This clause specifies the currency in which all payments under the contract must be made. It designates whether payments are due in U.S. dollars, euros, British pounds, or another currency, and addresses how currency fluctuations will be handled if payments are made in a different currency than specified. This clause is essential in international contracts because exchange rate volatility can significantly alter the real value of the payment obligation. For example, if a contract specifies payment in U.S. dollars but the paying party's revenue is in euros, a weakening dollar means the party must spend more euros to meet its obligation—a hidden cost that can be substantial over time.
The clause also prevents disputes about which currency's exchange rate applies if a payment is made in the wrong currency, and it clarifies whether the paying party bears the risk of currency fluctuation or whether the receiving party does. In some cases, contracts include a "most favored currency" provision allowing the debtor to pay in whichever of two currencies is most favorable to them, or they may specify that payment must be made in the currency of the creditor's country. The choice of currency can have tax implications as well, particularly for parties operating in multiple jurisdictions.
For contracts involving parties in different countries, explicitly specify the payment currency and require payment in that currency without conversion by the paying party. If the paying party operates primarily in a different currency, negotiate for payment in that currency or include a currency adjustment clause that protects both parties from extreme fluctuations (e.g., "if the exchange rate moves more than 5%, the parties will renegotiate the price"). Specify the exchange rate source to be used if conversion is necessary (e.g., the European Central Bank rate on the invoice date) and clarify that the paying party is responsible for all currency conversion costs and risks. For contracts with long payment terms, consider including a currency collar or adjustment mechanism to protect against significant devaluation.
Frequently Asked Questions
What does this clause mean in simple terms?
This clause specifies the currency in which all payments under the contract must be made. It designates whether payments are due in U.S.
Why should I care about this clause?
dollars, euros, British pounds, or another currency, and addresses how currency fluctuations will be handled if payments are made in a different currency than specified. This clause is essential in international contracts because exchange rate volatility can significantly alter the real value of the payment obligation.
What are my options?
For example, if a contract specifies payment in U.S. dollars but the paying party's revenue is in euros, a weakening dollar means the party must spend more euros to meet its obligation—a hidden cost that can be substantial over time.
How does this affect small businesses?
The clause also prevents disputes about which currency's exchange rate applies if a payment is made in the wrong currency, and it clarifies whether the paying party bears the risk of currency fluctuation or whether the receiving party does. In some cases, contracts include a "most favored currency" provision allowing the debtor to pay in whichever of two currencies is most favorable to them, or they may specify that payment must be made in the currency of the creditor's country.