Exchange Control under the International Monetary Fund Agreement


A. Introduction


B. Legal Character of Article VIII(2)(b)


C. Public Policy under the IMF Agreement


D. The Scope and Interpretation of Article VIII(2)(b)




‘Exchange contracts’


‘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’


A. Introduction


As between the 187 or so members of the International Monetary Fund (IMF), the law of exchange control differs from the general rules applicable to exchange control.1 In those member States, the rule of positive law laid down in Article VIII(2) of the Articles of Agreement of the IMF applies. Article VIII(2)(a) provides the background to the present discussion, and requires that: ‘No member of the Fund shall without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions.’ Article VIII(2)(b) then seeks to provide a measure of international protection for member countries which impose systems of exchange control which conform to the terms of the Fund Agreement. So far as relevant in the present context, that 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.


According to Article XX(1) of the Agreement, every member of the Fund has deposited ‘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’. It should therefore be possible to infer that all members of the Fund have incorporated Article VIII(2)(b) into their domestic law in such manner as may be required to ensure that their courts give effect to that provision in any relevant proceedings.2 In the United Kingdom, this obligation was fulfilled by the Bretton Woods Agreement Order.3 It is understood that the rule has not in fact been incorporated into, or has been removed from, the domestic law of certain member States.4 It may be that those latter countries are thus technically in breach of the Fund Agreement, but it is not necessary to pursue that point in the present context.


Article VIII (2)(b)—as incorporated into domestic legal systems—provides a defence to contractual claims if the relevant factual elements can be proved. A reading of the Article immediately suggests that a number of difficult issues of interpretation will arise, and it will be necessary to turn to those at a later stage.5 At the outset, however, it is necessary to observe that—as has been seen to be the case in other areas touching exchange control regulation6—the application of this provision may on occasion cause injustice, and the courts have thus shown marked astuteness in seeking to neutralize its effects.7

B. Legal Character of Article VIII(2)(b)


At the outset it is necessary to consider the legal nature of the provision set out in Article VIII(2)(b).8 It may potentially adopt four forms. First of all, it may be treated as part of the domestic contract law of the State which has incorporated Article VIII(2) (b) into its domestic law; in that event, Article VIII(2)(b) would be applied only in relation to contracts governed by that system of law.9 Alternatively, it may be seen as part of the system of a member State’s private international law.10 Thirdly, the Article (as incorporated into national law) may be regarded as a mandatory rule, the application of which overrides both the law applicable to the contract and the private international law of the forum.11 Fourthly, the domestic manifestation of Article VIII(2)(b) may be regarded as a rule of procedure, which would inevitably be applied by the domestic tribunal regardless of the law applicable to the contract or any other matter.


The difference between these versions may be considerable. For example, if Article VIII(2)(b) is to be applied as part of the law applicable to the contract, then an English court must apply Article VIII(2)(b) as interpreted by the courts of the country whose system of law governs the contract.12 If, by contrast, the English court applies the Article as part of its private international law, as a mandatory rule of domestic law, or as a rule of procedure, then English conceptions of the Article will have to be applied. This may make a difference because, as will be seen, the provision has been given different meanings in different member States.13 Given that the provision is derived from a multilateral treaty, the characterization of the provision cannot be resolved purely by reference to English canons of interpretation.14 It is instead necessary to ascertain the meaning of the Article by a broad approach, taking into account its objectives and purpose. In this context, the core provision of the Article reads ‘Exchange contracts … shall be unenforceable in the territories of any member’. This language does not make or suggest any reference either to the law applicable to the contract concerned or to the private international law of the forum; nor does the context suggest that the governing law has any relevance to the matter. The broad objective of the Article is to ensure that contracts infringing the exchange controls of member States will not be enforced either in that or in any other member State. In this context, it should be noted that it is only necessary that the contract should be ‘contrary’ to the exchange control regulations of the country concerned. It is not necessary that the contract should be rendered illegal or unenforceable under those regulations. Consistently with the United Kingdom’s obligations under the IMF’s Articles of Agreement, the rule must have mandatory application, regardless of the governing law of the contract, the residence or nationality of the parties, or any other matter.15 But, even then, the mandatory character of a rule can be achieved either by (i) providing that a rule is to be applied irrespective of the law applicable to the contract at issue, or (ii) by establishing the rule as a purely procedural requirement. The difference may be significant. For example, if Article VIII(2)(b) creates a rule of procedure, then a foreign court considering a contract governed by English law would apply its own interpretation of Article VIII(2)(b) and would not be constrained by the narrow approach that has been adopted by English courts in the context of that provision. The ‘procedural’ approach is also consistent with the Interpretation of the provision published by the Executive Directors of the IMF in 1949,16 which notes that (i) contracts contravening Article VIII(2)(b) ‘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’; and (ii) parties to such contracts ‘will not receive the assistance of the judicial or administrative authorities of other members in obtaining performance of such contracts’. The latter extract, in particular is suggestive of a rule of procedure, rather than one of substance.


Although there is very limited authority on the precise characterization of the provision in this sense, it is submitted that Article VIII(2)(b) would normally present itself to the English courts in the manner just described, ie as a rule which forms a part of English procedural law and which must accordingly be applied regardless of the governing law of the contract at hand.17 This would normally mean that Article VIII(2)(b) must be applied irrespective of any other considerations of private international law. The advantage of a procedural view of the provision is that a court will apply a uniform approach to Article VIII(2)(b) regardless of the law applicable to the contract before it.18 There is no reason why party autonomy in the selection of the governing law should be a consideration in this particular sphere, for they should not be able to legislate for the consequences of a contract that infringes the exchange controls of a relevant country. It should be said that the views just expressed depart from those in the sixth edition of this work and also from those noted by Dr Mann in earlier editions. Since the character of the provision is in some respects linked to the meaning of the word ‘unenforceable’ in Article VIII (2) (b), the issue is considered further at a later stage.19

C. Public Policy under the IMF Agreement


As is well known, an English court will disregard rules forming part of a foreign system of law if, under the circumstances of the case, the application of that rule would be manifestly contrary to public policy.20 In the context of foreign exchange control regulations, there can be no doubt that Article VIII(2)(b) demands respect for exchange controls introduced by other member States and which are maintained consistently with the IMF Agreement; it must necessarily follow that the ability of the English courts to disregard such foreign exchange control regulations on public policy grounds is thereby severely circumscribed. Indeed, it is difficult to envisage any circumstances under which regulations which are consistent with Article VIII(2)(b) could be ignored on policy grounds.21 This view is reinforced when it is remembered that Article VIII(2)(b) is intended to override any contrary municipal law of the member countries.22


Other provisions of the IMF Agreement also tend to support the view just expressed. Member States grant to each other the right to ‘exercise such controls as are necessary to regulate international capital movements’ and the right, with the consent of the Fund, to ‘impose restrictions on the making of payments and transfers for current international payments’.23 Having obtained these rights for themselves and granted them to other member States by treaty, it is not open to national courts to reject as contrary to public policy that which those States have expressly allowed each other to do. On the contrary, policy considerations demand the recognition of exchange control regulations which are consistent with the IMF Agreement. Thus, where in accordance with the permission given by the Agreement, members agree to ‘cooperate in measures for the purpose of making the exchange control regulations of either member more effective’,24 and with this object in view enter into a bilateral treaty, compliance with its provisions may have to be treated by the judge as a matter of public policy, even though they are not incorporated into the domestic legal system.25


Yet it would seem that, although exchange control regulations as a whole may be maintained consistently with the Fund Agreement, certain of their specific effects may be such as to require or permit the refusal to apply them in a given case on the ground of public policy. This may occur when their application would be discriminatory or penal in character or otherwise obnoxious. There is nothing in the Fund Agreement that compels the courts in a given case to reach decisions which are offensive to their sense of justice; they are precluded only from ignoring a member State’s exchange controls as a matter of principle or of a priori reasoning.26 It seems that this is the rationale underlying a decision of the Dutch Hoge Raad, which rejected Indonesian exchange control regulations.27 Public policy ought to have been (and perhaps was) one of the reasons why the New York Court of Appeals in J Zeevi & Sons Ltd v Grindlays Bank (Uganda) Ltd28 disregarded Ugandan exchange control restrictions: ‘As typified by strong anti-Israeli and antisemitic suggestions made by Uganda’s President to the Secretary General of the United Nations’, the Bank of Uganda purported to cancel all payments to Israeli companies (including the plaintiff) and the defendant relied on these cancellations to avoid liability under a letter of credit opened prior to such official cancellations. The court described the cancellations as ‘confiscatory and discriminatory acts of the Ugandan Government’; under these circumstances it would surely have been contrary to public policy for the New York Court to give effect to the cancellations, and the defendant bank thus could not avoid liability on this basis.29

D. The Scope and Interpretation of Article VIII(2)(b)


It should be appreciated that the scope of Article VIII(2)(b) is relatively limited. It by no means requires the universal recognition and enforcement of exchange control legislation among member countries; it merely requires that certain types of contract be treated as unenforceable if they infringe such regulations and certain other conditions are met.


It should also be appreciated that Article VIII(2)(b) supplements the internal law of the members of the Fund. Thus if, Article VIII(2)(b) is inapplicable for some reason, it does not necessarily follow that the contract will be valid and enforceable. On the contrary, it may be unenforceable on other grounds—for example, where the contract forms part of a wider scheme which involves the deliberate commission of actions designed to infringe the laws of a friendly foreign State30 or because it forms part of a wider scheme involving the commission of illegal acts.31 Equally, if the contract at hand is governed by the law of the country which imposes the exchange control regulations, the English courts would give effect to any provisions which invalidate the contract by reason of the breach, because those provisions form a part of the law applicable to the contract.32


It is to be appreciated that Article VIII(2)(b) is only concerned with the enforceability (or otherwise) of certain contracts. Thus, there is no room for the application of the provision in the context of actions in rem,33 restitution, tort,34 unjust enrichment,35 or for the enforcement of a foreign judgment,36 which are governed exclusively by general rules—Article VIII(2)(b) cannot apply in such cases. Some support for these views may be derived from the decision of the New York Court of Appeals in Banco do Brasil v Israel Commodity Co Inc,37 although it is not easy to see the relevance of Article VIII(2)(b) to the case. The plaintiff, an instrumentality of the Government of Brazil, claimed damages for conspiracy alleged to have been committed by the defendant and a Brazilian coffee exporter with a view to depriving the plaintiff of US dollar funds to which it was entitled under Brazilian exchange control laws. The plaintiff argued that the defendant’s participation in a scheme to evade Brazilian exchange control laws afforded a ground of recovery under Article VIII(2)(b). The argument was bound to fail, for, as the court said, the unenforceability of a contract ‘is far from implying that one who so agrees commits a tort in New York’.38


Furthermore, it is submitted that Article VIII(2)(b) had no bearing upon the type of situation with which the House of Lords was faced in two cases.39 There, the owner of securities was resident in Czechoslovakia. He entered into a contract of bailment with a local bank whereby the latter undertook to hold securities with a sub-bailee in England. Article VIII(2)(b) does not preclude the owner from claiming the securities by means of a direct action in detinue against the sub-bailee—a point ultimately admitted by the defendants before the House of Lords.40


If a contract does prove to be unenforceable by virtue of Article VIII(2)(b), this does not preclude one party from claiming damages for a failure by the other party to seek and to endeavour to obtain the necessary authorization, where the latter party was required to do so by the terms of the contract.41


It is thought that Article VIII(2)(b) should not be applied in a purely domestic context, ie where the creditor in country X claims payment in country X from a debtor in country X. In other words, Article VIII(2)(b) presupposes a contract or at least a payment across national frontiers. Thus, in J Zeevi & Sons v Grindlays Bank (Uganda) Ltd,42 the New York Court of Appeals decided that an irrevocable letter of credit for a sum in US dollars established by the defendant in New York in favour of the American plaintiffs could be enforced in New York notwithstanding an order by the Ugandan Government instructing the defendant to cancel it on the grounds that the necessary exchange control approval had been revoked.43 In such a case, there is no cross-border element of a kind which is sufficient to bring Article VIII(2)(b) into operation. It is for this reason, amongst others, that it is difficult to support the decision of the House of Lords in United City Merchants (Investments) Ltd v Royal Bank of Canada.44 Peruvian buyers had agreed to buy goods from English sellers for approximately US$662,000. Payment was to be made by the defendants in London by confirmed irrevocable transferable letter of credit. It was arranged between the buyers and the sellers that one half of the purchase price, when paid under the letter of credit, would be remitted by the sellers to an account in the United States for the benefit of the buyers. Without direct reference to the evidence, the House of Lords held that it was contrary to the exchange control regulations of Peru to make the US$331,000 available to the buyers in the United States. Payment of this sum was thus held to be contrary to Article VIII(2) (b), but the issuing bank was ordered to pay the balance, which represented the legitimate purchase price of the goods. In other words, the payment by a London bank of money owing to an English creditor and payable in England was held to be unenforceable because it ‘mirrored’ an unlawful payment in a separate contract to which the bank was not a party. This decision is irreconcilable with the autonomous nature of a letter of credit which is so strongly emphasized in the judgment.45 The decision is perhaps explicable by the fact that the proceedings were brought by a transferee of the credit, who had no interest in ensuring that the Peruvian buyers received their anticipated US dollar payment. But whatever may be said about the contract between the buyers and the sellers, the defendant’s obligations under the letter of credit issued by a London bank for the benefit of English sellers were, it is submitted, entirely outside the scope of Article VIII(2)(b).


It should be appreciated that Article VIII(2)(b) does not impose a broad, general obligation on member countries to have regard to the exchange control laws of their fellow members, and to give effect to them where appropriate.46 On the contrary, according to the true meaning of the Article, ‘the Member States were contractually bound to have regard to their exchange control regulations within the framework envisaged by the treaty’.47


It has, on occasion, been suggested that Article VIII(2)(b) does not apply to transactions of a capital nature,48 partly because the heading to Article VIII(2) (b) refers specifically to ‘current transactions’, and partly because the scheme of the Agreement distinguishes between current and capital payments; the control of capital transactions is separately permitted by Article VI(3) and, indeed, it is generally accepted that capital transfers fall outside the Fund’s jurisdiction. As a matter of logic, it may therefore be said that capital transfers fall entirely outside the scope of Article VIII(2)(b). Yet it may be argued that it would be a curious position if contracts in the course of trade might be caught by Article VIII(2)(b), whilst gifts, investments, and the purchase of foreign property were not, for it is the latter category of transactions which could pose a greater threat to a member country’s exchange resources.49 Given that the court must strive to achieve a purposive (rather than a merely formal) interpretation, it is thus tempting to suggest that the Article must be taken to apply both to capital and to current transactions; if Article VI(3) allows a country to restrict capital outflows, then exchange control regulations which seek to exercise that right should enjoy the limited degree of protection afforded by Article VIII(2)(b). It may be convenient at the outset to examine the case against the application of Article VIII(2)(b) to capital controls.