The Less Than Almighty Dollar: or Why US Arbitrators Should Consider Awards of Damages in a Foreign Currency

01 September 2007

This compensatory principle used to be limited in both England and the US by restrictions on award of judgments in a foreign currency. See Mitsui & Co v Oceantrawl Corp, 906 F Supp 202, 204 (SDNY 1995) (“Entry of judgment in the currency of the parties’ transactions accords with principles of fairness and with the goal of making injured parties whole”). English Courts and arbitrators have long been freed from this restriction. See John Knott, “A Quarter Century of Foreign Currency Judgments” [2004] LMCLQ 325; see also Miliangos v George Frank (Textiles) Ltd, [1976] AC 443 (HL (E)) (overruling prior cases that required judgments to be entered in sterling). 

It may come as a surprise that US courts may issue judgments in foreign currencies, as the English courts have done for the past 30 years. It is time that US arbitrators also recognised the goal of “fairness” in making foreign currency awards. 

Foreign Currency Awards Under English Law

The leading English case is The Texaco Melbourne, 1994 1 Lloyd’s Law Reports, p. 473 [HL]. The plaintiff, the Fuel Ministry of the Republic of Ghana, shipped 14,010 tonnes of fuel oil on Texaco’s ship. Disputes arose and the cargo was discharged to the order of the party from whom Texaco had chartered the ship to perform the voyage. Ghana brought an action against Texaco for failure to deliver under the bill of lading: “the crucial question was the identification of the relevant currency” (id, 476). Ghana claimed that it was US dollars and Texaco claimed that it was the Ghanaian cedi. The latter had depreciated during the course of the proceedings, 1982- 1991, so that the exchange rate at the breach date compared to the date of trial was the difference between 2.75 cedis to the US dollar as opposed to 375 to 1 at the time of the trial court’s first judgment. Thus, at the time of the trial, a judgment in cedis of the principal claim amount of $2,866,187 would, in a cedi terms, be worth no more than $21,165. 

The trial court awarded Ghana judgment in the sum of $2.8 million with interest. The Court of Appeal reversed substituting an award of 11 million cedis ($21,165) plus interest in that currency. The House of Lords then heard the appeal. 

Lord Goff, who wrote the opinion for the Court, noted at the outset: 

Although the difference in terms of dollars between the two alternative awards is very striking, it is important not to be mesmerised by it. We have at all times to bear in mind that fluctuations in the relevant currency between the date of breach and the date of judgment are not taken into account. The award of damages is assessed as at the date of breach and, the appropriate currency (usually sterling) in which that award is to be made as at that date is identified. Delay between the date of breach and the date of judgment is compensated for by an award of interest (as indeed is delay in the satisfaction of the judgment). 

He further noted: . . .

if an award is made in cedis, the value of the award in terms of dollars is, at the date of judgment, worth less than one per cent of the value of an award in U.S. dollars as at the date of breach. But to pay too much regard to this startling result can be most misleading, because it can lead to the conclusion that, contrary to the law, account should be taken of the fluctuation in the value of the relevant currency between the date of breach and the date of judgment. The proper approach is to identify, in accordance with established principle, the appropriate currency in which the award of damages is to be made, and to award an appropriate sum by way of damages in that currency, and also of interest in that currency to compensate for the delay between the date of breach and the date of judgment.” 

Lord Goff considered that the trial court had been “led astray by the startling consequences of the depreciation in the value of the cedi.” Although the trial court had correctly identi- fied cedis as the currency of loss it incorrectly considered the cedis’ depreciation as unfair to Ghana while providing Texaco a “windfall.” Lord Goff then outlined the history of sterling’s depreciation and how the “breach date conversion rule” into pounds sterling had led to competitive disadvantages so that London, presumably mostly maritime, arbitrators began making foreign currency awards, as upheld by the Court of Appeal. The distilled principles in considering currency of the judgment, Lord Goff concluded, should be: 

“First, it is necessary to ascertain whether there is an intention, to be derived from the terms of the contract, that damages for breach of contract should be awarded in any particular currency or currencies. In the absence of any such intention, “the damage should be calculated in the currency in which the loss was felt by the plaintiff or” (adopting the words of Lord Denning, MR, in the Court of Appeal [citation omitted] “which most truly expresses his loss”. 

US Law Catches Up

It used to be the law that US courts could not make judgment in a foreign currency. The Seventh Circuit, in In re Amoco Cadiz 954 F2d 1279, 1328 (7th Cir 1992), explained: 

Foreign currency awards are rare in federal courts of the United States – this may be the first – because § 20 of the Coinage Act of 1792, 31 U.S.C. § 371 (1976), provided that “the money of account of the United States shall be expressed in dollars . . . and all proceedings in the courts shall be kept and had in conformity to this regulation.” Congress repealed this section of the Coinage Act in 1982. . . . There is now no bar to judgment in the appropriate currency. 

French plaintiffs were therefore awarded damages arising from an oil spill off the coast of France in French francs because they had incurred their damages in francs. According to that court: 

When all of the transactions occur in dollars, the judgment should be in dollars. Always. When they occur in some other currency, the award should be in that currency. Always. (id at 1328-29) 

See also Sea-Roy Corp v Parts R Parts, Inc, 1999 US App LEXIS 3383, *12-13 (4th Cir 1999) (damages in Deutschmarks as infringement loss “was felt in” Deutschmarks). 

US Maritime Arbitrators

Calculating damages in the currency in which the injured party’s losses are ‘felt’ has also been considered by New York maritime arbitrators for some time. In the M/T Porsanger, SMA No. 2881 (Arb at NY 1992), the panel, thinking that US law prevented foreign currency awards, determined the damages in the currency in which they had been ‘felt’ by the plaintiff (sterling) and converted that sum amount to US dollars as of the date of the award. Raising, thereby, an entirely different and problematic issue of breach date versus judgment date for conversion. 

Dangers of "Mesmirizing" Results Call for a Clear Rule

The arbitration Tbilisi Shipping Co Ltd v Pemex-Refinacion, SMA No. 3935 (2006) encompasses both the “startling results” and “problems about conversion dates” that arise in failing to make an award in the currency in which the loss is “felt.” There a vessel charterer/ cargo owner brought claim against the shipowner for its mitigation expenses, etc, incurred in Mexico in blending a contaminated petroleum cargo. Although some internal accounting for dead freight was in US dollars, all mitigation expenses incurred were in pesos. The incident occurred in 1992. Pursuant to a third-party “final adjustment” agreed to and executed in November 1994 by the adjuster, Pemex and its cargo underwriter, Asemex, Pemex’s loss was agreed. Dollar- denominated expenses were converted into Mexican pesos, which, along with the actual peso mitigation expenses, resulted in an agreed peso sum equivalent to approximately $1.2 million. The shipowner was not a party to, or aware of, the agreement or “adjustment” proceedings. 

In December 1994 the Mexican government permitted the peso to trade freely against the US dollar: the “December surprise”. The cargo insurer had not yet paid and was, under the adjustment agreement, obliged to pay only the agreed upon peso amount. By the time Asemex came to pay, in 1995, the agreed upon amount had, in dollar terms, declined from over $1 million to approximately $542,000 (the exchange rate having moved from 3.11 to 6.27 pesos to the dollar in the relevant period). Later in 1995, Asemex received payment in pesos from its foreign reinsurers of 93 per cent of the peso sum that it had paid Pemex. 

The author, who represented the shipowner, urged the arbitration panel to make an award to Asemex/the reinsurers in the currency in which the claim had been adjusted; paid; and in which Asemex had also received reimbursement: pesos. Pemex made several arguments for a US dollar award such as that the charter called for payment of hire/demurrage in dollars; the Clause Paramount incorporated COGSA and the situs of arbitration was New York. The Panel denied Pemex’s attempt to obtain a US dollar award based on the 1992 exchange rate. It decided that “[b]y making its claim in US dollars converted at the 1992 rate, Pemex [sic] seeks to have itself awarded a contrived amount which it did not pay in 1992. It paid its expenses in 1992 in pesos, not dollars ... [it] received payment in full from Asemex [the cargo insurer] in 1995 ... in pesos, not dollars.” 

The next logical step was for the Panel to determine that the fully subrogated underwriter (there was no deductible) and its reinsurers having paid in pesos should only recover in pesos. Unfortunately, the Panel appeared to reach a compromise. It employed the April 1995 exchange rate to convert the adjustment agreement’s peso figure and award $434,896, notwithstanding that, as quoted above, none of Pemex’s mitigation expenses were incurred in pesos. That avoided the substantial windfall to Asemex of using the 1992 exchange rate but nevertheless skewed the outcome. Asemex, because of reinsurance, was only entitled to keep 7 per cent of the principal claim. It conceded that its proportional reimbursement payments to the foreign reinsurers would be solely in pesos. Accordingly, based on an exchange rate of over ten pesos to the dollar at the time of the award, Asemex had to use 40 per cent fewer dollars in 2006 to buy pesos to reimburse the reinsurers in pesos compared to what it received from them in 1995. It thus obtained a windfall of close to $200,000. Had the award been made in pesos the shipowner would have obtained the benefit of the further peso depreciation but the compensatory principle of damages would not have been compromised: Asemex would have received exactly the correct amount of pesos that it had paid. 

*** 

The US dollar remains the currency of payment stated in most maritime contracts, including charterparties. As the US dollar declines and the length of arbitration proceedings grows on both sides of the Atlantic (although 13 years must be something of a record) parties would be well advised to state in their contracts that any damage claims (other than for payments denominated in the contract in US dollars), including for mitigation expenses and attorneys’ fees and costs, “shall be awarded in the currency in which such loss was originally incurred or paid or which most truly expresses the loss claimed.”

It is not possible to buy entry into Who's Who Legal

terms and conditionscontact us