Court highlights currency risks

Posted: 5th November 2012

A Court of Appeal ruling has underlined the risks posed by shifting currency exchange rates in cross-border commercial dealings. In the context of a very substantial contract for the sale of paper tissue towels, the court has decided that one party to the agreement must carry the financial losses incurred as a result of a dramatic decline in the value of the euro against sterling.

FactoryThe contract between companies within the Proctor & Gamble Group (P&G) and Svenska Cellulosa Aktiebolaget SCA (Svenska) was agreed following the sale of a P&G paper factory in Manchester to Svenska in 2007. As an interim arrangement prior to completion of the sale, P&G agreed to sell products manufactured at the plant to Svenska at prices which were expressed in euros.

When the contract was signed the euro/sterling exchange rate stood at almost 1.5. However, during the currency of the agreement, that exchange rate fell dramatically. Svenska continued to make payments for P&G’s products calculated on the basis of the exchange rate at the date of the contract’s execution. However, P&G demanded payment in line with the fluctuating exchange rate and argued that it had been substantially underpaid.

Dismissing Svenska’s appeal against a High Court decision, Lord Justice Moore-Bick, sitting with Lord Justice Rix and Lord Justice Lewison, rejected the company’s arguments that a fixed rate of exchange had been agreed when the contract was executed. The court emphasised that Svenska had at all times been well aware that the manufacturing and warehousing costs at the Manchester plant were incurred in sterling.