64 / 330
GAZETTE
APRIL 1986
and sensible, and in accordance with the English approach
to construction", it was held that the term "exchange
contract" had a "narrow, ordinary but true" meaning,
viz. contracts to exchange currency of one country for
the currency of another. Even Lord Denning M.R.
admitted that his wide construction of the term in
Sharif
-v-
Azad
was wrong. Kerr J. explained the "logic and
sense" behind the narrow construction of the term as
follows:
"First, [the broad] interpretation gives no effect at all
to the word 'exchange' . . . An interpretation that
sweeps in all contracts affecting any member's exchange
resources does considerable violence to the text.
Secondly, not only is there nothing in the[I.M.F.]
Agreement which requires such an enormously wide
interpretation, but, on the contrary, the strong indi-
cation is that the word 'exchange' is used throughout
as intended to refer to currency. Thirdly, such a wide
interpretation runs counter to the second paramount
purpose of the Agreement, to facilitate and promote
international trade. The consequence of international
trade of this broad interpretation would in fact be the
opposite. The great majority of countries have com-
bined a system of exchange or currency control with
control on international contracts generally, as regards
either their conclusion or their performance or both.
It would be extremely difficult, if not impossible, for
every contracting party to seek to satisfy itself before
entering into an ordinary international contract con-
cerning goods or services or choses in action that all
necessary permissions had been obtained. Yet all such
contracts can be said to affect the exchange resources
of (at least) the payor's country. This difficulty could
only in practice be overcome by covering the enfor-
cibility of all such contracts by insurance, but this
would substantially add to the cost and hamper inter-
national trade. The only exception to 'exchange con-
tracts', so far as I can see, would be contracts of
barter without any money consideration. Take some
ancillary incidents in the present case as an example.
When Mr. Terruzzi engaged English solicitors to
defend the action he was, on this interpretation,
entering into an 'exchange contract' since he would
have to pay them. Without the necessary permission,
this contract would on this interpretation become
unenforceable by the solicitors in our courts because it
was unlawful under . . . the Italian decree. But con-
tracts such as these are made between nationals or
residents of I.M.F. Member States in their hundreds
each week as a matter of ordinary international
course. When Mr. Terruzzi came to London, he not
only made an exchange contract when he changed his
Italian travellers cheques or lire for sterling, as
obviouly he did, but on this theory apparently also
when he booked into his hotel or took a taxi to the
Law Courts and thereby rendered himself liable to
spend currency to the loss of Italy's exchange res-
ources. Or take the converse case. At one time both
parties were considering calling an Italian lawyer as
an expert in the action. Although he would presumably
have been paid for his services in sterling, with a
consequent gain to Italy's exchange resources, would
such a contract on that ground not be an exchange
contract? It would still 'affect' Italy's exchange
resources, though benefically. Or would contracts of
purchase be exchange contracts but not contracts of
sale, because the former deplete a country's currency
resources whereas the latter increase them? And what
about hybrid contracts such as those sued upon by
the plaintiffs in the present action? They were con-
tracts of sale under which Mr. Terruzzi could have
been called upon to deliver metal and would have
been paid in sterling to the gain of Italy's exchange
resources if he repatriated the sterling, as he was
obliged to do under Italian law. But at the same time
he could be called upon under their terms to put up
margin if the market went against him, which would
affect Italy's exchange resources in the converse sense
by depleting them
pro tanto.
How is one to be balanced
against the other?"
27
The narrow interpretation was endorsed by the Court of
Appeal, and implicitly by the House of Lords which
refused leave to appeal. The Court added that a monetary
transaction in disguise is also an exchange contract, i.e.
an agreement in reality to exchange currencies that is
dressed up to look like something else.
Sir Joseph Gold was the I.M.F.'s general counsel and
lirector of its legal department for many years, and is
one of the World's foremost authorities on foreign
exchange law, on which he has written extensively. In
1980, he published a devastating critique of the
Terruzzi
case and of the narrow interpretation of Article 8 (2)(b) -
" 'Exchange Contracts', Exhange Control and the
I.M.F. Articles of Agreement: Some Animadversions
on . . .
Terruzzi"
1
*
in 33
International and Compara-
tive Law Quarterly, 111
(1984). According to Gold,
Article 8 (2)(b) is part of an international treaty, and
therefore should be interpreted in the same way in all
I.M.F. countries; and the balance of authority, which
includes decisions of the Federal German and the French
Supreme Courts, favours the more expansive interpre-
tation. The results of the
Terruzzi
approach is to reduce
the Article to a triviality; and that approach is incon-
sistent with other provisions of and the general structure
of the Bretton Woods Agreement, and with the Agree-
ment's objectives. His response to Kerr J.'s "logic" and
sense is as follows:
"Kerr J., whose opinion was approved by all mem-
bers of the Court of Appeal, objects to various con-
sequences of an interpretation of 'exchange contracts'
that went beyond the exchange of currencies and
applied to all contracts that affected a country's
exchange resources. First, it would be extremely
difficult if not impossible, he said, for every con-
tracting party to satisfy itself before entering into an
ordinary international contract concerning goods or
services or choses an action that all necessary per-
missions had been obtained. Exchange control is a
nuisance, whatever meaning is given to 'exchange
contracts'. It is not uncommon for parties engaged in
transactions that are not purely domestic to obtain,
or to require the other contracting party to provide, a
legal opinion on the status of the contract under the
other party's law. Furthermore, the I.M.F. publishes
an annual volume on
Exchange Arrangements
and
Exchange Restrictions,
which summarises the exchange
controls of each member and changes in them during
the year to which the volume relates. The volume
55