Table of Contents
CISG: Convention on Int'l Sale of Goods ............................................................................................................... 3
Gaps and Exclusions in CISG ......................................................................................................................... 5
issues in an int’l trxn (overview to BOL/LOC) ...................................................................................................... 7
Bills of Lading (shipping) ....................................................................................................................................... 7
Hague-Visby Rules .......................................................................................................................................... 7
BOL ..................................................................................................................................................................... 7
Certificate of inspection ...................................................................................................................................... 8
Carrier Liability ................................................................................................................................................... 9
3 Limitation on Carrier Liability ..................................................................................................................... 9
Marine Insurance .................................................................................................................................................. 11
EDC Insurance ...................................................................................................................................................... 12
IMPORT-EXPORT & WTO ................................................................................................................................ 13
Canadian Import Requirements ......................................................................................................................... 13
NAFTA.............................................................................................................................................................. 14
WTO (see WTO class outline) .......................................................................................................................... 14
Letter of Credit ...................................................................................................................................................... 15
2 KEY PRINCIPLES: Autonomy and strict compliance .................................................................................. 15
1) Principle of Autonomy of the Credit. ........................................................................................................ 15
2) Principle of strict compliance .................................................................................................................... 15
2 types of Correspondent bank .......................................................................................................................... 16
Types of LOCs .................................................................................................................................................. 16
Common Docs for the LOC .............................................................................................................................. 17
Bank Review/ Rejection Notice ........................................................................................................................ 18
CSR ....................................................................................................................................................................... 19
Why binding bribery treaty but not CSR? ..................................................................................................... 19
Social Audit ....................................................................................................................................................... 19
Voluntary Principles on security and hr for Extractive Industries .................................................................... 20
2010 OECD voluntary Due Diligence for supply chains of minerals from conflict & high-risk areas ............ 20
CA Bill C-300: Corporate Accountability for the Activities of Mining, Oil or Gas in Developing Countries 21
Caal v. Hudbay Minerals Inc............................................................................................................................. 21
OECD Voluntary Guidelines for Multinational Enterprises ............................................................................. 23
OECD Watch: Evaluation of NCPs and OECD guidelines ........................................................................... 23
Guidelines (1976, updates in 2000 and 2011) ............................................................................................... 24
Bribery/Corruption ................................................................................................................................................ 27
1
OECD Convention on Combating Bribery of Foreign Public Officials in IBT ................................................ 30
CA Corruption of Foreign Public Officials Act - CFPOA (1999) .................................................................... 31
US FCPA: Overview - Foreign Corrupt Practices Act passed in 1977, revised in 1988 and 1998 ................. 33
Royal Dutch Shell, a Case Study ................................................................................................................... 34
Int'l Financial Trxn................................................................................................................................................ 35
Loan Facility Agreement ............................................................................................................................... 35
What changes when it crosses border? .............................................................................................................. 39
Syndicated Lending ....................................................................................................................................... 41
Derivatives Transactions ............................................................................................................................... 41
Securitization and Structured Finance ........................................................................................................... 42
Security ................................................................................................................................................................. 43
Security Generally ......................................................................................................................................... 43
Ensuring Security – get an opinion: .................................................................................................................. 43
licensing (Non-establishment forms of investment) ............................................................................................ 47
Reminders
o THERE IS NO READING PERIOD ON THE EXAM
o State assumptions
o W/ 30 mins of readings I have 18 mins per 10%
2
CISG: CONVENTION ON INT'L SALE OF GOODS
Uniformity: displaces both domestic law and choice of law rules re. sale of goods [ENG hasn’t
adopted]
 Can K out in sales of goods trxns in whole or in part (CISG Art 6)
o Rationale: toleration for breaches of k too liberal for things like international commodity
sales and some countries have extensive experience in commercial matters which 
predictability
 E.g. standard form ks modify like BP, Shell, Grain and Feed Trade Association
Scope: formation of k and rights and obligations of seller and buyer (CISG Art 4)
 not the validity of k which is governed by nat’l laws (e.g. CISG only requires performance be
ordered if in accordance w/ nat’l law Art. 28); legal capacity; competence of parties, legality of
powers of attorney, set-off, Third party rights; assignment of claims and receivables; whether
claim can be assigned; Transfer of debts; Legal situation of joint debtors and relations;
Suggested jurisdiction and arbitration clauses not CISG b/c are procedural;
Application: ks for the sale of goods where parties in diff states if: (CISG art 1)
(a) both States are Contracting States; or
o If a party is present in several States, consider location w/ closest connection to the K, Art.
10(a)
(b) rules lead to the application of the law of a Contracting State.
o Note: not in US this doesn’t happen if if other party hasn't ratified [UCC applies], Art. 95
reservation
does not apply to: (CISG Art 2) goods for personal use (consumer protection law); liability for
death/personal injury caused by the goods (CIST Art 5); auctions; goods transferred by authority
of law; electricity; stocks, shares, investment securities, or money (see Securities law); ships,
vessels, hovercraft or aircraft;
No def’n for: “sale” nor “goods” nor “contract of sale of goods”
 “Goods” include: food; circus elephants; Software if it is saved on a data carrier such as a hard
drive, disc or chip; storage certificates or BOL
 “Sale” includes: mass-produced articles for a price, e.g. maquiladoras unless buyer undertakes to
supply a substantial part of the materials, Art 3(1) but not supply of customized articles (too
much service involved), Art 3(2)
 “k for sale of goods” : Battle of the Forms– no mirror image rule.
 CISG 19(1) A reply to an offer which purports to be an acceptance but contains material
(price, time of delivery, quality, dispute resolution, liability) additions, limitations or
3
o
o
other modifications is a rejection and constitutes a counter-offer. If not material offeror
must object to the acceptance
Price is material so can’t leave open CISG Art 55
UCC 2-207 [more likely to find a k] A definite acceptance operates as an acceptance
even though it states additional or different terms from those offered (unless acceptance
is expressly made conditional on assent to the additional or different terms)
 additional terms are to be construed as proposals unless offer expressly limits
acceptance to the terms of the offer; they materially alter it; or notification of
objection is given [note that you still have a K if acceptance had a materially
different term – it just drops out]
 Cmt 4: “material alteration”: would “result in surprise or hardship e.g warranty
disclaimer, clause contradicting trade usage; complaints within unreasonably short
period of time;
 If parties act like there’s a k, there’s a K (base on agreed terms in writing and UCC
supplements
 Open Price Term possible UCC Artb2-305
Principles of Interpretation
In interpreting the CISG Cts should consider:
Art 7 (1)(i) “international character and the need to promote uniformity” and
o If a Q of substance has been considered by highest Ct in another jdx should be regarded as
“persuasive”
 informal doctrine of precedent - a ‘jurisprudence constante’, Bridge (interesting where
applied in civil law context)
 UNCITRAL and UNILEX databases of cases x-world
o Art 7 (1)(ii) “the observance of good faith in international trade “
 compromise b/w civil States (pro-general principle of good faith) and common States
(generally opposed)
 Some argue good faith is a “general principle” (CISG s.7(2)) on which CISG is based b/c:
o underlies the whole CISG, e.g. Art 8 “reasonable interpretation”; 16(2), cannot
revoke offer if reasonable for offeree to rely on it being irrevocable; 29(2), if a “no
amendment except by writing” clause, not enforceable if reasonable for other party
to rely on conduct 32: arranging for carriage and insurance; 34, 37, 48: defect in
goods delivered or documents supplied, sellers right to cure; 38, 39, 40, 44: buyer
must consider interests of seller by promptly inspection goods and giving notice of
any defect; 65: specifying goods to be sold; 85-88: preservation of goods and 77
mitigation of damages
 others argue this is unfair b/c
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o
o
o
only expressly found in the interpretation clause
 not be surprising that many CISG articles are consistent w/ fairness and
reasonableness b/c this is a law - can't just make the leap to "good faith"
from this.
imposition of substantive obligations of good faith undermines the objectives of
the CISG to promote certainty and predictability (Prof thinks this is overstated,
e.g. UCC drafters wouldn't agree it creates a sea of uncertainty
can't do indirectly what you can't do directly. Unfair to deny the compromise by
reading in a general duty
o Art. 8: statements/conduct to be interpreted according to intent if other party knew/could
not have been unaware what that intent was;
 consider all relevant circs, including: negotiations, practices established by the parties;
usages and any subsequent conduct
o
o
Art 9(1) parties bound by usages agreed to and practices established b/w themselves
Art 9(2) Imply trade usages (practices and understandings) parties knew/ought to have
known that are widely known and regularly observed in int’l trade in ks of the type involved
in the particular trade concerned
 Avoid having to prove it's law by arguing it’s implied in the k
 E.g. (maybe) INCOTERMS [see attached]
 Prob: so well-known that if not included may indicate intention to exclude;
aren’t particular to a trade/type of k
 FOB and CIF history in English law outside INCOTERMS so can treat
differently
 Not UNIDROIT b/c general k rules =/= usages
Gaps and Exclusions in CISG
7 (2): if issue not expressly settled:
(1) for gaps look to the general principles on which CISG is based or
 E.g. Art 78 requires a party that fails to pay, to pay interest BUT no rate/due date. Interest
covered by CISG, but gap exists. Ct used UNIDROIT Art. 7.4.9(2) as a general principle
(weighted avg)
o NOTE can’t just assume UNIDROIT principles are general principles on which
CISG based have to use them to guide you to a principle underlying the CISG
(2) for exclusions look to the law applicable by virtue of the rules of private in’l law (conflicts of
law determination to apply nat’l law)
o e.g. rights of third parties
o
if possible avoid use of domestic law to interpret technical terms/principles
5
6
ISSUES IN AN INT’L TRXN (OVERVIEW TO BOL/LOC)
Domestic trxns done on “open account” - payment w/in 30 days. Bank involvement minimal to avoid fees
Purchaser: Doesn’t want to pay until know goods of the quality promised will be delivered  BOL and Ins.
 Doesn’t want to tie up WORKING K - Wants to sell goods in transit to finance transaction;
Vendor: Doesn’t want to give up control/deliver the goods until knows will be paid  LOC
int'l dimension makes more complex b/c: duration of time (Working K tied up for longer), lack of relationship,
diff culture/legal system, can't afford to inspect goods, exchange rates (usually seller’s risk),
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Carrier knows scope of duty of care and price in risk:
Shipper knows how carefully must pack goods and insure them;
Insurers decide what terms on which risks covered;
Buyers determine level of protection required;
Banks know extent to which can depend on security interest in the goods.
BILLS OF LADING (SHIPPING)
Freight Forwarder (shipper's rep): Ascertains date and place of sailing; Obtains a space allocation; Prepares
BOL; Arranges delivery of goods alongside ship or to aggregation point; Arranges customs entry, pays tariff on
cargo (determines classification rate and potential excise tax); After shipment collects BOL & sends to shipper
 Upon delivery of goods to ship gets a "mate's receipt", involves an inspection -not a doc of title
Loading Broker (Carrier’s rep): Advertises dates of sailing; Supervises the arrangements for loading (though
not actual stowage); Signs BOL and issues it to shipper or agent in exchange for payment of freight;
Shipowner: advises shipper/ loading broker re. name of ship; Locality & time when goods sent for loading
Hague-Visby Rules (CA’s Marine Liability Act, 2011) - governs BOL and carrier liabiltiy
Purpose: equalize power imbalance b/w carriers and shippers/buyers
Prob: Predates container shipping
Application: BOLs b/w ports in different States if : (a) BOL issued in or (b) ship from Contracting State; or (c)
k choses these Rules or laws of a State adopting these rules
 Cannot k out (HV Art III r.8) (not even indirectly through choice of law/forum clauses that name jdx's
that have lower carrier liability max The Hollandia)
BOL
Purpose: enable buyer to dispose, pledge, resell of goods rapidly. Frees up working K provides collateral
interest for a loan
 Trust receipt. Bank may release LOC to consignee (borrower) in trust so they can sell the goods (if
borrower goes bankrupt BOL is still the bank’s property)
Features:
 document of title
 Evidence of the k of carriage (not the k itself, but little diff today b/c generally standardized)
 A special term of the k, even if oral, may override general provisions in BOL Ardennes, [1951]
(oranges - oral agreement to ship dir. BOL std term that route up to captain)
 Issued in 3s - first person to show up w/ any one of them gets the goods (“accomplished”)
 If carrier delivers goods to a person w/out a BOL liable for conversion
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o
Carrier might release on an indemnity – usually only for repeat trxn (or perishable)
Negotiable/non-negotiable
 non-negotiable: made out to bearer transferred by delivery
 Negotiable: (Default): Buyer can sign over or pledge as collateral security (maintain working k). Made
out to order transferred by indorsement and delivery of the bill; put consignee’s name in "notify
party" box
shipped/received
 "shipped": confirms goods loaded (more valuable)
 "received" confirms goods delivered for shipment (e.g. stored in a warehouse);
“Through”: multistage shipment w/ consecutive carriers or modes of transport where shipper only deals w/ first
carrier
“Clean” vs. “Claused”
 Clean BOL required for LOC
o Only states “apparent good condition” so get a cert. of inspection to ensure quality
o (UCP Art. 27) “Clean”: no clause or notation expressly declaring a defective goods or packaging
 "Clausing" if damaged carrier must state so to avoid liability  Buyer won't take it.
o Carrier cannot modify even upon promise of indemnity b/c that’s fraud and indemnity won’t
stand. Percy Dalton Ltd (tally clerk describes casks as "old and frail:, but carrier issues clean
BOL on promise of indemnity)
o  clausing the bill in an apparently innocent form to protect carrier and avoid alerting the
unwary consignee (e.g. weight unknown", "quality unknown")
o Not ok if ship's log has greater detail that would alert a consignee to damages The
Skarp
Requirements: BOL must show: (HV III(3))
 (a) the leading marks (trademarks) necessary to ID the goods as furnished in writing by the shipper before
loading and that such marks are clearly shown and should ordinarily remain so until the end of the voyage;
 (b) either the # of packages or pieces, or quantity, or weight, as furnished in writing by the shipper;
 (c) the apparent order and condition of the goods. (shipowner doesn’t have to be an expert - just
reasonable)
o  shipowner estopped from denying goods received in apparent good order and condition
o reliance established by acceptance of clean BOL Silver v. Ocean Steamship Co
o does not: guarantee what’s inside (case re. sardines (mud is fine)); extend to goods not apparent to
reasonable inspection
o "said to contain" is fine
 Info on BOL entered into ship's manifest, which is produced at customs
CERTIFICATE OF INSPECTION
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Rationale: Indemnity from seller no good if they're dishonest and carrier expertise ltd
Pay inspecting agency to take on the risk/liability
Include: authentication of goods; import requirements (e.g. labelling); Standards compliance
Put this in the K for sale and make it part of the req. docs for an LOC (b/c bank’s obligation to pay
out…)
8
CARRIER LIABILITY
Network theory: if various modes of transport involved must determine where the loss occurs then apply that
convention
 Multimodal convention adopted in model form by UNCTAD and ICC
Shipper indemnifies carrier through a deemed guarantee re. accuracy of marks, quantity, weight it gives to
carrier
 Prob: solvency time lag to trial/enforcement (carrier stuck w/out the working K as it seeks indemnity)
 void if carrier knew but still issued clean BOL (fraud) Percy Dalton Ltd
Requirements
 HV Art.III (1) Before and at start (not during) must exercise due diligence to (a) Make the ship
“seaworthy” (b) Properly man, equip and supply (c) Make the holds, refrigerating, etc fit for reception,
carriage and preservation.
 At common law absolute obligation [not negligence] to provide seaworthy ship (having regard to
ordinary perils). Rationale for change is that modern ships very complex
o principal-agent liability for independent k’ers/employees of carrier (but then these actors- though
not always the indep K- get same defences and limits of liability as carrier)
o
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hard to challenge - burden of proof on cargo-owner to establish ship unseaworthy and
unseaworthiness caused loss/damage to cargo
 Burden shifts to carrier to prove due diligence
HV Art.III (2) throughout the trip must properly and carefully load, handle, stow, carry, keep, care for
and discharge goods carried
 includes time on land if in connection w/ sea voyage Mayhew Foods Ltd
3 Limitation on Carrier Liability
General exception to the limitations (HV Art.IV(5)(e)): if damage resulted from act/omission done w/ intent or
recklessly w/ knowledge that damage would probably result
o Art IV bis: the above ltn on liability also applies to a carrier’s agent
1) Maximum [also min.] Limit of Carrier’s Liability (HV Art.IV(5))
 666.67 special drawing rights per package or 2 per kg, whichever is the higher
o [2013 1SDR= Cdn $1.54; 666.67 units = $1,026; 1kg = $3.07]
 Exception
o shipper: (1) declares the nature and value of goods to be more and (2) inserts it into the BOL (must
do both Pendle & River Ltd)
 Carrier can refuse to increase
 Shipping cost will increase
 Better to get shipper to provide ins. (get proof of this in exchange for LOC)
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Declaring goods at a higher value for insurance won't increase the freight charges
unless you choose to declare the higher value on the BOL
2) Excepted Perils (HV Art IVr.2)
[doesn't excuse duty to supply seaworthy vessel The Star Sea]
Not responsible for loss or damage arising from:
(a) act or default of master, mariner, etc of the carrier in the navigation or mngt of the ship -but see
Art.IV(5)(e) above
 Navigation defined narrowly Kawasaki Kisen Kaisha Ltd (doesn't include decision to take unusual,
slower route)
 [shipowner's burden to prove]
(b) Fire, unless caused by the actual fault of the carrier [shipowner's burden to prove]
(c) Perils, dangers and accidents of the sea or other navigable waters.
(d) Act of God; (e) Act of war; (f) Act of public enemies.
(g) Arrest or restraint of princes, rulers or people, or seizure under legal process (bankruptcy, embargo, fulfil
order).
(h) Quarantine restrictions.
(i) Act or omission of the shipper or owner of the goods, his agent or representative,
(j) Strikes or lockouts or stoppage or restraint of labour from whatever cause; (k) Riots and civil
commotions.
(l) Saving or attempting to save life or property at sea.
(m) Wastage in bulk or weight or any other loss or damage arising from inherent defect, quality or vice of
the goods. [popular carrier’s defense]
(n) Insufficiency of packing; (o) Insufficiency or inadequacy of marks.
(p) Latent defects not discoverable by due diligence.
(q) Any other cause arising without the actual fault …of the carrier, or …neglect of the agents or servants
of the carrier, but the burden of proof shall be on the person claiming the benefit of this exception to show
[no negligence] [shipowner's burden to prove]
3) SOL (HVArt II.6)
 If loss/damage apparent, notice must be given in writing to the carrier at port of discharge before or at time
of removal (removal of goods= prima facie evidence of delivery of the goods as described)
o If not apparent, must give notice w/in 3 days of delivery
o Suit must be brought w/in 12 mos after delivery or date when should’ve been delivered
o Exception: (HVArt II.6 bis) action for indemnity vs 3rd person may be brought w/in time allowed by the
law of the ct seized of the case. [e.g. ON Limitations Act is 2 yrs]
 Min.3mos from when party seeking indemnity is sued
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MARINE INSURANCE
Rationale (1) BOL only provides for "apparent " good order etc (2) ltd liability – max value; only seaworthy
req. at start; short SOL; excepted perils
Types of policies
 valued policy: specifies the agreed value
 unvalued policy: (rare) specifies the policy max – actual value to be ascertained later
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voyage policy: insured in transit for A to B
 transit clause: (included as a default) warehouse to warehouse –includes incidental land risks
time policy: insured for a fixed term;
 Growing in popularity. Must be > 2 months;
 continuation clause: if vessel at sea, in distress, or at a port of refuge or of call at time of
expiration covered at a pro rata monthly premium to port of destination - provided notice given
 no implied warranty of seaworthiness but no insurance if insured knew unsearworthy
mixed policy: insured both for a particular journey and a certain period of time;
floating policy: chunk of coverage for a period (usually 12mos). Notify insurer of value of shipments as
they come up. Essentially debits that amount of insurance from the lump sum of coverage.
Blanket Policies: need not advise the insurer of the individual shipments
Eligibility for coverage
 Must have an insurable interest (i.e. suffer a loss) -can’t speculate.
 When insured goods are sold or transferred, insurance does not automatically pass to the buyer. Therefore,
condition sales of insured goods on seller assigning the insurance (Consent of insurer not necessary)
 Right of subrogation - insurance co. pays the insured and then acts as the P
Termination
 limit of 60 days after completion of discharge at final port or
 rationale: extra time helpful if detained in customs
 when goods are forwarded to a destination other than that named in the insurance
Scope of coverage
All clauses cover general averages [in time of peril share loss from dumping] and salvage charges;
Clauses “A: (broadest) covers “all” risks except 4-7 [see below]
Clauses “B”: covers the following risks (except 4-7)
 Fire or explosion;
 Vessel stranded, ground, sunk or capsized;
 Overturning, derailment of land conveyance;
 Collision with any external object other than water;
 Discharge of cargo at a port of distress;
 *Earthquake volcanic eruption or lightning;
 Loss by general averaging;
 Jettison or washing overboard;
 *Entry of seal lake or river water into vessel hold;
 *Total loss of any package lost over board or dropped while loading or unloading
Clause “C” (narrowest) major casualties only
 Doesn’t include those w/ * in B
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Risks not covered (4-7) [see CP 407]
 4.1: wilful misconduct of the assured
 but covered for any loss proximately caused by a peril insured against, even though loss would not
have happened but for the misconduct or negligence of the master or crew.
 ? Unsure - B and C excludes “deliberate damage to or deliberate destruction of the subject-matter
insured or any part thereof by the wrongful act of any persons”
 4.2 ordinary: leakage, loss in weight or volume, or wear and tear
 4.3 insufficiency or unsuitability of packing or preparation
 4.4 inherent vice or nature of the subject-matter insured.
 4.5 loss proximately caused by delay even though delay is caused by a risk insured against
 4.6 insolvency or financial default of the owners, mngrs, charterers or operators of vessel
 5.1 unseaworthiness/unfitness if assured knew of it
 6 War [Use EDC to insure this]
 7 strikes [Use EDC to insure this]
 7.3 terrorist/political motive [Use EDC to insure this]
EDC INSURANCE
provides insurance to Cdn Co’s where regular insurers won't in order to promote Cdn investment abroad
Political Risk Insurance
 Breach of K by state-owned entity or foreign gov’t that refuses to honour an arbitral award
 Non-payment by a government: refuses/unable to make scheduled loan payments or honour a
financial guarantee
 Creeping or outright expropriation: gov’ts seize, confiscate or otherwise expropriate (through
regulatory measures) your investment w/ no justification.
 e.g. Metalclad (buy land for waste then gov't passes law saying no waste site)
 NAFTA Ch 11 and other BIT provisions provide a remedy for expropriation, but it's expensive
and time-consuming so prefer to insure through EDC
o Ban on Repossession: foreign gov’t prevents you from repossessing or re-exporting physical assets
brought into the country (e.g. machinery, equipment, etc)
o Cancellation of export or import licenses and permits.
o Political violence: terrorism, war, civil strife, etc
o restrictions on conversion of local currency to hard currency (often during econ crisis)
 Transfer: foreign gov’t or central bank may prevent hard currency from leaving the country
Extended Private Insurance
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Buyer bankruptcy or insolvency.
Buyer refusal to accept the goods.
Non-payment or default by your customer.
Termination or cancellation of the contract by your customer.
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IMPORT-EXPORT & WTO
CANADIAN IMPORT REQUIREMENTS
Is the good dangerous? documentation requirements in Transportation of Dangerous Goods
Does the client do a lot of US-CA deals? Free and Secure Trade (FAST) for pre-approved importers, carriers,
and truck drivers. Requires history of compliance; acceptable book keeping, member of PIP or C-TPAT
CBSA: calculates duties and taxes (value {invoice}, tariff classifications and rules of origin); examines traffic
and goods; Investigates dumping; Enforces customs laws and regulations;
 random inspection of shipments for: accuracy of report; Labelling and marking compliance
[certified where required]; Product Standards compliance; Registration of pharmaceutical goods
 CBSA can go back 10yrs and additional penalties for fraud
Release and accounting
 report imports to CBSA [usually carrier does this on the cargo control doc]
 goods not released until (a) accounted for by importer and (b) all duties paid, Canada Customs Act s.32. (1)
o s.32 (2) exception: on minimum documentation (RMD) - if (a) importer makes an interim
accounting or (b) goods authorized for delivery to, place of business of importer they can be released
w/out accounting (but must be done later s.32 (3))
o Import Documentation for Accounting:
 Certificate of Origin; 2 copies of the Cargo Control Document; 2 copies of an Invoice
completed by importer or vendor; official CA commercial customs invoice or one w/ all
same info [see attache]; 2 copies of a B-3 form; document used to account for entry of goods
[see attached]; Other forms, permits and certificates (e.g. emission applications, end-user
certificates)
 ultimate responsibility lies with importer to ensure rules and regs met, but may work w/:
 Customs Brokers (CBSA licensed): Clears goods at the border - prepares docs, collects duties
 Freight Forwarders: Arrange int’l transport, help importers w/ compliance (e.g. determine tariff
classification and pay exise taxes)
 Customs Bonded Warehouses (CBSA regulated): store goods duty free and tax free until exported or
used. Usually used by FFs who are dealing w/ goods in transit.
o pay annual fee; complete bonded application; post security deposit
Customs Valuation
 Trxn value method: price at which sold in ordinary course of business under competitive conditions
 specific valuation techniques for goods not sold on an arm’s length:
 Trxn value of identical or similar goods sold for export to CA
 Deductive value: unit price at which goods, or identical or similar goods, sold in CA in the
largest quantities to unrelated persons;
 Computed value: costs/value of materials + fabrication/ processing + profit + general expenses
 Associated costs usually deductible (e.g. royalties, freight, insurance, license fees, management fees)
Additional Taxes Payable
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HST - only pd on issued invoices - Working capital!
Excise Tax Act (e.g. Alcohol; Auto Air Conditioners; Gasoline/fuel; Jewellery/Clocks; Tobacco)
Harmonized Tariff Classification (1988)  Simplify/standardize classifications (see attached)
 ten digit number: first six digits Int’l HS last four digits are for nat’l sub-categorization
NAFTA
 Costs of compliance w/ NAFTA  Some use MFN over NAFTA to avoid it
 use of NAFTA: 57% of imports CA US; 44% USCA
Art. 302: Tariff Elimination. no Party may increase/adopt a customs duty and must progressively eliminate on
originating goods
Rules Of Origin (quite restrictive)
 A form of hidden protectionism - Usually in sensitive sectors e.g. textiles, auto, agriculture
 Art. 401 “originates” if:
 (a) wholly obtained or produced entirely in the territory of one or more of the Parties or
 (b) each of the non-originating materials used in the production of the good undergoes an applicable
change in tariff classification as a result of production occurring entirely in the territory of one or more
of the Parties (transformation of the good)
 regional value content of the good must be: >or= 60% of trxn value or >or= 50 % of net cost
 often requires a chapter change under Harmonized Tariff Classification
o E.g. orange marmalade is classified under 20.07 while fresh oranges are 08.25 so it passes
Customs Procedures (Ch 5)
 Certification of Origin. Importer needs exporters to complete and sign if wants to claim preferential
tariff
o Canada Customs Act 42.01 CBSA may conduct a verification of origin[for which preferential tariff
treatment claimed]/ tariff classification/ value by:
 verification visit; review of verification questionnaire (completed by importer or person who
accounted for goods; review of a written response to a verification letter; review of any other
information or article received
 Can be very invasive and time consuming
 Advance Rulings possible prior to import, Art 509
 post-entry verification/audits possible here BUT not under WTO
WTO (SEE WTO CLASS OUTLINE)
Types of Tariffs:
General Preferential Tariff for developing countries. Must have Certificate of Origin.
o W/held from import-sensitive products such as textiles, clothing and footwear;
General Tariff: 35%. Applies to goods from non-WTO members (North Korea, Libya and Saudi Arabia)
Art I.1 MFN for bound and unbound tariffs
Art III.2 and III.4: NTO
Art XX: General Exceptions
14
LETTER OF CREDIT
Uniform Customs and Practice for Documentary Credits (2007 Revision-UCP 600)
 usually incorporated into LOC by reference
A Documentary Credit: buyer stipulates docs for payment (e.g. certs of quality/quantity by an indep
third party)
Purposes:
 reduce risk for seller of buyer not paying
 Assist seller in financing the trxn - transferrable credit/back to back credit (bank takes LOC as
security against issuing another LOC for supplier. Banks may not want to though b/c only
recourse for the LOC they accept as security is against middleman who may not have much k)
 Assist buyer – has a payment obligation to the bank, but rather than tie up working K by paying
directly, can issue the bank a trust receipt (pay a fee) and then resell goods
2 KEY PRINCIPLES: AUTONOMY AND STRICT COMPLIANCE
1) Principle of Autonomy of the Credit.
 Art 2: Credit is almost always irrevocable - a definite undertaking by the issuing bank to honour
complying presentations
 Can only revoke w/ agreement, UCP Art 10
 Revocable Credit rare - Used to be the default (Reversed in UCP 600)
 Art 5: Banks deal w/ docs - not goods to which the docs may relate
 Art 4(c): credit is a separate trxn from the sale on which it is based. Buyer can’t order bank not
to pay.
 No injunction of bank's payment to seller where buyer claims goods defective Hamzeh
Malas&Sons
 Even a foreign Ct order enjoining the bank from paying is not enough to protect the bank
from seller lawsuit if bank fails to pay out Power Curber Int’l Ltd v. National Bank of
Kuwait
 Only exception: fraud, fundamental mistake, or illegality in the jdx where LOC to be enforced
 Fraud in underlying sale contract not enough, has to be fraud in the docs Czarnikow
 Must be clearly established - grave suspicion and reasonable belief not enough
 seller must know of the fraud United City Merchangs Investment (1983)
2) Principle of strict compliance
o No “close enough”
 but not permitted to reject docs based on trivial/immaterial variations UCP Art 14 (d)
o But see Equitable Trust Co of N.Y.(bank not entitled to be reimbursed by the buyers
b/c LOC said cert by expertS and cert provided only 1 expert) – Prof thinks an
anomaly
15




Can’t conflict, UCP Art 14 (d) e.g.Conflict Soproma SpA (“collect freight” v “freight prepaid”)
General description of goods ok, UCP Art 14 (e) e.g.Conflict Soproma SpA (Fish Full Meal v
fishmeal)
 but see J.H Rayner (not accepted “coromandel groundnuts” vs “machine-shelled groundnut
kernels” even though known in trade that it’s the same thing)
Quantity may be +/- 5% unless measured by packing units or individual items; if LOC states
"about" or "approx" variation increased to 10% (UCP Art 30)
If bank refuses docs, seller should contact buyer and request them to instruct the bank to accept as
tendered
2 TYPES OF CORRESPONDENT BANK
1. Confirming bank steps into shoes of IB and honours the LOC from IB when seller presents docs.
 Must be clear, otherwise just advising Wahbe Tamari
 can pay the beneficiary under reserve
 Pro: localizes payment obligation in seller’s country which makes enforcement easier
 Con: most expensive - Where country risk of IB is high, commission high
2. Advising bank: confined to advising beneficiary of opening of credit by IB. Lower fee – less
secuirty
TYPES OF LOCS
1) Straight Credit: LOC not a negotiable instrument- IB obligation to pay to the seller alone (Third
Party who buys the LOC has no claim vs bank)
2) negotiation credits: bank has an obligation to a purchaser of an LOC. Can restrict it to banks, and
even certain banks
1) Transferrable Credits, UCP Art. 38
 seller requests AB make the credit available in whole or part to other(s) (may only be transferred
once)
 Terms must be the same as in the original credit except w/ respect to: unit prices; expiry date
 Convenient where seller is a middleman
 Pros: avoid fees in establishing another LOC (though does requires transfer fees)
 Con: supplier knows the cut you’re taking so might deal dir. w/ buyer in future
2) Back to back credit: middleman (seller) takes out LOC for supplier (third party) using first LOC as
security
 Pro: seller won't know the cut the middleperson is taking
 Con: higher fees b/c bank’s recourse ltd to middleman who doesn’t usually have capital base
3) Revolving (Evergreen) Credits: a single credit covering entire transaction (numerous shipments)
can draw it down and then pay it back several times over
16
COMMON DOCS FOR THE LOC
 Commercial Invoice (UCP Art 18)
 usually required. Must: (1) appear to have been issued by the beneficiary; (2) be made out in
name of applicant; (3) be made out in the same currency as the credit; and (4) need not be
signed.
 Description should = description in the LOC
 Transport docs (UCP Art 19);
 Bills of Lading (UCP Art 20) Must:
i. indicate name of carrier and be signed by carrier
ii. indicate goods have been shipped on a named vessel at port of loading stated in the credit;
iii. indicate shipment from port of loading to port of discharge stated in credit;
iv. be sole original BOL or the full set. (All 3 copies)
v. contain terms and conditions of carriage or make reference to another source containing them
 Clean Transport Doc: (Art 27) A bank will not accept a claused transport doc
 Insurance Docs (Art 28)
 issued and signed by an insurance co., underwriter or agent;
 Date no later than date of shipment,
 must indicate amount and be in same currency as credit
 default for coverage required is 110% of the CIF or CIP value of the goods
 Must indicate risks covered
 If stated in imprecise terms (e.g. "usual risks") will be accepted despite risks not
covered
 If stated "all risks" insurance doc presenting an "all risks" clause accepted despite any
risks excluded
 Others: Non-negotiable sea waybills (Art 21); Charter party bills of lading (Art 22); Air transport
documents (Art 23); Road, rail and inland waterway transport documents (Art 24); Courier and post
receipts, certificates of posting (Art 25);
17
BANK REVIEW/ REJECTION NOTICE
Review
 UCP 14(b) CB and IB each have 5 BANKING DAYS to determine compliance after day of
presentation
 If refuses must issue rejection notice, see below, UCP Art 16(d)
 determine of docs on their face, UCP Art 14(a)
 Not required to examine or investigate the sufficiency, accuracy, genuineness, or legal effect
or to inquire whether underlying trxn fraudulent UCP Art 34
 e.g. Gian Singh v. Indochine (not required to investigate genuineness of a signature)
 If unclear, a reasonable interpretation will suffice Commercial Banking Co of Sydney
 if possible to contact buyer bank should do so European Asian Bank AG
 Inconsistencies b/w docspresumption of non-conformity, but examine as a whole
Kredietbank NV
 All docs stipulated by buyer must be presented; Credit Agricole vs. Muslim Commercial
 UCP Art 17, generally must be “original”, i.e. apparent original signature, mark, or label of the
issuer or, unless otherwise indicated, bank will also accept if it appears written, typed, perforated or
stamped by issuer's hand; original stationery; or states that it is original
 LOC’s may permit docs to be "accepted as presented", e.g. where not receiving bank’s language
 Non-documentary conditions disregarded UCP 14(h)
 doesn't void the whole trxn if there is one
 e.g. if LOC states shipment is to be b/w x and y dates that is non-documentary, if LOC
requires a doc stating shipment b/w x and y dates, that is enforceable Chailease Finance Corp
Rejection Notice
 if bank decides to refuse must give notice by telecommunication or other expeditious means w/in 5
days following presentation, UCP Art 16(d) [fits w/ Art 14(b)]
 Notice must state: (1) the refusal to pay; (2) describe each discrepancy; and (3) advise
whether:
 Bank is holding docs pending further instructions from presenter (seller); or
 IB is holding docs until wavier from the applicant (buyer); or
 Bank is returning docs; or
 Bank is acting per instructions previously received from the presenter (seller)
 IB may approach the applicant for waiver but this does not extent the 5 day deadline, UCP Art
16(b)
 If bank doesn’t comply w/ the above, precluded from claiming docs don’t comply, UCP Art 16(f)
18
CSR
"sunshine effect”: bringing of attn not the remedy that is helpful
 like NAFTA legal procedures on enviro and labour
 The strength of a co is also its weakness - destroying the brand is HUGE for corporate giants [what Naomi
Klein overlooking in "No Logo"]
 important for Jr Mining Cos b/c they need to be able to raise $ in the public market (not actually selling
anything)
 reflected in statements/reps of Skye Resources thoughout the statement of claim. See e.g. para 84
Why binding bribery treaty but not CSR?
 difficult to reach consensus b/c: heavily political/social and US not leading like in bribery post-Watergate
 Western bias: comparative advantage; lack of alt jobs; foreign contractors pay many times local wages (e.g.
Cambodia garment factory wage $65/mo, but excuse not to pay living wage (mass faintings))?
 Landclaims issues
o pot calling kettle black (CA)
o What country's property law should dictate? E.g.
 Cambodia vs. American Sugar Refining (NCP pending) Issue of chain of title in
Cambodia b/c history of country
 HudBay case para 34: contesting legitimacy of land grant by dictatorial military gov’t
Possibly the early stages of change for CSR (like the previous shift for bribery) E.g.:
 Rights and obligations from OECD guidelines are being strengthened:
 Extending responsibility throughout the supply chain [like in bribery]
 cos must have due diligence policies and procedures in place [social audits]
 OECD special guidelines for mining

BUT NCP still weak (no on-going surveillance like in WTO where it has been effective)
SOCIAL AUDIT part of Due Diligence in take-overs to mitigate risk:
 Rationale: Best practices and canary in coal mine
 Ask: Is there a potential for harm in raising funds?
 What's the history of the target co.?
 E.g. HudBay alleges liability possible for past wrongs of target co in amalgamations
 What issues have been raised even if no legal recourse in CA? Consider:
(1) PR
(2) future legal regimes (Can't insulate from history);
 Look to non-binding conventions and other int'l agreements/conventions where there is
consensus b/c increasingly being adopted into OECD stds.
(3) other tribunals. E.g. FTA side agreements like the NAFTA’s labour and enviro [mostly
sunshine but does  published report]
E.g. Mexico vs. Excellon Resources (NCP pending) could've been dealt w/ through NAFTA
19
VOLUNTARY PRINCIPLES ON SECURITY AND HR FOR EXTRACTIVE INDUSTRIES 2000
 Created by U.S., U.K. and NGOs [see attached for member co.s, states, NGOs]
 Identify security risks:
 Potential for violence in the area (e.g. land claims). Consult Civil society, home and host gov’t

Conflict analysis. ID/ understanding root causes and nature of local conflicts;


Human Rights records and reputation for excessive force of security forces you hire
 Consider rule of law, i.e. Ability of local system to hold accountable
 Equipment transfers: make sure proper licensing and controls for anything that could  HR abuses
adopt code of conduct and likely put it into k w/ Private security re.:
 observing: corporate policies on ethical conduct and human rights, domestic law, emerging best int’l
practices as dev’ed by industry and civil society, and promote observance of int’l humanitarian law
 appropriate use of force (rules of engagement)
 private security should maintain high levels of technical and professional proficiency
 Necessity/Proportionality of force

E.g. UN Principles on the Use of Force and Firearms by Law Enforcement Officials;





Only preventative/defensive use
respect for rights like free speech/peaceful assembly
procedures for reporting
investigate credible allegations of abusive or unlawful acts (consider using third party)
ensure availability of disciplinary measures sufficient to prevent and deter;
2010 OECD VOLUNTARY DUE DILIGENCE FOR SUPPLY CHAINS OF MINERALS FROM
CONFLICT & HIGH-RISK AREAS
 Rationale: response to 2002 UN Panel of experts listed over 80 foreign companies implicated in armed
conflict, illicit trading in minerals and human rights violations;
1) Establish strong co mngt systems:
 internal mgt structured to support system of controls and transparency over supply chain (any one
you contract w/)
2) ID and assess risk in the supply chain;
3) Design and implement strategy to respond to risks
 Report to sr mgmt;
 Disengage w/ suppliers after failed attempts at mitigation
 Carry out independent third-party audit of supply chain
4) Do not to be party to:
 Forms of torture, cruel, inhuman or degrading treatment;
 forced or compulsory labour;
 Worst forms of child labour;
 Other gross humans rights violations and abuses such as sexual violence;
 War crimes or other serious violations of international humanitarian law, genocide;
5) Report on supply chain due diligence (transparency)
20
CA BILL C-300: CORPORATE ACCOUNTABILITY FOR THE ACTIVITIES OF MINING,
OIL OR GAS IN DEVELOPING COUNTRIES
 never passed (Barrick Gold alone registered seven lobbyists)
 Would’ve had Ministers investigate and if find violation EDC and CPPI automatically cut off
from funding (which basically means death to the co b/c won’t be able to raise k)
 Prof didn’t like b/c (1) lack of due process (Ministers examining (political), no stds for
process), and (2) consequences too dire so unlikely Ministers would find a prob
 recommendations on CSR mostly shelved except CIDA funding becomes focussed to help Cdn
co.s (“enhance dev’ing co’s capacity to manage their extractive sector)
CAAL V. HUDBAY MINERALS INC (ONSC pending) – Statement of claim
[Motion to dismiss for forum non dropped]
Alleged Facts:
 At request of HudBay Mineral’s predecessor Skye Resources Inc , (now amalgamated into
HudBay) mine security personnel, police and military forcibly expelled remote indigenous Mayan
community of Lote Ocho from land they consider ancestral home in Guatemala
o Jan 8-9, 2007: homes burned, undue use of force, theft
o Jan. 17, 2007: hundreds of personnel invade. 11 Mayan Q’eqchi’ women gang-raped
 Some control exercised by Skye’s subsidiary GCN, but that wouldn’t matter for voluntary OECD
guidelines for MNEs b/c “investment nexus” would be satisfied (98.2% ownership)
 Paras 33 and 79: Skye Resources previously publically stated it adhered to Voluntary Principles on
Security and HR for Extractive Industries (see above for requirements – most all listed in the
complaint at para 81)
o Also said it would follow IFC Performance Stds which require: risk assessment, proportionality,
reasonable inquiries into security personnel and proper training, not condone force except
preventative and defensive, have a grievance mechanism and investigate credible allegations
 Land claims/domestic law Guate Const Ct 2011 rules gov’t must recognize Q’eqchi’ collective land
rights
21



Potential for violence in the area
o AI (violent expulsion from land - land claims), Doctors w/out borders (rape crisis) and UN
truth Commission (normalization of rape) paras 92-96
Human Rights records and reputation for excessive force of security forces
o Para 98 UN Truth Commission documents prior violence (murder) by the CGN subsidiary of
Skye Resources
Consider rule of law
o Para 97 Ability of local system to hold accountable unlikely b/c corruption, political
interference, threats of violence (HR Watch Report re. alarmingly low prosecution)
Alleged Negligence
o Para 26 and 32: Skye Resources failed to: include rules of conduct for appropriate use of force
and rules of engagement; procedures to protect HR; and proper training (also para 57) for
Integracion Total (IT) security personnel
o Paras 28,29,30: failure to ensure compliance w/ local law (knew security providers unlicensed
and lacked authorization to carry/use firearms b/c hadn’t registered or submitted to background
checks)
o Para 31: serious and credible public allegations IT was involved in organized crime (e.g.
trafficking arms and drugs)
o Para 60: failed to investigate violence of Jan 8-9 2007 evictions
o Para 103(n) failure to establish and implement adequate disciplinary mechanisms to deter
violence
o Red flags: historic land claim issues, informal oral agreement w/ security co., volatile area (AI
report and UN-Truth Commission), lack of licensing (paras 88-93)
What could’ve been done to avoid it?
Adhering to Voluntary Principles For Extractive Industries
Considering canaries: Corruption supply-chain liability (responsible for agents etc) – also move’t
toward this in OECD Guidelines for MNEs
22
OECD VOLUNTARY GUIDELINES FOR MULTINATIONAL ENTERPRISES
 borrows from other ratified sources e.g. ILO, Rio Decl
 could give rise to CIL through jus cogens b/c broad consensus
 saves reinventing the wheel
OECD Watch: Evaluation of NCPs and OECD guidelines
 123 Cases filed majority re. HR and enviro (More cases rejected or closed without resolution
than cases concluded)
 others not brought b/c: cost (avg 100,000 GBP), ltd scope of NCPs, ltd outcomes (poli
appts, few remedies, no follow up), time (avg 2 yrs)
 Positives:
o have become a key global benchmark of CSR (influence expectations)
o “Specific instance” grievance mechanism (sunshine effect, public outrage)
 Negatives:
o 25% cases mediated to agree’t but ltd impact
o most NCPs don’t address grave HR abuses (lack of training/ political appointees)
o Failure by NCPs to monitor adherence and follow-up
Afrimex (UK co.) in DRC 2007
Co. accused of buying minerals from mines with harsh working conditions and
forced child labour. UK NCP attempts to mediate. Afrimex stopped
participating. NCP report concludes co. failed to ensure trading activities did
not support armed conflict and forced labour. Co. claims it stopped trading in
DRC but later that Afrimex subsequently claimed that it stopped trading
minerals from DRC in late 2008 but then found affiliations
Avient Air bombing DRC in 1999/2000
Avient provided planes, attack helicopters and Ukrainian crews to the Congolese
Air Force and the Zimbabwean Defence Force. Also dir. involved in bombing
from cargo planes. OECD Watch reports UK NCP refused NGO standing and no
investigation; NCP report effectively exonerates co. No followup
Mopani Copper Mines [Cdn/Swiss co] (2000 Zambia)
evicting subsistence farmers from long-standing informal communities. Recall
DeSoto's cost of not owning the land (can't get loans, invest long-term, etc)
Oxfam-Canada complains to Cdn NCP in 2001 re. evictions as breach of the
HR stds
23
o
o
o
NCP organised meetings  agreement (1) stop all evictions (2) work
together towards resettlement on land they could legally own (3) continued
dialogue
eviction of subsistence farmers began again in 2006 [once public attn
waned]
2010 uneasy interim arrangement reached w/ short-term ‘licenses’
Guidelines (1976, updates in 2000 and 2011)
Gov’ts must establish a National Contact Point to:
o Hear Complaints
 initial assessment whether issue merits further examination
 Prob: political not indep. Appointment w/in DFAIT and point of the dep't is to
promote Cdn biz overseas so no motivation to jump on every complaint
 NO discussion of ombudsperson in 2011 update that seeks to strengthen mediation
(despite fact this position already exists in most gov’ts)
 If has merit, NCP offers e.g. mediation
 Prob: lack of due process. Can’t candidly present your strengths and weaknesses
of your case in mediation if NCP is both mediator and the final arbiter
 If parties fail to agree NCP will make recommendations
o Prob: Weak dispute settlement mechanism (proecess) and very little enforcement (see DRC
e.g.s above)
o Compare w/ WTO: legalistic processes w/ nothing but poli remedy but lots of moral
suasion
o NGOs can bring complaints [2000 amdt]
o Investment Committee to assists NCPs by clarifying guidelines [2011 amdt]
24
Enterprises should:
 Governance. Support and uphold good corporate governance principles
 Develop and apply effective self-regulatory practices
 Refrain from accepting exemptions not contemplated in the statutory or regulatory
framework re. enviro, health, safety, labour, tax, financial incentives etc
 Disclosure re. their activities, structure, financial situation and performance.
 Employment. Refrain from discriminatory or disciplinary action against employees
 Respect trade unions; Abolition of child labour; elimination of forced/compulsory
labour; Not discriminate on race, colour, sex, religion, political opinion [Drawn from
ILO]
 Provide facilities to employee representatives to develop effective collective
agreements;
 Encourage local capacity building invest in human k
 Notice of collective lay-offs or dismissals;
 Engage in collective bargaining [Drawn from ILO]
 Environment, health and safety [drawing from the Rio Decl.]
 Establish syst of env’tal mngt
 Provide the public and employees with adequate and timely info
 Assess foreseeable impacts associated with the processes, goods and services
 precautionary principle - Not use the lack of full scientific certainty as a reason for
delaying cost-effective measures to prevent or minimize such damage. [Principle 15
of Rio, WTO-SPS Agr’t]
 Bribery;
 Science and Tech. Take into account concerns about cost, business confidentiality, and the
protection of IPR. Contribute to the dev’t of local innovation capacity
 IX. Competition; VII. Consumer Interests; X. Taxation;
 Supply Chain responsibility [2011 amdt]
 Can’t deny responsibility for subsidiaries and contractors if there’s an investment
nexus:
o share ownership, provision of finance  investigation
o just trade  no responsibility [even though text says trade – political
expediency]
(Investment Committee clarification in 2003)
 Determination of appropriate action depends on: leverage over the entity concerned
and whether terminating relationship would have adverse HR impact
25


financing/lending is not an investment nexus, e.g. complaint re. ANZ Bank in 2006
re. logging
 BUT OECD Watch suggests an increasing willingness by NCPs to find nexus.
o Potentially why ANZ voluntarily adopted formal forestry and
biodiversity policy (though subsequent findings suggest not sticking to it)
HR. [2011 amdt]
 Respect HR consistent with the host gov’ts int’l obligations/commitments
 Requires reference to Int’l Bill of HR (Universal Declaration of HR, ICCPR,
ICESCR, ILO decl.)
 [drawn from UN’s Framework for Business and Human Rights ‘Protect, Respect and
Remedy’]
 Have a policy commitment: approved at the most Sr. level of the enterprise;
informed by relevant internal and/or external expertise; stipulates expectations of
personnel, business partners and other parties directly linked; publicly available and
communicated internally and externally; reflected in operational policies and
procedures necessary to embed it throughout the enterprise.
 due diligence appropriate to size, nature and context of operations and severity of the
risks
 an on-going exercise, as HR risks may change over time;
 operational-level grievance mechanisms - Co itself should create ombudsperson
26
BRIBERY/CORRUPTION
Policy: Is corruption evil or is it just making a living?
Note: If paying an indiv more likely to be bribery, if paying to a dep't under fee schedule less
likely
Are there are systems in place to prevent corruption/bribery?
WHO
o any one in supply chain
WHY
o Part of Due Diligence in an Int’l Trxn
o Might slow things down if bribes part of doing biz in local market unpopular w/ biz ppl
BUT at least co. won't be shut down completely! E.g. b/c unable to raise funds
o Trend to greater enforcement [see e.g. RDS]
 increasingly serious in CA-14yrs (very serious in US, RDS)
o Professional responsibility - to corp/client and to bar to avoid corruption
 Counsel held to higher std than biz ppl so doing nothing --> risking legal career

Is there exposure to US law?
 Get help from external lawyers to draft and implement due diligence
 Convenant re. compliance w/ US FCPA in k’s w/ 3rd parties
 Is there a proper training program? Comply w/ US FCPA
 Like an antitrust compliance prgm, an effective [corruption] compliance program
can literally be the diff b/w survival and possible extinction
HOW
If this is the initial stage of a relationship:
 include rep, warranties, and Covenants in all ks re. conducting biz for lawful purpose, no
breach of legislation – Cdn FCPA or USFCPOA – or int’l best practices
 Create an Anti-Corruption compliance prgm for Subsidiary; local agent; Freight
forwarders, contractors, etc
 Should include: Due diligence joint ventures, and third parties; Periodic audits;
training prgm
 show you undertook reasonable steps to control behaviour of others (e.g. get an
indep investigator)
27
will help mitigate liability if there is an investigation, but won’t eliminate
see Griffiths.
Create a code of conduct for reporting
o

If this is an acquisition:
Due Diligence
 Review FCPA/international policies, internal controls, certifications, and contracts
 Investigate previous reports/terminations
 review data room financials and last 5 years’ auditors’ reports
 Include anti-corruption reps and warranties that there has been no past corruption/bribery
and that the books are accurate
 Get guarantees from officers
Insert covenants
 Interview compliance and sales personnel
If this is well-into the relationship audit (after below, go back to initial stage requirements
and set it up):
 Review 3rd Party/Agent Contracts [start w/ ppl who not previously dealt w/] RDS Wiseman
 Are the books accurate? Siemens, RDS
 Are there internal compliance programs to prevent violations? Siemens
 Are there irregular payments? AMEC
 Assess FCPA Awareness of Key Personnel
 Review Accounting and Internal Controls
 Review Code of Conduct & Foreign Anti-Corruption Compliance Program


If a prob consider self-reporting like Griffiths ("if you're being run out of town, get in
front and make it look like a parade")
If no prob redraw Ks to make sure covenants and representations re. compliance (see
above)
28
WHAT:
Risk factors:
 Geographic location - conflict
 Extractive industries (risk is why OECD created separate guidelines for this area for
CSR)
 Amt of interactions w/ gov’t;
 Involvement in JVs, contracting, other 3rdP relationships
 Importance of licenses and permits to operations;
 Volume/importance of goods/ppl clearing through customs and immigration;
red flags re. 3Ps or FPOs:
 (3P’s only) consider their connections to FPOs
 Lack of details on invoices, e.g. “services rendered”
 Reluctance to act openly or desire for secrecy
 Requests for payments in cash or of goods or services.
rd
 Previous suspicious reports re. 3 P sub-agents or its employees.
 request gifts, services, benefits, hiring of relatives, political or charitable
contributions, other favours
 Invoices lack detail , appear unofficial, or seem too high
 unusual methods of payment
 Requests co utilize specific agents, vendors or service providers.
29
OECD CONVENTION ON COMBATING BRIBERY OF FOREIGN PUBLIC
OFFICIALS IN IBT
Application: 38 ratified (e.g. AG, BR, BUL, CA, UK, US)
Scope: bribery of foreign public officials (FPO) in context of obtaining or retaining business;
State must:
 Art 1(1): criminalize intentionally offer, promise or give any undue pecuniary or other
advantage, whether directly or through intermediaries, to FPO, in order that the FPO act or
refrain from acting in relation to the performance of official duties [whether or not within the
official’s authorised competence Art 1(4)(c)], in order to obtain or retain business or other
improper advantage in the conduct of international business.
 Art 1(2) Includes: attempt, conspiracy, incitement, aiding and abetting, or authorising
 Art 1(4)(a) “FPO” [broad] any person at any level of gov’t:
 holding a legis., admin, or judicial office, whether appointed or elected;
 exercising a public function including for a public agency or public enterprise
 acting as an official or agent of a public IO

Art 3(1): Sanctions must be effective, proportionate and dissuasive criminal penalties,
comparable to that applicable to the bribery of the Party’s own public officials

Art 4: Jdx if committed in whole or in part by “any person” acting within a party’s territory
 CA differs a "substantial connection to CA" in order to prosecute [criticized by
OECD]

Art 7: Money Laundering – if bribery a predicate offence then this type of bribery counts

Art 8: Accounting
 prohibit the off-the-books accounts or trxns; recording of non-existent or inaccurate
expenditures or liabilities; and use of false documents for purpose of bribing FPO (or
hiding a bribe) and
 provide effective, proportionate and dissuasive civil, admin or crim penalties for it
 i.e. can't cook the books. If you're going to bribe have to list it as a line item!
 seems a bit odd b/c not going to put it in a line item, but means if accounting
tainted and then consolidated up parent also liable
 CA differs- doesn’t include acting (though proposed)
30
CA CORRUPTION OF FOREIGN PUBLIC OFFICIALS ACT - CFPOA (1999)
History
 nothing much done until 2005 OECD criticizes - Maybe b/c influence/importance of mining
sector
 2007 CA part of the “coalition of the unwilling”; Transparency Int’l ranks CA w/ Bulgaria
 2011 again criticized by OECD – so more changes potentially coming?
 bribing only a prob where “for profit”;
 Sanctions applied too low to be “effective, proportionate and dissuasive” (Hydro Kleen)
 Extraterritorial jdx in CA ltd to “real and substantial” to CA - should prosecute all nationals
abroad
 Art 3(5) factors can never be proper – CA should specify this
 CA has not yet committed adequate resources (only 2 corps prosecuted)
 Initially no resources assigned by RCMP (now 2x7ppl in In’tl Anti-corruption Units)
Scope: applies to the worldwide conduct of Cdn indivs and cos if there’s a substantial connection
 [proposed elimination of connection req. 2013 Bill S-14. If commit etc an act or omission outside
CA that, if committed in CA, would be an offence then deemed to have committed it in CA if
person is: Cdn citizen, perma res. Or Cdn corp.]
 proposed elimination in 2009 Bill C-31 never passed
Prohibited acts:
 s.3(1) if in order to obtain or retain an advantage in the course of business:
 directly or indirectly gives, offers or agrees to give or offer
 a loan, reward, advantage or benefit of any kind to a FPO (or other person for benefit of FPO)
 (a) as consideration for an act or omission by the FPO in connection w/ official’s duties
 (b) to induce the FPO to influence acts or decisions of foreign org for which FPO works
 No financial records offence despite the convention requiring it
 [proposed inclusion 2013 Bill S-14. An offence to: establish/maintain accounts which do not appear
in any of the books/records required; record non-existent expenditures; enter liabilities w/ incorrect
ID; knowingly use false docs; intentionally destroy accounting books earlier than permitted]
Saving provisions
 3(3) Not guilty if the loan, reward, advantage or benefit
o (a) is permitted or required under the laws of the foreign org
o (b) was for reasonable expenses incurred in good faith by FPO for:
o (i) promotion, demonstration or explanation of products and services, or
o (ii) execution or performance of a K b/w person and the foreign org
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 Facilitation payments 3(4) not guilty if payment made to expedite or secure performance by FPO of
any act of a routine nature that is part of FPO’s duties or functions, including: [prof finds this
bizarre]
 (a) issuance of a permit, licence or other docs to qualify a person to do business; (b) processing
of official docs (visas, work permits); etc (see longer outline) (c) services normally offered to
the public (mail, telecomm., utilities); (d) services normally provided as required (police
protection, loading/unloading of cargo, protection of perishable products from deterioration, etc)
 Art 3(5) does not include decision to award new biz, continue biz, or negotiating terms of biz
 [proposed elimination 2013 Bill S-14]
Penalty: s.3(2) criminal sanction up to 5yrs in prison, Unltd fines; Forfeiture of all proceeds – not just
profits – of any k obtained by corruption
 [proposed extension to 14yrs 2013 Bill S-14]
o Significant reputational and business losses
o No SOL
Prosecutions under CFPOA [see attached]
 SNC-Lavalin (2011-12) and 20 others ongoing
 Hydro Kleen(2005) low penalty
 but see Niko Resources (2011) costly compliance prgm and hefty fine (after self-reported) responsible for agents and 3rd parties
Complementary legislation
 EDC 2004 Anti-Corruption Policy Guidelines
 CIDA Protocol for Dealing with Allegations of Corruption
 Canadian Commercial Corporation (CCC) domestic contracts w/ Cdn suppliers
 2005 UN Convention vs Corruption – CA rat. 2007
32
US FCPA: OVERVIEW - FOREIGN CORRUPT PRACTICES ACT PASSED IN 1977, REVISED
IN 1988 AND 1998
Jurisdictional Reach [wide net, but still territorial principle]
 Art 1(a)(i) US person who (ii) is an officer, dir, employee, agent or stockholder of an issuer
(securities) or uses US mail or interstate commerce to further [includes entities]
 “Domestic concerns” (1) any citizen, national, or resident of US; (2) nearly every entity w/ principal
place of biz in [or (3) organized in] U.S
 Issuers under the Exchange Act, including: securities registered pursuant to Section 12(b); listed on
NASDAQ; foreign private issuers registered w/ SEC
 Any other person who while in US commits the act or person who uses US mail or interstate
commerce to further prohibited payment etc
Liability of 3rd Parties if they “know” (negligence doesn’t suffice)
 Std: knowledge includes Conscious Disregard, Deliberate Ignorance
 deemed if high probability or substantially certain
 liability for: foreign subsidiaries, joint-ventures, agent, consultant, rep, distributor, affiliates, or
subk’ors;
 due diligence and supervision essential
 even if you’re a minority stakeholders
 defense: Registering disapproval [do this quickly]
Prohibited to:
 wilfully makes or authorizes [doesn’t actually have to happen] dir or indir payment, offer, or
promise of anything of value [e.g. Jobs for relatives, Donations to charities – Prof’s e.g.] that could
reasonably be believed to be an improper inducement
o to any FPO (broad poli (incl. candidates); employees of instrumentalities
(parastatals(gov't)/crown corps/state owned enterprises); gov’t employees; employees of IOs
o w/ corrupt intent [improper motive or purpose]o For purpose of: influencing official act/decision; inducing act/omission in violation of lawful
duty; Inducing use of influence with a foreign gov’t; securing any improper adv/assist in or
retaining business

Financial records offence
o must “make and keep books, records, and accounts, in reasonable detail, accurate and fairly
reflect trxn
o system of internal controls that “provides reasonable assurances trxns executed in accordance
w/ GAAP
o subsidiary's tainted financial statements that are consolidated up can  trouble for parent
RDS
o broad:
o Not ltd to improper inducements
 SEC Rule 13b2-1: Prohibits the falsification of books and records (including
“accounts, correspondence, memoranda, tapes, discs, papers, books and other
docs)
33
No materiality requirement - “zero tolerance”
 SEC Rule 13b2-2 Amded by Sarbanes-Oxley Act 2002
 Officers and directors prohibited from fraudulent influence, coerce,
manipulate, or mislead an independent public or certified accountant in an
audit
 issuers must devise internal accounting controls sufficient to assure trxn carried
out and recorded in accordance w/ direction given
o Includes all aspects of books for entities w/ securities traded on a nat’l exchange
o Liability: Individual liability (officers, directors, employees, stockholders and agents)

Defense of duress and true extortion but must prove: threat of force at the time sufficient to induce
well-founded fear of impending death or SBI an dreasonable alt
 no defense: for choosing wrong person i.e. if they can’t actually influence or if inducement not
accepted
Enforcement by DOJ and SEC
 Major impact on share values once action taken (SH class actions), e.g. Syncor Int’l Co.: -45%.
Most cos exhibited statistically significant price reactions and 10b-5 actions if FCPA-related news
Penalties: 5 years per violation; Fines of up to $2mill or Up to twice the benefit; Disgorgement;
Debarment - loss of rights and practices; Defence costs; Personal and professional ruin
Royal Dutch Shell, a Case Study
H: Deferred Prosecution Agreement (aka settlement): huge fines ($10mill to NI, $30 million to US),
review of internal policies etc and strict compliance/ethics prgms for books and anti-corruption
procedures going forward worldwide
 compliance prgm to include: Visible corporate policy w/ standard an procedures; re. all items of
value that could be used in a bribe; Ensure Sr mngt provides strong, explicit support; Compliance
stds that apply to all internal and “where appropriate” external (agents, intermediaries, consultant,
distributors, suppliers, JV partners…); Must notify as part of duty; Individualized based on risk
assessment; Review of law firms – including those advising third parties (not hired by co)
F: SNEPCO (RDS subsidiary) pays $2mill to 3rd P freight-forwarder w/ knowledge and intent some of
it be used for bribes to FPO (customs) to speed up entry of drills into Nigeria. [estimated value of
benefit= $7mill]
 Booked under codewords (e.g. local processessing fees) and then consolidated up into Shell's
financial statement. Shell’s books therefore contaminated.
 After Qs raised SNEPCO employees prohibit reimbursement to FF w/out documentation that
proved the payment to customs [Prof thinks there is a defense here]
 Some charges refused but SNEPCO knowingly continues to authorize subks to use FFA and
authorize reimbursement; [note how far removed]  $mill in bribes
 from outset red flags: rarely if ever receive copies of official documents; actual knowledge
came out during business dispute (letter re. premium rate for expedited service)
34
INT'L FINANCIAL TRXN
Loan Facility Agreement
 a living breathing doc that defines when lender can step in if things going wrong (e.g. breach
of covenants)
 Business structuring of the trxn will determine the appropriate structuring of the debt and
determine the instruments to document the terms and relationships among the parties;
4 Features:
1. Conditions Precedent. Either upfront or throughout for iterative lending. E.g.s:
 Legal opinions confirming enforceability of the agreement or security taken
 Documentary evidence (resolutions of dirs/SHs, Certificates re. factual matters)
 Provisions of guarantees and security (can include personal guarantees/certs from dirs.
and officers that they hold title etc)
 Info re. regulatory matters e.g. money laundering; US embargoes [potential exclusion
from US banking system if a bank deals w/ co. w/ an affiliate that deals w/ one of the
countries]
2. Reps and warranties - snapshot of status quo re. legal and commercial circs of borrower
 Purpose: prevent defences by the borrower; ID other potential higher ranking claims
o E.g. Legal:
 Absence of litigation;
 Ranking of lender’s rights as a creditor (priming claims);
 In US: compliance w/ ERISA [trust-based priority for security to
employees]
 In CA: compliance w/ Bankruptcy and Insolvency Act [pension claims
have a priority even secured creditor claims]
 Borrower has necessary consents, and permits
 Trxn will not contravene rights of third parties (Has the IP licenses
and patents)
 taxes/fees paid to date
 Also: Borrower’s Due existence, status, powers and authority to contract;
Legal validity and enforceability of documentation
 E.g. commercial: No events of default; No past material adverse change in
borrower’s circs; Info to lender (including financial and accounting statements) give a
true and accurate pic and do not omit any material matters; Opinions that were
expressed to lender were on reasonable grounds;
35
3. Covenants and Undertakings – prospective; borrowers obligations to lender during
period agreement
 purpose: regulate and preserve financial position of borrower; Ensure sufficient
resources [working k] to meet obligations;
 Positive or negative: promise to act/refrain from acting in a certain way.
 often set on consolidated and indiv basis for a corporate group;
 Borrower’s counsel will want to review to ensure they do not cause issue for the
operation or structure of the business and future plans;
 remedy: If breached, lender has right not to make further advances
 Bank will often require an increase of security to allow the loan to continue
(e.g. mortgage home/personal guarantee)
Information undertakings E.g.s
o provide accounting information to borrower’s creditors and Shareholders;
o show fulfilling regulatory requirements;
o provide certificates signed by directors;
o advise in light of specified events of default
o financial covenants provide early warning signals re. change in fiscal health. [will be
specified to periods where applicable] E.g.s:
[positive undertakings]
o provide quarterly reports using GAAP - or other
 Manzer: should reflect borrower’s std accounting and reporting practice b/c
very expensive to recalculate financial info
 International Financial Reporting Standards help to unify
o Keep proper books and records of financial transactions
o ensure tax filings current and payments properly made
o claims that would be primed are paid on an regular basis (e.g. ERISA, Bankruptcy and
Insolvency Act, other employee protections in Latin America)
o Use proceeds of loan for intended purpose;
o Maintain insurance coverage;
o Continue to comply w/ domestic laws (e.g. securities)
o Continue to fulfil tax/fee obligations
o Maintain financial ratios
36






balance sheet value maintained at or >X
Gearing covenant: ties financial debt to worth
Interest cover covenant: ties interest payable to earnings
Notice of deterioration in earnings or asset value or an increase in liabilities.
Cash flow covenant: ties outgoing debt service to earnings
security cover covenant: value of secured assets > principal/interest under
facility agreement
o to carry on business in ordinary course (i.e. can't behave differently if start losing
money (e.g. sell off assets)
o If an unsecured loan, maintaining its ranking in a bankruptcy on pari passu (“equal
footing”)
[Negative pledges]
o Ring Fencing: No asset relocation – especially to jdxs where no security for lender
o prevent transfer of funds from group you're lending to affiliates in a country
you don’t want to deal w/
o Could also merely require permission to move it or that notice to be given
before moving so you can register in that jdx
o Expenditure restrictions: can only spend the loan in certain ways
o tension - Borrower wants flexibility (e.g. to move assets or spend k in certain
ways) where it best suits the overall group;
o no permitting claims in priority to lender’s position;
o Tension - unduly hampering borrower’s ability to continue business by
borrowing/interacting w/ others whose claims might be primed
o can’t dispose of assets subject to security (PPSA domestically, but no int’l equivalent)
o Restrict ability to change corporate structure
4. Enforcement provisions (make sure to have one for each of the above! Symmetry)
 Get an indemnity in favour of lender in event of a breach or for potential liabilities
 Indemnities not always that much better than normal rights of recourse but may
give rise to higher and greater rights re. nature and extent of damages that might
be recovered by the lender;
 E.g. CERCLA clean-up for contaminate sites

Events of default clause: lender may suspend or terminate agreement and demand
repayment (call) upon occurrence of an event.
37


May allow lender to step in and run the co., appoint a receiver, seize
property
 Enforceable (i.e. not a penalty) if it doesn’t require payment of interest accruing in
future
 Possible events of default:
 Non-payment of amounts due
 cross-default: default on payment by any member of borrower’s group of
cos. I.e. a material default by one of the group is considered a default by
all
 Enforcement action against borrower by other creditors
 Insolvency events
 Loss of security or a guarantee relating to an agreement
 “Any” change in business, revenues, profits, assets or other financial
condition that adversely affects ability of borrower to comply with
obligations under agreement;
 “Any”: should specify as Material adverse change (especially as
borrower’s lawyer) e.g. Prof’s x-border case w/ Cdn dstbr or US mnfr]
Acceleration clause: allows lender to call the entire loan – e.g. If payments due
month to month don’t have to wait for future breaches to require complete repayment
38
WHAT CHANGES WHEN IT CROSSES BORDER?
Monetary issues
 Currency Risk (Borrower’s risk)
o state currency in which funds will be advanced and in which they are to be repaid;
o set the basis for conversion of currency on a routine basis;
 Currency Restrictions either on repatriation of foreign currency or ability to take domestic
currency out (e.g. Indonesia)
 tax Risk (Borrower’s risk)
o covenant: tax treaty w/holding taxes paid and proved going forward
 Money Laundering
o Covenant: status debtors, use of the funds advanced, and source of repaid funds
Regulatory Issues
 Actionable security, effectuating security (e.g. registration PPSA); Statutory priming;
Conflict of laws rules
Controlling Security
 Who owns seized property and what type of ownership is it?
1. Currency Risk and Restrictions
Currency Risk
 Floating rate post IMF. e.g. Mexico's import exclusion policy modelled after US success.
Inefficient, but price of oil shoots through roof in 1970s and sustains Mexico. 1982 oil drops
sharply and Mexico now in a crisis. Had borrowed in USD and its currency depreciated so
now local currency cost of foreign debt is huge
 1997 Thailand devalues currency --> depression, IMF austerity measures severe

x-border syndicates will involve a mix of currencies
o Loan documentation must state currency in which funds will be advanced and
currency in which they are to be repaid;
o Must set the basis for conversion of currency on a routine basis;

Lenders generally do not take currency risk - require funds advanced be repaid in same
currency
o Lender can ask for currency hedge (aka swap) and may provide to borrower (fixes
future exchange of currency at predetermined rate)
o Cts only provide judgment in national currency so include clauses re. any potential
shortfall arising from judgments in currency other than that in which the advance was
made
39

Ontario Courts of Justice Act: Foreign money obligations
o 121(1) where a person obtains an order to enforce an obligation in a foreign currency,
the order shall require payment of an amount in Canadian currency sufficient to
purchase the amount of the obligation in the foreign currency at a bank in ON on the
first day on which the bank quotes a Canadian dollar rate for purchase of the foreign
currency before the day payment of the obligation is received by the creditor
Currency Restrictions
 Restrict the repatriation of foreign currency (e.g. can’t take US currency out of country);
 E.g. Indonesia restrictions on how much $ can go out of the country (against IMF and
WTO rules), but they came through the crisis strong.
 Manzer says this is the case in many jurisdictions in Latin America, Southeast Asia and
Eastern Europe.
2. Tax Issues
 Often a w/holding tax on profits being paid out of the county - It’s a cost of doing x-border biz.
 Includes interest, fees or similar payments to a financial services provider that is not
taxed in that country;
 even if flowing b/w subsidiary and parent
 risk of tax imposed on the borrower through clauses assigning “additional amount to
compensate for withholding tax” and that “filings be kept current and tax payments promptly
made”
3. Money Laundering Issues
 Get covenant re. status debtors, use of the funds advanced, and source of repaid funds;
CA Laundering Proceeds Of Crime Act 462.31 (1) offence
o uses, transfers possession of, sends or delivers, or deals with in any manner
o any property or proceeds thereof w/ intent to conceal
o knowing or believing that property/proceeds was obtained dir or indir of
 (a) the commission in CA of a designated offence; or (b) act or omission anywhere
that, if it had occurred in CA, would have constituted a designated offence.
Is there a US aspect? (borrower, guarantor, credit party or lender)
Include covenant requiring compliance w/ U.S. law re. money laundering and terrorist
funding
40
Syndicated Lending
 Purpose: enable groups of banks/lenders to fund large loans;
 Process
 Arranger financial institution commissioned by borrower
 Given a mandate and a term sheet
 Market Flex provisions permit arranger to amend basic terms (e.g. instrest rate) of trxn in
event of an adverse change in borrower’s situation
 Arranger builds the syndicate
 Each responsible for a proportion of overall facility on a pari passu basis and ltd to its
specified participation (though often have option to take over other lenders’ liabilities)
 Arranger organizes facility docs to be signed and may arrange to “sell down” if want to enable a
wider syndicate
 agent (often arranger) or security trustee manages for the banks (usually by majority, some
issues special majority or consensus)
 Prob: if default some may want to act and others won't
Derivatives Transactions
 slicing and sale of a risk (breaking white light into a prism). Trxn now multiple risks
 like how terms of a k are an assignment of risk.
 Investors buy the risk based on their risk aversion
3 Types of Derivatives:
1. Currency Swap: (most popular)
 Crossing border increases risks, e.g. Currency fluctuation makes pricing difficult
 Currency traders take this risk - portfolio theory of investment
 A agrees to pay an amount in one currency to B on stipulated dates and B agrees to pay A in a
second currency
 One party will win, the other will lose. It's a gamble as to whose info is better on the
predicted future exchange rate, but the advantage to both is predictability
2. Interest Rate Swaps:
 If you have a variable rate and you want a fixed one, you pay s'one else to take that risk
 A pays B at set intervals the value of the interest calculated at a floating rate; B pays A
the value of a fixed rate
 B is betting the floating rate does better, A is getting predictability but has to discount a
bit to get B to take the risk
3. Credit Enhancement, guarantees and Credit Support:
41

Risk here is that s'one will default. Sell the risk to s'one willing to take the bet e.g. the condo
example again that says the guarantor will step in and finish the project if not completed to x %
by y date
Securitization and Structured Finance
 Securitisation: an assignment (i.e. sale) of packaged debts by the transferor (aka originator – often
banks) rather than holding the debt and seeing it through to maturity;
 Transferor receives $ and is relieved of the risks/rewards of original ownership
 bond holders may want a credit enhancement (guarantee), which costs a % fee
 creditor's payment rights given to investors who hold the securities issued by the purchasing
vehicle [called “Asset Backed” or “Mortgage Backed”]
o E.g. Mortgage backed securities: package and sell mortgages into special purpose
vehicle by issuing bonds at x rate of return. This money pays the lender the value of
the mortgages and enables the lender to go out and lend again.
 Security trustee holds title to the underlying land for the bond holders or the person
providing credit enhancement (see below)
 Need to convince credit rating that these bonds have value. Look to: purchasers' ownership rights in
the portfolio; Likelihood of satisfactory performance in the underlying portfolio; Adequacy of
credit enhancement, credit insurance and liquidity facilities
42
SECURITY
Security Generally
Policy: Importance - Hernando de Soto and the extra-legal economy of Peru (and elsewhere).
o If way to register assets/land can’t collateralize. This limits dev’t, e.g. FN reserves in CA
Security: setting aside asset(s) to provide a security right or interest in favour of a creditor
o Secured asset are not part of the insolvent debtor’s assets
 need both for it to be good (gives notice):
 Attachment
 asset must be sufficiently identified (if bulk it can be a portion)
 Perfection:
 registration or possession according to law (provincial in CA) makes it enforceable vs others
 3rd parties assumed to have notice - due diligence requires a search
Forms of Security:
1) Possessory Pledge involves giving possession of the relevant property to the pledgee (creditor). Can
be done by giving document of title to the goods (e.g. BOL).
Actual possession or Constructive (someone else holds) possession;
2) Non-possessory: proprietary right in the asset, but until enforcement borrower is entitled to remain
in possession
 Future property ok. E.g. Dividends not yet declared; Copyright in works not yet written;
Types of security (in English Law):
1. Pledge requires delivery of possession to the creditor who may sell
2. Contractual liens: creditor that obtains possession of goods (e.g. repairs) may keep until it debt paid
3. Equitable Floating Charge: hovers above property (e.g. inventory) then crystalizes – typically on
specified default or at a point in time. Borrower (Chargor) can deal w/ assets until that point including
selling inventory items to 3Ps in the ordinary course of business
4. Mortgage: an interest in land created by a written instrument providing security. Transfer of legal or
equitable ownership (usually have to register)
priming claims: Construction liens; Municipal and utility liens; employee claims
IP Security tricky [see attached]
Bank Act Security (federal): special form of security over inventory that includes ability to sell by agency
ENSURING SECURITY – GET AN OPINION:
o Note: BOL a doc of title so avoids difficulties taking security on moveable goods;
Step 1: Is there valid collateral security for the agreement?
Step 2: After you get a legal opinion re. various issues work that into reps/warranties/covenants.
Step 3: ensure all of the above have a default mechanism and can be validly enforced
Role of lawyer in int’l trxns: Get an opinion!
o lawyer as legal manager
 know what Qs to ask and how to read
 Are the assumptions and qualifications in the opinion reasonable?
 not whether covenants are good for biz, but if they’ll provide the guarantee they’re meant to
43
 don’t give business advice but may advise whether terms are specific enough
o Limitations of Legal Opinions - not cast iron guarantees. Provide a warning system
o should guarantee “security taken on the asset in accordance with usual commercial practices in that
jdx”
o May be in good faith and on reasonable grounds but incorrect;
o Will be based on negotiations, not final doc
o Usually ltd so that no subsequent parties can rely [e.g. not transferees of a loan participation,
bondholders]
 Exception: facilities intended to be syndicated shortly after initial loan through selling-down
o Responsibilities in Giving an Opinion
 negligence applies: duty of care, reliance, foreseeability;
 Necessary to determine the law that would govern the claim vs the lawyer in a diff jdx
WHY:
o NOT qualified to practice in law of other jdxs.
o no int`l harmonization here. Difficult to achieve one b/c:
 sensitive public policy areas involved – e.g. in tax (social policy); competition/IP (industrial policy);
bankruptcy
 Some Agreements to address non-uniformity:
 UN Conv on the Assignment of Receivables in Int’l Trade (receivables financing);
 UNIDROIT Convention on International Security Interests in Mobile Equipment;
o Most advanced. Heading toward int'l registation
 UNCITRAL Legislative Guide on Secured Transactions to assist countries in implementing a
secured transactions law based on Article 9.
 OAS Model Inter-American Law on Secured Transactions; 2002
o Based on UCC and PPSA; Helps w/ predictability, which attracts biz
WHO: from in-house counsel, jdx of borrower, jdx of lender (incorporation) and jdx of assets in trxn (if
intangible need to determine the legal location)
WHAT:
Terms of the Agreement
 domestic tax law/ tax treaty for business / tax planning purposes
 Currency Restrictions either on repatriation of foreign currency or ability to take domestic currency
out (e.g. Indonesia)
 opinion re. Money Laundering risks to lender- foreign equivalent to CA Laundering Proceeds Of
Crime Act 462.31 (if funds came from crime or what would’ve been criminal if it had taken place in CA)
or if any links to US also consider terrorist funding
 diff legal principles (e.g. trust)
 conflicts of law principles (Sadler advises to get this). Will choice of law/forum be respected? Which
law will apply upon default?
 must be a connection to the jdx: e.g. domicile/jdx of formation of borrower, lender, k or
location of the assets;
 Typically security is taken(validity) and perfected (registered) pursuant to the law of jdx
where the assets are located at the time the security interest attaches
 e.g. PPSA 5 (1)
 requirements re. disclosure of credit terms?
 breach may result in unenforceability
 potential liabilities? Get indemnities
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Reps and warranties:
 legal issues re. status of the assets (pledged to others? E.g. PPSA) in that jdx
 what are the domestic substantive regulatory/licensing requirements that the trxn touches on (need to
know this to know what kind of representations to get)
 the borrower/guarantor’s rights in that jdx (to guarantee the asset)
 Creditor’s rights re. k’s b/w borrower and other parties?
Financial Covenants
 diffs b/w accounting principles and basic definitions in diff jdx
 Priority claims (priming of tax, environmental, employment, etc)
 Can you invoke “super priority” status?
 Can others? If so, should you lend through them? (e.g. domestic banks) (but fees)
Enforceability
 Is the security valid in that jdx? avoid lender holding security that’s not actionable
o Is security on that asset limited to certain types of liabilities or creditors?
o If so consider making the loan through the intermediary
o Restrictions on certain forms of security
 E.g. Uruguay no security on moveable property (like cattle)
 E.g. Uruguay no floating security
o Restrictions on taking security from members of a corporate group (including LOC, back-to-back
arrangements, etc)
 E.g. US: financial assistance restrictions on subsidiaries [Can't provide a guarantee w/out getting
s'thing for it]
 E.g. GE: giving of financial assistance for another entity by a co. is severely constrained by
assets, liabilities, prior claims and general financial health;
 acceleration in that regime?
 What is the effect of an insolvency of the debtor?
 Potential effect of the bankrupty regime;
 statutory rights to cure: e.g. equity of redemption: borrower has a right to redeem its security upon
payment or discharge of liabilities covered by the security (ltd time)
 Public policy matters. E.g. employee rights, enviro protection, securities law and disclosures;
 Statutory rights of the debtor – ID those that can and can’t be waived or amended by k;
 How to attach/perfect security? Has security already been taken? (e.g. PPSA)
 Is there a local regime to register in order to perfect security? E.g. UCC, PPSA
 Is it specifically ID’ed to ensure attachment?
 aircraft, trains, motor vehicles (trucks, ships etc. assets)? Look for specialized registries
 accounts receivable?
o In CA, can take a general charge and perfect w/out notifying the 3rd party accounts
o civil law jdxs usually require taken on assignment (complete transfer) and notice given (some
exceptions if you go through bank to collect)
o Notice obligations? E.g. Ability of creditor to shut down the business
o Controlling Security: If there is a default and lender seizes inventory what can they do w/ the property?
o who owns seized assets?
o UCC limits ability of licensors to refuse to recognize security and assignment of transfer of licenses
for imbedded software in secured assets
o Do you have security interest in proceeds of collateral?
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HOW: General Form of the Opinion
Preliminary matters:
 Describe agreement and matters to which it relates;
 limit opinion to this trxn (even where other trxns impacted by this one)
 do not comment on the adequacy of documentation from a commercial or negotiations
perspective
 the law (at x date) and legal jdx addressed; {limit to ON if licenced in ON}
 that qualified to advise in that jdx
Assumptions
 trxn cannot be challenged on underlying grounds (e.g. inadequate consideration, duress, mistake)
 accuracy of matters of fact or law, including foreign law, on which unable to verify [e.g. that other
parties to the agreement/security docs have capacity and are acting legally]
 e.g. Board meetings duly convened; Resolutions duly passed; persons reported as being at
the meetings and executing documentation were duly appointed and not fictitious;
 Docs submitted are genuine and copies are accurate
Qualifications
 Ltd to parametres stated in the doc – cannot be extended by implication
 Solely for benefit of immediate requesting party - exclude reliance by any other person
 Based on current law, no obligation to notify of any changes.
 In relation to a choice of law clause in a k may not apply to govern matters capable of being seen as
of a non-contractual nature including
 E.g.: Status of the co. and it powers and objects; Issuance and transference of shares;
Relationship b/w co and its SHs/ directors/officers; Tort or property issues
 Interpretation of a k will follow rules of Cts
 Binding nature of a party’s obligations does not mean that mandatory orders (e.g. performance
obligation) will be granted by a Ct (normal remedy for breach of a k is damages)
 A k may be terminated by frustration, although a restitutionary remedy may be available;
 A claim may be subject to set-off, abatement of counterclaim;
 may excuse performance of a k obligation if unlawful in the place where the k requires it to
be performed or is otherwise a violation of public policy considerations
 Effectiveness of clauses limiting liability/ remedies or excusing non- performance may be subject to
review;
 Ct may refuse to adjudicate on title to an asset situated abroad
 a party may be found by its conduct to have waived its rights
 enforcement of rights subject to SOL
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LICENSING
(NON-ESTABLISHMENT FORMS OF INVESTMENT)
Licensing principles extend to other trxns like Distributorship, Contract manufacturing, fanchising
o not establishing a business entity overseas
Deeper cross-border relationships/investment than simple sale of goods
 Once the toothpaste out of the tube how to put it back in!
Ltd law here, but some Conventions (canaries in the coal mine)
1. Distributorship
o solicits orders but does not take title [doesn’t own the product or represent the seller]
 UNIDROIT Convention on Agency in ISG (not in force) (see attached) tries to bridge gap
re. principal-agent liability
o tension: mnfr wants to be able to pull the plug at will – distributor wants to protect their
investment in building the biz in that market
 risk: distributor establishes own reputation and sells a substitute
2. Franchising
o Master franchise agreement for country or region gives ability grant other franchises w/in the
region
o Direct franchise where license each individual franchise;
o Some national laws governing franchise agreements e.g. re. misrepresentation in prospectus and
providing franchisee a period to cancel without penalty;
o UNIDROIT Model Law on Franchising (see attached)– tries to level the playing field by
providing informational requirements for franchisors to give franchisees in negotiations
3. IP Licensing
 TRIPS (see attached)
 Licensor goal: Maintain quality/ensure exploitation/not create a competitor;
 Licensee goal: Ensure that once they build market, can reap rewards without fear of losing rights to
technology;
note: I’ve written this for licensor/see, but could be franchisor/see or distributor/tee
both sides will consider:
 Are the rights exclusive in that region?
 if yes higher performance obligations on licensee
 Territorial restriction?
 Field of use restriction? [Only certain types of buyers]
 Financial arrangement. Get an accountant for details but consider:
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Typical payment for rights a % fee based on sales volume plus an annual non-volume
related fee [also common: upfront lump and ownership interest]
o Royalties: How are they calculated? What reports are to be produced?
 Currency; Place of Payment;
 Net vs. gross sales; prob of diff accounting methods (cash vs accrual) and what is an
appropriate deduction Prof’s H2O purification client
 Withholding taxes owed?
How is the License terminated?
 Upon default - Failure to meet performance requirements; an audit that finds a breach
 expiration of a term (time)
Right of Action. Licensor may want to control any infringement litigation in licensee’s territory
b/c deeper pockets/interest
 Licensor covenant for prompt notification and right to conduct the defence/settle at its own
expense
 Licensee should ensure any right to settle w/out its consent subject to settlement not
interfering w/ its rights and remedy upon default
How are disputes resolved?
 What law applies? Probably law of the licensor b/c: unsure re. local courts practices;
potential for abuse, and corruption; uncertainty re. law
 likely to be arbitration NYC Convention means an award will be enforced in any of the
Parties
Of particular concern to Licensor:
 [may want to take security if providing equipment, raw materials]
 Risk of loss of proprietary control or that a competitor will be created
 TRIPs = baseline protection for copyright, trademark, patents and trade secrets [see
attached]
 Business model, trade secrets, strategic plans not covered
 Employees will gain knowledge, experience and skills during regular course of
employment, which is not entitled to trade secret protection (might include particular
process, methods or materials)
 Confidentiality. Non-disclosure agreements
 What information should be/not be received?
 How long must the information be kept secret? Usually indefinite
 What limitations?
o Only disclose to responsible employees who have been properly instructed
o Not to disclose the terms and conditions of the licensee agreement;
o Not to disclose methods of manufacture or sale
o safeguard all docs against theft, damage, or access by unauthorized persons;
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 Licensee should seek exceptions:
o If required to obtain patent or register per law of that jdx (e.g. pharma)
 BUT Licensor should register local IP rights so control the process
o for purpose of promoting the sale or use of products by the licensee (provided
it then obtains a covenant of non-disclosure)
o
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pre-contractual agreements. Licensee must evaluate the technology before taking
on the k. Try to Limit the amount of disclosure required b/c:
Receiving confidential info can be dangerous for licensee. Even if no confidentiality
agreement - oath of confidence at common law Lac Minerals v. International Corona
(Canada, 1989) (property ordered forfeited after JV fails but one negotiating party
learned of the mine site and bought neighbouring land)
Letter of Understanding/intent to clarify obligations to an agreement/initial
discussion
o Not binding except for confidentiality or exclusivity obligations;
o No fiduciary obligations exist but maybe an obligation to negotiate in good faith
o time-limit to ensure negotiations do not drag, can always be extended by mutual
agreement;
o Dispute settlement mechanism;
Penzoil v. Texaco,
F: Pennzoil made an offer for stock in Getty Oil. Getty controlling SH suggests
Penzoil acquire a minority interest instead. Parties sign MOU based on a merger
agreement. Getty began secret discussions with Texaco who then buy co. Pennzoil
sues Texaco (now owners of the co.) into bankruptcy.
non-competition agreements. Usually 1 yr
 licensor often has very ltd ability to create these
Manufacturing vs. Sales Agreement
 If manufacturing, may be difficulty in shutting operation down if terminate deal;
Whether to allow Sub-Licenses?
 Usually restricts licensee’s ability to appoint another manufacturer
How to maintain quality? Covenant for it
 Limitations on Advertising & promotion where licensor specified doesn’t want such
association
 If not consider: prominent display TM on every product produced; additional mark
indicating the products manufactured by the licensee;
 Pre-approval of the label artwork
How to limit sales to markets licensed?
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avoid Parallel Imports/grey market sales into other markets (can upset the brand)
 Not the same as counterfeiting: goods produced w/out any license at all
ensure commitment to your good through sound business methods (quality/accounting)
 covenant for “best efforts” obligation to exploit the licensed rights;
Covenant for compliance with local laws:
prevent blocking patents from being filed (e.g. if you have end-product but not part of the
process protected.
 grant-back provisions or feedback licenses
How to enforce rights?
 IP and Ct system weak in many developing countries may even restrict licensor
 Laws of the licensee’s territory may vest IP rights in the licensee
o k clause re. forfeiture of these right - may not be enforceable
 E.g.China, Licensor must guarantee license is ‘complete, faultless and effective, and
able to achieve targets set in agreement”
 US and EU Community antitrust laws
Of most concern to Licensee
 Protect its investment in:
 establish the brand, get the product accepted in the marketplace; alter/improve it (licensor
might have grant-back/ feedback licenses provisions  incentive not to register it until
expiry)
 don’t want non-exclusive license b/c then licensor can just bring it in through s’one else
 minimum performance stds – e.g. Must meet quotas in order to keep rights under license;
 Can be set in a manner likely to result in failure;
 Licensor will often have more knowledge. May want licensee to fail so can have
option to take a better deal
 e.g. prof’s water purifying client and accounting audit on diff terms  revoked.
Where dealing w/ small #s a % amt of variation can be deadly
 Reports and accounts. Margin of error, if exceed, may be grounds to Terminate license
 keep documents for inspection- permit audit (e.g. for royalty payments)
 choice of law/forum may be at a disadvantage in licensor’s jdx
 Ensure licensor has right to license technology free from dispute

If getting trade secrets ensure:
 Licensor has taken all necessary steps to maintain confidentiality;
 Trade secrets are not in the public domain;
 Licensor has not been threatened with or sue for misuse of confidential information;
 Licensor’s obligation to provide technical assistance; [tech transfer]
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