Exchange Control Regulations within the Meaning of the Bretton Woods Agrement: A Comparison of Judicial Interpretation in the United States and Europe

Berkeley Journal of International Law, Dec 1990

Allan T. Marks

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Exchange Control Regulations within the Meaning of the Bretton Woods Agrement: A Comparison of Judicial Interpretation in the United States and Europe

Berkeley Journal of International Law Exchange Control Regulations within the Meaning of the Bretton Woods Agrement: A Comparison of Judicial Interpretation in the United States and Allan T. Marks 0 Recommended Citation 0 0 Allan T. Marks, Exchange Control Regulations within the Meaning of the Bretton Woods Agrement: A Comparison of Judicial Interpretation in the United States and Europe, 8 Int'l Tax & Bus. Law. 104 (1990). Available at: - Exchange Control Regulations Within the Meaning of the Bretton Woods Agreement: A Comparison of Judicial Interpretation in the United States and Europe by Allan T. Markst INTRODUCTION In July 1944, leaders from around the world gathered at the small town of Bretton Woods, New Hampshire, to redesign the world economic order in the wake of the Second World War. The delegates to the Bretton Woods International Monetary Conference drew up articles of agreement establishing the International Monetary Fund (IMF).' Two principal purposes of the IMF Articles of Agreement [hereinafter the Bretton Woods Agreement], as set forth in article I of the treaty, are "[t]o promote international monetary cooperation [and] [t]o promote exchange stability." 2 In order to further these twin goals, the Bretton Woods Agreement generally requires that each member state respect the foreign exchange laws of other IMF members. This article analyzes certain aspects of article VIII, section 2(b) of the Bretton Woods Agreement. Article VIII, section 2(b) renders unenforceable those exchange contracts that involve the currency of an IMF member state and that violate the exchange control regulations of that state. This provision effectively gives extraterritorial effect to the currency control laws of member states by mandating the unenforceability of contracts that violate these laws. t J.D. Boalt Hall School of Law, University of California, Berkeley, 1990; B.A. Johns Hopkins University, 1986. Mr. Marks is associated with the firm of Milbank, Tweed, Hadley & McCloy in Los Angeles, California. The author gratefully acknowledges the assistance of Professor Stefan A. Riesenfeld of the University of California, Berkeley (Boalt Hall) School of Law and Hastings College of the Law, and Professor David Caron of the Boalt Hall School of Law, University of California, Berkeley. The author also thanks Katherine J. Moore, Esq. and Stephanie Rasines, Esq., both of Milbank, Tweed, Hadley & McCloy, for their generous help. 1. Articles of Agreement of the International Monetary Fund, Dec. 27, 1945, 60 Stat. 1401, T.I.A.S. No. 2322, 2 U.N.T.S. 39, amended by May 31, 1968, 20 U.S.T. 2775, T.I.A.S. No. 6748, 726 U.N.T.S. 226, amended by Apr. 30, 1976,29 U.S.T. 2203, T.I.A.S. No. 8937 [hereinafter the Bretton Woods Agreement]. 2. Id. art. I. The first sentence of article VIII, section 2(b) of the Bretton Woods Agreement states: Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member.3 The strength of this provision lies in its broad geographic reach: article VIII, section 2(b) completely bars the enforcement of an illegal exchange contract in any IMF member state. Article VIII, section 2(b) of the Bretton Woods Agreement particularly deserves analysis because of its potential applicability to a wide range of private international agreements. This provision has been given internal effect in several countries, including the United States, 4 and probably has the full force of law in all IMF member states, even those that have not otherwise incorporated article VIII, section 2(b) into their domestic law.5 Additionally, recent, rapid changes in political and economic regimes in many parts of the world may result in increased application of the Bretton Woods Agreement to invalidate private international contracts. As the cases discussed in this article illustrate, article VIII, section 2(b) has been invoked most often as a defense to the enforcement of contracts following sudden political change, drastic economic upheaval, or the nationalization of financial institutions, especially in developing countries.6 The shift toward open markets in Central and Eastern Europe and the admission or readmission of some or all of the member nations of the Council for Mutual Economic Assistance (CMEA) 7 into the IMF may also lead to increased application of the Bretton Woods Agreement in domestic litigation.8 In order to determine whether article VIII, section 2(b) of the Bretton Woods Agreement prohibits the enforcement of a particular contract, a court must focus closely on two questions: (1) is the challenged contract an "exchange contract"? and (2) does the contract violate the "exchange control regulations" of a member state whose currency is involved in the contract? Once a court finds that an exchange contract violates the exchange con (...truncated)


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Allan T. Marks. Exchange Control Regulations within the Meaning of the Bretton Woods Agrement: A Comparison of Judicial Interpretation in the United States and Europe, Berkeley Journal of International Law, 1990, Volume 8, Issue 1,