The authors of other treaties, both bilateral and multilateral, have faced the problem of drafting convertibility clauses that adequately reflected their intentions, and they have produced a great diversity of formulas. The notes that follow are no more than an introduction to a more detailed examination of this facet of treaty law than is possible here.
Sometimes a treaty will provide for payment in “freely convertible currencies.” 66 This term recalls the remark of an English judge who said that, in his opinion, “gross negligence” was “negligence” with the addition of a vituperative epithet. It might be said that a “freely convertible currency” is a convertible currency with the addition of a complimentary adverb. Safeguards are introduced on occasion by providing for payment in a specified currency or in a currency that can be converted into that currency: “Payments … shall be made in sterling or, at the option of the participating country, in any currency which is freely convertible into sterling on the London foreign exchange market.” 67 On occasion, examples are relied on: “Contracts … will be concluded either in G… pounds or in convertible currencies of third countries (e.g. in Swiss francs, pounds Sterling or U.S. dollars) and will be paid for in G… pounds or other convertible currency.” 68 Another form of safeguard is to call for agreement on the convertible currency of payment: “the said sums may be converted into pounds sterling, United States dollars or another convertible currency agreed upon” by the contracting parties.69 Yet another variant has been a provision requiring the convertibility of particular balances that are transferred in discharge of obligations. For example: “The payments of the contributions … shall be made in the currency of the Party concerned, freely useable or convertible for purchases anywhere, or in such other currency or currencies as may be agreed….”70
There has been a certain tendency in the drafting of international agreements to rely on some aspect of the Fund’s Articles or experience. The use of Article VIII as the basis for a definition of convertibility occurs in the Act of Pledge, as amended on July 27, 1960, between the High Authority of the European Coal and Steel Community and the Bank for International Settlements as depository. To ensure that the payments due on notes of the Community given to raise resources could be met in the currency or currencies in which the payments were denominated and that the enterprises to which loans of these resources were made could meet payments on the Community’s loans to them when the currencies due were other than the currency of the country of the enterprise, the Act of Pledge required that the government of that country must give a “currency undertaking” as a condition of the grant of a loan to an enterprise in its territory. Under the amended Act of Pledge, the government must undertake to make the necessary foreign exchange available against its own currency or provide a statement that its currency was “freely convertible into all currencies or into the currency or currencies designated in such statement”:
The currency of a particular country shall be deemed to be freely convertible into another currency, for purposes of the foregoing provisions, if under the applicable laws and regulations of such country no restrictions exist at the time that limit the right of any party to obtain against currency of such country, and to make payments and transfers in, such other currency for current international transactions within the meaning of the Articles of Agreement of the International Monetary Fund effective December 27, 1945, and if such country shall have accepted the obligations of Article VIII, Sections 2, 3, and 4, of said Articles of Agreement by notifying said Fund, pursuant to Article XIV, Section 3, of said Articles of Agreement, that it is prepared to accept such obligations.
One consideration which led to the adoption of this definition was the inclusion of “payments due as interest on loans” and “payments of moderate amount for amortization of loans” in Article XIX(i) of the Fund’s Articles as payments for current transactions, which therefore could not be restricted under Article VIII, Section 2(a), without the prior approval of the Fund. When the original Act of Pledge was entered into, none of the six members of the Community had a convertible currency under Article VIII. By July 1960, however, one of them had removed restrictions, and it seemed that the others might do so in the not too distant future. In addition, it seemed likely that they would give notices under Article XIV, Section 3. This was the reason for the amendment under which the statement referring to Article VIII was incorporated in the currency undertaking. There was an awareness that restrictions might be approved under Article VIII, but there was an expectation that the countries would not seek to reintroduce restrictions on the availability of foreign exchange against domestic currency for payments under the notes and loans and that the Fund would not approve restrictions if they should be contemplated.
The Articles of Agreement of the International Development Association (IDA) employ the concept of “freely convertible currency,” 71 which is described as follows:
For the purposes of this Agreement the Association shall regard as “freely convertible currency”:
(i) currency of a member which the Association determines, after consultation with the International Monetary Fund, is adequately convertible into the currencies of other members for the purposes of the Association’s operations; or
(ii) currency of a member which such member agrees, on terms satisfactory to the Association, to exchange for the currencies of other members for the purposes of the Association’s operations.72
A number of aspects of this provision are interesting. First, it was recognized in the course of the drafting of the provision that the term “freely convertible currency” was not defined in the Articles of the Fund. It was intended, instead, that IDA would be free to determine, after consultation with the Fund, what currencies were to be regarded as covered by the phrase. Second, the criterion is adequate convertibility into other currencies for the purposes of IDA’s operations. Third, the provision covers two classes of freely convertible currency: a currency which is freely convertible as such and particular balances of a currency that are freely convertible because of the special agreement of the issuer. For making determinations under the provision a precise analysis of convertibility under Article VIII, Sections 2, 3, and 4, or of external convertibility has not been decisive. A practical approach has been followed under which a broad transferability enabling nonresidents to convert current earnings through the market is given great weight.
Various provisions of the Articles of Agreement of the Asian Development Bank refer to “convertible currency” or “convertible currencies.” 73 The Articles contain no definition of this concept, but Article 23, entitled “Determination of Convertibility,” provides as follows:
Whenever it shall become necessary under this Agreement to determine whether any currency is convertible, such determination shall be made by the Bank after consultation with the International Monetary Fund.74
The Preparatory Committee which considered the draft Articles commented as follows on Article 23:
A question was raised as to whether the terms of this Article would enable the Bank to determine that the currency of a country which was not convertible in terms of Article 14 of the Articles of Agreement of the International Monetary Fund was convertible for the purposes of the Bank’s operations. It was agreed that the Bank would not make a determination on this question of convertibility different from that of the International Monetary Fund and that a specific amendment was not required.75
In accordance with understandings between the staffs of the two institutions, the staff of the Fund provides the staff of the Asian Development Bank, at the request of the latter, with a statement of the latest facts available to the Fund staff on the exchange system of a member of the Fund, including the existence of any exchange restrictions. The Bank determines on the basis of these facts whether a currency is convertible in accordance with the Bank’s charter. It is understood that this determination is made on the basis of the total exchange system of a currency and not on the basis of any special incidents that may be attached to the particular balance transferred to the Bank. This approach differs from the approach of Article II, Section 2(f), of IDA’s charter, under which particular balances may be regarded as “freely convertible currency.”
It is also understood that the Bank does not hold that “a convertible currency” under its charter must necessarily be convertible under Article VIII of the Fund’s Articles, and although that status is given great weight, the existence of any restrictions would be taken into account. Similarly, the absence of restrictions in connection with a currency that was not convertible under Article VIII might permit the conclusion that the currency was convertible in practice and therefore convertible for the purposes of the Bank.
The charter of the African Development Bank as well refers in various places to “convertible currency” or “convertible currencies.” 76 Article 26 declares that:
Whenever it shall become necessary under this Agreement:
(i) To value any currency in terms of another currency, in terms of gold or of the unit of account defined in paragraph (1)(b) of article 5 of this Agreement, or
(ii) To determine whether any currency is convertible,
such valuation or determination, as the case may be, shall be reasonably made by the Bank after consultation with the International Monetary Fund.
The few examples that have been cited of the efforts of the drafters of other international agreements to ensure the convertibility of currencies of payment show that only rarely is some definition of convertibility incorporated in the agreement as the solution of the problem. This undoubtedly reflects the complexities of the concept in practice. More often, the problem is avoided by adopting safeguards, usually in the form of ad hoc determination. In the drafting of recent plurilateral or multilateral treaties, this technique has been coupled with the requirement that the advice of the Fund be obtained. The organization which is to seek this advice retains the power of final determination whether there is convertibility for the purposes of the organization. This is further evidence that in practice the concept is not absolute but is determined by the particular purpose that is being pursued.