How to deal with exchange rate fluctuations in commercial contracts

The long-term fall in the value of the pound is leading to a renewed focus on the impact exchange rates have on businesses.

Not all businesses are affected in the same way by exchange rate fluctuations, but for those that are affected, changes in exchange rates can have a significant impact on the bottom line.

Indeed, fluctuating exchange rates are one of the biggest areas of risk for businesses trading overseas.

Of course, changing exchange rates can be positive or negative depending on whether you are importing, exporting, investing in businesses overseas, or looking for investment from businesses overseas.

What steps can I take to protect against currency fluctuations?

People tend to look at contracts as documents designed to reduce uncertainty about the detail of agreements to reduce the chances of disputes arising. But they can also serve as mechanisms to share risk between parties.

One way of dealing with this in the context of exchange rates is to specify the exchange rate to be used in consideration for the goods or services in question and apply that irrespective of any fluctuations during the life of the contract.

A notable instance of such a measure is in secondary option X3 of the NEC construction contracts, which can be used with main options A or B to apply an agreed exchange rate.

What can I do if my current contracts aren’t serving my interests effectively?

Of course, currency fluctuations can bring advantages, which sometimes benefit both parties.

If you are an exporter, your customers can buy from you more cheaply and both parties might wish to increase the volume bought and sold.

In these and similar circumstances, it is likely to be worth renegotiating the contract to allow for this benefit to be realised.

More urgently, if your current contracts are making an existing commercial relationship unprofitable or unviable, then you should seek immediate legal advice as to your options. Get in touch with us to find out how we can help.

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