Foreign Currency: Claims, Judgments and Damages
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CHAPTER 2
Basic concepts
Summary
2.1 The purpose of this chapter is to provide some definitions and explanation for some of the concepts and terms that are used in this book or which feature in the cases and materials to which we refer. Any term in this text that is itself defined in this chapter is marked with an asterisk. The terms are arranged in alphabetical order.Bank note
2.2 From a legal point of view, a bank note is an amalgam of two properties: it is a promise by the issuing bank to pay the bearer of the note a sum of money, and (at least when it is legal tender) it is in modern times treated as money*/cash*.1 2.3 When the currency* of which the bank note forms part is convertible* (in the technical sense described below), the issuing bank will be obliged to redeem the note in gold coinage* or gold bullion at the stipulated rate. Where the currency* is not convertible* in this technical sense, the promise to the bearer is nothing more than a promise to proffer a replacement note in the same sum or in sub-units comprising notes of the same currency*. Bank notes are promissory notes within the meaning of section 83 of the Bills of Exchange Act 1882. 2.4 What distinguishes a bank note from other debt instruments such as Treasury bills and certificates of deposit is that bank notes represent a right to immediate payment. A bank note is the embodiment of the unit of account and is therefore also treated in law as money* or cash*.2 As with coins in English law, title to bank notes passes by delivery and the doctrine nemo dat quod non habet does not apply to them.3Bitcoin
2.5 Bitcoin is a volatile, open source, decentralised, peer-to-peer cryptocurrency*, involving cryptography in its production and transfer. Its existence was announcedPage 8
Breach-date rule
2.6 The formerly dominant breach-date rule (also referred to as the sterling-breach-date rule or principle) was a compound rule, derived partly from the late-Victorian case Manners v Pearson 7 (obligatory conversion into sterling) and partly from then well-established principles governing the date at which compensation was to be assessed. The rule was that claims for damages or debt in a foreign currency had to be converted into sterling* (because the court could not give judgment in a foreign currency) and that the date of conversion was the date of breach (for contractual claims) and at the date of the wrong (for claims in tort and breaches of trust). The rule was followed and applied in Di Fernando v Simon Smits & Co.,8 The Volturno,9 Madeleine Vionnet et Cie v Wills 10 and Cummings v London Bullion Co. Ltd.11 Despite criticism,12 it was confirmed by the House of Lords in resounding terms in Re United Railways of Havana and Regla Warehouses Ltd.13 Nevertheless it was abandoned only 15 years later, in 1976, by the House of Lords in Miliangos v George Frank (Textiles) Ltd.14Cash
2.7 Cash is a collective term for bank notes* and coins* (in contrast to other goods or securities or financial instruments). In most contexts, the word cash is synonymous with money*. It is preferred by some people because it clearly refers to bank notes and coins in a concrete and practical sense. It is less abstract than the more general term ‘money’*. Its original meaning appears to have been a case or chest used by merchants to store money and valuable goods. ‘Cash’ makes occasional appearances in legislation. So, for example, for the purposes of the Financial Collateral Arrangements (No. 2) Regulations 2003 SI 3226/2003, cash is defined asPage 9
Coins/coinage
2.8 Coins are usually the medium of exchange but they may be both the medium of exchange and the object of exchange. When they are the object of exchange, they are a commodity, and are chattels or goods like any other, and no special rules or legal principles apply. South African Krugerrands and British silver half-crowns are coins that fall into this category.16 However, where coins function as a medium of exchange, they are money* and cash* with all the legal consequences that follow from that. The two aspects may coexist. A coin that is part of the legal tender of a country and capable of being used lawfully as a medium of exchange may also be bought and sold as a chattel.17 2.9 Whether a coin is or is not legal tender* falls to be decided by the application of the lex monetae*. That is to say, it is the law of the country under whose laws the coin was issued18 that determines whether the coin is legal tender* or not. In England, the coins that are defined as legal tender* are set out in the Coinage Act 1971, as amended by the Currency Act 1983.19Convertibility
2.10 There are two very different meanings to the words ‘convertible’ and ‘inconvertible’ in connection with a currency. The more modern meaning refers to the ability of a currency to be exchanged for another currency (or gold) without government restrictions. Such currencies are usually said to be ‘freely convertible’. Most currencies are now convertible in this sense, with a few exceptions such as the North Korean won and the Cuban peso. A currency may still be said to be fully convertible even if physical export of the currency out of a country is prohibited. 2.11 The other, and original, meaning of convertibility is to describe the ability of a holder of a bank note to demand from the issuing bank a fixed quantity of a precious metal such as silver or gold. The purpose of convertibility in this sense was to ensure that paper money maintained its value. Convertibility in its original form was enshrined in the Bank of England Act 1819, which provided that as from 1 May 1823 the Bank was required to redeem any of its notes in gold coin at facePage 10
Cryptocurrency
2.12 Cryptocurrency is a form of digital or electronic currency* which is created and sustained through the use of cryptography. The first and the most common version of cryptocurrency is Bitcoin*, but there are now also hundreds of other versions. Although cryptography gives a digital currency a measure of security, events have shown that holdings of cryptocurrencies are not immune to attack and manipulation, and that any claim to absolute anonymity is not justified. A report commissioned by the UK Government, and published in January 2016, has highlighted alternative uses of the electronic principles underpinning the first cryptocurrency.21Currency
2.13 Currency in modern English is an abstract noun which when used in a financial context refers to any unit of account* or payment that is accepted and/or legally prescribed as having a value for purchase or exchange in a particular place. So it is now normal in modern English to say, for example, that ‘The won is the currency of North and South Korea’ or ‘The euro replaced the deutschmark as the official currency of Germany’ or ‘Russia converted to a decimal currency in 1704’. The Decimal Currency Act 1969 defined the ‘old currency’ of the United Kingdom as meaning ‘the currency of the United Kingdom before the appointed day (15 February 1971)’ and the ‘new currency’ as being ‘the new currency of the United Kingdom provided for by the Decimal Currency Act 1967’. 2.14 The word ‘currency’ still retains its more general meaning in English as a means to describe a condition of flowing,22 or the quality of being in general use. According to the Oxford English Dictionary, it was the philosopher John Locke who, in 1699, first used ‘currency’ as an abstract noun to denote the circulation of money. Previously, it was more usual to use the adjective ‘current’ or ‘currant’ to qualify money, with the idea of indicating the use of a particular form of coinage in a particular place, or to emphasise genuine, as opposed to counterfeit, money. 2.15 In section 3 of the Currency and Bank Notes Act 1954 ‘currency’ was not itself defined. Instead, coin was defined in the Act as meaning ‘coin which is current and legal tender in the United Kingdom’.Page 11
Currency of account/currency of payment
2.17 It is most useful to consider the two concepts of currency of account and currency of payment together. The currency of account is the currency in which the substance of the obligation is expressed. In civil law jurisdictions it is the sum that is said to be the sum in obligatione. The currency of payment is the currency in which the obligation is to be discharged. In civil law jurisdictions it is often referred to as the sum in solutione. The currency of account thus determines the extent or scale of the obligation. The currency of payment is merely concerned with the mode in which the obligation (once ascertained) is to be performed at the place of payment. To convert from one to the other, a rate of exchange must be determined and applied. This must be agreed by the creditor and debtor or, in the absence of an agreement, supplied by a court by means of an implied term.24 2.18 The distinction between the currency of account and the currency of payment was explained in clear terms by Lord Denning MR in Woodhouse A.C. Israel Cocoa Ltd S.A. and Another v Nigerian Produce Marketing Co. Ltd in the following way:At the heart of the case lies the difference between the money of account and the money of payment. It is this: The money of account is the currency in which an obligation is measured. It tells the debtor how much he has to pay. The money of payment is the currency in which the obligation is to be discharged. It tells the debtor by what means he is to pay. Take an example: Suppose an English merchant buys 20 tons of cocoa beans from a Nigerian supplier for delivery in three months’ time at the price of five Nigerian pounds a ton payable in pounds sterling in London. Then the money of account is Nigerian pounds. But the money of payment is sterling. Assume that, at the making of the contract, the exchange rate is one Nigerian pound for one pound sterling - ‘pound for pound’. Then, so long as the exchange rate remains steady, no one worries. The buyer pays £100 sterling in London. It is transferred to Lagos where the seller receives 100 Nigerian pounds. But suppose that, before the time for payment, sterling is devalued by 14 per cent, whilst the Nigerian pound stands firm. The Nigerian seller is entitled to have the price measured in Nigerian pounds. He is entitled to have currency worth 100 Nigerian pounds: because the Nigerian pound is the money of account. But the money of payment is sterling. So the buyer must provide enough sterling to make up 100 Nigerian pounds. To do this, after devaluation, he will have to provide £116 5s. in pounds sterling. So the buyer in England, looking at it as he will in sterling, has to pay much more for his 20 tons of cocoa beans than he had anticipated. He will have to pay £116 5s., instead of £100. He will have to pass the increase on to his customers. But the seller in Nigeria, looking at it as he will in Nigerian pounds, will receive the same