, awards by the International Center for the Settlement of Investment Disputes (ICSID) may be recognized and enforced in all the states that are signatories to it.

References:
August, R. (2004). International Business Law. NJ: Prentice Hall.

Coquia, J. and Santiago, M. (2005). International Law and World Organizations. Manila: Central.

De Leon, H. (2001). The Law on Partnerships and Private Corporations. Manila: Rex.

Lopez, R. (1994). The Corporation Code of the Philippines (Annotated). Manila: Integrated.

Cases:
Asahi Metal Industry Co., Ltd. v. Superior Court of California, Solano County (United States Supreme Court Reports, vol. 480, p. 102 (1987))

Avelina G. Ramoso et. al. v. General Credit Corporation et. al. (SEC AC No. 295, October 6, 1992)

Canada Malting Co., Ltd., v. Paterson Steamships, Ltd (285 U.S. 413 422, 423, 52 Supreme Court 413, 415)

Gulf Oil v. Gilbert (United States Reports, vol. 330, p. 501 (1947))

Metro Industries v. Sammi Corp. (United States Ninth Circuit Court of Appeals, Federal Reporter, Third Series, vol. 82, p. 839 (1996))

Presbyterian Church of Sudan v. Talisman Energy (374 F. Supp. 2d 331)

Remo. Jr. v. Intermediate Appellate Court (172 SCRA 406, April 18,1989)

Reyno v. Piper Aircraft Company (United States District Court, Middle District of Pennsylvania, Federal Supplement, vol. 479, p. 727 (1979))

Villanueva v. Adre (172 SCRA 876)

Internet sources:
The Unocal Settlement: Implications for the Developing Law on Corporate Complicity in Human Rights Abuses
http://www.globalpolicy.org/
intljustice/atca/2005/09unocal.pdf

U.S. Department of State
http://travel.state.gov/law/info/
judicial/judicial_691.html

World Trade Organization
http://www.wto.org

Settlement of Disputes involving Multinational Enterprises: A Report

By Atty. Juris Bernadette M. Tomboc

The author is grateful to Prof. Sedfrey M. Candelaria for his advice in the preparation of this report.

Disputes involving multinational enterprises may be submitted for arbitration to the International Center for Settlement of Investment Disputes. They may also be filed with municipal courts. This report contains summaries of several cases involving the settlement of disputes concerning multinational enterprises.

I. Arbitration by the International Center for Settlement of Investment Disputes

The International Center for the Settlement of Investment Disputes (ICSID) was created in 1965 at a conference in Washington, D.C. to provide a mechanism for impartially resolving disputes between an investor and the country of investment. The Convention has been ratified by 131 states. Two requirements must be met before the ICSID can set up a tribunal to resolve a particular dispute: first, the state wherein the investment is being made (the host state) and the state of which the investor is a national (the home state) must both be parties to the Washington Convention and, second, the investor and the host state must both consent to ICSID jurisdiction (August 2004).

In the Holiday Inns v. Morocco Case, Holiday Inns Group and Occidental Petroleum, both American companies, incorporated subsidiaries in Morocco since the domestic law made it difficult for the government to contract with foreign businesses. When Morocco failed to pay for the building of hotels pursuant to their agreement, the tribunal considered as the basic agreement that agreement signed by the parents and Morocco containing an ICSID arbitration clause and as “secondary agreements” supplementing the former those agreements between Morocco and the subsidiaries, which had no ICSID arbitration clauses. The subsidiaries were thus not allowed to be parties to the arbitration proceedings (cf. August 2004).

If proper consent has been given to establish an ICSID tribunal, then the ICSID tribunal can be set up even when the host state or the investor refuses to participate. Consent cannot be withdrawn unilaterally (August 2004). In the case of Alcoa Minerals of Jamaica, Inc. (United States v. Jamaica), the tribunal decided, in relation to Jamaica’s refusal to participate and reservation with the ICSID to exclude disputes relating to minerals or natural resources, filed in order to avoid a suit by Alcoa, that it had jurisdiction and that proceedings would continue without Jamaica’s participation (cf. August 2004).

Alcoa, an American company, contracted with the Jamaican government to construct an aluminum factory in exchange for a 25-year bauxite mining concession, a promise of no increase in taxes for 25 years, and access to ICSID arbitration. Both the United States and Jamaica were parties to the Washington Convention. Further, Jamaica’s ratification contained no reservation to the tribunal’s jurisdiction. After Alcoa built the plant and began mining bauxite, Jamaica in 1974 levied a tax on bauxite mining making Alcoa liable for $20 million in taxes for that year and prompting the latter to file suit against Jamaica.

In order for a tribunal to have personal jurisdiction, parties must be a state party and a national of another contracting state. A national of another contracting state can either be a natural or a juridical person. A natural person must have the nationality of a home state in order to be a party to ICSID arbitration. In addition, he must have the same nationality on the date the parties consented to the arbitration and on the date that the request for the arbitration was registered with the ICSID (August 2004).

The Convention requires that a juridical person must have the nationality of another contracting state on the date the parties consented to arbitration. In addition, the tribunal in Klockner Industrie-Anlagen GmbH (Federal Republic of Germany) v. Cameroon (Jurisdiction), implies that the juridical person must also a national of another contracting state on the date the request for arbitration was registered with the ICSID; personal jurisdiction would be lacking if foreign ownership ends before a case has been filed with the ICSID. Companies under the control of nationals of a state that is not a party to the Convention may also be treated as nationals of another contracting state if the parties thereto agree (August 2004).

In the earlier cited case of Holiday Inns/Occidental Petroleum Corp. v. Government of Morocco, the tribunal decided that “control” by the national of another contracting state would be implied only if no other implication would be made (cf. August 2004). However, in AMCO Asia Corp. et al. (United States) v. Indonesia (Jurisdiction) the tribunal after considering the facts assumed that the parties acted in good faith and concluded that foreign control would be implied because the host state knew that the company was dominated by a foreigner, even though this was not expressly mentioned in the agreement containing the ICSID clause (August 2004).

The Convention does not define “foreign control.” The tribunal in the earlier cited case of Holiday Inns/Occidental Petroleum Corp. v. Government of Morocco found foreign control since 51 percent of the shareholders were foreigners. Further in the case of Liberian Eastern Timber Corporation v. Liberia (1987) the tribunal ruled that a local company was under French control because French nationals owned all company shares and dominated the management of the firm. Majority of the directors and manager were French (August 2004).

ICSID arbitration tribunals can only decide disputes that arise by reason of an investment. In AGIP Co. SpA (Italy) v. Congo the tribunal found that no dispute arose before the Republic of Congo nationalized AGIP’s subsidiary. The tribunal therefore limited its inquiry to determining whether the compensation made after nationalization was adequate. In the case, AGIP breached its investment agreement with the Republic of Congo to which the latter responded by nationalizing AGIP’s subsidiary. AGIP filed for arbitration which the Republic of Congo refused saying that there was no dispute because it had compensated AGIP when it nationalized the subsidiary (cf. August 2004).

The Convention does not define what should be considered as an investment. In Alcoa Minerals of Jamaica, Inc. (United States v. Jamaica) the issue of whether there was an investment was raised. The tribunal explained that the agreement of the parties as to what constitutes an investment, although not binding, should be given great weight. Absent such agreement, it must be given its ordinary meaning, that is, capital put into a venture with the expectation of receiving a profit. Thus, the tribunal decided that the nationalization of Alcoa’s aluminum plant by the Jamaican government was a dispute arising directly out of an investment (August 2004).

In Fedax N.V. v. The Republic of Venezuela, the tribunal considered debt instruments issued by the Republic of Venezuela and assigned by way of indorsement to claimant Fedax N.V., a company established and domiciled in Curacao, Netherlands Antilles as an “investment” within Article 25(1) of the Convention in determining that the Centre has jurisdiction under the Convention (cf. August 2004).

II. Settlement of disputes in municipal courts

Jurisdiction by municipal courts in civil cases cover disputes between parties appearing within the territory of the forum state. Such jurisdiction is based on the power of the court to decide matters relating to natural, and juridical, persons who are physically present within the forum state (in personam) and its power to determine the rights of all persons with respect to particular property that is located within its territory (in rem). Natural persons subject to in personam jurisdiction include: nationals of the forum state, individuals who are physically present within or are domiciled in the state, and individuals who consent to such jurisdiction. In the case of legal entities, those created within a state are nationals of that state and may be sued there. Foreign entities may acquire legal personality to sue in another state’s municipal courts only if they are recognized in law as juridical persons and if they give their consent (August 2004).

The issue in the case of Arab Monetary Fund v. Hashim and Others (No. 3) was whether the Arab Monetary Fund (AMF), an organization created by a group of 20 Arab states and the Palestine Liberation Organization in 1976 with “independent legal personally and … in particular, the right to own, contract and litigate” has legal personality to bring suit in the United Kingdom against its former Director-General for allegedly misappropriating AMF funds. The United Kingdom was not a member of the AMF. Neither had it formally recognized the AMF under the provisions of the United Kingdom’s International Organizations Act of 1968. The court observed that it would be odd for the court to recognize an international organization that the English government declined to recognize in international law. However, the municipal court ruled that the AMF had the requisite legal personality because it had been constituted under the laws of its headquarters state, Abu Dhabi, pursuant to a federal decree issued by the President of the United Arab Emirates (cf. August 2004).

In the case of Matimak Trading Co. v. Khalily and D.A.Y. Kids Sportswear Inc. the principal issue was whether a Hong Kong corporation is a “citizen or subject” of a “foreign state for purposes of alienage jurisdiction. More precisely the issue was whether “Hong Kong” may be regarded as a “foreign state.” The court decided that the United States does not recognize Hong Kong as a sovereign and independent international entity. Accordingly, Matimak was not allowed invoke alienage jurisdiction as a “citizen or subject” of Hong Kong (cf. August 2004).

In ruling thus, the court noted that the overriding rationale of alienage jurisdiction was in order not to harm foreign relations. “According alienage jurisdiction to ‘stateless’ persons does not serve this rationale: there is no danger of foreign entanglements, as there is no sovereign with whom the United States can become entangled.” However, although stateless persons are not allowed to bring suit in a federal court, they may do so in a state court.

In Matimak, the court cited the case of Iran Handicrafts and Carpet Export Center v. Marjan International Corp., wherein an Iranian corporation sued a New York corporation in the United States for breach of contract at the time that Iran was undergoing a revolutionary change of government, thus:

“The court surveyed the case law, concluding that “[i]n cases involving parties claiming to be citizens of a foreign state…. courts have focused on whether the foreign state was recognized by the United States as ‘a free and independent sovereign.’” This description is consistent with the accepted definition of “state” in international law, which requires that the entity have a “defined territory” and be “’under the control of its own government.’” Relying on the State Department’s clarification of Iran’s diplomatic status, the Iran Handicraft court concluded that “it is beyond doubt that the United States continues to recognize Iran as an independent sovereign nation.”

In the case of Bumper Development Corp., Ltd. v. Commissioner of Police of the Metropolis and Others (Union of India and Others, Claimants) the issue was whether a foreign legal person which would not be recognized as a legal person under the law of the United Kingdom can sue in English courts. The temple at Pathur in the Indian state of Tamil Nadu as claimant in the case filed in an English court sought the return of the Siva Nataraja Hindu idol that was lost in India and found in London. The court considered the temple as an acceptable party noting English public policy will not be offended in allowing a Hindu religious institution to sue in its courts for the recovery of property to which it is entitled by the law of its own country. In arriving at its decision, the court considered that it might not be acceptable for an English court to refuse access to say a foreign Roman Catholic cathedral having legal personality under the law of the country where it is situated and given that personality by legislation empowering it to sue for the protection and recovery of its contents simply because its own law would not recognize the cathedral as legal person (cf. August 2004).

A juridical person’s consent to the jurisdiction of a foreign court may be given expressly or impliedly. An example of express consent is the forum selection clause, which designates a particular court or tribunal to resolve any dispute that may arise in relation to a contract (August 2004). The case of Shell v. R.W. Sturge, Ltd. examined the enforceability of a forum selection clause (cf. August 2004).

The Society of Lloyd’s in the case brought a suit against R.W. Sturge, Ltd., the Society of Lloyd’s, the Council of Lloyd’s and the Corporation of Lloyds to rescind their investment contracts under Ohio securities law. In response thereto, the defendants filed a motion to dismiss the suit for improper venue on the ground that forum selection clauses in the investment contracts gave exclusive jurisdiction to English courts. The plaintiff objected saying that the forum selection clauses deprived them of their substantive rights under Ohio securities laws and that Ohio public policy outweighs the policies served by enforcing the forum selection clauses. The court upheld the validity of the forum selection clauses citing the case of Roby v. Corporation of Lloyd’s. The said Roby case noted that forum selection and choice of law clauses could not be circumvented merely because foreign law or procedure might be different or less favorable than that of the United States. The court in Roby explained that instead the question should be whether the application of foreign law presents a danger that a party will be deprived of any remedy or treated unfairly.

The court explained that it is not logical to allow a plaintiff to circumvent forum selection and arbitration clauses merely by stating claims under laws not recognized by the forum selected in the agreement because to do so would allow the plaintiff to simply allege violations of his country’s tort, statutory, or property law in order to render nugatory any forum selection clause that require the application of the law of another jurisdiction.

Consent by a juridical person to jurisdiction may be implied if there are sufficient “contacts” between the juridical person and the foreign state. In International Shoe Co. v. State of Washington the Supreme Court said that there must be a minimum number of contacts before a court may extend jurisdiction over a foreign corporation, with respect to which the following factors must be considered: (a) whether the company performed acts that relate to the forum state; (b) whether the suit is based on those acts; and (c) whether the company has indicated that it intends to rely on benefits (of doing business) from the forum state (August 2004).

The issue in the case of Asahi Metal Industry Co., Ltd. v. Superior Court of California, Solano County was stated, thus:

“whether the mere awareness on the part of a foreign defendant that the components it manufactured, sold, and delivered outside the United States would reach the forum State in the stream of commerce constitutes “minimum contacts” between the defendant and the forum state such that the exercise of jurisdiction does not offend “traditional notions of fair play and substantial justice.” (Cf. August 2004)

In the said case, Zurcher lost control of his Honda motorcycle while he was on Interstate Highway 80 in Solano County, California in 1978. The accident severely injured him and killed his wife who was his passenger. In 1979, Zurcher filed a product liability action in the Superior Court of the State of California in and for the County of Solano. Zurcher alleged that the 1978 accident was caused by a sudden loss of air and an explosion in the rear tire of the motorcycle and that the motorcycle tire, tube and sealant were defective. Zurcher’s complaint named, inter alia, Cheng Shin Rubber Industrial Co., Ltd. (Cheng Shin), the Taiwanese manufacturer of the tube. Cheng Shin in turn filed a cross-complaint seeking indemnification from its codefendants and from petitioner Asahi Metal Industry Co., Ltd. (Asahi), the manufacturer of the tube’s valve assembly. Regarding Cheng Shin’s indemnity action against Asahi, the court decided that the facts of the case did not establish minimum contacts. The court explained, thus:

“Assuming, arguendo, that respondents have established Asahi’s awareness that some of the valves sold to Cheng Shi would be incorporated into tire tubes sold in California, respondents have not demonstrated any action by Asahi to purposely avail itself of the California market. Asahi does not do business in California. It has no office, agents, employees, or property in California. It does not advertise or otherwise solicit business in California. It did not create, control, or employ the distribution system that brought its valves to California. There is no evidence that Asahi designed its product in anticipation of sales in California. On the basis of these facts, the exertion of personal jurisdiction over Asahi by the Superior Court of California exceeds the limits of due process.”

Municipal courts are faced with the task of choosing the law to govern the dispute. In general, if parties to a dispute have agreed to the application of the law of a particular country (choice of law clause), the court should apply that law. If the parties did not agree as to which law should apply (either expressly or impliedly), then the court must consider (a) statutory dictates and (b) which state has the most significant relationship with the dispute or has the greatest interest in the outcome of the case (August 2004).

The agreement of parties can be made in statements to the court. In the case of Multi Product International v. Toa Kogyo Co., Ltd., a Japanese court held:

“The plaintiff brought an action in this court and expressed, in preliminary proceedings as well as in the oral proceedings, the intention that the law of Japan should be the applicable law…. The defendant appeared in court and also expressed the same thing…. Therefore, both parties are held to have had the intent that the law of Japan shall apply to the matters at issue.” (August 2004)

If the parties did not agree on a governing law, courts in civil law countries will apply the vested rights doctrine, that is, the court must apply the law of the state where the rights of the parties to the suit vested (where the contract was perfected). Specific rules involve the subject matter of the suit in determining which court has jurisdiction (August 2004).

In recent years, however, many civil law states have modified their choice of law rules in response to objections that they are too rigid and fail to reflect the true interests of other states. Many states adopted the “most significant relationship” doctrine, while others adopted the “governmental interest” doctrine. The “most significant relationship” doctrine provides that courts must apply the law of the state that has the closest and most real connection with the dispute. Courts must consider the following general factors in choosing that state law that will apply: (a) what which will best promote the need of the international system; (b) the state law that will be furthered the most by its application to the subject case; and (c) the state law that will best promote the underlying policies of the legal subject matter/area involved (August 2004).

Further, courts must consider the following specific factors: (1) for tort cases: (a) the place of injury; (b) the place of the act; (c) the nationality, domicile, residence, or place or incorporation of the parties; and (d) the place where the relationship between the parties was centered; (2) for personal property cases: (a) the property’s location and (b) the nationality, domicile, residence, or place of incorporation of the parties; (3) for real property cases, the property’s location; and (4) for contract cases: (a) the place where the contract was entered into; (b) the place where the contract was negotiated; (c) the place of performance; (d) the subject matter’s location; and (e) the nationality, domicile, residence, or place of incorporation of the parties (August 2004).

In the case of Bank of India v. Gobindram Naraindas Sadhwani and Others the issue was whether or not Japanese law is the proper law of the contract, i.e., of guarantee. Mr. Gobindram contends that Japanese law has the closest and most real connection. The Bank of India (the Bank), on the other hand, relies upon the three-stage or sub rule test propounded in Dicey and Morris 'The Conflict of Laws' which requires the court to apply the law which the parties intended either expressly or impliedly and in the absence thereof the system of law with which the transaction has its closest and most real connection (cf. August 2004).

In the case, the Bank brought suit against Mr. Gobindram and his wife, as guarantors of a line of credit of 230,000,000 yen the Osaka branch of the Bank had provided Sadhwanis (Japan), Ltd. (SJL). The Gobindrams were residents of Hong Kong. The Bank was an Indian corporation with a head office in Bombay. It had a regional office in Tokyo and a branch office in Osaka, Japan. SJL, on the other hand, carried on business in Osaka and was managed by Mr. Gobindram’s brother, Kishinchand Naraindas Sadhwani (Mr. Kishinchand) who lived with his wife near Osaka. The Kishinchands owned 60 percent of SJL, while the Gobindrams owned the remaining 40 percent. SJL drew bills of exchange against corporations in Sri Lanka and Nigeria that were run by the other brothers of Mr. Gobindram and Mr. Kishinchand. When the bills were dishonored, the Bank sought payment from Mr. Kishinchand. The latter, in turn, offered to bear all legal costs if the Bank would pursue its claims against the Gobindrams as guarantors and the Sri Lankan and Nigerian corporation as drawees of the bills of exchange. The problem however was that the Bank had already agreed to release the Gobindrams as guarantors sometime before the bills of exchange were drawn (August 2004).

In ruling that Japanese law was the proper law of the contract, the court explained that while the preponderance of authority clearly supports the three-stage criteria, the parties did not expressly or impliedly indicate their choice of law. Thus, the court applied the Japanese legal system to which the contract was most closely connected. It decided that on the evidence, the place of performance must be Japan. Further the court considered that, two of the four co-guarantors resided in Japan and one of the two, Mr. Kishinchand was the only guarantor who played an active part and actually took decisions for the four. Moreover, the court considered that the guarantee formed part of the SJL’s operations in Japan. The court also considered that the principal sum guaranteed was expressed in Yen and that the guarantee in addition bears a 100 Yen stamp. Further, all the guarantors had assets in Japan.

The “governmental interest” doctrine, on the other hand, provides that courts should apply the law of the state that has the most interest in determining the outcome of the dispute (August 2004). In the case of Reyno v. Piper Aircraft Company the issue was which law should be applied among three choices: California law, Pennsylvania law or Scottish law (cf. August 2004).

The California court explained that the interests of the state must be identified with reference to the interpretation of the laws by possible forum courts. It explained that California courts have held that the state’s interest in creating a cause of action for wrongful death lies in governing the distribution of proceeds to beneficiaries and in deterring conduct within its borders that takes life. The California court reasoned that since the accident did not occur in either Pennsylvania or California and because none of the decedents were residents of either state, the application of the laws of either state will not serve to further the purpose of their wrongful death laws, assuming that the interests of Pennsylvania are similar those of California. The California court concluded that if the purpose of the Scottish law were similar, it would seem that its interests would be furthered by the application of the law of Scotland.

The Reyno case involved a small commercial aircraft that crashed in the Scottish highlands in 1976. The pilot and five passengers, all of Scottish origin, died in the crash. At the time of the crash, the plane was subject to Scottish air traffic control. Piper Aircraft Company (Piper) manufactured the aircraft in Pennsylvania while, while Hartzell Propeller, Inc. (Hartzell) manufactured the propellers in Ohio. The aircraft was registered in Great Britain at the time of the crash and was owned and maintained by Air Navigation and Trading Co., Ltd. The aircraft was operated by McDonald Aviation, Ltd., a Scottish air taxi service. Both companies were organized in the United Kingdom.

In 1977, a California court appointed Reyno, a legal secretary of the attorney who filed the suit, as administratrix of the estates of the five passengers although Reyno was not related to any of them. Reyno commenced separate wrongful death actions against Piper and Hartzell for each of the five passengers claiming negligence and strict liability. Reyno candidly admitted that the action against Piper and Hartzell was filed in the United States because its laws regarding liability, capacity to sue, and damages were more favorable to her position that were those of Scotland. Scottish law does not recognize strict liability in tort. Moreover, the Scottish law permits only the decedent’s relatives to bring wrongful death actions. Piper moved for the transfer of the case to the United States District Court for the Middle District of Pennsylvania, pursuant to the United States Code, Title 28, § 1404(1) (change of venue). Hartzell and Piper then moved for the dismissal of the case in the District Court in Pennsylvania arguing that according to the law of Scotland, Reyno had no standing to proceed with the wrongful death claim.

The District Court dismissed the case on grounds of forum non conveniens concluding that although an action based on strict liability could proceed against Piper, justice would be better served if the court will decline to hear the case and the parties will take their dispute to a Scottish court instead.

III. Other cases involving multinational enterprises

In banking, a foreign branch is often treated as a separate business unit, with its own profit-and-loss statement, its own foreign tax liabilities, and its own separate account with the parent bank. There is, however, inconsistency in the treatment of foreign branches as separate from or mere extensions of the their parents. For example, in 1979, in response to the Iranian hostage crisis, the United States government froze all Iranian government assets held in banks in the United States and their foreign branches. Further, courts in the United States have also held that valid orders may be issued to a parent bank to freeze the account of a foreign corporation in foreign branches (August 2004).

Likewise, in the case of United States v. First National Bank the United States’ Supreme Court decided that a parent bank has actual and practical control of a foreign bank branch since the latter is not a separate entity. Further, in the case of Sokoloff v. National City Bank of New York, as with other court rulings, the court decided that a parent bank is liable for the debts incurred by its foreign branches as the branch is considered to be subject to the supervision and control of the parent. Thus, in the case of Wells Fargo Asia, Ltd. v. Citibank, N.A. the U.S. District Court for the Southern District of New York concluded that “under New York law, which governs this question, Citibank is liable for the debt of its Manila branch and plaintiff is entitled to look to Citibank’s worldwide assets for satisfaction of its deposits.” (August 2004)

Likewise, in Vishipco Line et al. v. Chase Manhattan Bank, NA the U.S. Second Circuit court of Appeals considered the parent bank responsible for funds deposited in a foreign branch when the foreign branch and its assets were seized by the host country. The court adopted the following rationale, thus:

“A bank which accepts deposits at a foreign branch becomes a debtor, not a bailee, with respect to its depositors. In the event that unsettled local conditions require it to cease operations, it should inform its depositors of the date when its branch will close and give them the opportunity to withdraw their deposits or, if conditions prevent such steps, enable them to obtain payment at an alternative location…. In the rare event that such measures are either impossible or only partially successful, fairness dictates that the parent bank be liable for those deposits which it was unable to return abroad. To hold otherwise would be to undermine the seriousness of its obligations to its depositors and under some circumstances (not necessarily present here) to gain a windfall.” (Cf. August 2004)

On the other hand, in the case of Libyan Arab Foreign Bank v. Bankers Trust Company the High Court considered earlier court decisions that treated branches as separate from the head office (cf. August 2005). One of decisions was that rendered in the case of R. v. Grossman where Lord Denning, Master of the Rolls, said: “The branch of Barclays Bank in Douglas, Isle of Man, should be considered as a different entity separate from the head office in London.” The court explained, thus:

“That notion, of course, has its limits. A judgment lawfully obtained in respect of the obligation of a branch would be enforceable in England against the assets of the head office. (That may not always be the case in America.). As with the theory that the premises of a diplomatic mission do not form part of the territory of the receiving state, I would say that it is true for some purposes that a branch office or a bank is treated as a separate entity from the head office.”

In the case, the Libyan Arab Foreign Bank had over $131.5 million deposited in a “call” account with the London branch of Bankers Trust Company, a New York corporation (and $161.4 million in a demand account in New York) on January 8, 1986 when, effective 4:10 p.m., the President of the United States froze all Libyan assets “in the United States.” When the Libyan Bank sued Bankers Trust in the United Kingdom for recovery of its deposit, Bankers Trust argued that it was not liable since New York law governed the deposit pointing to an arrangement made in December 1980 providing that Bankers Trust’s New York office shall oversee the Libyan Bank’s accounts in both New York and London which prohibited it from making transfers out of the London account. The High Court ruled in favor of allowing the Libyan Bank to recover its deposits in both the London branch and the New York office of Bankers Trust explaining that under the provisions of the managed account arrangement, Bankers Trust should have transferred the Libyan Bank’s deposit from its New York office to its London branch on the morning prior to the Presidential freeze (August 2004).

Reference:

August, R. (2004). International Business Law (Text, Cases and Readings). International Edition. New Jersey: Prentice Hall.

List of cases:

a. AGIP Co. SpA (Italy) v. Congo. International Legal Materials, vol. 21, p. 740 (1983).

b. Alcoa Minerals of Jamaica, Inc. (United States v. Jamaica). Yearbook of Commercial Arbitration, vol. 4, p. 206 (1979).

c. AMCO Asia Corp. et al. (United States) v. Indonesia (Jurisdiction). International Legal Materials, vol. 23, p. 351 (1985).

d. Arab Monetary Fund v. Hashim and Others (No. 3). England, High Court, Chancery Division, 1989. Weekly Law Reports, vol. 1990, pt. 3, p. 139 (1990); International Law Reports, vol. 83, p. 244 (1990).

e. Asahi Metal Industry Co., Ltd. v. Superior Court of California, Solano County. United States Supreme Court. United States Supreme Court Reports, vol. 480, p. 102 (1987).

f. Bank of India v. Gobindram Naraindas Sadhwani and Others. Hong Kong, High Court, 1982. Hong Kong Law reports, vol. 2, p. 262 (1988).

g. Bumper Development Corp., Ltd. v. Commissioner of Police of the Metropolis and Others (Union of India and Others, Claimants). England, Court of Appeal, Civil Division, 1991. All England Law Reports, vol. 1991, p. 4, p. 638 (1991).

h. Case Concerning Right of Passage over Indian Territory (Portugal v. India) (Preliminary Objections). International Court of Justice Reports, vol. 1957, p. 125 (1957).

i. Fedax N.V. v. The Republic of Venezuela. International Centre for Settlement of Investment Disputes (1997). International Legal Materials, vol. 37, p. 1378 (1998).

j. Holiday Inns v. Morocco Case. Holiday Inns/Occidental Petroleum Corp. v. Government of Morocco, described in P. Lalive, “The First World Ban Arbitration (Holiday Inn v. Morocco)-Some Legal Problems,” British Year Book of International Law, vol. 51, p. 123 (1980).

k. International Shoe Co. v. State of Washington. United States Reports, vol. 326, p. 310 (Supreme Ct. 1945).

l. Iran Handicrafts and Carpet Export Center v. Marjan International Corp. Federal Supplement, vol. 655, p. 1275 (District Ct. for S. District of N.Y.), affirmed, Federal Reporter, Second Series, vol. 868, p. 1267 (2d Circuit Ct. of Appeals, 1988).

m. Klockner Industrie-Anlagen GmbH (Federal Republic of Germany) v. Cameroon (Jurisdiction). Yearbook of Commercial Arbitration, vol. 10, p. 71 (1985).

n. Liberian Eastern Timber Corporation v. Liberia. International Legal Materials, vol. 26, p. 647 (1988).

o. Libyan Arab Foreign Bank v. Bankers Trust Company. England, High Court of Justice, Queen’s Bench Division, Commercial Court 1987. Lloyd’s Reports, vol. 1988, pt. 1, p. 259 (1988); International Legal Materials, vol. 26, p. 1600 (1987).

p. Matimak Trading Co. v. Khalily and D.A.Y. Kids Sportswear Inc. United States Second Circuit Court of Appeals, 1997. Federal Reporter, Third Series, vol. 118, p. 76 (1997).

q. Multi Product International v. Toa Kogyo Co., Ltd. Hanreijiho, No. 863, p. 100 (1977); Japanese Annual of International Law, no. 23, p. 187 (1980).

r. R. v. Grossman. Law Reports, Criminal Appeal Reports, vol. 73, p. 302 at p. 307 (1981).

s. Reyno v. Piper Aircraft Company. United States, District Court, Middle District of Pennsylvania, 1979. Federal Supplement, vol. 470, p. 727 (1979).

t. Sokoloff v. National City Bank of New York. New York Miscellaneous Reports, vol. 130, p. 66 (New York Supreme Court, 1927).

u. United States v. First National Bank. United States Reports, vol. 379, p. 378 (Supreme Ct. 1964).

v. Vishipco Line et al. v. Chase Manhattan Bank, NA. United States, Court of Appeals, Second Circuit, 1981. Federal Reporter, Second Series, vol. 660, p. 854 (1981).

w. Wells Fargo Asia, Ltd. v. Citibank, N.A. Federal Supplement, vol. 695, p. 1450 at p. 1456 (1988).