I

At the end of World War II, when the Fund was established, most, if not all, countries maintained some form of exchange controls. Those controls were regarded as harmful to the growth of international trade and services. Therefore, one of the purposes of the Fund, set forth in Article I of its Articles of Agreement, is “(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.” In this respect, a fundamental distinction is made, in the Fund’s Articles, between controls on capital transfers and restrictions on the making of payments and transfers for current international transactions. The relevant provisions are Article VI, Section 3 and Article VIII, Section 2(a).

Article VI, Section 3 provides:

Section 3. Controls of capital transfers

Members may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments, except as provided in Article VII, Section 3(b) and in Article XIV, Section 2. Article VIII, Section 2(a) reads as follows:

Section 2. Avoidance of restrictions on current payments

(a) Subject to the provisions of Article VII, Section 3(b) and Article XIV, Section 2, no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions.

The language of Article VIII, Section 2(a) is very explicit. It establishes a principle and some exceptions. The principle is that a member of the Fund is not allowed to impose restrictions on the making of payments and transfers for current international transactions. The concept of payments for current transactions is defined rather broadly in Article XXX(d), and the Fund has the power to determine whether specific transactions are or are not current for purposes of the Articles.

Article XXX(d) provides that

Payments for current transactions means payments which are not for the purpose of transferring capital, and includes, without limitation:

• (1) all payments due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities;

• (2) payments due as interest on loans and as net income from other investments;

• (3) payments of moderate amount for amortization of loans or for depreciation of direct investments; and

• (4) moderate remittances for family living expenses.

The Fund may, after consultation with the members concerned, determine whether certain specific transactions are to be considered current transactions or capital transactions.

Given the principle in Article VIII, Section 2(a), the imposition of restrictions on the making of payments or transfers for current international transactions (referred to as “exchange restrictions”) is normally a breach of obligation under the Articles, and may give rise to sanctions under Article XXVI, Section 2, as would any other breach of obligation under the Articles.

However, there are exceptions to this principle. In some cases members are authorized, by the Articles themselves, to restrict current international payments. The most important provision in this respect is Article XIV, Section 2,¹ which authorizes a member to notify the Fund of its intention to “maintain and adapt to changing circumstances the restrictions on payments and transfers for current international transactions that were in effect on the date on which it became a member.” On the basis of this provision, a distinction is made between the maintenance or adaptation of existing restrictions, and the imposition of new restrictions. The latter is subject to the prohibition in Article VIII, Section 2(a). Moreover, a member may renounce the benefit of Article XIV by expressly accepting the obligations of Article VIII. In that case, existing restrictions must be terminated.

The other, and even more important, exception to the prohibition of exchange restrictions in Article VIII, Section 2(a) is the power of the Fund to approve a restriction. Once approved, an exchange restriction is not a breach of obligation, at least for as long as the approval remains in effect. The Fund’s normal practice is to approve restrictions for a specified period. When the period ends, the approval lapses, unless it is renewed by the Fund. The Fund’s approval is normally explicit and takes the form of a decision adopted by the Executive Board. However, in the case of restrictions imposed for security reasons, a different procedure has been established: the member imposing the restriction must notify the Fund, and unless the Fund objects within 30 days, the restriction is deemed approved by the Fund. Under this special procedure, there is no fixed period of approval. However, the Fund may, at any time, terminate the approval.

In summary, not all exchange restrictions are a breach of obligation under the Fund’s Articles. If a member maintains or adapts a restriction under the transitional arrangements of Article XIV, or if the restriction is approved by the Fund under Article VIII, Section 2(a), there is no breach of obligation by the member.

It should also be noted that certain exchange control measures do not fall under the prohibition of Article VIII, Section 2(a): controls on capital transfers, on the one hand, as indicated above, and, on the other hand, measures that affect current payments without restricting the making of the payments. Examples of such measures, which are not prohibited by the Articles, are the verification that a payment is a genuine payment for a current international transaction (for instance, where an importer must show that there will be an actual shipment of goods from abroad), and a surrender requirement imposed on holders of foreign exchange (for instance, where an exporter must sell his foreign exchange earnings, within a given period of time, to the central bank of his country of residence).

There are many cases, therefore, where an exchange control measure is not prohibited by the Fund’s Articles. Those measures are intended to have an effect on private parties. Under the laws of the enacting state, those measures will be given effect. For instance, criminal sanctions will be imposed or contracts will be annulled or otherwise denied legal effects. The courts of the countries imposing those exchange controls will apply their own laws, including the sanctions they prescribe, when those laws are applicable, but a more difficult question is whether, and to what extent, the courts of other countries will recognize and enforce those foreign laws, at least in their civil sanctions, leaving aside the criminal sanctions, which are normally not enforced by foreign courts. For example, will a domestic court annul or refuse to enforce a contract on the grounds that it is contrary to the exchange control laws of another country?

In order to find the answer to this question, one must turn both to the general rules of conflict of laws of the forum and to existing international treaties, it being understood that the general rules do not apply when a particular treaty governs the matter.

II

Starting with the general rules of conflict of laws, it is obvious that there is no uniform answer to the question of the recognition of exchange controls of foreign countries by domestic courts.

A number of systems are conceivable, with two extremes and a few intermediate approaches.

One extreme system is to deny any effect to any foreign law imposing exchange control measures, on the grounds that they are “public laws” or contrary to the public policy (ordre public) of the forum. Examples of this approach can be found in decisions of different national courts. It seems to be the position of courts in Switzerland and the Federal Republic of Germany.

Another extreme system, which seems to be rather theoretical, would be to recognize any foreign law whenever it declares itself applicable to the case at hand. There does not seem to be much support for this type of unlimited universal effect of foreign laws.

In between the two extremes, there is ample room for intermediate approaches. Various distinctions may be envisaged in the recognition of foreign exchange controls. Those distinctions can be used separately or cumulatively. Without even attempting to be exhaustive, at least three distinctions may be made.

The first distinction that comes to mind, at least to a lawyer’s mind, is the distinction between the law governing the making or performance of the contract and other laws. If, for instance, the exchange control provisions are part of the lex contractus or of the lex loci solutionis, they should be given effect; if they are not, they will not be given effect. Examples of this approach can be found in France, the United States, the United Kingdom, the Netherlands, etc. In those countries, the so-called public law nature of exchange control laws does not preclude their application between private parties. There is always the possibility, however, that a particularly offensive foreign law be declared inapplicable because it is repugnant to the public policy (ordre public) of the forum, but this would be only in exceptional cases.

A second distinction is between the laws the judge must apply because they govern the contract, and the laws he may take into consideration because of their mandatory nature (lois de police) and in view of all the circumstances of the case. It is the system of the famous Article 7 of the 1980 Rome Convention on the law governing contractual obligations. Not all countries, however, favor this discretionary recognition of foreign laws by the forum. We understand that the Federal Republic of Germany, when ratifying the Convention, did not incorporate this Article 7.

A third distinction is between foreign laws that are consistent with international treaties and foreign laws that are inconsistent with such treaties. It is found in many countries, including the United States (under the act of state doctrine). It is not always effectively applied, however, because lawyers and judges are not fully familiar with international treaties. For instance, when, in a civil case, a party argues that a contract is contrary to the exchange control law of a member of the Fund (other than the country of the forum), the question of consistency of the foreign law with the Fund’s Articles could be raised by the other party. The Fund would be prepared to answer such a question, but it is often not asked by the parties or the court, and the case is decided as if the issue of consistency of the foreign law with the Fund’s Articles had not even arisen. The question of consistency with international treaties is not limited to the Fund’s Articles. It arises also in the context of bilateral treaties or regional treaties, such as the Treaty of the European Economic Community, which, however, incorporates a special procedure for the determination of consistency of a member’s law with the Treaty (Article 177).

Recourse to conflict of laws principles for the recognition of exchange control laws of other countries can be illustrated with many cases from different countries. Perhaps one of the most recent and interesting cases is the decision of the Queen’s Bench Division (per Staughton, J.) in the case of the Libyan Foreign Arab Bank v. Bankers Trust Company² (2 September 1987). The Libyan bank had opened an account with the London branch of Bankers Trust (a U.S. corporation whose head office is in New York). After the U.S. President’s Executive Order of January 8, 1986 freezing official Libyan assets, the London branch of Bankers Trust refused to comply with withdrawal instructions given by the Libyan bank. As a defense, Bankers Trust invoked the Executive Order, which applied to overseas branches of U.S. banks. Moreover, the account, which was denominated in U.S. dollars, was managed through transactions in New York. The British court held, however, that payment was due to the Libyan bank, on the grounds that English law was applicable to the account maintained with the London branch. Even if payment could not be made through the U.S. clearing system because of U.S. legislation, other means of payment could be found, according to the decision, in order to discharge Bankers Trust’s debt to the Libyan bank, such as payment in cash (dollars or sterling) or clearing outside the United States.

Leaving aside the rather complex discussion of the factual relations between the parties, the most interesting aspect of the decision is its strict reliance on the conflict rules of the lex fori—that is, English law. The principle was enunciated as follows:

Performance of a contract is excused if (i) it has become illegal by the proper law of the contract, or (ii) it necessarily involves doing an act which is unlawful by the law of the place where the act has to be done.

The judge found that English law was the law of the contract, because “[a]s a general rule the contract between a branch and its customer is governed by the law of the place where the account is kept, in the absence of agreement to the contrary.” As for the performance of illegal acts, the judge found that there was no provision under U.S. law prohibiting Bankers Trust from shipping dollars to its London branch where payment would be made, under English law, to the depositor and that U.S. law could not govern the discharge of Bankers Trust’s debt to the Libyan bank outside of the United States.

According to the decision, therefore, two laws are relevant to such cases: the lex contractus and the lex loci solutionis. It may be noted that, in accordance with English conflict rules, the court was prepared to recognize the effect of laws enacted after the making of the contract if they purported to apply to existing contracts. In other words, there is no vested right of the parties to the non-application of subsequent laws. This rule is particularly important in the field of exchange controls, where new laws often apply to the future performance of existing contracts, thus frustrating the expectations of the parties for reasons of public interest.

The conflict of laws approach exemplified by the Bankers Trust case rests essentially on the premise that the role of a judge is to arbitrate disputes between private parties. There is a striking difference, in this respect, with the system in which the forum refuses to enforce foreign public laws, because in so doing the judge would become an agent of a foreign government. The distinction is attenuated, however, in the conflict of laws approach by the refusal to enforce foreign.laws contrary to the public policy (ordre public) of the forum.

In some legal systems, the importance of the public policy of the forum becomes so important as to obfuscate the application of conflict rules. This trend is particularly clear in the United States, where the solution of conflict of laws problems is often based on a balancing of the respective interests of the foreign state and the forum, on a case-by-case approach, rather than on abstract conflict rules of general application.

For instance, in Zeevi v. Grindlays Bank (Uganda) Ltd.,³ (June 16, 1975), the Court of Appeals of New York denied any effect to an exchange control law of Uganda, on the grounds in particular that

New York has an overriding and paramount interest in the outcome of this litigation. It is a financial capital of the world.... In order to maintain its preeminent financial position, it is important that the justified expectations of the parties to the contract be protected. Since New York has the greatest interest and is most intimately concerned with the outcome of this litigation, its laws should be accorded paramount control over the legal issues presented.

When determining the public policy of the forum, a U.S. court will pay particular attention to the acts of the executive and legislative branches of the federal government. It may even be willing to reverse a prior decision if it is demonstrated to its satisfaction that its own assessment of U.S. public policy is incorrect. For example, in Allied Bank International v. Banco Crédito Agricola de Cártago et al.,⁴ the U.S. Court of Appeals for the Second Circuit had, in a first decision, dismissed the creditor bank’s claims against Costa Rican debtors on the grounds that the Costa Rican exchange control laws were consistent with the law and policy of the United States; even if those laws affected claims within the United States—which excluded the application of the act of state doctrine—they had to be given effect for reasons of international comity (decision of April 23, 1984). Then the plaintiff (Allied Bank) filed for a rehearing of the case, and the U.S. Department of Justice submitted a brief as amicus curiae, arguing that the first decision was “based on a misunderstanding of the policy of the United States.” On rehearing, the Court reversed its earlier decision and gave judgment for the plaintiff (March 18, 1985).

Obviously, the solutions to the conflict of laws problems raised by exchange controls are far from uniform. This lack of uniformity may be unsatisfactory, but it is the usual consequence of the principle that conflicts of laws are resolved in accordance with the conflict rules of the lex fori. What is more surprising and less acceptable is that even where a treaty attempts to unify solutions with respect to the recognition of exchange controls, different interpretations of the treaty may result in a non-uniform application of the same provision. This is, however, the present unfortunate state of affairs with respect to the provision of the Fund’s Articles of Agreement that deals with the recognition of exchange control laws of members by the courts of other members.

III

At the Bretton Woods Conference of 1944, when the Fund’s Articles of Agreement were adopted, it was recognized that exchange controls could, within certain limits and in certain circumstances, contribute to the temporary solution of a member’s balance of payments problem. Restrictions on capital transfers were left to the sovereign decisions of members. Even restrictions on current payments could, it was believed, be a lesser evil than a protracted balance of payments disequilibrium. Moreover, recourse to those restrictions could limit the use of the Fund’s resources by members confronted with balance of payments problems. The Fund is a cooperative institution designed to help its members, but its resources are made up of taxpayers’ money and are not unlimited: hence the desire to find other—even distasteful—remedies to limit the amount of financial assistance from the Fund.

The problem of the recognition of exchange control laws was considered in that context at Bretton Woods. Various proposals were made, some relating to capital transfers, others to the maintenance of exchange rates within official margins. Eventually a compromise provision was adopted and was inserted in the Fund’s Articles of Agreement—almost paradoxically—immediately after the provision prohibiting restrictions on current payments.

This provision, which has given rise to an abundant legal literature but remains the subject of endless controversies, is Article VIII, Section 2(b):

Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member. In addition, members may, by mutual accord, cooperate in measures for the purpose of making the exchange control regulations of either member more effective, provided that such measures and regulations are consis-tent with this Agreement.

Only the first sentence is relevant to the present discussion. Read literally, it imposes an obligation on members: they must take the necessary steps, under their respective domestic laws, to give effect to the obligation prescribed in Article VIII, Section 2(b). For example, in countries where an international treaty has no direct effect in domestic law and is not binding on a judge, appropriate legislation must be passed to ensure the effective application of the provision by the courts. This is usually done, if necessary, when a country joins the Fund as a new member, and the obligation is set out as part of the membership legislation.

Article VIII, Section 2(b), by its own terms, is not a conflict rule. It does not designate a particular law as being applicable by the court. It does not designate the law governing the contract. All it does is require the court not to enforce a contract when the conditions prescribed by the provision are met. It is a substantive rule of private international law, with its own scope and sanction.

As early as 1949, the Fund realized that insufficient attention had been paid to this important new provision of international law, perhaps because it was rather unexpected for the charter of an international organization to contain a rule of private international law, perhaps also because the meaning of the provision was rather unclear. For instance, the concept of “unenforceability,” which is familiar to common law systems, has no precise equivalent in civil law systems, although it is not entirely unknown (“natural obligation,” gambling contracts, “prescription” of a right). Unenforceability is not a synonym for nullity: a valid contract may be unenforceable, in the sense that no judicial or other remedy will be available for its nonperformance.

To clarify the meaning of Article VIII, Section 2(b), the Fund adopted an interpretative decision on June 10, 1949.⁵ The decision was adopted under a provision (Article XVIII, now Article XXIX) which confers upon the Fund the power to interpret its own Articles; those interpretations, which are decisions of the Fund, are binding on all members. The decision explained the scope and meaning of the unenforceability of contracts in Article VIII, Section 2(b): when the conditions specified in the provision are met, a court may not order the performance of the contract or award damages for its nonperformance. The decision also stated that Article VIII, Section 2(b) applied regardless of the law governing the contract or its performance, and that the recognition of a member’s exchange control regulations could not be denied on the ground that they were contrary to the public policy (ordre public) of the forum, if they were consistent with the Fund’s Articles.

The decision ended with the following two sentences:

The Fund will be pleased to lend its assistance in connection with any problem which may arise in relation to the foregoing interpretation or any other aspect of Article VIII, Section 2(b). In addition, the Fund is prepared to advise whether particular exchange control regulations are maintained or imposed consistently with the Fund Agreement.

The first sentence means that the Fund was prepared to provide further clarification, upon request, of the meaning of Article VIII, Section 2(b). It has not been implemented, however, because no such request has been made.

The second sentence is an invitation to inquire about the consistency of exchange control regulations with the Articles. Over the years, many inquiries have been received in connection with cases pending before the courts of member countries. They have always been answered by the Fund.

The 1949 interpretation has left unanswered a number of questions of interpretation. With the benefit of hindsight, although one may deplore the incompleteness of the decision, it must be concluded that it was probably wise not to try to answer those questions at an early stage. Law develops in mysterious ways, and the price to be paid for its growth is uncertainty and confusion, at least for a while. At a certain point, however, confusion must come to an end, lest the concept of law itself disappear.

There is already so much literature on the meaning of Article VIII, Section 2(b) that attempting even to summarize it would be futile. Only a few salient points can be mentioned.

Probably the most controversial issue is the meaning of “exchange contracts.” According to many commentators, an exchange contract can only be a contract for the exchange of currencies. This so-called literal interpretation has been adopted by the courts of the United Kingdom and the majority of U.S. courts. Yet everybody recognizes that in “exchange control regulations,” the term exchange has a much broader meaning. Similarly, the expression “foreign exchange” does not mean an exchange of currencies abroad, but rather foreign currency. The term “exchange,” therefore, has several meanings, only one of which is an exchange of currencies. Another meaning is currency in an international context. On that basis, other commentators have proposed a broader interpretation of the concept of exchange contracts which would include all contracts involving international payments or transfers and domestic contracts payable in foreign exchange: sales, loans, deposits, etc. It has even been suggested that an exchange contract is a contract affecting the foreign exchange resources of a country, including a baiter of goods or services, even if no monetary obligation was created by the contract. This very broad—probably too broad—interpretation has been adopted by courts in France and the Federal Republic of Germany. The result of those different interpretations is that whereas Article VIII, Section 2(b) is of practically no effect in British and U.S. courts (for instance, its application was not even considered in the recent Bankers Trust case discussed above), the same provision is often applied in other countries, particularly in Germany. The contrast is particularly striking as the principle in German law, outside the scope of Article VIII, Section 2(b), seems to remain the nonrecognition of foreign exchange control laws.

A second issue is the meaning of “involving the currency” of a member. Those who believe that an exchange contract is an exchange of currencies conclude that the currencies involved are those that are the subject matter of the exchange. There is a slight problem, however, in that the provision speaks of the currency involved in the singular, while an exchange of currencies necessarily involves two currencies. Those who support a broader interpretation of exchange contract usually agree that the term currency does not only designate the currency of payment, because a payment in foreign currency has an even more immediate effect on a member’s exchange resources than a payment in domestic currency. Those commentators, and the courts that endorse their opinion, conclude that a member’s currency is involved when the member’s exchange resources are affected by the contract. Then the question becomes: When are a member’s exchange resources affected by a contract? Different tests have been proposed: payment from assets within a member’s territory, payment by or to a resident of the member, and transaction affecting the member’s balance of payments. The balance of payments test itself is not always clear, because it may refer either to an accounting system, which is neither uniform nor immutable, or to the underlying transactions, which may or may not be captured by the accounting system. In other words, the purposes of the balance of payments statistics are not necessarily the same as those of exchange control regulations: some operations may be recorded purely for purposes of information or may be left out simply because their recording would be too cumbersome. This does not mean that the former would affect a member’s exchange resources, or that the latter would not.

A third question is the meaning of “exchange control regulations.” Does this concept include only the restrictions on current payments referred to in Article VIII, Section 2(a), which are subject to approval by the Fund? Does it also include restrictions maintained under Article XIV on current payments, exchange measures that are not restrictions, and even restrictions on capital transfers maintained under Article VI, Section 3? The use of different terms in two successive provisions (Article VIII, Section 2(a) and (b)) implies that the concepts are not identical, and “regulations” is a broader concept than “restrictions.” Moreover, the terms “maintained or imposed consistently with” the Articles in Section 2(b) confirm that not only restrictions “imposed” under Section 2(a) come within the scope of the provision. Some commentators have argued that measures imposed for reasons other than the protection of a member’s exchange resources, such as freezing orders of enemy property, are not exchange control regulations within the meaning of Article VIII, Section 2(b). There is no doubt, however, that these exchange restrictions are within the jurisdiction of the Fund and subject to approval under Article VIII, Section 2(a).

A fourth question is whether a court should recognize the exchange control regulations that were in force when the contract was entered into or the regulations in force at the time of the proceedings. Both opinions have been advocated: the first one on the ground that the parties that had entered into a lawful contract could not later be deprived of their rights by a supervening regulation, the second one on the ground that the paramount interest of a member should take precedence over those of private parties. Moreover, under the second analysis, if the regulation is abrogated or ceases to be consistent with the Fund’s Articles between the making of the contract and the judgement of the court, Article VIII, Section 2(b) will not apply.

These are at least some of the basic questions that have agitated scholars, puzzled their readers, and been differently answered by the courts of member countries.

As long as the general trend was toward the gradual elimination of exchange controls because of the improvement in members’ balances of payments, it could be expected that those questions would disappear before being answered. Now that the debt problem has taken on the proportions we know and may even worsen, recourse to exchange controls may be a better solution than the accumulation of arrears.

Therefore, these questions have emerged again and will have to be answered if exchange controls become an instrument for the solution of the debt problem. The Fund’s staff has given some thought to the matter and recently expressed some views on the meaning of Article VIII, Section 2(b). Those views will be presented by Mr. Pierre Francotte.

COMMENT