The Articles of Agreement (Articles) of the International Monetary Fund (IMF) and the practices of the IMF under that treaty are the principal sources of public international law on the exchange rates of the currencies of member states (members) of the IMF. By the end of September 1990, there were 154 members, among which a great variety of political and economic systems were represented. The most notable nonmembers were the Union of Soviet Socialist Republics and Switzerland, but the latter country and a number of other countries have applied for membership.
The fluctuation of exchange rates has given rise to problems of allocating the advantage or disadvantage resulting from changes in exchange rates. In one situation, the problem is bilateral, arising between the parties to a transaction or series of transactions. In the case of disagreement between them on the appropriate exchange rate for settlement when there are two or more possible rates, the advantage that one party enjoys because of the rate that is chosen is matched by the correlative disadvantage suffered by the other party. This kind of problem arises in many forms between the parties to a contract. Sometimes, the judicial solution of a problem may depend on interpretation of the contract.1 In other cases, the outcome may depend on the interpretation of an international convention,2 or the way in which a particular legal concept, such as restitutio in integrum, is applied.3 In some cases, courts have relied on the proposition that a party should have taken steps to protect itself against exchange risk in accordance with the normal practice of the trade in which the transaction or transactions occur.4 It may even be possible to imply a term that a party is to behave in this way.
Fluctuations in exchange rates can have disturbing and even catastrophic effects on contracts, particularly if performance is necessary over a long period or at a time far ahead. As a consequence, what are known as hardship clauses have become common.1 A hardship clause can be described as a term of a contract under which the contract can be reviewed if a change in circumstances occurs that fundamentally modifies the initial balance between the obligations of the parties, so that performance, though not impossible, becomes unusually onerous for one party.
In the twentieth century, sterling and the U.S. dollar have functioned successively as hegemonic currencies. The deutsche mark performs something like this role within the EMS, and in relation to some other countries as well even though they are not participants in the EMS. Switzerland and Austria, for example, take cognizance of the leadership of the deutsche mark in fashioning their own policies.
The effects of the Miliangos doctrine have been felt in English law far beyond claims for debt or damages for breach of contract. Numerous areas of the law have been affected, and it is possible that the process has not come to an end. The process should not come to an end, because it brings about a modernization of the law in the era of fluctuating exchange rates. The consequences of the process so far in some areas of the law are examined in this chapter.
Decisions of the English House of Lords are not binding on the courts of other jurisdictions in the Commonwealth but are often considered to have persuasive influence, unless, of course, local statutory law precludes such treatment.
The traditional position in the United States has been that judgments by courts in that country can be pronounced in U.S. dollars only, whether a foreign currency claim was deemed to be domestic because the claim was payable or arose in some other way in the United States or was foreign because the claim was payable or arose in some other way in a foreign country. If the claim was domestic, the federal courts originally applied the exchange rate prevailing at the date of breach or injury in translating the foreign currency into dollars. The principle relied on for this choice was that the plaintiff should be put into the position he would have been in if payment had been made at the due date or if he had been compensated immediately for tortious injury (or put into the position he would have been in if the tort had not been committed). If the claim was foreign as described above, it was regarded as arising under foreign law. A dollar claim in respect of a foreign claim was asserted for the first time when an action was filed in the United States and was sustained when judgment was given for the plaintiff. Therefore, the appropriate exchange rate was the rate prevailing at the date of judgment. Most State courts in the United States have tended to avoid these niceties and have favored a breach date exchange rate without regard to these distinctions.1 Since Erie Railroad Co. v. Tompkins,2 federal courts have usually followed State jurisprudence in these matters.
The complexities of claims in a foreign currency and judgments based on such claims suggest the question whether judgments can be expressed in the SDR or the ECU when one of these units of account is the contractual unit of account and the means of payment for discharging the obligation giving rise to the claim. If judgments can be expressed in this way and are discharged in instruments or deposits denominated in one of these units as the contractual unit of account and payment, the problem of choosing the appropriate date of an exchange rate disappears. The judgment would be satisfied by the defendant’s transfer of instruments or deposits denominated in the SDR or the ECU, as the case might be, in an amount equivalent to the amount of the judgment. If, however, a plaintiff sought enforcement in currency of a judgment expressed in the SDR or the ECU, or the defendant sought to discharge the judgment debt in currency, the problem of the exchange rate would have to be faced, provided that the plaintiff was entitled to this form of enforcement or the defendant was entitled to discharge his obligation in this way. A plaintiff might see some advantage in obtaining a judgment expressed in the ECU if he were entitled to obtain settlement in the currency of any member state of the Community. The problem of exchange rate might be less contentious, however, in view of the relative stability in the exchange value of the unit of account.
Present international monetary arrangements permit the fluctuation of exchange rates and movements that are sometimes wide and erratic. Exchange rate behavior is extremely difficult to predict. Problems are created for the parties whose activities are affected. These parties can be official or nonofficial. Both international and national law have had to respond in order to mitigate the difficulties and hardships created by fluctuating exchange rates. Modifications of earlier law and innovations of considerable importance have taken place, and the process continues.
For the purpose of this monograph, the fluctuation of exchange rates means all the movements in exchange rates that are possible under the exchange arrangements in force in the discretionary system. A characteristic of such a system is that it makes predictability of exchange rate behavior extremely difficult. This difficulty generates problems for parties engaged in international payments. They have to be aware that wide and erratic variations can take place in the exchange rates that affect their costs, revenues, and profit margins.