The exercise of control by States over dealing in their own and other currencies, and over international contracts in general, is a common phenomenon. Such control is designed to protect balance of payments positions against large-scale currency speculation, and it is a necessity tempered by the need to facilitate and expand international trade. English private international law has responded to these realities by providing that where a contract is invalidated or discharged by exchange control regulations of its proper law, or the law of the place of its performance, then such regulations will be given effect to (see, e.g., Dicey and Morris, “The Conflict of Laws”, 9th ed., 1973, Rule 175). There is also another rule, however, the largely unexplored art. 8, s. 2(b) of the Bretton Woods Agreement establishing the International Monetary Fund (IMF):—

This provision, which became part of English law under the Bretton Woods Agreement Act 1945, was recently considered in Wilson, Smithett and Cope Ltd. v. Terruzzi [1976] Q.B. 683 (Kerr, J., and C.A.). The extraordinary circumstances of this case, with implications for hundreds of cases concerning ordinary commercial contracts, may now be considered.

The case concerned certain contracts for the sale of metals between the plaintiffs, members of the London Metal Exchange (LME), who were dealers and brokers in metals, and the defendant, an Italian metal dealer. In about January, 1973, the defendant was introduced to the plaintiffs by the latters’ Italian agent, and they commenced to deal for him in increasingly large amounts of metal according to his instructions. It appears, however, that Mr. Terruzzi’s motive in contracting was not to acquire the metal contracted for for use in the course of his ordinary business, but to speculate in price changes on the LME.

On Oct. 18, 1973, the “forward” price of zinc (for delivery three months later) was about £470 per ton. Between that date and Nov. 7, 1973, the price rose to about £520 per ton. Within that period, the defendant “went short”, instructing the plaintiffs to sell zinc for future delivery which he did not then have. This was done in the belief that the price of zinc was then too high, and was likely to fall to earlier, more normal, levels, enabling him to meet his commitments to the plaintiffs by buying metal at the new lower price, and thus show a handsome profit in his account with them. Unfortunately, however, prices continued to rise to unprecedented levels. By Nov. 14, 1973, the price of zinc was £600 per ton; this was followed by a short-lived price fall, and this was itself followed by a rise to over £800 per ton in early December. By late January-early February, 1974, prices had fallen back to £500-600 per ton.