Currency of payment: Overview, definition, and example
What is currency of payment?
Currency of payment refers to the specific currency in which a payment is made or received under a contract or agreement. It defines the monetary unit used for settling financial obligations, such as paying for goods, services, or debts. The currency of payment can be specified in the agreement, and it is particularly important in international transactions where different currencies may be involved. Common currencies of payment include the U.S. Dollar (USD), Euro (EUR), British Pound (GBP), or any other national or international currency.
For example, a company based in the U.S. may agree to pay a supplier in China in U.S. dollars, even though the supplier’s local currency is the Chinese Yuan (CNY). This is an example of a currency of payment specified in the contract.
Why is currency of payment important?
The currency of payment is important because it provides clarity and ensures that both parties understand in which currency the transaction will be settled. It helps prevent disputes related to exchange rates and foreign currency fluctuations, which can affect the value of the payment. Additionally, specifying the currency of payment can help streamline accounting, simplify international transactions, and ensure compliance with applicable tax or regulatory laws.
For businesses, having a clear currency of payment clause is essential for managing cash flow, controlling costs, and ensuring that all payments are made in a manner that aligns with business practices and financial systems.
Understanding currency of payment through an example
Imagine a company based in the United States enters into a contract with a supplier in Japan for the purchase of machinery. The contract specifies that the currency of payment will be in U.S. dollars (USD). When the payment is due, the U.S. company will pay the agreed amount in USD, regardless of the fact that the Japanese supplier normally conducts business in Japanese Yen (JPY). This clause avoids potential confusion or disputes related to currency conversion.
In another example, an online retailer based in the European Union may sell products to a customer in Brazil. The retailer may specify that payments must be made in Euros (EUR), even though the customer’s local currency is the Brazilian Real (BRL). This ensures both parties know what currency will be used for the transaction.
An example of a currency of payment clause
Here’s how a currency of payment clause might look in a contract:
“All payments made under this Agreement shall be in [insert currency], and the Purchaser shall bear any costs associated with currency conversion. If the currency of payment is not the same as the currency of the payment account, the Purchaser is responsible for any exchange rate fluctuations or fees associated with the transaction.”
Conclusion
Currency of payment is a critical aspect of any financial agreement, particularly in international transactions, as it specifies the currency in which payments will be made. Clear terms regarding currency of payment help prevent confusion and disputes, manage exchange rate risks, and ensure smooth financial transactions between parties. Whether it involves local or foreign currency, defining the currency of payment ensures that all parties are aligned in their expectations and obligations.
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.