Moratoria And Freezes
Cases 4 and 5 involve whether country Xwill recognize the laws of country Y, either the moratorium of country Y declared with respect to debts owed to a bank (Case 4), or the freeze imposed by country Y on deposits of country Z with country Y's nationals, such as the bank, including the bank's branch in country X (Case 5). Y's competence to prescribe is only partly, if at all, in issue. What is at issue concerns the secondary competence of country X to prescribe by applying Y's law.
From the point of view of international law, country Y is entitled to impose a moratorium or freeze. A moratorium applied to entities in country Y falls directly within the territorial principleThere is a separate issue of whether a moratorium is in breach of Article VIII (2) (a) of the IMF, which obliges members not to restrict the making of payments and transfers for current international transactions without approval of the IMF. However, the issue is never a live one in practice because the IMF does not generally disclose whether or not it has given approval.
What of a freeze, in particular one applying to country Y's nationals, such as the branch of one of its banks situated in country X ? When in 1982 the UK government imposed a freeze in relation to Argentinian bank deposits, the statutory instrument did not extend it to UK banks abroad, but confined it to banks within or incorporated within theUnited Kingdom. By contrast the United States extended its freeze of Iranian and Libyan bank deposits to deposits with foreign branches of US banks. Its actions can be justified on the nationality principle. Whether a freeze such as the Iranian freeze is legitimate if extended to US foreign subsidiaries, in addition to US foreign branches, is more doubtful.
As a matter of corporations law, a foreign subsidiary is separate from its parent, whereas a branch is part of the same entity.
From the point of view of control, however, the subsidiary may be as much subject to direction by the parent as a branch is by its head office. It would seem wrong to determine the issue simply on the basis of corporate form.No doubt the courts of country Y will impose its moratorium or freeze, as the mandatory law of the forum, even though the proper law of the transaction is that of another jurisdiction.
Of course it may be that on its true interpretation the law does not apply: in criminal proceedings, for example, the courts of country Y may construe it narrowly. If money is lent in breach of this type of law, the English approach is that it is irrecoverable as an illegal contract it is not unjust enrichment for the borrower not to be made to repay.
The real question is whether, as a matter of domestic law, the courts of country X will apply the moratorium or freeze imposed by country Y. In Britain and the United States, the court decides this independently of international law. Indeed, in certain circumstances in England, foreign law in breach of international law will be given effect, unless it consti tutes a grave infringement of human rights.
England invokes principles of conflict of laws, the United States, the act of state doctrine. Article VIII, section (2)(b), of the IMF is interpreted so as not to apply.
US courts invoke the act-of-state doctrine, whereby their courts will not enquire into the validity of public acts, such as moratoria or freeze orders, of a recognized foreign power having effect within its own territory. The situs of the debt affected by the moratorium or freeze is thus crucial, since the doctrine does not apply if this is outside the territory of the foreign state. Thus the US courts have enforced payment obligations under cross-border loans, despite a moratorium in the borrower's country, where repayment of the loan had to be made in New York. There are close similarities between the factual enquiries necessary in English and US courts for determining respectively the proper law (in the absence of an express choice) and the situs of the debt. Not surprisingly, the results produced are similar, despite the different doctrines.
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