The Private International Law of Exchange Control
THE PRIVATE INTERNATIONAL LAW OF EXCHANGE CONTROL
B. The Status and Application of Foreign Exchange Control Regulations
F. Foreign Exchange Control as an Unenforceable Prerogative Right
Chapter 15 considered the special consequences of Article VIII(2)(b) of the Articles of Agreement of the International Monetary Fund (IMF) in proceedings before domestic courts. That single provision is at once both very important and yet in many respects relatively insignificant. Important, because the application of that provision constitutes an international obligation of the member States of the Fund; relatively insignificant because—however one chooses to interpret the provision—it is of an essentially limited scope.
The difficulties which surround Article VIII(2)(b) are unfortunately apt to obscure the fact that exchange controls may be relevant in many cases in which, for one reason or another, Article VIII(2)(b) has no application. The creation of a system of exchange control represents an exercise of sovereign and legislative power by the State which chooses to impose them. If a contract is governed by the laws of that State, then its exchange control laws will form part of the corpus of law which should be applied by a foreign court in determining the validity, meaning, and effect of that contract.1 This conclusion has nothing to do with Article VIII(2)(b); it flows from an application of the ordinary principles of private international law. The line of reasoning just suggested could apply in relation to exchange controls operated by States which are not even members of the IMF.2 This brief analysis suggests that private international law may offer significant scope for the application of foreign exchange control laws before the English courts; yet it must not be forgotten that a system of exchange control is of an essentially public character, and the English courts have traditionally been reluctant to enforce foreign laws of this kind.3 How are these two conflicting principles to be reconciled in an exchange control context?
Questions of this kind will be addressed in the opening section of this chapter. Thereafter, the text will consider the impact of foreign exchange control regulations in the context of contractual and proprietary rights.
B. The Status and Application of Foreign Exchange Control Regulations
It is proposed to consider three questions under this heading. First of all, what is the general status of foreign exchange control laws before the English courts? Secondly, to what extent are the statutory rights and obligations arising under such laws capable of enforcement in England? Thirdly, if they are not capable of active enforcement by the English courts, to what extent are such exchange control laws capable of recognition by the English courts?
Status of foreign exchange control laws
It has occasionally been asserted that the private international law of exchange control should be dominated by the principle that exchange control regulations are incapable of international recognition.4 This view has occasionally rested on the premise that exchange controls are of a ‘public law’ character, and are thus incapable of recognition by the courts in other countries. This line of argument is misconceived. Whilst foreign public laws require a certain delicacy of treatment in the English courts, they are by no means simply ignored.5 Sometimes, the courts took the view that monetary laws were of a strictly territorial nature, and thus could not be applied elsewhere. With reference to the exchange control laws of Czechoslovakia, the French Cour de Cassation opined ‘que les effets de la réglementation des changes de cet État ne pouvaient être reconnus en France’.6 Similarly, in another earlier decision, the Cour de Paris was prepared to enforce a contract made in Russia between nationals and governed by Russian law, even though the contract infringed Russian exchange control regulations as in force at the time of the contract. In relation to those regulations the court noted ‘que ces lois … constituent des textes d’une portée politique dont l’application ne peut par suite qu’être territoriale; que n’ayant d’autre objet que de protéger la monnaie nationale, elles demeurent sans effet devant une jurisdiction française même en cas de contestation entre ressortisants russes’.7 Similar decisions may be found in the jurisprudence of other civil law countries. Whatever the merits of these individual decisions, it is suggested that they cannot stand in the face of the Articles of Agreement of the IMF. The member countries have acknowledged the right of other members to create and impose a system of exchange control regulations; it is thus not open to domestic courts within those member countries simply to disregard those regulations.
It has also been said that considerations of public policy deprive exchange control regulations of any right to international recognition.8 Thus, in one case, a German debtor owed money to a Swiss creditor, which had in turn assigned it to the plaintiff. The German debtor contended that the assignment was invalid because the necessary consent from the German Foreign Exchange Board had not been obtained; payment was only possible if made to a blocked account within Germany. Although both the original debt and the subsequent assignment were governed by German law, the Swiss Federal Tribunal refused to give effect to the German currency regulations; it held those regulations to be contrary to Swiss public order, because they violated the vested rights of the creditor and constituted a ‘spoliatory encroachment’ upon them.9
Even apart from the constraints which are, or ought to be imposed by the existence of the IMF Agreement, it is impossible to justify such a wide-ranging principle, especially in those cases in which exchange control is not a supervenient event but is in force at the time the contract is made. Exchange control regulations usually originate from an economic emergency and are applied everywhere for the legitimate purpose of protecting a State’s currency resources. It is true that exchange controls may seriously prejudice foreign creditors, and the Swiss Federal Tribunal may have been right in comparing some of the effects of exchange control to spoliation. Yet this cannot be said to render those regulations inconsistent with public policy. Many countries have from time to time been compelled to adopt systems of exchange control, and domestic courts should not condemn arrangements which their own country may itself have adopted at some point. Furthermore, exchange control is merely an aspect of a broader system of physical control to which the world has become accustomed, and to which it applies general principles of law. Export and import restrictions operate to restrict the sale and purchase of goods, whilst exchange control regulations restrict the making of payments for those goods. These are effectively two sides of the same coin; if the courts will respect the trading arrangements of other countries,10 then exchange control arrangements should be respected on a similar basis. Courts in the Anglo-American world have thus generally accepted that, in the absence of some aggravating factor, the existence of a foreign system of exchange control does not offend domestic public policy.11 Likewise the Federal Supreme Court of Germany refused to hold that the then existing German Democratic Republic’s exchange control system was contrary to public policy in West Germany.12 Against this background, it must be concluded that there are no overarching considerations of public policy which would justify a blanket disregard of foreign exchange regulations irrespective of their context or terms.
It would, however, be equally wrong to move to the other extreme and to assert that public policy has no role whatsoever to play in the consideration of foreign exchange controls. Nor should it be forgotten that the treatment of such controls in a contractual context must be consistent with the general principles of private international law in this field, as illustrated by the terms of Rome I. How do foreign exchange controls fit into the framework thereby created? Four points should be noted in this regard:
(1) Amidst the debates and complexities to which foreign exchange controls will often give rise, it must not be overlooked that they will, in many cases, be irrelevant to the substance of the dispute, even though that position may give rise to considerable hardship for the debtor.13 This is so because—subject to the minor exceptions considered below—foreign exchange controls will only form part of the body of law to be taken into account if the contract happens to be governed by the laws of the country which also imposes the exchange controls at issue. This necessarily follows from the fact that matters touching the interpretation and performance of contracts are governed by the law applicable to them.14 Exchange controls forming part of a different system of law will thus generally have no bearing upon the substance of such a dispute. No question of public policy is involved—the regulations will simply not apply.15
(2) Where the contract is governed by English law,16 payment may not be enforced if it is rendered unlawful by exchange control regulations in force in the place of performance. This difficult and uncertain point will be considered at a later stage.17
(3) Where the exchange control regulations form a part of the law of the country in which the proceedings take place, then the application of those regulations will generally be mandatory, regardless of the law which governs the contract as a whole.18
(4) It was noted earlier that public policy could not be entirely disregarded in the context of foreign exchange controls. It is now necessary to return to that subject, but this must be done strictly within the confines of Rome I. Bearing in mind the general points noted in point (1), let it be supposed that foreign exchange control regulations do form a part of the law applicable to a contract. In general terms, an English court must therefore give effect to those regulations in determining the dispute before it. However, this will not always be so, for any laws—including exchange control regulations—may be disregarded if their application would be manifestly contrary to public policy.19 Thus, if foreign exchange controls are oppressive or discriminatory in their character or application,20 or so inconsistent with treaty obligations,21 or otherwise so contrary to English public policy, they may have to be denied recognition in this country. Thus, whilst the English courts will recognize the right of other countries to protect their economies by means of foreign exchange control and by altering the value of their currencies, the court must satisfy itself that the exchange controls are genuine in the sense that they were passed in order to protect the economy in times of national stress. Foreign laws which ostensibly have the character of exchange control regulations but which were in fact introduced for some ulterior motive may be rejected on public policy grounds, especially where those laws are inconsistent with international law.22 Public policy may also lead to the conclusion that exchange controls which were originally unobjectionable should be disregarded on the grounds that they have subsequently become an instrument of oppression or discrimination.23
Enforcement of foreign exchange control laws
To what extent will the English courts actively assist in the enforcement of a system of exchange control imposed by another country? It is only necessary to state this rule in order to realize that such enforcement would be deeply unattractive. The imposition and administration of such a system are highly political acts on the part of the government concerned; the English court should thus have no part in the interpretation or enforcement of such laws, nor should the English courts provide a forum for the enforcement of foreign sovereign authority.
This reaction finds voice in the rule that the English courts ‘have no jurisdiction to entertain an action … for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State’.24 It is true that there is some doubt as to the precise meaning of the term ‘public laws’ and the extent to which such laws may be enforced in this country.25 In particular, there is some authority to the effect that moneys paid out by the State to repair damage caused by the act of the defendant may be recovered in a foreign court, even though the source of the reimbursement obligation is to be found in a statute conferring the corresponding rights on the government concerned.26 But whatever the scope of these exceptions may be, it must be acknowledged that exchange controls are intended for the protection of a country and its economy as a whole. Exchange controls thus cannot be assimilated with quasi-private rights of the type just mentioned. It is apparent from the cases about to be discussed that the term ‘public laws’, in the sense of foreign public laws which cannot be enforced in the United Kingdom, is apt to embrace a system of exchange control.
Two cases have served to emphasize that the English courts will not enforce exchange control regulations imposed by another country. In Re Lord Cable deceased,27 trustees of a will wished to remit funds to India in compliance with that country’s exchange control regulations. The beneficiaries applied for an injunction to prevent them from doing so; the Government of India sought to join in the proceedings in order to support the position of the trustees. The court refused to join the Indian Government into the proceedings partly on the basis that the English courts could not entertain proceedings by a foreign government whose sole objective was to enforce compliance with its own exchange control regulations.28
The enforcement of foreign exchange controls received more recent attention from the Court of Appeal in Camdex International Ltd v Bank of Zambia (No 3).29 In that case, Camdex had obtained money judgments against the Bank of Zambia, which remained unsatisfied. The Bank of Zambia was responsible for the administration of that country’s system of exchange control. Zambian Consolidated Copper Mines Ltd (ZCCM) was the country’s major copper exporter and was under a statutory obligation to surrender its foreign currency earnings to the Bank of Zambia in return for payment in the local unit (the kwacha) at the official rate.30 Since some of ZCCM’s foreign currency earnings would pass through accounts in London, Camdex sought garnishee orders against ZCCM, requiring that the moneys so owing to the Bank of Zambia should instead be paid to Camdex in reduction of the judgment debt. This attempt failed, principally on the basis that the Zambian exchange control legislation relied on criminal penalties as a means of enforcement; as a result, the obligation of ZCCM to the Bank of Zambia did not amount to a ‘debt’ which was enforceable by civil action. However, the Court of Appeal also considered whether enforcement of ZCCM’s obligation to pay over foreign exchange earnings should be viewed as an obligation arising under a foreign public law and which ought not to be enforced in this country for that reason. On this subject, Simon Brown LJ noted the exchange control regulations ‘are part of the public law of Zambia enforceable by right of the authority of the Zambian State rather than by way of a private law right in BoZ’. He also noted that ‘the same objectives which arise with regard to the enforcement of foreign revenue and penal laws … apply, equally to many other public laws, including particularly, exchange control, the enforcement of which is of no less political character’.
It is submitted that these observations are plainly right. Foreign exchange regulations cannot be characterized as revenue or penal laws,31 but they nevertheless represent an exercise of sovereign or political will which, in compliance with the general principle discussed earlier,32 cannot be enforced here. It is thus clear that there is no scope for the positive enforcement of foreign exchange control laws before courts in this country. The fact that both the United Kingdom and the other country concerned are members of the IMF does not give rise to policy considerations in favour of the enforcement of foreign exchange controls which are of sufficient weight to displace the general principle which has been discussed.33 The necessary consequence of this position is that a State which imposes a system of exchange control is unable to enforce it on an extraterritorial basis.34
Recognition of exchange control laws
It was noted in an earlier chapter that one of the key provisions of an exchange control system will be the duty to surrender foreign currency in return for the local unit at an officially prescribed rate.35 It has also been demonstrated that a foreign law obligation of this kind will not be enforced by the English courts.36 But if foreign exchange control regulations cannot be enforced here, it is plain that the existence and application of those regulations will be recognized by the English courts, and effect may thus be given to them where such recognition does not amount to the direct or indirect enforcement of those laws to the financial benefit of the State concerned. That foreign public laws of this kind can be recognized, but cannot be enforced, in England seems to be well established and accepted.37 The result appears to be that foreign exchange legislation cannot be used offensively, in the sense that it may be invoked as a cause of action before the English courts; but it may be used defensively, in the sense that it may render the performance of an agreement illegal, or it may have other contractual consequences. To borrow an expression from a different field, foreign exchange control laws may provide a shield, but not a sword.
The English courts will thus recognize the reality that contractual and proprietary rights arise within spheres of economic activity which may be affected by a system of exchange control regulation. Having arrived at this point, it is now necessary to consider the impact which such regulations may have on particular aspects of contractual and proprietary rights.
C. Contractual Consequences of Exchange Control
The complexities and unfamiliarity of exchange control should not obscure or lead one to ignore the legal analysis to which such controls must be subjected in a contractual and conflict of laws context. The general principles which apply in this area have already been outlined,38 but it may be helpful to briefly re-state the core rules, as follows:
(a) matters touching the material validity, interpretation, and performance of a contract are generally governed by the applicable law;39
(b) the law of the place of payment may usually be taken into account in relation to the manner or method of performance;40
(c) the laws of the forum State must be applied where the application of those laws is mandatory irrespective of the system of law which governs the contract;41 and
(d) a rule forming part of a foreign system of law will not be given effect if its application would be manifestly contrary to the public policy of the forum State.42
With these broad principles in mind, it is proposed to consider the following subjects:
(a) the impact of foreign exchange controls on the material validity of a contract;
(b) the position where exchange controls form a part of the law applicable to the contract;
(c) the consequences of exchange controls which do not form a part of the governing law;
(d) the impact of the private international law of the forum;
(e) the impact of exchange controls in the place of payment; and
(f) the impact of exchange controls on the mode of performance of a monetary obligation.
The issues surrounding the material validity of a contract will fall into two categories, namely (1) those in which the relevant exchange control restrictions form a part of the applicable law, and (2) those in which the applicable law differs from the system which imposed the exchange control regime in question. It is necessary to consider these two categories separately.
If, on their proper construction and application, the exchange control regulations of a foreign country render a particular contract invalid and the contract is governed by the laws of that country, then—in the absence of any countervailing consideration of English public policy—the contract will likewise be treated as invalid before the English courts. This position reflects the general rule of conflict of laws and is by no means limited to exchange control regulations. This statement of general principle may appear to be unobjectionable but it is necessary to record that its application has led to injustice in cases involving persecution and refugees. It is hardly necessary to relate that many cases of this kind arose in the first half of the twentieth century; regrettably, more modern circumstances have not entirely eliminated the possibility of their recurrence. What is to be the position if A and B both plan to flee a particular country, with A funding the escape against a promise from B to refund him on arrival at their destination; would this arrangement be enforced against B, notwithstanding that it contravened exchange control regulations in the first country?
In a case of this type—where the arrangement is made between two nationals of the country concerned prior to their attempted flight—there can be little doubt that the contract will generally be governed by the law of the oppressor country. If the contract is invalid under the exchange control regulations of that country, then it would follow that the English court would likewise refuse to enforce the creditor’s claim in accordance with the principle described earlier. Courts sitting in common law jurisdictions have accepted this result and allowed the debtor to avoid his obligations under circumstances which can only be described as manifestly unjust.43 If, however, the contract is governed by the law of the forum State, then the exchange control rules of the relevant foreign State cannot be invoked as a defence to a claim for payment.44