The Fund Agreement in the Courts— III*
- Joseph Gold
- Published Date:
- December 1962
THREE CASES of importance are discussed in this installment of the survey of cases involving the Articles of Agreement of the International Monetary Fund.1 These have been decided by the International Court of Justice, the New York Court of Appeals, and the U.S. Federal Communications Commission. The issues relate to the right of a country to impose exchange control, the recognition by members of the Fund of the exchange control regulations of other members, and the privileges and immunities of the Fund.
The validity under public international law of exchange control in the French zone of Morocco was one of the issues raised by the parties in the Case Concerning Rights of Nationals of the United States of America in Morocco (France v. United States of America), which was decided by the International Court of Justice on August 27, 1952.2 The arguments of both France and the United States on this aspect of the case constitute the most exhaustive discussion so far of the effect on exchange control of the Articles of Agreement of the International Monetary Fund.
France had submitted the case to the International Court of Justice as the result of a protracted dispute with the United States in which the latter had contended that, under a complex series of treaties affecting Morocco entered into over a period of many years, it was entitled to certain economic and extraterritorial rights which France had not observed. The disagreement between the two Governments had arisen soon after the establishment of the French Protectorate over Morocco under the Treaty of Fez of March 20, 1912,3 but had become more acute after the end of World War II. The last stage of the dispute, as far as it concerned one of the economic rights, was the result of a Decree of December 30, 1948 issued by the Resident General of the French Republic in Morocco (hereinafter referred to as the Decree).
The effect of the Decree was to restore certain regulations under which imports not requiring an official allocation of exchange (imports sans devises) were subjected to a system of licensing. It was declared that under these regulations licenses would be granted for only a limited list of goods. The Decree applied to all importers in Morocco, including U.S. nationals; and it applied to imports from all sources, save only that imports from France and other parts of the French Union might enter freely. The justification by France for the imposition of these regulations was that the regime of free importation that had preceded them had resulted in extensive illegal transfers of funds and an adverse effect on the franc4 The United States contended that the restrictions on imports by its nationals in Morocco and the discrimination in favor of France were contrary to treaty rights. It based its case on various treaties, including the General Act of Algeciras of April 7, 1906, a multilateral treaty defining the status of Morocco which recognized the principle of “economic liberty without any inequality”. The United States also relied on treaties between Morocco and a number of countries which guaranteed the right to import into Morocco, and on a most-favored-nation clause in a treaty of its own with Morocco, dated September 16, 1836. To settle the controversy, France asked the Court to declare that U.S. nationals in Morocco were subject to the Decree without the prior consent of the United States, and that the Decree was in conformity with the economic system that applied to Morocco under the conventions binding on the United States and France. For its part, the United States requested the Court to find that the application of the Decree to U.S. nationals without the consent of the United States violated its treaty rights and was a breach of international law.
(1) The French Memorial
The arguments of both parties included detailed discussions of the validity of exchange control, but these arguments will be summarized here only insofar as they relied upon or were related to the Fund’s Articles of Agreement. The arguments will be set forth approximately in the order in which they were presented to the Court, so as to give some impression of the development of what was in effect a broad colloquy between the parties on the Fund Agreement.
The essence of this part of the French case was as follows:
… the Government of the United States claims to find in the General Act of the International Conference of Algeciras of April 7th, 1906, proof that France, in her conduct of affaira in Morocco, had departed from the principle of economic liberty without any inequality, which is lard down in the Preamble of that diplomatic instrument. According to the Government of the French Republic, the actual meaning of the principle of economic liberty without any inequality must be determined in the light of the information revealed by international practice, as it is shaped by economic development and as it results from the interpretation of other treaties containing the same principle. The great international instruments by which the States, after the last conflict, tried to restore the freedom of exchanges and to eliminate discrimination (in particular, the Agreements of Bretton Woods of July 22nd, 1944, the Agreements on customs tariffs and trade of October 30th, 1947, and the Charter of Havana of 24th March 1948) authorize a State to take such measures as are necessary to avoid a crisis which would gravely threaten the foundations of its economic equilibrium and its monetary stability.5
This contention was elaborated by France in four propositions set forth in the Memorial submitted by it to the Court.6
(i) A system of equality of treatment does not preclude the institution of exchange control. Monetary or economic disorders may rapidly and fundamentally shake the stability and order of a State. Therefore, a State is and must be free to regulate its monetary system and foreign trade in order to defend itself against such a threat. When the exchange resources of a State are inadequate, it is a vital necessity for it to introduce exchange control. Any limitation on this freedom of action that a State may have accepted must be construed restrictively. Various postwar international conventions have recognized the unavoidable necessity for States to organize their scarce means of payment as a stage in the progress toward freedom of trade and convertibility of currencies. The Bretton Woods Agreement is the basic international instrument which defines the obligations of member States in monetary matters. It establishes a principle of liberty without inequality because one of its general purposes is to facilitate the expansion and balanced growth of international trade and because it prohibits exchange restrictions and discriminations. Nevertheless, various provisions in the Agreement recognize the need for exchange control and authorize its imposition. Article XIV, Section 27 provides generally for exchange control during the whole of the postwar transitional period. Other provisions deal with special cases, such as Article VII, Section 3(a) and (b),8 which applies where the Fund declares that a currency is scarce. Moreover, there are circumstances in which the imposition of exchange control is compulsory, as in the case of an excessive outflow of capital (Article VI, Section 1 (a))9.
The right of a State to impose exchange control, as recognized by the Fund Agreement and other international agreements, is not denied to Morocco because it has undertaken a commitment of equal treatment in its commercial relations with other countries. The principle of equal treatment as provided for in the Act of Algeciras in vague and general terms was intended only to prevent the creation of special privileges. The Fund Agreement does not and was not meant to create such privileges. It establishes principles and institutions for all members. Thus, there is no conflict between the Act of Algeciras and the Fund Agreement.
(ii) The right of Morocco to impose exchange control has been recognized. Jt has been recognized because the Fund Agreement is binding on Morocco under Article XX, Section 2(g).10 It cannot be argued that the drafters intended to exclude from that provision protectorates or colonies subject to a system of equal treatment, because the drafters expressly included mandated territories, and these are always subject to such a system, The notification by France under Article XIV, Section 311 informing the Fund that France intended to take advantage of Article XIV, Section 2 during the transitional period applied to all French protectorates, including Morocco. The Fund received the notification without reservation, and therefore impliedly accepted the institution of exchange control in Morocco. Furthermore, the United States itself had accepted the need for exchange control in Morocco in various policies, agreements, and communications.
(iii) Exchange control can legitimately extend to the prohibition of imports sans devises. The Fund Agreement and other international agreements specify the circumstances in which exchange control is justified, and the aims to be achieved by it, but, generally speaking, do not limit or otherwise prescribe the manner in which it may be exercised. Provided that a State does not go beyond the general principles of any relevant treaty, it may determine for itself how it will adapt its exchange control regulations to changing requirements. The prohibition or limitation of imports sans devises is a normal feature of exchange control and circumstances may make it necessary.12 It had been found necessary in Morocco in order to prevent such violations of exchange control as illegal transfers for the purpose of acquiring exchange on the Paris parallel market with which to pay for imports into Morocco.
(iv) The prohibition of imports sans devises, except from France and the French Union, is not a discrimination against the United States which is contrary to public international law. To hold otherwise would be to condemn exchange control as a whole, because it never applies uniformly but is always exercised in relation to the availability of each currency. France intends to reduce exchange control as much as possible, but the dollar is scarce in Morocco whereas the means of making payments to France are not. Inasmuch as adoption of the Decree was dictated by financial necessities, and not by discriminatory or protectionist policies, it did not constitute an unjust discrimination against the United States.
(2) The U.S. Counter-Memorial
In its Counter-Memorial the United States reviewed the treaties and diplomatic negotiations affecting Morocco and concluded that the United States is guaranteed a regime of free trade without restrictions on imports. The Decree is a violation of this guarantee unless two conditions are met. First, it must be shown that the Fund Agreement and other later treaties cited by France supersede or abrogate the earlier treaties. Secondly, in view of the rule of international law that treaties affect only the parties to them, it must be shown that the later treaties are binding on both the United States and Morocco.
The United States and Morocco are both bound by the Fund Agreement. France entered into the Fund Agreement in respect of Morocco under Article XX, Section 2(g). There are no express terms in the Agreement that modify previous treaty provisions forbidding prohibitions on imports. Abrogation by implication cannot be lightly assumed. To sustain the argument of implied abrogation, it is necessary to show that the Fund Agreement confers on Morocco a legal right or obligation to impose exchange control and that exchange control necessarily leads to the control of all imports, including imports sans devises.
One of the fundamental purposes of the Fund is “To assist… in the elimination of foreign exchange restrictions which hamper the growth of world trade” (Article I(iv)). By joining the Fund, therefore, countries commit themselves in principle to the elimination of exchange control. This purpose is furthered by the general obligation of Article VIII, Section 2(a), under which “Subject to the provisions of Article VII, Section 3(b), and Article XIV, Section 2, no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions.” Thu3, Article VIII, Section 2(a), as well as Article I, sets its face against exchange control, subject however to two exceptions. One of these is Article XIV, Section 2, which France describes as a provision authorizing exchange control. However, this provision neither empowers nor compels Morocco to have exchange control. It merely recognizes the fact that exchange control is in existence, and gives the option to a country to maintain it for a transitional period instead of abolishing it at once under Article VIII. In other words, Article XIV, Section 2 creates no rights or obligations except the negative right of option not to become bound at once by the provisions prohibiting exchange control. This interpretation is supported by Article XIV, Section 3.
The view that Article XIV, Section 2 is a positive provision authorizing exchange control would mean that the legal authority to have exchange control originates in and depends upon that provision. But the parties obviously had this authority before the Agreement took effect, and this explains why it was necessary to draft an agreement to eliminate exchange restrictions. Thus, until, as provided in Article XIV, Section 3, a country accepts the obligations of Article VIII, it is simply exercising the legal authority to control its exchange which it enjoyed before the Fund Agreement took effect. The one case in which it may be conjectured that Article XIV, Section 2 would be the direct source of authority would be the hypothetical one in which a country first unqualifiedly accepts the obligations of Article VIII and subsequently is permitted by the Fund to have exchange control under Article XIV.
The second reservation to the prohibition of exchange control in Article VIII, Section 2(a) is the case covered by Article VII, Section 3(b). France cites this provision as one which authorizes control when the Fund considers that a certain currency is scarce. This formulation suggests that a country is authorized by Article VII, Section 3(b) to impose exchange control when it suffers from a shortage of a particular currency, but this is not the true meaning of the provision. Article VII, Section 3(b) permits exchange restrictions, not because a member country lacks a particular currency, but because the Fund has declared under Article VII, Section 3(a) that its own holdings of a currency are scarce. The Fund has never made any such declaration, so that Article VII, Section 3(b) cannot be construed as conferring authority on Morocco to control its exchange.
There is a similar ambiguity in the reference by France to Article VI, Section 1(a) as an example of a provision which makes it compulsory for a country to have exchange control. This provision does not mean that a country must have exchange control whenever capital outflows threaten its financial position. As in the case of Article VII, Section 3(b), it is the financial position of the Fund, and not of member countries, that is at issue. Article VI, Section 1(a) seeks to protect the resources of the Fund from drawings by members to meet a large or sustained outflow of capital. The Fund has never invoked this provision either, and again, therefore, it cannot be regarded as conferring authority on Morocco to impose exchange control.
The United States concluded that there is nothing in the Fund Agreement or any of the other international agreements relied upon by France to support the proposition that they are the source of any right or duty on the part of Morocco to impose exchange control. Therefore, the argument of implied abrogation or supersession of earlier treaty rights cannot succeed. Those treaty rights entitle U.S. nationals to import into Morocco without prohibitions, and as the Decree prohibits imports it is a violation of the treaty rights. There would be no violation only if, on the request of Morocco, the United States agreed to waive its rights.13
(3) The French Reply
In its Reply, France elaborated the argument that neither the Act of Algeciras nor the earlier treaties entered into by Morocco prevent such exchange control or import prohibitions as are necessary to maintain l’ordre public in Morocco and to transform it into a modern state. Exchange control adopted to cope with a serious shortage of foreign exchange is necessary for these purposes.
The argument based on the Fund Agreement is not that it abrogates earlier treaties or makes exchange control legal where it is otherwise illegal, or that exchange control was not legal in Morocco before the Fund Agreement took effect. The argument is that even a treaty which establishes a new general rule prohibiting exchange control nevertheless recognizes that there are circumstances, both before and after the termination of the transitional arrangements of Article XIV, Section 2, in which it is legitimate for any member or any territory under Article XX, Section 2(g) to have exchange control. For this reason France would reply to the views expressed by the United States on certain provisions of the Agreement even though Article XIV, Section 2 is in itself a sufficient recognition of the right of Morocco to have exchange control at this time.
The United States construes Article VII, Section 3(b) to refer to a scarcity of the Fund’s holdings of a currency and to apply only where the Fund makes a formal declaration of scarcity. But the scarcity of the Fund’s holdings of a currency must be preceded by a scarcity among members. The Fund has acknowledged a scarcity of U.S. dollars among members participating in the European Recovery Program and, although it has not formally declared the dollar scarce, it has adopted a more stringent measure in its decision of April 5, 1948 which announced that such members should request the purchase of dollars from the Fund only in exceptional or unforeseen cases.14
It is true that the Fund has not resorted to Article VI, Section 1(a), but this does not mean that the provision cannot apply to Morocco. It has not been applied only because Morocco has exchange control under Article XIV, Section 2; it would have been applied but for this fact.
The argument of the United States that Article XIV, Section 2 cannot be construed as a source of authority to have exchange control except where a country accepted the obligations of Article VIII and then requested the Fund to permit it to revert to Article XIV leads to a curious result. All that would be necessary to authorize Morocco to institute exchange control under Article XIV, Section 2 would be a purely symbolic interruption in the exchange control it has been maintaining.15
(4) The U.S. Rejoinder
The United States attacked the French concept of l’ordre public on various grounds, one of which was that it would enable a State unilaterally to modify or suspend its treaty obligations. The Fund Agreement does not support the view that a country can arbitrarily and unilaterally impose import prohibitions on the basis of financial considerations in disregard of anterior engagements. Article VIII, Section 616 deals with a possible conflict between exchange restrictions contemplated by the Fund Agreement and earlier treaty obligations, and in such a case requires prior consultation between the parties. France cannot rely on all of the benefits of the Fund Agreement and ignore the one obligation, that of Article VIII, Section 6, to which those benefits are subject. In the circumstances, therefore, all of the arguments of France based on the Fund Agreement become irrelevant.17
(5) French Oral Argument
To the argument of the Rejoinder based on Article VIII, Section 6, France replied, first, that that provision is subject to an express exception, Article VII, Section 5,18 which deals with scarce currencies, and the present case is governed by that exception. Article VII, Section 5 covers two cases of scarcity, the general scarcity of a currency under Section 1 and a scarcity of the Fund’s holdings of a currency under Section 3. An official declaration by the Fund is necessary only under Section 3. However, the Fund’s decision on the use of its resources by members benefiting under the European Recovery Program was an even more vigorous declaration than that envisaged by Section 3. Secondly, if Article VIII, Section 6 does apply, then France has performed its duty of consultation. That provision does not require prior consultation, and consultations have taken place between the Moroccan and U.S. authorities from 1948 to 1950. Until parties succeed in good faith in reaching a mutually acceptable adjustment under the provision, a country is authorized to maintain exchange control under the other provisions of the Agreement.19
The payments regime in Morocco has been notified to the Fund and the Fund has not objected to it. The Fund, and not the Court, is the competent international authority to decide whether exchange control is valid under its Articles. It is for the United States, which is really in the position of the plaintiff, and not for the Moroccan authorities, to request an interpretation from the Fund under Article XVIII.20
(6) U.S. Oral Argument
The arguments of France based upon the Fund Agreement ignore the fact that that Agreement deals with exchange control and not import control. The present case involves import control. Moreover, it was imposed, not in order to enforce exchange control, but for protectionist purposes.21
In any event, the French version of Article VIII, Section 6 cannot be accepted. The Fund Agreement does not deprive a member of its rights under prior treaties. Such a member is bound to consult with another member which wishes those rights to be waived or modified. The United States is thus bound to consult with France on the modification of preexisting treaty rights of the United States. But this does not mean that, if consultation has taken place and no “mutually acceptable adjustment” has been reached, there is then a unilateral right to treat the pre-existing engagements as rescinded. Those engagements can be affected only when the parties reach an agreement, and no agreement has been reached in the present case.
This view of Article VIII, Section 6 is supported by its last sentence, which states the sole exception to the general rule that derogations from prior treaties are not authorized. This exception relates to action required by Article VII. However, France cannot rely on that provision because the Fund has never made a “formal declaration” of scarcity. The Fund’s E.R.P. decision of April 5,1948 was not drafted as, and was not intended to be, a “formal declaration” under Article VII. Nor was it a more stringent measure than a “formal declaration”. Such a declaration would affect all members of the Fund, whereas the E.R.P. decision affected only those members participating in E.R.P. Finally, in March 1952 the Fund recognized that the E.R.P. decision was no longer in effect.
The discussion as to the meaning of the E.R.P. decision shows the wisdom of the requirement in the Fund Agreement which imposes on France, as the party attempting to justify action based on the Agreement, the burden of requesting an authoritative interpretation from the Fund under Article XVIII. That provision states that: “Any question of interpretation of the provisions of this Agreement arising … between any members of the Fund shall be submitted to the Executive Directors for their decision.” France has not complied with this mandatory provision, and therefore its assertion that the treaty rights of the United States have been abrogated should be rejected.22
(7) The Decision of the Court
The International Court decided unanimously that it must reject the submissions of France with respect to the Decree. The Act of Algeciras provided that Morocco should have a regime of “economic liberty without any inequality”. The meaning of this concept was to be found in the context of treaty provisions relating to trade and equality of treatment in economic matters existing at the time of the Act of Algeciras. A series of diplomatic pronouncements, both before and after the Act of Algeciras, showed that it was understood by all, including France, that the concept was not an empty one, and that it meant that there must be no differential treatment in economic matters among the nationals of the various States concerned. Thus, the United States was assured by both Morocco and France, as the protecting State, of equality of treatment.
Was France, as the protector, entitled to privileges in Morocco that need not be accorded to the United States? The rights of France in Morocco were defined by the Treaty of Fez, which gave France no privileged position in economic matters. Any such privileged position would be incompatible with the principle of economic liberty without inequality upon which the Act of Algeciras was based.
It followed that the Decree contravened the rights of the United States under the Act of Algeciras because it discriminated between imports from France and other parts of the French Union, on the one hand, and imports from the United States, on the other. This conclusion could also be based on the Treaty of September 16, 1836 between the United States and Morocco, which contained a most-favored-nation clause.
The Court held that the conclusions it had reached made it unnecessary to pronounce upon the various contentions advanced by France to demonstrate the legality of exchange control. Even if the legality of exchange control in Morocco were assumed, it could not justify the discrimination in favor of France created by the Decree. It also became unnecessary to consider the other arguments invoked by the United States against the Decree. In these circumstances, the Court did not feel called upon to consider and decide the general question of the extent of the control over imports that might be exercised by the Moroccan authorities.23
Thus, although the pleadings in the case raised numerous and often fundamental questions as to the effect of the Fund Agreement on the public international law relating to exchange control, the International Court preferred not to pass upon these questions. For example, it did not discuss the general question whether the Fund Agreement entitles or compels a member country to have exchange control notwithstanding prior treaty commitments to the contrary. Nor did it hold in the particular case before it that Morocco was entitled to impose exchange control. All it purported to decide was that, under treaty arrangements entered into in the past, Morocco was prevented from adopting controls on imports that discriminated against the United States. The United States would be entitled to object even if Morocco had the general right to adopt exchange control but sought to exercise that right in a way that discriminated against the United States.24
The nature of the decision emerges more clearly when it is examined in relation to the basic arguments advanced by the parties. In this connection it is interesting to note that the United States interpreted the French case to be that the earlier treaties had been superseded or abrogated, so far as they dealt with the principle of economic liberty without inequality, by such later treaties as the Fund Agreement. It is doubtful, however, whether this was in fact the precise character of the main argument on which France relied. It seems really to have been that the principle of economic liberty without inequality was a flexible one, the content of which could vary from time to time. The determination of its content at. any particular date should be made on the basis of contemporary economic developments and international practice. Thus, the argument was not that the treaty provisions establishing the principle of economic equality had been abrogated or superseded, but that they should be interpreted by means of a particular technique.25 If this technique were followed, the fact that exchange control had not been thought of at the time of the Act of Algeciras in 1906 would not mean that the principle could not be interpreted so as to permit exchange control in 1948.
If the judgment is examined from the standpoint of the French argument as formulated above, it is clear that the Court did not agree that the principle of economic equality was a flexible one capable of growth or change. Its meaning was to be sought in diplomatic discussions relating to the treaties in which it had been incorporated, and the meaning when found in this way was fixed. The Court decided that the parties had understood the principle to preclude discrimination, and therefore it could not be interpreted so as to embrace discrimination at a later date.
If the United States’ version of the French argument is adopted, the judgment of the Court must mean that earlier treaties, insofar as they established a principle prohibiting discriminatory exchange control, have not been abrogated or superseded by such later treaties as the Fund Agreement, under which discriminatory exchange control might otherwise be possible. Clearly, if there had been such abrogation or super-session, the Court could not have rejected the French submission.
Unenforceability of Certain Exchange Contracts
In the second installment of the survey of cases involving the Articles of Agreement of the International Monetary Fund,26 an account was given of the decision of the Appellate Division of New York in Perutz v. Bohemian Discount Bank in Liquidation27 A further appeal was instituted, and the Court of Appeals, the highest State court in New York, has now delivered its opinion and reversed the judgment of the Appellate Division.28 Although the precise scope of the opinion is not clear, it will undoubtedly be regarded as a significant development in the law relating to the international recognition of exchange control regulations. The decision is of particular interest because it rests squarely upon the legal effect of membership in the International Monetary Fund.
Examination of the case must be prefaced by a summary of the Fund’s formal interpretation under Article XVIII,29 adopted in June 1949, of the first sentence of Article VIII, Section 2(b) which provides that:
Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member.…
The Fund’s interpretation30 involved three major principles. First, the judicial or administrative authorities in a member country must not give assistance to one who seeks the performance of an exchange contract falling within the provision which is contrary to the exchange control regulations of another member maintained or imposed consistently with the Fund Agreement. Secondly, these authorities may not ignore the exchange control regulations of another member in such a case on the ground that, under the private international law of the forum, the regulations are not part of the law which governs the contract or its performance. Thirdly, they may not ignore the exchange control regulations in such a case on the ground that the regulations are against the public policy (ordre public) of the forum.
In the Perutz case the facts were these. The plaintiff was the administratrix of the estate of her deceased husband, who had been employed by a Czechoslovak banking corporation, the predecessor of the defendant, another Czechoslovak bank. He had been a citizen and resident of Czechoslovakia, and in 1938 had entered into a contract in Prague with his employer under which he was entitled to a certain pension payable monthly at the employer’s Prague office. The husband left Czechoslovakia in November 1940 and became a citizen and resident of the United States, where he died in June 1949. He received his pension until the end of October 1912, but payment then ceased. Before his death, he obtained an attachment of the defendant’s funds in New York, and brought this action to recover the dollar equivalent of the pension payable after November 1, 1942. At the date when the contract was made and at all times thereafter, Czechoslovak exchange control regulations prohibited payments to nonresidents, in domestic or foreign currency, without the license of the exchange control authorities. Czechoslovak currency had been deposited by the defendant in a blocked account in the husband’s name in Czechoslovakia, but withdrawals could not be made without a license, and no license for withdrawals or for payment, in any other form had ever been granted.
On appeal to the Court of Appeals, the parties agreed that Czechoslovak law governed the contract under the private international law of New York. The defendant argued that it had performed the contract as permitted under that law, and performance in any other form was prohibited by it. Since the New York action was for breach of contract, it must fail because there was no breach. The public policy of New York did not require that the Czechoslovak exchange control regulations, which prescribed the form of performance and in accordance with which performance had been made, should be refused recognition by a New York court. The necessity for exchange control regulations was recognized by various provisions of the Fund Agreement, and one of them, Article VIII, Section 2(b), imposed a duty on members in certain cases to respect the regulations of other members. The first sentence of that provision had been given “full force and effect” by the Congress of the United States in its Bretton Woods Agreements Act.31
The plaintiff argued that the Czechoslovak exchange control regulations did not relate to the substance of the plaintiff’s rights but only to the remedies for their enforcement. They should, therefore, be refused recognition under the rule of New York private international law by which remedial matters are governed by the law of the forum and not some foreign law. They should be ignored for the further reason that the regulations were penal and confiscatory. Moreover, the protection of the Czechoslovak economy was contrary to the public policy of the United States, and recognition of the regulations should be withheld on this ground also. Article VIII, Section 2(b) of the Articles of Agreement of the Fund did not apply because the pension contract was not an “exchange contract” within the meaning of that provision.
The Appellate Division had held that the plaintiff’s claim succeeded and could be satisfied from the dollar funds of the defendant which had been attached. The Court of Appeals decided unanimously to reverse this judgment. Its opinion was brief. The contract, it held, was governed by the law of Czechoslovakia, the place where it had been made and was to be performed. The defendant had performed the contract as permitted by that law. New York courts could not refuse on the ground of public policy to give effect to exchange control regulations that were part of Czechoslovak law, because both the United States and Czechoslovakia were members of the Fund. The Court made no express mention of Article VIII, Section 2(b) or any other specific provision of the Fund Agreement.
The practical importance of the case is obvious. The effect of the decision is to extend an important measure of protection to the dollar assets of other members of the Fund. However, it is not completely clear on what principle the decision rests. There are at least two alternative readings of the case. Both have significant legal implications of a novel character, and an attempt will be made here to indicate what they are.
One view of the Court of Appeals’ decision is that it was not based on Article VIII, Section 2(b) as such, but on the general effect of membership in the Fund.32 Such a view would mean that even though a case involving the exchange control regulations of another member of the Fund does not come within Article VIII, Section 2(b), for example because the contract involved is net an “exchange contract,” the courts of a member country should not refuse to recognize the regulations. This rule would apply whenever the law of which the exchange control regulations are part is the law governing the contract according to the private international law of the forum. Moreover, such a rule would seem to apply even though no contract at all were involved. There would be no reason why the rule should net extend to any situation in which the law of another member country is applicable under the private international law of the forum and the foreign law includes exchange control regulations which affect the issue. An example of such a case would be one in which the foreign law governs the distribution of a decedent’s estate.33 In short, if the ratio decidendi of the Perutz case is not Article VIII, Section 2(b), the principle that public policy can no longer be relied upon for refusing to recognize the exchange control regulations of another member of the Fund will extend far beyond the cases embraced by the provision.
The alternative view of the Perutz case is that the Court of Appeals must be taken to have based its decision on Article VIII, Section 2(b). As against this interpretation of the case it may be objected that the Court made no express reference to the provision even though it was the subject of arguments advanced by both sides. The further objection may be made that, if the Court was relying on the provision, it should have based its application of Czechoslovak law, not on the private international law of New York, but on the thesis that Czechoslovak currency was the currency “involved” under the provision. Nevertheless, the result is consistent with Article VIII, Section 2(b), and with the Fund’s interpretation of it, particularly on the vital question of public policy. It can hardly be asserted, therefore, that it will be impossible for future courts to treat the decision as having been tacitly based on Article VIII, Section 2(b). In fact, it has already been argued by one author that the case must be thought of as decided under that provision because its presence in the Fund Agreement makes it illogical to assume that there is a further or different obligation in the Agreement with respect to the recognition of exchange control regulations.34
If the view does prevail that the case was decided on the basis of Article VIII, Section 2(b), it will have a bearing on a number of questions arising under the provision that were not dealt with in the Fund’s interpretation. Some of these questions have already been discussed in legal literature, particularly in contributions by two prominent authorities on monetary law, Dr. Mann and Professor Nussbaum. It is interesting, therefore, to relate the Perutz case, treated as a decision under Article VIII, Section 2(b), to the views held by these two authors. However, the merits of those views will not be examined here, and it is not suggested that any of the views would necessarily have been accepted by the court.
(i) Dr. Mann35 has argued that Article VIII, Section 2(b) deals only with the making of contracts and not with their performance. That is to say, the provision applies only if the contract when made was contrary to the appropriate exchange control regulations. Conversely, the provision does not apply if the contract when made was consistent with those exchange control regulations even though performance when sought is contrary to them. In the Perutz case, the contract when made was completely in accordance with Czechoslovak exchange control regulations. It was the particular performance sought by the plaintiff, i.e., recovery of dollars after he became a nonresident of Czechoslovakia, which was contrary to the regulations. The Perutz case would thus conflict with Dr. Mann’s conclusion that the general rules of private international law are displaced by Article VIII, Section 2(b) only insofar as questions of the initial validity of an exchange contract are concerned.
(ii) Closely related to the foregoing is Dr. Mann’s conclusion that the question whether or not a contract is an “exchange contract” within the meaning of Article VIII, Section 2(b) must be decided solely with reference to the time when it was made. “A contract made between two residents of France and lacking any international aspects, can be enforced in England if, e.g., the debtor establishes his residence [in England], even though such enforcement is contrary to French exchange control regulations, for the contract was not an exchange contract when made and does not become an exchange contract by the change of the debtor’s residence.”36 Yet this was the pattern of facts in the Peruiz case. The contract was made in Czechoslovakia between two residents; enforcement was sought, contrary to Czechoslovak exchange control regulations, after one of them had become a nonresident. The effect of the Perutz case would thus be that the date as of which to determine whether a contract is an “exchange contract” is the date at which a party seeks to get enforcement of it.
(iii) The Perutz case would also imply a view on the problem of the definition of “exchange contracts”. Professor Nussbaum37 has described them as contracts involving the exchange of one currency for another. This was not the nature of the contract in the Perutz case, and Professor Nussbaum’s view could not be reconciled with it. However, the case would be consistent with Dr. Mann’s theory that an “exchange contract” is one that affects the exchange resources of a country.38
(iv) Finally, the case would be consistent with the views expressed by both Professor Nussbaum39 and Dr. Mann40 to the effect that Article VIII, Section 2(b) applies to exchange control regulations adopted and contracts made before the Fund Agreement took effect.
Privileges and Immunities
The second installment of the survey of cases involving the Fund’s Articles of Agreement41 included an account of the case of International Bank for Reconstruction and Development and International Monetary Fund v. All America Cables and Radio, Inc., The Commercial Cable Company, Mackay Radio & Telegraph Company, Inc., RCA Communications, Inc., The Western Union Telegraph Company,42 in which the Hearing Examiner of the Federal Communications Commission, a U.S. agency which exercises regulatory powers over the rates charged for cable communications, delivered his Initial Decision in favor of the Fund and Bank.43 Exceptions were taken to the Hearing Examiner’s decision, and the case was then heard by the Commission, which on March 23, 1953 released its Final Decision. In substance, this confirms the Initial Decision of the Hearing Examiner, subject however to one modification.
The case arose in the following circumstances. In 1949 the cable companies proposed to adopt revised tariffs of charges under which the Fund would be required to pay the same commercial rates for its official telecommunications messages as were payable by private persons. Before July 1, 1949 the Fund had paid the same rates that applied to the messages sent by foreign governments from the United States to their own countries. These rates were substantially lower than the commercial rates. The Fund filed a complaint with the Federal Communications Commission contending that the revised tariffs were unlawful on the ground that, as long as special governmental rates were in existence, the Fund was entitled to the same standard of treatment.
The Fund’s case was based mainly on Article IX, Section 7 of its Articles of Agreement, which provides that:
The official communications of the Fund shall be accorded by members the same treatment as the official communications of other members.
This provision had been given “full force and effect” in the United States, its territories and possessions by Section 11 of the (U.S.) Bretton Woods Agreements Act. The Fund also relied upon other U.S. statutes.
Article IX, Section 7 had been the subject of an interpretation by the Executive Directors of the Fund under Article X VIII of its Agreement.44 This was the result of certain questions put to the Executive Directors by the Executive Director for the United States at the request of the (U.S.) National Advisory Council on International Monetary and Financial Problems. The interpretation stated the following propositions:
Article IX, Section 7 applies to rates charged for official communications of the Fund.
A member which exercises regulatory powers over the rates charged for communications is not relieved of its obligation under the provision because the facilities for transmitting communications are privately owned or operated or both.
The obligation of a member under the provision is not satisfied if official communications of the Fund may be sent only at rates that exceed the rates accorded the official communications of other members in comparable situations, as for example where the rate charged the Fund for its official communications from the territory of member A to the territory of member B exceeds the rate charged B for its official communications from the territory of A to that of B.45
The basic issue in the case before the Commission was whether the word “treatment” in Article IX, Section 7 embraces rates or whether, as contended by the companies, it is confined to such matters as priorities and freedom from censorship. This issue involved consideration of the binding force of interpretations by the Fund under Article XVIII of its Agreement.
The Commission decided that the question whether the word “treatment” applied to rates was conclusively determined by the Fund’s interpretation. This novel procedure for issuing interpretations binding on member governments was an integral part of the Fund Agreement, and the United States, in resorting to the procedure in Sections 12 and 13 of its Bretton Woods Agreements Act, had already recognized that it was bound by such interpretations. The interpretation in this case could not be any the less binding because it was the policy of the United States and the Commission to eliminate government rates. As long as they did exist, the Fund was entitled to the same standard of treatment, and policy must yield to international obligation.
The Commission rejected the argument of the cable companies that the interpretation was ultra vires because the question with which it dealt arose between the Fund and private companies. The question was raised by one member and involved all members of the Fund. It was thus within Article XVIII, even though in the result private companies might be affected. Nor did the decision lack the requisite finality because it had not been appealed from the Executive Directors to the Board of Governors. The interpretation had been adopted unanimously, and no member government had indicated any intention to appeal from it. Moreover, even if it were assumed that the Commission would not be bound to give effect to an interpretation which was so unreasonable, arbitrary, or capricious as to be an amendment rather than an interpretation of the Fund Agreement, the interpretation in this case was not of such a character. Finally, the Commission disposed of arguments that Article IX, Section 7 did not include rates because it dealt only with customary diplomatic privileges and immunities; that the provision as interpreted had been abrogated by certain telecommunications conventions entered into after the Fund Agreement took effect; that the (U.S.) Communications Act, 1934, under which the Commission determines the lawfulness of rates or the existence of discrimination, had not been expressly amended by the (U.S.) Bretton Woods Agreements Act; and that the Fund could not invoke its Articles or certain statutes before the Commission because they involved questions of interpretation of international executive agreements and statutes which were beyond the jurisdiction of the Commission.
Having concluded that the interpretation of the Executive Directors that the communications privileges of the Fund included rate treatment was binding on it, the Commission then went on to determine precisely what rate treatment the Fund was entitled to under the interpretation. It was on this part of the case that the Commission departed from the opinion of the Hearing Examiner. The latter had decided, in accordance with the argument advanced by counsel for the Fund, that the obligation of the United States to ensure that the Fund received the same preferential rates for its official communications as U.S. cable companies accorded to other member governments did not depend on any showing of reciprocity by the foreign correspondents of the U.S. companies. The Commission pointed out, however, that international cable service is a bilateral process, and before such service can be instituted a U.S. company must make appropriate arrangements with the foreign correspondent or government with which it expects to exchange traffic. Thus, the grant of reduced rates by a U.S. company for the official messages of a foreign government to its territory is generally the result of an agreement in which the foreign correspondent or government agrees to settle on the basis of the reduced tolls and to grant reduced rates to official U.S. Government messages from the foreign territory to the United States. If U.S. companies were required unilaterally to give reduced rates to the Fund without regard to the action of their foreign correspondents, they would not be giving the Fund the “same” treatment as is called for by Article IX, Section 7, but better treatment. The Commission was of the opinion that the interpretation itself recognized that the Fund was not entitled to such better treatment, because it called for the reduced rates accorded other members in “comparable situations.”
The Commission concluded, therefore, that Article IX, Section 7 and the Fund’s interpretation require U.S. cable companies to grant the Fund reduced rates for its official communications from the United States to another member country (X) when the following three conditions are met:
Reduced rates are in effect for the official government communications of X, sent from the United States to the home territory of X;
X or the cable company subject to its jurisdiction accords the Fund the same reduced rates for its official messages to the United States as are accorded to similar messages of the U.S. Government;
X or the cable company subject to its jurisdiction agrees to settle its accounts with the U. S. company for such official messages of the Fund on the basis of the reduced rates.
Accordingly, the Commission ruled that the cable companies must file revised tariffs based on governmental rates which would be effective where these three conditions are satisfied.
The Commission also discussed two further bases upon which the Fund had rested its complaint. The first of these was the (U.S.) International Organizations Immunities Act,46 Section 2(d) of which declared that the privileges accorded the official communications of organizations coming under the Act, of which the Fund was one, “shall be those accorded under similar circumstances to foreign governments”. The Commission held that, in view of its decision based upon the Fund’s Articles, it was unnecessary to decide what the Fund’s rights were under the International Organizations Immunities Act, but the Commission went on to note that whatever rate privileges might exist under that statute would be subject, in view of the language of Section 2(d), to the same conditions of reciprocity as under the Fund’s Articles and the interpretation. Finally, the Fund had argued that there was unlawful discrimination if rates for the Fund were higher than rates for the United Nations, but the Commission held that the cable companies were not required to accord the same rates to the United Nations and to other international organizations.
Originally published in October 1953.
For earlier installments, see pp. 1–36, supra.
I.C.J. Reporta, 1952, pp. 176–233. For a thorough analysis of the cases, see A. de Lauhadère, “Le Statut International du Maroc et l’Arrel de la Cour Internationale de Justice du 27 aoêt, 1952”, Revue Juridique et Politique de l’Union Française, Vol. 6 (1952), pp. 429–73, in which the question of exchange control is discussed at pp. 453–69.
However, it was not disputed between the parties that, even after the establishment of the Protectorate, Morocco retained its personality as a State in international law. See I.C.J. Reports, 1952, p. 185.
An analysis of imports sans devises is to be found in the French Memorial, I.C.J. Pleadings, Vol. I, pp. 15–17. For the argument of the United States that the variations in the strength of the franc on the parallel market were not attributable to the volume of these imports, see I.C.J. Pleadings, Vol. II, pp. 239–41.
From the Application by France instituting proceedings; see I.C.J. Pleadings, Vol. I, p. 11.
I.C.J. Pleadings, Vol. I, pp. 78–89; Vol. II, pp. 196, 199–207.
Section 2. Exchange restrictions.—In the post-war transitional period members may, notwithstanding the provisions of any other articles of this Agreement, maintain and adapt to changing circumstances (and, in the ease of members whose territories have been occupied by the enemy, introduce where necessary) restrictions on payments and transfers for current international transactions. Members shall, however, have continuous regard in their foreign exchange policies to the purposes of the Fund; and, as soon as conditions permit, they shall take all possible measures to develop such commercial and financial arrangements with other members as will facilitate international payments and the maintenance of exchange stability. In particular, members shall withdraw restrictions maintained or imposed under this Section as soon as they are satisfied that they will be able, in the absence of such restrictions, to settle their balance of payments in a manner which will not unduly encumber their access to the resources of the Fund.
Section 3. Scarcity of the Fund’s holdings.—(a) If it becomes evident to the Fund that the demand for a member’s currency seriously threatens the Fund’s ability to supply that currency, the Fund, whether or not it has issued a report under Section 1 of this Article, shall formally declare such currency scarce and shall thenceforth apportion its existing and accruing supply of the scarce currency with due regard to the relative needs of members, the general international economic situation, and any other pertinent considerations. The Fund shall also issue a report concerning its action.
(b) A formal declaration under (a) above shall operate as an authorization to any member, after consultation with the Fund, temporarily to impose limitations on the freedom of exchange operations in the scarce currency. Subject to the provisions of Article IV, Sections 3 and 4, the member shall have complete jurisdiction in determining the nature of such limitations, but they shall be no more restrictive than is necessary to limit the demand for the scarce currency to the supply held by, or accruing to, the member in question; and they shall be relaxed and removed as rapidly as conditions permit.
Section 1. Use of the Fund’s resources for capital transfers.—(a) A member may not make net use of the Fund’s resources to meet a large or sustained outflow of capital, and the Fund may request a member to exercise controls to prevent such use of the resources of the Fund. If, after receiving such a request, a member fails to exercise appropriate controls, the Fund may declare the member ineligible to use the resources of the Fund.
Section 2. Signature.—(g) By their signature of this Agreement, all governments accept it both on their own behalf and in respect of all their colonies, overseas territories, all territories under their protection, suzerainty, or authority and all territories in respect of which they exercise a mandate.
Section 3. Notification to the Fund.—Each member shall notify the Fund before it becomes eligible under Article XX, Section 4(c) or (d), to buy currency from the Fund, whether it intends to avail itself of the transitional arrangements in Section 2 of this Article, or whether it is prepared to accept the obligations of Article VIII, Sections 2, 3, and 4. A member availing itself of the transitional arrangements shall notify the Fund as soon thereafter as it is prepared to accept the above-mentioned obligations.
Reference was made to the prohibition of such imports by Italy in 1948; and to the abandonment by Greece, at a later date, of a proposal to permit them. It was pointed out that in this latter case Greece acted with the advice of experts, one of whom was from the Fund.
I.C.J. Pleadings, Vol. I, pp. 335–43.
International Monetary Fund, Annual Report, 1948, Appendix IV, pp. 74–75.
I.CJ. Pleadings, Vol. II, pp. 26–31.
Section 6. Consultation between members regarding existing international agreements—Where under this Agreement a, member is authorized in the special or temporary circumstances specified in the Agreement to maintain or establish restrictions on exchange transactions, and there are other engagements between members entered into prior to this Agreement which conflict with the application of such restrictions, the parties to such engagements will consult with one another with a view to making such mutually acceptable adjustments as may be necessary. The provisions of this Article shall be without prejudice to the operation of Article VII, Sections.
I.CJ. Pleadings, Vol. II, p. 105.
Section 5. Effect of other international agreements on restrictions.—Members agree not to invoke the obligations of any engagements entered into with other members prior to this Agreement in such a manner as will prevent the operation of the provisions of this Article.
I.CJ. Pleadings, Vol. II, pp. 201–2, 309.
I.CJ. Pleadings, Vol. II, pp. 200, 205, 308–9. For the text of Article XVIII, see a. 44, p. 56, infra.
I.CJ. Pleadings, Vol. II, p. 257. The French reply to this argument was that exchange control and import control are not identical, but they are not necessarily independent. Exchange control may apply where no import is involved, as in the case of capital transfers. Similarly, import control may involve no financial considerations, as in the case of controls for reasons of public health, trading with the enemy, or protection of a new industry. But exchange control may apply to current transactions, and then it necessarily involves import control. This is shown by Article VIII, Section 5 (a)(v), (vi), (xi); and Article XIX (i)(l) of the Fund Agreement. The Decree of December 30, 1948 is based on financial considerations, A prohibition of imports sans devises could not be characterized otherwise. It is, therefore, a measure of exchange control. I.C J. Pleadings, Vol.11, pp. 304–5.
I.CJ. Pleadings, Vol. II, pp. 257–61, 319–21. On the Fund’s E.R.P. decision. France replied that the decision was revoked because of the termination of the first U. S. aid program. This does not mean that the decision was ineffective for the period 1948–52, or that thereafter the dollar ceased in fact to be a scarce currency. Ibid., pp. 308–9.
I.C.J. Reports, 1952, pp. 183–86.
As a result of the decision, France could have extended the control of imports sans devises to imports from the franc area or could have removed this control altogether. It chose the latter course, making it clear at the same time that the existing control over the allocation of foreign exchange would be continued. In addition, importers who were free to import because they had not received an official allocation of exchange would be required, when requested by the competent authorities, to describe the use of funds from the sale or utilization of these imports. See U.S. Department of State Bulletin, Vol. XXVII, No. 695, p. 623, October 20, 1952, and A. de Laubadère, op. cit., pp. 463–65.
That this was the basic French argument appears more clearly in the Application instituting proceedings, from which a passage has been quoted on page 39. spra. In oral argument, however, France argued that, if the Court did not accept the Fund Agreement as helping to determine the content of the concept of economic liberty without any inequality under the Act of Algeciras, it should regard the Fund Agreement as establishing an exception to that Act, I.CJ. Pleadings, Vol II, pp. 193, 303.
Pp. 28–30, supra.
110 N.T.S. (2d) 446 (1952).
304 NY. 533, 110 N.B. (2d) 6 (1953).
For the text of Article XVIII, see n. 44, p. 56, infra,
For the text, see pp. 12–13, supra. It has also been published in International Monetary Fund, Annual Report, 1940, Appendix XIV, pp. 82–83; Revue Critique de Droit International Privé, Vol. XL (1951), pp. 586–87; and U.S. Federal Register, August 19, 1949, pp. 5208–9.
59 Stat. 512 (1945).
That this is the correct view of the Perutz case has already been argued in the supplemental memorandum of law submitted to the Supreme Court of New York by the intervenor in Bala v. Bala a.s.
See, for example, In re Liebl’e Estate, 106 N.Y.S. (2d) 715 (1951).
B. S. Meyer, “Recognition of Exchange Controls after the International Monetary Fund Agreement”, Yak Law Journal, Vol. 62 (1953), pp. 868–910.
F. A. Mann. “The Private International Law of Exchange Control Under the International Monetary Fund Agreement”, International and Comparative Law Quarterly, Vol. 2 (1953), pp. 106–7.
Ibid., p. 106.
Arthur Nussbaum, “Exchange Control and the International Monetary Fund”, Yale Law Journal, Vol. 59 (1950), pp. 426–27, and Money in the Law, National and International (Brooklyn, 1950), pp. 542–43.
F. A. Mann, op. cit., p. 102 and “Money in Public International Law”, British Yearbook of International Law, Vol. 26 (1949), p. 279, Dr. Mann has abandoned an earlier view that an “exchange contract” is one that provides for consideration in the form of exchange; see “The Exchange Control Act, 1947”, Modern Law Review, Vol. 10 (1947), p. 418. This was not the same as Professor Nussbaum’s view because a contract may provide for the payment of exchange otherwise than in return for another currency. The sale of goods for exchange is an obvious example. In the supplemental memorandum of law of the intervenor in Bata v. Bata a.s. (see n. 32, p. 52, supra), it was argued that, “the Court of Appeals [in the Perutz case] could have founded its decision on Article VIII. Section 2(b) only if it determined that the words ‘exchange contract’ in the section were intended to include all monetary transactions which affected the exchange resources of a member country.”
Arthur Nussbaum, “Exchange Control and the International Monetary Fund,” Yale Law Journal, Vol. 59 (1950), p. 427, and Money in the Law, National and International (Brooklyn, 1950), p. 543.
F, A. Mann, “The Private International Law of Exchange Control Under the International Monetary Fund Agreement,” International and Comparative Law Quarterly, Vol. 2 (1953), p. 104.
See pp. 20–27, supra.
F.C.C. Docket No. 9362,
For convenience, the case will be discussed here in terms of the Fund and the Fund Agreement, but all such discussion should be understood to apply equally to the Bank and its Articles of Agreement.
(a) Any question of interpretation of the provisions of this Agreement arising between any member and the Fund or between any members of the Fund shall be submitted to the Executive Directors for their decision….(b) In any case where the Executive Directors have given a decision under (a) above, any member may require that the question be referred to the Board of Governors, whose decision shall be final. Pending the result of the reference to the Board the Fund may, so far as it deems necessary, act on the basis of the decision of the Executive Directors.
For the text of the interpretation, see International Monetary Fund, Annual Report, 1960, Appendix XI, pp. 118–19.
59 Stat. 669 (1945).