605
Court of Appeal
Lord Denning M.R. Diplock and Russell L.JJ.
1966 July 25; Oct. 4
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612[...]
LORD DENNING M.R.
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613[...]
Let me say at once that England and Pakistan are both members of the International Monetary Fund and, as such, each country will respect the currency regulations of the other. This derives from the Bretton Woods Agreement which has been incorporated into our law by the Bretton Woods Agreements Act, 1945 , and the Bretton Woods Agreements Order [S.R. & O. 1946 No. 36] made under the Act. The material provision is article 8, s. 2 (b) of the Schedule, which says that:
"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."
The words "exchange contracts" are not defined, but I think they mean any contracts which in any way affect the614 country's exchange resources. The contracts with which we are concerned here are all clearly exchange contracts. They affect the exchange resources of Pakistan and England. If they offend against the currency regulations of Pakistan or England, they are unenforceable. It is not suggested now that they offend against the currency regulations of England; but it is said that these contracts offend against the currency regulations of Pakistan and are therefore unenforceable.Now it is plain to me that the cheque drawn by Latif for 6,000 rupees did offend the currency regulations of Pakistan. It was a flagrant breach of section 5 (1) (e) and (f) of the Pakistan Regulations. We would certainly not allow it to be enforced in this country. Equally in Pakistan the authorities there naturally enough did not allow it to be freely cashed. They put it into a "blocked account." No doubt they will consider carefully before they allow the brother, A. H. Azad, to take the benefit of it. They may even consider prosecuting him under their regulation 21. But the cheque drawn by Abdulla Azad in favour of Mohammed Sharif does not offend against the currency regulations of Pakistan at all. Those regulations affect persons in Pakistan or resident in Pakistan, such as Latif himself, or the brother, A. H. Azad. But they do not affect persons resident in England. I see no reason why Sharif should not enforce the sterling cheques for £300 against Abdulla Azad. This enforcement will teach Azad a sharp lesson not to engage in transactions of this kind. He will have to pay £300 to Sharif and may get nothing back: for I do not suppose the authorities in Pakistan will allow the brother to use the 6,000 rupees. At all events, the matter is in their control. It is for them to say whether they will permit those rupees to be used by the brother in Pakistan or not. I think the judge was quite right and I would dismiss this appeal. DIPLOCK L.J.
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617[...]
But they do not arise in the present case, for where the foreign law which is relied upon as affecting the contractual rights of parties is the exchange control regulations of a state which is a party to the Bretton Woods Agreement, the matter is not regulated by the general rules of English conflict of laws but by an English statute, the Bretton Woods Agreements Act, 1945 , and an English statutory order made under that statute, the Bretton Woods Agreements Order, 1946 , the relevant provision of which is to be found in Part I, art. 8 s. 2 (b) , of the Schedule to the Order and reads as follows:
"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."
618The effect of this is that an "exchange contract," whatever may be its proper law and wherever acts may be required to be done in performance of the "exchange contract," is unenforceable by an English court if it is contrary to the exchange control regulations of the foreign state. It is to be noted that such contract is not made "illegal" in English law, merely unenforceable. The expression "exchange contract" is nowhere defined in the Act or the Order or even in the Bretton Woods Agreement itself. I think that it should be liberally construed having regard to the objects of the Bretton Woods Agreement to protect the currencies of the states who are parties thereto; and I should be prepared to hold that the following were "exchange contracts," viz., (1) the agreement between the plaintiff and Latif whereby the plaintiff agreed to pay Latif £300 for the rupee cheque; (2) the agreement between the defendant and the plaintiff whereby the defendant agreed to issue to the plaintiff his cheque for £300 in exchange for the rupee cheque drawn by Latif; and (3) the contracts between Latif and the successive holders of the rupee cheque created by the rupee cheque itself, at any rate in so far as they were not in or resident in Pakistan.But not all these "exchange contracts" were contrary to the provisions of the Foreign Exchange Regulations Act, 1947, of Pakistan . Section 5 , on which the defendant relies, only purports to apply to transactions to which at least one of the parties is either in or resident in Pakistan. Neither the plaintiff nor the defendant was. No contract to which they alone were parties could be contrary to the exchange control regulations of Pakistan.How, then, stands the defence that the issue of the sterling cheque for £300 which is in suit was "affected with illegality" within the meaning of section 30 of the Bills of Exchange Act, 1882 ? It was an inland bill and did not itself constitute an "exchange contract" and it was issued in performance of an "exchange contract" between the plaintiff and the defendant, which, if they were the only parties to the contract, was not contrary to the exchange control regulations of Pakistan and was therefore not rendered unenforceable by the Bretton Woods Agreements Act and Order. Even assuming that the defendant's cheque was issued pursuant to a tripartite contract to which Latif was a party as well as the plaintiff and the defendant themselves - a matter which it was for the defendant to prove but which was never investigated at the trial - such tripartite contract would not have been "illegal" in English law, although it would have 619 been unenforceable under the Bretton Woods Agreements Act, 1945 , and the Bretton Woods Agreements Order, 1946 , notwithstanding that the proper law of the contract was English law.But the plaintiff is not suing on this contract, whether it was bipartite or tripartite. He is suing on the cheque which was issued by the defendant in performance of this contract. A cheque issued in performance of an agreement which is merely unenforceable is not "affected by illegality," although the drawer may have an alternative defence to an action by an immediate party by showing that the immediate party did not give value, that is, consideration therefor. This alternative defence, as I have already mentioned, was not pleaded in the present action and consequently the subsequent history of the rupee cheque which was delivered by the plaintiff to the defendant in consideration for the issue to him of the sterling cheque was not investigated in detail at the trial. It did appear from the documents produced at the trial that the rupee cheque has been paid in Karachi by the Pakistan bank on which it was drawn and that the payment has been credited to the defendant's brother, but upon the instructions of the State Bank of Pakistan, the payment was credited to what is described as a "blocked account." What the legal effect of such a payment is in Pakistan does not appear from the Foreign Exchange Regulations Act, 1947, of Pakistan , for it is not the type of blocked account referred to in section 6 of that Act, and there was no other evidence about it. The defendant got what he bargained for, a rupee cheque worth £450 at the current rate of exchange which he knew could only lawfully be paid with the permission of the State Bank of Pakistan and it looks as if it was ultimately paid to the holder to whom he transferred it, although not in the manner in which they had hoped.