Currency, cost calculations and contractual clarity

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Part of the Walker Morris Risk Series LogoWalker Morris’ Head of Commercial Dispute Resolution, Gwendoline Davies, highlights the importance of dealing comprehensively and clearly with matters of currency and calculation in cross-border contracts.

Currency confusion in an array of cases

Retailers and contract managers will recall the “Marmite Row”, during which Unilever (the Netherlands-based supplier of household brands) sought to impose on supermarkets around a 10% price increase, allegedly in response to post-referendum falls in the value of the pound. That dispute was resolved before it hit the courts, as Unilever and Tesco came to a private settlement, but the issue of Brexit-related currency fluctuation disputes suddenly became very real.  Since then, a number of other cases have considered the questions of currency and contractual clarity.

In the context of cross-border legal costs payments, the High Court in the November 2016 case of Elkamet v Saint-Gobain [1] ordered, without any prior authority on the point, that if a foreign company had to exchange currency into sterling in order to pay costs in UK litigation, then it was entitled to be compensated for exchange rate losses in the same way that it was entitled to be compensated for loss of interest.  On the same point in the 2017 case of MacInnes v Gross (2) [2], however, the High Court declined to make such an order.  In the latter case the judge reasoned that there were inherent differences between the costs and interest regimes; currency fluctuations are uncertain and wholly outside a party’s control (and can go up, as well as down); and, in any event, any “generous” interest rate ordered, such as 4% above base, is designed to provide at least some protection for payees against such matters.

More recently, the June 2018 case of Aras v National Bank of Greece [3] concerned a commercial contract dispute.  As a fall-out from “Grexit”, the parties entered into agreements for the sale, by the National Bank of Greece, of shares in Finansbank (a Turkish bank).  The agreements provided that the buyer would purchase in Euros and they contained a mechanism for calculating the purchase price and fees by reference to book value.  However, Finansbank’s book value was denominated in Turkish lira and the agreements were silent on when the currency conversion to calculate the price should occur.

The Commercial Court, following a trial conducted under the Shorter Trials Scheme, undertook a comprehensive contractual interpretation exercise to resolve the dispute:

Correct approach to contractual interpretation

  • Since the 2015 Supreme Court decision in Arnold v Britton [4], the courts will strive to uphold the clear wording of the clause wherever possible, applying the objective test of what the reasonable businessperson would understand the clause to mean, even if that results in a bad bargain for any party.
  • The court’s task is to ascertain the meaning of the language which the parties have chosen to express in their agreement when read in the context of the factual background known or reasonably available to the parties at the time of the agreement [5].
  • However, where a contract term might be interpreted in different ways, the court is entitled to prefer the interpretation which is consistent with business common sense [6].
  • Alternatively, where it is commercially and practically necessary, a court may imply terms into the contract to ensure business efficacy [7].

In short, a literal approach to contractual interpretation is to be preferred over a more purposive approach wherever possible. However, there may sometimes be provisions in even a detailed, professionally drawn contract which lack clarity. A court interpreting such provisions may take into account the factual matrix to ascertain the objective meaning. The lack of clarity in this case led the court to do just that.

The court asked itself what a reasonable person with the parties’ background knowledge would have understood the parties to have intended. It decided, in line with business common sense, that, to allow a valid valuation comparison and to remove uncertainties surrounding currency fluctuations, it was most likely that the parties intended that the relevant calculation, and the currency conversion, should be made by reference to a fixed date (which, in this case, was found to be the relevant accounting date).

WM Comment

As the UK moves towards its departure from the EU we are likely to see more and more cases in which currency fluctuations influence pricing, payments and contractual provisions and disputes in a myriad of ways.

In many situations, there will be practical steps that parties can take to protect their own position. For example, in the supply agreement/commercial contract context, much is likely to depend on the terms of individual contracts, including whether pricing structures and/or so-called Brexit clauses provide sufficient flexibility and clear mechanisms for changing market forces and for resolving disputes.  In the legal costs context, pending any appellate court’s authority, it might make sense for claimants in proceedings with non-UK based parties to include exchange rate losses as a head of claim so as to keep the Elkamet option open; and international costs claimants may be best advised to fully quantify any exchange rate losses claimed, so as to avoid having to ask the court for an open-ended order (as was the case in MacInnes).

In an otherwise largely uncertain economic environment, it is certain that contracting parties will now be well advised always to consider questions of currency fluctuations and calculations – and to address them specifically and clearly – in their contractual arrangements.

If you have any concerns arising from currency fluctuations in the current climate, if you would like any advice or assistance in connection with the drafting or review of your contractual terms, or if you have any more general Brexit-related queries or training requirements, please do not hesitate to contact Gwendoline Davies or any member of the Commercial Dispute Resolution team and Commercial team.


[1] Elkamet Kunstofftechnik GmbH v Saint-Gobain Glass France SA [2016] EWHC 3421 (Pat)
[2] [2017] EWHC 127 (QB)
[3] [2018] EWHC 1389 (Comm)
[4] [2015] UKSC 36
[5] Wood v Capita Insurance Services Ltd [2017] UKSC 24
[6] Rainy Sky SA v Kookmin Bank [2011] UKSC 50
[7] M&S v BNP Paribas [2015] UKSC 72