The Gazette 1986

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