7.01  Chapters 5 and 6 dealt with the interpretation of monetary obligations, and the difficulties which could arise if the money of account was uncertain at the time of the contract or became uncertain as a result of subsequent events. In some respects, those chapters were coloured by the application of Article 12(1)(a) of Rome I, at least in so far as obligations of a cross-border character were concerned. At the same time, those chapters considered such rules of municipal law as fell to be applied following the identification of the governing law.

7.02  In contrast, the present chapter is more directly concerned with Article 12(1)(b), read together with Article 12(2), of Rome I, although once again the relevant rules of domestic law will also be considered. The analysis in the previous chapters has examined whether or not a monetary obligation has actually come into existence, and has explained both the nature and scope of such an obligation and the identification of the currency in which it is expressed. The present chapter assumes that a valid and enforceable monetary obligation does indeed exist; it therefore seeks to determine whether the steps taken by the debtor have been sufficient to discharge (p. 178) that obligation.¹ In other words, has the debtor satisfied his monetary obligation, or is he in breach of it?

7.03  In order to answer this general question, it is proposed to consider the following matters:

1. (a)  the concept of payment and the performance of monetary obligations;

2. (b)  the money of payment;

3. (c)  payment in the context of private international law; and

4. (d)  the performance of monetary obligations abroad.

7.04  The concept of payment is, of course, a fundamental aspect of the law of money.² Payment in the legal sense must connote any act offered and accepted³ in performance of a monetary obligation without changing the essential nature of the original (p. 179) obligation.⁴ This approach is in some respects supported by remarks made in the Libyan Arab Bank case,⁵ where Staughton J stated, ‘in my view, every obligation in monetary terms is to be fulfilled, either by the delivery of cash or by some other operation which the creditor demands and which the debtor is either obliged to, or is content to perform’.⁶ It may be helpful to ask whether a transfer of funds has the effect of discharging a genuine liability and, if so, this may properly be regarded as a ‘payment’.⁷

7.05  Of course, in practice, the lawyer is less likely to be concerned with purely conceptual issues. He is more likely to confront problems of a more direct nature, for example, whether the steps offered by a debtor amounted to an adequate tender of payment in compliance with the contract at issue.⁸ The subject therefore requires discussion in some depth. For convenience, it is proposed to consider sterling and foreign currency obligations separately for these purposes. This treatment merely reflects the fact that, in the case of a foreign money obligation, a right of conversion into sterling may arise where the debt is payable in England; it does not detract from the general view that no material distinction should now be drawn between domestic and foreign money obligations.⁹ As will be seen, most of the relevant principles are applicable to both forms of obligations.

7.06  Before proceeding to the details, it is perhaps fair to note that the concept of payment cannot be defined in a single fashion for all legal systems. In France, (p. 180) Article L 133–3 of the Code Monétaire et Financier defines payment as ‘an action which consists in putting, transferring or withdrawing funds, independently of any underlying obligation between the debtor and the beneficiary, ordered either by the debtor or the beneficiary’. French writers have debated whether payment should be regarded as a legal fact or a legal act (fait juridique or acte juridique). One writer has argued that the extinction of an obligation through payment is always a legal fact because the extinction of the obligation in this way is mandated by law,¹⁰ but this view is not widely shared.¹¹ The importance of the distinction lies in the fact that an acte juridique must be proved by reference to specific rules set out in the Civil Code, whereas a fait juridique can be proved by reference to any available evidential means. In a recent decision, the Cour de Cassation has held that proof of payment is a factual issue that can be proved by evidence.¹²

7.07  Returning to questions of English law, how is a debtor to perform an obligation payable in sterling and to be performed in England? It is necessary to explain at the outset that the present discussion is concerned with the performance of liquidated debts or obligations.¹³ In England, it is well established that a claim for an unliquidated sum cannot be discharged by payment alone—for how can one pay a sum of an indeterminate amount? An unliquidated obligation can only be discharged by accord and satisfaction—that is to say, (a) a contract between the parties which settles the amount to be paid (thus discharging the unliquidated obligation and substituting for it a liquidated amount); and (b) the payment of the consideration which makes the contract operative.¹⁴ In other words, a contract between the parties is required effectively to convert the unliquidated obligation into a liquidated debt, so that it can be discharged in accordance with the rules about to be discussed.

7.08  In contrast, the payment of a liquidated obligation presupposes the existence of a contract between the parties.¹⁵ No further agreement is therefore required either to (p. 181) fix or to discharge the obligation. However, when notes and coins are handed over to the creditor, or money is transferred in any other way, it seems that the purpose of the transfer must either be made clear to the creditor or it must otherwise be apparent from the circumstances. The debtor must intend to discharge his obligation by the payment in question. The point may seem obvious but difficulties can arise in particular cases. For example, if a company owes a series of ten debts of £1,000 each, which of those debts is discharged if it pays £2,000 to its creditor? The point may be important, especially where each debt carries a different rate of interest.¹⁶ Likewise, suppose that a father owes a debt of £1,000 to his son. Shortly before his death, the father hands £1,000 (or a larger sum) to his son in cash. Did the father intend to repay his debt, or did he intend to make a gift to his son in anticipation of the father's death? In the latter case, the debt could be recovered from the father's estate, whilst in the former case it plainly could not. Applying the rules discussed above, it seems that (in the absence of any intimation that the father intended to discharge his debt) the payment would probably fall to be treated as a gift.

7.09  If the intention of the debtor is important, then one is naturally driven to enquire as to the relevance of the intention of the creditor. The debtor will have undertaken to pay the creditor under the terms of the contract and (by necessary implication) the creditor must have agreed to accept it. Why, otherwise, has he entered into the contract at all? But in spite of this reasoning, it seems that no creditor is under any positive, legal duty to accept payment, nor can the debtor effectively force payment upon the creditor. If payment is to be made in a legal sense, then the consent of the creditor is necessarily required.¹⁷ If the creditor declines to accept the proffered funds—even though tendered in strict conformity with the terms of the contract—then payment does not occur in the legal sense, even thought the creditor's refusal is apparently at odds with the terms of the contract.¹⁸ All the debtor can do is to tender payment, ie he may make an unconditional offer to pay in the (p. 182) agreed manner. In the event of non-acceptance, this places the creditor in default because he is responsible for the delay in performance.¹⁹ If the tender complies with the terms of the contract and the debtor thereafter remains ready and willing to pay in that manner, then any action brought against him will be dismissed with costs, provided that the money is paid into court immediately after service of the proceedings.²⁰ Under English law, therefore, it is necessary to re-emphasize the distinction between tender and payment in accordance with the terms of the contract. Tender is a unilateral act of the debtor, whereby he takes all of the steps which are open to him, acting alone, to complete the payment in accordance with the terms of the contract. On the other hand, payment is a bilateral act requiring the consent both of the debtor and creditor.²¹ In addition, payment must clearly be made to the creditor or his duly authorized agent, for payment to some other third party clearly cannot discharge the obligation. This statement is obvious and some of the difficulties that may arise in the context of payment to an agent—including the scope of any actual/apparent authority—will be discussed later in this chapter. But, in rare cases, there may even be doubt or confusion about the identity of the creditor himself, and the debtor will clearly need to exercise care in such a case. This may occasionally occur in cases involving transactions with a group of companies where there is a lack of clarity as to the identity of the precise entity which is entitled to receive payment.²²

7.10  In English law, therefore, the question of law is not how payment is to be made, for it may be made by any means agreed between the parties or which the creditor may otherwise choose to accept. Anything so agreed and accepted constitutes (p. 183) a payment provided that the creditor is put in a position freely to dispose of the money transferred to him, to the extent required by the terms of the contract.²³ The correct question is—how is a valid and effective tender to be made, such that it will produce the legal consequences described above? In principle, the answer is that a valid tender is made by unconditionally²⁴ proffering to the creditor the amount due in legal tender,²⁵ or otherwise in compliance with the terms of the contract. This rule enjoys general recognition²⁶ and is firmly established in England. In so far as the rule relates to cash, there exists a long line of decisions of the Court of Appeal which have expressed it in the clearest terms and occasionally in remarkable circumstances. At the end of the nineteenth century, the Court of Appeal held that £463—then a substantial amount—had to be proffered in legal tender. As a result, a solicitor had no authority on behalf of his client to accept another solicitor's cheque, and accordingly such a cheque could not constitute a valid tender.²⁷ A year later, the Court of Appeal likewise held that an auctioneer was entitled to insist upon a deposit being paid ‘in cash’, ie in legal tender rather than by cheque; and the rule was held still to be ‘strictly’ applicable even as late as 1974.²⁸ Indeed, as recently as 2005, the Supreme Court of New Zealand was called upon to decide that a vendor of land was not obliged to accept the purchaser's personal cheque as payment of the deposit on exchange of contracts.²⁹ The rule is, however, in all respects subordinate to the terms of the contract and (in the light of modern commercial practice) the courts will be very astute to find that the obligation to pay in cash has been varied or waived.³⁰

(p. 184) 7.11  Where large amounts are involved, payment by legal tender is frequently unthinkable and cannot possibly be within the contemplation of the parties. Accordingly, whilst a contractual requirement for payment ‘in cash’ may in some cases connote a requirement to pay by means of legal tender,³¹ terms of this kind must always be interpreted against the background of modern commercial practice. Consequently a contractual requirement for ‘payment in cash’ was interpreted to indicate ‘any commercially recognised method of transferring the funds the result of which is to give the transferee the unconditional right to the use of the funds transferred’.³² The robust process of interpretation just described can only be further accelerated by the current (and strenuous) governmental efforts to prevent money laundering and to trace the proceeds of crime, and which thus render problematical the acceptance of physical cash in many cases.³³ But the existence of such an implied term (or the existence of the creditor's consent) was perhaps surprisingly denied in a case involving the repayment of some US$292 million, with the result that the debtor would have been required to pay that sum in cash.³⁴

7.12  If it follows from this discussion that a creditor may often be compelled to accept a payment in the ‘commercial equivalent’ of cash (or, perhaps more accurately, the debtor may be entitled to make his tender by proffering such an equivalent), then it naturally becomes necessary to identify that which will amount to a commercial equivalent. Plainly, it would not include a cheque, for in the absence of his express (p. 185) or implied consent, the creditor cannot reasonably be expected to take the risks of countermand or dishonour; further, pending clearance, the effect of payment by cheque is to allow the debtor a few days’ continued use of the money.³⁵ But if the creditor refuses to accept a banker's draft issued by a reputable institution and insists on legal tender, then the Court should treat the creditor's attitude as vexatious and uphold the validity of the tender. It may pray in aid the judgment of the US Supreme Court in support of its approach.³⁶ Thus, an obligation to pay ‘in cash’ to the credit of an account at a particular bank may be performed by means of a bank transfer, for the net result for the creditor is the same in either case.³⁷ Likewise, in some cases, it will be possible to infer from previous dealings that the creditor is prepared to accept payment in a particular manner, or a similar inference may be drawn from the conduct of the parties or the surrounding circumstances.³⁸ If a creditor has agreed to accept payment by cheque, then the delivery of the cheque constitutes a valid tender, but the debt is still only discharged when the creditor accepts the cheque and, even then, this is conditional on subsequent payment of the instrument.³⁹

7.13  It should not be overlooked that this process of interpretation is necessary in order to conclude that the creditor—whether expressly or impliedly—has waived his right to receive payment in cash.⁴⁰ For the reasons just given, this type of interpretation will usually be reached with ease, but it must nevertheless be emphasized that the validity of any payment or tender otherwise than by legal tender does depend upon the express or implied consent of the creditor; whilst this may easily be inferred, it is not possible to dispense with it.⁴¹ Furthermore, it may be necessary (p. 186) in particular cases to consider the nature and extent of the consent which the creditor has given. For example, the debtor may happen to know that the creditor has several bank accounts; has the creditor consented to payment to any of these accounts, or merely to selected accounts? The point may be important if the recipient bank fails shortly following receipt of the payment and before the creditor has been notified of the funds transfer. If the payment was so made without the creditor's (express or implied) consent, then it is difficult to see why the creditor should be saddled with the loss under such circumstances; if such a payment were treated as a valid discharge of the obligation, then the creditor would necessarily also lose the benefit of any guarantee or security which he might hold. So far as English law is concerned, it is now clear that payment to the account of the creditor with a particular bank will not discharge the obligation—nor will it even constitute a valid tender—in the absence of the creditor's consent; the same principle appears to have been applied elsewhere.⁴² In other words, whilst ‘bank money’ may in general practice be accepted by creditors as a means of payment, it does not follow that they are legally bound to do so. Bank money and other non-cash forms of money can thus only function as money with the creditor's consent but, as noted elsewhere,⁴³ this does not in any sense disentitle them to their label as ‘money’.

7.14  It has been shown that a monetary obligation can be discharged by any means agreed between the parties or to which the creditor is prepared to consent. In most cases, of course, the creditor will be very willing to accept any reasonable form of payment tendered to him, even if it does not strictly conform to the express or implied terms of the original agreement.⁴⁴ Creditors will accept payment by means of cheque, letter of credit, or other instruments. Instruments of this kind are regarded by the courts as ‘equivalent to cash’, so that, following dishonour, judgment for the face amount of the instrument will generally follow as a matter (p. 187) of course,⁴⁵ although the payee does have the alternative of reviving the original cause of action.⁴⁶ The drawer of the cheque cannot raise defences or counterclaims arising under the underlying commercial contract, at any rate in the absence of fraud.⁴⁷ Of course, the mere acceptance of the cheque or other instrument by the creditor does not of itself constitute ‘payment’, for it does not have the immediate effect of making funds available to the creditor;⁴⁸ such instruments only constitute payment if they are subsequently honoured, but if this happens then the date of payment is deemed to be the date on which the cheque, letter of credit, or other instrument is given.⁴⁹ If the creditor has authorized the debtor to pay by cheque and send it through the post, then the creditor runs the risk that the cheque will be stolen and paid to a third party.⁵⁰ By contrast, payment by means of a credit card will usually involve the unconditional and absolute discharge of the debtor, for the (p. 188) supplier of goods or services accepts the issuing company's payment obligation in place of the customer's liability. The customer thereupon assumes an obligation to make a corresponding payment to the card issuer.⁵¹

7.15  Important though the foregoing means of payment may be in daily life, it must be said that the most difficult types of dispute which may have arisen in recent years have centred on payment by means of bank transfers.⁵² No doubt this is because transfers of this kind are now viewed as both a secure and more rapid means of transferring funds, and because the higher values which may be involved create a greater incentive to litigation in the very few cases in which some difficulty occurs.⁵³ In practical terms, most disputes have centred on the precise time and the date at which payment has been received. If payment was tendered later than the contractual date and time, then a number of consequences may ensue. First of all, the creditor may become entitled to interest or other damages in respect of the late payment. Alternatively, the creditor may be contractually entitled to reject the tender, to terminate the arrangements and, in a rising market, employ his assets more profitably elsewhere.⁵⁴

7.16  The principal payment system for large value transfers in this country is the Clearing House Automated Payments System (CHAPS). This and many other systems used (p. 189) to operate on the basis that all transfers were settled on a ‘net’ basis at the end of the working day. However, in line with many other modern, high value systems,⁵⁵ transactions are now settled on a real time, gross payments basis. Transactions are effected through the Bank of England via settlement accounts held by a group of banks⁵⁶ with the central bank. Although generally used for higher value payments, there is no specific lower limit on payments through CHAPS and settlement can be almost immediate, in the sense that no period of prior notice is required for an instruction to be given. All payments through this system are made in sterling.⁵⁷ In order to allow for the smooth operation of the system and to provide certainty of payments, CHAPS Rules require that payment instructions must be given on an unconditional basis and must be irrevocable. A bank that receives a payment within a set timescale is also required to credit its own customer's account on a ‘same day value’ basis, in the sense that the amount must be at the immediate disposal of the payee.

7.17  Other payment systems in this country include the following:

1. (a)  BACS (Bankers Automated Clearing Services) is commonly used for lower value but high volume business, including the collection and payment of direct debits and standing orders. Payments are processed over a three-day cycle.

2. (b)  Faster Payments provides for the collection of electronic payments within a short timescale following the receipt of the instruction. Again, members must hold settlement accounts at the Bank of England.

7.18  It may be helpful at the outset to say a few words about the legal nature of a funds transfer through the banking system.⁵⁸ First of all, it should be observed that—convenient though the terminology may be—nothing is, in fact, ‘transferred’ at all, at least in the literal sense of that word.⁵⁹ The payer simply instructs his bank to reduce his own account balance and to create a credit in favour of the payee's bank. (p. 190) The payee's claim on his own bank is thereby correspondingly increased.⁶⁰ There is no intention that the payee should acquire any rights as against the payer's bank and, hence, no assignment can be involved. This analysis, although correct, gave rise to an unsatisfactory outcome in R v Preddy,⁶¹ where defendants who had fraudulently procured a bank transfer as part of a mortgage scheme could not be convicted of obtaining property ‘belonging to another’ for the purposes of the Theft Act 1968.

7.19  A series of questions may arise in relation to payment via this means. These may include:

1. (a)  does payment through this means constitute a valid discharge of the debt;

2. (b)  does the payment comply with the terms of the contract; and

3. (c)  at what point of time will payment be complete?

7.20  First of all, does payment through the banking system amount to a discharge of the debtor's payment obligation? On ordinary principles of agency law, a payment made on behalf of the debtor through the banking system to the creditor's bank will discharge the debt if the recipient bank has actual or ostensible authority to receive it.⁶² The mere fact that the creditor is known to have an account with a particular bank does not of itself mean that such institution has authority to receive payments on behalf of the creditor for the purposes of the particular transaction at hand.⁶³ Equally, a transfer to a bank account of the creditor will not discharge the obligation if it has been made clear to the debtor that payment will only be accepted by means of a funds transfer to the client account of the creditor's legal advisers for, in such a case, the creditor's own bank plainly has neither actual nor apparent authority to accept the transfer.⁶⁴ Alternatively, and again on the basis of agency law, the payment will also discharge the debt if the creditor, having become aware of the transfer, elects to ratify the payment.⁶⁵

(p. 191) 7.21  The difficulties do not, however, end at this point. If payment is made to the creditor's bank—or, for that matter, to any other agent of the creditor—a question may arise as to the precise scope of that authority. For example, does the agent have authority only to accept the tender, or does he have authority to accept the payment? This apparently fine distinction may have real consequences. Two decisions may helpfully be contrasted. In Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia,⁶⁶ the charterer of a vessel was late in paying the hire, but funds were remitted to the owner's bank on the next business day. Since the payment had been received by the owner's bank, the charterer argued that this amounted to acceptance of the payment and, hence, a waiver of the breach on which the owner had relied to terminate the charter. That contention was rejected; the bank would have had no knowledge of the underlying transaction or the due dates under the charter. Whilst it had authority to receive the payment, it had no authority to accept it, with the result that the owner was entitled to reject the payment when it became aware of it and terminate the charter on the basis of late payment.⁶⁷ As a result, payment to the creditor's bank account of itself will not normally amount to the full discharge of the obligation concerned. The tender is only accepted when the creditor treats the funds as his own⁶⁸ or where he fails to take steps to reject the funds within a reasonable time of becoming aware of the credit.⁶⁹ In contrast, in Central Estates (Belgravia) Ltd v Woolgar (No 2),⁷⁰ a managing agent of property received and accepted a payment of rent whilst a breach of the lease was subsisting. Since the agent had accepted the payment and, in the course of its business, was aware of the possibility of forfeiture proceedings, this amounted to an effective waiver of the breach. In other words, the agent (in contrast to the bank in Mardorf Peach) had authority not merely to receive the payment, but also to accept it.⁷¹

7.22  Whether or not a payment or tender by means of a bank transfer has complied with the terms of the contract between the creditor and the debtor inevitably involves (a) an analysis of the contract in order to ascertain what he was obliged to do; and (b) an analysis of the steps taken by him in the intended performance obligation. This statement of the obvious means that one must separately consider the contractual time of payment and the actual time of payment.

(p. 192) 7.23  As to the first point, the time at which payment should be made (or, more accurately, tendered) is once again a matter of substance which must be ascertained by reference to the law applicable to the contract.⁷² Each case will thus depend upon the terms of the contract at issue. A few general points may however be noted in an English law context:

1. (a)  If no time for payment is expressly stipulated, then it must be inferred from the terms of the contract. Where the contract involves the provision of services, payment will often be due once the work has been completed and the debtor has had an opportunity to confirm its completion to a proper standard.⁷³

2. (b)  The time of payment is not usually of the essence of the contract⁷⁴ unless the express terms or the nature of the contract require a contrary conclusion or, following notice to perform given by the creditor, the debtor's continuing delay becomes a matter which goes to the root of the contract breach.⁷⁵

3. (c)  The mere stipulation of a date for payment will not usually indicate that time is of the essence of the contract. But where time has been expressed to be of the essence, then the courts will be slow to find a waiver of that term. Thus, where a contract provides for ‘punctual’ payment on a Sunday, payment on Monday is too late.⁷⁶ Where payment has to be made ‘on demand’, the debtor has to have it ready at a convenient place where he can get it within a reasonable time and without having to make time-consuming arrangements.⁷⁷

Whilst the identification of the date on which payment is contractually due may occasionally be obscure, the time at which payment is in fact made can usually be determined without difficulty.⁷⁸

7.24  Where the creditor is to receive or accept payment by means of a transfer of funds to his bank account, it is suggested that payment occurs only when the account (p. 193) has been unconditionally credited with the requisite amount.⁷⁹ It is sufficient if the amount was credited intentionally and in good faith, and not as a result of error or fraud, and under circumstances that the credit is unconditional and cannot properly be reversed. Payment is deemed to be made at that point, because the bank has unconditionally recognized that the recipient has become a creditor of the bank to the extent of the amount so transferred.⁸⁰ Notification to the creditor is not required in order to perfect or complete the payment, or to render it effective;⁸¹ nor is it even necessary that the creditor's bank has actually received a corresponding payment from the debtor's bank.⁸² It must be re-emphasized that the creditor must have complete, unconditional, and immediate access to the full amount of the funds concerned. Thus, if payment is due on 22 January and is credited to the creditor's account on that date, but subject to the proviso that the ‘value date’ is 26 January, then payment is only deemed to be made on 26 January, for the creditor only has full access to the required funds on the latter date. This remains the case even though the creditor could access the funds on 22 January subject to minor interest or other charges, for the requirement for such deductions derogates from the full and complete unconditionality which is an essential feature of this form of payment.⁸³

7.25  It may be argued that (as between the parties) payment should be treated as made when the requisite funds are received by the creditor's bank, ie before they will actually have been allocated to the creditor's own account. There is something to be said for this view, in that the debtor has done everything in his power to ensure payment and he should not be prejudiced by errors or delays within the creditor's bank in ensuring proper allocation—the creditor must take all the risks associated with (p. 194) his own choice of bank. This appears to be the justification for the first instance decision in The Afovos,⁸⁴ where payment was held to be complete at the point at which the receiving bank had received and tested the incoming telex from the paying bank. However, the decision was reversed and no firm views were expressed on the point in the House of Lords.⁸⁵ In the United States, it has been held that payment is treated as made once the electronic transfer instructions to the receiver bank have become incapable of alteration or revocation—an actual credit to the creditor's account was not a necessary part of the payment process.⁸⁶ But in spite of these decisions, it is suggested that payment can only be deemed to be made when the necessary credit entry has been made to the creditor's account, for it is only at that point that the creditor will acquire the immediate and unconditional use of his money which, as has been shown, is an essential ingredient of payment. Thus in The Brimnes⁸⁷ the Court of Appeal noted that ‘the credit of the owner's account so as to give them the unconditional right to the immediate use of the funds transferred was good payment’ and ‘“payment” is not achieved until the process has reached the stage at which the creditor has received cash or that which he is prepared to treat as the equivalent of cash or has a credit available on which, in the normal course of banking practice, he can draw, if he wishes, in the form of cash’. It is submitted that these statements are entitled to approval,⁸⁸ and that accordingly, nothing short of a credit entry is sufficient to achieve payment under these circumstances.⁸⁹

It is true that the language of the directive then excuses the debtor from liability for interest if he is not responsible for the delay—eg, because he gave timely instructions to his bank but which were not properly executed. But this goes to the question of liability for interest, and does not affect the question whether the payment has been ‘received’.

7.27  Although perhaps not directly relevant to the relationship between the debtor and the creditor, it may be helpful to note one point in relation to the position of the creditor's bank. Once it has received the funds transferred, together with sufficient instructions to credit the recipient's account,⁹⁴ it is not open to the creditor's bank to reject the transfer and return the funds to the debtor's bank, unless it has authority from the creditor for that purpose. To express matters in a different way, the (p. 196) bank becomes indebted to the customer when it receives the funds for credit to his account, and there is no implied term of the contract which entitles the bank unilaterally to cancel that debt. This may seem to be a curious statement, yet it became the practice of some banks to reject or to return funds transfers if there were grounds for suspecting that they were the proceeds of criminal activity. It has now been decided that a bank could not commit a money laundering offence merely on the grounds that it received and retained funds under these circumstances, although the bank would have to comply with the reporting requirements laid down by the Proceeds of Crime Act 2002. Where a bank returned the funds to the remitting bank in such a case, it did so without lawful authority and thus remained indebted to the customer for the amounts which had temporarily been credited to his account.⁹⁵

7.28  The date on which payment actually occurs—as compared to the date on which it was contractually due—will be of importance in a variety of cases. For example, interest may accrue on a payment that is overdue, or late payment may entitle an owner to withdraw a vessel from a charter.⁹⁶

7.29  For the reasons given above, it has been noted that:

1. (a)  where payment is made by cheque, the payment effectively back-dates to the date of receipt of the cheque by the creditor, subject to the condition that it is met by the paying bank on presentation; and

2. (b)  in the case of a bank transfer, payment is complete when the account of the payee is unconditionally credited with the necessary funds and expressly or impliedly accepted by the creditor.⁹⁷

7.30  Whilst it is suggested that these are the correct approach to payments of this kind, it should be noted that this view is not universally accepted. For example, French law appears to take the view that payment is complete when the funds are received by the creditor's bank, even though they have not then been credited to the account concerned.⁹⁸

7.31  How, in principle, is a foreign money obligation to be paid in England?⁹⁹ Many of the issues of a purely monetary law character have already been discussed in the context of sterling obligations. The starting point must therefore be that a foreign currency obligation governed by English law must be discharged by the payment of legal tender prescribed by the lex monetae. As discussed earlier, however, this prima facie rule may be displaced by the express or implied consent of the creditor, whether expressed in the contract itself or at the point of payment.

7.32  The obligation to pay in the legal tender of the lex monetae is inherent in the nominalistic principle as understood in England.¹⁰⁰ It defines not only the quantum of the obligation, but also the form of payment. Thus, it was held that the obligation to repay in Gibraltar a loan of pesetas involved the duty ‘to pay in whatever at the date of repayment was legal tender and legal currency in the country whose money was lent’.¹⁰¹ In strict terms, this remains the case if the original loan was made by means of a cheque or bank transfer in favour of the borrower.¹⁰² Yet it must be repeated that, at least in commercial cases, the requirement for payment in legal tender has both a dated and unrealistic flavour; consequently, the requirement for payment in this form should readily be set aside in modern business conditions, especially where large sums are involved.¹⁰³

7.33  As has been noted on a number of occasions, English law now strives, so far as possible, to treat sterling and foreign money obligations on an essentially similar footing. Both types of obligations are classified as ‘debts’ and the legal framework applicable to their enforcement in England will be the same in each case. Yet it is clear that this assimilation of domestic and foreign money obligations cannot be regarded as entirely complete. The very fact that an English law contract is expressed in a foreign currency raises private international law questions which would not arise in the context of a sterling obligation arising between the parties in England. Furthermore, where payment is to be made by means of an inter-bank funds transfer, it will frequently be necessary to record and give effect to that transfer through the payments or clearing system operated in the country which issues the currency concerned. If the contractual place of payment is outside that country, then it is plain that further conflict of law issues can arise.

7.34  Such questions arose in a particularly acute form in English litigation concerning US sanctions against Libya. In the leading case on the subject, Libyan Arab Foreign (p. 198) Bank v Bankers Trust Co,¹⁰⁴ a Libyan entity maintained accounts with both the London and New York branches of the defendant American bank. In January 1986, the US President imposed sanctions against Libya by blocking Libyan property held by US persons, both within and outside the United States. The Presidential Order thus prohibited repayment of the London deposits by Bankers Trust. The case is one of some complexity, but for present purposes it is sufficient to note that: (i) the London account was found to be governed by English law;¹⁰⁵ and (ii) following demand, amounts owing to the depositor were repayable in London. It followed that the Libyan depositor was entitled to judgment because:

1. (a)  the US Presidential Order plainly could not vary, suspend or discharge an obligation governed by English law;¹⁰⁶ and

2. (b)  although the English courts will not enforce a contract where the steps necessary for performance are illegal in the place of performance,¹⁰⁷ the rule did not apply in this case. The place of performance was London, where the depositor was entitled to receive his money. The fact that funds would have had to be cleared through New York in order to achieve that payment did not mean that New York thereby became the place of payment.

7.35  In the result, the Court held that the Libyan depositor was entitled to the repayment of some US$292 million in cash, because the right to receive payment in that form was not affected by market practice or by the previous course of dealings between the parties. This decision was made in the face of cogent expert evidence to the effect that eurodollar deposits of this kind and amount are never repaid in cash. In other words, it was not possible to imply into the contract a term which required that payment should only be made through the clearing system operated in New York. Nor could it now be argued that the obligation was to procure a credit to an account in New York, so that such obligation ceased to have a purely monetary character and could thus become impossible to perform;¹⁰⁸ such an argument in any event becomes more difficult to maintain in the light of the definition of ‘payment’ which was adopted earlier in this chapter. Whilst this result understandably caused some consternation in international banking circles, it may be seen as (p. 199) satisfactory from the purely monetary law perspective. It would be unfortunate if a debtor acquired additional defences to a monetary obligation merely because he has to pay by means of bank transfer rather than in cash or, to put matters another way, the intended mode of performance should not have an impact on the broad substance or enforceability of the obligation; such a state of affairs would subvert the dominance of the applicable law of the contract over the law of the place of performance.¹⁰⁹ Further, a single monetary obligation must have a single place of performance; this is sound both from a logical perspective and also because it ensures that the unfortunate rule in the Ralli Bros case is confined within proper limits.¹¹⁰

7.36  It was for some time thought that a distinction ought to be drawn between, on the one hand, an ordinary foreign currency obligation and, on the other, an obligation to repay a eurocurrency deposit.¹¹¹ The distinction between the two types of obligation is one of fact. For example, an individual may hold a foreign currency account with a London bank. Funds may periodically be paid into or out of the account; cheques may be drawn upon it. This ordinary type of account must be distinguished from a eurocurrency deposit, which will usually involve a single deposit of a very significant sum of money for a fixed term and at a pre-agreed interest rate; the transaction consists solely of the initial deposit and its subsequent repayment with interest. Deposits of this kind are normally placed and repaid by means of bank transfers. It was suggested that the latter type of deposit was only repayable via the Clearing House Interbank Payments System (CHIPS) or the corresponding payment system in the country of issue. It was therefore argued that eurodollar deposits should in this respect be treated differently from ordinary foreign currency accounts, and the suggestion met with some academic support. However, since the existence of the implied term was rejected in the Libyan Arab Bank case, it seems likely that there are no legally relevant distinctions to be made between the two types of account.¹¹²

(p. 200) 7.37  Leaving aside these special difficulties, it becomes necessary to ask the more general question—how is a foreign money obligation required to be performed in England?¹¹³ The essential question may be briefly stated: how (quomodo) should the debtor discharge his obligation to pay a sum of foreign money which he owes and the identity (quid) and extent (quantum) of which is defined? If a debtor has incurred an obligation of US$1,000 payable in London, is he obliged to tender that sum in US dollars, or is he entitled or even obliged to tender the equivalent sum in sterling? In other words, can or should the money of the place of payment be substituted for the agreed money of account where there is a lack of identity between them, so that the mode of payment differs from what appears to be the substance of the obligation?¹¹⁴

7.38  It is, of course, true that in most cases, the debtor who owes US$1,000 payable in London will simply tender that amount in US dollars, whether in cash or in some other convenient form acceptable to the creditor. It will probably not occur to either party even to consider adopting a different course of action. Furthermore, payment should be effected in such a manner as to ensure that the creditor or the debtor does not receive or pay any more or any less than he contracted for; the best way to achieve this result is to require payment of the stipulated sum in natura. If there is a promise to pay US$1,000 in London, and if it is performed by the payment of US$1,000, neither party has any ground of complaint.¹¹⁵ That the international value of US$1,000 may have risen or fallen between the date of the contract and the stipulated maturity date is an entirely irrelevant consideration, for only the US dollar is at issue.¹¹⁶ In such a case, it is clear that the mode of payment is in accordance with what is determined by the substance of the debt, because the money of account and the money of payment are identical; the money of the place of payment does not even fall for consideration.

7.39  On the other hand, there may be many cases where no prejudice to either the creditor or the debtor would be involved if, for the purpose of performing the contract, the money of account is converted into a different money of payment. This would generally be so in times of relative monetary stability and may even be so when monetary values are fluctuating, at least if payment is made on the stipulated maturity date. Furthermore, if the creditor generally carries on business in sterling, (p. 201) he would in all probability convert the dollar proceeds into sterling upon receipt. It may well be that nothing is lost by such an arrangement, and the creditor will have no objection at all.¹¹⁷

7.40  Under these circumstances, it becomes necessary to consider whether such a right of conversion exists, who is entitled to exercise any such right, and what rate of exchange is to be used; it must also be asked whether the right of conversion can be excluded, and whether the right continues to apply when the debt is overdue. Each of these questions requires separate consideration.

7.41  There seems to be no doubt that a general right of conversion exists where foreign money is to be paid in England.¹¹⁸ The origins of this right lie in the law merchant of the Middle Ages. In connection with bills of exchange, it was conceived at an early date that, from the point of view of both parties and the State, it was convenient and advisable to avoid the recurrent remittance of a domestic currency to a foreign place of payment. This objective could be achieved by requiring the creditor to accept local money at the place of payment.

7.42  Against that background, it is perhaps unsurprising that the right of conversion became recognized in most countries.¹¹⁹ The general right of conversion is recognized in the United States¹²⁰ and is perhaps most firmly established in relation to (p. 202) bills of exchange.¹²¹ Whilst there exists widespread agreement on the principle of conversion into the money of the place of payment, different answers have been given to some of the detailed questions—for example, whether the debtor may or must convert, the rate of exchange to be used, and similar matters.¹²² It is obvious that these questions of detail may have significant consequences for the parties. For example, the rate of exchange as at the date of payment is plainly acceptable if the debtor meets his obligations on the maturity date, for the creditor receives full value for the amount owing. But what rate should be adopted if the debtor is in default? The rate of exchange as at the maturity date may differ from that which prevails as at the date of payment; whether this position favours or disadvantages the debtor or the creditor will of course depend upon exchange rate movements in the intervening period. Neither the selection of the rate of exchange as at the due date or that applicable as at the date of payment can be guaranteed to produce a fair result in every case. In truth, the crux of the matter lies in the fact that the selection of either date cannot eliminate the need for the creditor to be able to claim damages for monetary depreciation during the period of the debtor's default.¹²³ Where no such claim can be entertained, the creditor must effectively take his risk on monetary depreciation.

7.43  Under these circumstances, perhaps the best solution is that to be found in the Uniform Law on Bills of Exchange and Notes.¹²⁴ The debtor may elect to pay in the currency of the place of payment provided that payment is made on the (p. 203) maturity date.¹²⁵ But if payment is made after the maturity date, the creditor may select either the rate of exchange which prevailed at the maturity date or that which prevails as at the date of payment. Thus, in the event of delayed payment, the creditor will receive the full value reflected by the substance of the debt, and the debtor cannot profit from his delay.

7.44  Where this happy solution does not apply, some countries have adopted a rule requiring conversion at the maturity date, whilst others have adopted the rate as at the date of payment.¹²⁶ For reasons given earlier, neither solution will be satisfactory in every case. In the United States, however, the legal effect of the debtor's default has at least found a more secure solution. It was stated by Mr Justice Holmes, giving the judgment of the Supreme Court in Hicks v Guinness.¹²⁷

7.46  As was made clear in a later case,¹²⁹ these remarks were based on the assumption that the obligation was subject to the law of the United States. Thus, under the rules laid down in Hicks v Guinness, a debtor is entitled to meet his obligation on the stated maturity date by payment of the requisite amount of foreign currency stipulated in the contract. However, in the event of late payment, the creditor acquires an optional right to payment in US dollars calculated at the rate of exchange prevailing on the maturity date. These rules apply if the obligation is subject to the laws of the United States and the obligation is payable within that country.¹³⁰

(p. 204) 7.47  What, then, is the solution so far as English law is concerned? There is no statutory provision which deals with the matter.¹³¹ The problem admits of three possible solutions:

1. (a)  the debtor who has to meet a foreign currency debt in England has an obligation to tender that foreign money only;

2. (b)  the debtor may be required to tender sterling only; or

3. (c)  the debtor may have the option of tendering the stipulated foreign currency or sterling.¹³²

7.50  This language suggests that the debtor's option to pay in sterling can only arise where the contract is governed by English law, for a matter of construction is involved. Yet it is submitted that this is not the correct approach to the debtor's option. If the obligation is expressed in a foreign currency, then a right to discharge it by payment in sterling must be regarded as a rule which deals with the mode of performance rather than its substance, and this remains the case regardless of the identity of the law which is applicable to the contract as a whole. Accordingly, if a (p. 206) foreign money obligation is payable in England, the debtor's option to discharge the debt in sterling forms part of the law of the place of performance and can be taken into account if necessary to do justice between the parties.¹³⁹

7.51  If the option to pay in sterling is exercised, it has already been shown that the date with reference to which the exchange rate is ascertained may have a significant impact. Whilst the creditor should not object to receiving sterling so long as he receives full ‘value’, an exchange arrangement which affects the quantum of his receipt would interfere with the substance of the obligation and is thus plainly unacceptable from that perspective. Fortunately, it is now possible to say that the conversion is to be effected at the rate of exchange on the date of payment, ‘this is the clear result of the Miliangos case’.¹⁴⁰ Thus, it is the rate at the date of actual payment (and not at the contractual maturity date) which will determine the amount of sterling which the debtor must tender in discharge of his foreign currency obligations.

7.52  It will be necessary to identify a rate of exchange to be applied in the event that the debtor exercises his option to pay in sterling. It is tempting to think that the rate of exchange should be ascertained in accordance with the law of the place of payment (ie English law, in this context) because that is the place in which the creditor will receive his funds. However, since the selected rate may affect the amount which the creditor will receive, it is submitted that the identification of the rate of exchange should be regarded as a matter of substance and should accordingly be governed by the law applicable to the contract.¹⁴¹

7.53  It is necessary to make one further observation about the debtor's option to discharge his foreign currency obligation in sterling. It has been shown that this option is derived from the fact that English law supplies the law of the place of performance. But the influence of the law of the place of performance has in some respects been diluted by Article 12(2) of Rome I. As a result, it is submitted that the option to pay in sterling now rests on a less secure foundation than was hitherto the case. Since the point may be relevant in any case where the location of the place of payment differs from the money of account (ie it is not confined to cases in which payment is to be made in England), the subject will be considered later.¹⁴²

(p. 207) 7.54  Finally, it may be noted that the French Cour de Cassation has held that a US dollar debt payable in France may be paid in euro at the rate of exchange on the date of payment, unless the debtor is paying late.¹⁴³

7.55  It is clear that the debtor's option to convert a foreign money obligation into the money of the place of payment can be excluded by the parties; this is particularly so in the case of bills of exchange.¹⁴⁴ This seems to mean that a problem of construction is involved; certainly this appears to be the approach adopted by English law.¹⁴⁵ Thus, if an intention to exclude the debtor's sterling option can be discerned, then the debtor will be bound to pay in the stipulated foreign currency. Such a different intention may readily be inferred from the terms of the contract and the surrounding circumstances. There is no need for an express term, for it is the intention of the parties which matters.¹⁴⁶ This may, for example, be influenced by the existence of a system of exchange control in the place of payment; if and so long as the foreign currency in question is not freely obtainable, then it may well defeat the intention of the parties if the debtor is allowed to pay in sterling.¹⁴⁷ It is probably (p. 208) reasonable to suggest that, where the exercise of the debtor's option to pay in the currency of the place of payment would affect not only the mode but also the quantum of the debtor's obligation, then it is likely to be excluded. Further, as between banks dealing in the eurocurrency markets, it is almost certainly intended that repayment should be effected in the currency in which it was originally advanced, and not in sterling.¹⁴⁸

7.56  To what extent do the rules described above continue to apply if a debt is not paid on the stipulated maturity date and thus becomes overdue? Consistently with the decision in Camdex International Ltd v Bank of Zambia (No 3),¹⁴⁹ debts must be treated on the same footing, whether they are expressed in sterling or denominated in a foreign currency. Thus, any debt remains a debt even after it is overdue and even after the obligation has been repudiated. In consequence, such a debt can still be discharged by payment in the currency in question rather than by accord and satisfaction.¹⁵⁰ The point is by no means academic; a debtor in financially straitened circumstances may be unable to pay as at the maturity date, but may come into funds shortly thereafter. Equally, a debtor who has repudiated his obligation may, on reflection, decide that it would be in his best interests to pay. In each case, the debtor retains the right to discharge his or her debt by payment, or at least to secure the procedural advantages flowing from a valid tender.

7.57  That an overdue foreign currency debt can still be discharged by payment under these circumstances is apparent from the Court of Appeal decision in Société des Hôtels Le Touquet v Cummings.¹⁵¹ In 1914, the defendant had contracted a debt of 18,035 French francs to the plaintiff, which was repayable before the end of (p. 209) that year.¹⁵² The defendant failed to pay and the plaintiffs commenced proceedings in 1919. The external value of the franc had fallen heavily by this time, and the plaintiffs accordingly claimed the amount of sterling which would have been equivalent to the amount of the French franc loan as at the end of 1914. While the action was pending, the defendant went to France and handed 18,035 francs to the manager of the plaintiffs; the manager knew nothing of the transaction but apparently had authority to accept money on its behalf. At first instance, the Court awarded the plaintiffs the sterling sum which was equivalent to 18,035 francs on 31 December 1914, less the sterling value of the money paid at the rate of exchange on the day of payment.¹⁵³ The Court of Appeal reversed the decision, effectively finding that the French franc debt had been fully discharged by payment in that currency, and that fluctuations in the comparative value of the French franc and sterling were entirely irrelevant.

7.58  Bankes LJ said that, as the manager knew the money was tendered in discharge of a debt due to the company, and as the plaintiffs had kept the money without protest, the payment must be treated as discharging the debt.¹⁵⁴

7.59  Scrutton LJ held that the payment could not be treated as an accord and satisfaction. Instead, he held that the tender and acceptance of the money actually handed over to the plaintiffs manager amounted to payment and thus discharged the debt: ‘the plaintiffs who were owed 18,035 francs payable in France must be content with 18,035 francs paid in France’.¹⁵⁵

7.60  Atkin LJ also held that there was no accord and satisfaction.¹⁵⁶ He rejected the notion that, once the English writ was issued, the debt was in some way transformed into a sterling debt of an amount calculated at the rate of exchange on 31 December 1914 and payable in England: ‘It appears to me that she was sued here for a French debt … and that by paying the debt in France, she discharged the debt.’

7.61  All three members of the Court of Appeal thus held that, accord and satisfaction being unnecessary, the claim for 18,035 French francs had been ‘paid’, and the action therefore had to fail. The French franc debt thus remained a French franc debt, regardless of default, the falling international value of the franc, the commencement of proceedings, or any other matter.

(p. 210) 7.62  The judgment in this case attracted some criticism,¹⁵⁷ but it is submitted that the decision is plainly correct. The Court of Appeal reached the only conclusion which would have been consistent with the principle of nominalism. Furthermore, the decision conforms to good sense; it is not at all obvious why a foreign currency debt governed by English law should be transmuted into a sterling debt merely because there is a delay in payment or legal proceedings are commenced.¹⁵⁸ It is true that the implications of the decision have not always been fully recognized and accepted in later cases, although the key elements of the decision were followed in an interesting New York case.¹⁵⁹ It should, however, be appreciated that the Le Touquet decision only applies to claims in debt where the concept of payment can apply; it is not applicable to claims for unliquidated damages.¹⁶⁰

7.63  It is finally necessary to consider whether payment by means of set-off is possible as between debts which are expressed in different currencies. Although in England, the law on set-off is in many respects open to doubt and its importance is in some cases diminished by the availability of a counterclaim, there is no reason of substance which should prevent set-off in such a case.¹⁶¹ The method was indicated by Brandon J at first instance in The Despina R:¹⁶² ‘the currency of the lesser liability should be converted into the currency of the greater liability, and the set-off then (p. 211) effected, at the date on which the amounts of the two liabilities are ascertained by agreement or decision’. In such a case, neither party is liable to pay until the balance has been struck and judgment is given for the amount of the excess. This is an eminently sensible and practical procedure.¹⁶³

7.64  In their essence, the rules discussed in the previous section have been consistent with the principle of nominalism. A debt expressed in sterling or a foreign currency can generally be discharged by payment of the requisite amount in legal tender or, subject to the express or implied consent of the creditor, other ‘cash equivalent’ for the currency concerned. By way of exception, a debtor obliged to pay a foreign currency amount in England may have an option to tender sterling in discharge of that obligation. But there may also be cases in which an obligation is expressed in one currency but is to be performed in another. It is now proposed to consider this separate category of cases.

7.65  Reference has already been made to the distinction between the money of account and the money of payment. It has been shown that the money of account provides the measure of a financial obligation; it has also been shown that the identification of the money of account is a matter of substance, which is thus governed by the law applicable to the obligation at issue.¹⁶⁴

7.67  As is apparent from the commercial illustration provided by Lord Denning, the application of the distinction between the money of account and the money of payment can have far-reaching financial consequences. A default in payment may lead to further difficulties if the money of payment further depreciates against the money of account, for the actual amount payable in the latter currency will increase.¹⁶⁶ Thus, both the creditor and debtor should be aware of the risks they are (p. 213) assuming if they contract for ‘US$1,000, payable in six months’ time in pounds sterling’ or ‘£1,000 payable in US dollars in 12 months’ time’. In the first case, the amount of sterling to be paid in six months’ time is unknown, and a degree of risk is borne by the debtor in that regard. The creditor is protected in that he knows that—regardless of exchange rates prevailing on the date of payment—the amount of sterling which he is to receive will be equivalent to US$1,000. Similar risks would arise in relation to the second example.¹⁶⁷ For these reasons, it remains important for the lawyer to distinguish carefully between the money of account and the money of payment. Yet it must be observed that the risks just described would flow from the language which the parties had selected to express their rights and obligations and, to that extent, the risks have been voluntarily assumed. The problem of the distinction between the money of account and the money of payment will only occasionally trouble the courts since, in the vast majority of cases, the two will be identical. Yet the issue recently arose in Procter & Gamble v Svenska Cellulosa AB.¹⁶⁸ In that case, the price of goods to be supplied was expressed in euro but payment was required to be made in sterling. Whilst an appendix to the contract contained a passing reference to a ‘£/euro exchange rate of 1.4916’, the court found that this was not intended to set a rate for the contract as a whole. In the absence of a contractual exchange rate, the court held that the debtor should generally be required to discharge its obligations by reference to the exchange rate as at the due date for payment. As the court rightly observed,¹⁶⁹ to imply any other term into the contract would involve an allocation of exchange risk that the parties themselves had not contemplated, and the court should therefore be wary of implying a different term. Finally, it may be noted that the distinction between the money of account and the money of payment has also troubled courts in other countries. The French Cour de Cassation has had to decide a case involving a lease of agricultural equipment to a company in French Guyana.¹⁷⁰ The rental was expressed in Surinamese guilders, but the lessor succeeded in obtaining a judgment (p. 214) in French francs. Effectively, the court found that the choice of the Surinamese unit functioned only as the money of account, and that the French franc was intended to provide the money of payment.¹⁷¹

7.68  It is now necessary to turn to other cases in which the creditor may be compelled to accept payment in a currency which differs from that stipulated in the contract. It has been observed elsewhere that there is no necessary connection between the law which governs a contract and the currency in which the monetary obligations arising under it are to be discharged.¹⁷² This was because the mode of performance was to be determined according to the law of the place in which payment was required to be made. The identification of the currency or money tokens which the debtor was required to proffer in settlement of his obligation was thus decided by reference to the law of the place of performance.¹⁷³ As has been shown,¹⁷⁴ a debtor who has an obligation to pay US dollars in London may tender either dollars or their sterling equivalent; and the creditor must accept the sterling amount so offered, or at any rate it constitutes an adequate tender in respect of the US dollar obligation.¹⁷⁵ Thus, a creditor who expected to receive payment in US dollars may be compelled to accept a sterling amount instead.

(p. 215) 7.69  It is suggested that rules of this nature should no longer be applied automatically or as a matter of course:

1. (a)  As already noted, the courts are now no longer positively required to give effect to the law of the place of performance in matters touching the mode of payment, they are merely required to have regard to that law where the justice of the case so requires.

2. (b)  It is difficult to see why—as a matter of justice as between the parties—the creditor should be obliged to accept payment in a currency different from that which was mutually agreed. The creditor may have stipulated for a particular currency because he requires those funds to meet other obligations or simply because he believes it to be a stable currency. There is no reason why the law should deprive him of the benefit of that bargain, or impose upon him the inevitable cost of converting local currency proceeds into his chosen medium of payment.

3. (c)  The notion that the currency of payment touches merely the mode of performance has limited connection with commercial reality, at least in the modern world.¹⁷⁶ Parties agree that payment should be made in (say) US dollars for a variety of reasons but they will usually regard this as a point of some importance. There seems to be no compelling reason why the debtor should be allowed unilaterally to decide upon payment in the local (as opposed to the agreed) currency.

4. (d)  Rates of exchange may vary from day to day. Thus, if a creditor receives US$10,000 in discharge of an obligation of that amount, he will continue to have US$10,000 on the ensuing day. But if he receives £6,000 in discharge of a US$10,000 obligation at a rate fixed by the applicable law, he will have the sterling equivalent of US$10,000 on the date of payment, but the sterling funds may be worth less than US$10,000 on the ensuing day. Furthermore, the creditor will have received a sterling amount at a rate of exchange fixed by the applicable law, but it will not necessarily follow in every case that he can obtain the identical rate in the place of payment. Even if payment is received through the banking system on the due date and at the appropriate rate, it may arrive towards the end of banking hours, with the result that the creditor is unable to secure to himself the benefit of that day's rate.

(p. 216) 7.70  For these reasons, rules forming part of the law of the place of payment and which allow the debtor the option to pay in the local currency will only rarely do justice as between the parties. Rather more frequently, they will distort the parties’ intentions and will consequently lead to injustice. The origins of the right of conversion lie in the mercantile practices of the Middle Ages.¹⁷⁷ They have very limited relevance in the modern commercial world. Accordingly, in the absence of any contrary indication in the contract, it should be assumed that the money of payment is identical to the money of account.

7.71  Inevitably, matters will not always be so straightforward and there will be exceptional cases. For example, the application of such a rule may do justice in a case where payment in the agreed foreign currency has become impossible as a result of supervening illegality. In such a case, payment in the local currency at the appropriate rate of exchange is clearly preferable to no payment; and some payment (rather than none) clearly accords with the justice of the case. Article 10(2) of the Rome Convention should accordingly apply the law of the place of performance in such a case.¹⁷⁸ Likewise, where exchange controls in the place of payment render it impossible to obtain the necessary foreign currency, Article 10(2) may lead to the conclusion that payment in the domestic currency may be required in accordance with the law of that place.¹⁷⁹

7.72  This analysis suggests that the influence of the law of the place of payment should be regulated in individual cases. In particular, it should not be applied where it would unnecessarily subvert the intention of the parties, or create an option of payment which was not contemplated by the parties. But it may be applied in cases where there is a genuine difficulty in making payment in the agreed currency in the agreed place. In other words, the traditional distinction between the money of account and the money of payment¹⁸⁰ should be less sharply drawn; if the parties have contracted by reference to a particular currency, then (at least as a starting point) the courts should assume that payment is likewise to be made in that currency, irrespective of the law of the place of payment.

7.73  It may be noted that French law has adopted a different approach to this subject. In 1917, the Cour de Cassation ruled that ‘all payments within France, whatever the (p. 217) cause, shall be made in French currency, if the parties did not agree otherwise’.¹⁸¹ In a more recent case, the Cour de Cassation refused to enforce a US dollar ‘depreciation clause’ in a lease of a building in the French West Indies, on the basis that the contract was of an internal character and was thus payable in the French currency.¹⁸² Where, however, the contract is of a truly international character, then the parties’ choice of a foreign currency as the means of payment is to be respected.¹⁸³

7.74  Various uniform rules also deal with questions touching the money of payment. In most cases, these rules allow the parties to select the money of payment but, failing that, generally provide for payment in the currency of the place where payment is required to be made.¹⁸⁴

7.75  It is a well-established principle of English private international law that the question whether a certain payment operates as a discharge of an obligation is governed by its applicable law.¹⁸⁵ But, however clear the principle may be, various specific aspects of the rule require discussion.

7.76  Whether or not a payment can, in particular cases, by itself discharge an obligation or whether some further action or step is required for that purpose is governed by the applicable law. Thus, it is for the law applicable to the obligation to determine whether the discharge is dependent upon a separate agreement, ie whether a doctrine similar to the English concept of ‘accord and satisfaction’ is to be applied.¹⁸⁶ Thus, if the governing law allows for tender and payment to be made in respect of a claim for unliquidated damages, then the English court will give effect to that state of affairs. It would be irrelevant that, under English domestic law, the concepts of tender and payment can be applied only to liquidated obligations.¹⁸⁷

7.77  In a private international law context, the concept of tender gives rise to peculiar difficulty, in that it has two separate meanings.

7.78  In the first instance, it may mean that tender has been made in accordance with the law applicable to the obligation and that this has resulted in the discharge of the monetary obligation or at least in some alteration in its structure. The effect of such tender should be governed by the applicable law.¹⁸⁸ On the other hand, the plea may mean that by offering the amount due to the creditor, the debtor has procured for himself the advantages of a plea of tender in the English sense which, if followed by payment into court, merely entitles the debtor to the costs of the action and bars a claim for interest.¹⁸⁹ In the light of the procedural nature of this class of tender, the matter would fall to be governed by English law, as the law of the country in which the proceedings take place.

The basis of this view was that the operation of the Canadian statute had to be confined to cases ‘where the action to recover the amount due is brought in Canada’. Yet Lord Maugham's approach was mistaken. The Canadian legislator did not seek to interfere with the law of tender in England or elsewhere; he merely intended to provide that a monetary obligation governed by Canadian law could be reduced or (p. 219) discharged in a particular way.¹⁹¹ Lord Maugham's opinion thus rests upon a failure to distinguish between the substantive and procedural meanings of ‘tender’.

7.81  So far as English law is concerned, rights of set-off are usually seen as matters of procedure which are thus governed by the law of the country in which the proceedings take place.¹⁹²

7.82  In a contractual context, however, the right to pay a reduced sum in diminution of a larger debt may be treated as a matter of substance,¹⁹³ and in such a case the availability of such a right must be governed by the law applicable to the contract which is claimed wholly or partly to be discharged by reason of the set-off.¹⁹⁴

7.83  The governing law of the obligation should also determine whether the method of paying a debt by depositing the amount due with a court (consignation), which is known to civil law countries, is available in a given case and whether such deposit amounts to a discharge of the obligation. This appears to be the reasoning on which the two difficult cases of The Baarn¹⁹⁵ were decided.

7.84  Both cases arose out of a collision between a Chilean vessel, owned by a company domiciled in Chile, and a Dutch vessel owned by the defendants, a Dutch firm.¹⁹⁶ The defendants admitted liability; the Chilean plaintiffs therefore issued proceedings in England and sought a determination of damages for expenses incurred by them in Chile in Chilean currency for the repair of their vessel. During the course of the English proceedings, the defendants deposited the amount of pesos spent by the plaintiffs with the court in Chile in accordance with certain provisions of the Chilean Code. The English court was thus called upon to determine whether that payment had discharged the defendants’ obligations.

(p. 220) 7.85  The economic background to the proceedings can only be understood if it is remembered that the Chilean peso was a ‘frozen currency’, that is to say that money could not be freely transferred out of Chile. As a result, the value of blocked accounts held within the country was quoted abroad at a discount, although the official rate of exchange was unaltered and, within Chile, the money had an undiminished purchasing power.

7.86  At first instance, the court fell into error in that it assumed that Chilean law governed the issue.¹⁹⁷ Having reviewed the evidence of Chilean law, the court held that the payment was valid according to Chilean law. This judgment was reversed on appeal, although each judge offered different reasons. Scrutton LJ took the view ‘that there is no final decision by the Chilean court that the payment in depreciated pesos is sufficient while proceedings are pending in London’—although it is not at all clear how a Chilean judgment would or could have affected the outcome in England. Greer LJ said that it was not clear whether the payment had discharged the debt under Chilean law; consequently, once damages were assessed in England, the court would have to give credit for that payment ‘by its equivalent value in sterling at the rate of exchange prevailing on the date when the payment was finally approved by the Chilean judge’. Romer LJ held that what happened in Chile could have the effect of a payment only where the relationship of the parties was that of debtor and creditor, and no such relationship subsisted in the present case.¹⁹⁸ During further proceedings the question arose whether the order drawn up by the Court of Appeal in The Baarn (No 1)¹⁹⁹ actually reflected the judgments given; it was contended that the Court of Appeal had not intended to exclude the possibility of taking the Chilean payment into account pro tanto, and to order payment in England. This contention was rejected by the Court of Appeal.²⁰⁰ Greer LJ dismissed the defendant's appeal on the ground that they were estopped from challenging the order; Scrutton LJ adhered to his view that there had been no payment (apparently according to Chilean law); whilst Maugham LJ emphasized²⁰¹ that he was ‘unable to see that Chilean law has anything to do with the matter before the court’.

7.87  The judgments in these two cases thus present something of a confused picture. Nevertheless, the central point appears to be that the claim for damages was governed by English law²⁰² and English law must thus determine whether the liability has been discharged. English law should likewise determine whether credit should (p. 221) be given for payment made to a foreign court; it should decline to give credit if the payment so made is ‘blocked’ by local legislation.²⁰³

7.88  It should be appreciated that paragraphs 7.83—7.87 deal only with the question whether a payment into court has the effect of discharging a particular debt. Where a payment is made into court under (for example) an order allowing the defendant to resist the claim on the footing that security is given, then this issue will obviously be a procedural matter for the law of the forum. For example, where such an order is made by the English court, the cheque must be received by the deadline set for the payment, and it does not matter that the cheque is only cleared at a later date. This rule applies to both sterling and foreign currency payments.²⁰⁴

7.89  It has been necessary at an earlier stage to consider in some detail the identification of the money of account and of the money of payment. It is now necessary to consider a further set of cases, where both the money of account and the money of payment have been identified, but where an item expressed in a foreign currency has to be converted into the money of payment in order finally to calculate the amount required to be paid. If, for instance, under an insurance policy providing for an indemnity in sterling, a claim is made in respect of a loss expressed in a foreign currency, it is clear that a conversion into sterling is required; for the insurer is only liable to pay in that currency. Similarly, if security over property in France has been given by way of security for a sterling loan and, upon enforcement, the property is sold to a French buyer for a price in euros, it becomes necessary to convert the euro proceeds into sterling so that the outstanding balance of the loan can be ascertained. The need for conversion is thus obvious in both instances.

7.90  In such cases, conversion should be effected at the rate of exchange on the day on which, according to the contract and the circumstances of the case, there arose the right to payment or the duty to give credit and, consequently, the occasion for conversion likewise arose.²⁰⁵ This rule renders it necessary in the first instance to turn to the contract to search for an express or implied agreement between the parties. Thus, where a charterparty provided for the revision of hire payable in dollars (p. 222) in accordance with wages paid to the crew in Deutsche marks, the latter are to be converted into dollars as at the date on which the wages are changed.²⁰⁶ Equally, it is of the essence of an indemnity policy that the holder is entitled to the value at the time and place of the fire; if the property is valued in a foreign currency and the policy is expressed in sterling, the value will have to be converted at the rate of exchange on the day of the fire.

7.91  In the case of reinsurance contracts, conversion will take place with reference to the rate of exchange on the date on which the insurer itself pays and the reinsurer's liability therefore arises. This point is impressively illustrated by the decision of the Court of Appeal in Versicherungs & Transport AG Daugava v Henderson.²⁰⁷ The defendant, an English underwriter, had reinsured the plaintiffs, a Latvian insurance company, against their liability on a fire policy relating to buildings in Riga. Following a fire in April 1930, the plaintiff ‘s liability to the defendants was ascertained by the Latvian courts in lats and the sum due was paid in January 1932. As between insurer and reinsurer, the question arose whether the sum in lats should be converted into sterling at the rate of exchange as at the date of the fire or as at the date on which the insurer settled his liability. The Court of Appeal adopted the latter date, on the basis that the reinsurer had no liability until the insurer's liability had been quantified and satisfied.²⁰⁸

7.92  A case in which credit has to be given according to the rate of exchange on the day when the obligation to give credit comes into existence arises where the victim of a tort or breach of contract is entitled to damages in terms of sterling, but in mitigating his damage has obtained a sum in US dollars for which credit must be given. It is submitted that the US dollars are to be converted into sterling on the date on which the victim receives them, rather than the date when the damage occurred or the wrongdoer makes payment.²⁰⁹

7.93  In Pape Williams & Co v Home Insurance Co,²¹⁰ American owners of cotton lying in Barcelona insured it with an American insurance company in terms of dollars, (p. 223) subject to terms: ‘Loss if any payable on the basis of the actual market value at time and place of loss, such loss to be payable in New York exchange to bankers.’ The goods were confiscated in Barcelona at a time when they had a dollar value of US$30,000. The Spanish Government subsequently paid to the owners compensation in pesetas which produced US$18,000. The court upheld the insured's claim for the difference, and rejected the insurer's argument that the loss had been made good by payment of the value of the goods in pesetas. The compensation paid by the Spanish Government was merely an item to be brought into account; for this purpose, it was to be converted into US dollars at the rate prevailing at the time of receipt of the credit.²¹¹

7.94  A final example is provided by a line of cases which arose in the sphere of taxation, as a consequence of the rule that the domestic currency is an unchanging measure of value, whilst foreign currencies can fluctuate against it. The decision in Bentley v Pike²¹² arose in the context of capital gains tax. In October 1967, a British taxpayer became entitled to a German property then worth DM132,000. She sold it in July 1973 for DM152,000. The question was whether the taxable gain was (a) DM 20,000 converted into sterling at the rate for July 1973, or (b) the excess of the sterling value of DM152,000 in July 1973 over the sterling value of DM132,000 in October 1967. The court decided in the latter sense, so that the taxpayer largely paid tax ‘on a gain resulting from the devaluation of the pound in November 1967’. It is submitted that the former solution would have been preferable on the basis that no question of converting anything into sterling should have arisen until the disposal in July 1973.²¹³ In contrast, in Goodbrand v Loffland Brothers North Sea Inc,²¹⁴ the taxpayer was affected by currency fluctuations which occurred after the disposal of four drilling rigs at a pre-determined price expressed in US dollars. The whole amount of the applicable capital gain was taxable in the year of disposal, but the dollar consideration was to be paid to the seller over a period of nine years. As a result of exchange rate fluctuations over that period, the company had paid more capital gains tax than would have been justified by the overall sterling equivalent of the gain. However, the taxpayer's attempt to adjust the assessment failed, because the consideration for the rigs had been expressed in US dollars, and payment of that sum had been received in full. The conversion of the dollar amount into sterling was a mere valuation exercise for the purpose of computing the tax payable; the taxpayer had never expected to receive payment in sterling and changes in the exchange rate which post-dated the assessment were accordingly (p. 224) irrelevant. Nevertheless, fluctuating rates of exchange cannot be invoked in order to create a taxable profit or gain where none has in fact been made. Thus, in Pattison v Marine Midland Ltd,²¹⁵ an international bank borrowed US dollars in order to make loans to customers seeking advances in that currency. Upon receipt of US dollar repayments from its customers, the bank made corresponding repayments to its own financier. The sterling value of the dollars originally borrowed was £6 million, whilst the sterling value of the same amount of dollars received on repayment was £8 million. The Inland Revenue claimed that the difference amounted to an income profit, which was liable to corporation tax accordingly. The House of Lords held that the transactions had been effected entirely in US dollars, and no question of exchange gains or losses could therefore arise.²¹⁶ Thus, whilst a conversion of currencies may be needed to effect any necessary adjustment, it should be appreciated that this is only required where the context positively demands that a sterling value must be placed on a foreign currency amount.

7.95  It has been shown that the determination of the money of account can cause particular problems in cases involving a conflict of laws.²¹⁷ The determination of the money of payment raises slightly different, but equally difficult problems. The point may perhaps be illustrated by an example. Suppose that, under English law, a debtor owes a sterling amount which is payable in Paris. Applying the English rules on conversion, the debtor should be entitled to discharge his debt by payment of the corresponding amount in euros. But should not the latter point be decided by French law, as the law of the place of payment? In other words, should the rule²¹⁸ of English municipal law that a monetary obligation is discharged by tendering the money of the place of payment be extended to a rule of private international law, to the effect that the determination of the money of payment falls to be decided by the law of the place of payment?

7.96  The situation involves two distinct questions, namely:

1. (a)  which system of law determines whether the debtor has a right or duty to convert the money of account into the local money of payment; and

2. (p. 225) (b)  which legal system governs the mechanics of conversion (for example, the rate of exchange to be employed and the date and place with reference to which such rate is to be ascertained)?

7.97  As to the first question, it has been noted that, at least in a more traditional line of reasoning, the creditor suffers no prejudice from the fact that he receives payment in the currency of the place of payment. In general therefore, and in the absence of indications to the contrary in the contract, it seems that the availability of an option or obligation to settle the debt in the local currency can be treated as one relating to the mode of performance; the court may therefore have regard to the law of the place of payment in this context.

7.98  As to the second question, however, a different approach is required. The rate of exchange to be employed and the date with reference to which it is to be ascertained will clearly affect the amount which the debtor is required to pay, ie they go to the substance of the obligation. As a matter of principle, it must follow that such questions must be governed by the law applicable to the obligation.²¹⁹

7.99  So far as English private international law is concerned, the ‘place of payment’ is the place in which the debtor is obliged to tender payment; this must, of course, correspond to the place in which the creditor is contractually entitled to receive the payment.²²⁰ Subject to that formulation, the identity of the place of payment will be determined by the law applicable to the contract, by establishing where the creditor is entitled to receive his money in accordance with that law. The place of payment is often fixed by the parties, either expressly or impliedly. But in the absence of such a determination, the general rule—under a contract governed by English law—is that the place of payment is the place where the creditor resides or carries on business²²¹ at (p. 226) the time of the contract.²²² This solution is adopted by a number of legal systems and also by the Vienna Convention on the International Sale of Goods,²²³ but it may be noted that French law provides for payment to be made in the place designated by the agreement or, failing that, payment must be made at the domicile of the debtor.²²⁴

7.100  The function of the place of payment may vary in different legal systems as well as in different contexts. So far as English law is concerned, the present work examines two particularly important legal characteristics of the law of the place of performance. First of all, it has been shown that English private international law pays regard to the law of the place of payment in questions touching the mode of performance.²²⁵ Secondly, it will be shown that the English courts will not enforce an obligation whose execution would be illegal in the law of the place of performance.²²⁶ But it is also necessary to enquire whether the place of performance and its laws have any wider or deeper consequences than those just described. Although the point does not appear to have been explored directly in decided cases, it seems that (so far as English law is concerned) the character and purpose of the place of payment is determined by (a) the express or implied terms of the contract; and (b) the overall rationale and purpose of the contract. Thus, as a matter of construction, the place of payment may be the place at which the debtor is both entitled and bound to pay. Alternatively it may be a place in which the debtor is entitled to pay; payment in that place is not mandatory but is ‘permissible’,²²⁷ or such place may be the ‘primary’ (if not the exclusive) place of payment.²²⁸ A nominated place of (p. 227) payment may be unalterably fixed, or it may be intended that it should be changed under circumstances which are expressly or impliedly defined by the terms of the contract. The mere fact that a contract specifies a place of payment does not necessarily or conclusively mean that there cannot be another one. It may be specified so as to be binding upon both parties or for the benefit of one of them, so as to allow either such party to make or require payment elsewhere. The difficulty which may thereby be caused in identifying the contractual place of performance can cause difficulties in related contexts. For example, in dealing with matters relating to performance of a contractual obligation, the court may have regard to the law of the place of performance. The application of this provision is obviously problematic if the place of payment cannot readily be identified, or if the creditor or debtor have options to require that payment be made in alternative locations.

7.101  The law of the place of payment may be of particular significance in the context of international banking transactions. For example, the contract arising from a bank deposit will generally be governed by the law of the country in which the account-holding branch is situate.²²⁹ If repayment of the deposit has become unlawful under its applicable law, then the English courts will not order repayment by the English branch of the bank concerned.²³⁰ The result is that the head office of an English bank is not generally liable for the repayment of blocked deposits placed with its overseas branches, at least for so long as the relevant blocking legislation remains in force.²³¹ If, however, the account-holding branch is closed or wrongfully refuses payment, then the head office and other branches are in principle liable to repay the deposits since the contract remains legally binding on the entity as a whole.²³²

(p. 228) 7.102  It has already been seen that, where a US dollar deposit is to be repaid by a bank in London, England is the place of payment of the obligation concerned.²³³ This is so even though, ultimately, transfers of US dollar funds have to be cleared through New York via the New York Clearing House Interbank Payments System (CHIPS). New York may thus be the place of settlement, but the principal obligation to make the US dollars available rests with the London branch—England therefore remains the place of payment. Whatever the merits of this rule, it does at least have the advantage of clarity.

7.103  Unfortunately, litigation in the United States on the place of payment for interbank Eurodollar deposits has served to confuse matters. In Wells Fargo Asia Ltd v Citibank NA,²³⁴ Wells Fargo Asia placed two US dollar term deposits with the Manila branch of Citibank. In line with the practice described previously, the initial placing of the deposits was achieved through a credit to an account of Citibank Manila with Citibank New York, as correspondent bank. Likewise, repayment to Wells Fargo Asia was to be effected via a credit to that institution's correspondent account with Wells Fargo International Corporation in New York. Prior to the maturity date of the deposits, and in an effort to deal with a worsening economic crisis, the Philippine Government issued a decree prohibiting the repayment of foreign currency obligations to external lenders unless central bank approval was obtained.

7.104  The Supreme Court drew a distinction between the place of repayment (‘location where the wire transfers effectuating repayment at maturity were to occur’) and the place of collection (‘the place or places where plaintiff was entitled to look for satisfaction of its deposits in the event that Citibank should fail to make the required wire transfers at the place of repayment’). The Court appears to have thought that the parties would agree as to the place of collection following default, which would surely be an unusual contract term. At all events, on remand, the Court of Appeals²³⁵ held that New York law would determine whether a depositor at a foreign branch of Citibank could recover payment of the debt in New York. If the Philippine law had expropriated the deposit then the New York courts would have treated this as an assignment of the debt, with the result that the original depositor would no longer have title to sue for the debt. However, where the foreign law merely suspended the right to repayment, the debt would remain in existence and could be recovered elsewhere.²³⁶ In addition, the court noted that there was (p. 229) nothing in the contract to prohibit collection of the deposit in New York, with the result that collection there was permissible. The court seems to have regarded New York as the place of payment on the grounds that the wire transfers had to be cleared through New York, but, for the reasons already given, that view would appear to be erroneous.

7.105  The court also determined that the deposit arrangement was governed by New York (as opposed to Philippine) law. In the writer's view, it is legitimate to regard Eurodollar deposits as a service provided by the lender of those deposits²³⁷ so that—in contrast to ‘ordinary’ deposits—they will be governed by the law of the country in which the depositor (rather than the depositee) bank is located. But Wells Fargo Asia was a Singapore entity, so it still remains difficult to see how the contract could be governed by New York law.

7.106  If a similar situation were to come before an English court then, for the reasons just given, it is suggested that it should hold that the interbank deposit is governed by the law of the country in which the lender is located. Assuming the lender to be a London bank, the Eurodollar deposit would be governed by English law and would be repayable in London. The result would be that blocking or similar legislation in the jurisdiction of the borrowing bank would not, in principle, constitute a defence to a claim for repayment.²³⁸(p. 230)