Pricing And Payment Clauses: Who Bears The Risk Of Currency Fluctuation? – Contracts and Commercial Law

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 usual approach: payor bears the 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.

Currency fluctuations won’t usually frustrate a contract
either

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.

When might the payee bear the risk?

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.

Drafting tips

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.

More information on pricing and payment issues

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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How we can help

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.