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Currency clause: how to solve the problem and whether it is necessary

Currency clause: how to solve the problem and whether it is necessary On May 19th, as part of the St. Petersburg International Legal Forum, a round table organized by and dedicated to the issues of currency clause in agreements took place. This topic, enough already relevant at the time of crisis, attracted even more attention after the notable case of Vympelcom vs Tizpribor. A mobile operator leasing a building in the center of Moscow for a price pegged to the exchange rate, tried to judicially introduce a “currency band” condition into the contract. The case drew public attention because the Moscow City Arbitration Court upheld the lessee’s claims, as it held that the circumstances that the parties relied upon at the time of entering into the contract have substantially changed (as set out in art. 451 of the Civil Code). Even though the appeals instance revoked this decision, public discussions are still active: the problem exists, and there is something to be done about it, many lawyers say.

One of them is Tatiana Starikova, partner of YUST Law Firm. According to her, even though the amount of currency mortgage is only 1%, in absolute relation it is a significant part of citizens who can be deprived of their only housing for non-payment. As Starikova observes, they file three types of claims: some try to hold contracts invalid, others convince the court that currency rate increase is force majeure, and still others try to change the conditions under art. 451 of the Civil Code. This article is of declarative nature and is rarely applied by courts, Starikova mentioned. In her opinion, the problem is that the market value of residential property has decreased to a great extent, and a possible remedy could be personal bankruptcy.

In the Russian legal system termination of a contract prevails over its amendment. This is normal, it is easier for the parties to terminate a contract and to enter into a new one, as partner of YUST Law Firm Alexander Evdokimov mentioned. The approach set out in art. 451 is in line with the global trend, however, this article is practically not applied. Although according to judicial practice it is impossible for the parties not to foresee inflation or rate change, Evdokimov thinks that this general approach cannot be fully justified.

The matter of discussion should not be narrowed down to currency clause, it is broader: for instance, the contractual price may be pegged to the discount rate, Artem Karaperov, director of M-Logos institute, professor of Higher School of Economics under the Government said. According to Karapetov, different countries demonstrate two approaches to the matter. Some are in comfort with the right of the court to intervene into the relationships between the parties and find a balance of interests (Germany, Netherlands), others follow the non-intervention policy for the purposes of stability and predictability (France, England).

It is important to distinguish between commercial and other contracts, including commercial contracts, Karapetov is certain: “Businessmen are acting at their own risk, we cannot excuse them for miscalculations”.

However, there is another substantial distinction. In some cases a party to the contract suffers double loss, while nothing changes for its counterparty. In other cases change of conditions can cause a double loss to one party and double profit to its counterparty (the “excess profit case”). In the second case it is more difficult to decide whether it is justified to interfere into the contract, although we are “not supposed to take compassion for businessmen”, Karapetov admitted. On the other hand, if the courts understand that the provision can be easily applied and they can intervene into relations between parties, the courts will be overwhelmed with such claims, and chaos will ensue, the consequences of which are difficult to predict. “There are pros and cons of any position, but I think that Pandora’s box should rather not be opened”, the professor summarized.

It should be added that the round table was moderated by senior partner of YUST Law Firm Andrey Lisitsyn-Svetlanov, who commented the situation with a professional sense of humor. “Planetary alignment” – this is what is necessary to apply art. 451, meaning that  four conditions have to apply simultaneously in order to amend or terminate the contract. First of all, at the time of entering into the contract the parties could not foresee the substantial change in circumstances. Secondly, the circumstances changed  beyond the will of the parties and the parties could not prevent them. Thirdly, execution of the contract in the new conditions causes damage to the parties. And finally – neither the contract nor the usual business practice provides that a party to the contract bears the risk of such change. In practice this combination of circumstances is very rare – as is planetary alignment.

the original publication in Russian

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