Article VIII, Section 2(b), of the Fund Agreement and the Unenforceability of Certain Exchange Contracts: A Note*

Joseph Gold
Published Date:
December 1962
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ARTICLE VIII, Section 2(b), of the Articles of Agreement of the International Monetary Fund1 reads as follows:

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. In addition, members may, by mutual accord, cooperate in measures for the purpose of making the exchange control regulations of either member more effective, provided that such measures and regulations are consistent with this Agreement.

Most of the problems connected with this novel provision have not yet been the subject of interpretation by the Fund itself.2 In recent years, however, it has been cited on a number of occasions in the courts of member countries, and much has already been written on its interpretation.3 An important contribution to the literature on this subject has appeared in the second edition of The Legal Aspect of Money by Dr. F. A. Mann:4 the provision is discussed in Chapter XIII, and there are interesting references to it elsewhere in the edition. Dr. Mann’s distinction in the field of monetary law gives great weight to his views. This is enhanced by his pioneer work—as a contributor to legal periodicals and as Rapporteur of the International Monetary Law Committee of the International Law Association5—in directing the attention of the legal profession to the provision and in analyzing some of its many complexities. Some of the views on the provision expressed by Dr. Mann in his new edition should receive general assent; although other points are more doubtful, there is at least an even chance that he may be right. However, there are some conclusions of a quite fundamental character which should not be accepted. This note is confined to an examination of those issues.


Obviously, “unenforceable” is a key word in the provision. Dr. Mann’s interpretation of it is not entirely clear. It should not be understood, he says, in the “very special sense” which is familiar to Anglo-American lawyers. To attribute to the Bretton Woods Conference an intention to employ the word in this sense would be “almost perverse.” Dr. Mann cites two respects in which it would be inappropriate to give unenforceability all of its technical meaning in Anglo-American law. The first is that, with such a meaning, it would be left to the option of one of the parties to decide whether or not to plead the exchange control regulations. This would be inconsistent with the purpose of the Fund Agreement. Secondly, the provision would apply to judicial proceedings only and would not extend to administrative authorities.6

If Dr. Mann is saying that the word “unenforceable” means that judicial or administrative authorities will refrain from enforcing an exchange contract and will refrain whether or not a party has relied on the exchange control regulations, there should be no dispute with him. As Dr. Mann points out, the Fund itself can be understood to have said this in its authoritative interpretation of the provision under Article XVIII.7 But is this all that Dr. Mann is saying? There is no reason to assume that he is saying more so long as he describes “unenforceability” as “ineffectiveness in the forum” or even “ineffectiveness.” Doubt arises, however, when he speaks of the provision as invalidating contracts8 or as displacing the private international law rules of initial validity.9 If his view is that unenforceability in the provision means invalidity, this interpretation can scarcely be accepted.

If the international legislators had intended invalidity, there is no reasonable explanation for their failure to use that word. Although the concept of a valid contract or obligation which cannot be enforced is not unknown outside common law systems, and can be found elsewhere in a major international charter,10 the concept of invalidity has wider currency. If it is assumed that the non-common law delegations at Bretton Woods thought that unenforceability meant invalidity, it is hardly possible to make this assumption of the lawyers in the common law delegations. Of them it would have to be assumed that they did nothing to explain the significance of the word to the other delegations, and that they were willing to permit a serious and obvious ambiguity to be incorporated into the text. The legislative history of the provision shows that its sponsors were the British and U.S. delegations.

It is not difficult to explain why the drafters of the Fund Agreement did not go so far as to declare that exchange contracts covered by the provision are invalid. The aim of the provision was to ensure that the exchange control regulations of one member would receive a measure of recognition from the judicial and administrative authorities of other members. In order to make this collaboration effective, it was not necessary that other members should regard the contracts in question as illegal or invalid. If other members were required to do this, they might be attaching a more severe legal consequence to a breach of exchange control regulations than the member having those regulations. Unenforceability was the lowest common denominator among legal consequences which at the same time would ensure the collaboration among members that was being sought.

On the question of invalidity, it is of interest to note that Mr. André van Campenhout, who was then General Counsel of the Fund, has expressed the following view:

The main propositions embodied in the Fund’s interpretation of Article VIII, Section 2(b), may be summarized as follows: (a) In declaring that certain contracts are unenforceable, what the provision means is that if there is an exchange contract involving the currency of any member of the Fund and contrary to the exchange control regulations of that member maintained or imposed consistently with the Fund Agreement, the judicial or administrative authorities of other members will not help a party to the contract to get performance of it. This is basically the same concept as that of unenforceability in Anglo-American law. The judicial or administrative authorities are not bound to treat such contracts as invalid or in any other way penalize the making or performance of them, although, of course, such sanctions may be the result of voluntary action by members under the second sentence of Article VIII, Section 2(b).11

Making v. performance of exchange contracts

Dr. Mann states that the provision relates not to the performance but to the making of exchange contracts. If an exchange contract when made is contrary to applicable exchange control regulations, it is unenforceable, even though before performance it becomes consistent with exchange control regulations. Similarly, if the contract is consistent with exchange control regulations when made, it remains enforceable even though before performance it becomes contrary to them.12

Dr. Mann recognizes the difficulty of reconciling his view with the use of the present tense in the phrase “which … are contrary.” However, he finds support for his view in the legislative history of the provision. His argument runs as follows. The first draft referred to “exchange transactions ... which evade or avoid the exchange regulations prescribed.” There is nothing to indicate that the international legislators changed their intentions when they substituted “contrary” for “evade or avoid.” In fact, in the Second Report of the Drafting Committee of Commission I of the Bretton Woods Conference, this change is described as merely a “new formulation,” Thus, the change of language is no more than a drafting change; the provision still means “evade or avoid”; and exchange control regulations can be evaded or avoided by a contract only when the contract is made.

Dr. Mann’s argument is based on a misreading, although an entirely reasonable one, of the legislative history. The Second Report of the Drafting Committee to which he refers contains the following language:

All the material contained in this report has been approved in principle by the Commission at previous sessions. The present report contains, however, a new formulation of certain provisions to which I should specifically draw the attention of the Commission.13

References to six provisions follow, of which Article VIII, Section 2(b), is one. Dr. Mann has read the second of the sentences quoted from the Report as if it were governed by the first. In fact, the second sentence is an exception to the first sentence, and this is the significance that was intended for the word “however.” What happened was that the Drafting Committee went beyond the narrow task of drafting in a few cases and made changes or innovations of substance. It is for this reason that the attention of the Commission was specifically drawn to them. If the texts of the six provisions listed by the Drafting Committee as new formulations are examined in relation to the work of Commission I prior to the Report of the Drafting Committee, it will be found that they are provisions which had not been previously approved in principle by the Commission. Some had been discussed, although inconclusively by the Commission, but others had not been discussed at all. This is clearly illustrated by the history of Article VIII, Section 2(b). The Commission had not approved any version in principle. The only position it had taken was that criminal penalties should not be imposed.14 It will be seen, therefore, that the reference to “new formulation” cannot be read to imply that the draft of Article VIII, Section 2(b), referred to by Dr. Mann,15 or for that matter any one of the other earlier drafts, had been approved in principle by the Commission, and that the Drafting Committee was merely giving it some new verbal form.

Dr. Mann has no case based on the legislative history of Article VIII, Section 2(b), for reading the provision as if it referred to exchange contracts that “evade or avoid” exchange control regulations. However, even if he did have a case, it would be difficult to agree that a contract can evade or avoid exchange control regulations only when made, unless, of course, Dr. Mann is attributing some special meaning to those words. Take the case in which parties enter into a valid contract but, under the applicable exchange control regulations, are required to obtain a license as a condition of its performance. When they made the contract, they intended to get the license. Later, they fail or neglect to get it, but nevertheless seek to perform the contract. This surely is an evasion or avoidance of exchange control regulations in the performance and not in the making of the contract.

It is submitted that Dr. Mann’s argument does not lead to reasonable results consistent with his own view of the provision. He sees it as a provision intended to protect the exchange resources of a country. From this point of view, what counts is the performance and not the making of contracts. Nobody’s resources are protected by regarding a contract as unenforceable when, at the date performance is sought, the contract has become consistent with all applicable exchange control regulations. No policy of the Fund Agreement or of individual members is served by refusing to enforce contracts in such circumstances. On the other hand, in the reverse case, i.e., where a contract originally consistent with exchange control regulations has since become contrary to them, the effect of enforcing the contract will be to deny protection to the exchange resources of the country affected.

In addition, Dr. Mann’s view leads to the following anomaly. Parties enter into a contract which is contrary to the exchange control regulations of a member of the Fund. When performance is sought, that country has ceased to be a member of the Fund. Dr. Mann’s view would Surely mean that other members must continue to refuse to enforce the contract. This would be a surprising result and difficult to reconcile with the freedom of action that members have retained with respect to non-members under Article XI.

Dr. Mann’s reasoning also leads him to conclude that the date as of which it must be determined whether a contract is an “exchange contract” is the date of making. If, however, the initial hypothesis that the provision deals only with the making of contracts is wrong, this conclusion also should fail. It has been seen that there are economic objections to insistence on the state of exchange control regulations at the date of the making of a contract in order to determine whether exchange contracts “are contrary” to exchange control regulations. These same objections apply to insistence on the state of the facts at the date of the making of a contract in order to determine whether it is an exchange contract.16

Finally, is it possible to reconcile Dr. Mann’s views on these two problems with the conclusion he reaches in discussing another aspect of the provision?

The word “maintained” refers to exchange control regulations which were in force when the Fund commenced operations, i.e., on 1 March 1947. Consequently, the provision has retrospective effect. The result is the same, if after a contract has been validly concluded, exchange control regulations are “imposed.” If the contract is contrary to them, it becomes unenforceable,17

When dealing with the date of making and the date of performance issue, Dr. Mann refers to this conclusion in a footnote as an “exception.”18 It seems to be an “exception” which destroys his argument on making and performance, at least with respect to contracts that are consistent with exchange control regulations when made but become contrary to them before performance.

If an exchange contract becomes contrary to exchange control regulations after its making, this may be the result of the introduction of regulations or the alteration of regulations in force when the Fund Agreement took effect or the alteration of regulations introduced subsequently.

The introduction of regulations is clearly covered by the word “imposed.” The alteration of regulations must also be covered by this word. From the practical point of view there is no difference between the introduction and the alteration of regulations. Certainly, Dr. Mann’s definition of the “maintenance” of regulations does not fit regulations altered after the Fund Agreement took effect, and it is not to be presumed that such regulations are outside the scope of the provision. Once this point is reached, all exchange contracts that become contrary to regulations after making and before performance are unenforceable under Dr. Mann’s exception. It is then legitimate to wonder why the reverse should not also be true.

Domestic transactions

Dr. Mann believes that the provision should apply to domestic transactions that are contrary to domestic exchange control regulations.19 No harm would be done to the purposes of the Agreement by reading the provision in this way, but it would nevertheless be a misreading. It is true that the first sentence of the provision is drafted broadly enough to achieve Dr. Mann’s result. However, this ignores the history of the provision, the language of its second sentence, and the absence of a rationale.

The history of the provision shows quite clearly that what was envisaged at all times was an obligation of cooperation among members. What the legislators sought was the recognition in one member country of the exchange control regulations of another member country. There is no particle of evidence of an intention to prescribe for a member what the consequences shall be of the disregard of its own exchange control regulations. The second sentence of the provision shows that it was meant to relate in each member country to the exchange control regulations of other member countries. Under this sentence, members may go beyond the obligation imposed on them by the first sentence and adopt such further measures as they can agree upon to make each other’s regulations more effective.

Lastly, there is no conceivable reason why it would have been thought necessary to bind members to attach any particular consequence to the disregard of their own exchange control regulations. It is difficult to imagine that, if a member has exchange control regulations, it will fail to provide for the disregard of them, and frequently the legal consequences it prescribes will be more severe than unenforceability. If it has not prescribed a special sanction, its general law will supply the deficiency.


Originally published in February 1955.

Referred to in the rest of this paper as “the provision.”

See International Monetary Fund. Annual Report, 1949. Appendix XIV, pp. 82–83; also pp. 12-13. supra.

A bibliography on the provision is appended to this paper.

F. A. Mann, The Legal Aspect of Money (London, 2nd ed., 1953).

The provision was the subject of detailed discussion at the 1952 Conference of the International Law Association at Lucerne and at the 1954 Conference at Edinburgh. At the latter Conference, the Association instructed the Committee to continue its work, with particular reference to the clarification of the provision.

F.A. Mann, op. cit., pp. 384–85.

The text of the interpretation is given on pp. 12–13, supra. See also “The Interpretation by the International Monetary Fund of its Articles of Agreement,” International and Comparative Law Quarterly, Vol. 3 (1954), pp. 256–76.

F. A. Mann, op. cit., pp.346,385.

Ibid., p. 387.

Article 102(2) of the U.N. Charter.

André van Campenhout, Note, American Journal of Comparative Late, Vol. 2 (1953), p. 391.

F. A. Mann, op. cit., pp. 386–87.

Proceedings and Document of the United Nations Monetary and Financial Conference (U.S. Department of State Publication 2866, International Organization and Conference Series I, 3), Doc, 448, p. 808.

Ibid., Doc. 374, p. 605; Doc. 393, p. 628.

This draft was a joint proposal of the British and U.S. delegations (Ibid., Doc. 32, p. 54). Later, the British delegation proposed a new provision (Doc. 236, p. 334). Later still, it was willing to withdraw its new proposal and return to the first one, but by that time the U.S. delegation preferred yet another provision which had been prepared by a drafting committee (Doc. 326, p. 543).

Dr. Mann’s view on the date as of which to determine whether a contract is an exchange contract is inconsistent with the decision of the New York Court of Appeals in Perulz v. Bohemian Discount Bank in Liquidation, 304 N.Y. 533, 110 N.B. (2d) 6 (1953), if that case is regarded as decided under Article VIII, Section 2(b). See B. S. Meyer, “Recognition of Exchange Controls after the International Monetary Fund Agreement,” Yak Law Journal, Vol. 62 (1953), pp. 686-910. See also p. 54, supra.

F. A. Mann, op. cit.. p. 384. The date given in the first sentence of this quotation is no doubt, a slip. The date should be that on which the Fund Agreement took effect, under Article XX, Section 1. i.e., December 27, 1945, and not the date on which it began exchange operations, i.e.. March 1,1947.

Ibid., p.387, n.2.

Ibid., pp. 344–16, particularly at p. 344, n. 4.

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