COMMENTS
COMMENTAIRES
The Currency of Suit in Actions for Damages
I. Introduction
In 1976, the House of Lords in Miliangos v. George Frank (Tex-
tiles) Ltd’ decided that actions for the recovery of debts could be
expressed in foreign currencies. According to Lord Denning, this de-
the law on this subject;2 prior to the
cision “revolutionised”
Miliangos case, English courts had steadfastly refused to recognise
claims expressed in currencies other than sterling. Remarking on
this change in a recent comment in this journal, Mr Brian Riordan
made the following observation:
To trace the juridical development of this new rule reveals a most
enlightening example of two key tenets of the reform and modernization
process of the common law: first, that the law should reflect the
fundamental (commercial) realities of the day, and second, that the
judge has a major role to play in keeping the law in step with those
realities.3
The House of Lords has recently taken up the suggestion made
by Lord Wilberforce in his speech in Miliangos4 that the new prin-
ciple of recognising claims expressed in foreign currencies be ex-
tended from cases of judgment debt to other areas, and in particular
to actions for damages in cases of tort or breach of contract. In
The Despina R. and The Folias5 (decided of late), the House of
Lords recognised that the increased volatility of foreign exchange
rates has necessitated the protection of injured parties from any
further losses that exchange rate changes may precipitate.
In contrast to the two earlier cases discussed in detail by
Riordan, The Despina R. and The Folias reveal more of the com-
plexities that the new rule has created. This paper will examine the
extent to which the law in this area is in fact capable of reflecting
“commercial realities” and whether the judge is properly equipped
to introduce the necessary reforms.
1 [1976] A.C. 443 (H.L.).
2 George Veflings Rederi A/S v. President of India [1979] 1 W.L.R. 59, 62
(CA.) per Lord Denning M.R.
McGill LJ. 422.
sRiordan, The Currency of Suit in Actions for Foreign Debts (1978) 24
4 Supra, note 1, 464.
5 [1978] 3 W.L.R. 804 (H.L.).
IMiliangos, supra, note 1; and Federal Commerce & Navigation Co. v. Tradax
Export S.A. [1977] 2 W.L.R. 122 (CA.). Riordan’s submission, supra, note 3,
was based primarily on these cases.
1979]
COMMENTS – COMMENTAIRES
II. Choice of currency
In both Miliangos and Federal Commerce, there was only one
non-sterling currency in which the plaintiff’s loss could reasonably
be expressed. However, in The Despina R. and The Folias, the House
of Lords was faced with a choice between several eligible foreign
currencies.
The Despina R. concerned a collision between two ships. The
expenses of repair had been incurred primarily in three non-sterling
currencies, one of which being the currency in which the plaintiffs
conducted their trading operations. Lord Wilberforce suggested that
in tort cases of this kind there were three possible currencies in
which a plaintiff might be entitled to have his damage award ex-
pressed. The first is the expenditure currency –
the currency or
currencies in which the expense or loss was immediately sustained.
The second is the plaintiff’s currency, “the currency in which the
loss was effectively felt or borne by the plaintiff, having regard to
the currency in which he generally operates or with which he has
the closest connection” 7 The third is the sterling equivalent, which
is calculated at the time that the losses occurred or at some other
date. In Miliangos, the House of Lords selected the plaintiff’s
currency as that which most truly expressed the plaintiff.s loss, but
it rejected a hard and fast rule and preferred not to indicate the cir-
cumstances in which the expenditure currency would be selected.
In The Folias, a cargo of onions was found to be damaged due to
the failure of the refrigeration on a ship chartered by the res-
pondents, a French company which operated shipping services.
The consignees of the cargo successfully claimed against the res-
pondents, and payment was made in Brazilian cruzeiros. The French
company in turn claimed damages for breach of contract from the
appellants, the Swedish owners of the vessel. The claim was brought
to arbitration in London pursuant to the terms of the contract. In
addition to the choice of currencies set forth in The Despina R.,
the currency of the contract or charterparty ‘presented a fourth
possible solution. The House rejected the currency of the contract
because even though .the contract provided that payments in respect
of the hire of the ship and other contractual payments were to be
made in U.S. dollars, it made no provision for the payment of
damages in U.S. dollars and hence was not susceptible of a “decisive
7 Supra, note 5, 808.
McGILL LAW JOURNAL
[Vol. 25
interpretation”. 8 A flexible rule was again adopted,9 although the
plaintiff’s currency was again selected.
While the conclusions reached by the House were compatible
with “the normal principles, which govern the assessment of
damages”,’
and indeed, placed emphasis on the restoration of
losses to the plaintiff, they do raise some difficulties relating to
“‘fundamental (commercial) realities of the day”.” Uncertainty as
to which of several available currencies might be selected may
affect the behaviour of the parties in the pre-arbitration bargaining
process. The defendant, in addition to being able to exploit the
plaintiff’s aversion to any risk by making lower offers of settle-
ment,’ 2 may have an incentive to delay settlement or to engage in
speculative activity normally prohibited by Exchange Control
Regulations.13 Correspondingly, he will have to bear all of the losses
arising out of fluctuations following exchange rate volatility.
III. Interest
A further problem arises -from the likelihood that there will
exist a relationship between the interest rates prevailing in different
countries and the exchange rate between the currencies of those
countries. This problem has been overlooked by the House of Lords,
by Riordan, 14 and by judges in subsequent cases.’ 5 The potential
importance of this relationship is great, as has been outlined by
one of the current authors in case notes on Miliangos0 and on
The Despina R. and The Folias.17
8 Ibid., 812.
9 Ibid., 814.
10 Ibid., 809 per Lord Wilberforce. The principles referred to are those of
restitutio in integrum and of the reasonable forseeability of the damage
sustained.
11 Supra, note 3. These difficulties are considered in Bowles & Whelan,
(1979)
Judgments in Foreign Currencies: Extension of the Miliangos Rule
42 M.L.R. 452.
12The role of uncertainty in bargaining about the quantum of damages in
personal injury cases has been investigated in Phillips & Hawkins, Some
Economic Aspects of the Settlement Process: A Study of Personal Injury
Claims (1976) 39 M.L.R. 497.
13 See generally The Exchange Control Act 1947, 10-11 Geo. VI, c. 14 (U.K.).
14 Riordan recognises that a dahiage award would include interest but fails
to explain the method by which such interest should be calculated.
15 See, e.g., Helmsing Schiffahrts G.M.B.H. & Co. K.G. v. Malta Drydocks
Corp. [1977] 2 Lloyd’s Rep. 444 (Q.B.) per Kerr J.
1′ Bowles & Phillips, Judgments in Foreign Currencies: an Economist’s View
(1976) 39 M.L.R. 196.
1* Supra, note 11.
1979]
COMMENTS – COMMENTAIRES
The problem in question, whilst of intrinsic technical interest,
also serves to highlight the unexpected complexities that legal re-
form may sometimes introduce. The relationship between the in-
terest rate and the currency exchange rate of any given country
was recognised in the Miliangos case by the lower cburt to which
the case was referred for resolution of the final details of the judg-
ment. In Miliangos v. George Frank (Textiles) Ltd (No. 2),18 Bristow
J. expressly stipulated that in calculating the amount of the judg-
ment debt, Swiss interest rates should be applied to the original
debt, expressed as it was in Swiss francs:
In my judgment the approach in English law should be: if you opt for
a judgment in foreign currency, for better or for worse you commit
yourself to whatever rate of interest obtains in the context of that
currency. 9
This procedure, which is essential if a consistent application of
the restitutio in integrum principle is to be achieved, 0 does not
seem to have been universally followed. In Helmsing Schijfahrts
G.M.B.H. v. Malta Drydocks Corp.,21 the plaintiffs were German
shipowners who contracted through the second and third defendants
for the building of two ships by Malta Drydocks Corporation. The
price was expressed in Maltese pounds, which had been agreed
upon -as the currency of account. Pursuant to the terms of the con-
tract, the plaintiffs were entitled to a return of approximately ten
per cent of the purchase price because they had chosen not to
to
order certain optional fittings. This sum, which amounted
105,000 Maltese pounds, should have been paid to the plaintiffs in
1972 but was not paid until 1976. As a result of this delay, the
plaintiffs had to borrow money in Germany at German commercial
borrowing rates, which at that time were said to be ‘approaching
fifteen per cent per annum.
Kerr J. thought that the plaintiffs’ olaim for payment in Maltese
pounds was justifiable,22 but decided to differ from the rule which
Bristow J. had adopted; he held instead that over the period in
question the plaintiffs were entitled to interest payable in Maltese
pounds, but calculated according to prevailing commercial borrow-
ing rates in Germany. Certainly the case before him was more com-
plicated than the Miliangos case in that the currency in which
judgment would have been made, Maltese pounds, was not the
18 [1976] 3 W.L.R. 477 (Q.B.).
19 Ibid., 479.
20 See infra, text between fnn. 22 & 23.
21 Supra, note 15.
22Ibid., 448.
.
McGILL LAW JOURNAL
[Vol. 25
plaintiffs’ currency. We respectfully submit, however, that Kerr J.,
in his attempts to fully compensate the plaintiffs, erred in the pro-
cedure that he followed in his calculations.
There are two logical ways in which the amount due to the
plaintiffs may be calculated. The first entails the assumption that
the plaintiffs, had they received the money that they were due
when it became payable, would have held it in an account in
Germany. Had they done so, or been treated as having done so, the
appropriate procedure would have been to convert the sum payable
in 1972 in Maltese pounds into German currency at the exchange
rate ruling at the time, and to then apply German interest rates
for the period of 1972 to 1976 over which the plaintiffs had been
deprived of the use of the funds. The second possible line of argu-
ment is based upon the assumption that the funds would have been
held in an account in Malta over the period in question. In this event
the calculation would have proceeded by applying Maltese interest
rates over the period to the basic sum expressed in Maltese pounds.
The amount of principal and interest could then have been con-
verted, if required, into German currency at the rate of exchange
prevailing at the time of judgment. The method of calculation
followed by Kerr J. conformed to neither of these two methods but
represented a conceptually unsatisfactory hybrid. By continuing to
express the basic sum in Maltese pounds while applying German
interest rates, Kerr J. suppressed the influence of the change in the
exchange rate between the currencies over the period.
The essence of the argument about the choice of interest rate
is that the extent of the opportunities foregone by the plaintiffs as
a result of being deprived of their money is best measured by re-
ference to economic conditions in the plaintiffs’ country or the
country in which their business is conducted. In the Miliangos case,
the Swiss plaintiff faced the prospect of considerable loss as a
result of the decline in value of sterling relative to the Swiss franc.
In compensating the plaintiff, it was clearly desirable to take ac-
count of the fact that he was expecting some specified number of
Swiss francs, and also to ensure that the interest rate awarded was
commensurate with the Swiss rate that would have been available
to the plaintiff. In other words, the funds that the Swiss plaintiff
would have had to borrow in order to finance (at least notionally)
the cash shortfall he experienced as a result of the defendant’s
failure to pay the debt would have been available at the Swiss in-
terest rate and not the rate prevailing in the United Kingdom or
anywhere else.
The importance of ensuring consistency between the currency
1979]
COMMENTS – COMMENTAIRES
and the interest rate upon which calculations are to be based
derives essentially from the existence of an inverse relationship
between the interest rate in a country and the international strength
of its currency. The rate of interest offered by a central bank reflects
a number of factors, but in particular it reflects inflation and ex-
pectations about subsequent movements
in exchange rates. For
example, the Bank of England varies its minimum lending rate
according to both the balance of payments position (which de-
termines in part the extent of the Bank’s eagerness to attract in-
vestment from overseas) and the expected rate of inflation (since
the incentive to invest depends in part upon the difference between
the nominal rate of return and the rate at which prices in the
economy are rising). It is clear that the weaker the currency is
expected to be, the higher the domestic interest rate will have to
be if investment is to be protected. An important corollary is that
the greater the fall in the international value of a currency, the
greater the extent to which domestic interest rates will exceed those
prevailing abroad. A cursory glance at the international financial
statistics for the relevant countries and time period in the Miliangos
case illustrates the point very clearly: the Swiss franc moved up
considerably against sterling, but over the same period Swiss in-
terest rates were correspondingly lower than those prevailing in
the United Kingdom23
In the Helmsing case, matters were slightly more complex. Over
the period from 1972 to 1976, the Maltese pound declined in value
against the Deutschemark. According to the rather sparse informa-
tion available about interest rates in Malta, they were generally
higher than those prevailing in Germany. This observation is based
on a comparison of the discount rate offered by the central bank
in each country. The interest rate figures quoted in the case, in-
cluding the fifteen per cent to which German commercial rates
were said to have risen, are confusing; by implication, German
commercial rates (which like all commercial rates offered to risk-
bearing firms exceed the minimum rate at which the central bank
will lend) are being compared with the Maltese discount rate.
Whilst there are good grounds for arguing that commercial rates
(rather than the minimum lending rate) are the appropriate criteria
to apply in compensating plaintiffs, it is important that comparable
rates be used. It is meaningless to compare central bank rates in
one country with a generically different interest rate in another
country.
23For details, see Bowles & Phillips, supra, note 16.
McGILL LAW JOURNAL
[Vol. 25
Thus, whilst it appears from reading the Helmsing case in isola-
tion that interest rates were higher in Germany than in Malta, the
available statistics suggest the reverse. As is suggested above, the
weakening of a currency is generally associated with high domestic
interest rates. The consequence of this is that the German plaintiff
is being overcompensated because too high an interest rate is being
awarded, given that he is being protected from the effects of the
weakening of the Maltese currency.
In general terms, it can be seen that where the interest rate
corresponds to the currency in which the award is made, the
plaintiff who loses as a result of currency volatility will suffer losses
that are less spectacular than would appear at first glance. Even if
there is substantial delay between the occurrence of harm and the
date of judgment, the change in the value of the sum resulting
from exchange rate- changes will be offset to some extent by the
lower rate of interest that it is appropriate to apply.
IV. Relevance to Canada
At the moment, Canadian courts have adopted the so-called
“breach date” rule, in which a foreign sum will be converted into
Canadian dollars at the rate of exchange prevailing when the pay-
ment was due.24 Riordan is correct when he observes that this is
based on “a now obsolete British rule”2 5 He proposes that the
guiding principle should be not only that the creditor should not
suffer from the fluctuation in exchange rates but also that the
debtor should not gain thereby. To allow a debtor to do so would
be to sanction his unjust enrichment2 He argues that a plaintiff
should be permitted to choose either the breach date or the date
of payment as the date on which the exchange is to be calculated.
English courts since Miliangos have held that the rate of exchange
should be the rate prevailing at the date of payment, but that a
plaintiff who is shown to have brought about delays in legal pro-
ceedings in order to increase the amount claimed in damages may
have his damages reduced on the grounds of failure to mitigate.2
It is, however, difficult for a defendant to prove that the plaintiff
has delayed, and to follow Riordan’s proposal may be to place an
inordinate burden on defendants.
24 See Johnson, Conflict of Laws 2d ed. (1962), 721 et seq.
25 Supra, note 3, 440.
26 Ibid.
2 See, e.g., supra, note 2.
2 8 Malhotra v. Choudhury [1979] 1 All E.R. 186 (C.A.),
19791
COMMENTS – COMMENTAIRES
According to Riordan, the proposal ‘discussed above would allow
the judiciary to “effectively mitigate the unfair disadvantage -that
section 11 of the Currency and Exchange Act has on international
plaintiffs, Canadian or otherwise”.- Section 11 provides that:
[A]ny statement as to money or money value in any indictment or legal
proceedings shall be stated in the currency of Canada.30
We agree with Riordan’s criticisms of this section, but his reliance
on the judiciary in this matter appears somewhat optimistic, given
the conceptual difficulties outlined above. Whilst many authors
have concluded that the Miliangos case and the associated adjust-
ments that have taken place represent an important step forward
and reflect the adaptation of the law to the demands of modern
commerce,3 ‘ relatively little attention seems to have been paid to
the difficulties that have arisen. Judges do not appear to have taken
expert advice on how foreign exchange markets operate;
their
intentions to fully compensate plaintiffs for losses, while laudable,
have led to overcompensation in the sense that an excessive interest
rate has been awarded 3 2 It is perhaps apposite to conclude by
noting that in several areas of the law, judges are still inclined to
react hysterically or derisively to the suggestion, that actuaries,
economists or other experts have much to offer to legal debate.3
This attitude has been less prevalent in the area of contract law.
Indeed, in his dissenting speech in the original Miliangos case, Lord
Simon argued that a matter such as foreign money obligations de-
manded “the contribution of expertise from far outside the law –
on monetary theory, public finance, international finance, com-
merce, industry, economics” 3 4 Perhaps he is right.
Roger A. Bowles*
Christopher J. Whelan**
29Supra, note 3, 440.
30 R.S.C. 1970, c. C-39.
31 See, e.g., Riordan, supra, note 3; Mann, case note on Miliangos in (1976)
92 L.Q.R. 165, 167, referring to the “openly progressive and reforming spirit
displayed in fields of international commerce”.
32 See, e.g., Helmsing Schiffahrts, supra, note 15.
33 See, e.g., Taylor v. O’Connor [1971] A.C. 115 (H.L.); Mitchell v. Mulholland
(No. 2) [1972] 1 Q.B. 65 (C.A.); S. v. Distillers Co. (Biochemicals) Ltd [1970]
1 W.L.R. 114 (Q.B.). On this problem generally, see Prevett, Actuarial Assess-
ment of Damages: The Thalidomide Case (1972) 35 M.L.R. 140, 257.
34 Supra, note 1, 481.
* Lecturer, Department of Industrial Economics, University of Notting-
ham, England; Visiting Research Associate, S.S.R.C. Centre for Socio-Legal
Studies, Wolfson College, Oxford, England.
** Research Officer, S.S.R.C. Centre for Socio-Legal Studies, Wolfson
College, Oxford, England.
