Monetary Obligations, Liquidated Sums, and the Principle of Nominalism


A. Introduction


B. The Foundations of Nominalism—Competing Theories


C. The Historical Development of Nominalism


D. The General Nature of Nominalism


E. Nominalism in Specific Contexts


English law debts


Foreign law debts


Interest and damages pre-Sempra Metals


Interest and damages post-Sempra Metals


Damages for domestic monetary depreciation


Domestic inflation


External value of sterling


Damages for foreign monetary depreciation


Discharge and termination of contracts


Specific performance


A. Introduction


It has previously been noted that the debtor of a monetary obligation is under a duty to pay money which, amongst other peculiarities, incorporates a reference to a distinct unit of account.1 It has also been shown that money is not merely a quantity of metal or paper, but an abstract unit of measurement which in this country cannot even be defined by an historical analysis.2 It has, therefore, been said, with some justification, that ‘a debt is not incurred in terms of currency, but in terms of units of account’,3 and that ‘contracts are expressed in terms of the unit of account, but the unit of account is only a denomination connoting the appropriate currency’.4


But how many such units of account is the debtor bound to pay? Legal tender legislation does not, of itself, supply an answer to this question; it determines the medium through which performance is to be achieved but it does not determine the amount to be paid. Such legislation merely provides that banknotes must be accepted according to their face or nominal value; it has no bearing upon the question of how many banknotes have to be tendered.5 It is this question of the value of money or the extent of monetary obligations which has not yet been answered, and which it is now necessary to address. This, in turn, requires a consideration of the principle of nominalism.


It may be helpful at the outset to state the principle of nominalism in succinct terms, so that the remainder of this Part can proceed by reference to that explanation. The principle has been formulated as follows:6

A debt expressed in the currency of another country involves an obligation to pay the nominal amount of the debt in whatever is the legal tender at the time of payment according to the law of the country in whose currency the debt is expressed (lex monetae), irrespective of any fluctuations which may have occurred in the value of that currency in terms of sterling or any other currency, of gold, or of any commodities between the time when the debt was incurred and the time of payment.


The parties thus contract by reference to a currency and the units of account in which it is expressed. It is implicit in the principle of nominalism that an obligation expressed in money is intended to have a uniform and unvarying value, which is not affected by supervening events which are extraneous to the monetary system itself.

B. The Foundations of Nominalism—Competing Theories


It has been noted previously that the existence of the general principle of nominalism flows, at least in part, from the State theory of money.7 Whilst that theory can no longer be accepted in all its aspects, it nevertheless survives to the extent that the State enjoys the right to define the unit of account and to organize the monetary system.8 In this sense, the remnants of the State theory continue to support the essential feature of nominalism—ie that an obligation to pay 100 units of a particular currency can be discharged by payment of 100 units of that currency, regardless of any changes in the purchasing power or external value of that currency between the date of the contract and the date of payment. In other words, the State establishes a currency and its units of account represent their own independent value in terms of the domestic legal system, regardless of any external factors which may have an economic impact upon that currency. The need to revise the State theory of money has thus not in any sense brought into question the continued validity of the nominalistic principle. It nevertheless remains necessary to expand upon those points, and to examine other theories which have been put forward in support of the principle.


The so-called intrinsic value of money, ie its substance or parity in terms of gold or any other substance, cannot have any bearing upon the value of money or the extent of monetary obligations. Neither the pound sterling nor any other unit of account is identical to a quantity of metal; as a consequence, the obligation to pay pounds (or other money) cannot be regarded as equivalent to an obligation to deliver a certain weight of metal.9 For the same reason, it is impossible to hold that the extent of an obligation to pay pounds is determined by the rate of exchange or by the value of gold or any other metal. If an obligation to pay one pound was incurred in 1930 but payable in 2000, it remained an obligation to pay one pound when the date for performance arrived, even though a pound in 1930 would purchase far more gold than a pound in 2000 could acquire.10 It should be said at this point that Savigny11 propounded a rate-of-exchange theory to the opposite effect and which is not very different from metallism in the narrower sense of the word. This theory presupposes that all currency systems are necessarily founded on the adoption of a certain precious metal as the standard of value. This primary prerequisite of the theory plainly does not exist, and it is thus unnecessary to consider it further.12 It does, however, serve to emphasize that the notion of the intrinsic value of money was born in a bygone age when the banknote had not acquired its modern status and function, and when only metallic money circulated which was liable to be debased by the Crown or pared by the clipper, so that there existed ‘one class which would give money only by tale and another which would take it only by weight’.13


The extent of monetary obligations is also independent of any functional or exchange value of money, ie its value in terms of its purchasing power.14 Accordingly, an obligation to pay £10 is discharged if the creditor receives what at time of performance are £10, regardless of their intrinsic or functional value. It follows that a monetary obligation has no ‘value’ other than that which it expresses.15 Economists may be concerned with the exchange value of money and the quantity theory.16 Economic principles of this kind have led some legal writers—often working at times of severe monetary disruption—to propose a legal theory of valorism. The theory17 relies upon the supposed (or alleged) intention of the parties to secure ‘economic value’ in their contractual relations, and develops a system of valorization which is to apply whenever money loses its relative stability of value. In other words, the amount of the obligation would, where necessary, be adjusted to reflect the reduction in the purchasing power of money between the date at which the obligation is incurred and the date on which it falls to be performed.


The theory of valorism has superficial attractions, especially in times of high inflation. But however that may be, it is suggested that monetary law cannot accommodate or pay attention to the functional value of money or any valoristic theory based upon it. There are three reasons for this view, which require explanation:

(a) The law must firmly reject any idea of permitting adjustments on account of changes in the price of goods, for such a risk must clearly be imposed upon the parties themselves. The theory of valorism assumes that the parties intend to maintain the ‘economic value’ of their contract. But, frequently, their intention may be the precise opposite. For example, a party may contract to purchase oil at a pre-set price and for delivery over a long period; he will do so because he wishes to avoid the additional costs which might flow from a general increase in the price of oil. Likewise, his seller will agree to sell at the pre-set price in order to insulate himself from a fall in the general price. Plainly, an adjustment to the agreed price would be inappropriate in such a case.18

(b) It might perhaps be more feasible to stipulate for a price adjustment if it could be shown that, for example, inflation had been caused by an expansion in the money supply, as opposed to an increase in the price of goods. It could be argued that the diminishing value of money had affected the expectations of the parties, and that the requirement for a price adjustment could thus constitute an implied term of the contract. In reality, however, it is impossible to distinguish clearly between these supposedly different types of inflation,19 and thus economic theory does not supply reliable means of identifying causes of inflation or other changes in the value of money which could reliably be used in a contractual context. There are thus no legally relevant criteria upon which a provision for an inflation adjustment could be implied into the terms of a contract or an agreement.20

(c) The extent of monetary obligations cannot be determined by reference to the functional value of money because there are no legally appropriate means of measuring changes in monetary values for these purposes. The indices which are available are, from a legal point of view, somewhat arbitrary.21 They measure the price of baskets of goods or services which are necessarily selective and may therefore be wholly inappropriate to the particular case in hand. In other words, the relevant indices tend to be of a generic nature, whereas the court will have to deal with very specific issues. As noted in (a), the problem is particularly acute in the context of long-term contracts.22 For example, it would be inappropriate now to adjust a ground rent agreed in 1914 by reference to a current cost of living index, because the value of land is in general independent of the cost of the goods or services which make up that type of index. The indices of the type now under discussion are thus too arbitrary for legal purposes and, in any event, they cannot distinguish between changes in the value of goods (which are legally irrelevant)23 and changes in the value of money, which might potentially have some legal relevance.24

It will appear later that, for these and other reasons, the law has fully adopted the conclusion to which the foregoing discussion inevitably leads—namely, that there is no general legal rule which allows the revision of the quantum of a monetary obligation in response to changes in monetary values.25


In the absence of a general rule allowing for the post-contractual adjustment of an obligation expressed in money, it must follow that the extent of monetary obligations cannot be determined otherwise than by the adoption of nominalism. As noted at the beginning of this chapter, the nominalistic principle means that a monetary obligation involves the payment of so many notes and coins, being legal tender at the time of payment and which, if added together according to the nominal values indicated thereon, produce a sum equal to the amount of the debt. In other words, the obligation to pay £10 is discharged if the creditor receives those notes and coins which, at the time of performance, constitute £10, regardless of both their intrinsic and their functional value.26 It follows that a monetary obligation has no other ‘value’ than the nominal value which it expresses.27 Nominalism in this sense is a legal principle, but it is empirically derived from a generalization of the normal factual situation.28 In the vast majority of cases, the possibility of changes in monetary value does not enter the parties’ minds, though they may have a definite idea of the exchange value, or purchasing power, of the stipulated amount of money. If they do have regard to that possibility, then they may safeguard themselves by appropriate protective clauses;29 if they fail to do so, then they must be taken to have accepted the risks involved in a possible monetary dislocation during the period of the contract.30 As a result, in the absence of express clauses to the contrary, parties must be understood to contract (or Parliament must be understood to legislate) with reference to the nominal value of the money concerned, as expressed by whatever is legal tender at the time of payment.31 Nominalism thus finds its justification in the legally relevant intention.32 Nominalism may be described as a legal principle, rather than a mere rule of construction, but it is derived from the presumed intention of the parties or the legislator.33 In the case of a contract, it is thus apt to say that the principle of nominalism operates as an implied term of the contract; in the case of a will, the principle operates by reference to the presumed intention of the testator.34 The main practical consequence of the application of the nominalistic principle may be briefly stated—the creditor of the sum in question bears the risk that the purchasing power of the contractual currency will have fallen by the time the date of payment arrives, whilst the debtor bears the converse risk.35 Given that the principle of nominalism touches the substance of the obligation, it follows that the application of the principle will at all times be directed by the governing law of the obligation concerned. Although it is important not to lose sight of the point just made, it will hardly ever be of practical relevance because the principle of nominalism enjoys universal acceptance.36

C. The Historical Development of Nominalism


It was noted earlier37 that the notion of money as a creature of the law, together with the ‘recurrent link’ principle, form integral aspects of the State theory of money. The principle of nominalism is also a necessary part of the State theory, but in fact its early origins enjoy a respectable antiquity. This is perhaps unsurprising, because problems associated with the value of money—and in particular, its depreciation—have existed for centuries. The history of the principle is of some importance and must therefore be described, at least in outline.38


The nominalistic principle is usually said to have been first laid down by Aristotle in his Nichomachean Ethics where he said,39 ‘money has been introduced by convention as a kind of substitute for a need or demand … its value is derived not from nature but from law, and can be altered or abolished at will’. This early statement emphasizes both that money is a creature of the law and that its value is in a sense an abstract and independent concept, derived from its use as a medium of exchange.


In Rome, a number of depreciations of money occurred,40 but the principle of nominalism does not appear to have been firmly established at that time. The main authorities draw a distinction between substance and quantity of money and suggest that quantity, rather than substance, is the governing factor. This would suggest an acceptance of the nominalistic principle, although it is difficult to draw entirely firm conclusions.41 However, when the books of Justinian were studied by the school of glossators, they were interpreted in a manner which supported a metallistic (as opposed to a nominalistic) principle.42 The post-glossators, adopting the approach of their predecessors, developed the distinction between bonitas intrinsica and bonitas extrinsica, and it was the former, ie the metallic value of money, which was held to be the subject matter of monetary obligations. However, a decisive reaction in favour of the nominalistic principle set in after the publication, in 1546, of Carolus Molinaeus’s (Dumoulin’s) Tractatus contractuum et usurarum, where early work was interpreted by the words, ‘Quantitas, id est valor impositus’.43 This view was attractive to kings and governments, whose financial interests demanded a theoretical basis for their practice of debasing the coinage. Thus in France, a decree of 1551 compelled the parties to contract by tale (sous, livres, deniers) and not by weight (metal). During the eighteenth century, Pothier affirmed the principle and declared:

Notre jurisprudence est fondée sur ce principe, que dans la monnaie on ne considère pas les corps et pièces de monnaie, mais seulement la valeur que le prince y a attachée … Il suit de ce principe que ce ne sont point les pièces de monnaie, mais la valeur qu’elles signifient qui fait la matière du prêt ainsi que des autres contracts.44

So far as France is concerned, the nominalistic principle found expression in Article 1895 of the Code Civil of 1803:

L’obligation qui resulte d’un prêt d’argent n’est toujours que de la somme numérique énoncée au contrat. S’il y a eu augmentation ou diminution d’espèces avant l’époque du paiement, le débiteur doit rendre la somme numérique prêtée, et ne doit rendre que cette somme dans les espèces ayant cours au moment du paiement.


It would be difficult to formulate a more accurate or concise statement of the principle and its consequences.45 Germany also ultimately adopted the nominalistic principle, although as late as 1793 Goethe was able to write that ‘money is money, not on account of the stamp, but as a result of the intrinsic value’.46 Although periodic attempts have been made to replace nominalism by metallistic or valoristic doctrines, it cannot be doubted that, in continental Europe, the principle is secure and nominalism universally predominates.47


The principle is equally well established in common law jurisdictions. It appears to have been recognized in the Middle Ages that the King had not only the prerogative of issuing coins, but also of determining the denomination or value at which the coin was to pass current.48 Consequently, the King could debase or enhance the value, a power which was in fact used on repeated occasions.49 The whole issue (including the nominalistic principle developed in continental Europe) was very fully discussed in the decision of the Privy Council of Ireland in the Case de Mixt Moneys (Gilbert v Brett).50 Gilbert of London had sold goods to Brett of Drogheda for ‘£100 sterling current and lawful money of England’ to be paid in Dublin. After the contract was made, but before payment fell due, Queen Elizabeth recalled the existing currency of Ireland and issued a new debased coinage (called mixed money). The new coinage was declared to be the current money of Ireland, and every creditor was bound to accept it according to its denomination or value—a refusal to do so was a punishable offence. Brett tendered payment in the debased coin, and it was thus necessary to decide whether or not this was a good and sufficient tender. The reporter dealt with the necessity of having a certain standard of money in every commonwealth and with the royal prerogative to issue money and to determine its substance, form, and value. The report then draws the distinction between (a) the value of money by reference to its metallic fineness and weight (bonitas intrinsica), and (b) the value of money by reference to its denomination and character (bonitas extrinsica or valor impositus). The latter was held to be the true description of money, for money is essentially an artificial, legal (rather than physical) creation.51 It necessarily followed that the mixed money, having been proclaimed to be the current and lawful money within Ireland, ought to be taken and accepted for sterling money. The reporter then determined that the mixed money circulating in Ireland could be said to be current and lawful money ‘of England’ for the purposes of the contract. Having reached an affirmative answer, he then proceeds to examine the importance of the fact that ‘better’ money was in circulation at the time the contract was made. This was determined to be an irrelevant consideration, for payment was to be made at a future time, and a monetary obligation must be discharged in legal tender at that time. The case is thus a clear authority for the application of the nominalistic principle in this country;52 an obligation to pay £100 sterling is to pay what the law denominates as £100 sterling at the time of payment.53


Since it became established, the English courts have consistently applied the nominalistic principle.54 The subsequent history of the principle in England—including its extension to banknotes—must nevertheless be recorded in some detail.


In 1811, the Bullion Committee in their Report55 had arrived at the conclusion that the rise in prices prevalent at that time was due to an over-issue of Bank of England notes, as a result of which the value of such notes had depreciated. On 6 May 1811, a resolution was introduced in the House of Commons, supporting the Report and affirming the depreciation of money.56 Although sterling had fallen in value against gold, foreign currencies, and commodities, the resolutions were lost by large majorities. A week later, Vansittart introduced resolutions which rejected the Bullion Report.57


These resolutions were passed with large majorities, and included the memorable statement ‘that the promissory notes of the said Company [the Bank of England] have hitherto been, and are at this time, held in public estimation to be equivalent to the legal coin of the realm and generally accepted as such in all pecuniary transactions to which such coin is lawfully applicable’. However, commercial considerations rapidly overtook the political debate when Lord King announced that, in view of the depreciation of money, he would no longer accept banknotes from his tenants in payment of rent; instead, he would calculate those rents on a gold basis. This provoked strong resentment, on the grounds that a person who contracted to receive a pound should accept whatever was regarded as a pound at the time of payment—a plain statement of the nominalistic principle.58 As a consequence, Parliament at once passed Lord Stanhope’s Act,59 by which banknotes were effectively made legal tender and which provided that no one should pay or receive more for guineas or less for banknotes than their face value. The Vansittart Resolution and the speed with which Lord King’s proposals were defeated should be seen together with the lack of success of all attempts to remedy the serious effects of deflation that followed from the restoration of the gold standard in 1821.60


Similarly, 110 years later, the abandonment of the gold standard in 1931 was accepted so quietly and readily and entailed so insignificant a ‘flight from sterling’ that the monetary discipline implied by the nominalistic principle may be said to have become an accepted part of national life. Indeed, it was at that very moment that nominalism was judicially reaffirmed by Scrutton LJ:61

I take it that if a tort had been committed in England before England went off the gold standard, the plaintiff could not say ‘We insist, after England has gone off the gold standard and the pound has depreciated in purchasing power, on being paid the value of the gold standard pound at the time of the commission of the tort.’ A pound in England is a pound whatever its international value.


The nominalistic principle continues to hold sway, and is supported by high judicial authority. Thus Viscount Simonds62 said that ‘the obligation to pay will be satisfied by payment of whatever currency is by the law of Queensland valid tender for the discharge of the nominal amount of the debt’. Lord Denning also made a characteristically clear and emphatic statement of the rule:63

A man who stipulates for a pound must take a pound when payment is made, whatever the pound is worth at that time. Sterling is the constant unit of value by which in the eye of the law everything else is measured. Prices of commodities may go up or down, other currencies may go up or down, but sterling remains the same.


The continued adherence to the principle does not, however, lead to the conclusion that the judiciary is blind to the injustice which its strict application can occasionally cause. Such injustices may occur as a result of the devaluation of the currency or during periods of high inflation, or as a result of some other monetary dislocation which reduces the purchasing power of money.64 These injustices were to some extent remedied, not by departing from the basic principle of nominalism, but by other means. For example, the courts decided to allow creditors to obtain judgment in the currency in which their debt was expressed, thus avoiding the need to convert the obligation into sterling with all of the exchange risks which that process involved.65 Similarly, where a long-term contract for the sale of water became onerous to the supplier because of the currency’s loss of internal purchasing power, the court implied into the contract a provision allowing for its termination on reasonable notice.66 It is perhaps fair to observe that nominalism was a perfectly satisfactory principle of English law while sterling was a major currency, but flexibility in some related areas has been necessary in the context of the currency’s decline. The judiciary in this country has not sought to undermine the principle of nominalism; rather, it has construed contracts in a manner which mitigates the harshness of the principle so far as the creditor is concerned. Thus, where a fundamental change of circumstances, such as a major erosion of monetary values, occurs over a period of time, ‘the contract ceases to bind at that point—not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation’.67


It remains to consider the adoption of the principle of nominalism in the United States. The leading authority in this area is the decision of the Supreme Court in the so-called Legal Tender Cases.68 The factual position in Knox v Lee is of some historical interest and must be described. Before the Civil War (or ‘the rebellion’, as it is described in the report), a Mrs Lee owned a flock of sheep in Texas. Mrs Lee left the sheep in the charge of her shepherd when the rebellion broke out. Mrs Lee was ‘a loyal citizen of the United States’ and, as a consequence, the Confederate Government regarded her as an alien enemy. In reliance on Confederate legislation designed to deal with the property of such persons, the Confederate Government sold her sheep to Mr Knox, who purchased them for $10.87 each, ‘confederate money’, which was then worth about one-third of the corresponding sum in coin. After the rebellion had been suppressed, Mrs Lee brought an action in conversion against Mr Knox. In valuing the claim, Mrs Lee sought to introduce evidence to demonstrate the difference in value between gold and silver (on the one hand) and the ‘greenback’ (on the other). The Circuit Court for the Western District of Texas refused to admit such evidence, on the ground that the greenback had been made legal tender and it was thus not open to the court to assess the value of the greenback against that of gold and silver currency. The Supreme Court upheld this approach, and observed that:69

it was not a duty to pay gold or silver or the kind of money recognized by law at the time the contract was made, nor was it a duty to pay money of equal intrinsic value in the market … The expectation of the creditor and the anticipation of the debtor may have been that the contract would be discharged by the payment of coined money but neither the expectation of one party nor the anticipation of the other constitutes the obligation of the contract. There is a well recognized distinction between the expectation of the parties to the contract and the duty imposed by it. Were it not so, the expectation of results would always be equivalent to a binding engagement that they should follow. But the obligation of a contract to pay money is to pay that which the law shall recognize as money when the payment is to be made[70] … Every contract for the payment of money simply is necessarily subject to the constitutional power of the government over the currency whatever that power may be, and the obligation of the parties is therefore assumed with reference to that power.


Once again, this amounts to a very clear statement of the principle of nominalism and its unmistakable relationship to the State theory of money. The principle has been restated and reinforced by a number of subsequent decisions of the Supreme Court.71

D. The General Nature of Nominalism


It has been shown earlier that—whilst nominalism is a key feature of monetary law—the principle relies upon, or results from, the presumed intention of the parties or the legislator.72 The nature and scope of the principle must be determined from this reference point. With this in mind, the following points may be noted:

(a) Nominalism is not derived from the English law of money. Nor is it the product of public law, although here (as elsewhere) it would be open to the legislator to give statutory force to the principle.73 Neither is the principle a matter of mandatory law or of public policy. As a consequence, the parties to a contract are generally free to avoid its effects by making express provision to that effect.74

(b) As nominalism is not a principle of public policy, a judge is both entitled and bound to take notice of inflation,75 ie of the undoubted fact that monetary values change—whether suddenly or over a period of time, and whether internally or as against other currencies.76 There can be little doubt that the diminution in the internal value of sterling was one of the influential factors in the South Staffordshire case, which has already been discussed77 and that the fall in the external value of sterling was one of the factors which influenced the court’s reasoning in the Miliangos decision.78 Nor should it be thought that judicial notice of this subject is an entirely modern phenomenon, for the Exchequer Chamber took note of the declining value of money in 1868. In Bryant v Foot,79 the Rector of the Parish of Horton claimed a marriage fee of 13 shillings. It could be shown that the fee had been paid since at least 1808, but the court refused to draw the inference that the right had existed since time immemorial. In view of the difference in value of money in 1189 and 1868—a fact of which the court took special notice—it was impossible to infer that a 13 shilling fee had been paid on every marriage since 1189. A claim to the fee by prescription accordingly failed.

(c) Given that the principle depends upon the implied intentions of the parties or the legislator, nominalism cannot apply to unliquidated sums.80

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