THE GOVERNMENTS of forty-nine countries have now accepted the Articles of Agreement of the International Monetary Fund. They have accepted the Agreement “on their own behalf and in respect of all their colonies, overseas territories, all territories under their protection, suzerainty, or authority and all territories in respect of which they exercise a mandate.”1 On signing the Agreement, each government declares that “it has accepted this Agreement in accordance with its law and has taken all steps necessary to enable it to carry out all of its obligations under this Agreement.”2

THE GOVERNMENTS of forty-nine countries have now accepted the Articles of Agreement of the International Monetary Fund. They have accepted the Agreement “on their own behalf and in respect of all their colonies, overseas territories, all territories under their protection, suzerainty, or authority and all territories in respect of which they exercise a mandate.”1 On signing the Agreement, each government declares that “it has accepted this Agreement in accordance with its law and has taken all steps necessary to enable it to carry out all of its obligations under this Agreement.”2

The Articles of Agreement include a series of undertakings by members with respect to their monetary conduct and relations. It is obvious from even a first reading of the Articles that many of these undertakings must have an impact on the rights and obligations of private persons. The courts of various countries have already decided cases in which the Fund Agreement or domestic legislation connected with it has been relied on as having some bearing on the issues.

It is fair to say that so far the approach to the Fund Agreement, by both litigants and courts, has been somewhat tentative. This is not surprising in view of the novelty of the Agreement as an attempt to coordinate international monetary affairs. Although it is reasonable to expect that as time goes on the approach will become more confident, it may be useful at this stage to note the first steps which have been taken by the courts. This article is intended, therefore, to describe what the courts have said or done in cases already reported in which some aspect of the Fund Agreement has been regarded as involved in the issues before the courts. It is thus not intended to be a critique of those cases.

The cases considered may be grouped into two classes. The first deals with par values and rates of exchange and, incidentally, the price of gold; the second with the international recognition of exchange control regulations.

Par Values and Rates of Exchange

Conversion of foreign currency amounts; gold clauses

One of the most significant features of the Fund Agreement is that fixed par values are established for the currencies of member countries. Article IV, Section 1(a) requires the par value of each currency to be expressed in terms of gold as a common denominator or in terms of the U.S. dollar of the weight and fineness in effect on July 1, 1944. Article XX, Section 4 describes the procedure by which par values are initially determined in agreement with the Fund, and Article IV, Section 5 deals with changes in par values. Sections 3 and 4(b) of Article IV oblige each member to take appropriate measures consistent with the Fund Agreement to ensure that exchange transactions taking place within its territories between its currency and the currencies of other members shall not differ from parity by more than the margins specified in Section 3 for particular types of exchange transactions.3

Although the concept of a fixed par value and of rates of exchange based on it is of fundamental importance under the Articles of Agreement, provision is also made for the retention, adaptation and introduction of multiple currency practices in certain circumstances. Broadly speaking, members may maintain multiple currency practices which were in existence when the Fund Agreement took effect or when members joined the Fund, subject, however, to certain obligations to remove these practices. Any change in such practices or introduction of new ones requires the approval of the Fund.4

Courts are frequently called upon to decide at what rate of exchange one currency shall be translated into another. For example, in many countries the courts, in adjudicating claims to or based upon foreign currency, will award only domestic currency. This rule makes it necessary for the courts to select what they consider the appropriate rate of exchange for converting the foreign currency into domestic currency. Thus, they have had to decide not merely which rate shall be used where there are different rates for different types of exchange transactions (e.g., rates for spot exchange transactions and for transactions in coins and notes) or where there are multiple rates of exchange for a currency, but also whether to use official rates or unofficial rates. Reference to two cases, one decided in England and the other in Canada, will illustrate the kind of problem which arises. In Marrache v. Ashton,5 A owed B a sum in Spanish pesetas under certain contractual arrangements governed by the law of Gibraltar, which was also the place of payment. B brought an action to recover the debt, and claimed conversion of it into sterling at the rate of 42.25 pesetas to the pound, which was the official rate of exchange in London under the Clearing Office (Spain) Order, 1936. However, in the course of the proceedings, B departed from this claim and maintained that the rate of 53 pesetas to the pound should apply. This was the official rate fixed in Spain at which tourists and laborers entering Spain from Gibraltar could exchange pounds for peseta notes. It was decided, however, that the appropriate rate of exchange was neither of these but was the rate at which peseta notes were traded in Gibraltar, even though the export and import of peseta notes were illegal under Spanish law. This was a rate of 132 pesetas to the pound.6 In Djamous v. Alepin,7 the defendant, a resident of Montreal, borrowed Syrian pounds in Syria and promised to repay the equivalent in U.S. dollars to the plaintiff in Brooklyn, New York. In an action in Quebec to recover the debt, the plaintiff claimed that the equivalent in U.S. dollars must be calculated at the official rate of exchange of 2.20 Syrian pounds per U.S. dollar. The court proceeded on the assumption that the defendant had to get the dollars in Syria. Under Syrian exchange arrangements, U.S. dollars were not available at the official rate for settlements of the kind which the defendant had to make. However, he was entitled to have recourse to the tolerated free market in which the rate was approximately 3.15 to 3.20. Accordingly, the free market rate was applied by the court in the calculation of the U.S. dollar equivalent. However, the Quebec court could award only Canadian dollars. Therefore, half of one per cent was added to the U.S. dollar equivalent, since this was the cost of converting Canadian into U.S. money.

In view of the difficulties of the kind which have been illustrated, it is of considerable interest to see what use courts will make of the par values (or rates of exchange based on them) established under the Fund Agreement or of the multiple rates which may be authorized by the Agreement. Reference has been made in at least one case to the significance of par values established under the Articles of Agreement in connection with the conversion of obligations expressed in foreign currency. This case also involved the question whether, in applying a gold value clause recognized as valid, the court will determine the currency equivalent of the gold value on the basis of the official price of gold or some other price.8

Setton Heirs et al. v. Suez Canal Co.,9 decided in May 1947 by the Mixed Court of Appeal of Alexandria on appeal from the Mixed Tribunal of Cairo, is one of a series of cases involving disputes between the Suez Canal Company and its bondholders as to the basis on which the bondholders should be paid. The facts are somewhat complex but may be summarized as follows. The courts had decided that certain coupons and bonds of the Suez Canal Company were payable in several different countries in the currency of each of those countries on the basis of an ideal gold franc (the “Germinal” franc) equal to one-twentieth of the gold “louis,” weighing 10/31 of a gram, with a fineness of 900/1000. The issue before the Court was the rate at which this gold franc should be converted into Egyptian currency in the case of coupons and bonds maturing at various dates, including dates during World War II. Conversion of the obligations into Egyptian currency had been simple as long as the Egyptian pound had been pegged to gold. After it had ceased to be pegged to gold in 1931, the Company had adopted the Poincaré franc, established in 1928 with a fixed par value in terms of gold, as the means of conversion. In 1936, the Poincaré franc had ceased to circulate. The war had terminated all connection between the French and Egyptian currencies and had made it impossible, moreover, to ascertain the value of the franc in terms of gold. In these circumstances the bondholders argued that the conversion should be effected on the basis of the price of gold in the Cairo free gold market on the respective maturity dates, and the court of first instance accepted this contention. The bondholders had claimed that they were entitled to the “intrinsic” value of the amount of gold, considered as a commodity, which was contained in the gold franc. This intrinsic value could be determined only in free gold markets, and the Cairo market should be selected because of the contacts of the obligations with Egypt. On appeal, however, this argument was rejected. The payment of an amount of gold by the Company was never anticipated. It was bound to make payments on the basis of an equivalence between a local currency (Egyptian currency) and an ideal international money of account (the “Germinal” franc) which was pegged to gold considered as a fixed monetary standard and not as a commodity. The fact that the Company could no longer determine this equivalence by reference to the currency (the franc) which it had employed for the purpose did not mean that this equivalence could not be ascertained or that the price of gold as a commodity must be adopted as the standard. The U.S. dollar had remained pegged to gold, and the conversion could be made by translating the gold content of the “Germinal” franc into dollars and the dollars into Egyptian pounds on the basis of the rates prevailing on the maturity dates of the obligations. This was precisely the technique of conversion which the Company had adopted as long as it had been possible to use the Poincaré franc as the means of conversion. The fact that the U.S. price of gold was officially controlled was not a valid reason for rejecting this technique:

It is obvious, however, and it has been implicitly recognized in all decisions issued in that connection, that the operations undertaken by the Company would never have been possible without the application of a monetary standard maintained at all times free from any changes occurring in the values of national currencies, thus supplying a norm in terms of which all the various national currencies may be easily evaluated.

It is only because gold has the characteristic and necessary stability mentioned above that it has been selected by unanimous consent of all peoples to constitute the monetary standard of the whole world. It is only because of the facility with which its par value with the various currencies could be stabilized and maintained that such a standard could be used for world trade. Such a stability has never been an inherent property of commodity gold, the value of which may vary in relation to multiple elements. It is only because the use of gold as a monetary standard lent itself readily to a system of control that it has retained up to the present time its character of a universal standard.10 (Translation)

It is true that in this case the difficulties may be regarded as abnormal in the sense that they were produced by war. But the complexities of international commercial and other relations frequently create similar problems. It is of more than casual interest, therefore, to note that after the Mixed Court of Appeal of Alexandria reached its decision, it expressed the view that for the future the Fund Agreement provided a simple solution to the problem of evaluating currencies in terms of each other:

…. whatever might have been the difficulties of performance during the past, difficulties arising from the interruption of communications and from a temporary lack of information concerning the par value of various currencies, it is obvious that at the present time and in the future, all these sources of confusion have been removed, since the international measures taken under the Bretton Woods Agreements—to which the Egyptian Government has adhered—resulted in the restoration, for the convenience of nearly all the countries of the world, of a monetary par value which cannot be subject to any uncertainty or doubt.

It is not true that the aforesaid Agreements have only settled the present relationships of various national currencies without restoring the gold standard as the basis of money, because the regime established under these Agreements does not involve freedom of gold movements. The Agreements have in fact restored the gold standard as the international basis of all currencies and have imparted to it a new effectiveness “by eliminating or diminishing the alarming rigidity which was a characteristic of the gold standard system,” and if gold movements remain under control, this fact, as has been explained above, is but the continuation of a system which is inherent and indispensable to the existence of the standard itself.11 (Translation)

Other cases involving par values

In at least two other cases, one Egyptian and the other Belgian, courts have made some reference to the par values established under the Fund Agreement, although not in connection with the conversion of one currency into another.

In Setton et al. v. Land Bank of Egypt, certain bondholders objected to the redemption of bonds which the obligor (the Land Bank of Egypt) announced in July 1944 and July 1945. The Land Bank had issued the bonds in connection with a loan in francs negotiated in France in 1930. The bonds were payable in francs in France and were governed by French law. The franc was defined as the Poincaré franc (65.5 milligrams of gold of 900/1000 fineness). The French franc of June 25,1928 had been devalued on several occasions by laws modifying the gold content of the franc. The obligor proposed originally to redeem the bonds on the basis of the gold content of the franc as defined by the law in effect at the date of the proposed redemption (23.34 milligrams of gold of 900/1000 fineness, or 2,806.34 francs per 1,000 1928 francs). Later it increased this offer to 53,600 francs per kilogram of fine gold, or 3,159.72 francs per 1,000 1928 francs, which corresponded to the purchase price for gold fixed by the Bank of France at the date of the proposed redemption on July 31, 1945. The bondholders argued that they were entitled to repayment in gold coin or at least on the basis of the price of gold in the free market reestablished in Paris by the law of February 2, 1948.

The issue in this case was thus not the rate at which one currency was to be converted into another under a contract providing for payment in various currencies at various places as it was in the Suez Canal case. It is true that this was finally involved in the Land Bank case, since the bondholders would be paid in Egyptian pounds and not French francs. However, the official rate of exchange between these currencies on the redemption date was known, and conversion, therefore, was considered no problem. The true issue was the amount of francs which the bondholders were entitled to under a contract governed by French law and providing for payment in francs in France.12 “The difficulty …. is that of evaluating a French currency which today has become a money of account without being legal tender in France into the only means of payment possible—the franc—which was legal tender in Paris on the due date of the debt.”13

The First Chamber of the Civil Court of Alexandria decided 14 that the obligation of the Land Bank was to pay francs and not gold, and that the amount of francs was to be determined by the proportion which existed between the gold content of the 1928 franc and the franc under the law in force at the date of the redemption. The Bank, however, had made a better offer. The bondholders could thus congratulate themselves but could not demand even more. This decision was sustained on appeal by the Second Chamber.15 It disposed of the argument that the true value of the gold franc of 1928 could be determined only in the free gold market by reasoning similar to that adopted in the Suez Canal ease, i.e., the price in such a market was for nonmonetary gold. To the argument that the Land Bank had itself chosen a price for nonmonetary gold (the purchase price of the Bank of France), the Court repeated the conclusion of the lower Court that this was in any event a better settlement than the bondholders could insist on. Moreover, the purchase price of gold fixed by the Bank of France was the basis of the par value for the franc which France had declared to the Fund in fulfillment of the Bretton Woods Agreement. This presumably was in recognition of the argument addressed to the Court by the Attorney General that the Land Bank’s offer was not fictitious or arbitrary. (“The gold standard represented by this price was that of the Bretton Woods Agreement to which France has adhered and it corresponded to the English and American gold standards except for the difference of the ‘gold point,’ which has always been admitted.”) 16

In Simonaer v. Community of Jette-Saint-Pierre,17 decided by the Court of Appeals of Brussels, certain real estate had been expropriated according to law at the request of a municipality. The indemnity was fixed by a judgment rendered on July 12, 1945. The former owners of the property appealed against it on the ground that the indemnity had been estimated as of June 23,1942, the date as of which the expropriation formalities had been completed, so that it included no allowance for the change in the gold value of the Belgian franc in 1944. The claim to an increased indemnity was based on Article I of the Law of April 29, 1935 under which changes in the gold parity were to be ignored in assessing indemnities except to the extent that such changes had affected the purchasing power of the franc in the field in question (real estate) on the date of the final assessment of an indemnity.18 The appellate court, in sustaining this claim, disposed of a number of objections to it by the defendant municipality. Only one of them need be noted in connection with the Fund Agreement.

The defendant argued that Decree-Law No. 5 and the Order of the Council of Ministers No. 6, dated May 1, 1944, had not changed the gold parity of the franc. The Decree-Law had abrogated the former gold parity and had authorized the King, as soon as circumstances permitted, to define by decree discussed in the Council of Ministers a new gold content for the franc. This step had not been taken, although the Order of the Council of Ministers No. 6 of May 1,1944 had authorized the National Bank to establish buying and selling rates for gold and foreign currencies. The Court decided that on these facts there had been a change in the gold parity of the franc within the meaning of the Law of April 29, 1935. That law did not require the establishment of a new fixed gold content. It was sufficient that there had been the abrogation of the former fixed parity and the adoption of a relatively flexible one. The Court then went on to establish a further basis for its judgment:

Whereas the Law of December 26, 1945 (Moniteur of March 13, 1947) has approved the agreement concerning the International Monetary Fund so that this agreement has the authority of a Belgian law in the national territory; and whereas, Article IV, Section 1 of this agreement provides that “the par value of the currency of each member shall be expressed in terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on July 1, 1944”;

Whereas pursuant to Article XX, Section 4, relating to “Initial determination of par values,” in the same agreement, the International Monetary Fund accepted the parity of one kilogram of fine gold equalling 49,318.08222 Belgian francs communicated to it by the Belgian Government on September 17, 1946, which was the same as that used in January, 1945 for the revaluation of the gold on hand of the National Bank of Belgium and which corresponds to 0.0202765 grams of fine gold per franc.19 (Translation)

The implication of this statement seems to be that the establishment by Belgium of a par value for the Belgian franc under the Fund Agreement had resulted in the establishment of a fixed gold content for the franc even under the internal law of Belgium, notwithstanding that the procedure contemplated by Decree-Law No. 5 of May 1,1944 had not been followed.20

Unenforceability of Certain Exchange Contracts

The courts of many countries have been faced, both before and after the coming into force of the Fund Agreement, with the problem whether they should recognize the effect of the exchange control regulations of other countries. For example, a plaintiff seeks to recover in the courts of country X on a contract which violates the exchange control regulations of country Y. The courts of country X must then decide whether they will reject the plaintiff’s claim because of the violation of the exchange control regulations of country Y or whether they will ignore those regulations.

Some courts have approached this question as one to be settled simply by the application of their private international law, i.e., by the application of that branch of their domestic law which determines, inter alia, what effect, if any, shall be given to foreign law in cases involving contacts with foreign countries. Courts which have adopted this technique decide whether, on the basis of their private international law, the plaintiff’s claim is governed by a particular system of foreign law. If it is, they recognize the effect of exchange control regulations which are part of that system. If it is not, they refuse such recognition even though the regulations purport to apply to the claim.

Other courts have taken the view that whatever may be the system of law which, according to their private international law, governs the plaintiff’s claim, the exchange control regulations of other countries are so essentially inimical to the interests of their own country that recognition must be refused on the ground of public policy. Reference to public policy has sometimes been in general terms; in other cases the courts have resorted to certain narrower applications of public policy, such as the rules that courts will not execute the “penal,” “revenue,” “confiscatory,” or “administrative” laws of other countries.

The result of these two techniques of deciding cases involving the exchange control regulations of other countries was that in many, and perhaps in most, instances courts did not give effect to these regulations.21 At the Bretton Woods Conference, however, it was felt that this would not be a satisfactory situation for the future. Countries were proposing to join as partners in an international organization whose first declared purpose was “to promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.” 22 Moreover, it was realized that exchange control regulations might be justified because of the balance of payments position of the member adopting them and because they were not devised to damage the interests of other members.23 Accordingly, the charter of the institution would make provision, in various of its articles, for the maintenance or imposition of exchange control regulations in the circumstances envisaged by those articles.24

It became apparent, therefore, that once the Fund came into being, the public policy of members would no longer require that they disregard the exchange control regulations of other members which were authorized by the Fund Agreement. On the contrary, the purposes of the Fund, and therefore the public policy of its members, would be better served by a measure of collaboration among them designed to give effect to each other’s exchange control regulations. A proposal at the Bretton Woods Conference25 that exchange transactions which take place outside the prescribed margins from parity shall be unenforceable in other member countries was thus broadened to provide, in Article VIII, Section 2(b), that:

Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member. In addition, members may, by mutual accord, co-operate 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.26

In order to understand the effect which this provision has had on the laws of member countries, reference must also be made to Article XX, Section 2(a) and Article XVIII(a):

Article XX, Section 2 (a): Each government on whose behalf this Agreement is signed shall deposit with the Government of the United States of America an instrument setting forth that it has accepted this Agreement in accordance with its law and has taken all steps necessary to enable it to carry out all of its obligations under this Agreement.

Article XVIII (a): Any question of interpretation of the provisions of this Agreement arising between any member and the Fund or between any members of the Fund shall be submitted to the Executive Directors for their decision.….

Members have thus bound themselves to give effect under their domestic laws to the undertaking in Article VIII, Section 2(b), and the Fund is empowered to interpret that provision under Article XVIII. In pursuance of this power, the Fund has adopted the following interpretation, which it addressed to members on June 14, 1949:

The Board of Executive Directors of the International Monetary Fund has interpreted, under Article XVIII of the Articles of Agreement, the first sentence of Article VIII, Section 2(b), which provision 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.”

The meaning and effect of this provision are as follows:

1. Parties entering into exchange contracts involving the currency of any member of the Fund and contrary to exchange control regulations of that member which are maintained or imposed consistently with the Fund Agreement will not receive the assistance of the judicial or administrative authorities of other members in obtaining the performance of such contracts. That is to say, the obligations of such contracts will not be implemented by the judicial or administrative authorities of member countries, for example, by decreeing performance of the contracts or by awarding damages for their non-performance.

2. By accepting the Fund Agreement members have undertaken to make the principle mentioned above effectively part of their national law. This applies to all members, whether or not they have availed themselves of the transitional arrangements of Article XIV, Section 2.

An obvious result of the foregoing undertaking is that if a party to an exchange contract of the kind referred to in Article VIII, Section 2(b) seeks to enforce such a contract, the tribunal of the member country before which the proceedings are brought will not, on the ground that they are contrary to the public policy (ordre public) of the forum, refuse recognition of the exchange control regulations of the other member which are maintained or imposed consistently with the Fund Agreement. It also follows that such contracts 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 ita performance.

The Fund will be pleased to lend its assistance in connection with any problem which may arise in relation to the foregoing interpretation or any other aspect of Article VIII, Section 2(b). In addition, the Fund is prepared to advise whether particular exchange control regulations are maintained or imposed consistently with the Fund Agreement.27

The interpretation makes it clear that Article VIII, Section 2(b) has changed the law in those member countries whose courts, before the Fund Agreement took effect, refused to recognize the exchange control regulations of other members. Article VIII, Section 2(b) has done this, in the cases in which it applies, by providing that the courts of one member country shall not ignore the exchange control regulations of another member country on the ground that they conflict with the public policy of the forum. Secondly, they may not ignore such exchange control regulations on the ground that the law of which they form part does not, under the private international law of the forum, govern the exchange contract or its performance. What the provision requires instead is that, in the circumstances provided for, the courts shall not enforce an exchange contract which violates the exchange control regulations of another member.

Notwithstanding the importance, both legal and economic, of the change which Article VIII, Section 2(b) has introduced, the courts and the legal profession have not been fully aware of it. For example, an article published in 1948 arrives at the following conclusions after examining the state of the law on the recognition of exchange control regulations:

It has been seen that Anglo-American courts, and especially the courts of civil law countries, frequently disregard foreign exchange controls regardless of ordinary choice of law principles. This result is obtained by applying the test of public policy expressly or as the underlying but appropriate explanation for the decision. The conclusion can therefore be drawn that, so long as foreign exchange controls are deemed repugnant to domestic public policy, such controls usually will not be given effect. This result is legitimate and widespread and no persuasive legal arguments can be advanced to condemn it.

True, the test of public policy is relative and varies with place and time; thus a change of circumstances might mean a reversal of attitude. In actuality, however, only an affirmative expression of a contrary public policy on the part of the legislative or administrative branches of the government is likely to alter the attitude of the courts.

Whether such a reversal of attitude is desirable for political or other reasons is a debatable point. In the meantime debtors will do well not to rely upon exchange controls to relieve them of their lawful obligations. On the other hand, creditors should procure the additional promise of a foreign surety on every obligation.28

Again, in Ahmed Bey Naguib v. Heirs of Moise Abner,29 the First Chamber of the Mixed Court of Appeal of Alexandria made the following statement, the implications of which might be difficult to reconcile with Article VIII, Section 2(b), to which, however, no reference was made:

Whereas, if the insurance, which was contracted in Cairo with the branch office of the [Italian] Company (which follows from the policy itself) and which is payable in Cairo (which follows from an express stipulation regarding the premiums), is stipulated to be payable in lire by check on Italy, this stipulation, in the intention of the parties, can only aim at permitting the Company to pay at the date of maturity by handing over to the insured a check in Italian lire, negotiable in Cairo; the stipulation could not by any means imply an acceptance on the part of the insured to submit himself to any monetary restrictions which might be enacted in Italy and which might prevent the execution of the contract in accordance with its terms. (Translation)

There have been two English and two American cases, all of them involving the exchange control regulations of Czechoslovakia, in which the courts have shown an awareness of the existence of Article VIII, Section 2(b). In all of these cases, however, the courts continued to formulate their opinions in terms of their traditional private international law, and paid little or no attention to the impact of the provision on the pre-existing law.

The earliest of these cases is Kraus v. Zivnostenska Banka,30 a decision of a New York court of first instance. In 1938 and 1939 the plaintiff deposited Czechoslovak funds and securities with the defendant Czechoslovak bank in Prague. The plaintiff instituted an action in New York for moneys had and received and to recover the value of the securities. Jurisdiction to bring his action in New York was obtained by the plaintiff by attaching the defendant’s funds in New York. The defendant admitted all of the facts set forth by the plaintiff. He pleaded, however, that the contract of deposit was made and to be performed in Prague, and that, at the time of making the contract and at all times thereafter, the exchange control regulations of Czechoslovakia prohibited payments or transmittals of securities by a resident to a nonresident without the consent of the exchange control authorities. No such permission had been given. The court accepted this defense, holding that since the place of performance of the contract was Prague, the law of Czechoslovakia determined the defendant’s liability under the contract. It went on to add the following comment:

In passing it may be stated that foreign exchange control to regulate the international flow of capital has been almost universally adopted in the present emergent period of history. The United Nations Monetary and Financial Conference held at Bretton Woods, New Hampshire, in July 1944, to which both the United States and Czechoslovakia were parties, recognized the necessity for foreign exchange control to regulate the international flow of capital and provided for recognition of such controls. See Article VI, Sect. 1, Subd. a; Sec. 3; Article VIII, Sec. 2, Subd. b; and Article XIV, Sec. 2.31

In Cermak et al. v. Bata Akciova Spolecnost,32 another New York court of first instance reached a different result. The defendant, a Czechoslovak corporation, had had dealings with two persons, C and H, as a result of which it had been agreed in 1941 that certain sums, amounting to more than five million Czechoslovak korunas, were owed to them. The defendant then assigned to C and H approximately $200,000 out of moneys which it had on deposit with the Guaranty Trust Company of New York and directed the trust company to pay that amount to, or to the order of, C and H. The present plaintiffs, who were the assignees of C and H, attached the credit balance of the defendant with the Trust Company and brought actions to recover the dollars. The defendant argued that at all relevant dates the exchange control regulations of Czechoslovakia prohibited unlicensed payments by or assignments from a resident to a nonresident. The court found that the defendant had in fact been authorized by the exchange control authorities to make the payments or assignments and entered judgments for the plaintiffs. This would have been sufficient to dispose of the case, but the court went on to indicate that its decision would have been the same even if the Czechoslovak exchange control authorities had not granted a license. Even if the assignments to the plaintiffs were not enforceable, the plaintiffs could succeed under the attachments. Finally, the court referred to the principle that the courts of one country will not enforce the revenue or penal laws of another.

If the international agreements entered into as a result of the Bretton Woods Conference of July, 1944, are to change that rule, I will at least await a decision of some appelate court blazing that trail or a case before me in which that point is briefed and decision of it is actually necessary.33

The two English cases are of considerable interest because they were carried to the highest court in the land, the House of Lords. In the Frankman34 case the plaintiff sought to recover certain debentures of the Skoda Works, Ltd., a Czechoslovak corporation, which had been issued in sterling in London. These debentures, of which the plaintiff was acknowledged to be the owner, were on deposit with the London branch of a Prague bank through which the securities had been acquired. The defendant bank relied upon Czechoslovak exchange control regulations, under which the bank was restrained from parting with the securities without the consent of the National Bank, which consent had been applied for but denied. The attention of the court was drawn to the Bretton Woods Agreement, “the purpose of which is mutual consideration of foreign exchange control regulations of the signatories,” and to the Bretton Woods Agreements Order in Council, made under the British Bretton Woods Agreements Act, 1945. The schedule to the Order declares that Article VIII, Section 2(b) has the force of law in the United Kingdom.

The court of first instance, pursuing the traditional private international law approach, found that the contract of deposit was made in Prague with the Prague branch of the bank, and that under the contract the place of performance was deemed to be in Prague. The law of Czechoslovakia thus governed the performance of the contract. From this it followed that the Czechoslovak exchange control regulations, which were part of that law, applied to the plaintiff’s claim, with the result that it must fail. Reference was made to the New York Kraus case to support this conclusion.

The court then went on to consider the defendant’s argument that English courts will not enforce the revenue or penal laws of other countries.

That is so, but these are financial restrictions and have to do with the financial position and internationally the financial relationship of Czechoslovakia. The Bretton Woods Agreement shows that such restrictions are honoured by the members of the International Monetary Fund. Those members include Czechoslovakia and this country.35

To support this view, the court quoted Article I and Article VIII, Section 2(b) of the Agreement.

It will be noted, therefore, that although the decision was based on the fact that, according to English private international law, the law of Czechoslovakia governed the performance of the contract, the court relied upon Article VIII, Section 2(b) and the purposes of the Fund Agreement to answer the objection that application of the law of Czechoslovakia would involve the enforcement of a foreign penal or revenue law. This was the conclusion which the New York court refrained from adopting in the Cermak case.

The Court of Appeal reversed the decision of the lower court. In construing the terms of the contract, it held that although the original contract was governed by the law of Czechoslovakia, the parties had intended that such obligations as were to be performed in England should be governed by English law. On this analysis, the exchange control regulations of Czechoslovakia had no application to the defendant’s obligation to redeliver securities deposited in London. The Court of Appeal decided, therefore, that the contract was enforceable in England and ordered the bank to return the debentures to the owner. None of the three members of the Court of Appeal made any mention of Article VIII, Section 2(b).

On appeal to the House of Lords, the judgment of the Court of Appeal was set aside and the judgment of the court of first instance was restored. Once again, the decision turned upon the application of English private international law to the contract in question. The House of Lords held that the true construction of the contract indicated that the parties had intended that it should be governed, as to both its making and its performance, by the law of Czechoslovakia. Only one of the five members of the House of Lords referred to the Fund Agreement, and this was to make the same point as had been made by the court of first instance:

It was urged that, even if the law of Czechoslovakia was the proper law of the contract and by that law the bank could cot legally deliver up the debentures, yet the courts of this country should not enforce that law. It was sought to apply to the circumstances of the present case the principle that an English court will not enforce a penal or confiscatory law of another country. I do not exclude the possibility of this principle applying where it appears that the law which is sought to be enforced or relied on is in reality confiscatory, though in appearance regulatory of currency, but I see no reason why it should be applied in the case of a law which does not appear to differ in material respects from the legislation contemplated by the Bretton Woods Agreement which is now part of the law of this country.36

In Kahler v. Midland Bank, Ltd.,37 the plaintiff claimed to be the owner, and sought delivery to him, of certain share certificates in a Canadian company which the defendants, an English bank, held for safe custody in the dossier of a Czechoslovak bank. The defendants argued that it would not be consistent with their contract with their customer (the Czechoslovak bank), or with proper banking practice, to hand over the shares to the plaintiff without the consent of the Czechoslovak bank. The Czechoslovak bank, however, could not give its consent without violating the Czechoslovak exchange control regulations which were in effect at all material dates. The Court of Appeal held that insofar as the plaintiff’s claim was based on a contract with the defendants, this must fail, because there was no contractual relationship between them. There was a contract between the plaintiff and the Czechoslovak bank, and a contract between that bank and the defendants, but no contract between the plaintiff and the defendants. Insofar as the plaintiff’s claim was based on his ownership of the shares, this also must fail. To succeed, the plaintiff, though owner of the shares, would also have to show that he was entitled to possession of them. His right to possession depended on his right to require the Czechoslovak bank to instruct the defendants to deliver the shares. The ability of the Czechoslovak bank to give this order was subject to Czechoslovak law, since that law governed the plaintiff’s contract with the Czechoslovak bank. One of the three members of the Court of Appeal, having reached these conclusions, went on to make the following comments:

An interesting argument was addressed to us on the scope and effect of the Bretton Woods Agreements Order in Council, 1946 (S.R. & 0., 1946, No. 36) (made under s.3 of the Bretton Woods Agreements Act, 1945), which gave the effect of law in England to certain parts of the Final Act of the United Nations Monetary and Financial Conference, 1944, commonly known as the Bretton Woods Agreements. The argument turned largely on the interpretation to be given to the term “Exchange contracts” found in the Articles of Agreement of the International Monetary Fund, art. VIII, s2(b). The term is not defined in the Agreement—or in the Order in Council—but provision is made by art. XVIII of the Agreement to the effect that any question of interpretation of the provisions of the Agreement arising as therein stated should be submitted to the executive directors of the International Monetary Fund. On the view I take of the case, it is unnecessary for me to express any view on the argument referred to, and, haying regard particularly to the interpretation provisions of the Agreement itself, it is, I think, undesirable that I should do so.38

The House of Lords, by a majority of three to two, upheld the decision of the Court of Appeal in favor of the defendants. The only reference to the Fund Agreement was in one of the dissenting opinions which concluded that the contract between the plaintiff and the Czechoslovak bank was governed, as to performance in England, by English law:

If that view is correct, the absence of consent on the part of the National Bank affords the respondents no valid ground for withholding the certificates unless it can be said that the Czechoslovakian foreign exchange laws are, apart from any question of choice or conflict of law, to be acted on by the courts of this country. As matters stand, I think any contention of this kind must be rejected. In their defence the respondents pleaded the Bretton Woods Agreements and the Order in Council of 1946 relating thereto (S.R. & 0., 1946, No. 36). In the course of the argument, however, they admitted their inability to rest this branch of their case on any specific provision of these agreements and were content to rely on them merely to the extent of indicating in a general way that the States which were parties thereto would respect each other’s exchange control legislation. That might have some bearing if the question was whether the recognition of the relevant Czechoslovakian laws would be contrary to public policy in this country—a matter I have not found it necessary to discuss—but it cannot well have any other bearing, for these instruments do not go the length of incorporating those laws in the law of England.39


Originally published in April 1951.


Article XX, Section 2(g).


Article XX, Section 2(a).


However, “a member whose monetary authorities, for the settlement of international transactions, in fact freely buy and sell gold” at a price within the margins from parity prescribed by the Fund is deemed to be fulfilling this obligation.


As to multiple currency practices under the Fund Agreement, see the Fund’s Annual Report, 1948, Appendix II, pp. 65-72.


(1943) A.C. 311.


On the other hand, in Graumann v. Treitel (1940) 2 A11 E.R. 188, in which C owed D a sum in German marks payable in Germany, the English court, in converting the claim into sterling, used the official rate (approximately 12 to the pound) and rejected the rate at which mark notes could be bought in London (about 36 or 37 to the pound).


(1949) Que. S.C. 354.

Under Article IV, Section 2 members have agreed not to buy gold at a price above par value plus the margin prescribed by the Fund, or to sell gold at a price below par value minus the margin. In its Statement of June 18, 1947 on Transactions in Gold at Premium Prices the Fund announced that it:

“… strongly deprecates international transactions in gold at premium prices and recommends that all of its members take effective action to prevent such transactions in gold with other countries or with the nationals of other countries.

“It is realized that some of these transactions are being conducted by or through non-member countries or their nationals. The Fund recommends that members make any representations which, in their judgment, are warranted by the circumstances to the governments of non-member countries to join with them in eliminating this source of exchange instability.

“The Fund has not overlooked the problems arising in connection with domestic transactions in gold at prices above parity. The conclusion was reached that the Fund would not object at this time to such transactions unless they have the effect of establishing new rates of exchange or undermining existing rates of other members, or unless they result in a significant weakening of the international financial position of a member which might affect its utilization of the Fund’s resources.

“The Fund has requested its members to take action as promptly as possible to put into effect the recommendations contained in this statement.”

(See the Fund’s Annual Report, 1947, Appendix XII, pp. 78-79.)


Journal des Tribunaux Mutes (hereinafter referred to as J.T.M.), No. 3772, May 26/27, 1947, pp. 3-6.


J.T.M., No. 3772, p. 5. Cf. Sir Leslie Scott and Cyril Miller, “The Unification of Maritime and Commercial Law through the Comité Maritime International,” International Law Quarterly, Vol. 1 (1947), pp. 495-96.


J.T.M., No. 3772, p. 6.


In Chilean Electric Company, Ltd. v. State Railway Enterprise, the electric company brought an action in the Chilean courts to require the railway enterprise to pay, for electric energy supplied to it, in certain gold pesos with a filed gold content or in current money with a gold premium determined by the Central Bank of Chile. The claim was based on a contract entered into in 1921 when the peso notes in circulation were not convertible into gold. They became convertible under a law of 1925, but ceased to be convertible under a law of 1932 which also declared that they should be accepted at par without limit in the discharge of all obligations. The Supreme Court, overruling the court of first instance and the appellate court, held that, on the true interpretation of the relevant statutory law, the defendant was not bound to pay the gold premium. Subsidiary arguments in the litigation were based on two statutory provisions incidental to the Fund Agreement. The first was Law No. 8,403 of December 26, 1945, by which Chile approved the Fund Agreement, and Article 16 of which declared that obligations contracted in legal money established by the 1925 statute should continue to be met with the same numerical quantity of pesos as were specified in the obligations, without regard to the relationship between the peso and gold established under the Fund Agreement. The second was Article 7 of Law No. 8,918 of October 31, 1947 under which the gold holdings of the Central Bank were to be revalued in accordance with the par value of the peso established under the Fund Agreement (Revista de Derecho, Concepción, Chile, Vol. XVI, No. 70, Oct./Dec., 1949, pp. 509-84).


J.T.M., No. 4052, March 23/24, 1949, pp. 4-5.


J.T.M., No. 3901, March 24/25,1948, pp. 2-7.


J.T.M., No. 4078, May 23/24. 1949, PP. 2-4.


J.T.M., No. 4052, March 23/24, 1949, p. 6.


Journal des Tribunaux, No. 3808, May 1, 1949, p. 260.


See Piret, Les Variations Monétaires et leurs Répercussions en Droit Privé Belge (Brussels and Louvain, 1935), pp. 200 et seq.


Journal des Tribunaux, No. 3808, May 1, 1949, pp. 260-61.


There has been much discussion of this question in Belgium. Cf. Journal des Tribunaux, No. 3822, Oct. 9, 1949, pp. 489-91; No. 3825, Oct. 30, 1949, p. 540; No. 3845, March 19, 1950, pp. 185-88.


There is a very considerable literature on this subject. See, for example, Martin Domke, “Foreign Exchange Restrictions (A Comparative Survey),” Journal of Comparative Legislation and International Law, Vol. 21 (1939), pp. 54-61; Edward C. Freutel, Jr., “Exchange Control, Freezing Orders and the Conflict of Laws,” Harvard Law Review, Vol. 56 (1942), pp. 30-71.


Article I(i).


In a recent Netherlands case, the defendant, who relied on Hungarian exchange control, argued, to quote from a note on the case in International Law Quarterly, Vol, 3 (1950), p. 103, that: “In view of the fact that all States have foreign exchange regulations, and that there is no longer free exchange, so that each payment of a foreign claim is dependent on a license from a Government, proper intercourse between States is only possible if the States mutually recognize each other’s regulations. Public policy, therefore, no longer prevents the application of the foreign exchange regulations of a foreign country as it did at the time when these were the exception and free exchange was the rule, On the contrary, public policy requires the application of these regulations.” This argument was rejected, but it should be noted that whereas the Netherlands is a member of the Fund, Hungary is not. Cf. Dicey’s Conflict of Laws (London, 6th ed., 1949), p. 752: “Even where the Bretton Woods Agreement does not apply it may be against English public policy to assist a party in violating the exchange control legislation of a foreign country, if the protection of the balance of payments of that country is a matter of vital interest to this country.”


See, for example, Article VI, Section 1; Article VI, Section 3; Article VII, Section 3(b); Article VIII, Section 2; Article XIV, Section 2.


The working papers of the Conference have been published in Proceedings and Documents of the United Nations Monetary and Financial Conference (U, S, Department of State Publication 2866, International Organization and Conference Series 1, 3). On the history of Article VIII, Section 2(b), see the following Documents: 32 (p. 54); 172 (p. 217); 191 (p. 230); 236 (p. 334); 238 (p. 341); 307 (p. 502); 326 (pp. 5s42, 543); 343 (pp. 575–76); 370 (p. 599); 374 (p. 605); 393 (p. 628); 413 (p. 671); 448 (p. 808).


Under Article XV, Paragraph 6 of the General Agreement on Tariffs and Trade any contracting party which is not a member of the Fund shall enter into a special exchange agreement with the Contracting Parties if it does not become or ceases to be a member of the Fund. So far, special exchange agreements have been entered into with Ceylon (this agreement, however, expired automatically when Ceylon became a member of the Fund), with Haiti, and with Indonesia. Article VII, Paragraph 3 of the special exchange agreement provides that: “Exchange contracts which involve the currency of any contracting party and which are contrary to the exchange control regulations of that contracting party maintained or imposed consistently with the Articles of Agreement of the Fund or with the provisions of a special exchange agreement entered into pursuant to paragraph 6 of Article XV of the General Agreement, shall be unenforceable in the territories of [the country signing the special exchange agreement].”


The Fund’s Annual Report, 1949, Appendix XIV, pp. 82–83. The interpretation was published in the United States, by the National Advisory Council on International Monetary and Financial Problems, in the Federal Register of August 19, 1949. pp. 5208–9. For some press comments on the interpretation, see The Journal of Commerce (New York), August 24, 1949, and Business Week (New York), September 3, 1949.


“The Treatment of Foreign Exchange Controls in the Conflict of Laws,” Virginia Law Review, Vol. 34 (1948), p. 705. There has, however, been some discussion of or reference to Article VIII, Section 2(b) in the literature on the recognition of exchange control regulations: Arthur Nrssbaum, “Exchange Control and the International Monetary Fund,” Yale Law Journal, Vol. 59 (1950), pp. 421–30; Arthur Nussbaum, Money in the Law, National and International (New York, 1950), pp. 539–45; Dicey’s Conflict of Lam (London, 6th ed., 1949), p. 752; “Exchange Control; The Relevance of Foreign Restrictions,” Solicitors’ Journal, Vol. 93 (1949), p. 413; C. M. Schmitthoff, A Textbook of the English Conflict of Laws (London, 1948), p. 122; F. A. Mann, “Confiscatory Legislation and Share Certificates,” Modern Law Review, Vol. 11 (1949), p. 479; F. C. Howard, Exchange and Borrowing Control (London, 1948), p. 254; F. A. Mann, “The Exchange Control Act, 1947,” Modern Law Review, Vol. 10 (1947), pp. 418–19; F. A. Mann, “International Monetary Co-operation,” British Yearbook of International Law, Vol. 22 (1945), p. 254.


An abstract of this case, decided on April 28,1948, appears in J.T.M., No. 4003, Nov. 24/25, 1948.


64 N.Y. Supp. (2d) 208,187 Misc. 681 (Sup.Ct., 1946). This case was followed in Spitz v. Schlesische Kredit-Anstalt A.G. (New York Law Journal, Jan. 21,1948, p. 267).


64 N.Y. Supp. (2d), p. 211.


80 N.Y. Supp. (2d) 782 (Sup.Ct. 1948).


80 N.Y. Supp. (2d), p. 785.


Frankman v. Anglo-Prague Credit Bank (London Office) (1948) 1 A11 E.R. 337; Frankman v. Anglo-Prague Credit Bank (1948) 2 A11 E.R. 1025; Zivnostenska Banka National Corporation v. Frankman (1949) 2 A11 E.R. 671.


(IMS) 1 All E.R., p. 342.


(1949) 2 A11 E.R., p. 676.


(1948) 1 A11 E.R. 811; (1949) 2 All E.R. 621.


(1948) 1 All E.R., p. 819. In a case decided by the Vienna Court of Appeal on June 29, 1949, a British plaintiff appealed against an order requiring the deposit of security for costs on the ground that British exchange control did not permit him to transfer funds for this purpose. The order requiring security was, however, sustained. To judge from the report in Journal du Droit International, No. 2 (1950), pp. 745-47, Article VIII, Section 2(b) was not discussed, but the commentator in the Journal considers the relevance of that provision. The issue, he states, was not the enforcement of anything which could be regarded as a “contract” under the provision, but the application of the Austrian law obliging foreign plaintiffs to give security for costs. He concludes, therefore, that Article VIII, Section 2(b) did not prevent the enforcement of such sa obligation.


(1949) 2 All E.R., pp. 633-34.