chapter 18 Some Legal Consequences of Withdrawal
- International Monetary Fund
- Published Date:
- October 1985
The withdrawal of a country from the Fund produces some special legal consequences in the courts, the Fund, and other international organizations, as well as in a variety of other ways.
Nonrecognition of Exchange Controls of Ex-Members
According to Article VIII, Section 2 (b), “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.”
In Stephen v. Zivnostenska Banka, National Corporation,1 the plaintiffs sought the protection of their claims as creditors of the defendant by having the defendant’s assets placed under permanent receivership on the ground that the defendant was a foreign institution that had been nationalized. The case had been sent to a referee for examination and report. The New York Supreme Court decided to confirm the referee’s report except on two issues, on one of which it said:
Regarding the second exception, that relating to the plaintiffs’ standing as creditors, as influenced by the International Monetary Fund Agreement, the referee noted the membership of Czechoslovakia in the International Monetary Fund, and considered particularly … Article VIII, section 2 (b). … He therefore concluded that the plaintiffs could not obtain relief in this court. …
However, he did state, and with mindful foresight, that this phase could be reopened if Czechoslovakia ever withdrew, voluntarily or otherwise, from the fund organization. Such circumstances actually occurred on January 5, 1955, when the International Monetary Fund issued a release that Czechoslovakia was no longer a member. …
No valid reason currently exists to frustrate our public policy, as expressed in the controlling statute, and thereby allow Czechoslovakia to take advantage of one of the privileges of fund membership when it is no longer a member. …
Accordingly, the present status of Czechoslovakia in relation to the International Monetary Fund does not bar the plaintiffs in this action.2
The decision is clear. A nonmember is not entitled to the benefit of Article VIII, Section 2 (b), even though it is an ex-member, the contract that is the subject of an action was entered into while the ex-member was still a member, and the contract would have been unenforceable if the ex-member had remained a member.
In Pan-American Life Insurance Co. v. Lorido,3 the respondent, who was the beneficiary under an insurance policy issued by the petitioner, a life insurance company, upon the life of her late husband, brought an action in Florida, where she resided, for the payment of benefits under the policy. It had been issued by the company, a Louisiana corporation, in Louisiana in 1943, and was delivered to the insured, a Cuban national, in Havana. The policy provided that payments by both parties of all obligations would be made in U. S. dollars in New Orleans. In contesting the widow’s claim, the company argued that its liability under the policy had been extinguished by certain decrees of the Cuban Government, and it relied on Article VIII, Section 2 (b), as further justification for its position.
The court of first instance held that the company could not rely on the Cuban laws because the place of performance was the United States and not Cuba. Appellate courts affirmed this judgment without opinion and denied certiorari.4 The company petitioned the Supreme Court of the United States for writs of certiorari to the Florida courts. It argued that one of the three questions presented for review was whether U. S. courts were entitled to enforce a contract between a Cuban national and a U. S. corporation when that would result in the violation of a Cuban exchange control law that was maintained and imposed consistently with the Articles within the meaning of Article VIII, Section 2 (b). The Florida courts had not dealt expressly with this issue in their judgments, and the company argued that they had not passed upon it. The Solicitor General of the United States was invited to express the views of the United States. He stated that he did not believe that the case presented any important question of federal law. On the issue relating to Article VIII, Section 2 (b), he wrote:
Further review is not warranted with respect to the petitioner’s other contention—that granting recovery to the respondent is contrary to Article VIII (2) (b). … In April of this year , Cuba withdrew from the International Monetary Fund. The provisions of Article VIII (2) (b) are for the benefit of member states and not for the benefit of private parties. Since Cuba is no longer a member of the Fund and since the date of proposed relief determines the applicability of Article VIII (2) (b), a decree granting recovery to the petitioner will not violate the provisions of the Agreement. See Stephen v. Zivnostenska Banka, National Corporation, 140 N. Y. S. 2d 323, 326.
The Supreme Court denied certiorari.5
Other Effects Under Domestic Law
The conclusion that Article VIII, Section 2 (b), is designed for the protection of the economies of members and that ex-members are not entitled to its benefits is sound. But another and more difficult issue arises. Has Article VIII, Section 2 (b), or the Articles as a whole, changed the attitude of members toward nonmembers because of the sharp distinction between members and nonmembers that results from the Articles? If it used to be not inconsistent with the public policy of country A to recognize the effect of the foreign exchange control regulations of country B when the law of B was the applicable law under the private international law of A, has this situation been changed as a result of the Articles if A is a member and B is a nonmember? A decision of the Supreme Court of the Federal Republic of Germany may perhaps be understood in this way,6 but there is not yet sufficient authority on which to base a confident answer to this question.7
There is at least one judicial opinion, although a dissenting one in the case in which it was delivered, that holds Article VI, Section 3, and perhaps other provisions of the Articles to be declaratory of nontreaty international law. On this approach, the opinion held that the defendant could not base a defense on Cuban decrees, even though in view of the withdrawal of Cuba from the Fund the defendant was not arguing for the application of Article VIII, Section 2 (b).8 It is doubtful, however, that Article VI, Section 3, which the dissenting judge thought that Cuba had failed to observe, expresses a principle of general international law.
Withdrawal from the Fund can produce consequences under a member’s law unrelated to the recognition of exchange control regulations. One example that may be cited because of its financial character is the amendment of the Johnson Debt Default Act of the United States 9 by Section 9 of the U. S. Bretton Woods Agreements Act.10 Under the original statute it is an offense in the United States to deal in certain circumstances in the bonds, securities, or other obligations of a foreign government 11 issued after April 13, 1934, or to make a loan to it, while that government is in default in the payment of its obligations to the United States. The Bretton Woods Agreements Act creates an exception in favor of any government while it is a member of both the Fund and the World Bank. The exception terminates, therefore, on the withdrawal of a country from either organization.
Currencies of Nonmembers
When a country withdraws, “normal transactions” in its currency cease.12 The qualification involved in the word “normal” is necessary because there must be some transactions as part of the settlement of all accounts, and it has been seen that in certain circumstances the Fund may even be empowered to sell the ex-member’s currency in the market.13
The Fund may continue to hold an ex-member’s currency until it is redeemed, but it cannot accept new amounts of the currency except in payment by the ex-member of charges on the Fund’s holdings of the currency or in discharge by the ex-member of its obligation to make good losses suffered by the Fund in disposing of its holdings of the currency.14 The inability of the Fund to accept an ex-member’s currency is simply an application of the rule that the Fund cannot hold any nonmember’s currency.15 Even if the Fund specifies a nonmember’s currency for inclusion in the calculation of the monetary reserves of members for the purpose of determining their repurchase obligations,16 the Fund cannot accept the non-member’s currency.17 If the inclusion of a nonmember’s currency results in an obligation for a member that would be payable in that currency but for the rule that it is unacceptable, the member must discharge this obligation in the convertible currencies of members as determined by the Fund.18
The currencies of nonmembers are not normally acceptable by the Fund for a variety of reasons. One of the most important reasons is that the issuer would not be subject to an obligation to maintain the gold value of the Fund’s holdings of the currency.19
A problem might arise if the currency issued by one member were also the currency of another member and the issuer withdrew. It would be difficult to resist the conclusion that the Fund was authorized to go on holding and receiving the ex-member’s currency as the currency of the continuing member, but this difficulty has not arisen in practice.
Personnel of Fund
As early as September 25, 1946, the Executive Directors decided that persons on the staff of the Fund shall be nationals of members unless the Executive Directors authorize exceptions “in particular cases.” 20 The decision was not required by the Articles, which provide only that in appointing the staff the Managing Director shall pay due regard to the importance of recruiting personnel “on as wide a geographical basis as possible.” 21 Geographical distribution has been taken to mean geographical distribution among members. The Executive Directors must be requested to approve the employment of any nationals of nonmembers even though the Managing Director is responsible, subject to the general control of the Executive Directors, for the organization, appointment, and dismissal of the staff.22
When a country withdraws, its nationals are affected by the rule that their employment is subject to approval by the Executive Directors. It has been the practice of the Executive Directors to authorize the continued employment of the nationals of a member who were on the staff of the Fund at the time of the member’s withdrawal.
Membership in Other Organizations
Withdrawal from the Fund has consequences in other international organizations. Under the Articles of the World Bank, a member of the Bank that withdraws from the Fund ceases automatically after three months to be a member of the Bank unless the Bank decides by a three-fourths majority of the total voting power to allow the country to remain a member.23 One proposal advanced at the Bretton Woods Conference would have provided for the cessation of membership in the Bank on a country’s withdrawal from the Fund without any opportunity for the Bank to maintain the country’s membership in that organization.24 This proposal was opposed on the ground that a country that severed its relations with the Fund might still be a desirable member of the Bank. The solution, therefore, was the cessation of membership in the Bank unless the Bank decides to prevent this result, but even after this solution was agreed there remained a difference of opinion on whether the majority required for a decision to permit the retention of membership should be drafted in terms of the number of members or of weighted voting power. Moreover, there was a question whether a majority in terms of weighted voting power should be a simple majority or a majority of three fourths of the total voting power. The committee that considered this question reported in favor of a simple majority, but noted that this was not a unanimous opinion.25 The Conference decided in favor of the high majority, which indicates an assumption that a case would have to be made for the maintenance of membership. A country’s withdrawal from membership in the Bank has no effect on membership in the Fund.
The loss of membership in the Bank for any reason, including the cessation of membership in the Fund, involves the automatic cessation of membership in the International Finance Corporation26 and in the International Development Association,27 other organizations in the World Bank Group. There is no provision in the Articles of either of these organizations enabling it to maintain a country’s membership notwithstanding the cessation of membership in the Bank.
When the charter of the International Trade Organization (ito) that had been contemplated by the Bretton Woods Conference was being negotiated, it was considered inexpedient to require withdrawal from it because a country ceased to be a member of the Fund. Although the obligations under the charters of the ito and the Fund would be complementary, there appeared to be no advantage in compelling withdrawal from the ito. In addition, automatic withdrawal from the ito would be an encumbrance on the right of members of the Fund to withdraw from that organization at will. The ito did not come into existence, but the Contracting Parties to the General Agreement on Tariffs and Trade (gatt) have undertaken much of the task that would have been performed by the trade organization. Once again, it was recognized by the negotiators of the gatt that the obligations it imposed and the obligations under the Fund’s Articles were complementary, but the negotiators did not provide that withdrawal from the Fund should produce withdrawal from the gatt. Instead, the solution was to require a contracting party that ceased to be a member of the Fund to enter forthwith into a “special exchange agreement” with the Contracting Parties.28 The object of a special exchange agreement is to ensure that a contracting party that is a non-member of the Fund will not frustrate the objectives of the gatt by action in exchange matters. In principle, therefore, a country that withdraws from the Fund loses the privileges it enjoys as a member but does not free itself wholly of the kind of obligations that would bind it as a member. There are qualifications that must be made to that statement, but these are investigated in Chapter 21.
Effects Under Loan Agreements
Withdrawal from the Fund by a country that is a member of the World Bank may affect existing loan agreements with the Bank. The General Conditions Applicable to Loan and Guarantee Agreements of the Bank set forth general terms and conditions that are applicable to loans under loan agreements and to agreements with a member that provide for the guarantee of any loans, subject to any modifications that may be provided for in any particular agreement. The General Conditions enable the Bank to give notice to the borrower and the guarantor in certain circumstances suspending in whole or in part the right of the borrower to make withdrawals from the Loan Account on the books of the Bank to which the amount of the loan is credited. Among the circumstances in which the Bank may give notice are those in which the member of the Bank that is the borrower or guarantor “shall have ceased to be a member of the International Monetary Fund.” 29 If the right of the borrower to make withdrawals from the Loan Account has been suspended with respect to any amount of a loan for a continuous period of 30 days, the Bank by giving notice to the borrower may cancel its right to withdraw that amount.30
It is a common practice for other entities to enter into agreements to lend to a member or to one of its agencies when the Fund approves a stand-by arrangement for the member. The terms of these agreements are often related in various ways to the terms of the stand-by arrangement or to the member’s ability to use the Fund’s resources.
Private banks have provided in their loan agreements with a country that if it withdrew from the Fund, any amounts already advanced would become due and payable forthwith at the option of the lender. Similarly, under some Euro-dollar loan agreements withdrawal from the Fund by a country may be regarded as a default that accelerates the obligation to repay.31 The purpose of these provisions is to protect the lender if the borrower is released from the obligations of good conduct in monetary matters that bind members of the Fund.
The Fund itself has agreed in the General Arrangements to Borrow that if a participant withdraws from the Fund, the participant’s commitments under the General Arrangements cease. Any amounts that the withdrawing member has lent to the Fund are included in the settlement of all accounts between it and the Fund.32 No participant in the General Arrangements has withdrawn from the Fund.