DAMAGE ASSESSMENT PROBLEMS IN FOREIGN CURRENCY

Problems in assessment of damages remain among the most contentious aspects of

private law disputes. The assessment exercise becomes particularly difficult when
one of the parties asks that damages be assessed in some foreign currency or claims
that, even though damages should be assessed in the currency of the forum, foreign
exchange losses should form a head of loss. The 1975 decision of the House of Lords
in Miliangos v George Frank (Textiles) Ltd was revolutionary in that it permitted
English courts to award judgment in a foreign currency.1 Miliangos has been
influential throughout the common law world and courts in the commonwealth and
the United States now contemplate awarding damages in currencies other than their
own. However, that modernisation has hardly eliminated the problems in this area.
When may a judge assess damages in a currency other than that of the forum? If a
court elects to assess damages in its own currency, what conversion date should it
select in converting from a foreign currency that was relevant to the obligations
between the parties? In an age of fluctuating currencies questions of this nature
present judge with choices involving significant financial implications. This research
paper takes a comparative look at how common law courts have addressed damages
claims when foreign currencies are involved, and at statutory responses to that issue.
It describes the practices of UK, Commonwealth and American courts in this field
and draws both on principles of private international law and of damages assessment
to analyse current practice.2

USA:

In times of depreciated and fluctuating currencies the determination of the date

governing the rate of exchange becomes important when- ever damages are assessed
in a foreign currency. In any case where one or more of the operative facts occurred
without the territorial limits of the forum, many questions may arise as to the legal
consequences to be attached to those facts by the law of the forum. But assuming
that damages have been properly assessed, what is the date upon which the rate of
exchange shall be taken for the purpose of computing the damages in the currency of
the forum. A classification of the cases with reference to their operative facts may aid
in the solution of this rather novel and perplexing problem. The question arose from
a tort action in the recent case of Owners of S. S. Celia v. Owners of S. S. Volturno. 3
Due to the defendant's negligence, a collision occurred in which the plaintiff's ship
was damaged. The collision occurred on December I7, I9I7; the ship was detained
for temporary repairs at Gibraltar from December 25, to December 30, I9I7, and for
permanent repairs at New- port News from January to February. A part of the
plaintiff's loss was due to the fact that the vessel was at all of these dates under hire
to the Italian Ministry of Marine, and- the plaintiffs received no pay thereof or during
the periods of detention for repairs. The dam- ages were assessed in Italian lire and,

1
Miliangos v George Frank [1976] The House of Lords (The House of Lords).
2
Edward Gluck, 'The Rate Of Exchange In The Law Of Damages' (1922) 22 Columbia Law Review.
3
Owners of S S Celia v Owners of S S Volturno [1921] The House of Lords (The House of Lords).

1
for the purpose of entering judgment in English currency; it was held that they
should be converted at the rate prevailing at "the time when the actual loss for each
detention was incurred." While the majority opinion suggests that, in cases of
contract or tort, the rate of exchange decided upon should be the rate at the time of
loss by "breach or in consequence of the wrong," the general discussion, and most of
the cases cited as controlling, point to the date of breach of duty as the proper date.
But if this date is meant, the instant case is inconsistent, for the collision-and hence
the defendant's breach of duty-occurred sometime before the periods of detention. If
the periods of detention are meant as the only possible date, then what disposition
should be made of cases where there is either no detention or where the detention
extends over a long period of time, during which the rate fluctuates? Another class of
cases in which the problem arises is where the dam- ages allowed for the dishonor of
negotiable paper are assessed in a foreign currency. The early cases are not in
agreement. The cur- rent decisions generally hold that the owner of a dishonored bill
is entitled, besides interest and charges, to an amount in the currency of the forum
which will purchase a good bill drawn in the foreign currency at the rate of exchange
prevailing on the date of dishonor,- denominated "re-exchange."" There may be
situations, however, where subsequent to the date of dishonor the exchange has gone
against the plaintiff and he thereby suffers loss. A third situation is where the duty
violated by the defendant does not arise out of contract or tort.8 In practically all
cases of this kind the date when the defendant should have performed is considered
the proper one for taking the rate of exchange. In most of them, too, the rate is
favorable to the plaintiff; and one might well inquire whether the courts would stand
by the rule if the converse of this were true." When the defendant has broken his
contract (negotiable paper not being involved) and the damages are assessed in a
foreign currency, the authorities are not in accord. Some apply the date of breach,
others the date of judgment," a few the date of trial. If any of these dates is
considered as the only possible one, it is easy to think of situations in which the
plaintiff would be put either in a much better position than he would have been in
had the contract been performed, or else in a much worse position. There is a
seeming injustice in either of these results. It is interesting to note, however, that, in
most of the cases in these four classes, the courts seem to have attempted-perhaps
unconsciously to apply a date for taking the rate of exchange which would be
favorable to the plaintiff. It seems impossible, therefore, to fix a date for ascertaining
the amount of the judgment in foreign currency which will always be conclusive. As
between the date of breach and the date of judgment, the former seems clearly
preferable since the aim of the courts is to make the plaintiff as nearly whole as
possible, and not to enable him to speculate in foreign exchange. And where as in the
ordinary contract case performance of a duty is promised for a certain date, it may be,
as the majority of cases seem to hold, that damages for the breach should be assessed
at the current rate of exchange as of that date, both in the interest of certainty, and
because the plaintiff may take steps to protect himself against non-performance. But
where, as in the tort cases, the breach of duty is unexpected; it may be unfair not to
allow the plaintiff a short period to protect himself. There is a rule of damages, of
fairly wide acceptance in this country, that on conversion of articles of fluctuating

2
value, particularly stock, the plaintiff should have a reasonable time in which to
replace the converted articles, and his damage is therefore computed at the highest
value of the articles within a reasonable time after he has notice of the breach. A
similar rule applied here would lead to the selection of the date when plaintiff
reasonably might have repaired his vessel. While this rule is not definitely applied in
the principal case and in other similar tort cases, the result seems to approximate it.4

UK

In 1976, the House of

Lords abandoned 350 years of precedent and discarded the rule that English
judgments must berendered only in sterling. Miliangos v. George Frank (Textiles)
Ltd. acknowledged that the victim of a tort or the non
breaching party to a contract may sustain additional injury from the
fluctuation of currency exchangerates after the injury or breach. In the United States,
the Restatement (Third) of Foreign Relations Law and a new Uniform Foreign-
Money Claims Act provide direction for a similar change.
While Miliangos proves the need to discard discredited rules of the past, care is
necessary to
avoid replacement with rules that may be similarly inappropriate. Inequitable rules
should be supplanted
with a new system founded not upon mechanical new formulae but rather upon a
clear understanding of basic principles of the law of damages. In President of India v.
Lips Maritime Corp.5 In the "Lips"
the House of Lords demonstrated the limitations encountered
when rigid rules are given precedence over basic principles. The decisions in The
Lips unfortunately
neglect the foreign currency issue involved, thus failing to consider the progress
made
in Miliangos. In contrast, the New Zealand case of Isaac Naylor & Sons, Ltd. v. New
Zealand Co-operative Wool Marketing Association, Ltd.6

It demonstrates that proper attention to

basic principles can lead to just results in transactions affected by currency exchange
rate fluctuations.
Past rules on foreign currency claims have not adequately addressed either post-
breach or postjudgment exchange rate damages. Early drafts of the Uniform Foreign
-Money Claims Act acknowledged this concern and provided rules for incidental and
consequential damages.
The deletion of these rules from the final Act intentionally leaves much of the
substantive law of

4
'Damages In Foreign Currency' (1921) 31 The Yale Law Journal.
5
President of India v Lips Maritime Corp [1987] The House of Lords (The House of Lords).
6
Isaac Naylor & Sons, Ltd v New Zealand Co-operative Wool Marketing Association, Ltd [1981] NZLR, 1
(NZLR).

3
damages to the vagaries and uncertainties of the conflict of laws rules of each state
adopting the Act.

The determination of damages is inseparable from consideration of the proper

currency in which
to grant judgment. Failure to include this determination in a uniform act on
foreign-money
claims renders the act of little value. This Article demonstrates that the
"money of account"
determination governed by section 4 of the Uniform Act improperly presumes that
whenever
parties to a contract allocate risk of exchange rate fluctuation during the term of the
contract;
they also allocate risk of exchange rate fluctuation after contract performance was to
have
occurred. This presumption is inconsistent with traditional contract damages law an
d disregards the foreseeeability tests originating in Hadley v. Baxendale.7

It does, however, necessarily

control the substantive issue of damages, thereby doing exactly what its drafters say
the Act
doesnt do. Further, to the extent the Act does not provide rules governing damages,
it will encourage undesirable. If all of this seems something of a digression from
analysis of the question of how to achieve faithful compensation in the face of
oscillating currencies, the point is that that is largely how it functioned in
Miliangosas a diversion. While the reasoning in that case emphasised the crucial
goal of accurate compensation, its insistence that the existing rule was ancient, was
fatally infected by something called monetary nominalism, and had been crafted
before the period of the daily rise and fall of currencies, operated to relieve the
majority in Miliangos from any fully elaborated account of exactly why and how the
breach-date rule was productive of inaccurate compensation. Perhaps that
conclusion may seem so obvious as not to need articulation, but in order to
understand why the payment-date rule operates as an improvement over the breach-
date rule it supplanted it is necessary to be clearer about the way in which the
traditional breach-date rule might be said to have departed from or undermined
accurate compensation. In this connection it is worth noting that under the pre-
Miliangos regime a plaintiff in the position of the unpaid seller Miliangos could
without much effort take steps to avoid the risks cast upon it by the forum-
currency/breach-date rule. Application of the rule has both down-side and upside
risks, of course. But to the extent that an unpaid seller does not want to live with the
hazards inflicted on it by the breach-date rule it could purchase a futures contract to
shift its risk away from English pounds and back into fraricoa point Lord Denning
had made in the course of defending the breach-date rule in Havana Railways. In
fact for all we know the plaintiff seller in Miliangos did exactly this; it had originally

7
Hadley v Baxendale [1854] Exchequer Court (Exchequer Court).

4
pleaded its claim in sterling and surely would have known about the breach-date rule.
Before Miliangos that rule was both widely-known and uniformly applied; its initial
effects in terms of risk distribution, whatever we might think of their fairness, were
both obvious and easily dodged. Moreover, proper hedging by a claimant could not
only escape the risks that the forum-currency/breach-date rule subjects it to, but, if
the claimant so preferred, substitute the risks associated with the payment-date rule.
That is, it could without great effort achieve a result that replicated that which would
follow from Miliangos.

Alternatively it might simply do the following: on the date that it was supposed to
receive payment of Swiss francs from the defendant it could borrow from a bank the
number of pounds sterling required to purchase those francs on that day. It could
then turn around and exchange those pounds for francs. When it was successful in
collecting its pounds from the defendant then, at least provided interest was awarded
at a commercially reasonable rate, it should have sufficient sterling to pay off that
loan. Of course this would not permit the creditor to avoid all risk. It would merely be
exchanging the risks associated with fluctuation of pounds sterling for those
associated with fluctuations of the Swiss franc. That, however, was the risk it
contracted for. In addition, it is worth noting that the negative effects of the breach-
date rule may have been taken into account in the terms of the original bargain
struck by the parties. That is a seller like the plaintiff in Milicingos may well have
charged a higher price for its goods because it knew at the time of contracting that if
it had to sue in England to recover the price it would be subjected to the breach-date
rule forum shopping based on differing conflict of laws rules.8

It is important not to forget that any rule on the currency of judgment, even
Miliangos's new payment-date rule, subjects claimants to some financial asset. Just
as there is no risk-free form in which to retain one's wealth, there is no commodity in
which compensation can be awarded that does not carry with it the hazard that its
value vis-a-vis other commodities will decline over the course of litigation and of
course also the chance that it will rise. However, a firm conversion date rule like the
breach-date rule does tell civil litigants what risks they are running. To all of that it
may be objected that we should not trivialise the effort required to acquire knowledge
of the operative standard affecting the currency of judgment and then take steps to
avoid the negative consequences of that rule's operation. With respect to the former,
howeverthe costs of acquiring the knowledge of which risks are imposed on
litigants by the operative remedial rules of the forum in which they have chosen to
litigate there will always be costs to plain-tiffs (and defendants too, for that matter) in
finding out what that rule is.

That is, whether the rule on foreign currency involves a breach-date or a payment-
date conversion, plaintiffs who are unfamiliar with the rules will incur the bother of
discovering them. At various points in this book we will encounter courts and

8
John Knott, M. N Howard and John A Kimbell, Foreign Currency.

5
commentators asserting that one of a variety of conversion dates that of breach, of
judgment, or of the losing partys eventual payment of the judgment debtfulfil the
goal of accurate compensation. (Miliangos, for instance, made this claim for
payment-date conversion.) In light of the foregoing it might be said that they are all
wrong, or all right. Any conversion date a court picks will necessarily impose on
claimants some risk they would not have had to run had the defendant not breached
its obligation. To that extent they all deviate at least a little from exact compensation.
Still, so does a judgment for debt or an award of damages in a purely domestic case.
To the extent that a claimant has to accept money in recompense for some other
obligation or wait until the outcome of litigation before it can collect its debt it will be
subject to possible outcomes, upside and downside, it had not initially agreed to run
and necessarily so, since no court can turn the clock back and make it as if the
obligation had never been breached. Any sort of judicial compensation places on
claimants the risk that the commodity used to effect that compensation will fluctuate
in value during the course of settling the grievance. Despite these deviations from
perfect compensation, however, sublunary analysts are commonly content to describe
these rules as fulfilling the compensation principle. Does not regard such rules as
particularly unjust to claimants since when they can identify in advance the metric by
which compensation will be meted out then if they do not care to run the
accompanying risks they can take steps to alter them. In any event it is the best we
can do to set things right, and despite when the operative rule is breach date
conversion, this still leaves plaintiffs who do not wish to chance that risk with the
cost of taking steps to avoid it. The fact that the contract in Miliangos stipulated
payment in Swiss francs indicated that, in terms of the perils of currency fluctuation
after the completion of the contract, most likely the seller was content to chance the
possibilities, at least until the time stipulated for contractual payment, of the franc's
rise or fall.9

So requiring it to hedge against a drop in sterling would thus likely involve making it
take steps it was not otherwise planning to make. However, while we should not
underrate the effort required to (1) appreciate the need to hedge against sterling's fall
and (2) do so, it nevertheless bears noting that this effort is no greater indeed no
different from what is required of the non -breaching party in a purely domestic
contract dispute involving non -delivery of goods or non-performance of services.
There the general rule of contract damages stipulates that the wrongfully withheld
performance is evaluated, in the currency of the forum, as of the date of breach. So
the innocent party, if it does not wish to stiffer the ill consequences of the fall of the
forum currency vis-a-vis the contracted -for performance, is in effect required to
purchase substitute performance at the and compensation, as it is effected through
the standard judicial remedies for unpaid debts and breach of contract is a rough
concept indeed. Creditors are made whole but litigation takes time, and during that
time they are also subjected to risks they had not bargained for date of breach.

9
Vaughan Black, Foreign Currency Claims In The Conflict Of Laws (Studies In Private International Law; V.
2) (Hart Publishing Limited 2010).

6
There are aspects of that law the foreseeability requirement for instance that in the
service of other principles introduce elements of uncertainty that can make it difficult
for parties to predict in advance the amount of damages that will be awarded as
compensation for a given wrong. Possibly the most we can say is that it would be a
bad idea to introduce uncertainty into the law of damages without some good reason.

On the analysis so far it seems like the question of whether Miliangios brought
about improved fidelity to the compensation principle depends on whether one
regards the greater fairness of the mildly plaintiff -favouring redistributed risks of
currency fluctuation during litigation as being worth the price of the increased
uncertainty imposed, at least in some cases, on both parties as to what the
currency of judgment will be. Persons might differ in their assessments of this. While
certainly is no doubt one goal of the law of damages it is hardly the only one, as the
rules regarding remoteness illustrate. Those turn on whether a given loss is to be
judged reasonably foreseeable, and that is a matter which may easily remain in doubt
until judgment is granted.

However, there are other factors we have not yet taken into account. In particular, it
is necessary to revisit the claim made above that the old breach date rule provided the
parties with a high level of certainty as to what the currency of judgment will be.
Looked at from the point of view of a single jurisdiction the forum currency/breach-
date rule undoubtedly had the virtue of certainty on this question. Parties knew from
the outset which currency would be used to effect compensation and which
conversion date would be employed. In some cases, however, there is more than one
jurisdiction in play. Because of the way that rules of court jurisdiction are structured,
in some disputes there may be two or more places where the non-breaching party
might bring an action for compensation. When each of those potential forums applies
the breach date rule there is no certainty about the currency of judgment at least in
the time between breach and the time when the ultimate forum is selected.

In some cases it is understandable that this should be so. Claims for this sort of
consequential loss can on occasion seem especially strong. With currencies we can
sometimes have a high degree of confidence in a claimant's argument that, had it
been paid on time, it would have converted the payment into another currency. For
instance, some legal rule might require contracting parties to deal in a given
currency, but there may be clear evidence that the plaintiff does not otherwise retain
its wealth in that money. In such circumstances it is easy to believe a plaintiff
creditor who claims that had it received the contracted for payment it would
immediately have converted that money into its home currency. Even in the absence
of such legal requirements to deal in giving money there may be situations where all
trading in a certain commodity takes place in a given currency, but where the
plaintiff can show that while it uses that currency for such trading it does not
otherwise keep any of its wealth in that money, and moreover that the defendant
knows that. In situations where we credit the plaintiff's assertion that, had it been
paid it would have exchanged that payment for some other given currency, claims for

7
losses in the amount of forgone gains from that currency's appreciation seem
especially appealing.

However courts' historical reluctance to grant exchange loss damages is also

understandable. Because they are a type of consequential loss, claims for exchange
loss damages are analytically distinct from the currency of judgment question. They
raise issues of causation, foreseeability and mitigation that currency of judgment
disputes do not present and they have a strong claim to be treated in the same way
that other claims for consequential loss are treated namely, with a scrutiny informed
by a concern to see that the loss in question, if proven, is within the scope of a risk
fairly imposed on the defendant. The fact that in a given case the granting of
exchange loss damages may operate to generate a result that is financially identical
to selecting a given currency as one in which to render damages does not render the
two questions identical. In particular, it does not mean that switching the currency of
judgment rule from a breach -date conversion to a payment date conversion, as

Miliangos did, entails any adjustment to the handling of the exchange loss problem.

However courts' historical reluctance to grant exchange loss damages is also

understandable. Because they are a type of consequential loss, claims for exchange
loss damages are analytically distinct from the currency of judgment question. They
raise issues of causation, foreseeability and mitigation that currency of judgment
disputes do not present and they have a strong claim to be treated in the same way
that other claims for consequential loss are treated namely, with a scrutiny informed
by a concern to see that the loss in question, if proven, is within the scope of a risk
fairly imposed on the defendant. The fact that in a given case the granting of
exchange loss damages may operate to generate a result that is financially identical
to selecting a given currency as one in which to render damages does not render the
two questions identical. In particular, it does not mean that switching the currency of
judgment rule from a breach date conversion to a payment date conversion, as
Miliangos did, entails any adjustment to the handling of the exchange loss problem.10

10
A. V Dicey, J. H. C Morris and Lawrence Collins, Dicey, Morris, And Collins on the Conflict of Laws (Sweet
& Maxwell 2006).