Excluding the Effects of Nominalism
11
EXCLUDING THE EFFECTS OF
NOMINALISM
A. Introduction
It has been shown that, in the context of liquidated claims arising under long-term contracts, the creditor is exposed to the erosion of his claim as a consequence of ‘creeping’ inflation.1 The general principles of private law do not afford to the creditor any protection against this erosion in value, since nominalism is presumed to reflect the intention of the parties. If contracting parties wish to displace the principle of nominalism, then this can only be done by means of an express contractual term to that effect.
Given that parties are free to contract out of the principle of nominalism, it is perhaps not surprising that they occasionally seek to exercise that right when entering into long-term commitments. Various techniques have been evolved which seek to preserve the effective value of a payment stream over a period, even though (in strict terms) such techniques do not directly affect the nominalistic principle. For example:
(a) In contracts with an international dimension, the creditor may stipulate for payment in a currency (for example, the US dollar) which he believes is most likely to maintain its international value over the period. However, the obligations concerned would continue to be discharged on a dollar-for-dollar basis, with the result that (regardless of the perceived ‘value’ of the stipulated currency) the nominalistic principle will continue to apply in the usual way.2
(b) Alternatively, parties may elect to contract in terms of barter, so that counter-performance involves the delivery of a set quantity of wheat, gold, or other commodity. Plainly, the application of nominalism is avoided in cases not involving a monetary obligation but (equally plainly) contracting parties would only very occasionally go to these lengths purely in order to avoid the impact of nominalism.
In other cases, it may be felt necessary to vary the principle of nominalism more directly, such that the nominal amount of the monetary obligation is increased as the value of money declines. Purely by way of example, it may be noted that a long-term contract for the supply of a particular commodity should include a provision for periodic price reviews.3
These introductory remarks have served to highlight the difficulties which may be posed by the principle of nominalism in relatively common commercial situations. It is now proposed to consider the types of contractual provisions which have at various times been developed to counteract the principle. It should, however, be clearly understood that the purpose of any protective clause is invariably to protect the creditor against a reduction in the value of the currency to which the clause is attached. In domestic contracts, protection is usually required against the consequences of (internal) inflation; in international contracts, the creditor is generally seeking protection against adverse exchange rate movements. Where the protected currency is formally depreciated or is allowed to ‘float’ downwards, the protective clause is likely to come into operation. Where another currency is revalued or appreciates, the protected currency remains stable in terms of all other currencies, save the one in relation to which its value is necessarily reduced or depreciated. Whether a protective clause applies in such a case will naturally be a question of construction; the clause is likely to apply in such a case if it is not merely designed to protect against the depreciation of the currency concerned, but is designed to ensure effective equivalence between the two currencies and to guard against the disturbance of any intended pattern of uniformity.4
B. Gold Clauses
So long as there existed a gold standard in any of its various emanations,5 that is to say, until 15 August 1971, gold was the most stable standard of value and dominated the world of money. Since gold was ‘demonetized’ in the 1970s, no fixed and stable standard of value exists. It is very necessary to emphasize and ponder this fact of singular starkness. Gold was fixed in terms of the US dollar for the entire period between 1934 and 1971, at a rate of US $35 per ounce. Since that date, the price has been free to fluctuate and has frequently done so. Gold is now merely a commodity, just as silver, copper, or wheat are commodities; it no longer holds a special place in national monetary systems.6
Gold clauses are now a matter of history.7 Whilst the use of the word ‘never’ is always dangerous, it is now very difficult to envisage any circumstances under which any form of gold standard could be reintroduced in any meaningful way.8 It should, however, be acknowledged that the law relating to protective clauses generally has largely developed within the framework of the gold clause; as a result, the general principles derived from the gold clause are relevant both to index clauses and to other types of protective provisions which may be developed at a future date. In addition, cases have occasionally come before the courts in relatively recent times which have involved silver or similar commodity provisions.9 There has also been a recent line of cases which have considered gold clauses which remain effective in international conventions. For these reasons, it is necessary to consider both the gold clause itself and some of the litigation to which it gave rise.10
The existence of a gold clause
At the outset, it is necessary to ask—what was a gold clause and how did it come into existence? A gold clause was a contractual provision which in some way referred to gold in connection with the monetary obligations created by the contract. As will be seen below, the reference to gold may have a variety of meanings, depending upon the manner in which the expression is employed.
It is implicit in this definition that a gold clause could only come into being as a result of an agreement between the parties. So far as English law is concerned, such a clause could thus be expressly stated or (in appropriate but very rare cases) could constitute an implied term of the contract.
There can be no doubt that a gold clause should be treated as valid and binding under English law. It is apparent that such a clause runs directly contrary to the principle of nominalism but, as shown earlier, the application of that principle under English law depends upon the presumed intention of the parties; it can thus be excluded by express or implied terms of the type just described.11 It is necessary to consider the two possibilities separately.
Express terms
If a reference to ‘gold’ was attached to a monetary obligation, then the relevant provision had to be construed in accordance with the law applicable to the contract concerned.12 One immediate difficulty which arose in this context was the purpose underlying the use of the word ‘gold’. Was it intended to define the extent of the debtor’s obligation, so as to create an enforceable gold clause? Or did expressions such as ‘gold franc’ connote the lawful currency of France, with ‘gold’ merely being descriptive of the fact that, at the time the obligation was incurred, France was on the gold standard? In the former case, the debtor’s obligation to pay would vary in amount according to the price of gold; in the latter case, the nominalistic principle would continue to apply. Where the contract is governed by English law, then the court must ascertain the parties’ intention from the words which have been employed. This is fully in accord with the principle formulated by the Permanent Court of International Justice in the Case of Brazilian Loans:13
One argument against the efficacy of the provision for payments in gold is that it is simply a ‘style’ or a routine form of expression. This, in substance, would eliminate the word gold from the bonds. The contract of the parties cannot be treated in such a manner. When the Brazilian Government promised to pay ‘gold francs’, the reference to a well known standard of value cannot be considered as inserted merely for literary effect or as a routine expression without significance. The Court is called upon to construe the promise, not to ignore it.
It must be said, however, that the judicial approach to gold clauses was not always in line with this approach, and other cases demonstrate a distinct tendency to treat references to ‘gold’ as merely descriptive, or merely as a synonym for the currency in question and referring to its statutory quality as a currency based on a gold standard, ie without contractual content and thus not affecting the application of nominalism. This view was even taken14 in the context of a very elaborately drafted promise to pay ‘pesos of 183.057 millionths of a gramme of fine gold’, although a different view was subsequently adopted by the Supreme Court of Chile.15
A number of other cases have adopted a purely descriptive (or non-substantive) approach to contractual references to ‘gold’ in the context of monetary obligations,16 and it must be said that courts in both England and the United States have likewise tended to adopt the ‘descriptive’ approach.17 More recent cases which have arisen in the United States have confirmed this general trend. Thus, a reference to the ‘Chinese silver dollar’ which was contractually defined as a unit of currency containing a certain amount of silver, was found by the Supreme Court of Delaware to be merely an effort to describe the currency in question which did not create a protective clause of any kind.18 In similar vein, an obligation expressed to be payable in ‘taels, Shanghai Sycee currency of the present weight and fineness’ created an obligation of a purely monetary character which was not protected by reference to the value of silver.19
Despite this generally negative judicial approach, it nevertheless remains clear that a provision for payment in gold constitutes a valid contractual provision. So long as it is clear that the reference to gold was intended to govern the substance of the obligation, then a court should give effect to it in accordance with its terms. It remains to add that in cases involving a conflict of laws, the validity, substance, and effect of a gold clause falls to be determined by reference to the law applicable to the contract concerned, and not by reference to the lex monetae.20
Implied terms
It is now necessary to consider whether a gold clause could be implied into a contract which contains no express reference to gold. If it is remembered that the nominalistic principle applies in consequence of the presumed intention of the parties, then the notion that a presumed intention can be displaced by an implied term is inherently unattractive. It should follow that the circumstances under which a gold clause could be implied into an English law contract should, in principle, arise only on the rarest of occasions. To express matters in a different way, to imply a gold clause into a contract would usually fly in the face of the nominalistic principle. As a result, the evidence upon which a gold clause could be implied into the contract must be derived from the terms of the contract itself or the circumstances surrounding its conclusion; it could not in any sense be inferred from the presumed intention of the parties.21 It must be emphasized again that, if there exists a mere promise to pay a certain sum of money of a certain currency, payment must be made in whatever is the money of that currency system at the time of maturity;22 the fact that the stipulated currency was on a gold standard at the time the contract was made did not alter this essential rule or the manner of its application. It follows that a mere promise to pay an amount in foreign currency—even if linked to gold at the time of the contract—could not be treated as a promise to pay that currency at its gold value.23 Similarly, a bare promise to pay ‘francs’ did not at any time imply a promise to pay gold francs. Something more than a mere reference to the currency was therefore necessary to lead to any implication of a gold clause. There had to be further evidence leading to a gold clause; an explicit reference to gold would therefore almost invariably be required,24 for as the French courts have noted, ‘la stipulation d’un paiement international à effectuer en francs—or ne peut résulter que de la convention des parties’.25
As has been shown, a gold clause could not be implied to give effect to any presumed intention of the parties. It could thus only be implied either from the terms of the contractual documents or from the circumstances prevailing at the time the contract was made.26 It is necessary to consider these two categories separately.