Currency indemnity: Overview, definition, and example
What is currency indemnity?
Currency indemnity is a provision in a contract that protects one party from financial loss due to fluctuations in currency exchange rates. It ensures that if the value of a currency changes unfavorably after the agreement is signed, the affected party will be compensated for the difference. Currency indemnity is often used in international contracts where transactions are conducted in different currencies, and there is a risk that exchange rate volatility could affect the financial outcome of the deal.
For example, if a U.S. company agrees to pay a European supplier in euros, and the euro strengthens significantly against the U.S. dollar after the contract is signed, the supplier may seek compensation to cover the difference in the exchange rate. The indemnity clause would protect them from the loss caused by the currency fluctuation.
Why is currency indemnity important?
Currency indemnity is important because it helps mitigate the risk of currency fluctuations, which can impact the profitability and stability of international transactions. By including a currency indemnity clause, businesses can protect themselves from unexpected changes in exchange rates, providing financial certainty and stability for both parties involved.
For businesses, especially those involved in cross-border trade or investment, currency indemnity clauses help ensure that the agreed-upon terms are upheld despite the volatility of foreign exchange markets. For individuals or companies engaged in international contracts, this provision offers reassurance that they won’t suffer undue financial losses due to currency swings.
Understanding currency indemnity through an example
Imagine a company based in Canada that enters into a contract with a supplier in Japan. The contract specifies payment in Japanese yen, but the Canadian dollar depreciates against the yen significantly after the agreement is signed.
To address this, the contract includes a currency indemnity clause, ensuring that if the Canadian dollar weakens beyond a certain threshold, the Canadian company will be compensated by the supplier to cover the additional cost incurred due to the exchange rate change. This indemnity protects the Canadian company from the financial burden caused by currency fluctuations.
In another example, a company in the U.S. enters into a service agreement with a contractor in Mexico. If the Mexican peso strengthens considerably against the U.S. dollar during the contract period, the currency indemnity clause ensures that the U.S. company will be compensated for the increased cost of services due to the exchange rate change.
An example of a currency indemnity clause
Here’s how a currency indemnity clause might appear in a contract:
“In the event of any fluctuation in the exchange rate between the agreed currency and the local currency, the Party paying the amount shall indemnify the receiving Party for any financial loss resulting from such fluctuation. The indemnity shall apply if the exchange rate changes by more than [X]% from the date of this Agreement.”
Conclusion
Currency indemnity is a useful provision in international contracts to protect parties from the financial impact of currency exchange rate fluctuations. It ensures that both parties are compensated for any losses caused by unfavorable changes in the value of currencies, providing greater financial certainty in cross-border transactions.For businesses, including a currency indemnity clause in contracts can help manage risks associated with global trade and ensure that agreements are not undermined by volatile currency markets.
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.