Relation between the provision and private international law
A fundamental question raised by the cases is the relation of Article VIII, Section 2(b), to private international law. That branch of the law of each country includes a set of rules that determine the law by which contracts, including their performance, are governed. Article VIII, Section 2(b), also establishes a rule for the recognition of certain provisions of a particular system of law. It declares that, if suit is brought in a member’s court to enforce an exchange contract, the court must refuse enforcement if the contract is contrary to the exchange control regulations of another member whose currency is involved. In short, the law of the member whose currency is involved must be recognized in the circumstances and for the purpose prescribed by Article VIII, Section 2(b).
The rule established by Article VIII, Section 2(b), produces two questions in relation to the choice-of-law rules of private international law. The first of these is whether the rule of the provision is an independent one. There has been a tendency by some courts to hold that the law which it indicates will be recognized only if it is the law selected as the governing law under the choice-of-law rules of the private international law of the forum. This would not render Article VIII, Section 2(b), meaningless, because some courts might find that a particular system of foreign law was the governing law under their private international law and nevertheless reject recognition of the exchange control regulations of that foreign law as contrary to domestic public policy were it not for Article VIII, Section 2(b). On this assumption, the sole effect of the provision would be to change the public policy of the forum but not to affect its rules with respect to the determination of the applicable law.
In at least one of the cases there is evidence of the belief that Article VIII, Section 2(b), operates to compel the recognition of the exchange control regulations of a particular system of law if this is the law selected by the private international law of the forum as the law governing the contract. This is the Theye y Ajuria case, in which the Supreme Court of Louisiana seems to have said that the provision requires recognition of the exchange control regulations of another legal system if the contracting parties intended that system to govern their contract. The court said that foreign and domestic courts had been uniform in observing that principle. The cases cited by the court do not support this proposition, even if one ignores the fact that, apart from Cuban insurance cases, they were decided in that primitive period in the history of Article VIII, Section 2(b), in which courts were usually unaware of the provision. The non-U.S. cases cited by the court seem all to have been drawn from the first installment of the series of articles on “The Fund Agreement in the Courts.” 35 There was no reference to later cases decided after years of international consideration had clarified the provision.36
There should be no doubt that recognition of the exchange control regulations indicated by Article VIII, Section 2(b), does not depend on the determination that they are part of the governing law under the private international law of the forum. The purpose of Article VIII, Section 2(b), is to provide a certain measure of support for the exchange control regulations of a member if they are consistent with the Articles of Agreement. The criterion adopted by the provision is consistency of the regulations with that international agreement On June 13, 1966 the U.S. Court of Appeals for the Fifth Circuit decided appeals from the U.S. District Court for the Southern District of Florida in the Blanco, Conill, Lorido y Diego and Zabaleta cases (Pan American Life Insurance Co. v. Blanco, 362 F.2d 167 (1966)). The Court of Appeals held that “although the determination of these cases may require consideration of the act of state doctrine and the Bretton Woods International Monetary Fund Agreement,” the court had to apply the private international law of the forum. The court noted, however, that Cuba had withdrawn from the Fund, so that the Articles would not preclude payment under the policies, for which proposition it cited Stephen v. Zivnostenska Banka, etc. (The court added the following obiter dictum, citing the Theye y Ajuria case: “Even though this were not so, the Bretton Woods Agreement would not be applicable to contracts such as the insurance policies here involved.”) and not the uncertain and diverse rules of private international law applied by members. The issue was settled long ago in the Fund’s authoritative interpretation addressed to members on June 14, 1949, in which the Fund said that the contracts covered by the provision “will be treated as unenforceable notwithstanding that under the private international law of the forum, the law under which the foreign exchange control regulations are maintained or imposed is not the law which governs the exchange contract or its performance.” 37
The principle, therefore, is that Article VIII, Section 2(b), establishes a rule which requires recognition of the exchange control regulations of the member whose currency is involved without any necessity to show that its system of law is the governing law under the private international law of the forum. With this settled, the second question must be faced. Does the principle mean that where the issue is whether the exchange control regulations of another member must be recognized, Article VIII, Section 2(b), has become the sole rule and has abrogated those rules of the private international law of the forum that deal with the identification and application of the governing law? Alternatively, does the principle mean that Article VIII, Section 2(b), has not abrogated those rules, which remain in reserve until it is seen how Article VIII, Section 2(b), operates? If the provision has had the former effect (abrogation), it would follow that if an exchange contract was contrary to the exchange control regulations of the member whose currency was involved, the contract would be unenforceable. But it would also follow that if the contract was not contrary to those regulations, it would be enforceable. This would necessarily be the result because the law of the forum would no longer refer to any other law as the law governing the contract. It is this latter result that would not necessarily follow from a different view of the relationship between Article VIII, Section 2(b), and private international law. If it were held that the provision does not abrogate the choice-of-law rules of the private international law of the forum, it would still be true that the inconsistency of a contract with the exchange control regulations of the member whose currency was involved would lead to the unenforceability of the contract. If, however, there was no such inconsistency, it would still be possible to apply the law, including the exchange control regulations, of some other country under the private international law of the forum, as a result of which the plaintiff might not succeed on his contract even though this result was not required by Article VIII, Section 2(b).
It should not be held that Article VIII, Section 2(b), is an exclusive rule that has abrogated private international law. The object of the provision is to ensure that a currency is not undermined by the non-recognition of the exchange control regulations of a member whose currency is involved when the conditions of the provision are satisfied. The policy of the provision does not extend to those cases in which Article VIII, Section 2(b), does not require the unenforceability of contracts. In those cases, it is no part of the purpose of the provision to interfere with the normal workings of private international law. If the provision does not result in unenforceability, the question whether exchange control regulations are to be recognized or not can be left to the vagaries of private international law.
This brief analysis of the relations between Article VIII, Section 2(b), and private international law is necessary for an understanding of the Cuban insurance cases. It will be seen that in some of them Article VIII, Section 2(b), did not require the recognition of the exchange control regulations of Cuba because Cuba’s currency was not involved. This left the way open to the private international law of the forum. This approach justified the weight that was given to certain points of contact in determining the applicable law. These were relevant under private international law but not under Article VIII, Section 2(b).
Finally, the analysis that has been offered may explain why some courts continue to approach problems of the recognition of the exchange control regulations of other countries by the route of the traditional private international law of the forum. It may be possible to follow that approach and find on the facts of the case that the governing law is the law which includes certain exchange control regulations, and that the regulations are to be recognized for that reason. In these circumstances, it is unnecessary to plunge into the profundities of Article VIII, Section 2(b), because the result will not be affected. The foreign law may also be the law of the currency “involved” under Article VIII, Section 2(b), and the law will then be applicable on this basis also; but it will only reinforce and not alter the result with respect to the enforcement of the contract.38 Alternatively, the law which includes the exchange control regulations and which is selected as the governing law may not be the law of the currency that is “involved,” but it will be applicable nonetheless under the private international law of the forum. Again, therefore, the result will not be altered by Article VIII, Section 2(b). It would only be on a finding that the law which includes the exchange control regulations was not the governing law under the private international law of the forum, so that the regulations were not entitled to recognition on this basis, that it would then be necessary to see if Article VIII, Section 2(b), compelled a different result.
The analysis in the preceding paragraph might be clearer in terms of an actual example. Suppose that under the private international law of the forum, Cuban law, which includes certain exchange controls, is the governing law. If Cuban law is applied as the governing law, the Cuban controls will be recognized, and this will not be changed by a finding that Cuban currency is “involved.” The Cuban controls will then be entitled to recognition on both bases. Similarly, if Cuban currency is not “involved,” the controls will not be entitled to recognition under Article VIII, Section 2(b), but they will still be recognized as part of the governing law. Only if Cuban law is not the governing law, so that the controls are not entitled to recognition on this basis, does the possibility exist that the provision may lead to a different result on the issue of recognition.
Exchange contracts
Under Article VIII, Section 2(b), the contracts that may be unenforceable are “exchange contracts.” In the Blanco case, the District Court, in a footnote to its opinion, raised the question whether the insurance policies in that case were “exchange contracts,” but the court did not try to answer the question. In the Raij case, a dictum of the District Court of Appeal can be read to suggest that the court thought the contract was not an exchange contract because it was for the payment of dollars, although the court couples this fact with further facts showing the relationship of the contract to the United States. In the Theye y Ajuria case, the Supreme Court of Louisiana dismissed an argument based on Article VIII, Section 2(b), on the ground that “a contract payable in the state of Louisiana in United States currency is not a foreign exchange contract.”
These are the only reasonably direct references to the question whether insurance contracts are “exchange contracts.” It is interesting that although the courts in these cases were attempting to formulate some delimitation of the concept, they did not suggest that the concept could not include insurance contracts as such. They have, therefore, avoided the too simple view, which had a little support at one time, that “exchange contracts” were confined to contracts for the exchange of international media of payment, usually the exchange of one currency for another. Exchange control regulations normally control other categories of transactions as well, and there is no reasonable explanation, based on the economic purposes of Article VIII, Section 2(b), or the Articles as a whole, for restricting the provision to only one of the categories of contracts that affect the exchange resources of a member.39
The Raij and Theye y Ajuria cases imply a limitation of another kind. Some of the language of the opinions can be read to suggest that the test of an exchange contract is whether it calls for payment in a currency foreign to the forum or perhaps foreign to the law governing the contract under private international law. The only virtue of these tests would be their mechanistic character. They would have no necessary relation to the objective of Article VIII, Section 2(b). For U.S. courts to hold that they will enforce contracts providing for payment in U.S. dollars because these are not exchange contracts ignores the fact that they are most obviously exchange contracts when viewed by the member in which an obligor-defendant is resident. That member’s foreign exchange resources would be directly drained away by a judgment. Similar unfortunate consequences could follow from the test of the governing law under private international law. The tests of forum or governing law to determine whether an exchange contract is before the court makes the application of Article VIII, Section 2(b), depend largely on the will of contracting parties. These tests, therefore, are in opposition to the international monetary objective of Article VIII, Section 2(b), which is that international recognition should be given to regulations controlling the will of contracting parties where, because the tests of the provision are met, this is necessary for the defense of member currencies.
The currency “involved”
Recognition of the exchange control regulations of a member in accordance with Article VIII, Section 2(b), depends on a determination that they are the regulations of a member whose currency is involved in the performance of the exchange contract that someone seeks to enforce. Although other views are still expressed from time to time, the more expert and more generally held opinion is that the currency of a member is involved if the contract affects that member’s exchange resources. Where other views are expressed, they tend to be based on a purely linguistic approach to the provision which ignores the economic considerations that were responsible for its adoption.40
The criterion of effect on a member’s exchange resources is not a traditional one for lawyers. It is tempting, therefore, to wonder whether the criterion is an economic formulation of the legal principle that the member had legislative jurisdiction under established norms of public international law to adopt the exchange control regulations in question. Another possibility is that Article VIII, Section 2(b), establishes a new norm in the concept of the currency involved that goes beyond earlier norms of legislative jurisdiction.
States sometimes write legislation with the intention that it shall regulate matters with which, in the eyes of some foreign observers, the legislation has an insubstantial contact, or they may use language that is loose enough to permit this application. Legislation of this kind is likely to be applied uncritically by the courts of the legislator, but other states may hold that the legislator has gone beyond the bounds of legislative jurisdiction. They are then likely to hold that the legislation does not produce legal results which they will recognize. Of course, it does not necessarily follow that they will recognize the effects of foreign legislation even when the existence of legislative jurisdiction is uncontested, but in that event, if they refuse recognition, it will be for different legal reasons. For example, in the field of exchange control, they may hold, apart from Article VIII, Section 2(b), that the exchange control regulations of another state cannot be recognized because they purport to be more than “territorial” and, therefore, to that extent, go beyond the bounds of legislative jurisdiction to adopt them. Where the objection of the absence of legislative jurisdiction is not available on the facts, they may hold that recognition would conflict with the public policy of the forum.
The difficulty of reaching a conclusion on the relationship between the criterion in Article VIII, Section 2(b), that a currency is involved (in the sense of effect on exchange resources) and the test of legislative jurisdiction is twofold. On the one hand, the norms of legislative jurisdiction in international law are still to some extent controversial.41 On the other hand, the determination of when a country’s exchange resources are affected has not been made with precision.
In the absence of the further analysis which needs to be made to answer the question that has been posed above as to the scope of the criterion, it is submitted that the currency of a member is undoubtedly involved where the member regulates the transactions of its residents or transactions dealing with assets within its territory. It must not be assumed that this is a simple rule that can be applied without difficulty. For example, in numerous cases the courts have struggled to establish where certain kinds of property are situated. One of these, debts, will be referred to in more detail later. Nevertheless, once it is decided that persons are resident or assets are present within the legislator’s territory, it will be possible to say with confidence that there is legislative jurisdiction to adopt exchange control regulations affecting those residents or assets, and also that the exchange resources of the legislator are affected by the contracts thus controlled. If regulations seek to go beyond the control of residents or of assets within the territory, the burden should then be on anyone who argues that the regulations affect the exchange resources of the legislator to prove that fact. If the fact is proved, the case will have to be treated as one that is covered by Article VIII, Section 2(b). If the case is one which is not covered by traditional norms of public international law on legislative jurisdiction, it will follow that Article VIII, Section 2(b), has created a new norm in the field of exchange control.
An examination of the Cuban exchange control legislation and decrees does not lead to an incontrovertible conclusion that an effort had been made to go beyond the control of residents or local assets. No comment will be made here on Law No. 13 and Decree No. 1384 for reasons that will be explained later. Law No. 568 is written in general terms, but these could be read as relating only to residents or assets situated within Cuban territory. There is no language which unambiguously shows an intention to go beyond these jurisdictional bases. The exchange control features of Law No. 930 give even less evidence of an intention to exercise control on some basis other than residence or the situs of assets in Cuba. The minority judge in the Florida District Court of Appeal in the Ugalde case42 and the U.S. District Court in the Blanco case 43 and then in the cases consolidated with that case44 suggest that the Cuban enactments were intended to have this limited application.
It is more important to see what the U.S. courts actually decided than to speculate about the scope that the Cuban legislator intended for the legislation and decrees. There is very little discussion of the question whether Cuban currency was “involved.” In the Blanco case, the U.S. District Court held that the legislation could not affect litigants who were not only outside Cuban territory but were also refugees, and that for this reason the Articles of the Fund did not apply. In an earlier part of its opinion, the court noted that the contracts did not call for performance from the defendants’ assets in Cuba, the implication of which is that the legislation could not affect the defendants’ assets outside Cuba. The court seemed to be reaching for a thesis that Article VIII, Section 2(b), did not require the recognition of exchange control regulations if they purported to control nonresidents in transactions involving assets outside the jurisdiction. The Blanco case influenced the decision in a number of other cases. In the Theye y Ajuria case, the Louisiana Court of Appeal used language suggesting that Article VIII, Section 2(b), required the recognition of exchange control regulations based on the control of nationals, but it is not impossible that the court intended residents by this. However, the Louisiana Supreme Court followed the Blanco decision in holding that Cuba had no jurisdiction over the refugee plaintiffs. In the Raij case, there is a suggestion in the opinion of the Florida District Court of Appeal that Cuban currency was not involved because the contract called for payments in dollars. It must be added, however, that the court referred to the contract as an “American contract,” by which it undoubtedly meant that there were many other contacts with the United States.
If a contract between two nonresidents of Cuba provides, expressly or implicitly, that it can be performed outside Cuba without affecting assets situated in Cuba, and such performance is in fact sought outside Cuba, any Cuban exchange control regulations that purport to prevent or control that performance are not entitled to recognition under Article VIII, Section 2(b), on the ground that Cuban currency is involved. This was the situation and result in the Blanco and similar cases. The contracts were made with nonresident American companies through resident Cuban agents or branches, but the suits were against the companies and not against the agents or branches. Cuban exchange control regulations could have regulated payments and transfers by the agents or branches, and these regulations would have fallen within the ambit of Article VIII, Section 2(b). The courts found, however, in the Blanco and similar cases that the contracts did not require payments from assets held by the agents or branches in Cuba, and that the assets of the companies, wherever they were situated and could be reached, were available for the performance of the contracts.
If the contract calls for performance in Cuba, the problem is more difficult.45 The issue can be stated in this form: if nonresident parties to a contract agree that performance shall be made in Cuba, does this enable Cuba to adopt regulations requiring performance in Cuba that would be entitled to recognition under Article VIII, Section 2(b)?
A traditional way of looking at this question in private international law would be to consider whether the debt is property situated in Cuba because it is payable there. This is an issue relating to the debt as intangible property and is not necessarily the same as the issue whether the law of the place of performance regulates the mode of performance of the contract giving rise to the property right. For example, if a resident of France agrees to pay a resident of England in Germany, the fact that German law may determine how the debt shall be discharged does not necessarily lead to the conclusion that the debt is situated in Germany instead of France, where the debtor can be reached. Even if it could be demonstrated that it is established in private international law that a debt as property is situated where it is payable, it still would not follow that this was the rule that had to be adopted for Article VIII, Section 2(b). The situs of a debt is a legal fiction, and the situs can be held to be in different places for different rules if the purposes of the rules are not the same.
Although there is some authority for holding that a debt is situated where it is payable for some purposes of private international law, it has been questioned whether this is or should be the rule, at least when the debts of insurance companies doing business in several jurisdictions are involved. It has been argued that
… the selection of the place where the principal or home-office of a corporation is situated is the natural and obvious solution of the problem which arises where a corporation maintains branches in different countries. The corporation may be present, in the sense of being amenable to jurisdiction, in many countries but its principal presence which must determine the situs of the debts owed by it should be at the place where the home-office is established.46
If traditional private international law provided any valid analogy for the special purposes of Article VIII, Section 2(b), it would follow from the conclusion quoted above that the debts payable in Cuba by the foreign insurance companies were not situated in Cuba, and therefore were not subject to Cuban exchange control regulations that would have to be recognized under Article VIII, Section 2(b). This result would follow to the extent that the involvement of a currency is deemed to depend on the presence of assets within Cuban territory.
It is interesting to note one consequence of the view that a debt payable in Cuba by one nonresident to another nonresident is an asset situated in Cuba and therefore subject to control by regulations entitled to recognition under Article VIII, Section 2(b). It would follow that Cuba could prevent the two nonresidents from amending their contract so as to provide for payment elsewhere than in Cuba, because that would amount to the withdrawal of an asset from Cuba. Other members would be required to respect regulations of this kind.
If a solution is sought without the dubious assistance of private international law in attributing a situs to debts, it is not easy to accept the idea that, because nonresidents have agreed to pay a debt in Cuba, Cuban currency is involved and Cuba’s exchange control regulations may preclude payment elsewhere. Even if payment is made in Cuba, it may be argued that Cuban currency is not involved. If the debtor pays with pesos newly acquired for foreign exchange, Cuba’s foreign exchange assets are increased, but the increase is matched by Cuba’s currency liability represented by the peso balance in the payee’s hands. If payment is made with an existing peso balance, Cuba’s currency liability is transferred from one nonresiden t holder to another. It may be replied that what counts is Cuba’s gross foreign exchange position, or Cuba’s ability to improve its net position by restricting the use of peso balances, and therefore that Cuba’s currency would be involved if payment were made in Cuba. These hypotheses show the ambiguity of the test that a member’s exchange resources must be affected and the need for the further refinement of that test. It is not necessary to resolve these ambiguities because the real issue is not whether Cuba’s currency would be involved in payment in Cuba, but whether it would be involved in payment by one nonresident to another nonresident outside Cuba with assets outside Cuba. That, it is submitted, is the real issue because the exchange control regulation that was relied on in the cases was said to be one that forbade payment outside Cuba. In more general terms, this submission can be restated as follows. A member’s currency will be involved in an exchange contract if the member’s exchange resources will be affected by the actual performance of the contract that is sought. There appears to be no way in which it could be demonstrated that payments between nonresidents outside Cuba with assets outside Cuba would affect Cuba’s exchange resources by adding to or subtracting from those resources.
To the extent that the insurance companies were relying on Article VIII, Section 2(b), when they argued that they were bound to pay in Cuba and were prevented by Cuban regulations from paying elsewhere, they were implicitly arguing that Cuban currency was involved because they had agreed on payment in Cuba. The issue arose in its sharpest form in the Ugalde case, in which the courts held that the place of payment was indeed Cuba, in contrast to the finding in the cases against U.S. insurance companies in which the Supreme Court of Florida held that the place of payment was in the United States. The Ugalde case is of some importance because of its influence on a number of other decisions.47
One basis for the decision in the Ugalde case was that Article VIII, Section 2(b), required the recognition of Cuban exchange control regulations.48 If it were concluded that Cuba’s currency was not “involved,” it would follow that the case was decided on the wrong principle to the extent that the ratio decidendi was Article VIII, Section 2(b). There is, however, one version of the facts which would show that Cuba’s currency was “involved.” It is possible that in this case the plaintiff was not a refugee but continued to be a resident of Cuba even though he brought suit in Florida. This has been alleged in a discussion of the cases which appeared in a periodical.49 It is interesting that in the report of the Ugalde case there is no mention of the residence or émigré status of the plaintiff. Although the court does not rely on the fact that the plaintiff was a resident of Cuba, Article VIII, Section 2(b), was clearly applicable if he was. Resources accruing to a resident of Cuba are resources of Cuba that could be conscribed for the support of Cuba’s currency. Cuba could therefore control the place and form in which a resident should receive payment, and regulations that were intended to do this would be entitled to recognition under Article VIII, Section 2(b), on the assumption, of course, that the provision was satisfied in all other respects.
The basic test for determining whether the currency of a member is involved in an exchange contract, it has been submitted, is whether the contract is entered into by a resident of that member or deals with assets situated within the member’s territory. This test is not affected by the currency in which payment is called for, although the District Court of Appeal in the Raij case may have taken the view that Cuba’s currency could not be involved in a contract requiring payment to be made in dollars. Moreover, observers might be tempted to explain the difference in result in the Ugalde and Blanco lines of cases in terms of the currency of payment. However, Cuba’s resources may be affected where a contract calls for payment in dollars and not affected where a contract calls for payment in pesos. If a resident pays a nonresident in dollars, Cuba’s foreign exchange assets are reduced; and if a resident receives payment in dollars from a nonresident, Cuba’s assets are increased.50 (If the same payments are made in pesos, the economic effects are comparable in that Cuba’s liabilities are increased or decreased, respectively.) If a nonresident pays another nonresident in pesos, prima facie Cuba’s exchange resources are not affected, because there is simply the transfer of a liability from one nonresident to another. However, Cuba’s resources may be affected if the transfer is of an asset within Cuban territory, such as a peso bank balance, because of the possible greater propensity of the transferee to withdraw (convert) the balance and thereby reduce Cuba’s assets.
The circumstance that a contract calls for payment in Cuba or in pesos does not in itself justify the conclusion that Cuban currency is involved under Article VIII, Section 2(b). Of course, it does not follow from this that the place or currency of payment is irrelevant for all purposes. It has been explained that private international law can still apply where a contract is not unenforceable under Article VIII, Section 2(b). If it is assumed that the contract in the Ugalde case was not unenforceable under Article VIII, Section 2(b), it would still be possible to conclude that under the private international law of the forum Cuban law was the governing law, for example, because it was the law intended by the parties or the lex loci solutionis. It would also be possible for the forum to decide whether it would recognize exchange control regulations that were part of this law or whether it would refuse recognition because of the public policy of the forum. If it found the regulations offensive to the public policy of the lex fori, Article VIII, Section 2(b), could not be relied on to compel recognition if it had been found that the contract was not unenforceable under that provision. This must not be taken to suggest that a court could not find that the effect of the Articles as a whole had changed public policy and the former refusal to recognize foreign exchange control regulations even though the case was not covered by Article VIII, Section 2(b).
Exchange control regulations
Article VIII, Section 2(b), refers to exchange contracts that are contrary to “exchange control regulations.” It has been shown in an earlier article that these words must not be taken to include all forms of economic regulation, and, in particular, must not be understood to embrace controls on trade in contrast to exchange.51 The Cuban insurance cases involved a limitation of a different kind.
The cases tend to deal with all of the laws and decrees that have been mentioned earlier in this article as if they were of the same character. For example, the pre-trial stipulation in the Blanco case stated that the issue was whether all of them were entitled to recognition under the Articles of the Fund. There is a similar implication in the dictum of the Supreme Court of Florida in the Ugalde case in which a parallel is drawn between “the Cuban laws relating to the establishment of currency control” and laws enacted in the United States with respect to the U.S. currency.52
Law No. 13 and Decree No. 1384 are legal tender laws in contrast to exchange control legislation.53 The purpose of legal tender legislation (cours légal) is to prescribe the currency that payees must accept in discharge of obligations. In these days, this legislation also frequently declares that the notes and coins issued by the monetary authorities of the legislator have the quality of legal tender.54 This aspect of the law is sometimes referred to as dealing with the cours forcé. Laws dealing with the cours légal and the cours forcé may be coupled in practice with exchange control legislation, but they are not in themselves exchange control legislation. Although usually it is not difficult to distinguish between them in practice, formulation of the difference is more difficult because of the absence of precise definitions. Normally, legal tender legislation deals with the establishment and characteristics of a currency, and exchange control legislation deals with the defense of a currency by husbanding national resources.55 It must be repeated that this is not a precise formula by which to distinguish between them. For example, the experience of the Fund itself shows that exchange control regulations are sometimes adopted for such nonbalance of payments reasons as the preservation of national or international security.56
If, however, the rough distinction that has been made is accepted as adequate for normal working purposes, Law No. 13 and Decree No. 1384 should be regarded as no more than legal tender legislation. They provided for the establishment of a national currency as the sole legal tender within Cuba, but they did not deal with the control of Cuba’s exchange resources. For example, a Cuban resident obligor was given the right to settle his obligation in pesos, but there appears to be nothing that prevented a Cuban resident from undertaking a dollar obligation abroad. Moreover, Cuban residents were expressly permitted to make foreign exchange deposits in Cuban banks and to draw against them in the form of foreign exchange. That Law No. 13 and Decree No. 1384 were not exchange control regulations is demonstrated by the fact that Cuba was not required to get approval of them under Article VIII, Section 2(a), when Cuba gave notice that it was prepared to perform the obligations of Article VIII, Sections 2, 3, and 4.57 Of course, Law No. 568 and Law No. 930 were quite obviously “exchange control regulations,” so that before Cuba withdrew from the Fund the question of the application of Article VIII, Section 2(b), to these laws could not have been avoided on the ground that they were not exchange control regulations.
Capital and current transactions
One of the more troublesome issues raised by the cases before Cuba withdrew from the Fund was whether the Cuban exchange control regulations that the defendants relied upon were “maintained or imposed consistently with this Agreement.” Cuba had notified the Fund that it was prepared to accept the obligations of Article VIII, Sections 2, 3, and 4. Therefore, it was bound by Article VIII, Section 2(a), to obtain the approval of the Fund for the imposition of any “restrictions on the making of payments and transfers for current international transactions.” It remained free, however, to control capital transfers under the authority of Article VI, Section 3:
Members may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments….
Payments for current transactions are defined as follows by Article XIX (i):
Payments for current transactions means payments which are not for the purpose of transferring capital, and includes, without limitation:
(1) All payments due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities;
(2) Payments due as interest on loans and as net income from other investments;
(3) Payments of moderate amount for amortization of loans or for depreciation of direct investments;
(4) Moderate remittances for family living expenses.
The Fund may, after consultation with the members concerned, determine whether certain specific transactions are to be considered current transactions or capital transactions.
The Fund authorized the issuance to counsel for a number of litigants, who applied for it, of the statement that was quoted by the U.S. District Court in the Blanco case. That statement referred to the legal position of a member like Cuba under Article VIII, Sections 2, 3, and 4, and Article VI, Section 3. It declared that, apart from a 2 per cent exchange tax on remittances abroad, the Fund had not approved any restrictions under Article VIII, Section 2, or any of the other exchange practices that require approval under Section 3.
The upshot of this was, therefore, that any Cuban exchange control regulations that restricted payments and transfers for current international transactions, apart from the exchange tax, were not maintained or imposed consistently with the Articles. By contrast, any regulations that merely controlled capital movements were maintained or imposed consistently with the Articles.
It will be apparent from what has been said that, while Cuba was still a member of the Fund, it was necessary for the courts, if all other elements of Article VIII, Section 2(b), were present, to determine whether the Cuban exchange control regulations dealing with insurance on which the defendants relied affected payments and transfers for current transactions or capital transfers. This is a difficult question on which the Fund has not adopted any interpretations. The following comments do not purport to arrive at a final conclusion.
One difficulty in reaching a view on the classification under the Articles of the exchange controls adopted by Cuba is a difficulty resulting from the facts. It has been seen that the problem of classification calls for a determination on whether Cuba was controlling capital transfers or payments for current transactions. Presumably, this means a determination on whether the controls were on capital transfers or payments for current transactions from the viewpoint of Cuba. For example, it is understandable that the drafters of the Articles should accept the idea that a member could control payments that were capital movements, whether inward or outward, of its own. It would not be easy to understand why the right to control capital transfers should depend on some abstract definition of capital transfers unrelated to any particular member. If it is accepted, therefore, that the classification implies a member in relation to which the classification must be made, payments under a contract between two nonresidents of Cuba not affecting assets situated in Cuba do not appear to be either capital transfers or payments for current transactions of Cuba. This is perhaps another way of saying that Cuba had no legislative jurisdiction to adopt exchange regulations controlling these payments.
The analysis cannot stop at this point because the facts may not have been as stated above in all of the cases, and they seem to have been different in the Ugalde case. It is necessary, therefore, to consider the case in which Cuba attempts to control payments between a resident insured and a nonresident insurance company.
A first approach to the question of classification might be that it is settled by Article XIX (i). This approach might be that any of the payments listed in categories (1) to (4) in that provision are decisively for current transactions and are not affected by the words “which are not for the purpose of transferring capital.” The argument would then proceed that “all payments due in connection with … other current business” are included in category (1) and that insurance is “other current business.” 58 If this view were accepted, all payments to or by insurance companies, whether of premium or benefits, and whatever the form of insurance, would be considered as payments for current transactions. But it does not follow that this is the final answer, and that one should conclude forthwith that Cuba would be controlling payments for current transactions, and that it was not entitled to apply these controls because they had not been approved by the Fund. The doubt that this is the final answer is induced by the reflection that it would provide an easy and obvious technique for the wholesale transfer of capital abroad. The single premium endowment or annuity policy is a good example of what could be done to transfer resources abroad as payments for alleged current transactions notwithstanding a member’s policy of controlling capital transfers.
The suggestion that the problem may not be wholly resolved by classification from the viewpoint of the nonresident insurance company means, once again, that the payments should be examined from the viewpoint of Cuba. How does Cuba view the payments made by its residents to nonresident insurance companies or by nonresident insurance companies to its residents? The answer to this question might turn on the particular form of life insurance policy that is involved. For example, it might be held that term insurance differs from whole-life and endowment contracts in that the last two involve a savings and investment element as well as protection against risk whereas the first provides only protection against risk. Under term insurance, nothing is payable at the end of the term, and no cash surrender value accrues during the term. It might be argued, therefore, that when the insured pays premiums for term insurance, he is making payments for a return in the form of a current service and therefore for current transactions. In contrast to term insurance, some forms at least of annuity contracts are considered to include no insurance benefit. If the annuitant dies and a cash value is paid to a named beneficiary, the payment is treated as a death benefit and not insurance against risk.59 It might be concluded that premiums paid under this form of insurance are not paid in respect of current transactions.60 Between term insurance at one extreme and these annuity contracts at the other are whole-life and endowment contracts under which it might be held that premiums are paid partly for the insurance service and partly for savings and investment. If this view were accepted, it would lead to the conclusion that the premiums are paid for both current transactions and as capital transfers.
The Fund has made no official determinations on the classification of insurance, but its Balance of Payments Manual contains the following passage:
294. Three aspects of life insurance transactions may be distinguished. First, life insurance premiums represent additions to, and life insurance claims payments represent withdrawals from, the funds which the insurance companies have set aside as cover for future claims on the basis of an actuarial calculation (hereinafter referred to as their life funds). Life funds, including the interest accrued on them, constitute savings of the policy holders; therefore, changes in residents’ share of the life funds of foreign insurance companies are appropriate to the capital account of the balance of payments. Second, the interest accruing on the policy holders’ accumulated shares of the life funds of the insurance companies represents investment income and should be recorded in Table VI. Third, part of insurance premiums and interest accruals, net of claim payments, is used to cover the administrative cost of the insurance companies, including their profits. This part, which represents payment for a pure insurance service, is the only element of life insurance transactions that is appropriate to Table VIII, item 1.61
It will be observed that this passage makes no distinction among the various types of life insurance. Secondly, the point is made that some part of the premiums can be treated as paid in respect of the administrative cost of the insurance companies, and, therefore, in respect of current transactions. Presumably, this would be true of premiums paid under all forms of insurance contract. If this view were adopted, the contrast between term and other forms of insurance would not be absolute. It must be borne in mind that the Balance of Payments Manual does not seek to present legal interpretations of the Articles. It might still be held, therefore, that the element of payment for the administrative cost of the insurance company in premiums paid under term insurance was secondary or consequential and did not prevent a country from controlling the payments of premium as capital transfers. This element would not affect the view that has been advanced of payments of premium under other forms of life insurance, because these may be regarded as payments for current transactions on other grounds.
The cases summarized earlier in this article did not involve term insurance. They involved the other forms of life insurance and a variety of claims under them, including claims to recover the cash surrender or maturity value of policies, to compel the defendants to accept premiums, and to get the return of premiums. Whatever the analysis that may be applied to the payment of premiums, there might be greater agreement that the payment of the cash surrender or maturity value of a policy to a resident represents the receipt by him of a capital transfer.62 Therefore, the member would be able to prescribe for its residents how and where they should receive such transfers, and the member would not need the approval of the Fund for this. It may be objected, however, that the proceeds are not exclusively of a capital nature, because they include some element of interest and, therefore, recent interest. Here again the interest might be of too symbiotic a character to obstruct the conclusion that the payment must be treated as a capital transfer.
Before the discussion of the “current” and “capital” dichotomy is terminated, it is legitimate to wonder whether it was necessary to make a final classification of the payments in the Cuban insurance cases. It will be recalled that under Article VI, Section 3, a member is authorized to regulate international capital movements but not in a manner “which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments….” It might be argued that even if a member was authorized to control payments connected with insurance policies as capital transfers, it could not do this consistently with the Articles if commitments to make these payments had been entered into. This argument would rely more particularly on the words “which will unduly delay transfers in settlement of commitments,” although it would be necessary to imply that the commitments referred to were entered into before the capital controls were adopted in order to avoid the absurdity of the total negation of authority to control capital transfers. This line of argument would rely on the fact that Article VI, Section 3, does not expressly confine the commitments to those connected with current transactions. Indeed, the separate mention of current transactions would imply the rejection of any such limitation. The conclusion of this reasoning would be that the Cuban controls were inconsistent either with Article VIII, Section 2(a), if they affected current transactions, or with Article VI, Section 3, if they affected capital transfers, and that in either event they were not entitled to recognition under Article VIII, Section 2(b).
The clause dealing with commitments in Article VI, Section 3, is undoubtedly obscure, but it is most unlikely that it applies to capital transfers. For example, it would be difficult to understand why there was so much discussion at the Bretton Woods Conference of the drafting of “payments of moderate amount for amortization of loans, etc.,” in Article XIX (i) (3) if a member would be unable under Article VI, Section 3, to restrict transfers in settlement of commitments to pay more than moderate amounts. Furthermore, if “commitments” applies to capital transfers, a member that was availing itself of the transitional arrangements of Article XIV, Section 2, would have less authority to control capital transfers than payments and transfers for current transactions. Under Article XIV, Section 2, the member would be able to control payments and transfers for current transactions whether or not commitments had been entered into, but its ability to control capital transfers would not extend to transfers covered by commitments. This result could not be reconciled with the purpose of the Fund “to assist in the establishment of a multilateral system of payments in respect of current transactions between members” and the absence of any comparable purpose with respect to capital transfers. In order to help members availing themselves of the transitional arrangements of Article XIV, Section 2, special authority was given by that provision to restrict payments and transfers for current transactions notwithstanding the purpose of the Fund to work toward the elimination of these restrictions. The absence of a similar provision with respect to capital transfers is to be explained by the fact that there was full freedom to control them whether or not a member was availing itself of the transitional arrangements and not by reference to any decision of the drafters to prevent interference with capital transfers where there were commitments to make them.
The pre-Bretton Woods history of Article VI, Section 3, gives some assistance in clarifying the obscure phrase relating to commitments. Among the unpublished drafts that were discussed at the preparatory conference held at Atlantic City were the following:
… a member country may not use its control of capital movements to restrict payments arising out of current transactions in goods and services or to delay unduly transfers of earnings, interest and amortization.
Not to impose restrictions on payments arising out of current transactions in goods and services or to delay unduly transfers of earnings, interest and amortization….
One reaction to the words italicized was that they should be transferred to the definition of payments for current transactions in what became Article XIX (i). Indeed, the words seem quite obviously to be the ancestors of categories (2) and (3) in Article XIX (i), which would have been regarded as capital transfers but for that provision. It is possible, therefore, that the original words were intended to single out certain types of payments of a capital nature in order to ensure their treatment as payments for current transactions.
A later draft at the Atlantic City conference read as follows:
No member country may control international capital movements in a manner which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments arising from such transactions….
This language confirms the impression of the purpose of the earlier drafts, and would have made it quite clear that the commitments related to payments for current transactions. Unfortunately, there is no explanation for the omission of the words “arising from such transactions” in the final text of Article VI, Section 3. Nevertheless, the provision should be understood as if they were still there. The object of the clause would then be the perfectly sensible one of making it clear that the concept of restrictions on current payments included not only the prohibition of such payments but also undue delay in allowing them to be carried out where they were permitted. With this analysis, it must be concluded that, if Article VIII, Section 2(b), was applicable, it was not possible to avoid the classification of the Cuban insurance payments as capital or current.