Foreign+Currency+Agreement

When doing business with a foreign partner one would have to decide which form of currency would be accepted. In the case reviewed, a U.S. Company had entered into a long term agreement with a Japanese manufacturer to purchase an inexpensive brand of adhesive. This agreement took place in the 1980’s, the agreed upon currency ratio was 185 yen to $1.00 U.S. dollar. At one point the exchange rate had significantly fallen which was an advantage to the U.S. Company, however the advantage did not last as the exchange rate had changed direction; by 1988 the yen was valued at 140 yen to $1.00 U.S dollar. The U.S. Company did not anticipate the large shift in the value of yen and unfortunately the agreement did not include any provisions to renegotiate the contract if there was a shift in the value of the rate of currency.

As the case points out, a country’s currency value can increase or decrease at any time. Before entering into an agreement it is important to have an in-depth understanding of that country’s current economic status. There are many factors that affect the value of currency such as rate of inflation, economic growth, the internal policy, stability of the country and interest rates. Understanding these factors will assist in mitigating future risks. The article also addresses the point that the negotiator does in fact have choices, these choices are: “They can both share the risk; The foreign partner assumes risk; Your side assumes the risk; One or both parties stipulate in the contract that the currency denomination is an area open to renegotiation, allowing for a certain percentage of rate fluctuation to occur.” It may be a difficult task to convince your foreign partner to assume all the risk. As the case has taught us, it would be beneficial for both companies to contractually agree upon an exchange amount of one currency for another currency for a specific time period, the shorter the time period, the smaller the risk.

What the case does not address is that when entering into a contractual agreement with a foreign company it is just as important to understand the foreign legal system as different cultures enforce formal contracts and disputes differently. As with all negotiations, it is important to clearly define what both parties interests are. This can be a difficult task if the parties are not attentive of the cultural differences.