Dealing with currency fluctuations in your contract

18 November, 2016

One of the most alarming changes since the Brexit vote has been the drop in value of sterling. The statistics have been well reported and show a pound weaker against the dollar than it has been in 31 years. Tesco and Unilever have experienced a high-profile, albeit rapidly resolved dispute over pricing as a direct result of the decrease in value of the pound. There were a number of issues in the dispute but the main reason was the effect that the fall in value of sterling has had on the price of imports. Unilever wanted to increase the price of their products by up to 10% due to a purported increase in their importing costs but in the end it appears that the parties reached a compromise (although neither party would confirm details of their talks).

 

Carrying on business in such a volatile time is difficult but flexible drafting of contracts can help parties to adapt and respond to external factors without having to negotiate entirely new agreements. In periods of boom, parties often spend less time considering what would happen if negative changes occur which are outside of their control. Although currency instability to the extent that has been experienced by the pound may at first glance appear to be sufficient to allow a party to terminate under a force majeure, it is unlikely to be covered under standard force majeure drafting. “Force majeure” has no legal meaning in the law of England and Wales and so it must be specifically defined in each contract and standard definitions do not include currency fluctuations.

 

How can businesses protect against currency changes?

There are a number of contractual provisions that businesses can put in their contracts, either during negotiations or by way of variation, to give some protection against the consequences of Brexit such as currency changes.

 

Materially Adverse Change

This clause would allow termination/variation of the contract in the event of a materially adverse change. What constitutes a materially adverse change would then be set out in more detail including the mechanism for invoking termination or variation. An example of such detail could be if a currency changed in value by a certain percentage amount when compared with another global currency.

 

Renegotiation

This clause would allow one party to renegotiate a specific commercial point under the contract in times of hardship such as a change in currency exchange rate. Agreements to agree are not legally enforceable and should be avoided. Instead, a default procedure should be agreed which explains what happens in the event the parties cannot agree on a renegotiated deal. Examples relevant to a dramatic change in currency value could be an agreed default rate of exchange or default indexed pricing structure.

 

Currency specific clauses

It is possible to include drafting that fixes the exchange rate. Clearly, the inclusion of such a clause will depend on the negotiation positions of each party and the benefits or disadvantages to each party if such a clause were triggered.

 

The effects of Brexit are real and businesses must be alive and prepared for the changes that will inevitably occur in the coming years. Flexible drafting will help parties mitigate the risk of disputes and allow them to work together without having to use contracts that, due to Brexit changes, are no longer fit for purpose. If a dispute arises from a Brexit induced change, a Court is unlikely to rewrite the contract to add new provisions as the parties will have been expected to be aware of Brexit issues and have dealt with them in the original drafting of the contract. Varying a contract to incorporate Brexit orientated clauses does not have to be a complex or expensive process and incorporating such clauses will likely be of benefit to both parties and we would encourage businesses to consider doing so.