What happens where you're required to pay in a different currency from your own and exchange rate fluctuations mean that suddenly, the cost (in your own currency) has gone up considerably? We look at how the English courts have approached this issue and what you can do to protect yourself against this type of risk.
The general principle in the event of currency fluctuation in commercial contracts is that the payor bears the risk. This is well illustrated by the case of Proctor & Gamble v Svenska Cellulosa (2012). Proctor & Gamble agreed to sell a number of its paper towel production plants to Svenska. It also agreed to provide transitional services to the new owner. Svenska was to be invoiced for the services in euros, but payment was to be made to Proctor & Gamble in sterling. Over the course of the next few months, the value of sterling against the euro fell, with the effect that settling the invoices expressed in euros required Svenska to pay a greater amount in sterling.
Svenska argued that there was an implied term in the contract which required the use of a more favourable fixed exchange rate set out in the manufacturing budget (included as part of the agreement). The Court of Appeal refused to imply such a term into the agreement. It said that the fixed exchange rate was included merely to explain the rate at which sterling costs had been converted into euros for the sole purpose of the manufacturing budget. If the parties had intended to adopt the fixed rate of exchange for the payment of the goods, they would have expressed the prices of the goods in sterling and not euros. The Court then re-iterated that the standard position is for currency risk to be borne by the payor and therefore if this standard position were to be reversed, you would expect to see express wording to this effect.
It's also worth noting that attempts to argue that currency fluctuations were sufficient to result in the contract becoming impossible to perform under the doctrine of frustration have usually failed.
In United International Pictures v Cine Bes (2003), a licence agreement required a Turkish broadcaster to pay the licensor in US dollars. After the abandonment of a "crawling peg" mechanism intended to link its value to the dollar, the Turkish lira fell substantially in value – making the payments under the licence agreement significantly more expensive for the broadcaster. Among other things, it argued that continuance of the "crawling peg" was a key assumption when entering into the contract – and since it had been abandoned, the contract should be regarded as having been frustrated (allowing it to walk away without further liability). The Court rejected this argument, observing that no evidence had been provided that this assumption had been crucial to both parties. It also noted that Cine Bes could have protected itself by hedging its exposure to the dollar exchange rate, but failed to do so.
Whilst the general principle is for the payor to bear the risk of currency fluctuation, this can be varied in specific situations. In GSMA v Europa Technologies (2013), one element of the dispute focused on the application of exchange rates in respect of royalty payments for the use of mapping software. Under the royalty arrangements, Europa – which owned the software – was to be paid directly by the users whose main relationship was with GSMA. Europa would retain 50% of the fees, with the remaining 50% being transferred to GSMA.
The case partly concerned how exchange rates should be dealt with in circumstances where Europa was paid in currencies other than sterling, as the fees in the contract were expressed to be in sterling. The Court noted that the contract was silent on this issue. It implied terms into the contract to the effect that Europa should be able to deduct the cost of converting the currency into sterling from the amount of any remaining funds which it was required to pay GSMA, thereby passing the currency fluctuation costs onto GSMA. The cost of conversion was therefore borne by the payee, seeming to make this case an exception to the "at the payor's risk" rule.
However, the outcome of GSMA Limited v Europa Technologies was likely shaped by the context of the case. The primary purpose of the payment arrangement was to ensure an income stream for Europa as the software licensor and GSMA was entitled to be paid 50% of those fees, rather than being entitled to a specific amount in a particular currency, as was the case in Proctor & Gamble v Svenska Cellulosa.
You won't be surprised to hear that our recommendation is to spell out clearly in the contract how the exchange rate will be determined and who will bear the costs of currency fluctuation. As the payor usually bears the risk, this is especially important if you are the party that will be making the payments and you want to provide for a different allocation of risk (e.g. payee bears the risk, or some element of risk-sharing). Although this advice may seem unsurprising, these disputes illustrate how easy it is in practice – perhaps in the rush to get contracts signed – to overlook this point and to find yourself faced with litigation and/or having to pay significantly more than you expected. If parties anticipate being badly affected by currency fluctuations, it is worth considering negotiating a price adjustment mechanism or entering into hedging arrangements to reduce or eliminate the potential losses from any adverse currency movements.
While we're on the subject of rates, don't forget that sterling LIBOR ceased to be available at the end of March 2024. Although the majority of parties will have made appropriate future-proofing arrangements to reflect this long-anticipated development, it is worth considering carrying out a health check of contracts to avoid a scenario where parties refer to a clause referencing LIBOR only to discover that it has since fallen away. For example, see our briefing discussing the impact of LIBOR cessation on late payment clauses - but note that there are also many other contexts in which LIBOR may have been used, such as derivatives and other financial instruments.
This is the ninth in a series of briefings about pricing and payment issues in commercial contracts. The previous eight briefings were:
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We have considerable experience of advising on pricing issues in commercial contracts across a wide range of sectors. We are also one of very few firms to be consistently ranked as one of the top tier advisers in the UK in this area.
