Does the institution of legal proceedings have any impact upon the nature or quality of a monetary obligation? At first sight it is tempting to answer this question in the negative. The commencement of legal process is a procedural step which is designed to enforce a pre-existing obligation; such a step should therefore have no effect upon the substance of the obligation at issue. This view can only be reinforced when it is considered in a private international law context, where the substance of the obligation is governed by its applicable law whilst procedural questions are subject to the law of the country in which the proceedings have been instituted.
On the whole, English law now broadly reflects the principle just outlined, although inevitably that principle cannot always be applied uniformly; in particular, difficulties may arise where it is necessary to convert one currency into another, for the date of calculation and other matters may tend to distort the substance of the original obligation.1 The application of the principle will be illustrated by reference to a discussion of English and US law; exceptions to it will be examined in the context of procedural questions which come to the fore in the context of insolvency and the division of trust funds.
In 1898, Lord Lindley observed that:2
if the defendants were within the jurisdiction of any other civilised State and were sued there, as they might be, the courts of that State would have to deal with precisely the same problem, and to express in the currency of that State the amount payable by the defendants instead of expressing it in Mexican dollars.
The assumptions that the English courts could only give judgment in sterling, and that a foreign currency obligation therefore had to be converted into sterling for that purpose, became an accepted feature of English law.3 It is submitted that this attitude rested upon an unduly narrow view of the courts’ powers;4 there is no obvious reason why a court could not express its judgment in a foreign currency where appropriate.5 Even if that principle were acceptable, one would have thought that a court could give judgment for such sum of sterling as at the date of payment represented the equivalent of the required sum of foreign money; this would have ensured that the procedural requirement for a sterling judgment would not materially interfere with the substance of the obligation. Yet immediately after the First World War, the courts propounded the breach-date rule by insisting that judgment had to be given for a sum of sterling calculated by converting the foreign money at the rate of exchange on the date of the breach or wrong.6 Since the period between the date of the breach and the date of payment in respect of any eventual judgment could be a lengthy one, the breach-date rule meant that the eventual award would not necessarily reflect the actual loss suffered by the claimant. This is objectionable both on the ground that it is inconsistent with the restitutionary nature of a claim in damages and on the ground that a procedural rule may thereby diminish the substance of the claim. It is true that, in the early part of the twentieth century, the breach-date rule would tend to protect the creditor in such cases; indeed, it would often work to his positive benefit, because sterling remained strong and debts expressed in foreign currencies tended to depreciate in relation to it. The difficulty, of course, was that the breach-date rule would penalize the debtor, and the currency conversion process effectively allowed to the creditor liquidated damages in respect of the debtor’s breach.7 Of course, once sterling began to decline, the breach-day rule had the opposite effect and became prejudicial to the creditor.8 As a matter of logic and legal reasoning, the breach-date rule was untenable but, despite various efforts, the Government declined to intervene with new legislation on the point.9 Nevertheless, the injustice which could be caused by the breach-date rule and the requirement for judgments to be expressed in sterling was becoming apparent to the courts. Lord Denning MR described the common law rules on the subject as ‘most unsatisfactory’10 and, eventually, the courts began to make inroads into the rule.
First of all, the Court of Appeal held that an arbitration award could be both made and enforced in terms of a foreign currency.11 Subsequently, the Court of Appeal refused to apply the breach-date rule on grounds which in strict law were—at least at the time—far from convincing, but produced a result that in justice could only be described as compelling.12 Further in the same case, the Court of Appeal held that judgments could generally be given in foreign currency; again, the reasoning is not at all convincing but the result was commercially satisfactory and even necessary.13 The point was subsequently confirmed by the House of Lords, which held that the creditor of a foreign currency debt is both entitled and obliged to seek judgment in the currency concerned.14 If the debtor pays the judgment debt voluntarily, then he may either pay it in the currency in which the judgment is expressed (in which event no further issues should arise) or in sterling at the rate of exchange on the date of actual payment, so that the net effect in each case is the same.15 Only if enforcement proceedings against assets in England becomes necessary will conversion into sterling be required, and conversion will be effected at the rate of exchange prevailing at that time.16 These rules apply whether the claim is for payment of a specific sum contractually due17 or for damages for breach of contract18 or tort19 for just a sum in respect of undue enrichment20 or for restitution.21 It has further been decided that the English courts may give judgment in a foreign currency regardless of the law applicable to the obligation in question,22 and that an award of damages may be made in a foreign currency, where appropriate.23 That being the case, it must follow that the creditor’s entitlement to judgment in a foreign currency (or to the sterling equivalent as at the date of payment/enforcement) must be regarded as a procedural question which will always be governed by the law of the forum.24 If it becomes necessary to take execution proceedings in order to enforce a judgment expressed in a foreign currency, then it is the established practice of the courts to specify a sterling exchange rate for that purpose, but failure to do so does not vitiate any order which the court may have made for that purpose.25
The rule established in the Miliangos case had already been extended into many other areas.26 An Admiralty Marshall who sells an arrested ship for a US dollar consideration is under no obligation to convert that sum into sterling prior to its distribution;27 a garnishee order could be made against a foreign currency bank account held with a financial institution in England;28 a statutory demand under the Insolvency Act 1986 was valid if expressed in a foreign currency and even though it omitted to state the sterling equivalent, the rate of exchange, or other matters;29 and a company incorporated in the United Kingdom may issue shares denominated in a number of different foreign currencies.30
It is thus possible to conclude that, so far as English law is concerned, the institution of legal proceedings does not have the effect of altering the substance of the debt or the debtor’s obligations; further, this observation applies equally to obligations expressed in sterling and in foreign currencies, and will apply regardless of the law applicable to the substance of the obligation in question. This conclusion displays a pleasing symmetry with the principle of nominalism, which occupies a central position in the field of monetary law.31 Any case law on the subject which predates the Miliangos case must now be of very doubtful authority.32 Nevertheless, it remains necessary to emphasize a few final points:
(a) As noted earlier, it will be necessary to convert the foreign currency amount of the judgment into sterling as at the date on which the court authorizes enforcement of the judgment. It is necessary to ascertain an equivalent date for procedures which are effected without resort to the courts or which do not involve a judgment given in terms of a foreign currency. There may be cases in which a measure of discretion or flexibility has to be allowed. For example, where a court was asked to convene a meeting to sanction a scheme of arrangement, the court held that holder of US dollar and sterling bonds were effectively the same ‘class’, even though the balance between them would be affected by the need to strike an exchange rate.33
(b) It has been shown that the rule in the Miliangos case is of a procedural character—it effectively entitles the creditor to judgment in the currency by reference to which the contract was made. Miliangos thus does not affect questions of substance. In particular, it does not in any way affect the question whether compensation for currency depreciation should be allowable as part of a claim for damages flowing from the debtor’s breach. That is an entirely separate question which is governed by the law applicable to the obligation at issue.34