An FX pass-through clause is a contract term that moves some or all of a currency movement from one party to the other, usually by adjusting the price when the exchange rate leaves an agreed range. Under English law you need express wording to get that result. Without it, the party making the payment normally carries the risk. This guide explains how the clauses work, how to specify the rate, trigger and calculation, and where UK drafting traps sit.
TL;DR
- English law starts from the position that the payor bears currency risk, so a pass-through clause only works if the contract says so clearly.
- A usable clause names the rate source, the base rate, the trigger, the formula, the notice steps and any cap.
- The main designs are full pass-through, shared pass-through, capped pass-through, freezing clauses and currency options.
- A clause moves risk between the parties. It does not remove it. Your treasury still needs to measure and, where sensible, hedge what remains.
- Have a solicitor review the final wording. Contract terms that raise prices after signing can face a reasonableness test.
Table of Contents
- What an FX pass-through clause does
- The default under English law
- When a pass-through clause makes sense
- The main clause designs
- How to specify the clause, step by step
- Protections and UK drafting issues
- Advantages and drawbacks for each side
- What a clause does not do: the exposure behind it
- Putting the clause to work in treasury
- Promo: see your currency exposure in one place
- Perspective
- FAQ
- Sources
What an FX pass-through clause does
Suppose a UK distributor buys from a supplier that invoices in euros, and sterling falls 8% before payment. The distributor now needs more pounds to settle the same invoice. A pass-through clause answers one question in advance: who absorbs that movement, and how much of it?
There are two ways to use the idea:
- Seller protection. The seller quotes in sterling, or in a fixed price, and the clause lets it add a charge if the pound moves against its own costs.
- Buyer protection. The buyer pays in its home currency and the clause makes sure the supplier cannot push all of a weak-pound shock onto it, for example through a cap on adjustments.
Both sides use the same mechanics. What changes is who asks for the clause, and who has the negotiating leverage to get it.
The default under English law
The starting point matters because the clause exists to change it. As Travers Smith explains, the general principle is that the payor bears the risk of currency fluctuation, and reversing that requires express wording.
The Court of Appeal confirmed this in Proctor & Gamble v Svenska Cellulosa (2012). Svenska was invoiced in euros but paid in sterling. As sterling fell, settling the euro invoices cost more pounds. The court held that the fixed exchange rate in the manufacturing budget was merely explanatory and not a contractual payment term. The case is summarised in a Mondaq article on pricing and payment clauses.
The practical lesson: a rate mentioned in a budget, a quote or an email is not a contract term. If you want a rate or a sharing formula to bind, it belongs in the operative wording.
Money of account and money of payment
Two concepts sit underneath every currency clause. The money of account is the currency in which the debt is measured. The money of payment is the currency in which it is settled. The Court of Appeal stressed in Woodhouse v Nigerian Produce Marketing that the distinction is vital. In that case, if sterling were devalued by 14% while the Nigerian pound held firm, the English buyer would have to provide £116 5s 0d instead of £100 to make up 100 Nigerian pounds, because the Nigerian pound was the money of account.
So your clause should state both: the currency the price is expressed in, and the currency that actually leaves your bank account.
When a pass-through clause makes sense
You do not need one in every contract. It earns its place in specific situations:
- Longer contracts. The longer the gap between signing and final payment, the more room for the rate to move. A one-off invoice settled in 30 days rarely justifies a clause. A multi-year supply agreement often does.
- Your supplier insists on its own currency. Many UK businesses prefer to pay in sterling, and suppliers often prefer their local currency. LegalVision's guide to international supply agreements describes adding a price adjustment clause tied to a named exchange rate and an agreed band that triggers renegotiation when the supplier will not move.
- Thin margins. If a few percentage points of currency movement wipes out your profit on a contract, you need a clause, a hedge or both.
- Cost base in a different currency from the price. Thackray Williams suggests a price adjustment when the rate moves beyond an agreed tolerance, or a specified rate with regular reviews and an agreed price increase if the pound falls by a set percentage.
Where you expect to be badly affected by currency moves, Travers Smith points to two routes: negotiate a price adjustment mechanism, or enter hedging arrangements. They are not alternatives so much as layers, and we return to that below.
The main clause designs
Currency clauses come in several shapes. Ashfords lists the common forms, and they map onto the pass-through spectrum:
| Design | How it works | Who it favours | Best for |
|---|---|---|---|
| Full pass-through | The whole movement is added to or removed from the price | The party that is not exposed | Suppliers with strong leverage |
| Shared pass-through | Movement beyond a band is split, for example in equal shares | Neither side | Long-term relationships |
| Capped pass-through | Adjustment is limited to a maximum percentage | The party paying the adjustment | Buyers needing budget certainty |
| Freezing clause | The rate is fixed for the contract or a period | Whoever the fixed rate suits on the day | Short, defined projects |
| Currency option | One party may switch the payment currency if the rate passes a level | The party holding the option | Contracts with a clear alternative currency |
| Renegotiation trigger | Parties must talk before any termination right arises | Both, in a mild way | Relationship-led contracts |
In construction, BCLP describes a common bespoke arrangement as risk-sharing: the contractor bears movements up to a ceiling or within a range, and only costs beyond a threshold pass to the customer.
How to specify the clause, step by step
Vague currency clauses cause disputes. Ashfords makes the point that every currency fluctuation clause needs clarity on when the adjustment takes place, whether it is automatic or needs the parties' agreement, and which exchange rate is used. Use this checklist.
- State the currencies. Name the pricing currency and the payment currency separately.
- Name the rate source. Choose a publicly available, independent source, and say exactly which publication and time of day you mean. "The market rate" invites an argument.
- Record the base rate. Write the rate on the signing date into the contract, to enough decimal places that nobody can dispute it.
- Set the trigger. Decide the band within which nobody owes anything. Some contracts also require the breach to last for a number of consecutive days, to filter out one-day spikes.
- Write the formula. Say which part of the price is exposed (often only the foreign-currency component), what share of the excess moves, and give a worked example.
- Add protections. Cap annual adjustments, set review dates, or lock the price for an initial period.
- Define the process. Who sends notice, within what time, with what evidence, how the other side checks it, and how the revised invoice or credit note follows.
- Say whether it is two-way. A clause that only lets the supplier raise prices will look one-sided and may be harder to defend.
A worked example
This is an illustration, not a recommended set of numbers. The right figures depend on your margin and your counterparty.
A UK manufacturer agrees to buy components priced at €500,000 a year, with sterling as the payment currency. The contract sets a base rate of £1 = €1.1500 on signing, a neutral band of 5% either side, and a 50% split of any movement beyond the band, capped at 7.5% of the total annual contract value.
- Sterling weakens to €1.0350, which is 10% below the base rate.
- The first 5% falls inside the band and is ignored. The remaining 5% is the excess.
- The manufacturer bears 50% of that excess, and the supplier bears the other 50% through an agreed price adjustment on the foreign-currency component.
- The adjustment is checked against the 7.5% annual cap before the credit or debit note is issued.
The example shows why wording matters. Without the worked figures in the contract, the parties could read "50% of the variance" as applying to the whole 10% or only to the excess.
Protections and UK drafting issues
Reasonableness and unfair terms
A clause that lets a supplier raise prices after signing may be tested for reasonableness. Fladgate notes that such a provision may be subject to section 3 of the Unfair Contract Terms Act 1977. Two-way adjustment, objective rate sources, caps and notice steps all make a clause easier to defend.
Fladgate also lists tools you can borrow from inflation clauses: time limits or locked-in periods, percentage caps and floors, and defining an index by its publisher and measurement period.
Standard industry forms
If you work in construction or engineering, the standard forms already take positions on currency. According to HFW's review of currency risk in construction, NEC Option X.1 allows adjustment for inflation but does not expressly deal with currency fluctuations, and the 1999 FIDIC Red and Yellow Books fix an exchange rate at the outset. RICS guidance on fluctuations adds that NEC contracts try to mitigate currency effects through an agreed exchange rate in secondary option X3.
HFW's advice is to raise currency risk during tender negotiations, when meaningful change is still possible.
Common drafting mistakes
- Relying on a rate in a budget or quote instead of the contract.
- Naming a rate source that is later renamed, discontinued or published at a different time.
- Leaving the notice period unstated, so a late claim becomes a dispute.
- Applying the percentage to the whole contract value when only part of the price is in foreign currency.
- Forgetting that a clause is only as good as your ability to track the exposure it creates.
This article is general information, not legal advice. Have a commercial solicitor review the final wording before you sign, especially on long or high-value contracts.
Advantages and drawbacks for each side
For the buyer, a clause turns an open-ended exposure into a defined one. The payor otherwise carries the risk and may end up paying significantly more than expected, or in litigation, if the contract is unclear. A cap gives a budgetable worst case.
For the seller, a clause protects margin when costs and price sit in different currencies. The cost is negotiating friction. Counterparties may resist taking currency risk, especially in competitive markets, and ambiguity breeds disputes when rates move sharply, as Bizowie's guidance on foreign currency contracts points out. A clause works best when you have some leverage, or when the relationship is long enough that both sides gain from predictability.
What a clause does not do: the exposure behind it
A pass-through clause reallocates risk between two parties. The currency movement still happens. Your business may still carry the share the clause leaves with you, and a clause with a 5% neutral band leaves you exposed inside that band.
That is why finance teams usually treat the clause as one layer. The practical questions are:
- How much of your revenue and cost base sits in each currency, and when does cash actually settle?
- Which contracts have clauses, which have fixed rates and which have nothing?
- What is the residual exposure after the clauses, and is it worth hedging?
Our guide on drafting enforceable FX adjustment clauses for counsel and finance covers the contract side in more depth. For the finance side, see low-cost fixes for invoice currency risk and our walkthrough of ways to monitor FX exposure.
Putting the clause to work in treasury
Once a clause is signed, someone has to operate it. The tasks are routine but easy to miss:
- Log the base rate, band, formula and notice deadline for each contract in one place.
- Check the reference rate on the schedule the contract sets, not when someone remembers.
- Calculate the adjustment and send notice inside the contractual window.
- Feed the expected adjustment into your forecast and hedge decisions.
A spreadsheet can do this for a handful of contracts. As the number of currencies and contracts grows, the monitoring becomes the weak point, and missed notice windows can mean lost adjustments.
Promo: see your currency exposure in one place
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If your contracts carry pass-through clauses and you want a clear view of the exposure that remains, look at the Corphedge platform or see how hedging based on Value at Risk works. If your team needs the fundamentals first, our FX hedging course is a one-off €220 purchase.
Perspective
We see the same pattern in many finance teams: the contract is negotiated by one group, the currency exposure is managed by another, and the two rarely meet until the rate moves. A pass-through clause is a sound tool, but it only has value if someone can see, at any moment, which contracts carry it, how close the rate is to the trigger and what is left unprotected.
That is the reason we built Corphedge around live exposure tracking and strategy simulation. Our aim is to give SMEs analytics of the kind large institutions use, at lower cost than traditional institutional platforms, so a CFO can test a clause's effect against a hedge before committing to either.
Our advice is to treat the clause and the hedge as a pair. Use the clause to share what the counterparty will agree to share, then measure the remainder with Value at Risk and decide deliberately how much to cover.
Bartas
FAQ
Is an FX pass-through clause the same as a currency adjustment clause?
In practice, yes. Both terms describe a clause that adjusts the price when the exchange rate moves beyond an agreed point. "Pass-through" stresses that the movement is passed from one party to the other, while "adjustment" or "fluctuation" clause is the wording more often used in contracts. What matters is the mechanics: rate source, trigger, formula and process.
Does English law imply a fixed exchange rate if the contract mentions one?
Not necessarily. In Proctor & Gamble v Svenska Cellulosa, the Court of Appeal refused to imply a fixed exchange rate term where the rate appeared only as explanatory material. If you want a rate to bind, put it in the operative terms and state how and when it applies.
Should the clause be automatic or require agreement?
Automatic clauses are easier to operate because the formula does the work once the trigger is hit. Clauses that require agreement are softer, and can stall if the parties disagree. Whichever you choose, say so expressly. Ashfords stresses clarity on whether the adjustment is automatic or by agreement.
Do I still need to hedge if I have a pass-through clause?
Often yes, for whatever the clause leaves with you. A neutral band, a cap or a sharing split means some movement stays on your side. Measure that residual exposure, then decide whether hedging it is worthwhile for your margins and cash flow.
Can a supplier raise prices under a clause whenever it likes?
No. A term allowing a supplier to increase prices after signing may face a reasonableness test under the Unfair Contract Terms Act 1977. Objective triggers, two-way adjustment and a cap make the term easier to defend. Take advice from a solicitor on your specific wording.
Sources
- Pricing and payment clauses: who bears the risk of currency fluctuation (Travers Smith)
- Pricing and payment clauses: who bears the risk of currency fluctuation (Mondaq)
- Woodhouse A.C. Israel Cocoa Ltd S.A. v Nigerian Produce Marketing Company Ltd
- International supply agreements: UK business guide (LegalVision)
- Contract pricing in commercial agreements: pitfalls to avoid (Thackray Williams)
- The impact of Brexit on risk allocation in contracts (Ashfords)
- Risk mitigation in a volatile price market (BCLP)
- Managing inflation in commercial contracts (Fladgate)
- Managing the risk of currency fluctuations in construction (HFW)
- Fluctuations (RICS)
- Managing foreign currency contracts (Bizowie)