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# Exchange Rates

### A. Introduction

18.01

The existence of an independent monetary system creates two distinct problem areas in terms of its relationship with other monetary systems. The first problem area concerns the question of making payments into areas covered by different currency systems. The ability to make such payments may be affected by the incidence of exchange controls or sanctions and these aspects have been considered earlier in this Part. It is now necessary to consider the second problem area, namely, the valuation of one currency in terms of another.

Monetary systems may be related to each other by two means of measurement, the (nominal) par of exchange and the (real) rate of exchange. The par of exchange is now of very limited importance in a world in which currencies are ‘floating’ and will therefore require only a few comments. On the other hand, the real rate of exchange gives rise to many and varied problems which will require more detailed discussion.

### B. The Par of Exchange

18.03

The par of exchange is the equation between two money units, each based on a fixed (usually metallic) standard. Where both currencies were based on the gold standard, each currency would have a value in terms of gold, by reference to a fixed quantity or weight of gold. From the common element of these two equations (namely the relevant quantity of gold), it was possible to derive a third, which provided a par (or fixed) value between the two currencies concerned. The par of exchange sometimes represented an equality fixed by law. Thus the relationship between the US dollar and the pound sterling had long been fixed at US\$4.44,1 although this was bound to be of limited influence since both currencies were on the gold standard and the weight for weight par was apparently US\$4.866. Under the Bretton Woods system as originally devised and as in force from 1946 until 1971, the par of exchange between most currencies was fixed by treaty, namely the Articles of Agreement of the International Monetary Fund.2

18.04

The par of exchange is independent of the rate of exchange of the day, and consequently it does not express the current value of a foreign money unit as resulting from general economic events or influences, or the impact of supply and demand. Moreover, if one country or both of the countries are on a purely paper standard, then the par of exchange either does not exist or becomes effectively meaningless, for there is no independently valued medium which provides a feature common to both monetary systems. With these considerations in mind, it is hardly surprising that, under present circumstances, the par of exchange is never resorted to—indeed, it does not even exist—when two currencies have to be valued in terms of each other for commercial purposes.3 Even in a sovereign or governmental context, references to the par of exchange are rare. The par rate of exchange could be applied in valuing imported goods for customs purposes, and it was envisaged that the par value would generally be derived from the Bretton Woods Agreement; but in the absence of such a par rate, it was envisaged that a commercial rate of exchange would apply.4

18.05

18.06

In England, there was likewise some doubt whether the par or the actual rate of exchange should be regarded as the proper indicator of the value of a foreign currency. Early cases did, however, tend to adopt the actual rate of exchange in the place of payment. In Cockrell v Barber,7 legacies expressed in sicca rupees were payable in England and the court was invited to choose between (a) the East India Company’s rate between India and Great Britain; (b) the East India Company’s rate between Great Britain and India; and (c) the current value of sicca rupees in England. Consistently with the principle just outlined, the last solution was adopted. Likewise, in Scott v Bevan,8 the English court was called upon to enforce a judgment given in Jamaica and expressed in the local currency. The question arose whether the amount in question should be converted at the nominal par or at the actual rate of exchange. The court applied the actual rate, on the basis that computation by reference to that rate ‘approximates most nearly to a payment in Jamaica in the currency of that island’. This is surely the most cogent reason for the adoption of the actual rate, and yet the court reached this conclusion only with some hesitation.9 Today, however, it cannot be doubted that the current rate of exchange in the place of payment is almost universally applicable.10

18.07

Perhaps the most clear illustration of the dominance of the actual rate of exchange is provided by the House of Lords’ decision in Atlantic Trading and Shipping Co v Louis Dreyfus.11 The respondents were agents for a ship owned by the appellants. The respondents became entitled to the repayment of expenses incurred by them in Argentine dollars, and to the payment in sterling of dispatch money and commission. In payment they received from the appellants in Buenos Aires 66,727 = 30 Argentinean dollars, with the stipulation that any balance was to be returned to the appellants. In applying this amount in paying the sterling amounts owing to themselves, the respondents employed a rate of \$5.04 to the pound sterling. There remained a surplus of \$3,433, which the respondents paid to the appellants in sterling after having converted the surplus at a rate of \$3.66 to the pound. The appellants contended that the first step in the accounting process should also have been effected at the \$3.66 rate. It is necessary to explain that the \$3.66 rate was the actual market rate of the day. In contrast, the \$5.04 rate was fixed by an Argentine law of 1881, which had been passed to stabilize the relative value of the Argentine currency. For that purpose, it was decreed that the currency units in circulation in Argentina should be reckoned in terms of the British gold sovereign at a rate of \$5.04 per sovereign.12 It appears that British gold sovereigns were circulating in Argentina at the time of the 1881 law and this enabled the House of Lords to characterize such law13 as ‘merely a legal tender law, fixing the parity at which certain gold coins then passing current in the Republic should be made legal tender with the national currency then recently established’. In other words, the rate of the new Argentine paper money was stabilized in terms of a (nominal) par of exchange with certain gold standard currencies; the 1881 law regulated the parity of sovereigns with the Argentine currency, but could not affect international obligations or payment obligations governed by English law which were to be performed in England. In the present case, the contract was governed by English law and required payment to be made in England; it could therefore only be seen as an obligation to pay the ‘commercial equivalent of the sums, measured in sterling’, and that equivalent had ‘to be ascertained not by a permanent legal tender law relating to currency, but by the current quotation for the exchange rate of sterling’ at the relevant time.14 It followed that the appellant shipowners were entitled to succeed in their claim.

18.08

A similar point arose in Lively Ltd v City of Munich.15 The case involved the conversion of a US dollar sum into sterling on 1 December 1973. The conversion was required to be effected for the purposes of Article 13 of the Agreement on German External Debts (1953), which provided for the rate of exchange to be ‘determined by the par values of the currencies concerned in force on the appropriate date as agreed with the International Monetary Fund’ and ‘if no such par values are or were in force’, the current rate for ‘cable transfers’ was to apply. As has already been shown,16 by 1 December 1973 the Bretton Woods par value system had collapsed although, on paper, par values still existed and even continued to be used for certain intergovernmental purposes. In a commercial context, the par values may have continued to exist but (for all practical purposes) they were not ‘in force’ for the purposes of Article 13 of the 1953 Agreement. Since the rate of exchange was required in a commercial—as opposed to governmental—context, it was appropriate to ignore the nominally existing par value and to apply the commercial rate of exchange as to the date in question.17

18.09

The foregoing discussion has demonstrated that the par of exchange is of virtually no modern significance. It is thus now possible to concentrate on issues associated with the use of a market rate.

### C. The Rate of Exchange

18.10

Whenever it is necessary to employ a rate of exchange for the purpose of converting a sum of money from one currency into another, four distinct problems are likely to arise. At the risk of repetition, these must be stated in a comprehensive manner, as follows:

(1) Where a payment is contractually required to be made in England, all questions as to the rate of exchange (including questions as to the identification of the applicable rate) should usually be governed by the law applicable to the contract.18 As to payments which, under the terms of the contract, are required to be made abroad in a currency other than sterling, the need for conversion into sterling only arises where it is sought to enforce a foreign judgment in this country.19 In such a case, questions touching the rate of exchange are governed by English law, since the enforcement of a foreign judgment is a matter of procedure, to be governed by the laws of the forum.20 The following observations are thus aimed at providing a summary of English domestic law in this field.

(2) In an era of floating currencies, the date with reference to which the required rate of exchange is to be fixed assumes a considerable importance. Where the conversion is required for the purpose of proceedings, the rate prevailing as at the date of payment is now firmly established.21 Outside proceedings, the appropriate date depends upon the construction of the contract, but again there exists a strong tendency to apply the payment-date rule.

(3) Rates of exchange may differ from place to place. As a result, the ascertainment of the legally relevant place may be important in some cases. That place may, of course, be expressly identified by the parties in their contract. But what is the position if the contract is silent? Whilst the point has not been explicitly decided, it is suggested that the rate of exchange in the place of payment should be applied for these purposes.22 In other words, where the contract is governed by English law, it is an implied term of the contract that any required rate of exchange should be the rate prevailing in the place in which payment is contractually required to be made,23 ie and not in the place (if different) in which payment is actually made. It is thus submitted that the general rule formerly applicable to bills of exchange is of general application.24 The justification for this position lies in the fact that the application of a different rate would not necessarily secure to the creditor the amount which he is entitled to have at the agreed place of payment, rather than elsewhere. The rule suggested in the text—adopting the rate in the contractual, rather than the actual, place of payment—has thus been adopted in New York25 and also receives some support in English case law.26

(4) The most troublesome problem of the rate of exchange has been that of identifying the particular rate of exchange to which resort is to be had for the purpose of effecting the conversion. This matter is investigated in the next section of this chapter.27

### D. Identifying the Rate of Exchange

#### The market rate

18.11

There does not at present exist on the London market any rate of exchange which can be described as official, in the sense that it is an exclusive rate or is conclusive and binding on contracting parties in the event of a dispute. The amounts transacted daily on the London Foreign Exchange Market represent vast sums and yet it is not an official market in any real sense.28 Thus, the dealings which occur on a daily basis as between brokers and dealers in the major financial institutions do not produce what can be described as a uniform or generally acceptable or authoritative rate. Banks will thus have their own rates for everyday transactions; but these may vary from day to day (and during the course of a day), and different rates may be negotiated for especially large transactions. For these reasons, loan agreements or other documents involving an exchange transaction should specify both (a) the institution whose rate is to be used;29 and (b) the date and time on which the relevant note is required to be ascertained.30

Where a rate of exchange is required in order to give effect to an agreement but none has been expressly stipulated, then it becomes necessary to deal with the point by way of implied term.31 Inevitably, this analysis will depend upon the precise circumstances. However, a few general propositions may be suggested. Where a contract is priced in euros but provides for the seller to be paid in sterling, this will usually lead to the conclusion that payment is to be made in sterling as at the applicable date of payment, for there will not usually be any basis to imply a term stipulating for a fixed rate of exchange to be adopted.32 By extension, it may be possible to infer that the rate quoted by the seller’s bank was intended to be used as the reference point in such a case, because the seller will be the recipient of the funds and will rely on his own bank to effect any necessary exchange. Equally, where a currency contract between a bank and its customer refers to a rate of exchange, it may be inferred that the rate quoted by that bank at the relevant time was intended to be used.33 Equally, where a supplier of services over an extended period incurred its expenditure in sterling but was required to invoice its customer in US dollars at a rate specified in the Financial Times, it was found to be the intention of the parties that the rate should be adjusted and updated at monthly intervals.34 On the other hand, in Attrill v Dresdner Kleinwort Ltd,35 it had been the practice of the bank to award bonuses to staff in euros but to pay the bonuses in sterling to employees in London. It was stated that the bonus was to be paid ‘in the usual way’. The evidence demonstrated that such remuneration had in the past been calculated on the basis of the average euro/sterling exchange rate over the year in question, and the court accordingly applied the same rate to the bonus for the year in repect of which the claim was made. In each case, the appropriate rate is determined by the context in which the need for conversion arises, and by reference to any relevant contractual or statutory provisions at issue.

18.13