Currency adjustment: overview, definition and example
What is a currency adjustment clause?
A currency adjustment clause is a provision in a contract that allows for changes in the payment amount due to fluctuations in exchange rates between different currencies. This clause is commonly used in international contracts to account for the impact of currency value changes on the agreed-upon payment amounts. It ensures that one party is not unfairly disadvantaged if the value of the currency changes significantly during the course of the contract.
Why is a currency adjustment clause important?
A currency adjustment clause is important because it helps protect both parties in an international agreement from unexpected losses due to currency fluctuations. For businesses dealing with foreign clients or suppliers, exchange rates can be volatile, and a currency adjustment clause helps ensure that the value of payments remains fair and aligned with market conditions. It provides a safeguard for businesses that are exposed to foreign exchange risk.
Understanding a currency adjustment clause through an example
Suppose a company in the United States enters into a contract with a supplier in Europe to purchase goods worth €100,000. The contract includes a currency adjustment clause stating that if the exchange rate changes by more than 5% between the time the contract is signed and the payment is due, the payment amount will be adjusted accordingly.
For instance, if the exchange rate at the time of signing is 1 USD = 0.90 EUR, the payment would initially be around $111,111. However, if the exchange rate changes to 1 USD = 0.85 EUR by the time the payment is due, the payment amount would be adjusted to account for the weaker USD, ensuring the supplier is not underpaid.
Example of a currency adjustment clause
Here’s how a currency adjustment clause might look in a contract:
“The payment due under this Agreement shall be adjusted to reflect any fluctuations in the exchange rate of the agreed currencies by more than 5% from the date of execution of this Agreement to the payment date, with adjustments to be made in writing by either party.”
Conclusion
A currency adjustment clause is a valuable tool for businesses engaged in international trade. It helps protect both parties from the risk of currency fluctuations, ensuring that payment amounts remain fair and equitable. By understanding how currency adjustment clauses work, businesses can better manage their exposure to foreign exchange risks and maintain stable financial agreements in a dynamic global market.
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.