Losing Control: Why IMF Article VIII(2)(b) May Nullify the Enforceability of Financing Contracts When Spiraling Oil Prices Prompt the Use of Exchange Controls

INTRODUCTION As the price of oil continues its climb, a potential catastrophe looms on the horizon. While the countless effects of surging oil prices have been discussed at length, one possibility has received far less attentionthe revival of International Monetary Fund1 (IMF) Article VIII(2)(b) as a defense to financing contracts. If the recent surge in oil price accelerates, countries may be forced to adopt new monetary policies to protect their own faltering currencies. The effects of countries adopting new monetary policies,2 especially currency controls, might call into question the enforceability of many and financing contracts.3 Exchange controls can take the form of a limit upon the outflow of local currency, a limit on the outflow of U.S. dollars, or mandatory rates of exchange.4 The IMF requires member states5 to enforce each others' controls when imposed consistently6 with the IMF Articles of Agreement.7 Specifically, Article VIII(2)(b) declares: Exchange contracts which involve the currency of a member and which are contrary to the control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member.8 This provision applies to both governments and private contracting parties in IMF member states where controls are imposed.9 Article VIII(2)(b) completely bars the enforcement of an illegal in any IMF member state.10 Although much ink has been spilled over what precisely comprises an exchange contract, however, there is no international consensus.11 The disagreement centers upon whether the term exchange contract should be viewed broadly or narrowly.12 A broad interpretation, generally preferred by developing countries, would encompass any that involves monetary elements; a narrow interpretation, generally preferred by developed countries, includes only those contracts that contemplate the of one currency for another.13 This lack of a precise definition leads to uncertainty in financing contracts between developed and developing countries, and can potentially destroy these contracts and even bankrupt companies.14 In any case, parties on either side of a financing agreement can take measures to shield themselves from this uncertainty.15 Part I of this Note will investigate how a potential surge in the price of oil might cause developing countries to use more controls. This part will also briefly examine the causes of a drastic surge in oil prices and how enacted controls can destroy aspects of project financing. Part II will analyze what constitutes an exchange contract within the meaning of Article VIII(2)(b). Finally, Part III suggests various methods that may reduce the likelihood of Article VIII(2)(b) reeking havoc upon seemingly ironclad financing contracts. Various methods proposed include: an interpretation of the article directly from the IMF, explicit stipulation by the contracting parties regarding the exact interpretation of the article, and a choice of law provision included in the contract. In this age of uncertainty and sky-high oil prices, the best option is for the IMF to adopt an amendment to the Articles of Agreement. I. OIL'S POTENTIAL FOR DEVASTATION The record-high price of oil has countless effects on every facet of the global economy.16 Higher oil prices lead to inflation and lower investment in oil-importing countries as the affected government and its citizens have less money to spend.17 Oil price increases also alter the balance of trade and rates between countries.18 oil-importing countries normally experience deterioration in their balance of payments,19 which exerts downward pressure on their rates and leads to higher inflation.20 This combination of higher inflation, higher unemployment, lower rates, and lower real output imposes pressure on the government to take appropriate action. …

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