Contractual balance under the pressure of the exchange rate - effects of the depreciation of the Romanian Leu

In the context of the depreciation of the Romanian RON against the main reference currencies (Euro), a phenomenon that profoundly influences both the banking activity and the contractual relations between private individuals, the economic climate is marked by inflation and external imbalances, and the monetary obligations denominated in foreign currency can quickly turn into financial burdens.

In the following, we intend to analytically present the legal framework applicable in Romania in the context of this phenomenon, as well as the instruments through which either banking institutions or private contractors can protect their interests.

Regulatory framework – the distinction between the reference currency and the currency of payment

Civil Code (Law no. 287/2009)

According to the provisions of art. 2.646 of the Civil Code, the payment currency is defined by the law of the state that issued it, at the same time that the effects that the currency exerts on the extent of a debt are determined by the law applicable to the latter.

At the same time, the payment, regardless of the currency in relation to which a payment obligation has been assumed, will be made in the currency established according to the law of the state in which the payment is to be made (of course, outside the contractual relations of private international law in which the parties themselves have agreed on another payment currency).

NBR Regulation no. 4/2005 on the foreign exchange regime

According to the provisions of Article 3 paragraph 1 of the NBR Regulation no. 4/2005 on the foreign exchange regime, payments, receipts, transfers and any other such operations arising from the sale of goods and services between residents, regardless of the legal relationship that regulates them, are carried out only in the national currency (Romanian RON).

The exceptions to this rule can be found in Annex 2 of the same Regulation regarding the categories of residents who can carry out operations in foreign currency, among which we mention (by way of example and not limitation):

natural persons, legal entities and other entities, for operations arising from acts of commerce carried out in ports, in the areas of airports and state border crossing points, assimilated to free zones;

legal entities that directly make payments and collections based on subcontractor contracts arising from international economic collaboration (cooperation) contracts;

natural persons, for transactions carried out between them on an occasional basis;

natural persons, legal entities and other entities, for direct operations arising from the organization and/or provision of external services, such as the international transport of goods and persons and international tourism;

As for payments, receipts, transfers and any other such operations between residents arising from the remuneration of the work performed, regardless of the legal relationship that regulates them (therefore, regardless of whether the work is remunerated under an Individual Employment Contract or not, such as, for example, the exercise of occasional activities carried out by day laborers), they are carried out only in national currency (RON).

In conclusion, except for the situations expressly and exhaustively listed in Annex 2 of the NBR Regulation no. 4/2005 on the foreign exchange regime, all payment obligations will be paid in the national currency (Romanian Leu), regardless of the currency in which they were established in the contract – the payment will be made, as a rule, according to the exchange rate in force on the date of payment, in this case, the risk of monetary depreciation being borne by the debtor.

Consequences & available solutions

Recalculation of the installments on loans assumed in foreign currency

With the depreciation of the national currency (Romanian RON) against the reference currency in which a loan was assumed, with each maturity rate, the balance in foreign currency is to be converted into lei according to the NBR exchange rate, this leading to an increase in monthly installments by a significant number of percentage points compared to the initial estimate.

Hedging Instruments

Hedging instruments (hedging instruments) are financial products designed to reduce or manage unwanted exposure to fluctuations in market variables, such as the exchange rate or the price of commodities.

Based on the practice of banking institutions in Romania, there are various derivative instruments for hedging currency risk, such as:

Cross-currency swaps (CCS) under which the parties exchange capital and interest from one currency to another, for a specified period of time. These instruments are usually contracted by companies with cash-flow exposures in euros or dollars, but also by financial institutions, in order to manage currency mismatches on the balance sheet.

Foreign exchange forward contracts that commit both the bank and the client to exchange a fixed amount of currency at a future date at a predefined exchange rate. For the debtor, the advantage is the elimination of the risk of bearing the currency depreciation – of course, with the bearing, in addition to bank commissions, of the difference between the exchange value agreed for the future and the exchange rate applicable at the time of contracting.

E.g.: If a certain company is aware that in 5 months it is going to pay the amount of 500,000 Euros and fears that the Romanian RON will depreciate, it can conclude a Forward Contract, blocking a rate of 5.15 RON/Euro, regardless of whether in the next 5 months the exchange rate will exceed this threshold.

While providing protection to borrowers by reducing the risk of currency depreciation and predictable budget planning, hedging tools can at the same time expose the debtor to losses in the event of a contractual lock-in of exchange rates that subsequently improve.

Effects of impairment in civil and commercial matters and available remedies

Payment of amounts denominated in foreign currency

Taking into account the provisions of art. 2.646 of the Civil Code in relation to the provisions of art. 3 para. 1 of the NBR Regulation 4/2005 according to which "payments, receipts, transfers and any other such operations arising from the sale of goods and services between residents, regardless of the legal relationship that regulates them, are made only in the national currency (Romanian Leu)", even if the parties express the amount of the obligation in euros, dollars or another currency, the actual payment shall be made in RON at the official NBR exchange rate on the day of payment, unless they have agreed on another mechanism.

Available instruments in case of currency depreciation

Express establishment of another conversion method, such as the NBR monthly average exchange rate (e.g. the average NBR exchange rate in the month prior to payment) or the fixed exchange rate (a predetermined rate, with express mention of the application period and any revision conditions).

Indexation clauses and mixed mechanisms, useful in long-term legal relationships, the parties being able to opt for mixed aid mechanisms aimed at:

1. Monthly average of the NBR exchange rate (useful in relation to NBR fluctuations)

2. Setting an adjustment ceiling (e.g. +/- 3 percent compared to the baseline), so that the reduced fluctuations are borne by the party in charge of the risk, and the major fluctuations lead to renegotiations.

Invoking unforeseeability according to the provisions of art. 1.271 of the Civil Code, unforeseeability being the instrument by which a party whose obligations have become excessively onerous due to an exceptional change in circumstances that would make it manifestly unfair to oblige the debtor to continue the enforcement, may, with the intervention of the court, obtain the adaptation or termination of the contract.

Not every increase in the value of the obligations of one of the parties is apt to attract the application of the unforeseeability mechanism, but those excessive increases (in other words, capable of leading to the financial ruin of the debtor) and which arise from causes that occurred after the conclusion of a contract and which are external and exceptional.

Given that, in the majority, the situations in which unforeseeability can occur are credit agreements, these exceptional circumstances often consist of significant exchange rate changes. The most eloquent example of devaluation of the national currency against the currency of the contracted loan was provided by the evolution of the Swiss franc.

In order to be able to successfully bring an action with the resolution of which the court orders the adaptation or termination of the contract, it is necessary that:

1. The change of circumstances occurred after the conclusion of the Contract.

2. The change in circumstances, as well as its extent, was not and could not have been reasonably foreseen at the time the contract was concluded.

3. The debtor has not assumed the risk of changing circumstances or is not considered to have assumed such a risk.

4. The debtor has attempted, within a reasonable time and in good faith, to negotiate the adaptation of the contract with his creditor

Conclusions

Payment in national currency – risk transferred to the debtorAccording to art. 2.646 of the Civil Code and art. 3 para. 1 of the NBR Regulation 4/2005, the pecuniary obligations expressed in foreign currency are usually paid in RON at the official NBR exchange rate on the day of payment, so that the risk of depreciation of the national currency is fully borne by the debtor.

Impairment and impact on foreign currency loansEach outstanding installment of a foreign currency loan is converted into lei at the applicable NBR exchange rate, which can generate significant increases in monthly obligations compared to initial estimates.

Hedging tools – advantages and limitations (i) Cross-currency swaps (CCS) and forward contracts can lock in a future course, providing predictability and protection against depreciation.(ii) The associated costs (commissions, possible loss if the exchange rate evolves favorably) require careful analysis of the cost-benefit ratio.

Alternative contractual arrangements in civil and commercial law: (i) express establishment of an average monthly NBR rate or a predetermined fixed rate, with a clearly defined period and review conditions; (ii) these solutions reduce the risk of imbalance, but require detailed drafting to avoid ambiguities.

Indexation clauses and mixed mechanisms: (i) the monthly average of the NBR exchange rate, useful in relation to oscillations, (ii) adjustment ceiling (e.g. +/- 3%), which limits the impact of small fluctuations, triggering renegotiations only at major variations.

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