Francis Kendall explores the impact of fluctuating exchange rates in Law360
Francis discusses the recent decision in P&ID v The Federal Republic of Nigeria and the impact of fluctuating exchange rates on legal costs.
Francis’s article was published in Law360, 9 September 2024, and can be found here.
Fluctuating exchange rates and a £43m legal costs battle
In a July decision in Process & Industrial Developments Ltd. V. The Federal Republic of Nigeria, the Court of Appeal refused to change the currency used in the payment of the Nigerian government’s legal costs in a long-running fraud case. In doing so, the Court of Appeal acted fairly and consistently. Experience shows that the costs bill was always unlikely to be converted from British sterling to Nigeria’s naira currency.
Process & Industrial Developments Ltd (P&ID) had called for changing the currency because of the sharp depreciation of the naira after it was ordered to pay its opponent’s legal bills of approximately £43 million ($56 million). This appeal, however, was a somewhat vain hope, pinned upon an attempt to convince the panel of three judges to go against a longstanding precedent that costs should be paid in the currency in which invoices were issued.
The legal costs come from Nigeria’s successful challenge at the High Court to a fraudulent $11 billion arbitral award issued in favour of P&ID in 2017 over a contract for a natural gas refinery and electricity generating project that went sour. In its appeal, the company’s counsel argued that the fluctuating exchange rate would allow Nigeria to effectively make a windfall from the costs order if it paid the bill as it stood in sterling.
The extreme swings in the exchange rate between British sterling and the naira would lead to an effective profit for Nigeria of approximately 45 billion naira, worth approximately £26 million at the current value, P&ID’s counsel explained at a hearing in April. According to its figures, Nigeria had initially paid around 23 billion naira in legal fees, while the £43 million in costs that P&ID has been ordered to pay now amounts to 68 billion naira. Conversely, Mark Howard KC, acting for Nigeria, argued that P&ID should pay his client’s legal costs in sterling as the energy company was billed in sterling.
The Court of Appeal decision, which has now been published, upholds the earlier High Court ruling requiring the costs to be paid in British sterling. “The judge was right to accept Nigeria’s straightforward submission that, because Nigeria had been invoiced and had incurred its liability to its solicitors in sterling, and had paid those bills in sterling, the court ought to make its costs order in sterling,” the decision signed off by Judge Richard Snowden reads. Justices Julian Flaux and Peter Fraser also sat on the panel.
This decision is one which aligns with the general consensus from courts that they should not be concerned about fluctuating exchange rates and how they might benefit one party over another. If a case has been heard in a UK jurisdiction, then the costs award will always be in sterling.
The assessment is only ever based on what is reasonable and proportionate based on the court’s experience. Of course, with the inevitable changes in exchange rates, this can often lead to a face value injustice where a client has chosen to deal with their lawyers or experts in a different currency.
That choice, however, will have always been one made by the paying party in its dealings with its legal team. It is not for costs judges to stray beyond their powers and to deal with currency fluctuations which have resulted in unfairness and the perception of a windfall for the opposing party. The problem incurred lies with the paying party, not the judge who issues the costs ruling.
The bottom line is that the Senior Courts Costs Office, and the courts generally, are looking to deliver justice. What they say is based entirely on their experience.
It is relatively rare to seek to convert costs into a foreign currency in a British court, because it would be impossible for a judge to know what constitutes a fair and reasonable hourly rate in Nigerian naira. The judges’ experience is based on dealing in British sterling.
One might reasonably wonder what would have happened if the currency fluctuation had led to the situation being the other way around, so there was no windfall for the winning party but an effective saving for the paying party.
During the time it has taken to get to this point, to the Court of Appeal ruling, there might well have been further depreciations in the value of the naira, which has only added to the overall cost burden.
Given the lapse of time between a client paying their lawyers and recovery of those costs from the opponent, the problem of currency fluctuation can be a very real issue that is faced by solicitors. Timing is critical and questions such as using the exchange rate at the time of payment by the client or by the opponent become of paramount importance when calculating legal costs.
In cases which involve other currencies, such as one involving a lot of billing in US dollars, there are always nuances with the timing. It is unlikely that you will deal with costs in US dollars at the point at which they were incurred because currencies fluctuate on a daily basis. Where interim invoices have been rendered by a law firm over several months or years, costs lawyers usually split the bill into parts.
What costs lawyers also have to do with claims is make sure that we do not breach the indemnity principle, which ensures that the losing party will never be obliged to pay more costs than the successful client would have been liable to pay to their solicitor under the terms of the agreement.
If lawyers have a foreign client whom they billed $40,000 in May 2023, for example, they are entitled to recover $40,000 should the client win the case. This is, of course, fair and reasonable, but it does almost breach the indemnity principle if the exchange rate proves to be favourable at the time of payment, resulting in a windfall.
There is also a strong argument that the point of exchange should be the point at which the paying party actually transfers the payment for the costs incurred following the judge’s assessment.
What these scenarios demonstrate is that there are many significant moments during the course of litigation at which you can place an exchange rate. Disputes often arise based on the assessment of which point is accepted as being the most suitable for that exchange.
Litigants should understand that if they have to work in other currencies during the course of litigation – for example, if an expert comes in who deals in that other currency – the U.K. courts will only ever be assessing a fair, reasonable and proportionate figure based in sterling. It is absolutely fine to invoice in euros or US dollars, or any other currency pertinent to the case and its location, but whether a party recovers or has to pay costs down the line, the figures will be in British sterling.
It is highly unlikely that a party will be able to avoid the impact of currency fluctuations in any judgment, or in the costs award.
Parties involved in litigation should also work in the safest and most stable currency. If the litigation is taking place in the U.K. against an entity based in a country where there might be hyperinflation, instability or a higher risk of an economic crash, it is always preferable to work with lawyers who bill in British sterling.
Francis Kendall, Director, Costs Lawyer and Joint Head of Commercial at Kain Knight
