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What happens when the pound in your client’s pocket is devalued?

Currency fluctuations in transactions

Anyone who went abroad during the summer was probably a little disappointed at how little the pound sterling could buy them compared to previous years. Although this problem has been highlighted by Brexit, exchange rate movements is a perennial problem for international transactions. Currency fluctuations can affect almost every trade that takes place internationally where the different parties do not use the same currency. Cynical (or perhaps sensible) advisors might also want to consider the legal fallout if a country falls out of a currency union, such as the Eurozone: in the past few years, such an event has gone from being unthinkable, to implausible, to a possibility.

Liability for currency fluctuations

Where a debt is expressed in the currency of a country, the debtor must pay the nominal amount of that debt in whatever is the prevailing legal tender at the time of payment according to the law of the country of the currency of the debt. This is known as the principle of nominalism. This principle can be traced all the way back to Gilbert v Brett (1604) Davis 18. Where the contract does not state the currency of payment, at common law it is normally determined by the law of the country in which payment is made.

When a party is late in paying an obligation and another party suffers loss from exchange rate fluctuations as a consequence, it might consider a claim for this loss from the contract breaker. Liability for losses arising from currency fluctuations is not, however, absolute: it very much depends on a proper interpretation of the contract and whether such losses are too remote to be recoverable.

In President of India v Maritime Corp (‘The Lips’) [1988] AC 395, demurrage (effectively liquidated damages) were to be paid at the rate of $6,000 per day, payable in sterling at the rate prevailing on the date of the bill of lading. The umpire implied a term that demurrage would be paid within two months; he awarded special damages arising from the depreciation in sterling for the delay in paying it. The House of Lords disagreed, holding that there was no such implied term: as it was damages for detention, albeit liquidated, liability for it arose from the moment that the detention began. The claim for damages for currency fluctuations was therefore rejected. More generally, the House of Lords made it clear that ‘claims to recover currency exchange losses as damages for breach of contract, whether the breach relied on is late payment of a debt or any other breach, are subject to the same rules as apply to claims for damages for breach of contract generally.’ (per Lord Brandon at 424).

Even if there is a contractual stipulation as to the time of payment and the debtor is late, whether or not they are liable for currency fluctuations will very much depend on what was contemplated by the parties at the time of entering the agreement. Losses flowing from currency fluctuations are not automatically awarded: as considered by the House of Lords in The Achilleas [2009] AC 61, a contract-breaker is only liable for damage resulting from his breach if, at the time of making the contract, a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. In that case, the owners’ loss of profit following a late return of a ship was caused by volatile market conditions which amounted to an unusual occurrence outside the parties’ contemplation. As a result, the charterers were not liable in damages for the owner’ loss of profit.

This need to prove reasonable foreseeability in currency fluctuation claims is illustrated by two cases. In Mehmet Dogan Bey v G. G. Abdeni & Co LD [1951] 2 KB 405, charterers under a charterparty failed to pay on the stipulated date. Pound sterling was devalued before the money was sent and the owner claimed for loss caused by the devaluation. On the facts of the case it was held that it was not reasonable to foresee a serious possibility or real danger that if they did not pay on the due date the loss claimed would result. This case should be contrasted with Ozalid Group (Export) Ltd v African Continental Bank Ltd [1979] 2 Lloyd’s Rep. 231. A bank which delayed payment was fixed with liability when the delay caused its client loss arising from a change in the dollar-sterling rate. The court held that since the bank knew or ought to have known the terms on which the claimant held dollars, and that they were merchants and not dealers in foreign currency, they ought to have foreseen that it would sell in dollars; it was also reasonably foreseeable that the claimant would incur reasonable expense in seeking to obtain payment in the event of default.

Country leaving a currency union: the lex monetae principle

If a country were to leave a currency union such as the Eurozone, parties would need to consider whether a ‘euro’ obligation would be converted into an obligation under the new successor currency. This is affected by the lex monetae principle: where a contract contains a reference to a particular national currency, the courts might imply a choice of the law of that country to determine the identification of that currency if there were a change in circumstances, regardless of the stated applicable law governing the contract. For example, if Greece were to leave the Eurozone, the parties would need to determine whether an obligation expressed to pay a party in Athens in euros would still be in that currency or if it should be made in the ‘new drachma’. In the absence of express wording in the contract, the court would need to consider the presumed intention of the parties in order to ascertain the lex monetae. This is a complicated area: furthermore, any Eurozone departure might very well be accompanied by legislation.

Drafting considerations

It is difficult to insulate your client against exchange rate fluctuations and currency problems. It is of course possible to set out the currency that applies. If a non-sterling currency is used for payment, you might consider spelling out details of the exchange rate and how it is calculated. Consider whether there be some mechanism to stabilise the price of the goods in the event of exchange rate fluctuations. Be careful to ensure that either the currency specified for payment is the same as the currency in which the prices are set, or otherwise confirm that there is some kind of robust mechanism for currency exchange. If the transactions might be taking place in euros, have in mind the possibility that there might be a withdrawal from the Eurozone and consider the effect of the lex monetae principle. Even if the formal contract is water tight, ensure that marketing and sales literature is equally currency compatible. Some costs (such as delivery costs) may be affected by currency fluctuations, too.

David Sawtell / 9th Sep 2016


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