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:
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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)