Article

The Fund Agreement in the Courts—VI

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1961
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THIS INSTALLMENT of the survey of cases involving the Articles of Agreement of the International Monetary Fund deals with cases in the courts of New York, Austria, and the Netherlands which were concerned with the unenforceability of certain exchange contracts; a case in Oregon, now to be reviewed by the United States Supreme Court, which considers the effect of exchange control on a nonresident heir’s right to inherit; and a case in Chile which dealt with the currency in which a claim to compensation for requisition should be discharged.

Unenforceability of Certain Exchange Contracts

New York

Southwestern Shipping Corporation v. National City Bank of New York1 has now been decided by the Appellate Division2 and the Court of Appeals in New York,3 and an application for review by the United States Supreme Court has been refused.4 Southwestern Shipping Corporation, a New York corporation, was an export brokerage firm which acted as purchasing agent for Italian importers, of which the Garmoja firm was one. In September 1951, Garmoja placed an order with Southwestern for 300 tons of fatty acid at a price of $37,222. At that time, Italian foreign exchange control laws required an importer to have a license to pay dollars for such an import, but Garmoja had never obtained a license. In order to make dollars available to Southwestern to pay for the fatty acid, Garmoja entered into a contract with Corti, another Italian firm, which had obtained a license to pay dollars to an American named Anlyan for rags to be imported into Italy from the United States.

The contract provided that Garmoja would pay lire into Corti’s account with an Italian bank, Credito Lombardo, and this bank would transmit a credit for the dollar equivalent amounting to $37,222 to the National City Bank of New York “in favor of” Anlyan. Corti undertook that, before transfer of the dollars to Anlyan and apparently before payment of the lire by Garmoja, it would get from Anlyan a letter addressed to National City assigning the dollars to Southwestern and instructing National City to pay Southwestern. In this way, Garmoja would be able to make an unlicensed payment of dollars for the import of the fatty acid.

To carry out the arrangement, Corti obtained from Anlyan the letter of assignment. Corti delivered the letter to Garmoja in Italy, and Garmoja forwarded it to Southwestern. Southwestern then sought from National City, and received, an assurance that National City would pay the dollars to Southwestern when the money arrived.

The various steps of the arrangement were carried out as contemplated up to the receipt by National City of a cable instructing it to pay the dollars to Anlyan. National City officials were not certain that this credit to Anlyan was the credit referred to in Anlyan’s assignment to Southwestern, although they thought that it might be. They therefore paid the money to Anlyan, and informed him that if these were the funds that he had assigned to Southwestern, he could endorse the check and turn it over. Anlyan absconded. Southwestern requested payment from National City, which was refused, and Southwestern then brought this action against National City to recover the money.

The jury found that National City had broken its contract with Southwestern and had negligently paid the money to a third party. However, the trial court, the New York Supreme Court, refused a verdict for Southwestern on the ground that the agreement between Garmoja and Corti and the Anlyan assignment were illegal under Italian law because these transactions were not licensed by the Italian exchange control authorities; that Southwestern was acting as the agent of Garmoja in this transaction, and by virtue of substantially common stock ownership and control was nothing more than an alter ego subsidiary for Garmoja; and that accordingly the suit was barred by both the common law of New York and Article VIII, Section 2(b), of the Articles of Agreement of the International Monetary Fund. The Appellate Division unanimously affirmed this decision, without opinion.

On further appeal, the Court of Appeals, in a majority opinion from which two judges dissented, recognized that it was well settled in New York that a party to an illegal contract cannot ask a court of law to help him carry out his illegal object, or plead or prove a case in which his claim is based on an illegal purpose. However, there is an exception to this where one party to an illegal transaction turns over money to a third person for the use of the second party to the transaction. The second party can enforce the express or implied promise or trust of the third person to deliver the money to him even though, if the first party had not paid the money, the second party would be unable to compel him to pay. In other words, a mere agent or depository of the proceeds of an illegal transaction cannot assert the defense of the illegality of that transaction in order to resist a claim to the proceeds.

Assuming, then, the illegality of the Garmoja-Corti agreement and the Anlyan assignment under Italian law, and hence under article VIII (§2, subd. [b]) of the Bretton Woods International Monetary Agreement, and assuming further that plaintiff was the alter ego of Garmoja, the defendant, as a mere depository or transmittal agent of the proceeds of the arrangement, had no status to assert the illegality of those transactions … .5

So far as the Bretton Woods Agreement is concerned, we are unable to see how it affects plaintiff’s right to maintain this action. The pertinent provision (art. VIII, §2, subd. [b]; 60 U.S. Stat. 1411) recites: “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.” While there is evidence that the applicable Italian foreign exchange regulations were “maintained or imposed consistently with” the Agreement, and while the quoted provision unquestionably prevents the courts of this State from enforcing illegal transactions in the field of international currency exchange, we do not see how this affects the New York common-law rule prohibiting an agent or depository from asserting a defense of illegality which the principals have elected to waive.

Plaintiff here is seeking to enforce a lawful promise of payment by a party unconnected with the antecedent illegal exchange agreement. This promise was made in New York, to be performed in New York, and its enforcibility is governed by New York law. The same is true of defendant’s negligence, which was committed in New York.

The Bretton Woods Agreement adds nothing to the already settled law of this State that a party to an illegal agreement cannot enforce it against the other party. By forbidding any court in the United States from enforcing a foreign exchange contract which violates the exchange regulations of a foreign signatory to the agreement, it prevents a local court from refusing to give effect to the foreign law of a member on the ground that it is contrary to the public policy of the forum (see Perutz v. Bohemian Discount Bank in Liquidation, 304 N.Y. 533, 537, 110 N.E. 2d 6, 7), or because the foreign law provides only penal sanctions for its violation—as was the case with the Italian exchange regulations involved here—and hence should not be given extraterritorial effect (see Loucks v. Standard Oil Co., 224 N.Y. 99, 102–103, 120 N.E. 198). In our opinion, it in no way affects the common-law rule of this State that a depository of the proceeds of an illegal transaction cannot plead the illegality of the transaction as a bar to suit against it for breach of contract and negligence.6

In other words, if Corti, after receiving the lire from Garmoja, had refused to transfer the dollar equivalent as agreed, it could not have been compelled by law to do so. But Corti did transfer the dollars to the defendant, National City, which, as depository, could not plead the illegality of the antecedent Garmoja-Corti agreement to resist the claim of Southwestern, the assignee of the dollars, based on the subsequent agreement between Southwestern and National City. Hence, National City must be held liable on Southwestern’s claim.

The dissenting opinion emphasized the rule that the courts will not lend their aid to enforce an illegal bargain, and that the right to take this objection is not confined to the parties to the illegal transaction. The exception that the majority opinion relied on was confined to circumstances in which the illegal transaction had been fully completed but in which a mere repository for one of the parties then refused to surrender the money.

The present is not such a case since judgment for the plaintiff here would in effect compel the taking of the final step in the transaction itself—a step without which the transaction would be meaningless—that is, the assignment to the plaintiff… . There are plenty of controlling cases which say that the “repository” exception does not apply when the whole thing is one single transaction… .

Although the point is not made in these terms by defendant, it would seem that this defendant, had it learned the purpose for which this assignment was made, could have refused to recognize that document and could have stood on its right not to aid in carrying out an essentially illegal transaction. That being so, its position is not made worse by the fact that by error or negligence it paid out the money to the assignor instead of holding it for the assignee and thus rounding out the whole forbidden transaction.7

The defendant, National City, petitioned the Supreme Court of the United States for a writ of certiorari to review the New York judgment, invoking that portion of Title 28 U.S.C. Section 1257 which reads:

Final judgments or decrees rendered by the highest court of a State in which a decision could be had, may be reviewed by the Supreme Court as follows:… (3) By writ of certiorari … where any title, right, privilege or immunity is specially set up or claimed under the Constitution, treaties or statutes of, or commission held or authority exercised under, the United States.

The federal questions which National City sought to have reviewed under this provision were (a) whether the State of New York had improperly superseded the policy of the United States as set forth in Article VIII, Section 2(b), of the Fund Agreement and the U.S. Bretton Woods Agreements Act,8 which gave the provision full force and effect in the United States, by interpreting New York law in such a way as to deny National City the right to assert a defense based on the provision, and (b) whether the New York Court of Appeals had interpreted the provision in a manner inconsistent with the construction adopted by other signatory countries and with the international commitment of the United States.

On the first question, National City argued in its brief that, if the application of Article VIII, Section 2(b), could be made to depend on such matters of state practice as the New York depository exception, the federal policy involved in the provision would be enforced in some U.S. states but not others and thus would not be observed uniformly in the United States as a whole.

On the second question, National City argued that dicta in the opinion of the New York Court of Appeals assumed that Article VIII, Section 2(b), applied only to suits by one party to an exchange contract against the other. Various commentators had agreed, however, that the unenforceability provision was not limited in this way. Moreover, the Court of Appeals had placed an unduly narrow construction on the term “exchange contracts.” That term should be construed to cover all steps essential to the accomplishment of the illegal objective. This would include the assignment to Southwestern. The courts in other member countries, such as the Hong Kong Supreme Court in White v. Roberts9 and the Schleswig-Holstein Oberlandesgericht in Lessinger v. Mirau,10 had adopted a broad construction of the provision consistent with its obvious purpose of discouraging illegal transactions. The present case was the first in which the construction of Article VIII, Section 2(b), would determine the outcome, and in view of the status of New York as a world financial center, it was important to establish a satisfactory precedent.

As already indicated, the Supreme Court denied the petition for a writ of certiorari. It is respectfully submitted that the result of the litigation is unfortunate. The mischief at which Article VIII, Section 2(b), is directed is the evasion of the exchange controls of other Fund members that are consistent with the Fund Agreement. The provision requires members to collaborate by ensuring that their judicial and administrative institutions refuse to enforce exchange contracts that evade such controls. In this case, it is undeniable that, in the result, the courts of one Fund member saw to it that performance was completed of a contract which evaded the exchange control law of another member. Incidentally, this was the outcome even though what National City had done, namely pay Anlyan, was strictly in accordance with Italian law and the exchange license granted to Corti under it. It is understandable that courts should be reluctant to allow a depository to profit by retaining the proceeds of an illegal transaction between other parties, but in this case National City had not retained the proceeds but had paid them over in a manner consistent with Italian law.11

It was recognized that the courts would not have lent their assistance if the action had been between Garmoja and Corti. But a distinction was drawn, and assistance was available, because the proceedings were between the agent and alter ego of Garmoja and the depository of Corti. It was thus the illegal stratagem itself which was adopted by the Court as the basis for a distinction as to the application of the unenforceability rule of Article VIII, Section 2(b).

The distinction made was that Southwestern was “a party unconnected with the antecedent illegal exchange contract” and that Article VIII, Section 2(b), adds nothing to the rule that “a party to an illegal agreement cannot enforce it against the other party.” Whatever might be said of an action to enforce a genuinely independent agreement by a genuinely independent party, this was certainly not the situation here. In this case, Garmoja and Southwestern could be distinguished only in a formal and artificial sense. Southwestern represented Garmoja for the purposes of the contract, and officials of Southwestern admitted in evidence that they understood the dollars to belong to Garmoja, and that they were to be held by Southwestern for Garmoja. Was the action by Southwestern, Garmoja’s representative, to enforce the contract? It could be said not to be for this purpose only if the arrangements were split into three steps which were then regarded as unrelated: Garmoja’s payment of lire in return for Corti’s transfer of dollars to Anlyan; Anlyan’s assignment to Southwestern; and National City’s promise to pay Southwestern. To regard these steps as unrelated ignored the true nature of the facts, including the fact that Corti itself agreed that the transfer of dollars to Anlyan by Corti, and presumably the payment of lire by Garmoja to Corti, were not to take place until Corti obtained Anlyan’s assignment to Southwestern. All of the steps were related as part of a single arrangement, with a purpose common to both Garmoja and Corti. The action was really by Garmoja to perfect the performance which was the subject of the agreement with Corti, i.e., to get the dollars into the hands of Southwestern for Garmoja’s benefit. The arrangement as a whole, and not some fraction of it, provided for this purpose, and should have been treated as the “exchange contract.”

It is implied in the foregoing comments that Article VIII, Section 2(b), should not be understood as confined to proceedings between the immediate parties to a contract. Nothing in the language of Article VIII, Section 2(b), requires such an interpretation. “Exchange contracts” are to be “unenforceable.” Therefore, if judicial relief would have the effect of enforcing the contract, i.e., seeing to it that the contract is performed or that a sanction is imposed for nonperformance, that relief is to be withheld. Nor is there anything in the Fund’s authoritative interpretation of Article VIII, Section 2(b), which lays down a different rule.12 It declares that parties cannot get judicial or administrative assistance for the performance of the contracts declared unenforceable, but it does not declare that the proceedings to which this rule applies must be between the parties to the contract. It is certainly sufficient if one party is suing, and this would include anyone who represents a party.

In any event, there is no reason to assume that the provision requires, as a condition of its application, the presence of even one party as a litigant if the issue is the enforcement of a contract covered by the provision. The Fund’s interpretation was not intended to be, and quite obviously is not, an interpretation of all aspects of the provision. The main purpose of the interpretation was to draw attention to the rule of unenforceability and to the consequence that, in the cases covered by the provision, the courts of member countries should no longer refuse recognition to the exchange control regulations of other members either because the public policy of the forum would otherwise prevent recognition or because the law of the exchange control regulations is not, under the private international law of the forum, the law governing the exchange contract or its performance. The Fund’s interpretation does not deal with issues unrelated to these aspects. The word “parties” or “party” was used in relation to these aspects because, in the great majority of litigated cases that involve the enforcement of exchange contracts, one or more of the parties to the contract will be parties to the proceedings.

Austria

On July 2, 1958, the Supreme Court of Austria decided a case in which it found that Article VIII, Section 2(b), did not apply.13 In 1945, the plaintiff, who now claimed to be an Austrian resident but was then a resident of Zagreb in Yugoslavia, agreed with the defendant bank in Zagreb that the latter would open credits for him with its correspondent, the Creditanstalt-Bankverein, in Vienna. The contract was made in Zagreb, and the plaintiff paid the counterpart of the credits there. The credits were to be used for the importation of merchandise into Croatia, but there remained an unused balance as late as January 1956, when the plaintiff began these proceedings. The plaintiff had requested the Vienna bank to pay this balance to him, but it refused to do this without the consent of the defendant bank. The defendant withheld its consent on the ground that the plaintiff had ceased to be the owner of the balance because it had been confiscated by the Yugoslav People’s Republic. The plaintiff asked the Austrian Court to order the defendant to give its consent to the surrender of the balance to him by the Vienna bank, or to order an assignment of the balance to him.

The court of first instance rejected the plaintiff’s request for relief, and the Court of Appeal affirmed this decision:

The Court of Appeal referred to Yugoslav foreign exchange law and found that the provisions applicable to the case at hand did not provide for a confiscation without indemnification and were not in conflict with good morals. Rather, they were measures such as have been introduced in numerous states for the purpose of protecting the domestic economy and currency, and which were expressly recognized by the Bretton Woods Agreement. Consequently, Yugoslav foreign exchange law must be applied and, accordingly, the plaintiff’s claim against the defendant must be rejected on the ground that it demanded a legally impossible payment. This result was especially supported by the consideration that, even if the plaintiff were a resident of Yugoslavia for foreign exchange purposes, in full possession of his rights and having a right to assignment, he could not have brought his claim before the Courts of the Federal Peoples Republic of Yugoslavia without the approval of the assignment by the exchange authorities. A change of residence should not improve the plaintiff’s position in this respect.

The Supreme Court reversed this judgment:

The claim, both in its primary form and in the above mentioned second wording, constitutes an actio mandati directa. The plaintiff, who, according to the defendant’s latest statements in the proceedings, covered the defendant for the credits opened in Vienna, demands as mandator from the other party as mandatarius the surrender of the profits from the transaction. This legal relationship is subject to the private law norms prevailing at the time in Zagreb. Direct legal relations between the plaintiff and the Bank in Vienna never existed. The law governing the contract pursuant to the principles of Austrian private international law, which is the law prevailing in Zagreb, would not require the application of Yugoslav foreign exchange law in the circumstances of this case even if, in deference to the newer doctrine, the hitherto prevailing jurisprudence were abandoned… . This jurisprudence held that foreign decrees were not to be taken into account by domestic tribunals even when the legal relationship was subject to the law of the state which issued these decrees, if their application would affect a domestic creditor. Similarly, the newer doctrine which takes account of Article VIII, Section 2(b) of the Articles of Agreement of the International Monetary Fund … provides merely that payments prohibitions based on alien foreign exchange laws must be taken into account if the shifting of assets resulting from the payment would occur (or at least, also occur) within the territory of the restricting state, since this state has the jurisdiction to seize, and legislate with respect to, assets located within its territory. The case under consideration, however, deals only with assets situated in a blocked account within this country. These assets stand in no relation to the Yugoslav foreign exchange provisions other than that the defendant is subject to these provisions. The applicable foreign exchange law is not determined on the basis of the law governing the contract, but on the basis of the law applicable to property, which points in the case at hand solely to the domestic laws… .

In the primary claim the Court was asked to order the defendant to consent to the surrender by the bank in Vienna of the counterpart of the unutilized credits to the plaintiff… . The contract of mandate which existed between the parties amply justifies such a judgment, since the mandatarius should surrender to the mandator all the profits deriving from the transaction. Consent to the surrender of the counterpart by a third party differs from assignment of claims deriving from unutilized credits with a third party only in formulation.

It will be observed that the Austrian Supreme Court interpreted the private international law of Austria, apart from Article VIII, Section 2(b), as precluding recognition of the exchange control regulations of another country, even when they were part of the law governing the transaction in issue, if recognition would adversely affect the interests of a domestic creditor. The plaintiff had ceased to be a Yugoslav resident and had become an Austrian resident and perhaps citizen. No such limitation can be imposed on the scope of Article VIII, Section 2(b). Any special tenderness for the interests of residents which the public policy of the forum might prescribe has been replaced by a public policy of helping to protect, under Article VIII, Section 2(b), the exchange resources of other members of the Fund. In applying the provision, no reservation was made for local residents by the Hong Kong Court in White v. Roberts,14 the Luxembourg Court in Société ‘Filature et Tissage X. Jourdain’ v. Epoux Heynen-Bintner,15 the Hamburg court in the case discussed in an earlier article,16 or the New York court in Perutz v. Bohemian Discount Bank in Liquidation.17

The Austrian Supreme Court did not suggest that Article VIII, Section 2(b), is limited to cases in which residents would not be adversely affected, but it did apply another limitation. It declared that the provision was operative only where the payment restricted by the exchange control regulations of a state would involve a transfer of assets within the territory of that state. The reason which the Court gave for this severe limitation on the scope of the provision is that “this state has the jurisdiction to seize, and legislate with respect to, assets located within its territory.” The analogy of seizure is, of course, misleading. Exchange control as such is not seizure. It involves a husbanding of resources, but not their conscription without compensation. This regulation of resources normally includes the control of assets within the territory of the controlling state. But, in addition, regulation is just as often exercised by the control of persons who are resident within the territory of the controlling state. That state has “jurisdiction to … legislate with respect to” its residents in their performance of such acts as the transfer of assets and the creation of liabilities to nonresidents, and this form of control is as common and as well recognized a basis] of jurisdiction as the situs of assets. Article VIII, Section 2(b), does not distinguish among the possible jurisdictional bases for exchange control legislation when referring to “exchange control regulations … maintained or imposed consistently with this Agreement.” To make the distinction adopted by the Austrian Court would destroy half the protection of the provision. In the Austrian case, the defendant, the Zagreb bank, was a resident of Yugoslavia, and it was subject to Yugoslav exchange control regulations under which it could not freely transfer the unutilized credits to the plaintiff. This is a form of exchange control which members have jurisdiction to adopt and which is covered by Article VIII, Section 2(b), if they do adopt it.

Pursuing the line that it had taken, the Court held that the plaintiff’s claim derived from but was not based on the contract between the parties. The claim was founded in property and not contract, and was thus governed by the law of Austria and not Yugoslavia.18 By permitting the plaintiff to recover on this claim, the Austrian Court altered the nature of the contract between the parties and then enforced it in a form that had not been licensed by the Yugoslav exchange control authorities. The contract made by the parties and licensed by the Yugoslav authorities was for the establishment of credits in Vienna so that the plaintiff could bring imports into Yugoslavia. It was not simply a contract for the transfer of exchange resources to the plaintiff abroad. Such a contract would have involved an unrequited use of Yugoslavia’s exchange resources and would not have been licensed. The parties must have known, and it was thus necessarily an implied term in their contract, that if the credits were not used for imports the plaintiff would not be entitled to retain the foreign exchange. In those circumstances, he would be entitled to the return of the Yugoslav counterpart which he had paid for the foreign exchange, and this was presumably still available to him because the Austrian Court of Appeal found that the case did not involve confiscation. What the Austrian Supreme Court did was to award the plaintiff the balance of the foreign exchange even though imports had not been made for this amount. This was inconsistent with what the parties must have understood their contract to be and also with the license granted by the Yugoslav authorities. Of course, if the parties had intended an unconditional transfer of the foreign exchange, this was even more obviously contrary to Yugoslav exchange control and the license granted under it. In the result, the decision brought about a loss of foreign exchange to Yugoslavia which could and should have been avoided by the application of Article VIII, Section 2(b).

The Netherlands

The main interest of Stichting Leids Kerkhovenfonds v. Bank of Indonesia,19 decided by the First Chamber A of the District Court of Amsterdam on June 21, 1960, is in a dictum acknowledging the obligation, resulting from the Fund Agreement, of a Dutch court to recognize the exchange control legislation of Indonesia in appropriate circumstances, but with due regard to other relevant international engagements between the Netherlands and Indonesia. The Astronomical Society of Indonesia, which was established at Bandung, was dissolved in 1951, and the liquidators, who were residents of the Netherlands, assigned to the plaintiff, also a resident of the Netherlands, certain of the Society’s assets, a balance of Netherlands guilders and Dutch securities deposited with the defendant’s Amsterdam branch. The assignment was made in Amsterdam with the license of the Netherlands Bank, but no license was ever granted by the Foreign Exchange Institute of Indonesia. In this proceeding, the plaintiff claimed payment and surrender of the assigned assets. The defendant argued that as an Indonesian authorized bank it was bound by Indonesian exchange control legislation, that the securities had been registered with the Indonesian Exchange Institute, and that the Institute had not licensed the payment and transfer.

The District Court said that

… a Dutch court cannot in general limit itself to testing its judgment against Dutch exchange law, but in certain circumstances its judgment must also be tested against foreign exchange law, notably if and to the extent that the foreign exchange law must be considered to apply to the legal relation to be judged by the Dutch court, provided that the application of such foreign exchange law does not violate Dutch public policy and good morals;

… with respect to Indonesian exchange law in particular such testing may not be omitted in cases where the court is faced with the question of the significance to be attributed to the Draft Financial and Economic Agreement which was accepted on November 2, 1949 at the Round Table Conference during the Second General Assembly. The same applies with respect to the significance of the adherence on April 14, 1954 of the Republic of Indonesia to the Agreement concerning the International Monetary Fund, to which Agreement the Netherlands had already adhered pursuant to ratification by the law of December 20, 1945, Official Journal F 318.

The Court held that, under the arrangements made at the Round Table Conference, it had been agreed that assets within the Netherlands foreign exchange sphere prior to May 10, 1940 remained within that sphere, and that these arrangements could not be changed unilaterally. The assets in issue had at all times been within the Dutch sphere. The bank balance had been fed exclusively with the revenues and redemptions of the securities, so that no part of the assets had been drawn from the Indonesian economy. The Court held that, under the agreed arrangements, the assets were never subject to Indonesian exchange control law. Alternatively, the Indonesian authorities must be taken to have given a license for such transfer as might be made. The Dutch courts could not be compelled by subsequent unilateral action on the part of Indonesia to recognize the effect of Indonesian exchange control on these assets. It was, therefore, unnecessary to consider to what extent Netherlands public policy and good morals prevented the recognition by a Dutch court of Indonesian exchange control regulations under present circumstances, because there was no provision of Indonesian law which prevented judgment for the plaintiff.

The decision of the District Court of Maastricht in Frantzmann v. Ponijen20 on June 25, 1959 is perhaps the first decision of a Netherlands court based squarely on Article VIII, Section 2(b), of the Fund Agreement. In 1955, the parties, who were then residents of Indonesia, made an agreement in Indonesia under which the plaintiff paid to the defendant a sum in Indonesian rupiah in return for a promissory note. This note required the defendant to pay the plaintiff in the Netherlands 5,000 Dutch guilders, either in a lump sum or in installments. The agreement was subject to licensing under Indonesian exchange control law, but no license was granted. Both parties subsequently became residents of the Netherlands, where the defendant paid 700 guilders to the plaintiff. The plaintiff claimed the balance, interest, and costs.

There are many interesting features of the District Court’s opinion. Its discussion of the relevant law began as follows:

… The defendant argues primarily that an exchange contract concluded in violation of the foreign exchange provisions of any member country of the International Monetary Fund—the text of which was laid down at the Monetary and Financial Conference of the United Nations held at Bretton Woods from July 1–22, 1944—is unenforceable in law pursuant to Article VIII, Section 2(b) of that Agreement.

By the law of December 20, 1945, S. F 318, the Netherlands adhered to the above Agreement, hereinafter called the Fund Agreement, as of December 27, 1945. The Agreement was published in the Netherlands by Royal Decree of October 9, 1946, S. G 278. Pursuant to Article 65 of the Constitution, the above Agreement is binding on everyone as of the time of its publication to the extent that this is required by the contents of the provisions of this Agreement… .

Indonesia joined the Fund on April 14, 1954. The above Foreign Exchange Ordinance of 1940 and Foreign Exchange Decree must be considered as exchange legislation of that country maintained in accordance with the Fund Agreement. Article VI, Section 6 of the Fund Agreement provides that members can exercise such control as is necessary to regulate international capital movements. The fact that the Indonesian legislation is in accordance with the Fund Agreement is especially obvious, since pursuant to Article XX, Section 2(a) of the Fund Agreement members are bound to deposit an instrument with the Government of the United States of America, declaring that they accept the Agreement in accordance with their laws and have taken all necessary steps to enable them to carry out all their obligations under the Agreement, while Section (b) of this provision adds that governments can join the Fund only as of the date on which the above instrument has been deposited on their behalf.

The first point to notice on this passage is that the Court regarded the Indonesian regulation as a control of capital transfers, and therefore authorized by Article VI, Section 3, of the Fund Agreement.21 Thus, in deciding that this control must be recognized under Article VIII, Section 2(b), the Court was not perturbed by the title which prefaces the text of Article VIII, Section 2: “Avoidance of restrictions on current payments.” The conclusion that Article VIII, Section 2(b), applies to exchange control regulations governing capital as well as current transactions22 is undoubtedly correct. The language of Section 2(b) makes no distinction between the two categories of transactions, and there would be no basis in the rationale of the provision for forcing a distinction. Moreover, the drafting history of the provision shows quite clearly that it was regarded, inter alia, as a contribution to the discouragement of undesirable capital movements.23

The second point to notice is that the Court relied on Article XX, Section 2, as proof that the Indonesian regulation met the test of Article VIII, Section 2(b), of being “maintained or imposed consistently with this Agreement.” Article XX, Section 2(a) and (b), reads as follows:

(a) Each government on whose behalf this Agreement is signed shall deposit with the Government of the United States of America an instrument setting forth that it has accepted this Agreement in accordance with its law and has taken all steps necessary to enable it to carry out all of its obligations under this Agreement.

(b) Each government shall become a member of the Fund as from the date of the deposit on its behalf of the instrument referred to in (a) above, except that no government shall become a member before this Agreement enters into force under Section 1 of this Article.

In fact, these provisions did not apply to Indonesia, which, as a country subject to Article II, Section 2,24 was bound by paragraph 8 of the Membership Resolution adopted by the Fund’s Board of Governors in respect of Indonesia.25 The differences between Article XX, Section 2, and paragraph 8 of Indonesia’s Membership Resolution are not material for the present purpose. What is interesting is that the Court assumed that the regulation must have been consistent with the Articles at the date when Indonesia joined the Fund, and must therefore have remained consistent at all other material dates. This was a safe assumption, not because of paragraph 8 of the Membership Resolution, but because of the privilege of members at all times to control capital transfers in accordance with Article VI, Section 3. If the pertinent exchange control regulation were a restriction on payments and transfers for current international transactions, consistency with the Articles at some date subsequent to the acceptance of membership in the Fund could not have been so readily assumed. This uncertainty would result from the Fund’s power to make representations for the withdrawal or abandonment of these restrictions under Article XIV, Section 4,26 or to refuse approval of them under Article VIII, Section 2(a).27 It is for reasons such as these that the Fund stated in its authoritative interpretation of certain aspects of Article VIII, Section 2(b), that it “is prepared to advise whether particular exchange control regulations are maintained or imposed consistently with the Fund Agreement.”28 It is for such reasons also that the Fund has been frequently approached for a statement certifying whether or not certain regulations were maintained or imposed consistently with the Articles. This procedure is all the more important now that a number of countries that are major participants in world trade and payments have given up the privileges of Article XIV, under which they had considerable latitude to maintain and adapt restrictions on payments and transfers for current international transactions, and have declared their acceptance of Article VIII,29 under which the approval of the Fund is required for the retention, introduction, or adaptation of such restrictions.

After the passage quoted above, the Court continued as follows:

The agreement between the parties by which the defendant agreed in Indonesia, on the basis of an amount in rupiah received as a loan from the plaintiff, to render to the plaintiff in the Netherlands an amount of 5,000 Dutch guilders, is in essence an exchange of currencies and, consequently, constitutes an exchange contract within the sole meaning of this term. This contract also involved the currency of Indonesia and it violated the exchange legislation of that country. As was mentioned above, both contracting parties were exchange residents of Indonesia within the meaning of Article 1, subsection 1(a) of the 1940 Foreign Exchange Ordinance and their contract involved a claim which, pursuant to Article 2, Section 2, part 1, and Article 1(8) of this Ordinance, was considered as a foreign claim. Pursuant to Article 11, Section 1(c) of the Foreign Exchange Decree the conclusion of such a contract was permitted to residents only with a license issued by or on behalf of the Foreign Exchange Institute. Such a license had not been issued.

It is irrelevant in this connection for what purpose the defendant received the rupiah from the plaintiff. Similarly, it is irrelevant in this connection whether the parties were conscious of the fact that they acted in violation of the exchange provisions of Indonesia.

In this passage, the Court held that the contract between the parties was an “exchange contract” and that it “involved” the currency of Indonesia. This was, of course, undeniable because the contract was for the exchange of Indonesian currency against Dutch currency. However, what must be challenged, with all due respect, is the dictum, which was unnecessary for the decision of the case, that a contract of this kind is the sole type of contract within the meaning of the words “exchange contract.” This conclusion narrows the scope of the provision in such a way as to make it of little practical importance, and it is contrary to the main trend of jurisprudence and the main current of opinion among commentators.30

The Court then went on to state these principles:

Irrespective of the fact that under Indonesian law, which applies under the rules of Dutch private international law (since the parties were both within the legal sphere of Indonesia at the time the contract was concluded and since this contract was concluded in Indonesia), every contract concluded in violation of provisions issued on the basis of the 1940 Ordinance is legally void pursuant to Article 29 of this Ordinance, and, furthermore, irrespective of the fact that this entails nullity of the obligation pursuant to Article 1373 of the Netherlands Civil Code, since such obligation has been contracted in violation of good morals, the plaintiff’s claim must be declared non-receivable on the basis of Article VIII, Section 2(b) of the Fund Agreement. Pursuant to Article 65 of the Constitution, this provision is directly binding on everyone and thus constitutes a part of the total legal provisions which are binding upon a Dutch forum. The Dutch forum must refrain from evaluating the Indonesian foreign exchange provisions and must also refrain from judging the question whether in view of its behavior Indonesia can be considered as a treaty partner. Apart from the fact that a partner to a treaty which has had to protest against violations of international agreements must itself fulfill its obligations, the paramount interest is that the international order to which the Netherlands and Indonesia have both adhered be respected.

There are three principles in this paragraph which deserve comment. First, the Court states, in effect, that even though it could have reached the same result under traditional Dutch private international law, under which Indonesian law would have been the governing law, it was basing its conclusion, not on that private international law, but on Article VIII, Section 2(b), of the Fund Agreement. Secondly, the Dutch Court would not seek to evaluate the Indonesian regulation, but would recognize that the public policy of the Fund Agreement had become its public policy. Thirdly, the Dutch Court would not depart from this position because, in the view of the Netherlands, other treaty engagements between the two countries not legally relevant to the claim in issue had been neglected by Indonesia.

The judgment concluded with these paragraphs:

It also follows from the above that the fact that the defendant has partly executed her promise to repay cannot render the plaintiff’s claim receivable.

On the basis of the defendant’s conduct, by which she first induced the plaintiff to lend her money with promises of repayment but now refuses the performance of these promises, the plaintiff augments his claim with the subsidiary claim of payment of the amounts mentioned in his primary claim as damages for tort committed by the defendant.

After both parties had acted in disregard of the foreign exchange provisions of Indonesia, the defendant is not now acting contra legem, but, on the contrary, secundumlegem.

The plaintiff had not alleged any facts which would show that the defendant acted without any reasonable purpose or exclusively with the intention to harm the plaintiff.

In acting as alleged by the plaintiff, the defendant has not gone beyond the limits of a breach of obligation in such a way as to be subject to a natural obligation to the extent that her obligation was not wholly void, and therefore the plaintiff cannot succeed on his subsidiary claim.

In other words, where a party’s claim based on an “exchange contract” is unenforceable because of Article VIII, Section 2(b), he cannot succeed by reformulating the claim as one for damages for tort, or for the performance of a natural obligation, or for the restitution of an unjustified enrichment. A similar result was reached by the Hong Kong Court in White v. Roberts and by the Schleswig Court in Lessinger v. Mirau.31

Lembaga Alat-Alat Pembarajan Luar Negeri and the Republic of Indonesia v. Brummer, Bekker, and Winkelman and Company suggests the following general question: If a contract is unenforceable as a result of Article VIII, Section 2(b), can the member country whose exchange control regulations were violated attack the contract, or a judgment based on it, in the courts of another member country?

Winkelman was a firm established in Indonesia, and Tengbergen was a director of the firm. Tengbergen left Indonesia for the United States in September 1940 and remained there until after the war. Tengbergen claimed a large sum of guilders from Winkelman as salary and expenses. In August 1951, Tengbergen assigned this claim to Brummer and Bekker, residents of the Netherlands, for a nominal amount of guilders, and in September 1951 the Netherlands Bank issued a license for this assignment. Tengbergen’s intention was to make the amount of his claim available to the shareholders of Winkelman, and Brummer and Bekker agreed to distribute to the shareholders any recovery in excess of what they had paid for the assignment to them. Winkelman had assets with the Amsterdam office of the Java Bank. Brummer and Bekker sued to attach these assets in the District Court of Amsterdam, Third Chamber, and judgment was given for them in December 1952. Various appeals taken during the next four years failed to shake this verdict. It is not known whether at any time the judgment was attacked on the basis of Article VIII, Section 2(b).

The Foreign Exchange Institute of Indonesia, the first plaintiff mentioned above, and the Republic of Indonesia, then brought this proceeding in the District Court of Amsterdam, Second Chamber, against all of the parties to the original suit in order to set aside the judgment of December 1952. The plaintiffs’ proceeding was a third party opposition action under Article 376 of the Code of Civil Procedure of the Netherlands, which provides that

Third parties are entitled to oppose a decision which injures their rights if they were not represented in person or by counsel, or if the persons whom they represent were not summoned or had not been parties to the proceeding by intervention or joinder of actions.

The petition goes before the Court which gave the decision that is opposed, and all of the parties to the original action are joined. If the petition succeeds, the decision is amended or nullified to the extent that it is adjudged to impair the opposer’s rights (Articles 377–381).

The plaintiffs in the opposition action argued that Winkelman and the Java Bank, as residents of Indonesia, were governed in their legal relations inter se by Indonesian law. In addition, Brummer and Bekker were residents of the Netherlands. Therefore, a license of the Indonesian Exchange Institute was necessary before the Java Bank could surrender Winkelman’s assets to Brummer and Bekker. The plaintiffs also argued that the assignment by Tengbergen and other agreements involving Tengbergen, Winkelman, Brummer, and Bekker were a fraudulent evasion of Indonesian law in that they were designed to enable Brummer and Bekker to sue in the Dutch courts and reach assets in the Netherlands. Finally, the plaintiffs argued that

Both the Netherlands and the second plaintiff have signed the Bretton Woods Agreement. The provisions of this Agreement constitute a part of the law of the Netherlands and of the second plaintiff. The arrangement between Tengbergen, Winkelman and Brummer and Bekker was made in violation of the provisions of the Bretton Woods Agreement, and the Dutch forum, which is obliged to apply the provisions of the Bretton Woods Agreement, should therefore not have adjudged the claim as was done by the decision now opposed.

The defendants replied, first, that third party opposition can be resorted to only by a third party which demonstrates that a right which belongs to him has been impaired by the decision he opposes. In this case, the plaintiffs had no right to Winkelman’s assets deposited with the Java Bank. The plaintiffs could allege, at most, an economic harm. Secondly, the legal relations between Winkelman and the Java Bank involved a deposit in the Netherlands, and hence were governed by that law. Thirdly, the Indonesian exchange regulations violated Dutch public policy, and this objection was all the stronger because the regulations were enacted after the deposit in the Netherlands was first made. Fourthly, the agreements among Tengbergen, Winkelman, Brummer, and Bekker were ordinary arrangements which a creditor may make to reach his debtor’s assets and were not infraudem legis. Finally

The defendants do not consider the Bretton Woods Agreement to be applicable because the provisions of this Agreement do not constitute a part of Netherlands or Indonesian law. The Agreement is not directed at the citizens but at the contracting states. Even if this were not the case, the arrangements in question do not violate the provisions of the Bretton Woods Agreement, because the Indonesian exchange position was not affected thereby. Neither was the Indonesian exchange position involved. Consequently, the provisions of the Bretton Woods Agreement cannot apply. The defendants point out that the decision opposed was rendered before Indonesia had adhered to the Bretton Woods Agreement.

The District Court held that Winkelman’s obligation to Tengbergen was governed by Indonesian law. They had been residents of Indonesia and had contracted in Indonesia for services to be performed there. Tengbergen’s claim could not be withdrawn from Indonesian law by his assignment to nonresidents. The question of the law governing the relations between Winkelman and the Java Bank was irrelevant to the present proceeding. The real issue in this case was whether the Indonesian foreign exchange law conferred on the plaintiffs a right which was impaired by the decision of December 1952. For the purposes of an opposition, the right to be protected could derive from public law as well as from private law. However, there was no right of either kind in this case. The plaintiffs’ power to restrict Tengbergen’s right to dispose of his salary claim did not invest the plaintiffs with a right to the salary itself. At most, the plaintiffs could impose penalties if the Indonesian exchange control regulations were ignored.

It follows from the above considerations that the plaintiffs’ claim cannot be admitted. Consequently, the question whether the agreement between Tengbergen/Brummer and Bekker/Winkelman must be considered as in fraudemlegis and the question whether the Bretton Woods Agreement applies need not be considered, because in the absence of a subjective right, the plaintiffs cannot be injured in such a right by an eventual fraudulent action by the parties. The applicability of the Bretton Woods Agreement could have been considered only if an independent right of the plaintiffs to the contested salary claim had been admitted.

The plaintiffs appealed to the Court of Appeals, Amsterdam, First Chamber, which delivered its judgment on April 9, 1959.32 The Court of Appeals confirmed the judgment of the Court below, but for somewhat different reasons. Basically, its view was that any right which the Indonesian authorities might have to Tengbergen’s claim or to the assets deposited with the Java Bank could be exercised only in Indonesian territory.

The appellants can exercise these rights, which are of purely public law nature, exclusively by virtue of their public law authority as government [appellant No. 2] and governmental organ [appellant No. 1]; in the exercise of these rights they are in principle restricted to the limits of their own, Indonesian, territory.

To the extent that these rights and this authority pertain to assets located in the Netherlands, the plaintiffs cannot exercise them in the Netherlands or maintain them any more than would be possible with respect to rights and authority of a foreign government or foreign governmental organ in the field of military service, taxation, requisition of dwellings or expropriation, which appellants’ counsel called more or less similar.

The Court of Appeals wishes to remark that plaintiffs’ claim attempts to block in their behalf assets situated in the Netherlands, although in fact they have no rights to these assets and could not obtain any rights to these assets without the cooperation of the owners and the Netherlands Bank.

The above considerations do not detract from the fact that a Dutch court must take account of the exchange provisions of Indonesia which are invoked before it to the extent that they apply to the legal relationships of the parties and do not violate Dutch public policy. This attitude in no way implies that a foreign government would be entitled to invoke the authority of Dutch courts to protect its foreign exchange rights and interests.

It follows that plaintiffs’ arguments cannot justify the reversal of the decision they oppose. With respect to plaintiffs’ third argument, the Court of Appeals states that plaintiffs cannot base an independent right pursuant to Article 376 of the Code of Civil Procedure on the Fund Agreement.

In effect, therefore, what the Court of Appeals held was that, although, in appropriate circumstances, it would recognize Indonesian exchange control law where it governed the relationship between parties, it would not give extraterritorial effect to any Indonesian law which blocked assets situated in the Netherlands for the benefit of Indonesian public authorities. Thus, Indonesian law might have been relevant in connection with the claim of Brummer and Bekker which was the subject of the decision of December 1952, but once that decision went in favor of Brummer and Bekker, the Indonesian authorities could not intervene to block the assets in the Netherlands which were the subject of the decision. The Fund Agreement did not alter this proposition.33

Inheritance and Exchange Control

In Estate of Stoich, State of Oregon v. Kolovrat et al., and Estate of Zekich, State of Oregon v. Zekic et al., decided by the Supreme Court of Oregon,34 the effect of the Fund Agreement on a question of inheritance was discussed. The following is a purely descriptive account of the proceedings so far. Both cases involved the estates of persons who died intestate in Oregon and whose only heirs were various relatives residing in Yugoslavia. The issue was whether these heirs were entitled to take their shares in the two estates or whether those estates were to escheat to the State of Oregon on the ground that the decedents died without heirs who were entitled to take any part of the estates.

The right of an alien not residing within the United States or its territories to inherit real or personal property in Oregon upon the same terms as inhabitants and citizens of the United States is governed by an Oregon statute35 which provides that the following conditions must be met:

(a) … the existence of a reciprocal right upon the part of citizens of the United States to take real and personal property and the proceeds thereof upon the same terms and conditions as inhabitants and citizens of the country of which such alien is an inhabitant or citizen;

(b) … the rights of citizens of the United States to receive by payment to them within the United States or its territories money originating from the estates of persons dying within such foreign country; and

(c) … proof that such foreign heirs, distributees, devisees or legatees may receive the benefit, use or control of money or property from estates of persons dying in this state without confiscation, in whole or in part, by the governments of such foreign countries.

If the nonresident alien cannot prove that these three conditions were met as of the date of decedent’s death, and there are no other eligible heirs, the property escheats to the State.

The Oregon Court held it to be established by earlier cases that the rights referred to in the conditions set out above must be unqualified rights, enforceable at law. This meant that the rights must not in any sense be limited or dependent upon an act of discretion or grace upon the part of any governmental authority or agency. It had also been established that the second right, i.e., the right to receive, meant delivery of the proceeds of an inheritance from a foreign estate, not in the country where the foreign decedent left property, but delivery to the Oregon heir in the United States or its territories. In order to dispose of the case, the Court found it necessary to address itself only to the question whether there was, under Yugoslav law at the date of the decedents’ deaths, an unqualified and enforceable right vested in U.S. citizens to receive in the United States or its territories a Yugoslav inheritance.

The Court then considered the exchange control laws of Yugoslavia. It came to the conclusion that under these laws U.S. citizens did not have an unqualified and enforceable right to receive. Their receipt of property in each case would depend upon the exercise by the Yugoslav Minister of Finance of his uncontrolled discretion to permit or prevent transfers from Yugoslavia to a foreign country. The Court refused to come to a different conclusion because of evidence that U.S. heirs had been receiving a flow of Yugoslav inheritances. This merely indicated the indulgence of the Yugoslav authorities and did not establish the existence of unqualified and enforceable rights of receipt.

The Oregon Supreme Court observed that rights of succession under local State law might be affected by treaty arrangements entered into between the United States and Yugoslavia. If such arrangements conflicted with State law, the latter must give way. The Court then undertook a detailed examination of a treaty of 1881 between the United States and Serbia, to which the present Yugoslav Government was the successor, but found that it did not conflict with Oregon law because the rights granted by the treaty were to the citizens of one country physically present in the territory of the other. What was required by the Oregon statute was receipt of a Yugoslav inheritance by a U.S. heir in the United States and not by a U.S. heir present in Yugoslavia.

Next, the Court examined the question whether the Oregon statute was in conflict with the Fund Agreement:

In arriving at our conclusions, we have given attention to the terms of what is commonly known as the Bretton Woods Agreement of 1944, cited by the defendants. Yugoslavia was one of the 44 participating governments at the United Nations Monetary and Financial Conference of that year. Later, it became one of the signatories to the Articles of Agreement formulated as the final act of the conference. The major features of the final document provided for the establishment of the International Monetary Fund and of the International Bank for Reconstruction and Development. It is common knowledge that the conference was motivated by the then prevailing international apprehension [sic] world economy would suffer seriously as an aftermath of World War II unless some devices to stabilize it were quickly undertaken by the world powers. This thought is clearly affirmed by Article I of that agreement, wherein its controlling purposes and objectives are stated.

The defendants, however, point to its Art. XIV, §4 and Art. XI, §2, which provide sanctions against any member nation which imposes foreign exchange restrictions contrary to the provisions of the agreement. Although not fully developed by defendants’ argument, the inference is that a foreign exchange system of controls and regulations was established thereby which would nullify the restrictive character of the Yugoslav Foreign Exchange Law and implementing Regulations. The contrary is clearly evident from a reading of the entire agreement. It is replete with expressions recognizing the want of economic parity between the signing nations and the relative difficulties of some of the lesser nations in maintaining a sound monetary system, and definitely places them in an exceptional class. We turn for the moment to one of the very articles to which they point. It is significantly captioned “Transitional Period.” Section 2 of that article is subcaptioned “Exchange Restrictions.” Its provisions are spread in marginal note.36

Article VII, §3(b) of the agreement is also to the same tenor in recognizing that some nations will find the need to “impose limitations on the freedom of exchange operations.”

The Bretton Woods Agreement gives no support to the thesis of defendants and, to the contrary, is in a large sense an international recognition that some countries, rightly or wrongly, would impose strictures such as are exemplified by the foreign exchange laws of Yugoslavia and Bulgaria … .37

The Oregon Supreme Court held that the Yugoslav heirs were not entitled to inherit under the Oregon statute. The heirs, invoking the jurisdiction of the Supreme Court under Title 28 U.S.C. Section 1257 (3),38 have successfully petitioned for a writ of certiorari. The federal questions presented were (a) whether the 1881 treaty had been properly interpreted by the Supreme Court of Oregon, and (b) “whether notwithstanding the adherence of both the United States and Yugoslavia to the Articles of Agreement of the International Fund, … a State of the United States may deprive citizens and residents of Yugoslavia of the capacity to inherit property in such State solely by reason of the existence in Yugoslavia of foreign exchange controls, imposed or maintained consistently with such Agreement, pursuant to a State law making the right of an alien residing in a foreign country to take by will or by intestacy dependent upon ‘the rights of citizens of the United States to receive by payment to them within the United States*** money originating from estates of persons dying within such foreign country***’.”

On the second question the heirs argued that the United States, by becoming a party to the Fund Agreement, necessarily gave its recognition and acceptance to foreign exchange controls maintained or imposed by other parties to it consistently with the Agreement. They cited Article VIII, Section 2(b), as an example of a provision in the Agreement supporting this proposition.39 This recognition and acceptance would be impaired if each of the states of the United States could put sanctions on the nations maintaining such controls by making the citizens and residents of these nations incapable of inheriting. Similarly, the exclusive authority of the federal government in matters of foreign policy and foreign affairs would be impaired if the individual states could follow their own domestic policies in this field. In this connection, the brief refers to Perutz v. Bohemian Discount Bank,40 in which the New York Court of Appeals held that, in view of the membership in the Fund of the United States and Czechoslovakia, the foreign exchange control laws of Czechoslovakia could not be deemed offensive to the public policy of the United States.

In its brief in opposition to the petition for a writ of certiorari, the respondent has argued that the United States, by becoming a member of the Fund, has not given acceptance to the Yugoslav foreign exchange control law, and that a state law requiring reciprocal rights of inheritance is not a forbidden entry in matters of foreign affairs. The respondent has supported this argument by referring to the passages in the judgment of the Oregon Supreme Court which have been quoted above.

The United States has submitted a brief as amicus curiae supporting the petition for a writ of certiorari. It has argued that the Oregon Supreme Court has misinterpreted the 1881 treaty and the Fund Agreement.

The alternative holding of the court below that existing Yugoslav monetary controls would prevent an American citizen from obtaining the benefit of inherited property in Yugoslavia is also erroneous… . Yugoslavia is a signatory to the Bretton Woods Agreement… in which reciprocal rights for the interchange of funds is recognized. The Agreement clearly obligates the countries participating to maintain only such controls as are permitted by its terms and within such limitations as are provided therein. There is nothing in the Agreement which would allow Yugoslavia to preclude the inheritance by an American citizen and resident of the estate of a Yugoslav.

The appendix to the brief cites the following as relevant provisions of the Fund Agreement: Article IV, Sections 3 and 4; Article VI, Sections 1 and 3; Article VIII, Sections 1 and 2.

In the petitioner’s reply brief, the argument has been repeated that the membership of the United States in the Fund has established a federal public policy within the competence of the federal government which the states cannot ignore. Thus, Oregon cannot deny a Yugoslav resident and citizen rights of inheritance that he would otherwise have under its laws solely because Yugoslavia has exchange controls, if those controls are consistent with the Fund Agreement.

The emptiness of the respondent’s position on this score is evidenced by the fact that the complaint is merely that Yugoslavia has foreign exchange controls, and not that the American distributees of Yugoslav estates are not receiving their distributive shares in dollars in the United States. See, Pet. pp. 9, 10. In this connection, it should be noted that in the International Monetary Fund’s Eleventh Annual Report on Exchange Restrictions (1960), p. 352, the following is said concerning transfers of capital from Yugoslavia: “All transfers of a capital nature by residents or nonresidents are subject to individual license.*** A Decision of the Yugoslav Federal Executive Council of October 14, 1955 requires the Yugoslav authorities to continue to permit the remittance of inheritances to citizens of the United States, provided that the remittance is requested within three years from the date of distribution of the estate.”[Italics supplied.]

When read together, therefore, there seem to be three arguments in the briefs of the petitioner and the United States based on the Fund Agreement, as follows: First, the Fund Agreement does not permit any limitation by Yugoslavia on the right of a U.S. citizen and resident to inherit the estate of a Yugoslav. Secondly, any such limitation by Yugoslavia would be consistent with the Fund Agreement. Thirdly, Yugoslavia does not in fact interfere with capital transfers to U.S. transferees. As already noted, the Supreme Court has granted review of the Oregon decision.41

Currency of Compensation

Lauritzen et al.v. Government of Chile, decided by the Supreme Court of Chile on December 19, 1955,42 arose out of the requisition by the Chilean Government of five vessels owned by Danish firms in February and May of 1941 when the vessels were immobilized in Chilean waters. The Chilean Government recognized its obligation to pay compensation in the decrees ordering the requisitions, but many issues as to the appropriate compensation had to be settled in this litigation. Only one of these issues is referred to here, and that is the currency in which the plaintiff shipowners were entitled to receive compensation.

The plaintiffs argued that the amount of damages should be assessed in U.S. dollars and that a fixed sum in this currency should be awarded to them in settlement of their claims. The defendant alleged that payment in dollars was illegal under Chilean law and that only Chilean pesos could be paid. The defendant relied upon the Monetary Law of 1925 (Decree-Law No. 606), Article 1 of which established the peso as the monetary unit of Chile with a defined gold content. The defendant also relied upon Law No. 5107 of April 19, 1932, which established a regime of foreign exchange control, including the necessity for official approval of payments in foreign currency.

The Supreme Court held

… Neither the said Article I of Decree-Law No. 606 which simply provides that “the monetary unit in Chile is the peso,” nor the provisions of Law No. 5107, which governs, in general, international exchange operations and, in particular, payment of contractual charges [precios], constitutes a barrier to recovery in dollars in this case. On the contrary, there are definite reasons for recovery in North American currency.

Actually, the defendant in the brief replying to the complaint, recognized the fact that part of the indemnity has already been paid in dollars, thereby admitting its willingness to accept this form of payment. This is evidenced by Decree No. 745 of April 22, 1946 (p. 139), by which the Chilean Government ordered a certain amount in dollars to be delivered to the Lauritzen Company as partial payment of the indemnity. Besides this, the Government ordered the amount of 214,463 pesos, which had been received by it from use of the ships, to be converted into dollars (at the rate of 31 Chilean pesos to the dollar) for the purpose of paying in dollars the sum which it owed.

During the proceedings both parties have discussed prices in terms of dollars in order to estimate the different kinds of damage which are the subject of the present litigation. For example, the dollar has been used in assessing the cost of construction of the ships, of their use, of the rates [of affreightment] per D.W.T., of the profits of the ships before and after requisition. The Government itself made the contract for the lease of the ships to the Compañía Sud-Americana de Vapores in terms of dollars (pp. 174 ff., 204, 221). Furthermore, it has been international practice since the last war to pay compensation due by reason of requisition in dollars. The numerous cases cited in Whiteman’s treatise corroborate this assertion. Moreover, it must be observed that the said currency is used as an international medium of exchange, which is evident in Article IV (I) (a) of the International Monetary Fund,43 which Chile ratified by Law No. 8403 of December 29, 1945. This Article provides that the par value of the currency of each member shall be expressed in terms of gold as a common denominator or in terms of the United States dollar.

The lack of merit of the exceptions under consideration is more evident if one bears in mind the fact that it would be neither just nor equitable to dismiss a lawsuit in which all court proceedings have been complied with and the parties have incurred heavy expenditures, for the sole reason that one party preferred payment in a specific currency which has universal exchange value rather than in a depreciated currency which is not a circulating medium beyond the national frontiers.

It should be noted also that, even if it were possible to order payment in national currency, the realization of the amount claimed would be rendered difficult. In the event that plaintiffs wished to reconstruct their vessels (payment of compensation must comprehend this possibility), they could not do so with Chilean currency because, unlike the dollar, it is not accepted by foreign shipyards as a circulating medium. This would raise the problem of the convertibility of the national currency into foreign currency. The plaintiffs would then be subject to the possibility of receiving an uncertain amount which would mean that they would not realize full compensation from their claim.

Mr. Gold, General Counsel, is a graduate of the Universities of London and Harvard, and was formerly a teacher of law and a member of a wartime British Government mission in Washington, D.C. He is the author of articles published in various law journals.

173 N.Y.S.(2d) 509 (1958). The proceedings in the New York Supreme Court were discussed in an earlier article; see Joseph Gold, “The Fund Agreement in the Courts—V,” Staff Papers, Vol. VI (1957–58), pp. 471–74.

178 N.Y.S.(2d) 1019 (1958).

190 N.Y.S.(2d) 352 (1959).

First National City Bank of New York v. Southwestern Shipping Corporation, 80 S. Ct. 198, 361 U.S. 895 (1959). The name of the plaintiff had been changed.

190 N.Y.S.(2d), p. 356.

190 N.Y.S.(2d), pp. 358–59. Italics in the original.

190 N.Y.S.(2d), p. 360.

59 Stat. 512 (1945).

33 Hong Kong Law Reports (1949) 231–82, discussed in “The Fund Agreement in the Courts—V,” Staff Papers, Vol. VI (1957–58), pp. 461–64.

Unreported. Discussed by Hartwig Bülck in Jahrbuch für Internationales Recht, Vol. 5, Part 1 (1955), pp. 113–23, and in “The Fund Agreement in the Courts—V,”Staff Papers, Vol. VI (1957–58), pp. 464–68.

This point is related to the one made in the minority opinion of the Court of Appeals. The minority held that, if National City had discovered the illegality of the assignment to Southwestern, it could have refused to carry out the assignment, and could have discharged itself by paying Anlyan, the assignor. National City should not be in a worse position because it did this unwittingly. On this point, it is interesting to compare Société ‘Filature et Tissage X. Jourdain’ v. Epoux Heynen-Bintner (see Pasi-crisie Luxembourgeoise [1957], pp. 36–39, and “The Fund Agreement in the Courts—V,”Staff Papers, Vol. VI [1957–58], pp. 468–70). J., a resident of Luxembourg, entered into a valid and enforceable contract with S, a resident of France. W, another resident of France, attempted to pay J, on behalf of S, in a way which was inconsistent with French exchange control regulations. A French court held that this did not discharge S., and the Luxembourg Court held that Article VIII, Section 2(b) required it to recognize this judgment. In the Luxembourg case, the issue was the effect of a judgment based on a payment inconsistent with the exchange control regulations of another member. In the Southwestern case, an issue raised by the minority in the Court of Appeals was the effect of a payment consistent with the exchange control regulations of another member.

See Joseph Gold, “The Fund Agreement in the Courts,” Staff Papers, Vol. I (1950–51), pp. 326–27.

Juristische Blätter, February 7, 1959, pp. 73–74.

See footnote 9.

See footnote 11.

Joseph Gold, “The Fund Agreement in the Courts—IV,” Staff Papers, Vol. V (1956–57), pp. 297–301.

304 N.Y. 533, 110 N.E.(2d) 6 (1953); see Joseph Gold, “The Fund Agreement in the Courts—III,” Staff Papers, Vol. III (1953–54), pp. 303–08. It is not clear whether the decision in this case was based on Article VIII, Section 2(b), or on the effect of the Fund Agreement as a whole.

For a discussion of the relation of Article VIII, Section 2(b), to quasi-contractual claims, see “The Fund Agreement in the Courts—V,” Staff Papers, Vol. VI (1957–58), pp. 467–68, and the Maastricht decision discussed later in the present article.

I am indebted to my colleague, Mrs. Philine R. Lachman, who obtained and translated the reports of the Dutch cases considered in this article. I have also benefited from discussing these cases with her, but she cannot be held accountable for any of the views that I have expressed.

Nederlandse Jurisprudentie 1960, No. 290. The headnote to the report refers to the article by Philine R. Lachman entitled “Overtreding van buitenlandse deviezen-bepalingen” in Nederlands Juristenblad, 1958, An. 17 (April 26, 1958), pp. 383–40.

“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.” The reference to Article VI, Section 6, is a slip. The obvious intention was to refer to Article VI, Section 3.

For the definition of current transactions in the Fund Agreement, see Article XIX(i).

Proceedings and Documents of the United Nations Monetary and Financial Conference (U.S. Department of State Publication 2866, International Organization and Conference Series I, 3), Doc. 191, p. 230; Doc. 343, p. 576.

“Other members.—Membership shall be open to the governments of other countries at such times and in accordance with such terms as may be prescribed by the Fund.”

Resolution No. 7–9 adopted on September 11, 1952.

“… The Fund may, if it deems such action necessary in exceptional circumstances, make representations to any member that conditions are favorable for the withdrawal of any particular restriction, or for the general abandonment of restrictions, inconsistent with the provisions of any other article of this Agreement. The member shall be given a suitable time to reply to such representations. If the Fund finds that the member persists in maintaining restrictions which are inconsistent with the purposes of the Fund, the member shall be subject to Article XV, Section 2 (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.”

See footnote 12.

See International Monetary Fund, Annual Report, 1960, pp. 7–8, 29–31, and International Financial News Survey, Vol. XIII (1961), p. 41.

See, for example, “The Fund Agreement in the Courts—V,” Staff Papers, Vol. VI (1957–58), pp. 466–67, 470; “The Fund Agreement in the Courts—IV,” Staff Papers, Vol. V (1956–57), p. 284.

See footnote 18.

Nederlandse Jurisprudentie 1960, No. 149.

Cf. Solicitor for the Affairs of His Majesty’s Treasury v. Bankers Trust Co., 304 N.Y. 282, 107 N.E.2d 448 (1952). This was an action by the Treasury Solicitor of the United Kingdom to recover funds deposited with the defendant by a British resident. The defendant had failed to comply with an order under British exchange control legislation to surrender the funds in return for their sterling equivalent. The funds were then vested in the U.K. Treasury, which assigned them to the Solicitor, who demanded them from the defendant. The decision in this case was based on purely procedural considerations.

349 P. (2d) 255 (1960).

ORS 111.070.

The marginal note sets out the text of Article XIV, Section 2, with emphasis supplied to the phrase “as soon as conditions permit.”

349 P.(2d), pp. 267–68.

See p. 290, supra.

A footnote elsewhere in the brief discusses Article VI, Section 3, and makes the point that under it members are permitted to exercise such controls as are necessary to regulate international capital movements; and under Section 1 members may be subject to sanctions in certain circumstances if they do not impose such controls. Capital transfers are basically those where no quid pro quo is involved, as in the case of payments of the shares of decedent estates. The footnote concludes that even if these are considered “current” payments, their control is permitted under Article XIV.

See footnote 17.

U.S. Law Week, October 11, 1960 (29 LW 3094–95).

International Law Reports (ed. Lauterpacht), Year 1956, pp. 752–54, from which the quotation infra is taken. The case is reported in Revista de Derecho, Jurisprudencia y Ciencias Sociales y Gaceta de los Tribunales, Vol. 52, Nos. 9 and 10 (November-December 1955), p. 444 et seq.

Article IV, Section 1. “Expression of par values.—(a) The par value of the currency of each member shall be expressed in terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on July 1, 1944.”

Note : Shortly before publication of this article, the Supreme Court unanimously reversed the Supreme Court of Oregon in the Stoich case. Fund aspects of the Supreme Court decision will be discussed in a later article.

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