Contractual currency: Overview, definition, and example
What is contractual currency?
Contractual currency refers to the specific currency that is agreed upon by the parties in a contract for the purposes of payments, calculations, and financial transactions related to that contract. This is the currency that will be used for all monetary obligations outlined in the agreement, such as payments, penalties, fees, or other financial terms. The choice of contractual currency is crucial, especially in international agreements, where currency exchange rates and differences in economic conditions may impact the contract’s value.
For example, in a contract between a U.S.-based company and a European company, the contractual currency might be set as U.S. dollars (USD), even if payments are made across borders, to avoid exchange rate fluctuations.
Why is contractual currency important?
Contractual currency is important because it provides clarity and consistency in financial terms. It ensures that both parties understand in which currency the payments will be made and eliminates confusion over exchange rate issues. For businesses involved in cross-border transactions, choosing a specific contractual currency can protect both parties from exchange rate volatility and ensure that payments are made in an agreed-upon form, without the need for conversions or extra costs related to fluctuating currency values.
For businesses, specifying the contractual currency can prevent disputes, simplify accounting, and make budgeting and forecasting more predictable. It also helps manage the financial risks associated with currency fluctuations, particularly in global transactions.
Understanding contractual currency through an example
Imagine a company in Japan enters into a contract with a supplier in Canada to purchase raw materials. The contract specifies that the payment for the goods will be made in Canadian dollars (CAD). This means that, regardless of where the parties are located or what their respective home currencies are, all transactions under this contract will be settled in CAD.
In another example, a consulting firm based in the U.K. signs a service agreement with a client in the United States. The contract may specify that the agreed payment for services will be made in U.S. dollars (USD) to simplify the financial process for the U.S. client, even though the consulting firm operates in GBP (British pounds).
An example of a contractual currency clause
Here’s how a contractual currency clause might appear in a contract:
“All payments under this Agreement shall be made in United States Dollars (USD), regardless of the location of the Parties, and shall be subject to any applicable taxes and fees. The Parties agree that any payment obligations will be settled in USD at the exchange rate in effect on the date of payment.”
Conclusion
Contractual currency is the designated currency used for all financial obligations within a contract. It ensures clarity and consistency in payments, protecting both parties from currency fluctuations and ensuring that financial transactions are straightforward and predictable. For businesses, specifying the contractual currency is an essential part of cross-border agreements, as it helps mitigate risks and simplifies the financial management of international transactions.
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.