nicu soltoianu classification of protection clauses

7/25/2019 Nicu Soltoianu Classification of Protection Clauses

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UNIVERSITY OF BUCHAREST

CLASSIFICATION OF

PROTECTION CLAUSES

AGAINST RISKS IN

INTERNATIONAL

COMMERCIAL

CONTRACTS

an essay byNicu oltoianu

5/25/2014


2/15

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INTRODUCTION

At the outset should be noted that all business transactions involve a certain degree of

risk, but the risks in international trade differ from those in domestic trade due to the foreign

element which is present in international contracts. International trade is the exchange of capital,

goods and services across international borders or territories. In principle, with regard to the

behavior of the parties, international trade is not different from the domestic one. The main

difference between the two categories of trade is, as stated above, that international trade

involves parties from different countries and jurisdictions. However, the legal system is not the

only factor which makes that international trade be more risky than the domestic one. e should

honestly acknowledge that moving goods across the border a border imposes additional costs

such as tariffs, time costs due to border delays and costs associated with country differences such

as language or culture. If goods are shipped abroad, risks may arise from damage or loss of

goods, contract disputes or rejection of the goods by the buyer. Another difference is that

international trade is mostly restricted to trade in goods and services, and only to a lesser extent

to trade in capital, labour and other factors of production.

There are plenty of risks affecting international commercial contracts, but we will focus

on the most common only, which, in our opinion are the following! poor "uality risk,

transportation risks, logistic risk, political risk, legal risks, unforeseen risks, credit risk, and

exchange rate risks. #ot all of the above mentioned risks can be can be anticipated or mitigated

by the parties to an international contract. $ontract protection does not cover such risks like, for

example, political risks or legal risks. These risks are of extracontractual nature, and protection

against them can be offered by public entities only. %oreover, there are some risks that typically

affect the importer or the exporter. In the next chapters we will classify the clauses intended to

prevent or to minimise as much as possible the risks that occur in international trade.

$lassification of protection clauses against risks in international commercial contracts is

of purely theoretical importance and is not pretend to be a recommendation for practitioners, as

in real trade the importer and the exporter will consider the most appropriate protection clauses

for them on a case by case basis.

CLASSIFICATION OF PROTECTION CLAUSES


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e propose the following classification criteria for protection clauses which we will

discuss forwards! &' type of the risk they cover( )' subject matter and the effect they have on the

economy( and *' their operation ways.

Chapter I. CLASSIFICATION OF PROTECTION CLAUSES BY THE RISKS

THEY COVER

+ased on the risks to which they refer, protection clauses fall into the following

categories!&

a' Protection ca!"e" a#ain"t c!rrenc$ ri"%"exchange variation'.

$urrency risks are most commonly prevented in practice by inserting in contracts, certain

specific protection clauses.

e classify these clauses in! the gold clause and currency clauses. The latter sub-classify,

in turn, in! mono-currency, multi-currency based on a currency basket set by the parties and

multi-currency based on an institutionalied basket unit of account'.)

&o' ca!"e

/old clauses specified within business contracts allow the creditor the option to receive

payment in gold or gold e"uivalent. A gold clause may prove valuable to the creditor in long

term contracts, wherein "uestions may arise as to whether a currency in use at the time the

contract was entered into would still have the same value when payment is due. $reditor

concerns in respect to inflation, war, changes in government, and any other uncertainty about the

future value of currency would be common reasons for adopting a gold clause within a contract.

A buyer of goods or services over long periods of time who agrees to pay a seller in gold

can hedge against fluctuations in the gold0fiat ratio by budgeting whatever payments will be

re"uired in the future through starting a consistent gold accumulation program.

henever the average price of gold decreases over a period of time, doing this allows the

payor to ac"uire gold at progressively cheaper prices, which decreases his dollar-cost in paying

the recipient. At the same time, whenever the gold price rises, the buyer benefits from the rising

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dollar-value of units he has ac"uired earlier in the period and the resulting hedge against

inflation, loss of dollar purchasing power, which benefits his bottom line.*

The buyer himself can also turn around and negotiate partial payments in gold

from those who owe him money. A buyer of services is usually simultaneously a seller of

something else, maybe a product he manufactures or markets. He can now himself earn gold

from his customers, possibly by negotiating a discount to the normal dollar-price of his product

that would make it attractive for his customers to choose to pay with gold.

The customers themselves can take advantage of these discounts by setting up a

similar gold ac"uisition program so he has gold available for any future payments he chooses to

make.1

/old clauses can be of two types!

- Gold-value clause2 uses gold as a reference for the value of the currency in which

the price is expressed(

- Gold-coin clause2 expresses the price directly in gold.3

C!rrenc$ ca!"e"

$urrency terms are also designated in the literature and practice of international trade and

arbitration as clauses to strengthen currency.

They are characteried by the fact that the parties establish two categories of currencies,

one for payment for invoicing' and one or more as reference computing, account'.

4uch clauses have the aim to avoid the risk of currency exchange rate changes of the

payment currency in relation to the reference currency, produced between the conclusion and the

performance of the contract, by including the percentage decrease in the price or by deducting

from the price the percentage of the exchange rate growth.5

(ono)c!rrenc$ ca!"e"

+y mono-currency clauses, parties show that the price of goods work, services, etc.',

expressed in the account currency will be paid invoiced' in the payment currency at the

exchange rate between the two currencies at the date of payment.6

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Ca""i*ication o* +ono)c!rrenc$ ca!"e"

%ono-currency clauses are presented in two forms.

a' In the first form, the most common in practice, the clause re"uires the parties to

indicate an account currency and a payment currency.7

The account currency, is also referred to as basic currency or primary currency. It is

usually a hard currency from a highly industrialied country, that is widely accepted around the

world as a form of payment for goods and services. A hard currency is expected to remain

relatively stable through a short period of time, and to be highly li"uid in the forex market.

If the payment is to be made in a currency other than in the accounting currency, the

amount to be paid is calculated on the basis of the proceeds of the conversion from the

accounting currency into the payment currency less fees.

8or companies or investors managing multiple currencies, the interplay of foreign

exchange rates and conversions can make the maintenance of the books a complicated task. 8or

companies operating in countries with a major currency, such as the 9.4. dollar, euro or pound,

the accounting currency may be the same as the selling currency. $ompanies operating in

smaller markets with :minor: currencies are more likely to have a domestic accounting currency

and a foreign selling currency.;

b ' In some cases, parties express the contract price in the same currency in which the

payment is made, on-going operations being performed in that currency, but they predict that the

price will be recalculated at the time of payment, depending on the exchange rate of a reference

currency, with exclusively computational role. In this case, the mono-currency clause takes the

form of a currency indexation clause.&

nicu soltoianu classification of protection clauses

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