Currency Fluctuation and Exceptional Circumstance

In Macbeth, the witches hail Banquo “Thou shalt get kings, though thou be none.” And we know the rest, the prediction became true as Banquo could not become king, but his descendants became king. Not everybody, evidently, can envision the future with such infallible precision. However, in the case of business, parties are required to be prudent sufficient at foreseeing what might occur in the future. If they are in doubts about the prospect, they are likely to take measures to deal with the consequences such as make contracts with provision to account risk such as unforeseen event and/or exceptional circumstance.

?Case Study of Currency Fluctuation

We all are cognizant about COVID-19 that was unforeseen. and due to its post radical impact on the economy, the inflation exacerbated all over the world, therefore, majority of the countries increased their interest rate in 2022 to ease price inflation, but Japan did not amend their monetary policy of negative interest rate due to their internal strategy to encourage banks to lend more and businesses and consumers to borrow more to spur the economy. Due to such incompatible financial strategy of Japan against rest of the world, the widening of the interest rate differential has led to a sharp depreciation of the JPY. Such radical devaluation of JPY puts enormous burden on the many contractor’s shoulder in JICA fund projects where the contract was formed before 2022.

As per the data that there is substantial devaluation of Japanese Yen (JPY) in the range of 34% after 2022 where prior to 2022, the fluctuation of JPY was generally negative (-2% to -3.5%)

?Test of Exceptional Circumstance

A situation can be considered as an exceptional circumstance if it meets certain parameter as per the International legal doctrines. In this regard, 4 no. of tests can be conducted to justify the exceptionality of the circumstance due to JPY currency fluctuation.

Exceptional Circumstance and FIDIC

FIDIC has considered the exceptional circumstance under Force Majeure as per Sub-Clause 19.1. However, FIDIC does not have any provision for financial compensation pertaining to Force Majeure events/circumstance unless they are political events or acts of God, and there is physical damage as per Sub-Clause 19.4 [Consequences of Force Majeure]. In other FIDIC provision of Sub-Clause 19.7 [Release from Performance], it is provided that if any event or circumstance outside the control of the Parties (including, but not limited to, Force Majeure) arises which makes it impossible for Parties to fulfil their contractual obligations, entitles the Parties to be released from further performance of the Contract, but no additional financial compensation except the incurred cost with related the Works and demobilization cost under Sub-Clause 19.6 [Optional Termination, Payment and Release] if the Contract had been terminated under Sub-Clause 19.6.

Perspective of Exceptional Circumstance in International Law

International Law Commission proceeded to codify the doctorine “Exceptional Circumstance” and included it as Article 62 of the Vienna Convention of 23 May 1969 on the Law of Treaties (‘VCLT’). The provision allows states to terminate or withdraw from a treaty due to the unforeseen “fundamental changes of circumstances” as understood from the treaty text and further interpretation by the International Court of Justice (ICJ). In public international law the doctrine essentially serves an "escape clause" to the general rule of pacta sunt servanda (promises must be kept).?

we can find in the Article 97 of the Saudi CTL (Civil Transaction Law), a party has the right to request the renegotiation of the contract if exceptional circumstances cause the party’s performance onerous to the extent that it threatens that party with an exorbitant or unreasonable loss. Article 471(3) of the Contract section of the Saudi Civil Code also offers relief where the exceptional circumstances have sternly made the contractual imbalance between the obligations of the parties of the Contract and impaired the ground of the cost budget of the contract. In this course, article 471(3) explicitly allows that a court might entertain a party with extension of time (EOT), financial compensation, or order for the termination of the contract.?

As per Article 171 of the Qatar Civil Code, the fulfilment of the contractual obligation as a result of exceptional and unforeseeable events, though not impossible, becomes excessively onerous in such a way as to threaten the obligor with exorbitant loss, the judge may, according to the circumstances and after taking into consideration the interests of both parties, reduce the excessive obligation to a reasonable level. Article 704 of the Qatar Civil Code relating to construction contracts deems the contract terminated in the event where the performance of agreed works has become impossible for reasons not incumbent on the parties. In this case, the contractor is entitled to claim compensation for the costs it incurred and the fees it earned within the limits of the corresponding profit gained by the employer. Article 204 of the Qatar Civil Code addresses if a person proves that damages have arisen from exceptional circumstance; such person shall not be liable for such damages unless there is a provision to the contrary.

In German Law, Parties may revoke contractual performance in exceptional circumstances under sec. 313 of the German Civil Code (BGB). BGB allows for modification to the Contract and termination both on the basis of facts. In a German case law (OLG Celle, 2 U 64/21, judgement of 2 December 2021), a further decision came that even where a contract can be terminated pursuant to sec. 313 BGB, the terminating party shall pay the other party a share of the losses caused by its termination. German law permits either party in exceptional situations to terminate a contract for good cause if they cannot reasonably be expected to continue performance when taking into account all of the circumstances and weighing the interests of both parties pursuant to. 314 BGB.Parties may also rely on the doctrine of subsequent to excuse non-performance of contractual duties. Under this doctrine, parties need not perform if performance is legally or factually impossible.

Article 1195 of the French Civil Code states “If a change in circumstances, unforeseeable at the time of conclusion of the contract, makes performance excessively onerous for a party who had not agreed to bear the risk, that party may request the other party to renegotiate the contract. It shall continue to perform its obligations during the renegotiation. If the renegotiation is rejected or fails, the parties may agree to terminate the contract, on the date and on the conditions they determine, or may request the court to adapt it by mutual agreement. If no agreement is reached within a reasonable time, the court may, at the request of one of the parties, revise or terminate the contract, on the date and under the conditions it shall determine.”

The case law, Elkamet Kundstofftechnik v Saint-Gobain Glass France [2016] EWHC 3421 (Pat), in which the claimant, Elkamet Kundstofftechnik, had to exchange Euros into sterling in order to pay its lawyers throughout the litigation. Accordingly, the claimant argued that it should be compensated for the additional cost it incurred as a result of exchange rate losses. Judge, Arnold J ordered a payment of ￡20,000 to reflect the currency loss suffered as a result of movement in the exchange rate between sterling and Euros since proceedings began.

Conclusion

In view of the above reference of international law, it is found that there is provision for compensation, termination and renegotiation of the Contract. Moreover, as per the FIDIC Golden Principles, there shall be fair and balanced risk/reward allocation between the Employer and the Contractor. Therefore, taking the notes from the above, it will be fair and reasonable for the Employer to pay the Contractor for the loss due to the exceptional circumstance (Contract Currency Devaluation) which makes commercially impracticable to procure the materials with excessively devaluated Contract currency for execution of the project works as due to current competitive market condition, the Contractor does have little opportunity to inflate the tender price to cover such high risk during the tender. It is also recommended to keep provision of compensation for exceptional circumstance in the Contract.