The Interpretation of Monetary Obligations—Subsequent Uncertainty


A. Introduction


B. Changes in Law


C. Changes in Territorial Sovereignty


Domestic cases


International cases


D. Extinction and Replacement of a Monetary System


Substitution of a single monetary system


Replacement by two or more monetary systems


A. Introduction


The money of account, though originally clearly defined, may become uncertain during the life of the legal relationship. This may occur in three categories of cases, namely:

(a) where a system of law having some impact on the obligation or the parties to it purports to alter the money of account;

(b) where a new monetary system emerges as a result of changes in territorial sovereignty, but the old monetary system continues to exist; and

(c) where a monetary system becomes extinct.

Each of these possibilities must be considered in turn.1

B. Changes in Law


A State may seek to legislate in a manner which affects subsisting monetary obligations. For example, a State encountering serious economic problems may provide that foreign money obligations are henceforth to be settled by payment to a State agency in the domestic currency;2 similar action might be taken by a State which wishes to inconvenience creditors resident in a State which it perceives to be hostile.3 Such a law would deal with questions touching the identification, substance, and performance of monetary obligations and, in principle, would thus apply only where the contract or obligation concerned was governed by the law of the legislating State.4 Alternatively, as occurred in the context of the recent financial crisis in Greece, a law may be passed to prevent bondholders from taking individual recovery proceedings through the imposition of collective action clauses, which require such action to be sanctioned by a stated majority vote.5 A law of this kind will usually further some governmental objective of high policy; it will usually be written in terms which are both clear and mandatory.6 Why, then, should such laws require consideration in a chapter dealing with uncertainty of the money of account? It is probably true that, in a purely domestic context, no question of uncertainty will arise; a national court sitting within the State concerned will simply give effect to the law in accordance with its terms, regardless of the law applicable to the contract or any other matter.


Uncertainties may, however, arise where the monetary obligations at issue subsist within an international framework and fall for consideration by a court sitting outside the legislating State. Should a court give effect to the law in question? Subject to two points noted below, it is suggested that the question falls to be determined entirely by reference to the law which governs the contract or obligation at hand.7


The principle is neatly illustrated by two cases. In Confederation Life Association v Ugalde,8 the court was confronted with an insurance policy governed by Cuban law and which was expressed to be payable in US dollars in Cuba. While the policy was in force, Cuba introduced a new law to the effect that ‘all obligations contracted or payable in Cuba’ in the US dollar would be substituted by an obligation to pay in Cuban pesos on a one-for-one basis. The court gave effect to the substitution on the ground that the policy was governed by Cuban law. In contrast, when considering a similar policy, the Ontario High Court in Serpa v Confederation Life Association9 held that the policy was governed by the law of Ontario, with the logical and inevitable result that the new Cuban law had to be disregarded when seeking to identify the money of account. On the footing that the law applicable to the policy was correctly identified in each case, the ultimate decisions are unimpeachable. The clear logic of these judgments must not, however, be allowed to obscure two points:

(a) A law which implements a currency substitution of this kind may be disregarded on public policy grounds, even though it forms a part of the law applicable to the obligation at issue. A court may thus decide not to give effect to such a law on the grounds that it is expropriatory, discriminatory, or is otherwise objectionable10 although, given the acknowledged sovereignty of States in the monetary field,11 it is submitted that a court should be slow to disregard foreign monetary legislation on this ground.12

(b) In countries—including the United Kingdom—whose system of private international law incorporates rules of the kind exemplified by Article 9(3) of Rome I:

Effect may be given to the overriding mandatory provisions of the country where the obligations arising out of the contract have to be or have been performed, in so far as these mandatory overriding provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

Plainly, in a case similar to Serpa, a provision of this kind would allow the court to give effect to the Cuban monetary legislation to the extent to which it made payment in US dollars in Cuba unlawful, even though that legislation does not form a part of the governing law. But, if the court may give effect to such laws, then under what circumstances should it do so? It is naturally very difficult to state general principles, for so much will depend on the facts of individual cases. But there may be significant arguments in favour of giving effect to the foreign monetary legislation in such a case. It is not necessarily unfair to the beneficiary of the obligation that this should be so; in choosing to deal with a counterparty in that country and accepting that location as the place of payment, the creditor has in some respects agreed to accept the sovereign, legislative, and other risks inherent in dealing with parties in that jurisdiction.13 Further, it may be said that the court should respect the monetary sovereignty of the legislating State, given its close connection to the contract. However, such generalized arguments should not prevail; in the cases under discussion, the legislating State has unilaterally imposed its own monetary system upon an obligation previously expressed in the currency of another country and governed by a foreign system of law. There is no consideration of international law which requires foreign courts to respect such drastic action. Despite the possibilities which have been discussed, it is suggested that Article 9(3) of Rome I should not be invoked in order to give effect to a foreign monetary law of this kind which does not form a part of the law applicable to the contract as a whole.14 In view of the express wording of Article 9(3), the possibility of applying such legislation could, in any event, only arise where the obligation was payable within the State concerned.

C. Changes in Territorial Sovereignty


For obvious reasons, a change in territorial sovereignty or the curtailment of a monetary system may have an impact on those obligations whose money of account was expressed in the currency of the territory affected by the change.15 The problem may have to be considered in a purely domestic context, where the obligation at issue was contracted by persons within the territory concerned and falls for consideration by a local court. Alternatively, the money of account may have been used in a cross-border contract and the subject may fall for consideration by a foreign court. It is proposed to consider these two types of cases separately.

Domestic cases


Changes in territorial sovereignty16 may impact upon a monetary system in a variety of ways. If one State acquires part of the territory formerly belonging to another State (for example, as a result of negotiations leading to the settlement of a boundary dispute or by way of cession), then the money of the acquiring State may become the currency of the territory so acquired, or a new currency may be introduced in that area. But the former sovereign continues to exist separately as a State; its monetary system continues to function, and its banknotes and coins may circulate thenceforth as foreign currency within the territory affected by the change in sovereignty.


Now, when the new currency is introduced into the area affected by the change in territorial sovereignty, the relevant law will no doubt include a recurrent link17 establishing the rate of conversion between the old and the new currency. At this point, a difficulty becomes apparent; both the old and the new currency continue to exist. It is therefore necessary to decide (a) which debts are converted into the new currency, and (b) which debts are unaffected by the substitution, and thus remain denominated in the old currency? Under such circumstances it is necessary that the legislation creating the new monetary system(s) must not only provide a recurrent link, but must also define the scope of its application, ie to which class or category of debts does the substitution apply?


History supplies many examples of cases in which the territorial ambit of a monetary system has been curtailed, or in which two or more monetary systems have been created in substitution for a former single currency.18 This happened in Australia, which originally shared the United Kingdom’s currency but subsequently developed its own monetary system.19 In June 1948, both the Federal Republic of Germany and what became the German Democratic Republic discontinued the use of the reichsmark as the unit of account, and both introduced separate currencies known as the Deutsche mark. More recently, the former republics of the Soviet Union attained independence and created new national currencies, whilst Russia retained the former rouble as its own unit of account.20 The disintegration of the Federal Republic of Yugoslavia also led to the creation of a number of newly independent States, each of which needed to adopt a new monetary system. Likewise, with effect from January 1993, Czechoslovakia divided into two separate States; the Czech Republic and the Slovak Republic adopted the Czech crown and the Slovak crown respectively.21


Where the territorial ambit of a monetary system is reduced,22 the legislator has, theoretically, a choice between a number of tests for delimiting the new from the old currency. These include, the nationality, domicile, or residence of either creditor or debtor; the place of payment; the law applicable to the debt; or the economic connection of the particular transaction with the one or the other territory. The test selected by the legislator may be made compulsory or optional.23 He may also delimit ‘old’ currency obligations from ‘new’ currency obligations by express legislative provisions; or he may say nothing of such delimitation, and the intention will have to be inferred.


There does not appear to be any universally agreed approach to this problem. Certain tests can be dismissed on the grounds that these would produce results which are effectively arbitrary because they have little connection with the monetary character of the obligation. Tests such as the nationality or domicile of the parties, and the system of law applicable to the obligation, may all be dismissed on this ground. In practical terms, legislation of this kind has tended to adopt the residence of the debtor or the place of payment as the applicable test.24 In other words, the new currency will be substituted as the money of account if that is the effect of the law of the place in which the debtor is resident or in the place of payment (as the case may be); otherwise, the money of account of the obligation remains that of the old currency.


It may be instructive to note a few cases in which courts have been confronted with cases involving a delimitation of this kind and to describe some of the more recent legislative provisions which have been introduced in this context:

(a) Australian monetary law offers an example of implied delimitation. Australia had power to make its own rules with respect to currency, coinage, and legal tender, ie it could establish its own independent monetary system.25 Until these powers were exercised, the pound sterling was also the lawful currency of Australia. In 1909, ‘Australian coins’ were issued on the basis of a standard of weight and fineness identical with that applicable to British coins under the Coinage Act 1870.26 Subsequently, the issue of Australian notes was authorized, which were declared to be ‘legal tender throughout the Commonwealth and throughout all territories under the control of the Commonwealth’ and to be ‘payable in gold coin at the Commonwealth Treasury at the Seat of Government’.27 Several points may be inferred from these provisions. First of all, Australia effectively provided that debts expressed in ‘pounds’ (which, up to that point, necessarily referred to English pounds) could be discharged by payment in the new, Australian pound. Secondly, in the absence of explicit provision, it must be inferred that the recurrent link was established to be one Australian pound for one English pound. Thirdly, it necessarily follows that Australia had created a new monetary system which was substituted for the English currency, but had delimited the application of that system to Australia itself and its territories. This was apparent both from the legal tender provisions included in the new legislation,28 and from the accepted fact that Australian law could not affect obligations expressed in pounds sterling and payable outside Australia. In accordance with the principles discussed in the introduction to this section, Australian law thus had to delimit the scope of its new monetary legislation, and it impliedly selected the ‘place of payment’ test. The legislation thus did not apply to debts which were expressed to be payable outside Australia.

(b) Following the First World War, certain German provinces came under Polish sovereignty. Poland introduced the zloty currency and provision was made for the conversion of mark debts into zloty debts. German courts held that the Polish legislation only applied to mark debts which were payable in areas under Polish sovereignty. In other words, the place of payment was the delimiting factor which had to be used to identify those mark debts which were converted into zloty.29

(c) Following its independence from the Austro-Hungarian monarchy, Czechoslovakia introduced a new monetary system. Under the terms of the relevant law dated 10 April 1919, debts expressed in Austro-Hungarian crowns and payable within Czechoslovakia were to be paid in Czechoslovak crowns, on the basis of a one-to-one substitution rate. Once again, therefore, the new monetary law adopted the place of payment as the delimiting factor.30 Before the separation, a railway company whose undertaking was mainly situate on Czechoslovak territory had issued bonds denominated in ‘crowns’; they were stated to be payable in Austria, where the company had its head office. Now, in view of the delimiting factor adopted by the Czech monetary law, it might have been thought that payment in the Austrian currency would be the necessary consequence. But in fact, both the Czechoslovak Supreme Court and the Austrian Supreme Court31

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