Brexit, FX and the law

July 13, 2017

The monumental Brexit vote has yielded political, cultural and also economic consequences. One particular impact was on the currency market. Clearly a weakened pound reduces the real value of sterling against other currencies. A judgment or award in sterling may not be as attractive as one in dollars or euros. This article addresses how English law deals with currency fluctuations and the tactics that minimise risks and indeed create opportunities.

The UK has experienced a depreciation of about 13% in the value of its currency since the Brexit referendum and at times up to 17%. The Brexit vote was undoubtedly responsible for most of the decline; if the vote had been to remain the pound might well have appreciated in value, so the difference the referendum result made was probably greater than 13%.

After the initial shock, the pound was further weakened by a series of unexpected political developments and poor economic data. A tumble in the UK’s purchasing manager indices – which measure activity in the manufacturing, construction and service sectors – sparked another sell-off. Plummeting consumer confidence, forecasts that sterling could hit parity against the euro, speculation that the government had no solid Brexit plan, warnings from international figureheads and worries that big businesses may move their operations out of the UK all combined to pressure the pound lower over the weeks following the referendum.

These events left the pound as the worst performing currency during the first half of 2016 – worse even than Venezuela, which is struggling with an estimated inflation rate of 700%.

As the Brexit negotiations proceed, there may be ups and downs as expectations about the outcome of the negotiations change, and there should be plenty of other happenings, especially in the United States, which may affect the exchange rate. However, the expectation must be that the next few years will see sluggish growth in disposable income, higher inflation than we have been accustomed to recently, slowing economic growth and continuing weakness in the exchange rate.

A further low was reached by a ‘flash crash’, which happened during the Asian trading session late on the night of 20 October 2016. Many traders had set up computer algorithms to monitor the news and automatically make trades when certain parameters were met. It is believed that algorithmic trading, triggered by news stories concerning the then French President Francois Hollande’s comments on Brexit negotiations, caused a significant drop in sterling.

Uncertainty is a currency trader’s worst enemy. The forex market is largely made up of investors looking to make a profit, so the consensus outlook they hold for a particular currency affects its overall value, regardless of the impact from companies and individuals looking to move money for practical purposes.

The fact that Brexit is largely shrouded in uncertainty is therefore keeping investors skittish. While the mass warnings over the negative impact of a Brexit from ‘Remainers’ in the referendum campaign have helped to damage investor confidence, there is also the perception that the ‘Brexiters’ in government still lack a real plan.

The fact that there are so many uncertainties regarding the Brexit means that there is always something waiting around the corner to unsettle markets. Once the initial shock of the vote outcome calmed down, investors were waiting for a solid timeline for the Brexit. When Theresa May announced the formal process would be initiated by the end of March 2017, markets reacted dovishly; many were still holding out hope that the referendum vote would be overturned.

Of course, obligations to pay under international trading contracts may be in different currencies to reflect the trading done around the world. The primary contractual obligation will be to pay in the original currency[1]; therefore, if an invoice is by contract to be raised in dollars or habitually the parties invoiced and paid in dollars, the obligation to pay will be in dollars. To pay in any other currency risks shifting the exchange rate risk to the recipient[2]. Many national laws and institutional rules[3] afford a broad discretion on currency and the UNIDROIT principles (Article 7.4.12) provide that:

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.

If there is to be payment in any other currency, it should be at the exchange rate prevailing at the date of payment, so that the recipient can exchange it back to the original currency and (subject to exchange costs) be left with the right amount.[4] As the House of Lords said in Miliangos v. George Frank:[5]

Any conversion date earlier than the date of payment would, ...be open to the same objection as the breach date, namely that it would necessarily leave a considerable interval of time between the conversion date and the date of payment. During that interval currency fluctuations might cause the sterling award to vary appreciably from the sum in foreign currency to which the creditor was entitled. ... it would not be justifiable to disturb the existing rule of taking the breach date, merely to substitute for it some other date rather nearer the date of payment but still more or less distant from it. If the date of raising an action in this country were taken for conversion, a period of a year or more might easily elapse, allowing for appeals, before payment was made. The date of judgment would be better but there seems no reason why one should stop short of the last practicable date, which seems to be the date when the court authorises enforcement of the judgment.

And as the court said in Federal Commerce and Navigation Co v. Tradax Export:[6]

Once it is recognised that judgement can be given in a foreign currency, justice requires that it should be given in every case where the currency of the contract is a foreign currency: otherwise one side or the other will suffer unfairly by the fluctuations of the exchange.

A further issue arises where a costs order or award is made. Counsel may be based in a different jurisdiction to the client (for example, the client may be in the US and have dollars as its local currency and counsel may be based in France and have the euro as its currency – if counsel invoices in euros, the client will have to sell dollars and buy euros to pay counsel). The client would recover costs under any order or award in euros and would be vulnerable to exchange rate losses when compared to the dollars originally sold to purchase the euros. An award in euros would not necessarily make the cleint whole.

Such a situation has arisen twice recently. 

In Elkamet Kunststofftechnik GmbH v Saint-Gobain Glass France SA[7] the Judge accepted the discretion to make an order for costs in a foreign currency but went further and said that:

the court ought to have the power, if it decides to make an order in sterling, to compensate for any exchange rate loss.” 

He accepted that he had no crystal ball to predict exchange rates at the time of payment (which he accepted as the correct date) and that satelitte litigation over exchange rates should be discouraged. Nevertheless, he went on to make an additional award of £20,000 to compensate for exchange rate losses.

In MacInnnes v Gross[8]the position was slightly different (in Elkamet the Judge was concerned with assessing costs and had specific figures, in MacInnes the Judge was simply asked to make an order for a compensating payment of an amount to be determined) but the Judge declined to follow Elkamet. He highlighted the differences between damages and an order for costs (the latter very rarely fully compensating the recipient) and discussed the lack of any analogy between interest on costs and compensating for exchange rate losses. The Judge in Elkamet had considered there to be a close analogy with interest but the MacInnes’ Judge distinguished them on the basis that interest is both commonplace and calcuable whereas exchange rates were not.

When the costs themselves can be very large and an exchange rate movement can also be large (as illustrated by the Brexit events) it follows that the compensating figure could be large in an appropriate case. A tribunal has allowed third party funding costs to be recovered (and the Court refused a challenge to the award)[9] and, on appropriate facts, a detailed forensic analysis of foreign exchange losses brought about by forex losses occasioned by delays in the receipt of monies and / or the interim payment of costs by the client to counsel, might also find favour with a tribunal or court. It may well all be worth arguing.

[1] This will be any currency stipulated in the contract and, if none, the de facto currency of the contract or the currency of the country in which the loss is suffered. Under English law damages should be assessed in the currency in which the claimant truly felt the loss: The Texaco Melbourne [1994] 1 Lloyd’s Rep 473 (HL) and see Milan Nigeria Ltd v Angeliki B Maritime Company [2011] EWHC 892 (Comm).

[2] Note that under s48 English Arbitration Act 1996 the award may be in any currency. The exercise of the discretion under this provision was considered in Lesotho Highlands Development Authority v Impregilo SpA and others [2005] UKHL 43.

[3] E.g. LCIA Rules Article 26.3

[4] Schorsch Meier v. Henin [1975] QB 416. The case makes for good reading not least for the typical judgment of Lord Denning MR. Discussing why English Courts had hitherto only been prepared to grant judgement in sterling he said: “Why have we in England insisted on a judgment in sterling and nothing else? It is, I think, because of our faith in sterling. It was a stable currency which had no equal. Things are different now. Sterling floats in the wind. It changes like a weathercock with every gust that blows. So do other currencies.” Great stuff, as true today as it was in 1975 and such a treat to see judges use 4-word sentences!

[5] [1976] AC 443, 502.

[6] [1977] QB 324, 342.

[7] [2016] EWHC 3421 (Pat)

[8] [2017] 4 WLR 49

[9] Essar Oilfield Services Limited v Norscot Rig Management Pvt Limited [2016] EWHC 2361 (Comm)


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