exchange risks in long term contracts

Exchange/Currency Risks

in Long Term Contracts

03/09/2017

RIGA 11TH VIS PRE-MOOT

UNIVERSITY OF LATVIA

Exchange Risk Definition

“The risk of losing money on an investment or sale because of changes

in exchange rates.”*

*Cambridge Business English Dictionary

2 Mgr. Matej Košalko LL.M. [email protected]

Overview of the Presentation

Exchange/currency risks in an arbitration proceedings

Exchange/currency risks as substantive or merit issue

Exchange/currency risks in investment contracts and investment arbitration


Exchange/Currency Risks in Arbitration

Proceedings

Substantive / merit to be determined by tribunal

Procedural orders/directions

(e.g., currency fluctuation as a reason for security measure)

Currency of the award

(e.g., whether the currency is exchangeable in the likely country of enforcement; whether the proposedcurrency may be devalued before the award is honored/enforced)

Enforcement of the award

(e.g., some countries allow enforcement only in their own currency; enforcement of award in a currency

not freely convertible in the country of enforcement and public policy defence)


Exchange/ Currency Risks as

Substantive or Merit Issue

Payment obligation under contract

Damages claim

Restitution

Defenses: frustration / force majeure and hardship


Payment Obligation under Contract

- CISG

CISG

No provision on exchange risk

Recoverable as part of the damages under Article 74 (foreseeability)

Recourse to local law?



– UNIDROIT Principles

Article 6.1.9 of UNIDROIT Principles

“(1) If a monetary obligation is expressed in a currency other than that of the place for payment, it may be paid by the obligor in the currency of the place for payment unless

(a) that currency is not freely convertible; or

(b) the parties have agreed that payment should be made only in the currency in which the monetary obligation is expressed.

(2) If it is impossible for the obligor to make payment in the currency in which the monetary obligation is expressed, the obligee may require payment in the currency of the place for payment, even in the case referred to in paragraph (1)(b).

(3) Payment in the currency of the place for payment is to be made according to the applicable rate ofexchange prevailing there when payment is due.

(4) However, if the obligor has not paid at the time when payment is due, the obligee may require paymentaccording to the applicable rate of exchange prevailing either when payment is due or at the time of actualpayment.”



– English Approach

Money of Account vs Money of Payment

Woodhouse v Nigerian Produce Marketing Co Ltd

A contract under which English buyers bought Nigerian cocoa provided for payment in Nigerian pounds in Lagos.Later, the Nigerian sellers wrote that payment could be made in sterling in Lagos. Thereafter the pound sterling was

devalued.

The money of account remained Nigerian pounds, although the money of payment became sterling.

Procter and Gamble Co v Svenska Cellulosa Aktiebolaget SCA

Contract for the supply of goods where prices were in euros but payment was to be in sterling. No fixed exchange ratespecified in the contract but appendix with manufacturing budgets contained an annotation at its foot, which read

"£/Euro exchange rate 1.49164". The court refused to imply or interpolate a term providing for a fixed exchange rateand applied Woodhouse.


Damages Claim - CISG

Article 74 of CISG - full compensation principle

“Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as aconsequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at thetime of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possibleconsequence of the breach of contract.”

CISG Advisory Council Opinion No. 6

Different solutions in practice:

awarded damages to reflect currency devaluation

refused to award damages for such losses

while a creditor/aggrieved party may bear the risk of fluctuating exchange rates over the course of the contract, such party does not continue to bear the risk after the debt has matured

receiving payment in its own currency vs. practice of converting currency immediately after payment

estimation/foreseeability of the loss


Damages Claim - UNIDROIT Principles


“Damages are to be assessed either in the currency in which the monetary obligation was

expressed or in the currency in which the harm was suffered, whichever is more appropriate.”


Damages Claim – English perspective

Services Europe Atlantique Sud (Seas) of Paris v Stockholms Rederiaktiebolag Svea of Stockhol

A cargo of onions shipped to Brazil by the French charterers of a Swedish-owned motor vessel. The cargoarrived damaged, and the cargo receivers' claim for damages was settled by the French company inBrazilian cruzeiros, which they purchased with French francs, their normal business currency.

The hire under the charterparty was payable in U.S. dollars. In arbitration proceedings the owners admittedtheir liability, but contended that payment should be made in cruzeiros being the currency of the loss.

By then the value of the cruzeiro against the French franc was half what it had been when the charterershad paid the cargo receivers.

Owners of M.V. Eleftherotria Respondents v Owners of M.V. Despina

Collision between two ships, Eleftherotria being damaged. The Eleftherotria was owned by a Liberiancompany which had its head office in Piraeus. The managing agents had their principal place of business inNew York and the bank account used for moneys received and payments made on behalf of the ownerswas a U.S. dollar account in New York. The expenses of repair had been incurred in various currencies.Appropriate currency was the plaintiffs' currency rather than the currency of the expenditure.


Restitution

Article 81 (2) of CISG

“A party who has performed the contract either wholly or in part may claim restitution from the other party

of whatever the first party has supplied or paid under the contract. If both parties are bound to make -

restitution, they must do so concurrently.”


“(1) On termination of a contract to be performed at one time either party may claim restitution of whatever

it has supplied under the contract, provided that such party concurrently makes restitution of whatever it has

received under the contract.

(2) If restitution in kind is not possible or appropriate, an allowance has to be made in money whenever

reasonable.”


Restitution

Refund at the same exchange rate

A Czech buyer, plaintiff, and an Italian seller, defendant, concluded a contract for the production, delivery and

installation of a complete automatic assembly line for batteries, which was to be delivered to a Czech company.

Contract price, was valued in Lira but due in DM at an exchange rate agreed by the parties, the arbitral tribunal

held that any refund, including interest, should also be due in DM at the same rate.

Creditor’s domestic affair

The claimant’s government raised the rate of the national currency in relation to the US dollars which werethe contract currency. As a result, the return of an advance payment in US dollars by the respondent tothe claimant caused the claimant loss in a national currency.

Impossible to return goods

Where it became impossible to return goods after the contract had been avoided, the seller was entitled to the

value of the unreturned goods in its own currency calculated at the exchange rate at the last day by which the

buyer was bound to return the goods.


Frustration and Force Majeure

Article 79 (1) of CISG

“A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an

impediment beyond his control and that he could not reasonably be expected to have taken the

impediment into account at the time of the conclusion of the contract or to have avoided or overcome it,

or its consequences.”

Article 7.1.7 (1) of UNIDROIT Principles

“Non-performance by a party is excused if that party proves that the non-performance was due to an

impediment beyond its control and that it could not reasonably be expected to have taken the

impediment into account at the time of the conclusion of the contract or to have avoided or overcome it

or its consequences.”

Is revaluation of the currency of payment an impediment?


Hardship

Article 6.2.2 of UNIDROIT Principles“There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract eitherbecause the cost of a party's performance has increased or because the value of the performance a partyreceives has diminished, and(a) the events occur or become known to the disadvantaged party after the conclusion of the contract;(b) the events could not reasonably have been taken into account by the disadvantaged party at the time of theconclusion of the contract;(c) the events are beyond the control of the disadvantaged party; and(d) the risk of the events was not assumed by the disadvantaged party.”

Article 6.2.3 of UNIDROIT Principles – Renegotiation / Adaptation“(1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be madewithout undue delay and shall indicate the grounds on which it is based.(2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.(3) Upon failure to reach agreement within a reasonable time either party may resort to the court.(4) If the court finds hardship it may, if reasonable,

(a) terminate the contract at a date and on terms to be fixed; or(b) adapt the contract with a view to restoring its equilibrium.”


Hardship

CISG

No provision on hardship

CISG Advisory Council Opinion No. 7 - hardship and renegotiation through articles 7(1) and 79(5) of

CISG:

“In the interpretation of this Convention, regard is to be had to its international character and to the need to

promote uniformity and its application and the observance of good faith in international trade.”

“Nothing in this article prevents either party from exercising any right other than to claim damages under this

Convention”

Paiton

Construction of power plant in Indonesia with an investment volume of 2.6 billion USD. The investors were from the US, Japan

and England. Currency devaluation (power was priced in dollars) and other significant project risks were fully allocated to

and assumed by the Indonesian state electric utility. From an exchange rate of approximately 2400 Rupiah to 1 USD, the

Rupiah fell to as high as 16,000 to 1 USD. Arbitration was in Stockholm. Documentation promised heavy protection to investors.


Other Exchange / Currency Risks in

Investment Contracts

Monetary transfer provisions of most BITs deal with the nature of the currency with which the payment may be made and the applicable exchange rate

Currency / Exchange risks in US model BIT

Article 6: Compensation for expropriation shall be denominated in (i) a freely usable currency or (ii) converted intothe currency of payment at the market rate of exchange prevailing on the date of payment but shall be no lessthan the fair market value on the date of expropriation, converted into a freely usable currency at the market rateof exchange prevailing on that date.

Article 20 (2)(a): Financial Services: “Nothing in this Treaty applies to non-discriminatory measures of generalapplication taken by any public entity in pursuit of monetary and related credit policies or exchange ratepolicies.”

Article 18: Essential Security: “Nothing in this Treaty shall be construed to preclude a Party from applying measuresthat it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration ofinternational peace or security, or the protection of its own essential security interests.”


Other Exchange / Currency Risks in

Investment Contracts

LG&E v. Argentina - State of Necessity

2001/2002, economic, financial and political collapse in Argentina. The fixed exchange rate of the Argentine peso at parity with theUSD was canceled. As a result, the peso was allowed to float on the currency market.

Argentina claimed ‘state of necessity’ defense that it was excused from liability because its actions were taken In a state of political,economic and social crisis.

Himpurna – Abuse of Rights

At the time of the crisis 1 of the anticipated 4 turbine units was near completion while the others still in the process of construction orhad not even been started.

PLN did not fulfil its payment obligations when energy was available from the 1st power unit under the take or pay clause.

Himpurna claimed damages in the amount of USD 2.3 billion.

The tribunal held that:

PLN breached its obligations

it rejected PLN's submission that due to the changed circumstances Himpurna was obliged to renegotiate the contract and that it wasrelieved from its duties under the contract.

parties explicitly allocated the risk of currency devaluation to PLN by pricing the contract in USD.

It would be an abuse of rights if Himpurna could claim lost profits for investments not yet made and awarded a 1/10 of what wasclaimed.


Remember

Question of exchange/currency risks may be also a procedural matter

Carefully consider under what head you are raising the issue of the exchange /

currency fluctuation

Tribunals may be more benevolent towards the state in investment arbitration than

towards businesses in the commercial arbitration


Thank youMgr. Matej Košalko LL.M. MCIArb

[email protected]

exchange risks in long term contracts

Law