Chapter

10 A View of the Cases

Author(s):
Joseph Gold
Published Date:
December 1989
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Article VIII, Section 2(b) may require interpretation either because it is regarded by the court as establishing a defense for the defendant, or because, as in the Federal Republic of Germany, the provision is understood to create a procedural impediment for the plaintiff. Whether the one approach or the other is taken, judicial interpretations of the provision have been extraordinarily diverse. This diversity has not been produced by a widespread consideration of the judicial decisions of other countries and the deliberate rejection of the conclusions reached by foreign courts. The foreign decisions are often unknown and not readily available. If a court has paid attention to some of them, the reason may be that the forum shares a common language with the foreign courts, or that decisions of the foreign courts have been translated into the language of the forum, or have been published in the country of the forum, or have been discussed in publications readily available to lawyers in the country of the forum.

In England, for example, the foreign cases supplied by me and published by Sir Hersch Lauterpacht in 1958 in his International Law Reports for 19551 drew attention for the first time to early jurisprudence involving Article VIII, Section 2(b) and other provisions of the Articles. This collection was followed by the first volume of The Fund Agreement in the Courts in 1962. The cases in these two volumes are still cited frequently by authors and courts, often without awareness that many more cases have been discussed in subsequent volumes of The Fund Agreement in the Courts. The result is that the more mature decisions of later years, often of more senior courts, are neglected in favor of earlier and less impressive decisions.

Foreign decisions may have a unifying effect, because of a common legal tradition and the respect paid to the highest tribunal of the country from which the tradition has been inherited. The respect accorded to decisions of the English House of Lords by some other courts of the Commonwealth is an example of this tendency. The Commonwealth consists of a large number of countries, but the tendency noted here does nothing to promote compatibility between the decisions of Commonwealth courts and decisions of the courts of the even larger number of countries that do not belong to the Commonwealth.

A common language is not itself an assurance of uniform interpretation. For example, although courts in the United States and England have taken a similar approach to leading features of Article VIII, Section 2(b), this attitude has not been influenced by the jurisprudence of one country on the jurisprudence of the other. Furthermore, courts in the United States have not espoused the concept of the monetary transaction in disguise that has done something to moderate the narrowness of the approach to the provision followed by English courts.

Similarly, German and Austrian courts do not seem to have developed a common body of interpretation of Article VIII, Section 2(b). Differences in the official translations of the two countries may have had some effect in producing diversity of interpretation. Germany and Austria adopted the same translation of the provision for the first time when accepting the Second Amendment.

Different official translations of Article VIII, Section 2(b) persist among other members that share a common language. Although there are few decisions on the interpretation of the provision by the courts of these members, the differences in translation may produce differences in interpretation if cases involving the provision are instituted. This forecast is strengthened by the mistranslation of the provision in some instances.

In the absence of further authoritative interpretation of Article VIII, Section 2(b) by the Fund and of close attention by courts to foreign decisions, national jurisprudence has been influenced mainly by domestic legal concepts and interpretative techniques and by domestic public policy as seen by the courts. For example, one system of law may have a settled concept of unenforceability but not a concept of imperfect obligation, or the reverse may be true. It is inevitable that courts called upon to apply the provisions of a treaty in the absence of a binding interpretation under international auspices or in the absence of deference to foreign decisions will be disposed to rely on concepts of the lex fori because of familiarity with them.

In the academic writing on Article VIII, Section 2(b), a frequent topic, especially in the contributions of German authors, is the question whether the provision is part of “substantive” law, to use the English equivalent of the German adjective. Two distinct issues and two different uses of the word “substantive” are involved in this question. One issue is whether the provision is a rule of substantive law or a rule of procedural law of the forum; the other issue is whether the provision is a rule of substantive law or a rule of private international law of the forum.

If the solution of the first issue is that the provision is within the domain of procedural law, the plaintiff fails to get performance of his claim, but this failure is neutral on the merits and there is no finding that the claim is null, void, or illegal. German jurisprudence is strict in adhering to this view. The courts go to the length of placing on the plaintiff the burden of showing that the provision does not apply and of proving, therefore, that he is entitled to institute proceedings to enforce his claim.

The criticism by German scholars who are uncomfortable with this view is inspired by the alleged nonconformity of it with principles of domestic law. The critics prefer to hold that the provision is part of substantive, in contrast to procedural, law, which, they conclude, enables them to hold that exchange contracts affected by Article VIII, Section 2(b) are ineffective or null ab initio. Some authors take a position somewhere between the two views, explaining that the result of applying the provision is not neutrality on the binding effect of the contract but an endorsement of its validity even though an element of substantive law is lacking for the time being and enforcement of the claim is impeded. This view also is influenced by domestic legal concepts, but those who subscribe to it are motivated, in addition, by a desire to achieve an intellectually satisfying reconciliation among German decisions affected directly or indirectly by the provision.

If the solution of the other issue is that Article VIII, Section 2(b) is part of substantive law, the provision is seen to be a mandatory provision of the lex fori, which must be applied without reference to private international law, including its choice-of-law principles. The forum refuses to provide a remedy on a contract under the private international law of the forum. Furthermore, the forum recognizes the member’s exchange control regulations, but not as part of the contract law of that member, which the forum would take into account, insofar as it was relevant, if the exchange control regulations were recognized as part of the governing law under private international law. The preference for holding the provision to be part of private international law is influenced once again by considerations of domestic law, because the provision, within its sphere, sets aside some traditional rules of private international law and is therefore thought to be installed, in place of these rules, within the body of private international law.

These comments bring to the fore the problem of the extent to which a court should be affected by domestic legal rules, concepts, or interpretative techniques in dealing with a treaty provision such as Article VIII, Section 2(b). The ideal is that a court would see itself in the role of an international tribunal rather than a national court taking a strictly national approach to the provision. A national court should see its task as one that will contribute to uniformity in the interpretation of the provision wherever suit is brought. To perform this task successfully, the language of the provision must be understood in the light of the purpose of the provision within the context of the treaty.

One difficulty, however, is that the purpose of a provision may itself be unclear. Attempts to elucidate the purpose of Article VIII, Section 2(b) have produced controversy. Much effort has been devoted to a study of the drafting history of Article VIII, Section 2(b) in order to determine its purpose. There is much mystification about the purpose because of the fragmentary drafting history. However, the Fund, to give effect to the purposes set forth in Article I of its Articles, must seek to shorten the duration and lessen the degree of disequilibrium in the balances of payments of its members. Balances of payments are affected by payments and transfers for current international transactions or international movements of capital. Restrictions on payments and transfers or on movements of capital approved by the Fund or authorized by the Articles are most frequently measures to help members achieve equilibrium or avoid disequilibrium in their balances of payments. Therefore, the purpose of Article VIII, Section 2(b) should not be considered obscure.

It would be naive to expect courts to ignore their national law completely and to achieve uniformity in the interpretation of Article VIII, Section 2(b) in all circumstances, although in theory that might be the ruling principle. The volumes of The Fund Agreement in the Courts demonstrate the multiplicity of issues raised by jurisprudence so far, and it can be expected that this process has not come to an end. It would be impractical to assume that the Fund would be willing or able to engage in constant surveillance of litigation involving the provision or of litigation in which the provision is ignored without justification. At the present time, it seems that reasons of national and international policy preclude further authoritative interpretations by the Fund even on salient features of the provision. It is uncertain, therefore, whether the Fund would be willing to give greater amplitude than has been its practice in the past to the following sentence in the authoritative interpretation adopted on June 10, 1949:

The Fund will be pleased to lend its assistance in connection with any problem which may arise in relation to the foregoing interpretation or any other aspect of Article VIII, Section 2(b).2

The other main influence noted above on the interpretation of Article VIII, Section 2(b) by courts has been their view of national public policy. It is unclear whether domestic rules, concepts, and interpretative techniques have been relied on as the primary influence or whether they have been called into play in support of the judicial view of public policy. Part of the difficulty in answering this question is that a court’s view of national public policy is not always made explicit. In some cases, it has been. Restrictive interpretations, for example, may be associated with a declared policy of enduring as little interference as possible with the forum country’s financial markets or international trade or other forms of normal international intercourse.3 Sometimes, a policy of this character is considered to be the policy of the provision. There is a certain resemblance between these views of national public policy and the reasons for the Fund’s reluctance to adopt further authoritative interpretations of the provision. If, however, the courts assume national public policy, as evidenced by the provision, to be cooperation in an interdependent world, judicial interpretations of the provision are likely to be less restrictive.

The explanation of diversity in the interpretation of Article VIII, Section 2(b) as suggested above is not comprehensive. Part of the explanation may be the moral disapproval by some courts of defendants who seek to escape from their contractual obligations by pleading exchange control regulations, or a traditional dislike of other countries’ exchange control regulations, or an unwillingness to allow economics and economists to intrude into the resolution of issues considered purely legal.

One author4 has suggested that courts may have adopted interpretations of Article VIII, Section 2(b) so as to apply the provision when the exchange control regulations in issue are those of a fellow member of an association of countries, such as the European Economic Community, or of a country that was formerly a dependency of the country of the forum, or of a country with which the country of the forum conducts a major volume of trade. It is doubtful that any such theory can provide a widespread explanation of judicial behavior. The Appendix to this chapter includes two tabulations of a selection of cases in which Article VIII, Section 2(b) affected the outcome of the cases. Table A lists some cases in which the courts of some countries took account of the exchange control regulations of other countries and declared contracts to be unenforceable as a result of Article VIII, Section 2(b). Table B lists some other cases, in which, however, contracts were declared not to be unenforceable under the provision. The two tables support the opinion that the theory under discussion here must be viewed with some skepticism.

A final question can be posed. The diversity of judicial interpretation had become apparent before the Second Amendment. Why then was Article VIII, Section 2(b) not modified as part of that Amendment? Modification of the provision might have disposed of at least some of its ambiguities. The provision was one of the few that were not amended as a result of the sweeping modernization of the Articles.

The explanation of the failure to modify the provision may be that if amendment of it had been proposed, some members might have urged that the provision should be eliminated from the Articles. There would have been controversy and more delay in reaching agreement on the Second Amendment. If such a proposal had succeeded, a category of required collaboration among members would have been lost. It is true that established national doctrines can be modified under some legal systems by judicial activism to foster collaboration as national public policy in an interdependent world. The judicial interpretation of Article VIII, Section 2(b) and other judicial reactions to the exchange control regulations of other countries provide little reason to expect such an approach. A consequence of not amending the provision has certainly been that the courts in some countries have been able, in the absence of authoritative interpretation by the Fund, to reduce the provision almost to extinction.

APPENDIX
Table A.List of Some Cases in Which Article VIII, Section 2(b) Produced Unenforceability
CaseDate of DecisionRegulations ofCourt in
1. Chamber 12,BelgiumGermany
Commercial Affairs of
Hamburg Landgericht1
2. White v. Roberts2November 3, 1949ChinaHong Kong
3. Lessinger v. Mirau3April 1, 1954AustriaGermany
4. Société ‘Filature et TissageFebruary 1, 1956FranceLuxembourg
X. Jourdain’ v. Epoux
Heynen-Bintner4
5. Frantzmann v. Ponijen5June 25, 1959IndonesiaNetherlands
6. German Supreme Court6April 9, 1962AustriaGermany
7. Confederation Life AssociationMarch 26, 1963CubaUnited States
v. Ugalde7
8. German Supreme Court8April 27, 1970NetherlandsGermany
9. Daiei Motion Picture Co. Ltd.May 14, 1970JapanFrance
v. Zavicha9
10. Kammergericht, Berlin10July 8, 1974IsraelGermany
11. Batra v. Ebrahim11May 3, 1977IndiaEngland
12. Landgericht, Hamburg12February 24, 1978KenyaGermany
13. United City Merchants1982PeruEngland
(Investments) Ltd. et al. v.
Royal Bank of Canada et al.13
14. Landgericht, Karlsruhe14August 24, 1984SpainGermany
15. Dame Dang Thi To Tarn etMarch 12, 1985Viet NamFrance
autres v. Banque Française
Commerciale15
16. Oberlandesgericht, Munich16October 17, 1986ItalyGermany
17. Van Den Bussche v. Karabassis17March 24, 1987ZaireBelgium

Gold, Volume I p. 82.

Ibid., p. 87.

Ibid., p. 90.

Ibid., p. 94.

Ibid., p. 113.

Gold, Volume II, p. 18.

Ibid., p. 61.

Ibid., p. 139.

Ibid., p. 190.

Gold, Volume III, p. 263.

Chapter 5 of this volume.

Gold, Volume III, p. 271.

Ibid., p. 56.

Chapter 8 of this volume.

Chapter 6 of this volume.

Chapter 8 of this volume.

Chapter 4 of this volume.

Gold, Volume I p. 82.

Ibid., p. 87.

Ibid., p. 90.

Ibid., p. 94.

Ibid., p. 113.

Gold, Volume II, p. 18.

Ibid., p. 61.

Ibid., p. 139.

Ibid., p. 190.

Gold, Volume III, p. 263.

Chapter 5 of this volume.

Gold, Volume III, p. 271.

Ibid., p. 56.

Chapter 8 of this volume.

Chapter 6 of this volume.

Chapter 8 of this volume.

Chapter 4 of this volume.

Table B.List of Some Cases in Which Article VIII, Section 2(b) Did Not Produce Unenforceability
CaseDate of DecisionRegulations ofCourt in
1. Commercial Tribunal of Courtrai1NetherlandsBelgium
2. Southwestern Shipping1958ItalyUnited States
Corporation v. National City
Bank of New York2
3. Austrian Supreme Court3July 2, 1958YugoslaviaAustria
4. Oberlandesgericht, Hamburg4July 7, 1959FranceGermany
5. Stichting Leids Kerkhovenfonds v.June 21, 1960IndonesiaNetherlands
Bank of Indonesia5
6. Moojen v. Von Reichert6June 20, 1961NetherlandsFrance
7. Theye y Ajuria v. Pan1962CubaUnited States
American Life Insurance Co.7
8. Sharif v. Azad8October 5, 1966IndiaEngland
9. Indonesian Corporation P.T.1966IndonesiaNetherlands
Escomptobank v. N. V.
Assurantie Maatschappij de
Nederlanden van 18459
10. J. Zeevi and Sons, Ltd., et al.June 16, 1975UgandaUnited States
v. Grindlays Bank (Uganda)
Limited10
11. Wilson, Smithett & Cope Ltd.January 20, 1976ItalyEngland
v. Terruzzi11
12. German Supreme Court12March 8, 1979SpainGermany
13. Libra Bank Ltd. et al. v. BancoJuly 6, 1983Costa RicaUnited States
Nacional de Costa Rica S.A.13
14. Jachtwerf IJselmeer B.V.September 11, 1985AustriaNetherlands
v. Herman14
15. Bank of India v. TransMarch 24, 1986MalaysiaSingapore
Continental Commodity Merchants
Ltd. & Anor.15

Gold, Volume I p. 79.

Ibid., p. 102.

Ibid., p. 109.

Gold, Volume II, p. 9.

Gold, Volume I, p. 112.

Ibid., p. 143.

Gold, Volume II, p. 54.

Ibid., p. 107.

Ibid., p. 120.

Ibid., p. 219.

Ibid., p. 202.

Ibid., p. 294.

Gold, Volume III, p. 67.

Chapter 7 of this volume.

Ibid.

Gold, Volume I p. 79.

Ibid., p. 102.

Ibid., p. 109.

Gold, Volume II, p. 9.

Gold, Volume I, p. 112.

Ibid., p. 143.

Gold, Volume II, p. 54.

Ibid., p. 107.

Ibid., p. 120.

Ibid., p. 219.

Ibid., p. 202.

Ibid., p. 294.

Gold, Volume III, p. 67.

Chapter 7 of this volume.

Ibid.

International Law Reports: Year 1955 (London: Butterworth, 1958).

Decision No. 446-4, June 10, 1949, reproduced in the Appendix to Chapter 4. On the Fund’s practice, see Gold, Volume III, pp. 633–60.

Antonio makes this point in Act III, Scene III of The Merchant of Venice:

“The Duke cannot deny the course of law:

For the commodity that strangers have

With us in Venice, if it be denied,

Will much impeach the justice of his state;

Since that the trade and profit of the city

Consisteth of all nations”

George B. Schwab, “The Unenforceability of International Contracts Violating Foreign Exchange Regulations: Article VIII, Section 2(b) of the International Monetary Fund,” Virginia Journal of International Law (Charlottesville), Vol. 25 (1985), pp. 967–1005, particularly at pp. 995–1000.

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