The Gazette 1986

GAZETTE

APRIL 1986

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DUBLIN 7.

cannot give notice of changes that have occurred

since the end of the year, but the volume which is

readily available does reduce risks to a large extent.

Second, Kerr J. objected, a party could overcome the

risk of unforseeability only by insurance, but this

would add substantially to the cost of international

trade and would hamper it. This consequence is

certainly unfortunate. It is heard often in these days

of variable exchange rates, but it has not been demon-

strated that international trade has been reduced by

the necessity faced by parties engaged in it to protect

themselves against exchange risks. Furthermore,

enterpreneurs have responded to variable exchange

rates by developing new instruments for the protect-

ion of traders.

Thirdly, the broad interpretation would produce such

absurdities as encompassing the contracts entered

into when one took a taxi, booked a hotel room, or

sought the advice of a lawyer. These consequences

would be absurdities if exchange controls were operated

absurdly. The practice of authorising lump sums for

tourists' allowances or for business expenses disposes

of this objection, but it is irresponsible to think of the

taxi driver reminded of Article 8, Section 2(b) when

denied his fare by a passenger. The case would have

to be cherished by A. P. Herbert.

Fourthly, if the test of an exchange contract is that it

affects a country's exchange resources, the conse-

quence might be to prevent additions to them and

not only reductions. The assumption upon which this

objection is based is that additions are always favour-

able, but of course they are not. They may have

unwanted effects on the money supply or on the

exchange rate."

It remains to be seen if the Irish courts will adopt the

Terruzzi

approach to Article 8 (2)(b). The judges in the

Terruzzi

case were careful not to pronounce on whether

contracts relating to stocks, shares, and other securities

were exchange contracts.

There is some French auth-

ority that such contracts are exchange contracts;

and

some of the reasoning of Lord Denning, M.R. and of

Ormsrod L.J. in the

Terruzzi

case can be invoked in sup-

port of this view. They emphasise that the policy of the

I.M.F. is to control capital transfers as opposed to

current payments for goods and services. Ormrod L.J.

speaks of "ordinary international commercial dealings,

as opposed to capital transfers", and concludes that

exchange contracts are " t o be distinguished from cur-

rent international transactions such as contracts for the

sale of goods."

Are not most contracts to buy and sell

shares and the like capital transfers?

If our courts opt for the extensive interpretation of

exchange contract, it is conceivable that they would

place one gloss on Article 8 (2)(b), viz. if the contract

contravenes Irish exchange control but the parties are

not in

pari delicto,

then the Article should not stand in

the way of giving the innocent party a remedy. Such a

gloss is consistent with the Article's objective, which is

to ensure that the exchange control rules of one I.M.F.

State is rendered effective in

other

Member States.

An exchange contract in disguise was the subject

matter of

United City Merchants (Investments) Ltd.

-v-

Royal Bank of Canada

English company sold

machinery to a Peruvian company for around $U.S.250,000

and at the same time they agreed to a scheme to double

that price so that the Peruvian company could acquire

foreign currency, an arrangement that contravened

Peruvian exchange control. A letter of credit had been

issued in London in connection with the transaction, for

nearly $U.S. 800;000. The goods were shipped but the

buyer's bank refused to accept the documents regarding

them. The bank was then sued on the letter of credit. It

was held by the Court of Appeal that the court should

always look at the circumstances surrounding such con-

tracts to ascertain if they really are exchange contracts

in disguise; and that the sales contract here was indeed a

disguised exchange contract because its objective and

ultimate outcome was to bring about an exchange of

soles for dollars. Although the claim was on the letter of

credit and not on the contract for sale, the court would

not enforce the credit to the extent that the parties

sought to evade Peruvian exchange control. However,

the court held that the plaintiff was entitled to damages

representing the actual value of the rejected goods. In

Stepehenson L.J.'s words, "the courts . . . should . . .

do their best to prevent breaches of the Bretton Woods

Agreement . . . [They] should do their best to promote

both international comity and international trade. [In

the circumstances], this court could best carry out this

double duty in this case by enforcing the part of the sale

agreement which does not offend against the law of

Peru, and refusing to enforce the part of it which is a

disguised monetary transaction by which currencies are

to be exchanged in breach of that law".

The fact that

the action here was on a letter of credit should not

detract from the outcome because "once any payment is

made by the defendants under the confirmed letter of

credit, effect is, to some extent, being given to an

exchange contract contrary to the exchange control

regulations."

The letter of credit cannot be entirely

isolated from the underlying transaction. On account of

Section 30 of the Bills of Exchange Act, 1982, the

outcome might be different if the action was on a