Chapter 11 considered various means by which the application of the nominalistic principle may be avoided or modified. It has been implicit in that discussion that there was no general consideration which might vitiate any such arrangement. But it is now appropriate to consider the matter explicitly. Is the principle of nominalism such an entrenched part of monetary law that attempts to disregard it should be viewed with suspicion and struck down by the courts? This chapter will consider the possible areas of objection to clauses which seek to avoid the application of the principle.
It appears to be accepted that the nominalistic principle as such does not of itself invalidate gold, index, or similar protective clauses. Although the point is not directly discussed in any English decision, it is nevertheless plain that English law treats such clauses as valid.1 This conclusion is certainly logical if it is borne in mind that—under English law—the principle of nominalism reflects the presumed intention of the parties; if they have clearly expressed an actual intention to the contrary, then the latter should clearly prevail. It may seem curious that the principle of nominalism, which lies at the heart of monetary law, can be so lightly set aside by the contracting parties in any individual case, but the English law approach to the principle permits of no other conclusion.2 In other words, there is no room for the argument that the principle of nominalism constitutes a mandatory rule of English law which can override the wishes of the parties.
The same position would appear to apply in other countries, even where nominalism has been placed on a statutory basis. Thus, in France, where the principle is enshrined in Article 1895 of the Code Civil,3 the application of nominalism is not mandatory law but will give way to a contrary intention of the parties.4 As a result, gold and similar clauses were generally upheld by the French courts.
It follows from this analysis that the nominalistic principle does not have the quality of mandatory law which can override the expressed intentions of the creditor and the debtor.
The fact that legal tender legislation provided for payment in convertible money5—in the sense that it was convertible into gold—did not vitiate protective clauses of the type here under discussion.6 There is no need to dwell on this subject, given that in modern times all legal tender is inconvertible in the sense just described. It is thus possible immediately to move on to a consideration of this subject in the context of more modern legal tender legislation.
The question of whether protective clauses are invalidated by the issue of inconvertible paper money, ie the introduction of fiat money or compulsory tender, has caused rather more difficulty. So far as English law is concerned, it cannot be doubted that gold value clauses remained valid and enforceable notwithstanding the issue of inconvertible paper money initiated by the Gold Standard (Amendment) Act 1931—this point is apparent from the House of Lords’ decision in Feist v Société Intercommunale Belge d’Électricité.7 It has been pointed out that the gold value clause in that case was upheld notwithstanding the provisions of the Currency and Bank Notes Act 1928.8 But there is nothing in the 1928 Act which can be said to invalidate a gold or other protective clause, either expressly or by necessary implication.
In the United States, a number of State courts had held gold and silver value clauses to be invalid by implication, in that the legislation of Congress had made inconvertible greenbacks legal tender; contractual provisions undermining the legal tender legislation had necessarily to be invalid.9 This stance was, however, reversed by the Supreme Court decisions in Bronson v Rodes and Butler v Horwitz10 upholding contractual provisions of this kind, but only on the basis that they constituted an obligation to deliver a certain weight of gold.11
Shortly after the two Supreme Court decisions, the French Cour de Cassation decided to follow the first line of authority, holding that legal tender legislation introduced in August 1870 invalidated all protective clauses (whether referring to gold, foreign exchange, or otherwise). The monetary laws in question were ‘d’ordre public’ and, thus, mandatory in their application before the French courts. As a result, a creditor could not refuse payment in paper money in the amount which the law deemed to be equivalent to the nominal value of the debt.12 The same principle operated to strike down index or commodity linked clauses if they were intended to protect the creditor against the depreciation in the value of money—thus defeating the application of legal tender rules and the nominalistic principle—but not if there was some other, genuine economic reason for including the clause.13 However, this reasoning was founded purely upon domestic considerations, with the result that the mandatory rule applied only to domestic payments made between French nationals within France; it did not apply to cross-border payments.14
However that may be, all of these decisions were swept away by a revolutionary decision of the Cour de Cassation in 1957.15 In a case concerned with a loan of French francs granted by a corn merchant to a farmer and repayable by amounts based on the price of wheat, the court held that:
(a) the relevant contractual provisions could not be struck down on ground of ‘ordre public’.16 It was quite legitimate for the parties to agree provisions which protected the overall purchasing power of the lender’s money by reference to the price of a particular commodity—in other words, indexation clauses were in principle valid under French law;
(b) protective clauses could not be held to be a danger to the stability of monetary values, because their likely effect in this area was too uncertain;17
(c) the invalidity of protective clauses could not be derived from legal tender legislation, since this had nothing to do with the intrinsic purchasing power of money.
Against that background, gold value clauses and foreign currency obligations have subsequently been held to be valid and enforceable, both in an international and in an entirely domestic context.18 The position is now governed by legislation, rather than judicial decision.
Although they occurred in different periods, it may be observed that the American and the French experiences in this context were somewhat similar; an early determination that protective clauses were inconsistent with legal tender legislation, coupled with a later (and dramatic) reversal of that view. In this context, the English courts have not considered the point in a direct manner, but such authority as exists appears to confirm that protective clauses cannot be regarded as inconsistent with domestic legal tender legislation. An Australian court, however, has declined to enforce a gold clause on the grounds that the debt could be discharged by payment in notes pursuant to the provisions of the Commonwealth Bank Act—thus impliedly disregarding the gold clause because of its inconsistency with legal tender legislation.19
If domestic legal tender legislation will not generally operate to invalidate protective clauses, then are they liable to be struck down on more general public policy grounds? So far as English law is concerned, questions of public policy were not explicitly raised in the Feist case,20 but the award of judgment in favour of the creditor necessarily implies that there was no public policy impediment to their enforcement. The point was more explicitly addressed by the High Court of Australia in a domestic case decided in 1952,21 when the court noted that the index clause involved a measure of the substantive liability of the debtor, as opposed to the mode of performance. In other words, one had to ascertain the measure of the liability before one became concerned with issues touching legal tender legislation and the mode of discharge. The court observed that there was: