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Supply chain contracts and the risk of exchange rate fluctuations

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Posted by Christine Jackson on 11 March 2013

Christine Jackson - Commercial Contracts Solicitor
Christine Jackson Partner

International supply chain contracts have the added risk of exchange rate fluctuations.

A recent Court of Appeal decision underlines the importance of dealing expressly with this issue in the contract. The court refused to imply a term for the benefit of the buyer who was adversely affected by variations to the euro/sterling exchange rate.

Proctor & Gamble v Svenska Cellulosa Aktiebolaget SCA [2012] 

Background

  • Proctor & Gamble (PG) entered into a supply agreement to supply products (paper towels) to Svenska.
  • The supply agreement set out the prices for the products in Euros; to be invoiced in Euros and paid in sterling.
  • The agreement allowed for certain price variances (i.e. reflecting cost of raw materials) but it did not provide for variances in the euro/sterling exchange rate. 
  • In the months that followed the euro rose in value as against sterling. 
  • Rather than using the then current exchange rate to work out the sterling amounts due, Svenska applied the fixed exchange rate noted in the budgets scheduled to the agreement. 
  • PG objected and claimed the unpaid amount from Svenska.
  • The High Court rejected all of Svenska’s arguments and gave judgment for PG, but gave permission to appeal as to whether a term could be implied into the contract such that payment in sterling for the product supplied should be subject to the fixed rate of exchange noted in the budget.

Court of Appeal 

The Court of Appeal refused Svenska's appeal and confirmed the High Court's decision principally because the parties had not agreed that the fixed exchange rate noted in the original costs budget should apply. The parties could have easily have added an appropriate term in what was otherwise a carefully drawn agreement. 

It was also commented that the long established principle that, where the price was expressed in one currency and payment was due in another, the relevant exchange rate should be that applicable at the time of payment, could only be dislodged by a clear express provision.

Comment 

This case underlines the importance of identifying and dealing expressly with commercial issues and risks in contracts, including exchange rate risks.

About the author

Christine helps clients manage risk and financial exposure in their day to day business dealings.

Christine Jackson

Christine helps clients manage risk and financial exposure in their day to day business dealings.

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