Dr Marek Porzycki Chair for Economic Policy

1. Monetary Law and Monetary Policy13. Money inthe law of obligations. Foreign exchange under Polish law Dr Marek Porzycki Chair for Economic Policy

2. Issuescovered • principle of nominalism – reference to a particularcurrency and application of the lex monetae • use of foreigncurrencies in monetaryobligations • foreign exchange law (Prawo dewizowe) • regulation of moneychangingactivity(działalność kantorowa)

3. Principle of nominalism • Reference to a currency and the unit of accountinwhichitisexpressed • A debtexpressed in currency of a country involves an obligation to pay the nominalamount of the debt in whateveris the legal tender at the time of paymentaccording to the law of the country in whosecurrency the debtisexpressed (lex monetae) • Any fluctuations in the value of thatcurrency in terms of exchange rateorpurchasingpower (inflation) between the time when the debt was incurred and the time of payment do not affectthisobligation

4. Principle of nominalism • Relation to the State theory of money the State defines a currency and a unit of account; payment of a specifiedamountexpressedinthiscurrencydischarges an obligation under thelaws of this State • Thereis no general possibility of post-contractualadjustment of theamount of an obligationexpressedinmoney. • Risk for creditorsresultingfromthepossibility of loss of valueresultingfrominflationordepreciation of currency. • Theusualway of reflectingsuchriskin a contractualrelationship: applying an interestrateto theamount of theobligation (contractualinterestrate, not to be confusedwithstatutoryinterestrateapplicable to overduepayments)

5. Principle of nominalism – a specificexample • Capital gainstaxischarged on thenominalamount of theincome, regardless of theinflation. • Example: a fixed term deposit of 10.000 PLN for 1 yearwith 2% interestrate. After 1 yearthenominalincome will be 200 PLN. • Iftheinflationinthe same period will be 2%, theinterestrate will only offset theloss of thepurchasingpower of theamountinquestion. Correspondingly, theincomeinrealterms will be zero. • Nevertheless, capital gainstaxischarged on thefullnominalamountearned as interest (under Polish law 20% x 200 PLN = 40 PLN). • Overdecades, lawsuitswerebrought by taxpayersinthe U.S., the U.K., Germany and Austria but lostdue to courtsupholdingtheprinciple of nominalism.

6. Principle of nominalism - problem • Theapplication of theprinciple of nominalismmaylead to manifestlyunjustresultsincase of high inflation, inparticular of hyperinflation thecreditoriseffectivelydeprived of thevalue of his/herclaiminrealterms. • Example: ECHR caseRudzinskavs. Poland (1999), 45223/99. In 1984-87 theapplicantsavedmoney on a specific banking account („książeczka mieszkaniowa”) at a State-run bank with a purpose of financingthepurchase of an apartment. Her savingssubsequentlylosttheireffectivevalueduringthehyperinflation of 1989-90. The ECHR ruledthattheright to protection of property does not extend to theprotection of purchasingpower of money on a banking account. Correspondingly, there was no infringementagainsttherights of theapplicant as long as shecouldaccessthenominalamount of hersavings, eventhoughshehaslostalltheirvalueinrealterms.

7. Exceptions to nominalism • rebus sic stantibusclause – a statutoryright to have an obligationadjusted by a court in case of extraordinarycircumstances, specifically applied intimes of monetarycollapse • earlycasesdecided on thebasis of general clauses, e.g. Art. 242 of the German CivilCode (BGB) providing for theprinciple of equity and goodfaith (TreuundGlauben) applied to readjustdebtsinthe period of German hyperinflationinearly 1920s. • Specificstatutoryprovisionsintroducedlater, e.g. current Art. 3581 § 3 of thePolishCivilCodeallowing for an adjustment of a monetaryobligationincase of a significantchangeinthepurchasingpower of money • extraordinarycircumstancesusuallydefinednarrowly • Obligationsadjustedindividually on a case-by-casebasis - rebus sic stantibusclauses do not provide for a general rule of revalorization

8. Exceptions to nominalism • contractualindexation (valorization) clauses – adjustment of the obligationaccording to a contractuallypre-definedcriterion (e.g. inflationrate, exchange rate of a foreign currency) (e.g. Art. 3581 § 2 of the PolishCivilCode - the partiesmayagree to set the value of a monetary performance according to a measure of valuedifferent from money) • inthe past: „goldclauses” • defining a performance by reference to a specificcommodity • unit of accountclauses, e.g. reference to the SDR • clausesallowing for periodicpricereviewsin long-term contracts

9. Interestrate as protectionagainsteffects of nominalism • Mainobjective of interestrate: reflectingtheprice of borrowing (use of capital/externalfinancing) • Secondaryobjective: protectionagainstgradualloss of value of moneyresultingfromlowormoderate („creeping”) inflation • Third objective: penalization of paymentdelays • Fixedorvariableinterestrate • Contractualinterestrate – set by thepartiesinthecontract, subject to interestratecapsinsomecountries under anti-usurylaws (e.g. Poland: under Art. 359(21) of theCivilCodemaximuminterestrateis set as double thestatutorydefaultrateapplicable for obligations = currently 10%; under Art. 481(21) of theCivilCodemaximumcontractualinterestrate for overduepaymentsis set as double statutoryinterestrate for overduepayments, currently 14%).

10. Interestrate as protectionagainsteffects of nominalism • Statutoryinterestrate – set insomejurisdictions by law as defaultinterestrate for obligations and/or for overduepayments • defaultinterestrate for obligations (applicableiftheinterestrateis not set inthecontract) – in Poland under Art. 359(2) of theCivilCode set as a sum of the NBP referencerate and 3,5% = currently 5%); • statutoryinterestrate for overduepayments(in Poland under Art. 481(2) of theCivilCode set as a sum of the NBP referencerate and 5,5% = currently 7%).

11. Obligations in foreigncurrency Reference to foreigncurrencycan be used as a sort of indexationmechanism ( contractualexception to the principle of nominalism). In suchcases the actualpaymenttakes place orcantake place in anamount of nationalcurrencycalculatedaccording to the exchange rate of the foreigncurrencyat the time of payment. • Example - the generalrule of Art. 358(1) of the PL CivilCode: obligation for payment of anamount of moneyexpressed in a foreigncurrencycan be satisfied by payment of the amount of correspondingvalue in Polishcurrency, unlessactualpayment in specificforeigncurrencyisexpresslyrequired by statute, courtdecisionor the contract. • Principles of EuropeanContract Law, Art. 7.108 (2): In the absence of such agreement, a sum of money expressed in a currency other than that of the place where payment is due may be paid in the currency of that place according to the rate of exchange prevailing there at the time when payment is due.

12. Obligations in foreigncurrency 2 Ifpayment in a specific foreign currencyisexpresslyrequired – the principle of nominalismaccording to thelex monetaeapplies. • Example: Principles of EuropeanContract Law, Art. 7.108 (1): The parties may agree that payment shall be made only in a specified currency. Privateinternational law: lex monetaerefersonly to the currency of the obligation and candiffer from the law applicable to the contract. Example: a contract, subject to Polish law, provides for payment of 1000 USD. Polish law applies to the contract, but US law applies to the currency of payment (to whatislegal tender according to the lex monetae).

13. Nominalism and lexmonetae • If a contractrefers to obligationin a currency, the law of the State issuingthatcurrency (lexmonetae) determineswhatconstitutes legal tender and whatisitsnominalvalue. • Relevance: • cases of monetary reform, such as redenomination (e.g. Poland in 1995, Turkey in 2005); euro adoption; • demonetisation (withdrawal of banknotesorcoins), e.g. India in 2016.

14. Polishforeign exchange law • Law of 27 July 2002 on foreign exchange (Prawo dewizowe) • Used to restrict and regulate the use of foreigncurrencies and the exchange thereof element of exchange controls • Exchange controls graduallyabolishedsince 1990 • since 2008/2009 no limitations on the use of foreigncurrency in obligationssubject to private law • Verylimitedrestrictionsremain in place for movingfunds by Polishresidents to non-EU MemberStates for the purposes of investment in somecases a generalorspecificforeign exchange permitisrequired

15. Moneychangingactivity(działalność kantorowa) • Economicactivityconsisting of sale and purchase of foreigncurrency • A regulatedactivitysubject to the requirement of entryinto the register of moneychangingactivity (Art. 11 ForEx Law), maintained by the NBP • Specificpersonalrequirements (no criminalrecord) and requirementsregardingpremises (e.g. display of the exchange rates) • Furthertechnicalrequirementsspecified in a regulation of the Minister of Finance • Subject to control by the NBP (Art. 33(1)(2) ForEx Law) Attention: thereare no legallimits as regards exchange rates and exchange ratespreads applied by specificmoneychangers. In somecasesrates in some exchange pointsmayvary from mid-market rateseven by 20-30%  caveatemptor(customerbeware!)