Original version by Gerald G Sander November 2006; reviewed by Gerald G Sander June 2014; reviewed by Gerald G Sander November 2024.

A.  Introduction

1  Both Payment in Gold of Brazilian Federal Loans Contracted in France (France v United States of Brazil) (1929) (‘Brazilian Loans Case’) and Payment of Various Serbian Loans Issued in France (France v Kingdom of the Serbs, Croats and Slovenes) (1929) (‘Serbian Loans Case’) dealt with the contractual fulfilment of loans agreement obligations under municipal law between French bond holders and the Brazilian State on the one hand and the Serbian State on the other hand (Debts). Of particular interest was how the Permanent Court of International Justice (PCIJ) determined its jurisdiction (International Courts and Tribunals, Jurisdiction and Admissibility of Inter-State Applications) and whether the French State has a right to represent and protect its nationals before the Court, even in civil law matters (Diplomatic Protection; International Courts and Tribunals, Standing). Further, the question arose whether the Court, when ruling on a case and using municipal law, is obliged to take into account what the municipal courts have already said on the matter (International Law and Domestic (Municipal) Law).

B.  Brazilian Loans Case

2  The Brazilian government issued three loans between the years 1909 and 1911 in the form of bearer bonds. The bonds were mainly offered for subscription in France. While all three bonds included gold clauses, these clauses were worded differently. In the first bond, from 1909, only the interest was to be paid in gold, while, in the case of the latter two bonds, the interest and the redemption of the principle were to be payable in francs gold. Despite this discrepancy the payment of all three bonds, both for interest and the redeemed principle, was paid in paper francs alone. As the French franc depreciated in value, protests arose when the bonds continued to be paid in depreciating paper currency and not in valuable gold. In 1924 the French government intervened on behalf of the bond holders and asked the Brazilian government to repay the capital of the loans and the interest due thereon, on the basis of the French franc in gold at the time the bonds were issued. The Brazilian government and the French government started negotiations at the diplomatic level. When these talks failed, a special agreement (Compromis) was concluded on 27 August 1927, which requested the PCIJ to give a judgment on the question whether the service of the loans should be effected as hitherto in paper francs, that is to say, in the French currency which was compulsory legal tender or according to the value of the former gold franc.

3  On 12 July 1929 the Court decided in favour of France. In regard to its jurisdiction the Court referred to the judgment in the Serbian Loans Case announced on the same day. The court based its decision, after a detailed examination of the terms of the bonds, on the interpretation of these words and the application of the contra proferentem rule. This legal principle states that if the meaning of a contractual provision is ambiguous, the preferred meaning is the one which operates against the party who drafted the contract or supplied the particular provision. The Court came to the conclusion that the value of the gold franc at the time of issue should be used when repaying the bonds and not the value of the current paper franc. They went on to say that the acceptance of the depreciated French paper francs did not act as an estoppel against the French bond holders. The Brazilian government also pleaded force majeure, but the Court did not accept it, thereby confirming that economic dislocations did not affect legal obligations. Though the special agreement stated explicitly that the Court, when applying the municipal law of either State, should not be bound by the decisions of municipal courts, the Court commented that it must seek to apply the domestic law as it would be applied in that country and that therefore it must pay the utmost regard to the decisions of the municipal courts of a country. But the Court also announced that it would be anxious to make a true assessment of the jurisprudence of municipal courts, which is important in cases of uncertain or divided jurisprudence. The court then concluded that according to the jurisprudence of French courts a gold clause in an international contract is valid.

C.  Serbian Loans Case

4  The government of the Kingdom of Serbia issued five loans through a banking syndicate between the years 1895 and 1913. These loans amounted to nearly 1,000 million French francs and were sold mostly by French investors. The bonds all included gold clauses although they were worded differently, e.g. franc–or, payable en or or emprunt 4½% or. When the value of the French franc depreciated between the years of 1919 and 1928 to about a fifth of its pre-war level, the bearers of the bonds refused in the years 1924 and 1925 payment in French paper francs and demanded without success gold payments. The French government took up their claim against the government of the Kingdom of the Serbs, Croats, and Slovenes. However, these discussions did not succeed in disposing of the controversy. Finally, a special agreement was drawn up by the parties, signed on 14 April 1928 and submitted to the PCIJ.

5  On 12 July 1929 the Court announced its ruling in favour of France. The significance of this ruling stems from how the Court determined its jurisdiction. Article 14 Covenant of the League of Nations gives the Court jurisdiction over matters concerning a ‘dispute of an international character’. The Court acknowledged that the case involved only the contractual fulfilment of the loan agreement obligations between the French bond holders and Serbia under municipal law, which in fact cast doubt on whether Article 14 Covenant of the League of Nations applied. In fact the Court derived its jurisdiction from the broad scope of Article 36 Statute of the PCIJ. It emphasized that the controversy between the French government, acting in exercise of its right to give diplomatic protection to its nationals, and the Serbian government was fundamentally identical with the dispute between Serbia and its creditors. The demand at the governmental level could not be separated from the dispute between Serbia and the French nationals. Furthermore, by virtue of Article 38 PCIJ Statute, the Court acknowledged that its duty was to decide cases using international law, although its statute did not preclude the Court from dealing with cases which require the application of municipal law. With regard to the matter in dispute the Court stated that Serbia was bound by express contract stipulations. The court interpreted the specific use of the term ‘gold francs’ to be a binding clause relating to an internationally accepted standard value which gave the bond holders the right to demand in gold francs the equivalent in value of the twentieth part of the old 20 franc gold piece. That the French bond holders had accepted paper francs previously as payment did not negate these contractual obligations. The court determined that while Serbian law ruled the agreement in general terms, French law was to be used regarding the currency of payments. While French law at that time made such gold stipulations ineffective, French municipal courts had established in numerous decisions that the prohibition did not extend to obligations having an international character. The court found that in applying municipal law it had to take these rulings into account and thus supported its judgment by reference to the decision of French municipal courts.

D.  Conclusion

6  The Brazilian Loans Case and the Serbian Loans Case were a starting point for the development of foreign investment arbitration (International Investment Arbitration; Investment Disputes; Investments, International Protection). Main points of interest in these cases are firstly, how the Court determined its jurisdiction and secondly, that the State has a right to represent and protect its nationals before the Court, even in civil law matters. The court ruled that any contract which is not a contract between States in their capacity as subjects of international law is in fact based on the municipal law of some country. When ruling on a case and using the municipal law the Court is obliged to take into account what the municipal courts have already said on the matter. As a result of these decisions the validity of a gold clause in international contracts has been strengthened. Both cases therefore act as a lasting validation of the pacta sunt servanda rule.