Nominalism, Private International Law, and the Lex Monetae Principle


A. Introduction


B. The Lex Monetae Principle


C. Revalorization


D. Revalorization in Foreign Courts


E. Private International Law and Protective Clauses


A. Introduction


It has been noted elsewhere1 that, so far as English law is concerned, obligations expressed in sterling or in a foreign currency are now to be treated on broadly the same footing. This, however, should not be taken to imply that private international law has no role to play in the field of monetary obligations.2 This point, should, in many ways, be obvious. For instance, many contracts governed by English law will include obligations expressed in currencies other than sterling, and a description of a foreign currency obligation inevitably rests to some extent upon the law of the issuing country which defines the monetary system. In such cases, it will invariably be necessary to distinguish between the scope and functions of the law applicable to the contract (on the one hand) and the lex monetae (on the other). Equally, contracts involving sterling obligations may be governed by a foreign legal system, in which event a converse set of questions will arise.


The present chapter will accordingly consider the role of the law of the currency and a number of private international law questions.

B. The Lex Monetae Principle


When on the strength of the principles considered earlier in this work3 the money of a particular currency system has been found to be due by the debtor, the substance of the obligation is in general clearly fixed and no further comment is required. If, for instance, it appears that an English seller has contracted with a French buyer by reference to a price expressed in euros, the contract price is not affected at all by the fact that the comparative values of sterling and the euro have fluctuated against each other between the date of the contract and the date on which payment falls due; in the absence of an express provision dealing with the point, the external value of the euro is simply not relevant to the obligations of the parties.


In view of the universal recognition of nominalism in all its aspects,4 the proposition just stated cannot be open to any serious doubt. The units of account referred to in a monetary obligation are defined by the law of the issuing State and—where there has been a change in the domestic unit of account—by the ‘recurrent link’ rule adopted by that State. Money, being a creature of the law, is regulated by the State; in particular, it is the State which decides which notes and coins are to constitute legal tender for debts expressed in its currency, and the nominal value which is to be ascribed to them. As each State exercises these sovereign powers over its own currency,5 it must be law of the currency (lex monetae) which determines whether particular notes or coins have the character of ‘money’ and, if so, the nominal value to be attributed to them.6 What constitutes 10,000 Swiss francs must be exclusively determined by Swiss law; there is no other law in the world which would explain the meaning of that denomination and which would lay down whether and for what nominal amount certain notes and coins are legal tender for obligations payable in Swiss francs. One therefore arrives at the rule that the law of the currency determines which chattels are legal tender of the currency referred to, to what extent they are legal tender, and how, in the case of a currency alteration, sums expressed in the former currency are to be converted into the new one.7 It also thus becomes both possible and necessary to distinguish between the role of the governing law of the obligation and the role of the lex monetae. The law which governs the obligation must determine to which currency the parties intended to refer;8 but once that process has been completed, the law of the issuing State thus identified must be applied in order to define the currency itself and the monetary system of which it forms a part.9 Of course, a distinction of this type is relatively easy to state, but it is much harder to define the precise boundary lines. In particular, it must not be overlooked that, at least so far as English law is concerned, the nominalistic principle owes its existence to the law which governs the obligation,10 rather than to the lex monetae.


But whatever the difficulties may be, it is submitted that the lex monetae principle described enjoys almost universal support; it is also consistent with customary international law.11 It is true that some dissentient views have occasionally been expressed; in particular, it has been suggested that legal tender legislation has a purely territorial scope and thus cannot be applied by foreign courts;12 alternatively, it has been suggested that foreign monetary laws are of a public character which are thus incapable of recognition by a domestic tribunal.13 If such views were accepted, then alterations affecting a domestic monetary system would be incapable of international recognition. One only needs to state this consequence in order to recognize its absurdity in the modern world. Moreover, a contention of this kind was explicitly rejected by the Privy Council, in Ottoman Bank v Chakarian (No 2),14 where it said:

A further point put forward … was based on the construction of the Turkish statute which authorised the issue of currency notes and made then legal tender. These statutes were in terms limited to Turkish currency in Turkey. Sir William Jowett has contended that outside Turkey pre-war currency law remained in effect, so that the legal tender outside Turkey remained the Turkish gold pound. Their Lordships were unable to accept this contention. The currency in any particular country must be determined by the law of that country, and that law is naturally in terms limited to defining what is legal tender in that country. But when that is fixed by the local law, it determines what is legal tender of that country for purposes of transactions in any other country, so that a foreign court will, when such questions come before it, give effect to the proper law of legal tender so determined. There is no foundation in their Lordships’ judgment for the argument that Turkish paper is only legal tender as equivalent to gold sub modo, that is within the territorial limits of Turkish jurisdiction.


It is submitted that this statement provides a clear and practical guide to the lex monetae principle, and should always be referred to in cases of difficulty.15 The existence of the lex monetae principle is thus beyond doubt, but the precise scope of that principle requires further discussion and definition.


A brief comparative survey will help to demonstrate the general application of this principle:

(a) In relatively modern times, the lex monetae principle gained prominence in Germany in the ‘Coupons Actions’. Austrian railway companies had issued bonds payable either in Austrian (silver) guilders or in thalers which were circulating in Germany when the bonds were issued. Following the establishment of the German Reich in 1871, a uniform mark currency based on gold was adopted, and the German Legal Tender Act provided that debts expressed in thaler were to be converted into mark debts at the rate of 1 mark to 1/3 thaler. Since Germany had adopted the gold standard, silver (and with it, the Austrian silver currency) had depreciated by a very substantial margin; the debtor companies therefore denied that they were liable in the new mark based on gold. But in Germany, the Supreme Court held that, if the thaler option were exercised, the companies had to pay the bonds and the coupons in marks at the conversion rate established by German law; this was so even though the bonds themselves—and thus the substance of the obligations thereby created—were governed by Austrian law.16

(b) French courts have likewise adopted the lex monetae principle in cases involving the German mark17 and the Russian rouble.18 A further French decision illustrates the frequently forgotten fact that nominalism does not invariably operate in favour of the debtor.19 The case involved piàstres which circulated in French Indochina and which appreciated in value as a result of the adoption of the gold standard in 1930. The application of the lex monetae principle inevitably led to the conclusion that an obligation formerly contracted with reference to the ‘paper’ currency had inevitably to be settled in gold piàstres.20

(c) In Switzerland, the Federal Tribunal decided that (in the absence of a gold clause) a reference to French francs could only refer to money in circulation in France at the relevant time. This remained the case even where the case had international aspects, for only French law could identify its own national currency.21

(d) Courts in the United States have applied the lex monetae principle in relation to German marks,22 Russian roubles,23 cruzeiros,24 and an old Chinese currency.25

(e) The lex monetae principle is firmly established in England. It is true that the decision in Du Costa v Cole26 was founded on a different view of the subject. The case concerned an action on a bill of exchange drawn in London on 6 August for 1,000 Mille Rees, payable in Portugal thirty days after sight; on 14 August, the King of Portugal reduced the value of the ‘Mille Rees’ by 20 per cent. Holt CJ declined to recognize this monetary change, but held that: ‘The bill ought to be paid according to the ancient value, for the King of Portugal may not alter the property of a subject of England.’ The decision in Gilbert v Brett27 was distinguished on the ground that it involved British money which was changed by the King’s authority. The decision in Du Costa’s case does not appear to have been expressly overruled, but it has plainly been set aside by a number of modern cases. These decisions lay down the rule that the subject matter of a monetary obligation is whatever the law of the currency designates as legal tender for the nominal amount of the obligation and that obligation, accordingly, will be satisfied by the payment of whatever currency is by the lex monetae valid tender for the discharge of the nominal amount of the debt. Further, this rule applies regardless of the law applicable to the obligation at hand.28

(f) The principle of nominalism has rightly been described as fundamental to the treatment of foreign money obligations,29 although it should not be overlooked that the principle is equally applicable where the court is concerned with obligations expressed in the domestic currency.30 The principle is particularly well illustrated by two Privy Council decisions which arose out of Spanish peseta loans made in Gibraltar. In Pyrmont Ltd v Schott,31 it was held that the borrower was required to repay his loan in what was legal tender in Spain as at the date of repayment. It followed that he could not repay by means of Bank of Spain notes which were not legal tender in Spain at that time, although for certain purposes they had to be, and in practice were, accepted in ordinary transactions.32 As Lord Porter said,33 the form in which a payment in pesetas is to be made ‘must be regulated by the municipal law of the country whose unit of account is in question, and what would or would not be a legal tender must depend upon the law on that subject in force at the time when the legal tender should have been made’.34 In Marrache v Ashton,35 it was held that a loan of pesetas made in 1931 and repayable in 1936 could in May 1939 be repaid in peseta notes, because in January 1939 they had become legal tender in Spain;36 the borrower, according to Lord Macmillan ‘would have specifically performed his covenants, if he had tendered … the appropriate amount of Bank of Spain notes’.

(g) The principle of nominalism has also been recognized by international tribunals. For example, the Tripartite Claims Commission between the United States, Austria, and Hungary was confronted by the question whether a US citizen who was entitled to be paid in Austro-Hungarian krone could demand payment in US dollars at the pre-war rate of exchange. In accordance with the nominalistic principle, the question had to be answered in the negative for the krone obligation ‘is unaffected either by the purchasing power of the krone in Austria or by the exchange value of krone as measured in other currencies’.37


This survey of the principle of nominalism serves to demonstrate the general acceptance of that principle. However, a number of points deserve further discussion and elaboration:

(a) A mere change in the value of a foreign unit of account however serious it may be, is irrelevant to the monetary rights and obligations of the parties. In other words, nominalism places the risk of depreciation on the creditor and the risk of appreciation on the debtor; neither party can be heard to complain about any unexpected losses which may flow from such occurrences.38

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