Change of currency: Overview, definition, and example
What is change of currency?
Change of currency refers to a contractual provision that addresses how payments or financial obligations will be handled if the agreed-upon currency is no longer in use or if another currency needs to be substituted. This clause helps ensure that transactions continue smoothly despite fluctuations in exchange rates or changes in monetary policy.
For example, if a company signs a contract to make payments in euros, but the country later replaces the euro with a new national currency, a change of currency clause would determine how the payments should be adjusted.
Why is change of currency important?
A change of currency clause is important because it protects both parties from uncertainty caused by currency fluctuations, devaluations, or the adoption of a new official currency. It ensures that payments remain enforceable and that neither party suffers financial loss due to unforeseen monetary changes.
Businesses that operate internationally or deal with long-term contracts often include this clause to manage risks associated with currency instability. Without it, a party might face legal or financial complications if the agreed currency becomes unavailable or significantly changes in value.
Understanding change of currency through an example
A multinational company enters into a ten-year supply agreement with a manufacturer, specifying that all payments will be made in British pounds. Five years later, the UK replaces the pound with a new digital currency. A change of currency clause in the contract ensures that payments will now be made in the new official currency, using a fair conversion method.
In another case, a business signs a contract with a supplier in a country experiencing high inflation. The contract states that if the local currency devalues by more than 20%, the parties will renegotiate the payment terms or switch to a more stable currency, such as the US dollar. This protects both parties from financial instability.
Example of a change of currency clause
Here’s how a change of currency clause might appear in a contract:
“If the currency specified in this Agreement ceases to be in use as legal tender or undergoes a significant change in value, all payments shall be made in the successor currency or an equivalent currency agreed upon by the Parties. If no agreement is reached, payments shall be converted based on the prevailing exchange rate as determined by [Bank/Authority].”
Conclusion
A change of currency clause ensures that financial obligations remain enforceable even if the agreed-upon currency is replaced or devalued. It provides stability in international and long-term contracts, preventing disputes over exchange rate changes or monetary policy shifts. Including this clause in agreements helps protect businesses from financial risks and ensures clarity in payment terms.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.