With economic downfall starting early last year and resulting currency rate fluctuations many more parties to commercial contracts have suddenly noticed that such contracts contain certain clauses on adjusting the payments to some exchange rate of so-called hard currency, usually euro or US dollar.
It has long ago become common market practice in Ukraine to adjust payments by hard currency fluctuations. But in times when such fluctuations comprised 5-10% over the contract term, relevant clauses may have indeed satisfied their goal of making the price more relevant to the market. In situation when the national currency has lost more than 250% over one year, while the market remained almost the same or grew only nominally, in local currency, the disproportion became evident. The formal grounds to overcome the currency clauses appeared to be not so evident.
First of all we are discussing the local Ukrainian contracts with no direct foreign element in price formation. Like real estate leases, for example. What can tenant do when the landlord refuses to renegotiate?
The Ministry of Economic Development and Trade of Ukraine has shortly after subsequent local currency devaluation wave made another attempt to explain that local prices inside Ukraine should be in hryvnias with even recalculation of imported components thereof in hryvnias as well. However, more basic laws, like the Civil Code and the Commercial Code still contain provisions allowing the parties to define the price equivalent in foreign currency and adjust consecutive price payments by the effective currency exchange rate at the time of payment.
Failing to invalidate the currency clause as such, the affected parties began studying their force-majeure clauses. At the first glance, the revolution in Kyiv, exit of Crimea and military actions in Eastern Ukraine looked like classical force-majeure events. On several occasions some persons have even managed to get confirmative certificates on the same from the offices of the Ukrainian Chamber of Trade and Industry. But the connection between all those events and the party’s inability to pay is rather questionable. The question is whether the party physically cannot or merely does not want to pay. No mentioned circumstances actually created any obstacle to address the bank and initiate the payment. Even the earlier court practices showed that neither decrease in the payer’s income, nor the financial crisis as such do not constitute force majeure circumstances. Besides, force majeure clauses do not usually release the parties from obligation to pay; they merely release from liability for non-payment and extend the time for payment. Thus, the force-majeure clause did not effectively help either even to those, who managed to obtain the confirmative certificates.
Being unable to overcome solely currency clause, the affected parties started looking for the ways to get rid of the contract in whole with a perspective to renegotiate it for the future. Provided there are no due reasons for invalidation, like missing essential conditions or non-compliance with notary certification or state registration or other more or less evident drawbacks, attention was paid to the grounds for termination. For example, lease regulations provide for quite few such grounds for the tenant: poor quality of the leased property or the landlords failure to conduct capital repair. Apparently, none of them worked. The contracts are not that generous in letting the tenant get rid of the lease. In many cases they directly forbid unilateral termination. Moreover, according to the Commercial Code, the lease agreement may be terminated only on grounds, set out by law, read – not merely the contract. A more creative approach was to make the landlord terminate the contract. Landlords used to have more grounds for termination: for non-payment, non-timely payment, improper use or other. But in circumstances when the landlords understood they would not get another lease in the nearest months at all, not even speaking about the better lease conditions, they preferred to wait. Besides, non-payment or other misconduct does not release the tenant of duty to pay or contractual liability for such non-payment or misconduct. Practically, several months of such confrontation often led to opening a more sincere negotiations and finding compromise, at least temporally.
On several most desperate occasions some legal advisors have even given a more unconventional solution. Hardship. The law provides that the agreement may be changed or amended in case of material change in circumstances, which the parties were guided by when making such agreement. To qualify as material the change in circumstances should lead to a situation, in which, if known, the parties would not have made the agreement or would have made it on other conditions. Technically, the parties should agree on termination of the agreement or its change. If they do not agree, one of the parties may claim termination before the court. In order to terminate the agreement due to hardship the plaintiff has to prove, and the court has to establish, the following pre-conditions: (i) at the time of entering into the agreement the parties did not anticipate such change in circumstances. Some courts even rule that the plaintiff should prove that the parties were sure that such change in circumstances would not happen; (ii) change of circumstances is influenced by the reasons, which the disadvantaged party could not eliminate after their occurrence with all reasonable care and effort, expected from such party; (iii) further performance of the agreement would alter the balance of the parties’ property interests, and the damaged party would lose the benefit, which it aimed at achieving when making the agreement; (iv) the agreement, or business practice, does not assume that the disadvantaged party bears the change of circumstances risk. The weak point here is the latest requirement. Even if the parties have not explicitly agreed that hardship provisions do not apply or that the payer bears the risk of currency fluctuations, the currency reservation as such speaks of the party contractually obliged to bear that risk. The idea behind the hardship approach, thus, was to show that the agreement in general becomes useless in new market conditions and the affected party terminates its business in general and not only the payments under one particular agreement. Another weak point is that the agreement would be terminated only with the court decision entering into effect. Practically this could take months, for which the affected party formally has to pay.
Anyway, practical goal of all the above approaches is to bring the parties to the table and renegotiate the contractual terms with change of the market situation. Before that – pacta sunt srvanda… unless the parties agree otherwise.
