The impact of currency fluctuations on the costs of litigation

World currency markets have seen significant currency fluctuations in recent months, in particular following the result of the UK’s referendum on its membership of the EU. While the most immediate impact of this will be felt by corporates in relation to international trade, it is also of considerable significance to cross-border litigation.  Businesses across the world regularly choose the English courts to settle disputes with many cases in the Commercial Court involving at least one foreign party.

Months or years may pass between a breach of contract giving rise to loss and the claimant being awarded a judgment during which time exchange rates may change considerably. English procedural law provides mechanisms to protect a litigant in the English court against this risk - most obviously a claim may be brought in a foreign currency (the currency of the contract) and the court has power to award judgment in that currency.

The position regarding costs and currency fluctuations is less clear. However, for foreign parties who pay their lawyers in Pounds sterling, the point is no less relevant. As with any litigation, many months may pass between a party incurring legal costs and the court making a costs order for that party to recover all or part of its costs from the other side.

In two recent cases, it has been argued that costs orders should include an order for an additional sum which reflects any currency loss caused by the decline in the exchange rate between the Pound and the Euro since any payments of costs were made to the party’s lawyers and the court’s order for costs.

The first case was Elkamet Kundstofftechnik v Saint-Gobain Glass France [2016] EWHC 3421 (Pat), in which the issue was described as a ‘novel point’ by Arnold J.   The claimant, a German company, had to exchange Euros into sterling in order to pay its lawyers throughout the litigation. By the time that a costs order was made in favour of the claimant at the conclusion of the claim, the amount payable to the claimant in sterling was worth a lot less when converted back into Euros.  Accordingly, the claimant argued that it should be compensated for the additional cost it incurred as a result of exchange rate losses.

Arnold J ordered a payment of £20,000 to reflect the currency loss suffered as a result of movement in the exchange rate between sterling and Euros since proceedings began and, in particular, following the referendum result on 23 June 2016. It was also notable in that case that the defendant, a French company, declined the option of a costs order in Euros.

Arnold J accepted the claimant’s argument that the purpose of a costs order was to put the receiving party back into the position it would have been in had it not had to spend the costs to which the order relates. In this regard the Judge also noted the court’s power to award interest on costs which is often exercised.  Accordingly, if a foreign company has had to exchange its local currency into Pounds for the purpose of meeting the costs of litigation, it should be compensated for additional expenditure as a result of currency fluctuations in the same way it is entitled to be compensated for being kept out of its money by way of interest.

In doing so, Arnold J rejected that defendant’s arguments that as a matter of principle, the purpose of an order for costs is to compensate a party for costs incurred in litigating in the jurisdiction and should therefore be in Pounds irrespective of the source of the funds. The Judge had more sympathy with the defendant’s reference to practical considerations: namely that exchange rates can go up as well as down, and that satellite litigation in respect of such matters should be discouraged.  Nevertheless, he was prepared to order a sum of £20,000 in respect of exchange rate fluctuations.

In contrast, in the case of MacInnes v Gross [2017] EWHC 127 (QB), a little over two months later, Coulson J took the opposite view and declined to follow the decision in Elkamet.  While this involved a hearing as to the principle of costs rather than a summary assessment as in Elkamet, Coulson J nevertheless departed from Arnold J’s reasoning.  In particular, he was doubtful of the proposition that an award of costs should be treated as an order for compensation, as if it were a claim for damages. In his view “there are inherent differences between the two regimes, and that orders for costs have never been regarded as compensating the payee for the actual costs that he has paid out. On the contrary, unless the payee has an order in his favour for indemnity costs, he will never recover the actual costs that he has incurred”. Finally, Coulson J did not “see the close analogy between ordering interest on costs, which is commonplace, and ordering exchange rate losses due to the particular time that the costs were paid, which is not. The paying party can work out in advance the additional risk created by the potential liability to pay interest on costs, but any potential liability to pay currency fluctuations is uncertain and wholly outside his control”. He also commented that it could be argued that “the generous rate of interest on costs at 4% over base is designed to provide at least some protection to the payee against such events.”

Where do these two decisions leave us? The differing approach is clearly unhelpful to parties and it may be that the conflict will need to be resolved by the Court of Appeal. Nevertheless, the decisions demonstrate that this is a live issue and is something parties will need to be aware of – whether as a point to raise, or as one to defend.