5 Case Law: England
- Joseph Gold
- Published Date:
- December 1989
Mansouri v. Singh
In Mansouri v. Singh,1 the defendant, Singh, a travel agent, could use air travel tickets in his business. He discovered that tickets could be bought in the Islamic Republic of Iran for rials, taken out of the country notwithstanding its exchange control regulations, and exchanged for cash anywhere in the world under international air travel arrangements. The plaintiff, Mansouri, and his wife were Iranian nationals resident in the Islamic Republic of Iran, but the wife frequently visited England. Mrs. Mansouri arranged in England with Singh that if Mansouri deposited rials in Teheran with a travel agent there named by Singh, she would receive the sterling equivalent from Singh in England at an exchange rate favorable to him. Mrs. Mansouri would telephone her husband from England, and he would deposit rials with Singh’s agent. The agent would inform Singh of the deposit and would arrange for the tickets to be sent to Singh in England, who would then pay sterling to Mrs. Mansouri in England at the agreed rate of exchange.
After a number of transactions under this plan, Mansouri and his wife became residents of England. The parties agreed to continue their arrangements, with members of Mansouri’s family, instead of Mansouri himself, depositing rials in Teheran. The procedure was modified, however, with members of the family paying the rials not to Singh’s agent but to an employee of Singh who visited Teheran and brought back the tickets or arranged to have them forwarded to London. Furthermore, the sterling payments would be made in another way, because Mansouri had become dissatisfied with waiting until the tickets arrived in London. In respect of two payments of rials, Singh drew a check in London on a bank in London for 33,334 pounds sterling, but postdated the check to July 1, 1980. On June 30, 1980 he countermanded payment of the check, and it was dishonored when presented.
Mansouri sued to recover the amount of the check and was met with two defenses, one of which was that enforcing payment of the check would be enforcing an exchange contract contrary to the law of the Islamic Republic of Iran and to the provisions of English law that gave effect to Article VIII, Section 2(b). The Queen’s Bench Division,2 on the occasion of a routine application to the court, drew attention to the possible relevance of the Articles. The court instructed both parties to send written inquiries to the Treasury of the United Kingdom to determine whether the Islamic Republic of Iran was a member of the Fund in 1979 or 1980 and a party to the Articles, and whether its exchange control regulations prohibited the export of funds from the country. The Treasury replied that there was no record of the Islamic Republic of Iran’s withdrawal from the Fund or from the Articles.3 This feature of the case can be taken to endorse the view that it is a duty of the court to raise the issue of the applicability of Article VIII, Section 2(b) if the provision may be relevant, even though the parties have not done so.
The court stated that four issues arose under Article VIII, Section 2(b):
(i) Was the agreement between Mansouri and Singh an exchange contract? The court decided that it was, even though Singh had argued that he had exported tickets and not currency. The arrangement was considered a device to exchange rials for sterling.4
(ii) Was the agreement contrary to the exchange control regulations of the Islamic Republic of Iran? The court concluded, with some hesitancy, that, although it had received no expert evidence, the agreement was contrary to that country’s exchange control regulations.
(iii) Were the regulations maintained or imposed consistently with the Articles? The court found that they were consistent, acting on the presumption, not rebutted in this case, that exchange control regulations are consistent with the Articles. (The effect is then to place the burden on the plaintiff of proving that the regulations are inconsistent with the Articles. This result can be compared with the German practice of requiring the plaintiff to prove the inconsistency of regulations with the Articles in order to establish that he is entitled to institute proceedings.)
(iv) If Mansouri was allowed to recover on the check, would the court be enforcing the agreement between the parties? The court refused to distinguish between the obligations of a contract and a check given in performance of an obligation and held that to enforce payment of the check would be to enforce the obligations of an exchange contract.5
Mansouri appealed on the ground that the last question had been answered incorrectly by the lower court.6 For this purpose, Mansouri relied on the fact that the check was drawn on a bank in England and was to be paid in sterling in England. The obligation to make payment on the check was separate from any obligation that might exist under any underlying or associated agreement. The obligation under the check was not illegal, and the possible unenforceability under Article VIII, Section 2(b) of the separate agreement did not taint the check with illegality.
In the Queen’s Bench Division, Mansouri cited Sharif v. Azad.7 To enable it to find in favor of Singh, the court had to dispose of this earlier case. L., a resident of Pakistan, had an account with a bank in Karachi, on which he could draw rupees, but under Pakistan’s exchange control regulations he could not take rupees out of the country or exchange them for sterling without permission of the exchange control authorities. L. came on a short visit to England, and, needing sterling, he obtained an amount of it from S., a resident of England. L. gave S. a check for rupees drawn on the Karachi bank, with the payee’s name left in blank. S. transferred the check to A., also a resident of England, who inserted the name of his brother, a resident of Pakistan, to whom the check was sent for collection. In return for the rupee check, A. gave S. a sterling check drawn on an English bank and payable in England. The sterling check was postdated because A. wanted to be sure that his brother succeeded in encashing the rupee check. The Pakistani authorities became suspicious, and the rupees were placed in a blocked account. A. stopped payment of the sterling check.
In a suit by S. on the sterling check, A. relied on Article VIII, Section 2(b), but the Court of Appeal gave judgment for S. The court referred to the severability of the transaction between S. and L. from the one between S. and A., but later cases, including Mansouri v. Singh, have explained that the sole ratio decidendi of Sharif v. Azad was that Pakistan’s exchange control regulations did not purport to apply to the sterling check in the circumstances of the case.
The reading of the regulations was probably wrong,8 but if it was correct, the question of Pakistan’s jurisdiction to control transactions between two nonresidents to be performed abroad would arise. This question did not arise, however, because L., a resident and continuing resident of Pakistan, had entered into a contract to exchange rupees for sterling that contravened Pakistan’s exchange control regulations. Pakistan had clear jurisdiction to control his entry into the contract. What the Court of Appeal did in Sharif v. Azad was to help L. complete the scheme he had arranged by providing a rupee check, with the payee’s name left in blank, in return for sterling. The important element of the decision in Sharif v. Azad is the later explanation of it that it did not treat the sterling check as a discrete transaction unrelated for legal purposes to the exchange contract that gave rise to the check.
In Mansouri v. Singh, the Court of Appeal drew the following principles from the opinion of Lord Diplock in the United City Merchants case,9 with which the other members of the House of Lords in that case had agreed.
(1) The term “exchange contracts” is to be interpreted narrowly.
The term is confined to contracts to exchange the currency of one country for the currency of another: it does not include contracts entered into in connection with sales of goods which require the conversion by the buyer of one currency into another in order to enable him to pay the purchase price. The House of Lords approved the interpretation based on the term by the Court of Appeal in Wilson Smithett & Cope Ltd v Terruzzi , 1 All ER 817,  QB 683. The acceptance of this narrow interpretation has been criticised: see, for example, Gold’ “Exchange Contracts”, Exchange Control and the IMF Articles of Agreement’ (1984) 33 ICLQ 777, but as the law stands at present an important limitation is imposed on the scope of s 2(b) in English law.10
(2) The word “unenforceable” means that the exchange contract cannot be enforced by the courts.
The contract is not rendered ‘illegal’ by English law nor are acts undertaken in this country in performance of such a contract rendered unlawful, but, on the other hand, an English court must decline to enforce an exchange contract which appears to the court to be unenforceable by reason of s 2(b) even though the parties themselves have failed to raise the point.11
(3) On the evasion of exchange control regulations, the principle was as follows:
The court should be aware of the fact that men of business may seek to avoid s 2(b) by various artifices…and should therefore look at the substance of the contract and not at the form. Accordingly, it should not enforce a contract that is a ‘mere monetary transaction in disguise’.12
(4) The question whether and to what extent a contract is unenforceable by reason of Article VIII, Section 2(b) because it is a monetary transaction in disguise is not a question of construction of the contract but a question of the substance of the transaction to which enforcement of the contract will give effect.
The court quoted the following passage from Lord Diplock’s opinion in the United City Merchants case13 in further explanation of this principle and to justify principle (5) below:
If the matter were to be determined simply as a question of construction, the contract between the sellers and the confirming bank constituted by the documentary credit fell altogether outside the Bretton Woods Agreements; it was not a contract to exchange one currency for another currency but a contract to pay currency for documents which included documents of title to goods. On the contrary, the task on which the court is engaged is to penetrate any disguise presented by the actual words the parties have used, to identify any monetary transaction (in the narrow sense of that expression as used in the Terruzzi case) which those words were intended to conceal and to refuse to enforce the contract to the extent that to do so would give effect to the monetary transaction.
In the instant case there is no difficulty in identifying the monetary transaction that was sought to be concealed by the actual words used in the documentary credit and in the underlying contract of sale. It was to exchange Peruvian currency provided by the buyer in Peru for $US 331,043 to be made available to it in Florida; and to do this was contrary to the exchange control regulations of Peru.14
(5) Where the court finds a monetary transaction that is an exchange contract within the meaning of Article VIII, Section 2(b), the court should refuse to enforce that transaction “even though such refusal may involve the court in declining to give effect in whole or in part to an autonomous contract constituted by a letter of credit.”15
The court saw the issue it had to decide as how the principles it had drawn from the United City Merchants case applied to the case before the court, in which the autonomous obligation arose not under a documentary credit, but under a sterling check drawn by Singh on an English bank in favor of Mansouri. The contract between Singh and Mansouri was clearly a monetary transaction and an exchange contract. Mansouri’s position was not materially different from the plaintiff’s position in the United City Merchants case because the autonomous obligation on which Mansouri was suing arose under a check and not a documentary credit.
The court recognized that there were passages in the opinions of members of the Court of Appeal in Sharif v. Azad that seemed to detach a check from the underlying contract, and that nothing was said in the United City Merchants case to cast doubt on those passages. Nevertheless, the court was satisfied that the statements did not provide a satisfactory basis for distinguishing between the United City Merchants case and the instant case. The “real basis of the decision”16 in Sharif v. Azad, the court repeated, was that the check did not offend Pakistan’s exchange control regulations.
The court confessed misgivings about its own decision. Compelling reasons existed for treating the rights and obligations that arise from commercial documents, such as bills of exchange, letters of credit, and performance bonds, as being autonomous and as having an existence of their own that is unaffected by the rights and obligations springing from associated transactions. The court attempted, therefore, to limit the scope of its conclusion:
These reasons may be particularly obvious in the case of a cheque or bill of exchange which contains no reference on its face to any underlying or associated transaction and which has the characteristic of being negotiable. But it is to be remembered that, where s 2(b) applies, the court, by virtue of an international agreement, has an obligation not to enforce the exchange contract. Accordingly, once a s 2(b) point arises, either because the point is raised by one of the parties or because the point is perceived by the court itself, the court has two tasks to perform: (a) to identify any monetary transaction, whether concealed or not, which constitutes a relevant exchange contract; (b) or refuse to enforce the monetary transaction or any linked transaction or contract which if enforced would give effect to the monetary transaction.
If this be the right approach, it seems to me to follow that in the instant case, where the parties to the English cheque were the same parties as the parties to the exchange contract and where it was intended and contemplated that the cheque would be issued by the defendant to give effect to and to carry out his obligations under the exchange contract, the court is obliged to refuse to enforce payment of the cheque. Indeed, it might be said that to enforce the payment of this cheque in the circumstances of the instant case would be to do violence to the principles underlying the Bretton Woods Agreements. . . .
…I would wish to keep open for consideration in some future case the question whether an obligation to make payment to an innocent third party to whom a cheque had been negotiated could be regarded as an obligation which, if performed, would give effect to the exchange contract.17
On the basis of this conclusion, the court held that for the lower court to decide that the check was unenforceable under Article VIII, Section 2(b), it had been necessary to find that the exchange contract was contrary to the exchange control regulations of the Islamic Republic of Iran and that these regulations were maintained or imposed consistently with the Articles.
The Court of Appeal held that the burden of proving these facts was on the defendant, Singh. This finding should be noted. It is contrary, for example, to the practice of the German courts. As a result of the German doctrine that the provision establishes a procedural precondition for suit, German courts place on the plaintiff the burden of proving the enforceability of his claim. One consequence is that he must prove that he has complied with relevant exchange control regulations. The English rule is preferable, not only because it is more compatible with the concept of unenforceability in many legal systems, but, more important, because the provision deals with the unenforceability and not the enforceability of claims.
At the trial, Singh had been unable to produce evidence pertaining to the two facts about the regulations that he had to prove, but finally the judge concluded from admissions of the parties and other circumstances that the contract was contrary to the Islamic Republic of Iran’s exchange control regulations. The lower court held that it had to approach the question on the basis of all the evidence. If the evidence as a whole proved on the balance of probability that the transaction was contrary to exchange control regulations, the court should be astute to give effect to those regulations even though the precise terms of them were not in evidence. On the issue of the consistency of the regulations with the Articles, the lower court held that there was a presumption of the consistency of regulations with the Articles. The presumption was rebuttable, but it had not been rebutted with evidence that the Islamic Republic of Iran’s exchange control regulations were inconsistent with the Articles.
The Court of Appeal held that the lower court had not resolved these two important issues in a satisfactory manner. The case was sent back for retrial on that part of the case that involved the defense based on Article VIII, Section 2(b). On the retrial, the matters in issue would be the precise nature of the agreement between Mansouri and Singh, “the exchange control regulations of Iran in force at the material time,”18 and whether these regulations were maintained or imposed consistently with the Articles.
The words quoted in the previous paragraph raise the issue of the time that is material for proving the consistency of exchange control regulations with the Articles. Two obvious dates that might be considered would be the date at which the contract was entered into and some date related to the proceedings.19 The latter date should be chosen because of the economic character of the Articles and the protection this date would give to the balance of payments of the promulgator of the exchange control regulations. If, by the time of the proceedings, a member has withdrawn regulations that were in force at the time the contract was made, the member has decided that it does not need protection. To apply Article VIII, Section 2(b) in these circumstances would be to assume that an objective of the provision was to punish obligees rather than to protect members.
It is useful to recall some of the principles that bear on the question whether exchange control regulations are maintained or imposed consistently with the Articles:
1. The following exchange control regulations are consistent with the Articles:
(i) Regulations that do not restrict the making of payments and transfers for current international transactions as defined in Article XXX(d). Defenses based on the failure to comply with such regulations are less likely but not impossible. For example, a party may have failed to apply for an exchange license even though they are always granted. Another example would be failure to comply with regulations that require exchange transactions to be carried out through an authorized dealer, with no restriction on the transactions that may be entered into in this way. The purpose of exchange control regulations of this kind may be to provide the economic authorities of a country with information about trends in the movement of funds, goods and services, or capital between the country and other countries. These examples show the fallacy of the definition of exchange control regulations adopted by some authors as regulations intended to protect the exchange resources of a country or its currency or its international economic position. The inference is that exchange control regulations must be defined in terms of form or technique.
(ii) Controls of capital transfers.
(iii) Regulations by a member not availing itself of the transitional arrangements of Article XIV that impose restrictions on payments and transfers for current international transactions but that are approved by the Fund under Article VIII, Section 2(a).
(iv) Regulations by a member availing itself of the transitional arrangements of Article XIV that maintain or adapt to changing circumstances the restrictions on the making of payments and transfers for current international transactions that were in effect on the date when the member entered the Fund; provided that the Fund has not made a finding under the last sentence of Article XIV, Section 3 that the member persists in maintaining restrictions that are contrary to the purposes of the Fund.
(v) Regulations by a member availing itself of the transitional arrangements that introduce or reintroduce restrictions on the making of payments and transfers for current international transactions (that is, restrictions not maintained since the member entered the Fund or not considered by the Fund to be adaptations to changing circumstances of restrictions maintained since the member entered the Fund) if the Fund has approved the introduced or reintroduced restrictions under Article VIII, Section 2(a).
(vi) Regulations imposing restrictions on exchange transactions with nonmembers or with persons in their territories, unless the Fund finds that the restrictions prejudice the interests of members and are contrary to the purposes of the Fund.
(vii) Regulations imposed under the “scarce currency” provision of Article VII, Section 3. The Fund has never authorized the use of this provision.
2. In view of the complicated issues of fact, including developments over extensive periods, that must often be resolved to settle the question of the consistency of regulations with the Articles, the Fund is in the best position to make the necessary determinations.
3. There should be no judicial presumption that regulations are or are not maintained or imposed consistently with the Articles. For example, even if the Fund has not taken a decision declaring certain restrictions to be inconsistent, it should not be presumed that they are necessarily consistent with the Articles. The fact that the Fund has not expressly approved restrictions for which approval is necessary establishes the inconsistency of the restrictions with the Articles. The Fund does not normally adopt a decision declaring that certain restrictions are inconsistent with the Articles, except when an inquiry is addressed to the Fund. The Fund simply forbears from granting approval.
Similarly, no presumption of consistency should arise because the Fund has taken no action under Article XXVI, Section 2(a) to declare a member ineligible to use the Fund’s resources because the member is applying restrictions for which the Fund’s approval is necessary but has not been granted. Again, no presumption should arise because the Fund has not made representations under Article XIV, Section 3 to a member availing itself of the transitional arrangements that conditions are favorable for the withdrawal of any particular restriction or for the general abandonment of restrictions. The Fund is not compelled to make a declaration of ineligibility or such representations. The Fund’s practice is to press informally for the removal of restrictions that it considers inappropriate to a member’s situation when the Fund conducts consultations with members under established regulatory procedures or when it engages in negotiations with members on use of the Fund’s resources. These practices, however, do not establish the legal inconsistency of restrictions with the Articles.
4. The restrictions referred to under the principles set forth above are those that apply to the exchange contract on which suit is brought. The fact that other restrictions may be consistent or inconsistent with the Articles does not affect the legal character of the particular restriction that applies to the exchange contract in issue.
The use of the concept of the monetary transaction in disguise by English courts leads them to take all the steps in a transaction into account and to refuse to base a decision solely on the final step. At that last step, it might seem, for example, that the issue was the enforceability of a payment between two parties resident outside the territory of the promulgator of the exchange control regulations. This might have appeared to be the situation in both the United City Merchants case and at one time in Mansouri v. Singh. Concentration on the last step in these circumstances could have led to the view, on the balance of payments test of the currency involved, that the currency of the promulgator of the exchange control regulations was not involved.
By taking all the steps into account, it becomes apparent not only that there is an exchange of currencies, which satisfies the English view of exchange contracts, but also that the exchange contract would lead to an effect, although sometimes indirect, on the promulgator’s balance of payments.20 In Mansouri v. Singh, for example, the scheme would impose a liability on Iranian airlines to redeem airline tickets purchased for rials, with another currency at the place where redemption took place. In the United City Merchants case, recovery against the Royal Bank of Canada under the letter of credit imposed a liability on Continental, a Peruvian bank, to repay Royal.21
Article VIII, Section 2(b), it is submitted, applies only if the member that maintains or imposes exchange control regulations has jurisdiction under public international law to prescribe the regulations. The provision has not created a new head of jurisdiction, for example by requiring the currency of the promulgator of exchange control regulations to be “involved.” A difficulty in achieving a uniform international application of the provision by courts, unless the balance of payments test is adopted for the currency involved, is that there are differences of opinion among members on important aspects of prescriptive jurisdiction. It is unlikely that members would agree that the Fund should settle these disputed issues, because they are not questions of interpretation of the provisions of the Articles. Only questions of this kind are subject to the Fund’s power of authoritative interpretation under Article XXIX.22
The Fund’s practice has been to approve restrictions on payments and transfers for current international transactions that a member submits for approval without raising the question whether the member’s jurisdiction to adopt the restrictions is recognized by public international law. If the Fund withholds approval, it does so for economic reasons. It follows that if the defense of Article VIII, Section 2(b) is raised, and a member’s prescriptive jurisdiction to apply the exchange control regulations in the case is challenged, the court would have to settle the question on the basis of the principles it recognizes.
The countries constituting the Group of Five have a leading role in the Fund and in international monetary affairs. Their courts have taken different positions on Article VIII, Section 2(b). At one extreme is the narrow interpretation of courts in the United States, which ignores any economic purpose of the provision. At the other extreme is the broad interpretation, which rests on an economic objective, of courts in the Federal Republic of Germany and, to some extent, in France. The practice of English courts is basically in accordance with the narrow interpretation, but the concept of the monetary transaction in disguise falls somewhere between the two extremes, although the analaysis in support of the concept is the same as the reasoning that underpins the narrow interpretation. Japanese cases that discuss the provision have not been found.
Libyan Arab Foreign Bank v. Bankers Trust Company
Libyan Arab Foreign Bank v. Bankers Trust Company, decided by the Queen’s Bench Division on September 2, 1987,23 might seem to be a case that raised the question of prescriptive jurisdiction under public international law to impose exchange restrictions. The case might seem to deal with that problem because the United States imposed restrictions intended to affect moneys deposited with the foreign branches of U.S. banks, including the London branch of a U.S. bank. The decision, which rejected a defense based on the restrictions, rests, however, not on the denial of jurisdiction under public international law, but on principles of English private international law and of English contract and banking law.24 Although it can be assumed that the United States considered that it had jurisdiction under public international law to impose the restrictions, the English court did not think it necessary to go into this question.
The defendant did not rely on Article VIII, Section 2(b), and the court did not mention the possible relevance of the provision. The reason for this silence may have been the conclusion that an “exchange contract” was not involved according to the interpretation of that expression in earlier English decisions. There was no contract for the exchange of currencies, even though the result might be the recovery of sterling in settlement of a claim to U.S. dollars, and there was no monetary transaction in disguise. The Fund, however, had approved the restrictions imposed by the United States that were the basis for the defense. Approval was given under the procedure of Decision No. 144-(52/51) of August 14, 1952 on payments restrictions for security reasons. The decision is reproduced in the Appendix to this chapter. It will be seen that the Fund expresses “no objection” to restrictions subsumed under the decision. This formula was in use at the time the decision was adopted for all cases in which the Fund approved restrictions. In accordance with the Fund’s usual practice, there was no examination of the question whether the United States had prescriptive jurisdiction in accordance with public international law to impose the restrictions insofar as they applied to deposits by nonresidents in the foreign branches of U.S. banks.
The restrictions imposed by the United States were notified to the Fund under Decision No. 144 on January 16, 1986 by the Executive Director appointed by, and acting on behalf of, the United States. He informed the Fund that the U.S. Department of the Treasury had issued: (1) the Libyan Sanctions Regulations of January 10, 1986, implementing Executive Order 12543, which took effect at 8:06 p.m. on January 7, 1986, and which, among other things, prohibited the grant or extension of credits or loans by any U.S. person to the Government of Libya, or to its instrumentalities or controlled entities; and (2) the Libyan Sanctions Regulations, implementing Executive Order 12544 of January 8, 1986, which took effect at 4:10 p.m. on that date, and which blocked all property and interests in property of the Government of Libya, its agencies, instrumentalities, controlled entities, and the Central Bank of Libya that were in the United States, that thereafter came within the territory of the United States, or that were or thereafter came within the possession or control of U.S. persons, including overseas branches of U.S. persons.25 The notification stated that the Executive Orders became effective January 7 and 8, 1986, respectively, and were imposed for the purposes set forth in Decision No. 144.
The Executive Orders were issued by the President under various legislative enactments, including the International Emergency Economic Powers Act.26 The President made a finding that the policies and actions of the Government of Libya constituted an unusual and extraordinary threat to the national security and foreign policy of the United States. Criminal penalties would be incurred if the Regulations were not observed. The Regulations stated that a breach of them was not excused if a foreign court ordered the immediate release of assets held within the jurisdiction of the court.
The plaintiff (“Libyan Bank”), a Libyan corporation wholly owned by the Central Bank of Libya, engaged in banking business outside Libya. The defendant (“Bankers Trust”) was a New York corporation that had a head office in New York and foreign branches, one of which was in London (“Bankers Trust London”). Libyan Bank had a call (deposit) account, denominated in U.S. dollars, with Bankers Trust London. At the close of business on January 8, 1986, the credit balance in the account exceeded $131 million. Libyan Bank had, in addition, a demand (current) account, also denominated in U.S. dollars, with Bankers Trust in New York. At the close of business on January 8, 1986, the credit balance was more than $251 million.
As a result of the U.S. Regulations, it became illegal under the law of New York State (and of other States of the Union) at and after 4:10 p.m. on January 8, 1986 for Bankers Trust to make any payment or transfer of funds to or to the order of Libyan Bank in New York, either by way of debit to Libyan Bank’s account or as the grant of credit or a loan. Similarly, it was illegal under the law of New York or of any other State of the Union for Bankers Trust to make any such payment or transfer of funds in London or elsewhere. Bankers Trust applied twice to the U.S. authorities for a license to release the funds that would enable Bankers Trust to settle its obligations to Libyan Bank, but permission was refused.
Libyan Bank advanced six claims, of which the first related to the credit balance of $131 million in the defendant’s London branch. The legal issues connected with this claim were described by the court as of great interest and some difficulty. Much of the discussion by the court is devoted to this claim. The court recalled that while similar problems had arisen a few years earlier in connection with the U.S. freeze of Iranian assets, that freeze had been terminated before the litigation came to trial.
The court pointed out that the United Kingdom had not enacted any legislation similar to the U.S. legislation. British legislation giving the force of law to Article VIII, Section 2(b) was not mentioned. As the main issues were seen to arise under private international law, Bankers Trust argued that it could not transfer, or at any rate was not obliged to transfer, a sum as large as $100 million or more without using the payment machinery available in New York. Bankers Trust relied, therefore, on the defense recognized by English law that a contracting party will not be compelled to perform an act that is unlawful at the place where the act would necessarily have to be performed. Bankers Trust argued in the alternative that its contract with Libyan Bank was governed by New York law. Therefore, Bankers Trust could rely on the rule of English private international law that performance is excused if it becomes illegal, and for as long as it remains illegal, under the law governing the contract.
Application of these two rules of law required clarification of the banking relationship between Libyan Bank and Bankers Trust. Up to December 15, 1980, Libyan Bank did not wish to have an account with Bankers Trust in New York. All transfers for the credit of Libyan Bank used to arrive in New York, but, under a standing instruction, the credits were transferred at once to the London account, where, as Eurodollars, they earned a higher effective rate of interest than was paid on deposits in the United States. At the end of 1980, the parties agreed on a managed account arrangement. Bankers Trust opened an interest-free demand account for Libyan Bank in New York with a target (“peg”) balance of $500,000, and the London account was operated as an interest-earning call account. Transfers were made between the two accounts, as the need arose, in multiples of $100,000. The need for a transfer was determined each morning on the basis of the closing balance of the New York account for the previous business day. A necessary transfer was made with value the previous business day, so that interest was earned as of that day. The profit for Bankers Trust was the interest it earned on the peg balance, which meant $500,000 plus any sum short of $100,000 (the first transferable multiple).
The court found that a term of the arrangement was that all Libyan Bank’s transactions, whether as debits or credits, should pass through New York. In this way, Bankers Trust would know what transfers between the two accounts were necessary after the end of each business day to make the peg effective. Bankers Trust could safely make payments in New York on behalf of Libyan Bank, on occasion giving rise to an overdraft in New York, with the confidence that there was a credit balance in London that could not disappear and that Bankers Trust could call upon. Libyan Bank obtained not only an overdraft facility, but also had the benefit of the speed and efficiency with which current account payments could be made in New York, while Libyan Bank earned Eurodollar interest rates on the London account. If the arrangement were to be terminated, so that the London account became a current account, Bankers Trust would be entitled to reduce the rate of interest payable on that account or to decline to pay interest altogether, and would be entitled, in addition, to withdraw the overdraft facility connected with the New York account.
The second stage in the relationship between the parties ran from December 1980 to November 1985. Bankers Trust had become dissatisfied with the profitability of the peg balance in New York and proposed an increase in it and in the multiples for transfer, but Libyan Bank rejected the proposal. Bankers Trust then, in April 1984, put into effect a new procedure for transfers between the accounts. The change was made without informing Libyan Bank, which did not become aware of the change until mid-1985 and did not complain until October 1985. The effect of the new procedure was that Libyan Bank would lose interest on the London account in certain circumstances, and Bankers Trust would gain correspondingly. One of the claims on which Libyan Bank succeeded in the case was for the loss it sustained in this way, on the ground that Bankers Trust had committed a breach of contract.
A third stage in the relationship began on November 27, 1985, after the complaint by Libyan Bank, when Bankers Trust recorded the agreement of Libyan Bank to a new arrangement. It was in substance the one that Bankers Trust had instituted in April 1984 without informing Libyan Bank. On January 7 or 8, 1986, Bankers Trust should have transferred a substantial sum to London at 2 p.m. in accordance with the prevailing arrangement but failed to do so, with the result that the amount was caught by the freeze. At 2 p.m. on January 7, $165.2 million should have been transferred, but as the result of further transactions the amount at 2 p.m. on January 8 was $161.4 million.
On April 28, 1986 Libyan Bank instructed Bankers Trust by telex to pay $131 million from the London account on May 1, 1986. The payment was demanded in the form of a negotiable banker’s draft payable to Libyan Bank in London or to its order, but although payment in this form was preferred, payment in cash was stated to be acceptable. A similar demand was made for $161.4 million on the ground that this amount should have been transferred from the New York account to the London account on January 7 and 8, 1986. Bankers Trust refused to comply with these demands, because compliance would be unlawful in the United States, which the court held was correct but not necessarily relevant.
By a letter dated July 30, 1986, Libyan Bank’s lawyers wrote to Bankers Trust’s lawyers that if notice was required to terminate the managed account arrangement, notice had been implicit in Libyan Bank’s telex of April 28, 1986, and was in any event given explicitly by this letter. Finally, further demands for payment of the two sums were made on December 23, 1986. Payment within seven days was demanded in dollars by the means specified on April 28, 1986 or by any other commercially recognized method of tranferring funds that would result in timely and unconditional payment in London. In particular, and without prejudice to this demand, payment might be made by transfer to a designated dollar account at a London bank that was specified in the demand. If a transfer or clearing procedure was used to meet the demand, it must not result in freezing any part of the funds or credits. The message was concluded with the statement that Libyan Bank would not object to payment in sterling to a designated sterling account at the same specified London bank.
The court dealt first with the effect of private international law on the claim to $131 million. There was no dispute about the two rules of English law that have been mentioned already. No suggestion had been made that New York law was relevant because it was the national law of Bankers Trust, or because payment in London would expose Bankers Trust to sanctions under U.S. legislation, although Bankers Trust kept the latter point open if the dispute reached the House of Lords. That point would have raised the problem of extraterritoriality and prescriptive jurisdiction because of the effect of the sanctions in England.
Whether performance of a contract necessarily involved doing an act in a country where it was unlawful could be a difficult question, said the court. It distinguished between the necessity for a contracting party to equip itself to perform and the act of performance itself. A party was not excused from performing if it could not legally equip itself under the law of one country for performance in another country. The party might still be able to perform legally under the law of the latter country.27
A test to be applied was whether the real object and intention of the parties necessitated that they join in an endeavor to perform an act in a foreign and friendly country that was illegal there. If that was their real object and intention, the party was excused even though there might be other modes or places that permitted the contract to be performed legally. The court held that at no period was the real object and intention of Libyan Bank that any illegal act should be performed in New York.
This subjective test of the parties’ real object and intention did not provide a final answer to the question whether performance necessarily involved doing an act in a country where it would be unlawful. The court referred to an objective test also. For example, if the contract required payment in dollar bills in London, the bills would probably have to be obtained from the Federal Reserve Bank of New York and shipped to London. Bankers Trust would merely be equipping itself for performance in London, but performance itself—payment in London—would not involve the act of obtaining and shipping the bills.28 If, however, the contract required Bankers Trust to provide a banker’s draft to Libyan Bank in London, Bankers Trust argued that an illegal act in New York would necessarily be involved, because it was likely that the obligation represented by the draft would ultimately have to be honored in New York.
The court returned later to the issue of the mode of payment, but before considering that problem the court took up the question of the law governing the contract. The basic rule was that the contract between a bank and its customer is governed by the law of the place where the account is kept, unless the parties agree on some other law. The rule was in accord with the principle that a bank’s promise is to repay at the branch of the bank where the account is kept. The account was “kept” in London, even though in the age of the computer it might not be strictly accurate to speak of keeping an account at a branch.
The basic rule did not immediately resolve the question of the law governing the contract. Bankers Trust was prepared to accept that the governing law was English law until December 1980, but Bankers Trust argued that a fundamental change occurred when the managed account arrangement involving two accounts came into existence and required that all operations on the London account should be made through a New York account. Bankers Trust argued that there was a single contract and that when the managed account arrangement was made the governing law became New York law.
Bankers Trust contended, in effect, that it was not possible to treat the two accounts in isolation from each other, that a single contract covered the two accounts, that management of them was run from New York, and that the contract was governed by the law of New York. The London account existed solely for the purpose of enabling Libyan Bank to enjoy the higher Eurodollar rate of interest that could be earned on funds not required for meeting the needs of the New York demand account. Bankers Trust argued that this had been Libyan Bank’s only motive and not a wish to avoid the application of New York law. The managed account arrangement had been negotiated when the freeze of Iranian assets was in force. If Libyan Bank had been motivated by a desire to avoid the application of New York law and the risk of a freeze of its assets under that law, Libyan Bank would have been in a stronger legal position if it had opened an account with a London subsidiary of Bankers Trust, a registered United Kingdom company.
The Libyan Bank submitted that two separate contracts arose when the arrangement was made, one of which related to the London account and continued to be governed by English law; or that there was only one contract, again governed by English law; or that there was only one contract but subject to two governing laws.
The court was satisfied that the governing law of a contract could be changed, but the evidence had not been sufficient to displace the basic rule that the governing law of a bank’s contract is the law of the place where the account that is the subject of the contract is kept. It was necessary, then, to decide whether there were two separate contracts or one contract with two governing laws. Either view would be supported by the principle that the branch of a bank is for some purposes treated as a separate entity from the head office. The court found the notion of two contracts artificial and decided that after December 1980 there was one contract, governed in part by English law and in part by New York law. It was unusual, but it was recognized by the law and accepted by businessmen, that a contract could have a split governing law.
The court’s conclusion was that the rights and obligations of the parties in respect of the London account were governed at all times by English law. If this conclusion had not been reached, and the contract had been governed by New York law after the managed account arrangement had gone into force, it would have been necessary to decide whether, if indeed that arrangement had been terminated as stated in the letter of July 30, 1986, the London account became subject once again to English law.
Having reached this conclusion on the governing law, the court took up the question of the nature of the bank’s obligations to its customers under English law. The customer has a right in personam against the bank to payment of an amount equivalent to the amount deposited and not a right in rem to the deposited money. Payment takes place at the branch at which the customer’s account is kept after demand is made there. If the demand is made and payment refused, the bank can be sued for debt wherever the bank can be served.
In what form is the customer entitled to payment? To answer that question, the court stated that it was necessary to distinguish between services a bank is obliged to perform if requested and services many banks habitually perform on request but are not bound to provide. For a private customer with a current account, the first category would include the delivery of cash in legal tender over the bank’s counter and the honoring of checks drawn by the customer. Other services, such as banker’s drafts, letters of credit, foreign currency for travel abroad, would be among the services falling into the second category.
The problem in this case, however, did not relate to the current account of a private customer. A correspondent relationship existed between the two banks, one of which had a call account in London that was credited with large amounts denominated in U.S. dollars. The problem was whether these circumstances justified modification of what the private customer with a current account was entitled to demand. The court concluded that the contract between Bankers Trust and Libyan Bank had established the ordinary banker-customer relationship.
The court held that there were two ways in which Libyan Bank was entitled to have its right to payment satisfied: the delivery of cash, whether in the form of dollar bills or some other currency, and an account transfer (a process by which a third entity comes to owe money to Libyan Bank or its nominee and the obligation of Bankers Trust to Libyan Bank is extinguished or reduced pro tanto29). Any account transfer must be achieved ultimately by means of an in-house transfer between two accounts held by different beneficiaries with the same institution. Three different forms of account transfer were distinguished: correspondent bank transfer,30 in-house transfer,31 and complex account transfer.32
The court considered these and all other forms of transfer that had been canvassed in the case and discussed the extent to which they involved activity in the United States. If it proved possible to arrange in-house transfer at Bankers Trust London or correspondent bank transfer at a correspondent bank outside the United States, activity in the United States would not be involved. Two methods of complex account transfer, CHIPS and Fedwire, could be completed only in the United States.
The obligation represented by a banker’s draft on London33 or a banker’s payment34 would have to be settled ultimately through some other form of transfer, including one of the three forms of account transfer mentioned above, and so activity in the United States might be required. Furthermore, as a third party would have to participate in connection with an instrument issued by a U.S. bank that on its face contained a promise to pay to or to the order of Libyan Bank, it was unlikely that a third party could be found that would be willing to act while the freeze was in force.
The London dollar clearing system and other clearing systems outside the United States (Euroclear, Cedel, and Tokyo dollar clearing) would involve activity in New York at some stage if arrangements could be made to use them. But the London clearing system, according to its rules, was not available for substantial Eurocurrency transactions.
Certificates of deposit are issued by banks for large dollar sums and may be negotiable. Once again they raised the problem that Bankers Trust would substitute one personal obligation for another, and the substituted obligation would still have to be honored by some means at maturity.
The largest dollar bills in circulation were for $100. It would be a formidable task to assemble enough of them in Europe to meet a demand for $131 million. The bills could be obtained from a Federal Reserve Bank and shipped to London at some cost for the paying bank and with a loss of interest by it. The operation would involve no breach of New York law.
Bankers Trust would have no difficulty in obtaining sterling notes from the Bank of England in an amount equivalent to $131 million. Bankers Trust would have to reimburse the Bank of England, or the correspondent bank through which the notes were obtained, and reimbursement would probably be made by a transfer of dollars in New York. Again, such a transfer would not infringe New York law.
This theoretical survey of the means of payment would be irrelevant, the court held, if the managed account arrangement still subsisted, because it was a term of that arrangement that all transactions of Libyan Bank should pass through New York. The only entries on the London call account were credits from, or debits to, the New York demand account. Payments to, or credits from, other parties with which Libyan Bank had business relations were passed through the New York account. If the arrangement still existed, the London account could be used only to transfer a credit to New York, which would be of no benefit to Libyan Bank in this case.
The court went on, however, to hold that Libyan Bank was entitled unilaterally to terminate the managed account arrangement on reasonable notice. Some terms, such as those relating to a time deposit, cannot be changed unilaterally, but the ordinary customer can alter the bank’s mandate. In the present case, neither party was locked into the managed account arrangement for all time unless the other party agreed to termination of the arrangement or the entire banking arrangement were ended. The arrangement was ended implicitly by the telex of April 28, 1986, and if that conclusion was wrong, then explicitly by the letter of July 30, 1986.
After termination of the arrangement, the New York account remained a demand account. Subject to New York law, Bankers Trust was obliged to make transfers in accordance with Libyan Bank’s instructions to the extent of the credit balance, but Bankers Trust was not obliged to allow an overdraft. The London account remained an interest-earning account from which Bankers Trust was obliged to make transfers on the instructions of Libyan Bank, provided that no breach of United States law in the United States was involved. If Bankers Trust was dissatisfied with the frequency of such transfers, it was entitled on notice to reduce the rate of interest or to bring the account to an end. The court declared that if it had not held that the rights and obligations of the parties in respect of the London account were governed by English law, the court would have been inclined to hold that the rights and obligations were once again governed by English law when the managed account arrangement was terminated.
If the managed account arrangement had still been in existence, payment could have been made only through the New York account, which meant that it would be made through a clearing system there and that payment in cash would be precluded. After termination of the managed account arrangement, there was no express preclusion of payment in cash, but was there an implied preclusion?
Bankers Trust argued there was an implied term that transfers from the London account, whether or not effected through the New York account, would be made only through CHIPS or Fedwire and not by any other of the various forms of transfer mentioned by the court. The term was said to be implied from the usage of the international market in Eurodollars and from the course of dealing between the parties since 1980.
The court distinguished between a practice that was frequently or habitually followed and one that the parties could legally insist that they had to follow. Expert evidence had been given on behalf of Bankers Trust that participants in the Eurodollar market understood that all “wholesale” transactions, unless they involved an in-house or correspondent bank transfer elsewhere, had to be cleared in the United States, on the theory that a currency moves only in the country of origin because the clearing system exists there.35 Payment in cash was precluded by this usage. The whole-sale Euromarket, in other words, was a market in credits between banks and was not a money market. Cash transactions were confined to small retail accounts and constituted an insignificant portion of total Eurodollar transactions. The court, however, preferred other expert evidence that there was no such usage, at any rate in the case of an account such as the one Libyan Bank held in London.
In addition, the court found that the supposed usage was inconsistent with the course of dealing between the parties. From December 1980 to January 1986, all transactions by Libyan Bank had been carried out in New York, but this practice was pursuant to an express term of the managed account arrangement, and therefore was not proof of a term derived by implication from a course of dealing between the parties or from a usage of the market. Before 1980, not all transactions had been cleared through New York, although those that had not been were few and were possibly for relatively small amounts. Furthermore, the court found it difficult to derive a negative implied term—that is, no entitlement to payment in cash—from a course of dealing. It followed that evidence would be necessary to show that the parties recognized that there was no such right, but no such evidence had been introduced.
The distinction between “wholesale” and “retail” transactions had been discussed. The court did not exclude the possibility that a usage of some kind applied to time deposits traded between the dealing rooms of banks on their screens. If the term “wholesale” was applied to that class of business, the Libyan Bank’s account was not within that class. As noted already, the relationship between Bankers Trust and Libyan Bank was the ordinary banker-customer relationship.
Having rejected the two methods by which Bankers Trust sought to limit its obligation in respect of the London account—an express term in the managed account arrangement as if it were still subsisting or an implied term—the court considered next which of the forms of transfer that had been canvassed the Libyan Bank was entitled to demand, whether it had demanded them, and whether they would necessarily involve action in New York.
Libyan Bank would have been entitled to demand an in-house transfer at Bankers Trust London or a correspondent bank transfer, but no demand had been made for either method. No action would have been required in New York for the former method. The second method would have avoided action in New York only if another institution had an account with Bankers Trust London that Libyan Bank wished to benefit or if a correspondent bank outside the United States owed Bankers Trust $131 million or more. That these conditions could not be met was the probable reason why demands for these methods had not been made.
Libyan Bank was entitled to demand a transfer through CHIPS or Fedwire, but had not done so. Action in the United States would have been required and was illegal there.
Bankers Trust was obliged to provide a banker’s draft on London or a banker’s payment, provided that such instruments were eligible for London clearing. Libyan Bank had demanded them, but they were not eligible for London clearing, and so Bankers Trust was not compelled to comply with the demands for them. The court tended to think that if the instruments had been eligible, performance of Bankers Trust’s obligation under the instruments would require eventual clearing in New York and would be illegal there.
Libyan Bank could not demand a transfer through the London dollar clearing for the reason already given. Bankers Trust was not obliged to participate in any of the other clearing systems outside the United States, and was not bound to make transfers through them. If Bankers Trust had provided a transfer through the Tokyo clearing system, action in New York that was illegal in the United States would have been necessary.
The issue of certificates of deposit was a service banks habitually provide but without being obliged to do so. A sufficient reason for this conclusion was that agreement between the parties was necessary on the maturity date and the rate of interest. In addition, there would again be the problem whether at maturity a certificate could be honored without infringing the law of the United States.
The court arrived finally at the conclusion that the fundamental right of a customer was to payment in cash, even though a customer rarely demands cash for so large a sum as was claimed by Libyan Bank.
One can compare operations in futures in the commodity markets: everybody knows that contracts will be settled by the payment of differences, and not by the delivery of copper, wheat or sugar as the case may be; but an obligation to deliver and accept the appropriate commodity, in the absence of settlement by some other means, remains the legal basis of these transactions. So in my view every obligation in monetary terms is to be fulfilled, either by the delivery of cash, or by some other operation which the creditor demands and which the debtor is either obliged to, or is content to, perform. There may be a term agreed that the customer is not entitled to demand cash; but I have rejected the argument that there was any subsisting express term, or any implied term, to that effect.36
Libyan Bank was entitled, therefore, to demand cash in the form of dollar bills and had made this demand. The alleged principle that dollars lent in wholesale Eurodollar transactions do not leave the United States did not affect the obligation of Bankers Trust under English law to repay by whatever means were available. The fact that a bank does not normally keep such an amount of dollar bills in its vault does not affect this obligation. The bank cannot shift the burden of the costs of obtaining and providing the bills to the customer. No illegal action in New York would be involved.
The court did not accept the view that as a result of the decision in Miliangos v. George Frank (Textiles) Ltd,37 a debt expressed in a foreign currency payable in England cannot be discharged in sterling. That case dealt not with the question whether the foreign currency debt could be discharged only in the foreign currency but with the question of the measure of the debtor’s liability in sterling when he failed to pay in the foreign currency. There was no express or implied term in the present case that precluded payment in sterling. If the debtor has an option to discharge his foreign currency obligation in the foreign currency or in sterling, he should not be entitled to choose the route that is blocked and claim that his obligation is discharged or suspended. He must perform in the one way or the other so long as both routes are available, but if one is blocked he must take the other.
Given a bank account such as in this case, and the absence of an express or implied term that the bank’s obligation must be discharged in dollars, the customer is entitled to demand sterling if payment cannot be made in dollars. The court did not decide whether the customer could demand sterling if payment in dollars was possible. Libyan Bank had demanded sterling. Payment in that form would not involve any illegal activity in New York.
The second major claim of Libyan Bank was to $161.4 million as the net amount that Bankers Trust should have transferred to London on January 7 and 8, 1986 under the terms of the contract. Bankers Trust had failed to make the transfer, with the result that the amount became subject to the freeze. The legal analysis devoted to the first claim led the court to conclude that there had been a breach of the contract that justified the second claim. There is no need to deal with the other claims for the purpose of this chapter.38
A first reaction by the financial press to the decision was that Bankers Trust would appeal.39 On October 9, 1987, however, the United States Treasury granted Bankers Trust a license permitting it to make payment in accordance with the judgment, and an appeal was not entered. This action relieved Bankers Trust of the obligation to pay interest on the judgment, which is levied at 15 percent.40 “A senior U.S. official” was said to have described the decision as a narrow ruling based on the ties between the parties to the suit. He is quoted as having said that “[a]lthough the judgment was other than we would have preferred, it did not create some broad precedential effect.”41 This reaction may have been inspired by the court’s refusal to rule on the category of transactions between banks that constitute 90 percent or more of total Eurodollar business.
Article VIII, Section 2(b) was not mentioned in the judgment and almost certainly was not cited by counsel. Nevertheless, certain inferences can be drawn from the case that relate to the provision. Foremost among them must be the inference that, in the opinion of the court, the provision had no application to the case. This understanding of the judgment is unavoidable because of the principle recognized by English higher courts that it is the duty of the court to raise the question of the relevance of Article VIII, Section 2(b) if the provision might be applicable.42 The most likely reason for not invoking the possible application of the provision is that the contract between Libyan Bank and Bankers Trust was not considered an exchange contract under English decisions on the meaning of this term. The contract did not call for an exchange of currencies either overtly or under a disguise.
A second inference that can be drawn from the case is that although Bankers Trust was able to discharge its dollar obligation in sterling, this fact did not justify the view that the contract called for an exchange of currencies and was an exchange contract according to the English view of that concept. A sterling transfer would constitute discharge by operation of law but would not be performance of the obligation as prescribed by the contract.
Although the court reached its conclusions on the basis of private international law, the case nevertheless raises the problem of prescriptive jurisdiction under public international law. The U.S. Regulations are undoubtedly an assertion of such jurisdiction, which means that the United States thought that it was entitled to act as it did and that other countries were bound not to challenge the exercise of such jurisdiction as contrary to public international law. This view might have been based on the right of the United States to control the branches of U.S. banks wherever situated or on the right to control activities in the United States. The latter rationale might have been entertained on the assumption that Bankers Trust could discharge its dollar obligation only through a clearing system in the United States. These and other justifications were advanced informally by U.S. officials in the case of the freeze of Iranian assets.43
In the Libyan Bank case, the court was not prepared to attach much importance to the evidence of economists or to arguments of an economic character. This same neglect of economic considerations has been shown by courts called on to interpret Article VIII, Section 2(b) that prefer a narrow view of the provision. The court’s reaction in the Libyan Bank case to the views of Dr. F.A. Mann on the characteristics of Eurodollars is odd nevertheless. He had expressed the opinion that transfers of Eurodollars had to be cleared by the transfer of credits through clearing arrangements in the United States and not conducted in cash. It could be a national disaster, he argued, if the creditor bank were entitled to payment in cash, for in the last resort vast amounts of dollars and sterling might have to be purchased and sold with disturbing effects on exchange rates.44 The court considered this argument economic and not legal. If a person owed a large sum of money, it did not seem to be a sound legal defense for him to protest that payment would bring on a national disaster. Countries that think the exchange rates for their currencies to be at risk could resort to exchange control if they wished.
The court’s response is hardly compatible with the narrow interpretation of Article VIII, Section 2(b) by English courts. Nor is the spirit of the response compatible with the court’s disposition to hold that a bank’s duty of confidence to its customer might be subject to the exception of a higher public duty, which in this case would have been duty to the United States. What would be the difference between this duty and the duty under Article VIII, Section 2(b) that is owed to the promulgator of exchange control regulations? The court did not reach a final view on the question of the duty of confidence, because Bankers Trust had not shown that it suffered any loss as a result of the information provided by an official of Bankers Trust to the Federal Reserve Bank of New York on January 8, 1986 before the Regulations that froze Libyan Bank’s assets were announced.
The decision in the Libyan Bank case is consistent with the inclination of courts in the United States and England to provide safeguards for the financial centers of these countries. The courts have made this policy explicit, sometimes in adopting narrow interpretations of Article VIII, Section 2(b). One such case is J. Zeevi and Sons, Ltd., et al. v. Grindlays Bank (Uganda) Limited, in which the New York Court of Appeals, in rejecting a defense based on Article VIII, Section 2(b), said:
The parties, by listing United States dollars as the form of payment, impliedly…set up procedures to implement their trust in our policies. In order to maintain its preeminent financial position, it is important that the justified expectations of the parties to the contract be protected. . . .45
And in the second discussion of the United States Court of Appeals for the Second Circuit in Allied Bank International et al. v. Banco Credito Agricola de Cartago et al., in which the exchange control regulations of Costa Rica were unsuccessfully relied on but in which Article VIII, Section 2(b) was not cited, the court said:
The United States has an interest in maintaining New York’s status as one of the foremost commercial centers in the world.46
The upshot of the case is likely to be that banks, seeing no effective protection in Article VIII, Section 2(b), and, it might be added, not wanting such protection because the provision would harm them as plaintiffs when seeking the repayment of loans, will guard themselves against the predicament Bankers Trust found itself in by adapting the terms of their Eurodollar contracts. The terms that are rewritten may relate to the law governing the contracts47 or may provide for all transactions to be conducted only through clearing arrangements in the United States.48
A final comment here on the Libyan Bank case is that the court’s approach made it unnecessary to respond to the embarrassment that Decision No. 144-(52/51) can require courts to face. The decision grants the Fund’s approval—and not simply its toleration without legal consequences—of restrictions imposed in the course of a political dispute between two members, with both of which the country of the forum may have friendly relations. Whether the court recognizes or refuses to recognize the effect of the restrictions under Article VIII, Section 2(b), the court will be acting against the interest of one of the disputants. This predicament is not eased for most courts by attributing restrictions to the preservation of national or international security. Another objection to the decision by critics of it is that it prevents a clearcut and exclusive rationale of the provision in terms of the protection of balances of payments.
Batra v. Ebrahim
The judgment delivered by the Court of Appeal in Batra v. Ebrahim on May 3, 1977 has now been published in full.49 It contains a number of interesting features, which make it useful to discuss the case again. Batra, resident in England, was a frequent visitor to India, where a daughter of his resided. To obtain Indian rupees he paid sterling to Ebrahim, a money changer resident in England, who provided rupees at the rate of 31 rupees, instead of the official exchange rate of 18 rupees, per pound sterling.
The proceedings instituted by Batra involved two of the transactions between the parties. In one, entered into in 1970, Ebrahim undertook to provide two sums in India, 5,000 rupees in New Delhi and 15,000 rupees in Amritsar, on the occasion of Batra’s visit to India in early 1971. Payment of the 5,000 rupees was a year late, and Batra claimed interest for that year.
The second transaction was entered into in 1972, when Ebrahim undertook to pay 74,000 rupees to the account of Batra’s daughter in Chandigarh. Ebrahim never paid this amount, and Batra stopped his check for the sterling quid pro quo. Batra claimed damages based on the difference between the official and the contractual exchange rates. The lower court gave judgment for Batra, and Ebrahim appealed to the Court of Appeal.
The lower court held that the transactions were not illegal under the exchange control law of England, and judgment was given for Batra as a result. The judge was not referred to the exchange control regulations of India. On appeal, the defendant raised the defense of Article VIII, Section 2(b), to which he had been alerted by the recently decided Wilson, Smithett & Cope Ltd. v. Terruzzi.50
In Batra v. Ebrahim, the Master of the Rolls, Lord Denning, stated his understanding of “exchange contracts” under Article VIII, Section 2(b), and he appears to have thought the provision would apply to the exchange control regulations of England as well as to India’s, although the dictum is perhaps ambiguous:
The transactions in this case are clearly within that article. Both England and India are members of the International Monetary Fund. Both these transactions were exchange contracts involving the currencies of England and India. If they were contrary to the exchange control regulations—either of England or India—they are unenforceable in the territory of any member. They were not contrary to the law of England. But were they not contrary to the law of India?51
Expert evidence had been given that, except with the prior general or special permission of the Reserve Bank of India, no person was permitted to enter into contracts for the sale of rupees for foreign currency or the sale of foreign currency for rupees otherwise than at rates of exchange for the time being authorized by the Reserve Bank. The transactions in issue had not been authorized by the Reserve Bank.
Given Lord Denning’s view of “exchange contracts,” it was logical that he should explain the objective of the Indian exchange control regulation, and by implication of Article VIII, Section 2(b), as follows:
The object of the regulation is clear. It is to protect the Indian currency from being depreciated by speculators. As we pointed out in the Wilson, Smithett case at pp. 513 and 713 of the reports the currency of a country can be destroyed by wanton gambling by speculators in exchange. By flooding the market with rupees their value in exchange in the world would be reduced enormously to the great disadvantage of India. So the value is pegged at the official rate of exchange. Black market dealings are prohibited by law.52
Having concluded that the contracts were unenforceable, the Master of the Rolls took up the question whether the defense of Article VIII, Section 2(b) could be raised on appeal for the first time. He would be guided by the principle that international agreements should be construed so as to promote the general legislative purpose.
What does it mean when it says that such an exchange contract shall be “unenforceable”? It does not say they are illegal. Only that they are unenforceable, see Sharif v. Azad,  1 Q.B. 605 at p. 618 by Lord Justice Diplock. If the word “unenforceable” were used in the strict sense in which an English lawyer uses that word, the Courts could leave it to the parties to decide whether or not to raise the point, just as they did in the Statute of Frauds. If the defendant did not raise art. VIII, (2)(b) in his defence, the Court would take no notice of it. I cannot think that would be right. We should construe this article in the same way as we construe other international agreements. We should adopt such a construction as will promote the general legislative purpose, see Buchanan v. Babco Forwarding & Shipping (U.K.) Ltd.,  1 Lloyd’s Rep. 234;  2 W.L.R. 107 at pp. 236–237 and 112–113. On this basis it seems to me that if it appears to the Court that a party is suing on a contract which is made unenforceable by art. VIII, (2)(b), then the Court must itself take the point and decline to enforce the contract. It is its duty to do so. Otherwise the law of exchange control would be easily evaded, see Dicey and Morris Conflict of Laws, 9th ed., p. 921. If the point is not perceived by the Court of first instance, but is perceived for the first time by the Court of Appeal, then it is the duty of the Court of Appeal to take the point: just as it does when a contract is illegal, Snell v. Unity Finance,  2 Q.B. 203. It must refuse to enforce the contract.53
The principle of interpretation expressed by Lord Denning should indeed be endorsed. If, however, the general legislative purpose of Article VIII, Section 2(b) is not solely the protection of official exchange rates, but something broader, the provision must be interpreted to give effect to the broader purpose. Article VIII, Section 2(b), it is submitted, has always had a broader purpose than the protection of official exchange rates. The purpose is to help a member make its balance of payments policies effective, provided that they are consistent with the Articles.
Having expressed the principle that international agreements were subject to a technique of interpretation that was not necessarily appropriate for domestic statutes, the Master of the Rolls nevertheless leaned in favor of dealing with restitution for unjust enrichment in accordance with domestic law:
If money has been paid under it [a contract unenforceable because of Article VIII, Section 2(b)]—and the consideration has failed—then the money can probably be recovered back, see Mann, The Legal Aspect of Money, 3rd ed. (1971) pp. 448–449. In this respect it may be different from a contract which is illegal by English law, see Bigos v. Bousted,  1 All E.R. 92 when the exchange contract was illegal as being contrary to s. 1 of the Exchange Control Act, 1947. But for present purposes the important point is that if the contract appears to be one which is contrary to the exchange control regulations of India, then it is unenforceable in England and it is the duty of this Court to take the point, even though not pleaded nor taken below.54
Restitution was not claimed in this case. It would give rise to problems related to Article VIII, Section 2(b), because it would provide parties with the opportunity of riskless contravention of the exchange control regulations to which they are subject.55 Lord Denning’s tentative view is an example of the tendency of courts to rely on principles of their domestic law in interpreting provisions of a treaty, even though the courts subscribe to the view that a treaty must be interpreted in a way that gives effect to its purpose.
The Court of Appeal considered its conclusion so obvious that the defendant’s request for an adjournment or a new trial was refused.56 The court also refused leave to appeal to the House of Lords.
Bank of India v. Trans Continental Commodity Merchants Ltd. and J.N. Patel
In Bank of India v. Trans Continental Commodity Merchants Ltd. and J.N. Patel,57 decided by both the Queen’s Bench Division and the Court of Appeal in October 1981, the issue was one of practice and pleading. The interesting features of the case for the present purpose are the citation of Batra v. Ebrahim and the proceedings in Singapore involving the judgments of the English courts. The Singapore proceedings are discussed in Chapter 7 of this volume.
Patel, as the second defendant, sought leave to amend his defense by adding a plea of illegality because the plaintiff, in entering into the contracts in issue, had not complied with the English Exchange Control Act, 1947. The first defendant (“TCCM”), a company resident in England, dealt in commodities throughout the world and was a customer of the London branch of an Indian bank (“Bank”). The Bank alleged that in 1975 TCCM had entered into 12 forward exchange contracts for the sale of U.S. dollars to the Bank, but had defaulted by failing to make delivery, as a result of which the Bank suffered loss and issued a writ in January 1976. Patel, whose residence is not mentioned in the report but who may have been resident in Malaysia, had guaranteed TCCM’s performance of its contractual obligations, although Patel challenged the alleged scope of the guarantee.
The proceedings were protracted and led to judgment against TCCM, which for practical purposes had disappeared, so that the substantive claim of the Bank was against Patel as guarantor. Patel had succeeded in making amendments to his defense before the application was entered to make the amendment proposed in this case. In the course of the proceedings, the court adopted a consent order dated April 10, 1979 that included a voluntary undertaking by Patel to give notice of any further proposed amendment before August 1, 1981. The proposal to make the amendment that was in issue in the case was made after that date. Patel argued that once the court’s attention is drawn to illegality, however late, it is incumbent on the court to entertain the plea.
The Queen’s Bench Division laid down the following principles on the treatment of illegality:
(1) When a transaction is on its face manifestly illegal, the court will refuse to enforce it whether the point is pleaded or not and whether either party raises the point or not, and even though the point arises for the first time on appeal. The reason is that the courts may not be used to enforce unlawful contracts whatever the wishes of the parties may be. The court referred to Batra v. Ebrahim as a “fairly plain example once evidence of Indian law was admitted.”58
(2) When a transaction is not on its face manifestly illegal, the ordinary rule applies that only evidence relevant to a pleaded allegation is permissible.
(3) When a transaction is not on its face manifestly illegal, no special rule exists on pleading or on granting leave to amend, save only that if persuasive and comprehensive evidence of illegality emerges, even in the absence of a pleading of illegality, the court will take notice of it.
The court held that the case before it involved no necessary illegality. The Bank was an authorized bank and had been doing foreign exchange business for many years without breach of exchange control or illegality. TCCM had dealt in commodities and entered into numerous foreign exchange transactions. The question of pleading had to be considered according to principles (2) and (3) above.59 The court decided that in the circumstances of this case it would be inappropriate to give leave to amend five years after the defense had been delivered, because amendment would involve serious prejudice to the plaintiff and would be contrary to Patel’s voluntary undertaking of April 10, 1979.60
The Court of Appeal confirmed the principles set forth by the lower court and the court’s application of them. The Court of Appeal set forth the text of Patel’s proposed amendment and in commenting on it offered two remarks of some interest. First, part of the proposal was an attempt to have the plaintiff prove that the contract sued upon was legal. That proposition, the court held, could not be correct.
The implication of this finding is that the burden of proving contravention of the domestic exchange control law is on the defendant, but this principle does not prevent the court from taking cognizance of a patent illegality when it is not raised by a party or when it becomes manifest in the course of properly admitted evidence. The question that arises is whether the same rule would apply to unenforceability under Article VIII, Section 2(b). This question will be considered further below.
Second, on another part of the proposed amendment the court commented that Patel had conceded he had no evidence that would enable him to set up a prima facie case of illegality. Patel admitted that he would have to rely on cross-examination of the plaintiff’s witnesses to establish such a case. This attempt, the court held, would be a fishing expedition. Patel contended, however, that he should be allowed to make the attempt because an illegality might come to light, to which the Court of Appeal responded:
There have of course been before the Court thousands of transactions of international trade in which there may have been breaches of the exchange control, but it cannot be the duty of the Court to allow allegations of such breaches to be made by amendment when unsupported by any evidence, and when… there are strong grounds for not permitting the amendment to be made.61
On Batra v. Ebrahim, the Court of Appeal in the Bank of India case made this comment:
That case did appear to afford some support to the argument for Mr. Patel because there the Court did allow an allegation of illegality to be raised for the first time in the Court of Appeal, and this illegality only appeared when certain Indian Exchange Control Regulations were looked at. But the basis of the decision is most clearly shown in the judgment of Lord Justice Lawton at the foot of p. 8 of the transcript where he said:
But in this Court our attention has been called to the Bretton Woods Agreements Act, 1945 and the Order in Council which was made under it, namely, the Bretton Woods Agreement Order of 1946. As a result of a combination of the Act and the Order made under it, it is the duty of an English Court, when there is an agreement of this kind, to look at the law of the foreign country; and, if under the law of the foreign country an agreement is deemed to be unenforceable, then it is the duty of every English Court to refuse to enforce the agreement.62
A question to be considered is whether the three principles laid down by the Queen’s Bench Division for dealing with illegality apply also to unenforceability under Article VIII, Section 2(b). The issue is a practical one because some of the cases in which the plea of unenforceability under the provision has been raised show that the defendant became aware of the provision or decided to rely on it only at a late date in the proceedings. The question of the amendment of pleadings may have to be answered in such circumstances. Furthermore, the question is suggested by the fact that in the Bank of India case, in which Article VIII, Section 2(b) was not cited and was not relevant, the Court of Appeal relied on Batra v. Ebrahim, in which the provision was cited and was relevant.
Batra v. Ebrahim strongly suggests that the three principles apply to unenforceability under Article VIII, Section 2(b) even if the exchange contract that is unenforceable under the provision is not illegal under the exchange control regulations that have not been observed.
Article VIII, Section 2(b) provides no support for the hypothesis that a contract is to be treated as unenforceable only if the contract is illegal under the exchange control regulations that have not been observed. The provision refers to contracts that are “contrary” to exchange control regulations. The word seems to have been chosen with care to narrow the provision to a particular legal consequence attached to a failure to observe exchange control regulations, and to sweep up all cases of nonobservance if the conditions of the provision are satisfied.
Suppose that the parties do not draw Article VIII, Section 2(b) to the attention of a court in a member country, and the court gives judgment for the plaintiff having had no knowledge of the exchange control regulations offended by the contract. The plaintiff then seeks to enforce the judgment in the court of another member. Can an objection to the foreign judgment based on Article VIII, Section 2(b) be admitted in the second forum? This issue arose in the Singapore proceedings in the Bank of India case and is discussed in Chapter 7.
Art. VIII, Sec. 2(a), in conformity with its language, applies to all restrictions on current payments and transfers, irrespective of their motivation and the circumstances in which they are imposed. Sometimes members impose such restrictions solely for the preservation of national or international security. The Fund does not, however, provide a suitable forum for discussion of the political and military considerations leading to actions of this kind. In view of the fact that it is not possible to draw a precise line between cases involving only considerations of this nature and cases involving, in whole or in part, economic motivations and effects for which the Fund does provide the appropriate forum for discussion, and the further fact that the Fund must exercise the jurisdiction conferred by the Fund Agreement in order to perform its duties and protect the legitimate interests of its members, the following policy decision is taken:
1. A member intending to impose restrictions on payments and transfers for current international transactions that are not authorized by Art. VII, Sec. 3(b) or Art. XIV, Sec. 2 of the Fund Agreement and that, in the judgment of the member, are solely related to the preservation of national or international security, should, whenever possible, notify the Fund before imposing such restrictions. Any member may obtain a decision of the Fund prior to the imposition of such restrictions by so indicating in its notice, and the Fund will act promptly on its request. If any member intending to impose such restrictions finds that circumstances preclude advance notice to the Fund, it should notify the Fund as promptly as circumstances permit, but ordinarily not later than 30 days after imposing such restrictions. Each notice received in accordance with this decision will be circulated immediately to the Executive Directors. Unless the Fund informs the member within 30 days after receiving notice from the member that it is not satisfied that such restrictions are proposed solely to preserve such security, the member may assume that the Fund has no objection to the imposition of the restrictions.
2. The Fund will review the operation of this decision periodically and reserves the right to modify or revoke, at any time, the decision or the effect of the decision on any restrictions that may have been imposed pursuant to it.
Decision No. 144-(52/51)
August 14, 1952
Gold, Volume III, pp. 241–49.
The Times (London), July 21, 1984, p. 10; New Law journal (London), Vol. 134, No. 6177 (November 9, 1984), p. 991.
Acceptance of the Articles and membership in the Fund are simultaneous and indivisible.
The English cases, in dealing with the meaning of “exchange contracts,” have relied partly on the argument of the normal meaning of the words and partly on the suggestion that the expression may have a technical meaning in English law. For the latter proposition, the courts have cited Lord Radcliffe’s dictum in In re United Railways of the Havana and Regla Warehouses Ltd., a case not involving the Articles, that a “true exchange contract” is one “which is a contract to exchange the currency of one country for the currency of another” ( A.C. 1059). In Gubisch Maschinenfabrik AG v. Palumbo, Case 144/86 (The Times (London), January 12, 1988, p. 38), the European Court of Justice held (December 8, 1987) that concepts in the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters had to be interpreted independently and without reference to the internal law of contracting parties. The problem of interpretation had to be approached in the light of the objectives of the convention and with a view to ensuring coherence of its provisions. Similarly, in Kalfelis v. Schroder, Münchmeyer, Hengst and Co. and Others (Case 189/87) the European Court of Justice decided that the words “matters relating to tort, delict or quasi-delict” in a convention had to be regarded as an autonomous concept to be interpreted, for the purposes of applying the convention, by reference principally to the system and objectives of the convention. In order to ensure that all contracting parties observed a uniform interpretation, the words could not be understood to refer to the national law of any of the states concerned. (The Times (London), October 5, 1988, p. 44.)
A critique of the court’s answers will be found in Gold, Volume III, pp. 243–46.
Mansouri v. Singh  2 All E.R. 619;  1 W.L.R. 1393.
 3 All E.R. 785; Gold, Volume II, pp. 107–16.
Gold, Volume II, pp. 114–15. Similarly, the interpretation of Peru’s exchange control regulations was probably wrong (Gold, Volume II, p. 351) in United City Merchants (Investments) Ltd. et al. v. Royal Bank of Canada et al.  2 Lloyd’s Rep. 498;  3 W.L.R. 242;  3 All E.R.142;  Q.B. 208;  2 W.L R. 1039;  2 All E.R. 720 (Gold, Volume II, pp. 331-53; Volume III, pp. 56–67).
See footnote 8.
 2 All E.R. 625. For an amplified version of the article in the International and Comparative Law Quarterly referred to in the quoted passage, see Gold, Volume III, pp. 337–92. For discussion of the Terruzzi case, see Gold, Volume II, pp. 202–18, and for the Italian proceedings, see Volume III, pp. 92–98.
2 All E.R. 625.
 2 All E.R. 730;  1 A.C. 189–90.
In the United City Merchants case (see footnote 8 above), D., a director of a Peruvian company (Vitro) engaged in the glass fiber industry of Peru, negotiated a contract between Vitro and a British company (Glass Fibres), under which Glass Fibres would supply a plant against a confirmed, transferable, and irrevocable letter of credit. D. arranged for Glass Fibres to quote a price to Vitro in U.S. dollars double the true price of the plant. He also arranged a contract between Glass Fibres and the N. Co. of Miami under which Glass Fibres would remit to the N. Co. (and later to a substituted payee, B. Co.) half of any amount drawn by Glass Fibres under the letter of credit. Both the N. Co. and the B. Co. were controlled by Vitro. Vitro purported to comply with Peru’s exchange control on the basis of the full contract price for the plant. Vitro’s bank (Continental) opened an irrevocable letter of credit that was confirmed by the London branch of the Royal Bank of Canada (Royal), under which Royal would honor drafts drawn in accordance with the letter of credit by paying U.S. dollars in London. Payments by Royal would be repaid by Continental over a period of five years. Glass Fibres supplied the plant and presented the shipping documents as required by the letter of credit, but Royal refused to make further payment. Glass Fibres assigned its rights under the letter of credit to United, merchant bankers, to secure advances by them to Glass Fibres. United and Glass Fibres sued Royal, and Royal, arguing that the overinvoicing was contrary to Peru’s exchange control regulations, relied on the provisions of English law that gave the force of law to the first sentence of Article VIII, Section 2(b). The House of Lords gave judgment for the true price of the plant, holding that the rest was a monetary transaction in disguise that was unenforceable.
 2 All E.R. 626.
Ibid., p. 627.
Ibid., p. 628.
The latter date leaves open a number of possibilities, the choice among which would be determined by the procedural law of the forum. In view of the author’s preference as explained in the text, the latest conceivable date would be desirable. This issue shows how difficult it would be to achieve perfect uniformity in the application of Article VIII, Section 2(b) among members even if unanimity were achieved on all substantive issues of interpretation.
It is not suggested that the courts employ an economic analysis, but that the result is compatible with an economic view of the total circumstances.
See footnote 14.
See the Appendix to the Introduction of this volume.
 3 W.L.R. 314. See also Libyan Arab Foreign Bank v. Manufacturers Hanover T rust Co.  2 Lloyd’s Rep. 494.
Ross Cranston, “The Libyan Arab Foreign Bank Case,” Journal of Bushier Law (London), November 1987, pp. 499–504, at p. 499: “At first glance, it might be thought that the relevant area of law was that governing the extraterritorial effect of American law under international law and English public policy. . . . In fact, the claims were resolved on general law principles, once the conflicts of laws point had BEEN resolved.” See also p. 3 of the transcript of the case: “[T]he main issues in this case are concerned with the rules of conflict of laws, which determine when and to what extent the law of New York is given effect in our courts, and with the contractual obligations of banks.” ( 3 W.L.R., p. 318.)
“Deposits in currencies other than U.S. dollars held abroad by U.S. persons are unblocked, provided, however, that conversions of blocked dollar deposits into foreign currencies are not authorized.”—31 C.F.R., Part 550, Section 516.
50 U.S.C. 1701 et seq. An official of the U.S. Treasury Department delivered a statement on November 17, 1987 before the Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs of the U.S. House of Representatives, in which he opposed a bill that would extend the discretionary powers of the President, including the power, in nonemergency circumstances, to prohibit, monitor, or otherwise regulate the export of financial assets, or the extension of credit, to the government of any “controlled country,” or of any country designated as supporting international terrorism. The statement contained a number of interesting passages:
“Second, I would like to emphasize that as a general matter, the Articles of Agreement of t he Inter national Monetary Fund prohibit member countries from imposing restrictions on the making of payments or transfers for current transactions. The Articles recognize a limited exception to this prohibition for restrictions imposed for national security reasons, such as those the United States imposed against Iran in 1979 under the International Emergency Economic Powers Act. The imposition of controls under this bill, however, which are based on foreign policy rather than national security grounds, could place the United States in violation of its commitments under the Articles. Moreover, the United States has consistently opposed the imposition of restrictions on payments for current transactions by other members of the Fund.”—Treasury News, B-1203 (Washington, November 1987), p. 3.
“Unilateral controls by the United States could invite retaliation from our allies, who strongly resent the extraterritorial enforcement of U.S. law. Indeed, in response to the extraterritorial enforcement of U.S. securities and anti-trust laws and to efforts by U.S. courts to compel the production of evidence held abroad for litigation in this country, a number of our allies—including the United Kingdom—have enacted defensive statutes that block compliance with those laws and court orders.
“The United States enjoyed limited cooperation with the United Kingdom with respect to our freezing of Libyan assets in British branches of U.S. banks. However, the United Kingdom’s cooperation in this matter is largely due to our efforts to limit the application of the freeze to branches and not subsidiaries of U.S. banks and to the fact that the freeze was imposed as a result of an emergency declared in response to the serious terrorism threat posed by Libya, a threat which the United Kingdom had already witnessed on its own shores. Had there not been shared perceptions of the dangers and had the Libyan controls extended to subsidiaries, it is highly doubtful that relations with the United Kingdom would have been as smooth on this issue.”—Ibid., p. 4.
The International Chamber of Commerce has suggested the establishment of a body within the Organization for Economic Cooperation and Development (OECD) to settle disputes between governments on provisions that extend international trade legislation beyond national borders.—International Chamber of Commerce, Press Release No. 664/653 (Paris, June 21, 1988).
The court referred to Toprak Mahsulleri Ofisi v. Finagrain Compagnie Commerciale Agricole et Financiere S.A.  2 Lloyd’s Rep. 98, which is discussed in Gold, Volume III, pp. 233–37. If Article VIII, Section 2(b) applied, the contract would nevertheless be unenforceable if suit were brought in the court of a member country, whether that country was one in which the contract was to be performed or some other member country. The issue can arise if, for example, a party is subject to the exchange control regulations of a country and cannot obtain an exchange license under them to pay anywhere, but the party owns assets in another country and the forum of that country would not deny recovery apart from Article VIII, Section 2(b).
Although this point in the opinion ( 3 W.L.R., p. 330) is explained as if shipping the bills from New York was not required by the contract, the real point seems to be that obtaining the bills and shipping them from New York would not be illegal in the United States.
“Transfer,” said the court, is somewhat misleading, because the original obligation of Bankers Trust is not assigned to the third entity ( 3 W.L.R., p 334).
Libyan Bank and Bankers Trust have accounts with Third Bank. Bankers Trust instructs Third Bank to transfer an amount from Bankers Trust’s account at Third Bank to Libyan Bank’s account at Third Bank.
Libyan Bank and X Company have accounts with Bankers Trust London. Libyan Bank instructs Bankers Trust London to transfer an amount from Libyan Bank’s account to X Company’s account.
More than one tier of intermediaries may be involved through a clearing system, such as CHIPS (Clearing House Interbank Payments System) or Fedwire, in which the final transfer is between the accounts of two banks held with the Federal Reserve Bank of New York. See “Large-Dollar Payment Flows from New York,” Federal Reserve Bank of New York, Quarterly Review (New York), Vol. 12, No. 4 (Winter 1987–88), pp. 6–13; Ernest T. Patrikis, “Developments in the Law of Large-Dollar Electronic Payments in the United States,” Revue de Droit des Affaires Internationales/International Business Law Journal (Paris), No. 7 (1987), pp. 639–48; Benjamin Geva, “CHIPS Transfer of Funds,” Journal of International Banking Law (Oxford), Vol. 2, No. 4 (1987), pp. 208–21.
Bankers Trust London debits Libyan Bank’s account and issues an instrument in the nature of a promissory note by which Bankers Trust promises to pay to or to the order of Libyan Bank. If Libyan Bank negotiates the draft with X Bank in London, Libyan Bank is no longer concerned with the transaction, but X Bank will seek to have Bankers Trust honor its obligation under the draft. If Libyan Bank hands the draft to Y Bank in London for collection, Y Bank will seek to have Bankers Trust honor its obligation under the draft.
Bankers Trust London issues an instrument payable at Bank Y, another London bank. Libyan Bank receives payment from Bank Y and does not have to negotiate payment, which is one of its options in the case of a banker’s draft. Bank Y will seek to have Bankers Trust honor its obligation.
Professor R.M. Goode, who was one of the witnesses, has set forth his views as follows in an article:
“The place where a depositor is entitled to withhold money from his account is a matter of contract between him and his bank. The contract may be express or implied from the circumstances, from usage or from a course of dealing. Unless otherwise agreed, a depositor holding a Eurodollar account—that is, an account denominated in US dollars but located in a money market outside the United States—has no right to draw dollars where his account is maintained but must have his account transferred to the United States and withdraw his dollars there. Alternatively he can use his account to settle his debts without drawing physical money, by transferring funds to the accounts of his creditors. Whether he wishes to draw physical dollars or to transfer sums from his dollar account to the account of a creditor, it will usually be necessary for the funds to be transferred to or through New York. This is because it is only the central bank of the United States that will accept responsibility for an adequate supply of US dollars, and its commitment as a currency supplier is restricted to the settling banks in its own clearing system. They in turn have an obligation to repay their depositors on due notice, but only in legal tender, and US dollars are not legal tender outside the United States.
“It is, of course, possible to settle dollar deposit obligations outside the United States, for example by payment in cash or by in-house transfer in the books of a bank outside the United States with which the transferor and transferee or their respective banks hold an account. . . .
“However, the question is not whether methods of by-passing the CHIPS clearing may be or have been used but what are the terms of the deposit contract. The fact that on a particular occasion a bank outside the United States which happens to hold or have access to substantial quantities of dollar notes is willing to assist its customer by departing from the normal inter-bank transfer mechanism and allowing him to withdraw cash does not mean that it is contractually obliged to do so. Similarly the fact that an in-house transfer in the books of a bank outside the United States is coincidentally available and adopted as the mode of settlement on an isolated occasion is of little assistance in determining the content of the implied term as to the method of repayment. The established practice in the overwhelming number of transactions, necessitated by the size of the sums involved and by the convenience and speed of a net-net settlement through a central clearing, is to settle foreign currency obligations through the clearing of the country of the currency in question, and in the absence of agreement to the contrary the parties will be presumed to have contracted with reference to this practice.”—“Concepts of Payment in Relation to the Expropriation or Freezing of Bank Deposits,” Journal of International Banking Law (Oxford), Vol. 2, No. 2 (1987), pp. 80–87, at pp. 82–83.
 3 W.L.R., pp. 347–48.
 A.C. 443.
For discussions of the case or of related issues in addition to the article by Ross Cranston cited in footnote 24, see Mario Giovanol i, “A propos de deux decisions jurisprudentielles et de la parution du premier traité systématique du droit privé des eurodevises,” Revue de Droit des Affaires Internationales/International Business Law Journal (Paris), No. 3 (1986), pp. 267–302; Henry Weisburg, “Unilateral Economic Sanctions and the Risks of Extraterritorial Application: The Libyan Example,” Journal of International Law and Politics (New York), Vol. 19, No. 4 (1987), pp. 993–1011; R.M. Goode, “Concepts of Payment in Relation to the Expropriation or Freezing of Bank Deposits,” Journal of International Banking Law (Oxford), Vol. 2, No. 2 (1987), pp. 80–87 (an article of particular interest on the topics of the title); Cynthia C. Lichtenstein, “The Battle for International Bank Accounts: Restrictions on International Payments for Political Ends and Article VIII of the Fund Agreement,” Journal of International Law and Politics (New York), Vol. 19, No. 4 (1987), pp. 981–92; “Libya entitled to US$292m, in cash,” International Financial Law Review (London), Vol. 6 (October 1987), pp. 23–25; “Banking Law,” Business Law Review (London), Vol. 9 (March 1988), pp. 73–76; “United Kingdom Case Note,” American Journal of International Law (Washington), Vol. 82 (January 1988), pp. 132–36; Daniel Urech, “Elements of Contractual Law in Euromoney Dealings,” Journal of Inter national Banking Law (Oxford), Vol. 3, No. 1 (1988), pp. 11–17, and “Eurodollar Deposits and Freezing Orders: The Libyan Assets Case Revisited,” Journal of International Banking Law (Oxford), Vol. 3, No. 6 (1988), pp. 269–73; Corinne R. Rutzke, “The Libyan Asset Freeze and its Application to Foreign Government Deposits in Overseas Branches of United States Banks: Libyan Arab Foreign Bank v. Bankers Trust Co.,” American University Journal of International Law and Policy (Washington), Vol. 3, No. 1 (1988), pp. 241–82; Anne Joyce, “Libyan Arab Foreign Bank v. Bankers Trust: Common Law Meets Its Limits?” Harvard International Law Journal (Cambridge, Massachusetts), Vol. 29, No. 2 (1988), pp. 451–74.
Wall Street Journal (New York), October 6, 1987, p. 31. The court ruled later that Bankers Trust need not repay until a possible appeal was completed. The purpose appeared to be to relieve Bankers Trust from penalties under the U.S. regulations for not complying with the freeze if it made payment forthwith.
Wall Street Journal (New York), October 13, 1987, p. 31.
Ibid. “[A] British appellate court might have upheld the lower court’s ruling on broader grounds, which would add significant scope and precedential weight to an already adverse finding. Whatever the reason for the decision to grant the license, it represents an important concession by the United States on the extraterritorial effect of U.S. economic sanctions.”—“United Kingdom Case Note,” American Journal of International Law (Washington), Vol. 82 (January 1988), pp. 132–36, at p. 136.) But note Ross Cranston, “The Libyan Foreign Bank Case,” Journal of Business LAW (London), November 1987, p. 499: “The case will not be appealed, with the result that Staughton J.’s judgment, unlike many first instance commercial judgments, will not sink into unreported oblivion. This is fortunate, because the judgment is clear and well reasoned, even on points over which there is bound to be disagreement.”
“There is at least one situation in which the determination and content of the proper law are irrelevant, namely where Rustic Bank is able to invoke Article VIII, section 2(b) of the Articles of Agreement of the International Monetary Fund…
“It seems clear that if the deposit contract with Rustic Bank falls within Article VIII, section 2(b) and Ruritania and Urbania are members of the IMF, Ruritanian courts must give effect to that Article regardless of whether Urbanian law is the proper law of the deposit contract or whether the freezing order is contrary to the public policy of Ruritania. Unfortunately, controversy surrounds almost every word of Article VIII, section 2(b), one of the most heavily litigated of all the Articles in the IMF Agreement, and Rustic Bank will have to come to the court ready to answer a number of sticky questions. For example, is the deposit contract an exchange contract? Do the freeze regulations constitute exchange control regulations? Are they maintained or imposed consistently with the IMF Agreement? Does Article VIII, section 2(b) apply at all in relation to exchange control regulations not in existence at the time of the deposit contract?”—R.M. Goode, “Concepts of Payment in Relation to the Expropriation or Freezing of Bank Deposits,” Journal of International Banking Law (Oxford), Vol. 2, No. 2 (1987), pp. 80–87, at p. 86.
Gold, Volume II, pp. 376–84. Note Babanaft International Co. SA v. Bassatne and Another ( 1 All E.R. 433,  2 W.L.R. 232). The English Court of Appeal refused to grant a Mareva injunction freezing the defendants’ assets abroad, whether before or after judgment, on the ground that the injunction would be a claim to exorbitant extraterritorial jurisdiction over third parties outside the jurisdiction of English courts. But there was no objection to making a personal order binding the defendant only, or to an injunction that affected third parties if it was enforceable by the courts of the states in which assets were located. See also Derby & Co. Ltd. and Others v. Weldon and Others (No. 3 and No. 4)  2 W.L.R. 412.
F.A. Mann, The Legal Aspect of Money (Oxford: Clarendon Press, 1982, 4th ed.), p. 194. Note the view of bankers: “[Bankers Trust] also argued that such accounts were not repayable on demand in cash, whether in dollars, local currency or bankers draft as that would be wholly impractical. But, despite the evidence led by [Bankers Trust] that when its dealers rang two London banks to say it may need US$131m in cash immediately, Midland Bank’s people burst into laughter asking, ‘Before or after we pick ourselves up off the floor’ and the people at [National West] were left giggling helplessly.”—“Libya entitled to US$292m, in cash,” International Financial Law Review (London), Vol. 6 (October 1987), pp. 23–25, at p. 24.
37 N.Y.2d 220, at p. 227; 371 N.Y.S.2d 892, at p. 898.
757 F.2d. 516, at p. 521 (2d Cir. 1985). On legal concepts of public policy in monetary law, see Gold, Volume III, pp. 591–622. But note the suggestion of a different policy:
“The security of the deposits is, no doubt, a very important consideration. However, there is also an international interest in containing and combating terrorism and preventing it from destroying the very foundation on which the banking business exists. Dr. Mann wrote in 1979, on the occasion of the blocking of Iranian accounts, that international public policy requires courts of all countries to assist in the elimination of international illegality in the interest of the world community at large. In his view it is necessary to support an allied nation’s policy of retaliation. He also thinks this is not a point of politics but a matter of judicial conscience.
“Few judges will agree that it is their business to take the hot potatoes out of the fire to save the politicians’ skin, and the politicians do not like to fight a fire in other people’s houses—they prefer to wait until it spreads to their own.”—A.H. Hermann, “Eurodollars in the English Courts,” Financial Times (London), September 25, 1987, p. 6.
“It is always open to the parties to agree that a foreign law such as New York law should govern. But as…pointed out, the Bank of England may not like that to become common practice. However, as… counters, The Bank of England should not worry, no contract could exclude the ability of the Bank of England to regulate accounts in England.’ The Bank of England is waiting to see whether the case will be appealed before making any comment.”—“Libya entitled to US$292m, in cash,” International Financial Law Review (London), Vol. 6 (October 1987), pp. 23–25, at p. 24.
Note also the following suggestion: “provide expressly that the bank may be excused from its obligations if they are affected by illegality or supervening regulations or restrictions in any relevant jurisdiction (even if the result is not necessarily to make it impossible to perform those obligations).”—“Banking Law,” Business Law Review (London), Vol. 9 (March 1988), pp. 73–76, at p. 75. The effect would be similar to the application of Article VIII, Section 2(b), but the contractual term would be broader than the provision.
 2 Lloyd’s Rep. 11. The report makes it necessary to correct certain aspects of the discussion in Gold, Volume II, pp. 258–61, which was based on newspaper and other fragmentary reports.
 1 Q.B. 703.
 2 Lloyd’s Rep. 12.
Ibid., pp. 12–13. The page references are to the report of the Terruzzi case in  I Lloyd’s Rep.
Ibid., p. 13.
See Gold, Volume I, pp. 87–94, 117–18; Volume II, pp. 156–60, 192–93, 265, 272; Volume III, pp. 89–92, 224, 265, 272–73, 282, 291–92, 297, 299–300, 377–78, 470–71, 562, 706.
Lord Justice Bridge gave one reason for the refusal as follows:
“As I understand it, in substance the two points he would want to explore and, if the exploration were successful, raise at the new trial are these. First, he says, the evidence does not exclude the possibility that the rate of exchange which was the subject matter of the contract in question, although described as an ‘unofficial’ rate, was an authorized rate, being authorized by the Reserve Bank of India. That suggestion really, it seems to me, requires us to leave our commonsense behind us when we come into Court. It may be right in some circumstances that different currency exchange rates are authorized by a country’s central bank for different purposes. But, when the discrepancy between the rates are so great as here, the inference that the high rate is a black market rate, as my Lords have called it, is to my mind irresistible and it would be quite pointless to order a new trial for that purpose.” (P. 14.)
 1 Lloyd’s Rep. 427.
Ibid., p. 429.
An argument advanced by Patel was that, if the court took account of the consent order of April 10, 1979 as a basis for refusing leave to amend, the result would be to enforce an illegal contract, and the parties cannot by agreement require the court to do so. The court held (p. 430) that in a case falling within principle (3), a plaintiff could insist that a defendant observe a voluntary undertaking such as the one Patel had given on April 10, 1979.
 1 Lloyd’s Rep. 433.
Ibid., p. 434.