(1) If a monetary obligation is expressed in a currency other than that of the place for payment, it may be paid by the obligor in the currency of the place for payment unless
(a) that currency is not freely convertible; or
(b) the parties have agreed that payment should be made only in the currency in which the monetary obligation is expressed.
(2) If it is impossible for the obligor to make payment in the currency in which the monetary obligation is expressed, the obligee may require payment in the currency of the place for payment, even in the case referred to in paragraph (1)(b).
(3) Payment in the currency of the place for payment is to be made according to the applicable rate of exchange prevailing there when payment is due.
(4) However, if the obligor has not paid at the time when payment is due, the obligee may require payment according to the applicable rate of exchange prevailing either when payment is due or at the time of actual payment.
Monetary obligations are usually expressed in a certain currency (currency of account), and payment must normally be made in the same currency. However, when the currency of the place for payment is different from the currency of account, paragraphs (1) and (2) of this Article provide for those cases where the obligor may or must make payment in the former currency.
1. Monetary obligation expressed in currency different from that of place for payment
As a general rule, the obligor is given the alternative of paying in the currency of the place for payment, which may have definite practical advantages and, if that currency is freely convertible, this should cause no difficulty to the obligee.
If, however, the currency of the place for payment is not freely convertible, the rule does not apply. Parties may also exclude the application of the rule by agreeing that payment is to be made only in the currency in which the monetary obligation is expressed (effectivo clause). If it has an interest in the payment actually being made in the currency of account, the obligee should specify this in the contract.
1. A company from country X receives an order for machinery from a buyer from country Y, the price being expressed in US dollars. According to Article 6.1.6, payment of that monetary obligation must in principle be made at the obligee’s place of business, i.e. country X. If the company from country Y finds it more convenient, it may pay the price in euro which is the currency of X (see Article 6.1.9(1)).
2. The same company from country X frequently needs to buy from suppliers in country Z certain parts to be included in the machines, and has stipulated that the buyer from country Y should pay only in US dollars. In this case, payment may only be made in dollars (see Article 6.1.9(1)(b)).
3. The same company from country X has a plant in country W, where the machines will be assembled. The contract provides that the buyer from country Y has to pay the price to the firm’s subsidiary in country W. Since the currency of country W is not convertible, payment may only be made in dollars (see Article 6.1.9(1)(a)).
2. Impossibility for obligor to make payment in currency in which obligation is expressed
In some instances, the obligor may find it impossible to make payment in the currency in which the obligation was expressed. This may be the result of the application of exchange regulations or other mandatory rules, or due to any other cause preventing the obligor from obtaining that currency in sufficient quantity. Paragraph (2) gives the obligee the option of requiring payment in the currency of the place for payment, even if the contract contains an effectivo clause. This is an additional option open to the obligee who may find it acceptable or even advantageous in the circumstances. It does not preclude the exercise of any available remedy in the event of the obligor’s inability to pay in the currency of account amounting to a non-performance of the contract (e.g. damages).
4. A, a Swiss bank, lends USD 1,000,000 to B, to be reimbursed in Geneva. At maturity, B is unable to find the necessary US dollars. A, which knows that B has deposits in Swiss francs with another local bank, may require payment in Swiss francs, even though the loan agreement stipulated that reimbursement was to be made only in US dollars (see Article 6.1.9(2)).
3. Determination of applicable rate of exchange
Paragraphs (3) and (4) deal with the problem of the determination of the rate of exchange to be chosen when payment is made in the currency of the place for payment rather than in a different currency stipulated in the contract. This may occur when the obligor avails itself of paragraph (1), or the obligee the provisions of paragraph (2).
Two widely accepted solutions are offered. In normal cases, the rate of exchange is that prevailing when payment is due. If, however, the obligor is in default, the obligee is given an option between the rate of exchange prevailing when payment was due or the rate at the time of actual payment.
The double reference to the “applicable” rate is justified by the fact that there may be different rates of exchange depending on the nature of the operation.
5. The facts are the same as in Illustration 4. A chooses to be reimbursed in Swiss francs (CHF) and payment, which was due on 10 April, actually takes place on 15 September. The rate of exchange on 10 April was 2 Swiss francs to 1 US dollar. By 15 September it has become CHF 2,15 to USD 1. A is entitled to apply the latter rate. If the US dollar had depreciated rather than increased in value, A would have chosen the rate applicable on 10 April.