Currency exchange fluctuations are an inherent risk in international trade and consequently in cross-border disputes. While contractual risks can be taken care of at the time of contracting, disputes will inevitably unfold over a certain (rather unpredictable) period of time. This makes parties particularly vulnerable to developments affecting the value of the currency of the debt.
If the currency of the award is depreciating, it may be tempting for the debtor to resist the enforcement of the award and payment for as long as possible. This is relevant, for example, for awards in Russian rubles, particularly when they refer to pre-2014 debts, as the Russian currency has lost nearly 50% of its value since then. Post-award interest may be of some help to protect the award creditor’s interest; therefore, it should never be neglected.
In a recent case, the Russian Supreme Court explained to what extent the debtor bears the exchange rate risks. Case no. A40-157161/2014 is part of a remarkable legal battle over the enforcement of an ad hoc arbitral award in Russia between a US company, Joy Lud Distributors International Incorporated (Joy Lud), and Moscow Oil Refinery (MOR). In short, the dispute arose from a contract for supply of diesel oil between 1995 and 2004. The contract included an addendum that provided for the payment of a “fine” in the event that MOR failed to perform its obligations. This eventually gave rise to an ad hoc arbitration in Stockholm, when MOR ceased delivery. The arbitrators awarded US $28 million plus post-award interest.
However, the enforcement of the Stockholm award became a saga, which deserves separate and detailed description. Just to give a flavour of it, the (eventually unsuccessful) attempts to resist enforcement included:
- Several derivative actions (also known as “Russian torpedoes”) seeking to invalidate the supply contract and the relevant addendum.
- Several rounds of objections to enforcement on the basis of public policy (alleging that the fine was punitive).
- A number of criminal proceedings alleging fraud on the part of Joy Lud management.
- Attempted substitution of the creditor under the writ of execution, as Joy Lud’s claim was supposedly sold to satisfy its own indebtedness under an International Commercial Arbitration Court (ICAC) award to a third party (worth some US $2.3 million).
The award was enforced only by the Presidium of the Supreme Arbtirazh Court in 2006. Nevertheless, the bailiffs only seized the relevant amount from the debtor on 13 August 2013. By that time, the principal and the accrued interest amounted to US $51.1 million. However, the bailiffs failed to transfer the funds promptly to Joy Lud. There was also a new dispute with respect to the attempted substitution of the creditor under the writ of execution. The courts granted interim measures prohibiting distribution of funds until this dispute was resolved and the funds were blocked on the bailiffs’ account. It was only on 29 August 2014 when they were eventually transferred to Joy Lud.
While the Stockholm award was made in US dollars, bailiffs seized the equivalent amount in rubles from the debtor’s bank accounts. During the 12 months that the funds remained blocked on the bailiffs’ account, the rubles lost 11% of their value. This meant that by the time the funds were eventually transferred to Joy Lud, it obtained only US $47.5 million. Joy Lud applied to the bailiffs requesting recovery of the missing US $3.6 million from MOR. The bailiffs granted the request. MOR, however, applied to the court to challenge the bailiffs’ actions in this respect, alleging that it had discharged its obligation to pay the award when the funds were transferred to the bailiffs on 13 August 2013. The lower courts considered the actions of the bailiffs to be lawful, and MOR filed an appeal with the Supreme Court.
The Supreme Court agreed that MOR discharged its obligation to pay the award once the relevant amount was transferred to the bailiffs. Hence, the bailiffs were not entitled to recover the difference resulting from the subsequent foreign exchange rate fluctuation. According to the applicable Russian legislation, if debt is in a foreign currency, it is the bailiff’s duty to instruct relevant banks to purchase the foreign currency at the expense of the debtor, and the debtor is liable for whatever amount in Russian rubles makes for the requisite amount in foreign currency. Once the entire amount is recovered from the debtor, its obligations are discharged. Having obtained the requisite funds on its account, the bailiffs should have transferred them to the award creditor promptly (within five business days). The latter could have sought compensation for the losses incurred due to the bailiffs’ failure, but it could not seek the difference from the award debtor.
This decision provides guidance on the allocation of risk in similar situations. Up until the time the debtor transfers the relevant amount to the award creditor (or the bailiffs seize such amounts from the debtors’ accounts), the risk of currency fluctuations is on the debtor. The debtor must pay whatever is due in the award currency, no matter if it is lower or higher in the local currency. Once this is done, the subsequent exchange rate fluctuations become largely the creditor’s concern. Notably, from then on, post-award interest also stops accruing. The creditor would have a claim against the bailiffs if it suffers losses due to their failure to transfer the funds within five business days. However, as in the present dispute, this will be of limited help if the major part of the loss was due to an injunction (that is, non-transfer of such funds was lawful).