Withdrawal from the Fund

The Cuban insurance cases support the thesis that if a country withdraws from the Fund it loses the benefit of Article VIII, Section 2(b), even in respect of contracts that were entered into when it was a member. This had already been held by the New York Supreme Court in Stephen v. Zivnostenska Banka, National Corporation.⁶³ In the Ugalde case, the plaintiff’s motion for reconsideration of the case because Cuba had withdrawn from the Fund was dismissed, but no reason was given by the court. The defendant had opposed the motion on the ground that there was an alternative basis for the verdict, the determination that Cuban law governed the contract under private international law. In the Varas case, after the withdrawal of Cuba the defendant company asked the Superior Court of Pennsylvania to disregard the defendant’s argument based on the Articles, and the court said that, as a result of the withdrawal, a new look had to be taken at the cases that had been based on the Articles when both Cuba and the United States were members.

As a result of the Cuban insurance cases there is also available now the opinion of the law officers of the United States. In Pan American Life Insurance Co. v. Lorido,⁶⁴ the petitioner sought writs of certiorari from the U.S. Supreme Court to the courts of Florida, and the Solicitor General was invited to express the views of the United States. The Florida courts had given judgment for the plaintiff on the ground that the place of performance under the contract was the United States. One of the grounds on which the petitioner relied was Article VIII, Section 2(b). On this, the Solicitor General’s Memorandum for the United States says:

Further review is not warranted with respect to the petitioner’s other contention—that granting recovery to the respondent is contrary to Article VIII (2)(b) of the International Monetary Fund Articles of Agreement. In April of this year, Cuba withdrew from the International Monetary Fund. The provisions of Article VIII (2)(b) are for the benefit of member states and not for the benefit of private parties. Since Cuba is no longer a member of the Fund and since the date of proposed relief determines the applicability of Article VIII (2)(b), a decree granting recovery to the petitioner will not violate the provisions of the Agreement. See Stephen v. Zivnostenska Banka, National Corporation, 140 N.Y.S. 2d 323, 326.

In the view of the United States, therefore, this case does not present any substantial question of federal law or policy.⁶⁵

The implications of this view go beyond the immediate question that was raised. For example, it supports the thesis that the sanction of unenforceability under Article VIII, Section 2(b), is not invalidity. A contract that was invalid ab initio could not be resuscitated by a subsequent event like the withdrawal from the Fund of the member under whose regulations the contract had been invalidated. The view that the sanction is not invalidity permits the conclusion that a contract originally unenforceable may become enforceable because of a change in or the repeal of exchange control regulations, and the reverse will also be true.⁶⁶ A contract may also become enforceable or unenforceable as the result of a change in circumstances. A resident party may become nonresident before the performance of the contract, and exchange control regulations may cease to apply. This was the position in most of the Cuban insurance contracts. The reverse may also occur. A nonresident may become a resident and find that the exchange control regulations of the country of his residence apply to a contract he made before he changed his residence.

Withdrawal from IBRD

The withdrawal of Cuba from the Fund on April 2, 1964 was preceded by withdrawal from the International Bank for Reconstruction and Development on November 14, 1960. In the Blanco case, the District Court, in a footnote to its opinion, thought that one of the questions raised by the case was whether Cuba’s withdrawal from the Bank constituted such a breach of the purposes of Article I of the Fund’s Articles as to render the Articles “ineffective as to Cuba.” ⁶⁷ Later in the history of the case, the District Court noted that there was nothing in the Fund’s Articles that required a member to remain a member of the Bank. This is correct. The Articles of the Bank make membership available to countries that are members of the Fund,⁶⁸ and any member that ceases to belong to the Fund automatically ceases to be a member of the Bank unless the Bank by three fourths of the total voting power agrees to allow it to remain a member.⁶⁹ There is nothing corresponding to these provisions in the Articles of the Fund.

Reciprocity

In the Blanco case, among the questions posed by the District Court in the footnote to its opinion which has already been mentioned⁷⁰ were the questions whether Cuba had incorporated the Bretton Woods Agreement into its law as had the United States and whether Cuba was performing its obligations under the Agreement. These questions were not confined to Article VIII, Section 2(b), but this is irrelevant because, whatever the scope of the implication of the questions, it cannot be accepted as sound law.

It is true that the Articles envisage benefits for all of the members of the Fund as a result of the obligations of the Articles. This does not mean that there is a legal principle of reciprocity by which the failure by one member to perform an obligation releases other members from a similar obligation or other obligations to the defaulter. On the contrary, the purpose of the Articles is to preserve an objective legal order notwithstanding departures from the obligations of the Articles by individual members from time to time. It is not for each member to judge whether and to what extent there have been violations of the Articles by other members and the legal effect on itself. It is the function of the Fund to decide whether there have been violations and what are the legal consequences of them. It should not be assumed, however, that even if the Fund is satisfied that there has been the breach of an obligation by one member, the legal consequence will be that other members are absolved from that same obligation or other obligations in relation to the defaulter or other members.

It is appropriate to recall the words of a Netherlands court in a case involving the recognition of exchange control regulations under Article VIII, Section 2(b):

The Dutch forum must refrain from evaluating the Indonesian foreign exchange provisions and must also refrain from judging the question whether in view of its behavior Indonesia can be considered as a treaty partner. Apart from the fact that a partner to a treaty which has had to protest against violations of international agreements must itself fulfill its obligations, the paramount interest is that the international order to which the Netherlands and Indonesia have both adhered be respected.⁷¹

Quasi-contract

In the Varas case, one of the lower courts held that the plaintiff’s contractual right to payment was in Cuba, and because she could not return to Cuba to collect the benefits under her policy, she should be allowed to recover the value of the premiums that she had paid. This quasi-contractual remedy was available in order to prevent an unjustified enrichment of the defendant insurance company. The court held that Article VIII, Section 2(b), did not prevent this recovery because the remedy was in quasi-contract and this did not call for enforcement of the contract. The Pennsylvania Superior Court did not adopt this theory and allowed the plaintiff to recover on the contract.

The relationship of quasi-contractual claims to Article VIII, Section 2(b), is an interesting one. The Schleswig-Holstein Oberlandesgericht⁷² and the Supreme Court of Hong Kong ⁷³ have both held that if a contract is unenforceable under Article VIII, Section 2(b), a party that has performed its part cannot recover what he has paid. This conclusion is sound. If it were not adopted, parties would be encouraged to run the risk of flouting exchange control regulations because at worst the courts would restore them to their pre-contract positions to the extent that this could be done by restitution. Moreover, a remedy in quasi-contract in a forum foreign to the exchange control regulations that have been violated could produce the very result that was sought by the unenforceable contract.⁷⁴ It must be repeated that this caveat with respect to quasi-contractual remedies applies to contracts that are unenforceable under Article VIII, Section 2(b). In the Varas case, the contract was not unenforceable under the provision after the plaintiff became a nonresident of Cuba.

Fragmentation of agreements

After Cuba withdrew from the Fund, the Superior Court of Pennsylvania delivered its decision in favor of the plaintiff on the theory that the exercise of the cash surrender option completed a contract that was independent of the original contract of insurance. Because of the withdrawal, this theory did not determine whether or not Article VIII, Section 2(b), required the recognition of Cuban exchange control regulations. The technique by which a single agreement is fragmented into two or more contracts is a dubious one, and on occasion it could result in the circumvention of Article VIII, Section 2(b). Southwestern Shipping Corporation v. National City Bank of New York ⁷⁵ is an example of a case in which the willingness of the courts to hold that there were separate contracts made it possible to complete the evasion of exchange control regulations which private parties had planned.⁷⁶