The issue of the currency of a monetary obligation remains in the backdrop in the euro area because where the parties to a contract have not agreed upon the currency and the obligation is performed in a euro area country a contract entered into under Estonian law must be performed in euros. Nevertheless, it is not uncommon that the parties agree upon payment in another well-known currency such as the US dollar or the British pound sterling. In agreements related to currency, some noteworthy issues will be selectively addressed below.
According to the rule of thumb a monetary obligation must be performed in the currency agreed upon or, if the currency of performance is not specified, in the currency of the place of payment (the residence or seat of the creditor). There is an exception to the rule: if an obligation is expressed in a currency other than that of the place of payment, the debtor may also perform the obligation in the currency of the place of payment unless (i) the currency is not freely convertible or (ii) the parties have agreed upon exclusivity of currency: the parties have established a particular currency and exclude performance in any other currency. There is one more exception to the exception—the agreement may be deviated from where payment in the currency in which the monetary obligation is expressed is impossible. Hypothetically, such a situation may arise in a case involving large amounts of money where the bank fails to procure sufficient funds in the currency in which the payment is required to be made. However, this is not very likely to happen.
As a rule, an agreement on a foreign currency carrying a floating rate incurs a currency risk for the creditor. A loan agreement serves as a good example here. If the loan amount is issued in a foreign currency and no agreement concerning currency exclusivity is made and if the loan amount is then repaid in the currency of the place of payment, the currency of the place of payment should be based, for the purpose of converting the obligation, on the average rate of exchange at which the creditor can, at the place of payment and at the time when the obligation falls due (and not the date of loan issuance) immediately purchase the currency in which the obligation was expressed. There is also a problem where the debtor delays performance of its monetary obligation and meanwhile the rate of exchange changes to the detriment of the creditor. Should this be the case, the creditor may require payment according to the applicable rate of exchange prevailing either (i) at the time when payment is due or (ii) at the time of actual payment. Another aspect worthy of mention is that in the case of execution proceedings, claims in a foreign currency are converted into euros on the basis of the daily rate of exchange of the European Central Bank as at the date of satisfying the claim.
It is important to know that where the parties have agreed on a foreign currency but not on its exclusivity, the debtor may perform the obligation either (i) in the foreign currency or (ii) in the currency of the place of payment. This means that where a monetary obligation is to be performed in Estonia, the debtor may choose whether to perform the obligation in the contractual currency or in euros. Here, specific reference should be made to a recent position of the Supreme Court according to which the creditor may require performance of an obligation only in the currency agreed upon.
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Currency for performing monetary obligations
The issue of the currency of a monetary obligation remains in the backdrop in the euro area because where the parties to a contract have not agreed upon the currency and the obligation is performed in a euro area country a contract entered into under Estonian law must be performed in euros. Nevertheless, it is not uncommon that the parties agree upon payment in another well-known currency such as the US dollar or the British pound sterling. In agreements related to currency, some noteworthy issues will be selectively addressed below.
According to the rule of thumb a monetary obligation must be performed in the currency agreed upon or, if the currency of performance is not specified, in the currency of the place of payment (the residence or seat of the creditor). There is an exception to the rule: if an obligation is expressed in a currency other than that of the place of payment, the debtor may also perform the obligation in the currency of the place of payment unless (i) the currency is not freely convertible or (ii) the parties have agreed upon exclusivity of currency: the parties have established a particular currency and exclude performance in any other currency. There is one more exception to the exception—the agreement may be deviated from where payment in the currency in which the monetary obligation is expressed is impossible. Hypothetically, such a situation may arise in a case involving large amounts of money where the bank fails to procure sufficient funds in the currency in which the payment is required to be made. However, this is not very likely to happen.
As a rule, an agreement on a foreign currency carrying a floating rate incurs a currency risk for the creditor. A loan agreement serves as a good example here. If the loan amount is issued in a foreign currency and no agreement concerning currency exclusivity is made and if the loan amount is then repaid in the currency of the place of payment, the currency of the place of payment should be based, for the purpose of converting the obligation, on the average rate of exchange at which the creditor can, at the place of payment and at the time when the obligation falls due (and not the date of loan issuance) immediately purchase the currency in which the obligation was expressed. There is also a problem where the debtor delays performance of its monetary obligation and meanwhile the rate of exchange changes to the detriment of the creditor. Should this be the case, the creditor may require payment according to the applicable rate of exchange prevailing either (i) at the time when payment is due or (ii) at the time of actual payment. Another aspect worthy of mention is that in the case of execution proceedings, claims in a foreign currency are converted into euros on the basis of the daily rate of exchange of the European Central Bank as at the date of satisfying the claim.
It is important to know that where the parties have agreed on a foreign currency but not on its exclusivity, the debtor may perform the obligation either (i) in the foreign currency or (ii) in the currency of the place of payment. This means that where a monetary obligation is to be performed in Estonia, the debtor may choose whether to perform the obligation in the contractual currency or in euros. Here, specific reference should be made to a recent position of the Supreme Court according to which the creditor may require performance of an obligation only in the currency agreed upon.