Chapter

8 Case Law: Federal Republic of Germany

Author(s):
Joseph Gold
Published Date:
December 1989
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Landgericht, Frankfurt am Main, April 18, 1984

In this case,1 the defendant, apparently a resident of Germany, sold a plant to I. Company of Israel for DM 100,000 plus freight. The agreement was concluded in Germany, the plant was to be supplied from Germany, and payment was to be made there. The defendant signed a statement in which he undertook that P. would pay a commission of DM 50,000 to N. Co. of Switzerland as soon as payment was received from I. Co. The commission of DM 50,000 was to be paid into the account of S. at a Swiss bank. The defendant sent S. a check for only DM 28,797.86, having retained the balance as a setoff. The plaintiff, a resident of Israel, brought proceedings against the defendant to recover the retained balance, on the ground that she was entitled to the full amount of DM 50,000 as a commission for negotiating the transaction between the defendant and I. Co.

The defendant pleaded that the true selling price in the transaction of purchase and sale was only DM 50,000. Messrs. A., acting on behalf of I. Co., had requested the defendant to increase the amount of the invoice to DM 100,000. Earlier, Messrs. A. had purchased a machine from a firm in which the defendant had been a general partner. Payment had not been made for the machine. The defendant had retained the cost of the machine from the amount payable to S. for the benefit of the plaintiff.

The relationships among all the parties are not clear, but it can be assumed that Messrs. A. were connected in some way with I. Co., and that the plaintiff was associated in some way with N. Co. and S. It can also be assumed that the defendant was P.’s principal. The defendant had been a general partner in a firm that had not been paid for the machine supplied to Messrs. A. The defendant, therefore, was trying to get the claim for the machine satisfied from funds supplied by I. Co. and intended for the benefit of the plaintiff. Whether the plaintiff was connected with I. Co. or Messrs. A. is not apparent from the report.

The court held that the defendant’s agreement to pay the commission was part of the purchase agreement between the defendant and I. Co. and not separate from it. Therefore, as the purchase agreement was governed by German law, that law applied to the claim for the commission. Israeli law did not apply even though the court accepted the likelihood that a purpose of the purchase agreement insofar as it related to the commission was to evade Israel’s exchange control regulations. The defendant as a general partner in the firm that had not been paid for the machine supplied to Messrs. A. was responsible in German law for the firm’s debts but was not entitled to its claims. The defendant was not entitled to make the setoff, and as the condition in his undertaking had been satisfied, the plaintiff succeeded on the claim for the balance of the commission. The decision illustrates the precedence given to Germany’s private international law and domestic rules of law over Article VIII, Section 2(b), rather than reliance on domestic rules in the interpretation of the provision.

The case is in contrast to the decision in an English case of overinvoicing, United City Merchants (Investments) Ltd. et al. v. Royal Bank of Canada et al.,2 in which Article VIII, Section 2(b) was applied and the claim to the amount beyond the true commercial price was held to be unenforceable because of the contravention of Peru’s exchange control regulations. An author has criticized the Frankfurt decision for failure to apply Article VIII, Section 2(b).3 In his commentary, the critic explains that payment of the commission would be a capital transfer, but he holds that the provision applies to capital controls. The negotiators of the Articles were influenced by the experience of the flows of hot money between the two world wars. Indeed, he treats the application of the provision to capital controls as an a fortiori case, because members have general authority to impose such controls, while restrictions on payments and transfers for current international transactions are exceptional and need the approval of the Fund.

If other members were not obliged to observe a member’s restrictions on capital movements, it would be completely irrelevant whether the introduction of such restrictions were permitted or prohibited, because, in such circumstances, they would in any event be unenforceable through legal proceedings. Accordingly, the express authorization of restrictions on capital movements makes sense only if such restrictions are given legal effect—in other words, if they must be observed by all members.4

Landgericht, Karlsruhe, August 24, 1984

The defendant in this case,5 a German resident, had failed to observe both the contractual date and the additional grace period that had been negotiated with the plaintiff, a resident of Spain, for the delivery of certain items of fashionable dress for women. As a consequence, the plaintiff was unwilling to sell any more of the defendant’s collections, and she returned the garments that had not been delivered on time. The defendant refused to accept delivery of the shipment, and the returned goods were placed in storage by the transportation company.

The Spanish plaintiff claimed return of the amount she had prepaid in respect of the delayed shipment and objected to the setoff the defendant had made for earlier shipments. The plaintiff argued that the setoff was inadmissible because it violated the exchange control regulations of Spain. The defendant replied that the provisions of Spain’s law on which the plaintiff relied required an import license, and so they were not exchange control regulations within the meaning of Article VIII, Section 2(b). A second argument by the defendant was that the plaintiff had agreed to arrange authorization for settlement in respect of the deliveries but had failed to do so. This alleged failure went beyond the matter of Spain’s exchange control regulations. The defendant’s third contention was that Spain’s balance of payments was not affected by the setoff because the plaintiff’s prepayment was not made in Spanish currency but was made with funds in an account the plaintiff maintained in a bank situated in Germany.

The court held that the regulations in issue were exchange and not import regulations. The court offered a definition: “Foreign exchange regulations are mandatory regulations that govern movements of money, assets, and services to protect a country’s balance of payments.”6 Setoff was subject to authorization under Spain’s exchange control regulations, and in this case would affect Spain’s balance of payments. If the defendant, instead of setting off his claim had sought to recover on it in a German court, and the claim would be declared unenforceable, setoff would be equally unenforceable. The transaction that was the basis for the defendant’s claim had not been authorized under Spain’s exchange control regulations.

The fact that the plaintiff had made her prepayment from an account in Germany did not mean that Spain’s foreign exchange resources had not been directly affected. Payments abroad by Spanish residents had to be made through an authorized Spanish bank, which provided equivalent amounts of foreign exchange to the foreign banks through which the payments were made. The plaintiff’s establishment of an account in Germany had been made in accordance with this procedure as prescribed by Spain’s exchange control regulations. In any event, the nonpayment to the plaintiff of the amount of the setoff in itself had a detrimental effect on Spain’s balance of payments, because Spain was denied an accrual of foreign exchange. The court held that Article VIII, Section 2(b) rendered the defendant’s claim unenforceable, and that the plaintiff was entitled to recover the full amount of the prepayment.

The court dismissed also the argument that the plaintiff had failed to perform a term of the contract with the defendant and so was not entitled to resist the defendant’s argument that the issue had to be settled under general contract law without reference to the Articles. The court held that if the defendant’s argument were accepted, the way would be open to wholesale evasion of Article VIII, Section 2(b). Parties could enter into a contract, ignoring exchange control regulations, and then, if the obligor failed to perform a term of the contract, possibly by prearrangement, the obligee would be able to recover under the contract.

The court explained that Article VIII, Section 2(b) has nothing to do with whether parties honor the terms of their contract. The unenforceability of a contractual claim does not depend on whether the plaintiff was observing the terms of the contract. Unenforceability did not invalidate the claim. If it became possible for the plaintiff to sue, the merits could be examined in that proceeding. The court seemed to think that a resident of a country imposing exchange controls could sue in the courts of that country at any time for a recovery in the currency of that country notwithstanding the country’s exchange control regulations. This right would not be affected by unenforceability of the claim in another country.

Dr. Burckhardt Löber,7 in commenting on the case, has understood the court to have ruled that the setoff did not comply with Spain’s exchange control regulations, because an import license had not been granted and therefore exchange control authorization was lacking. Consequently, the German defendant’s claim by way of setoff was contrary to exchange control regulations that were maintained or enforced consistently with the Articles.

If indeed a contract for a trade transaction is subject to a provision requiring an import license, it will follow that payments may not be made pursuant to the contract. On these simple facts, the Fund will hold that the restriction is exclusively in the field of trade and does not constitute a restriction on payments and transfers for current international transactions, so that approval by the Fund is not required. Restrictions on payments and transfers are put into effect by exchange control regulations, but exchange control regulations need not restrict payments and transfers. It is possible, therefore, that restrictions on trade can be accompanied by exchange control regulations with which traders must comply, even though the exchange control regulations are not restrictions on payments and transfers. The regulations will not be restrictive if payments and transfers are permitted once the trade transaction is approved.

A trade restriction, however, can coexist with an exchange restriction because the authorities license both the trade and payment aspects of transactions and exercise independent discretions in relation to each of the two aspects. The authorities do not decide whether to license one aspect and then automatically license the other. In some cases, it may be impossible to determine how the licensing system is administered, so that the Fund must treat the case again as one in which trade and payment restrictions coexist. The classification of a regulation as a trade or an exchange or a mixed measure can require a minute examination of the practice followed by the administrative authorities. The importance of the inquiry is that it will determine whether or not the approval of the Fund is necessary under Article VIII, Section 2(a) of a restriction on the making of payments and transfers for current international transactions. If approval is necessary but is not granted, the exchange control regulations by which the restriction is made effective will not be maintained or imposed consistently with the Articles for the purposes of Article VIII, Section 2(b). It must be repeated, however, that exchange control regulations may supplement the administration of a trade restriction. Approval by the Fund will be necessary for neither the trade restriction nor the exchange control regulations. As the Fund’s approval is not required for such regulations, they are maintained or imposed consistently with the Articles. Even nonrestrictive exchange control regulations are within the Fund’s sphere of competence, and therefore can be said to be maintained or imposed consistently with the Articles, because the Fund must determine whether the regulations are restrictive and subject to the Fund’s regulatory jurisdiction. Although the Fund must distinguish between restrictions on trade and on payments and transfers, trade restrictions cannot be said to be maintained or imposed consistently with the Articles because they are not subject to the Fund’s regulatory jurisdiction.

The report of the Karlsruhe case does not include the information that would make it possible to decide whether the regulations in issue required an import license or a combined import and exchange license. The court, however, held that the regulations governed monetary transactions, and that import regulations were not involved.

What the court did not do was examine whether the regulation on setoff was maintained or imposed consistently with the Articles. The court simply assumed that the regulations were consistent with the Articles. The regulations in issue seem to have been imposed in 1980. Therefore, Spain would have required the Fund’s approval under Article VIII, Section 2(a) for the introduction in 1980 of a restriction on the making of payments and transfers for current international transactions, even though Spain was availing itself of the transitional arrangements of Article XIV at that time and its undertaking to perform the obligations of Article VIII, Sections 2, 3, and 4 did not take effect until July 15, 1986. The restrictions would have been authorized by the transitional arrangements of Article XIV only if Spain was merely adapting in 1980 a restriction that had been in force since the time when Spain became a member of the Fund.

The defendant in the Karlsruhe case argued that the plaintiff had undertaken to obtain the necessary license under Spanish law that would have made the defendant’s claim to a setoff enforceable. The court seems to have rejected this argument because there was no proof of such an undertaking, but also because acceptance of the defendant’s argument would have made evasion of Article VIII, Section 2(b) too easy to be tolerable.

There are two distinct kinds of contractual undertakings to obtain licenses.8 A contracting party may undertake to use due diligence to obtain a license, or he may give a warranty that he will obtain a license. The tendency of courts may be to find that an undertaking falls into the first of these classes, because of the heavy burden placed on a party by the second kind of undertaking. The second kind is more likely to induce the other party to claim that he is entitled to damages for breach of contract if a license is not obtained. A court may be tempted to find that if the party that gave the undertaking failed to obtain the license, he should not be allowed to avoid liability for damages by asserting that the claim was contrary to exchange control regulations because of the absence of a license. The plaintiff’s claim, however, would be based on the contract, and for the court to allow the plaintiff to succeed would mean that parties could frustrate the effect of Article VIII, Section 2(b) by means of a term of their contract. This conclusion was reached by the Landgericht of Karlsruhe. It will be recalled that the Fund’s interpretation of June 10, 1949 declares that courts must neither decree performance nor award damages for the nonperformance of contracts subject to the provision.

A first reaction to the Karlsruhe case is that it is logical for the purposes of Article VIII, Section 2(b) to treat a setoff as if it were the pursuit of a claim. On further consideration, however, it is legitimate to doubt whether the case was correctly decided. Article VIII, Section 2(b) applies to contracts that are executory, in part or in whole, and to proceedings that are brought to obtain a remedy for an unperformed obligation. This analysis is the necessary implication of the concept of unenforceability. The concept means that enforceability is being sought by a party of an obligation owed to him that has not been performed. The provision does not ensure that if an obligation to a party that would have been unenforceable has been performed, the other party can get the performance reversed.

It is arguable that the defendant in the case was not attempting to get performance of an unperformed claim in respect of earlier deliveries that had been made. The defendant had obtained performance of his claim, even though performance was achieved by the self-help of a setoff against the prepayment made by the plaintiff that was to be refunded. By denying the effectiveness of the setoff, the court was decreeing the reversal of an obligation that had been performed, and was finding justification for this step in Article VIII, Section 2(b).

If this line of reasoning is correct, the court should not have relied on the provision to undo the effect of the setoff. Instead, the court should have allowed the parties to argue the merits of the setoff to see whether or not it was justified according to legal considerations that did not include Article VIII, Section 2(b). The court, however, did not allow the defendant to give evidence of the legitimacy of the claim on which the setoff had been based, on the ground of a procedural defect related to Article VIII, Section 2(b) that precludes examination of the merits of a contractual claim under German law. The procedural defect is that a precondition for suit is not met if an action is instituted for the enforcement of a claim that may be unenforceable under Article VIII, Section 2(b) and the claimant has failed to prove that his claim is not unenforceable under the provision.

The alternative approach to the case that has been suggested above can be restated as follows. The conclusion that the setoff that had been made was legally ineffective would have to be drawn from some provision of law other than Article VIII, Section 2(b).9 The function of that provision is not to nullify—negate the legal effect of—a performance that has been carried out.

Nevertheless, an early decision of a Luxembourg court10 has some resemblance to, and supports the decision in, the Karlsruhe case. In the Luxembourg case, J. Co., a French firm, sold goods to S., a resident of Luxembourg for an amount payable in French francs. The French authorities gave the export and exchange control licenses required by French law. W., a French resident, paid the contract price to J. Co. in French francs on behalf of S. Proceedings were instituted in France by J. Co. for the contract price. The French court held that the payment by W. was not an effective discharge of S. and gave judgment for J. Co.

Proceedings were then brought in Luxembourg to obtain execution of the French judgment. It was argued on behalf of the estate of S. that execution should be denied because the judgment was based on French exchange control legislation. For this reason, execution would be contrary to the public policy of Luxembourg. The court rejected this objection because of Article VIII, Section 2(b). In this case, a court of the promulgator of the exchange control regulations, France, had declared the purported payment to be ineffective. In the Karlsruhe case, there was no comparable judgment by a Spanish court, but the setoff was regarded as contrary to Spain’s exchange control regulations, so that the distinction is not critical.

Oberlandesgericht, Hamm, January 24, 1985; Bundesgerichtshof (Federal Supreme Court), January 30, 1986

In 1981 and 1982 the parties worked together in Nigeria, where, at the time of the proceedings, the defendant was still employed. The parties were German nationals and probably permanent residents of the Federal Republic of Germany. The defendant received two amounts of Nigerian currency from the plaintiff: 20,000 naira at the end of 1981 and a further 20,000 naira on February 1, 1982. According to a memorandum relating to the agreement, the plaintiff was to receive, in respect of these amounts of naira, DM 70,000 and DM 60,000, respectively, in July 1982 at the latest. The exchange rates of DM 3.50 and DM 3 per naira seem to have been favorable for the plaintiff. In the proceedings brought in Germany for the two amounts less the amount of DM 76,473 already paid, the plaintiff obtained a default judgment. The defendant filed an objection and requested dismissal of the judgment; the plaintiff requested that it be upheld.

The defendant contended that his obligation was to transfer the funds in deutsche mark to Germany only through the O. Co., and that he had made payments to the O. Co. Nigerian exchange controls, however, had frustrated transfer to Germany. The funds remained in the hands of the O. Co. The defendant had relinquished his claim against the O. Co. to the plaintiff, probably by unilateral action on the part of the defendant.

On January 24, 1985, the Oberlandesgericht11 confirmed the decision of the Landgericht. The argument seems to have been made that the transaction violated German public policy because it contravened Nigeria’s exchange control regulations. The court held that those regulations were not involved. The question of public policy could arise only if the defendant had undertaken to transfer Nigerian currency, but the memorandum said nothing about how the defendent was to discharge his obligation. Furthermore, the plaintiff was entitled to receive payment from the defendant and not from the O. Co.

The court ruled also that the memorandum could not be interpreted as a contract for personal services, in which there was a stipulation that the defendant was to transfer the naira received from the plaintiff to Germany, instead of a loan contract. Perhaps the defendant had argued that he was to make the transfer for the benefit of the plaintiff as part of the personal services the defendant was undertaking for the benefit of the plaintiff. The defendant had argued that the absence of an obligation to pay interest showed that the contract did not provide for a loan. The court held that interest was not a necessary element of a loan, and in any event the defendant gave consideration in the form of favorable exchange rates. The defendant had failed to submit satisfactory evidence to prove his contention that the contract was for personal services and not for a loan.

On January 30, 1986, the Federal Supreme Court rejected the defendant’s appeal.12 The court confirmed the finding that the burden of proving that the contract was for personal services was on the defendant and that he had not discharged this burden.

The court concluded also that it could not accept the defendant’s argument that the plaintiff’s claim was unenforceable because of Article VIII, Section 2(b). The court left open the question whether the agreement between the parties—probably as recorded in the memorandum—was an exchange contract within the meaning of the provision. It was sufficient for the disposition of the argument that, as held by the Oberlandesgericht, the claim was to be settled in Germany in deutsche mark, and, one can assume, between residents of Germany. Such a claim was not affected by the provision.

For this last proposition, the court cited its decision of March 8, 1979.13 In that case, the court noted that the plaintiff, a resident of Germany, had assigned his claim against a resident of Spain to another resident of that country. The court pointed out that the plaintiff was suing to ensure that there would be payment of Spanish pesetas in Spain by one resident to another resident of Spain. The court held that payment would be a domestic transaction of Spain, without impact on its balance of payments. Article VIII, Section 2(b) was intended to protect a member’s balance of payments, so that there was no reason why the provision should be applied. The court refused, largely for procedural reasons, to consider whether the plaintiff had made an outright assignment or whether the assignment was merely for the purpose of evading the exchange control regulations. Even if the assignment was solely for the purpose of compelling the defendant to pay, there was no evidence of an intention to make a transfer to Germany or to use the pesetas in Spain except in compliance with Spain’s exchange control regulations.14

The Supreme Court avoided answering the question whether loan agreements are exchange contracts within the meaning of Article VIII, Section 2(b). The court had left this question open in a decision of December 21, 197615 that is unsatisfactory for a number of reasons.16 The court has held merchandise and other contracts to be exchange contracts, and it is difficult to see why it hesitates about taking the same view of loan contracts.

In a comment on the Supreme Court’s decision of January 30, 1986,17 Dr. Heinz Christian Hafke notes that the question whether a contract is an exchange contract is often left open because the court decides that the currency of the promulgator of exchange control regulations is not involved. He supports the view that a member’s currency is involved if its balance of payments would be affected, because protection of the balance of payments is one of the principal purposes of the Articles. He questions, however, whether there must always be a direct impact on the balance of payments in the sense of trans-border payments. Non-balance of payments effects might have an impact on a member’s currency. The decisive factor is whether a contract would be likely to have an adverse effect on a member’s financial strength. The tendency of Dr. Hafke’s view is to regard all contracts that a member subjects to exchange control regulations as contracts that involve the member’s currency. This conclusion would provide neither a rationale for, nor a uniform interpretation of, the concept of the involvement of a currency.

The author thinks that the title of Article VIII supports the view that the criteria for determining whether a currency is involved are broader than an impact on the balance of payments. The title is “General Obligations of Members,” but he does not explain why these words are evidence for his hypothesis.

He is satisfied, however, that the ratio decidendi in the case was sufficient: the absence of an effect on the balance of payments of Nigeria. This criterion has the virtue, he holds, of preventing a proliferation of the cases in which it will be found that a member’s currency is involved. A limited scope for the provision would promote the Fund’s purpose of eliminating exchange restrictions.

Oberlandesgericht, Munich, October 17, 1986

The interest of the two cases18 decided on this date is that a German court once again confirmed that guarantee contracts are exchange contracts for the purpose of Article VIII, Section 2(b). The plaintiff, a German firm, concluded with the defendant in the first case, an Italian firm, two contracts for work and material at the plaintiff’s plant in Germany. The defendant in the second case gave the plaintiff a guarantee in respect of one of the contracts for work and material. The guarantor’s country of residence is not mentioned, but it may have been Italy.

The main issue discussed by the court was whether the German or the Italian courts had jurisdiction to entertain the actions. The decision was that only the Italian courts had the necessary jurisdiction.

The court added a further reason why the action against the second defendant was inadmissible. Article VIII, Section 2(b) produced this result “because the concept of an exchange contract is to be construed broadly”19 and because the guarantee in this case was to be treated as a sort of banker’s guarantee. For the proposition that the concept of exchange contract had to be construed broadly, the Supreme Court’s decision of March 8, 1979 was cited,20 and the Supreme Court’s decision of March 11, 197021 was relied on for the proposition that guarantee contracts are exchange contracts.22

3/3 O 33/84, Praxis des Internationalen Privat- und Verfahrensrechts (IPRax), Heft 6 (1986), p. 298.

[1982] Q.B. 208; [1982] 2 W.L.R. 1039; [1982] 2 All E.R. 720.

Berthold J. Kohl, “Zur Anwendbarkeit von Art. VIII Abschnitt 2(b) des Abkommens von Bretton Woods” (The applicability of Article VIII, Section 2(b) of the Bretton Woods Agreement), Praxis des Internationalen Privat- und Verfahrensrechts (IPRax), Heft 5 (1986), pp. 285–87. The author holds that the agreement to pay the commission to the plaintiff was an exchange contract, because payment would improve Israel’s balance of payments.

Ibid., p. 287 (translation).

O 15/84, KfH II, Recht der Internationalen Wirtschaft (RIW), Heft 5 (May 1986), pp. 387–88; Internationales Privatrecht: Rechtsprechung 1984 (IPRspr. 1984), No. 118A, pp. 278–80.

Ibid., at pp. 386 and 278–79, respectively (translation).

Recht der Internationalen Wirtschaft (RIW), Heft 5 (May 1986), pp. 387–88.

Gold, Volume III, pp. 233–37.

It cannot be argued that the setoff was ineffective because the law of Spain governed the contract under Germany’s private international law, and because the setoff was contrary to Spain’s exchange control regulations. The court decided that the contract on which the plaintiff was suing was governed by German law, from which it might be deduced that the contracts for the earlier shipments also, on the basis of which the defendant justified the setoff, were governed by German law.

Société ‘Filature et Tissage X. Jourdain’ v. Epoux Heynen-Bintner, Pasicrisie Luxembourgeoise (1957), pp. 33–39; Gold, Volume I, pp. 94–96. See also Gold, Volume III, pp. 217–23, 372–73.

10 U 228/84, Wertpapier-Mitteilungen (WM), No. 19 (May 10, 1986), p. 599; Entscheidungssammlung zum Wirtschafts- und Bankrecht (WuB), 7/1986, VII B2, pp. 893–94.

III ZR 74/85. Pp. 600, 894, respectively, of the reports cited in footnote11 above.

Wertpapier-Mitteilungen (WM) 1979, p. 486; Gold, Volume II, pp. 294–99.

See, however, Gold, Volume III. pp. 285–86.

III ZR 83/74; Wertpapier-Mitteilungen (WM), 1977, p. 332.

Gold, Volume II, pp. 272–77.

Entscheidungssammlung zum Wirtschafts- und Bankrecht (WuB), 7/1986, pp. 894–97.

Recht der Internationalen Wirtschaft (RIW), Heft 12 (December 1986), p. 998.

Ibid., p. 999 (translation).

See footnote 13.

Neue Juristische Wochenschrift (Munich), Jahrg. 23 (1970), p. 1002. See also Gold, Volume III, pp. 279–81. For a detailed discussion of Article VIII, Section 2(b) in relation to guarantees, see Gold, Volume III, pp. 458–67.

Article VIII, Section 2(b) was cited in a case decided by the Landgericht, Aachen, on May 14, 1986 (11 0 643/82), but the court held that the contract was not contrary to the exchange control regulations of Libya that were cited.

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