CURRENCY CONVERTIBILITY RISKS IN ENERGY CONTRACTS

1. Meaning and Concept

Currency convertibility risk refers to the risk that a party to an energy contract may be unable to convert local currency into a foreign currency, or may suffer substantial financial loss because of exchange-control restrictions, currency depreciation, shortages of foreign exchange, or governmental limitations on transferring foreign currency abroad.

This risk is particularly significant in international energy projects, including power plants, renewable-energy projects, oil and gas projects, LNG transactions and cross-border electricity infrastructure. Such projects frequently involve foreign lenders, imported equipment and contractual obligations denominated in US dollars, euros or other hard currencies, while project revenues are earned in local currency.

Currency convertibility risk must be distinguished from ordinary foreign-exchange fluctuation risk. Exchange-rate risk concerns changes in the value of currencies, whereas convertibility risk concerns the legal or practical inability to obtain or transfer the required foreign currency.

2. Sources of Currency Convertibility Risk

Currency risks in energy contracts may arise because of:

Government-imposed foreign exchange controls;

Restrictions on conversion or repatriation of project revenues;

Significant depreciation of the host-country currency;

Shortage of foreign currency in domestic banking markets;

Government suspension of international transfers;

Sanctions or banking restrictions;

Changes in monetary or exchange-control legislation.

Because energy projects generally operate for twenty to thirty years, these risks can materially affect debt servicing, fuel purchases, equipment procurement and investor returns.

3. Contractual Allocation of Currency Risk

The principle of freedom of contract allows parties to determine who bears currency-related risks. Energy contracts commonly address these risks through:

Currency denomination clauses – identifying the currency in which payments must be made.

Foreign exchange adjustment clauses – permitting tariff or contract-price adjustment when specified exchange-rate movements occur.

Change in law clauses – providing relief where new exchange-control legislation restricts convertibility.

Force majeure clauses – potentially covering governmental restrictions preventing lawful currency transfers.

Hard-currency payment clauses – requiring payment in USD or another internationally convertible currency.

Currency hedging arrangements – using swaps, forwards or other financial mechanisms to reduce exchange exposure.

The IEA has identified foreign-exchange hedging facilities as an important mechanism for mitigating currency risk in renewable-energy investment, particularly where projects depend upon international financing.

4. IMPORTANT CASE LAWS

Case Law 1: Forasol v. Oil and Natural Gas Commission

Citation: Forasol v. ONGC, 1984 Supp SCC 263.

Facts:
A French company entered into an agreement with ONGC for drilling operations connected with petroleum exploration in India. Part of the contractual consideration was payable in French francs. During the contractual period, the Indian rupee was devalued, resulting in a dispute regarding the appropriate exchange rate for converting the foreign-currency obligation into Indian currency.

Legal Issue:
Which date and exchange rate should govern conversion of a foreign-currency contractual liability into Indian rupees?

Judgment:
The Supreme Court examined the appropriate conversion-date principles applicable to foreign-currency obligations and recognised the importance of preserving the real economic value of the foreign-currency claim.

Legal Principle / Ratio Decidendi:
Where contractual liabilities are expressed in foreign currency, courts must apply an appropriate conversion date consistent with the contractual obligation and the nature of the monetary claim.

Significance:
The case is fundamental to Indian energy-contract law because it demonstrates how currency denomination and conversion mechanisms can materially alter the economic value of international petroleum contracts.

Case Law 2: ONGC Ltd. v. Essar Steel Ltd.

Citation: Oil & Natural Gas Corporation Ltd. v. Essar Steel Ltd., Bombay High Court, 26 April 2001.

Facts:
The contract expressly provided that the lump-sum price would remain firm and would not be increased because of foreign-exchange fluctuations. Essar nevertheless claimed additional compensation arising from currency movements.

Legal Issue:
Could an arbitral tribunal shift foreign-exchange risk despite an express contractual allocation?

Judgment:
The Court held that the contractual provision expressly placed foreign-exchange fluctuation risk upon the contractor. An arbitral award granting compensation contrary to that allocation exceeded the arbitrators' jurisdiction.

Legal Principle / Ratio Decidendi:
Express contractual allocation of currency risk is binding, and an arbitrator cannot rewrite the commercial bargain by transferring the risk to another party.

Significance:
Energy companies must therefore carefully negotiate forex and convertibility clauses because courts will ordinarily enforce the agreed allocation of financial risk.

Case Law 3: NTPC Vidyut Vyapar Nigam Ltd. v. Godawari Green Energy Ltd.

Citation: APTEL, Appeal No. 403 of 2017 and connected appeals, decided 26 July 2022.

Facts:
Solar thermal developers obtained foreign financing and imported equipment. The rupee reportedly moved from approximately ₹45 to ₹62 per US dollar, substantially increasing project costs. The developers sought relief for Foreign Exchange Rate Variation (FERV) under force-majeure provisions.

Legal Issue:
Could extraordinary foreign-exchange variation constitute a force majeure event under the specific PPA?

Judgment:
APTEL treated the unusual forex variation, in the particular circumstances of these pioneering solar-thermal projects and the wording of the PPA, as an “unnatural business risk” akin to force majeure, directing the Central Commission to frame an appropriate compensation mechanism.

Legal Principle / Ratio Decidendi:
Whether currency risk qualifies for contractual relief depends heavily upon the precise language of the force-majeure clause, foreseeability, control and prudent utility practices.

Significance:
The decision demonstrates that severe currency disruption may exceptionally justify relief, but ordinary commercial currency fluctuations are generally expected to be allocated contractually.

5. Conclusion

Currency convertibility risk is a major bankability and investment risk in international energy projects. Effective contracts should expressly regulate payment currency, exchange-rate adjustment, convertibility restrictions, change in law, force majeure, hedging and government guarantees. Indian case law demonstrates that courts and tribunals primarily respect the parties' contractual allocation of currency risk, while exceptional relief may arise where extraordinary events satisfy specifically drafted contractual protections.