Until recently, the Swiss National Bank had a policy of pegging the value of the Swiss franc to the Euro. Because of the relative strength of the Swiss economy and its institutional stability, many investors were channeling funds into the country, which (in the opinion of the Swiss National Bank at the time) was causing the franc to become overvalued. In order to prevent the currency from rising, which would make Swiss products and tourism prohibitively expensive to foreigners, the Swiss National Bank committed to maintaining the currency at a minimum of 1.2 francs per Euro. For a multitude of reasons, this policy came to an abrupt and sudden halt this past January 15.
Within minutes of the Bank’s announcement that it would allow the franc to float freely, it surged 30% against the Euro and 18% against the dollar. The results were catastrophic for many people. Swiss companies that had sold products to the United States in exchange for dollars suffered tremendous losses, since the dollars they were receiving would now be worth significantly less when exchanged back into francs. A United States-based consumer that had ordered Swiss products in francs suddenly had to pay significantly more dollars for the products he was receiving. Many Europeans who had opted for franc-based mortgages were faced with huge increases in their monthly payments since their local currencies exchanged for far fewer francs.
While the particulars of this incident were unique, it is interesting to note that there are teshuvos (responsa) dating back hundreds of years that discuss the halachic ramifications of currency fluctuations. The issue raised is whether a party to such a transaction may repudiate the contract because of the unexpected and drastic change in circumstances.
For example, what happens if a Swiss-based watch supplier had entered into a long-term agreement to ship watches to a U.S. client who was to pay a fixed amount of dollars for the goods. As a result of the franc surge, the supplier is faced with huge potential losses, since his expenses are in francs, while the contract payments are in dollars, which are now worth significantly less. May the supplier repudiate the contract based on the drastic change in circumstance? On one hand, a valid and binding contract was signed. Nevertheless, it is clear that the parties did not anticipate this drastic change at the time they executed the contract, and the supplier would have never agreed to the terms had he known what would occur. Is this a valid defense?
Contracts and Halachah
It is important to note that parties to an agreement can only be bound through a formal act known as a kinyan. Verbal agreements generally will not suffice to bind the parties. Nevertheless, a person has a moral obligation to honor his words even in the absence of a binding contract. One who violates his verbal commitments is considered a mechusar amana. However, according to many poskim, there is an important exclusion to this rule. If prices change after the verbal agreement, the parties are not bound to their commitments. According to these opinions in our scenario, if the parties did not execute a contract or another valid kinyan, the discussion would be limited to mechusar amana, and the supplier would be able to back out of the deal. While there would be a middas Chassidus to honor the terms regardless, the supplier would not have a strict obligation to do so according to these opinions The question at hand is how to deal with a scenario when a valid kinyan was in fact made between the parties.
Although a valid kinyan will bind the parties, we do find halachic precedent that extreme circumstances allow a party to repudiate a contract. For example, a party may not be obligated to perform on a contract if a war breaks out, or a plague spreads. Such scenarios are known in Halachah as makas medinah and in civil law as force majeure.
Unexpected or Extreme Price Shifts
In our case however, we are not dealing with a force majeure that renders it impractical to honor the terms of the contract. Rather, the extreme price shift due to the currency surge makes it uneconomical for the supplier to do so. There is a fascinating discussion among the Poskim about similar scenarios, with some surprising results.
Shulchan Aruch rules that if a man agrees to feed his wife’s daughter (from a previous marriage) for a period of time, he is obligated to provide for her even if the price of food increases. The Taz limits this to ordinary price escalations; however, one would not be required to do so in the event that the price increases by an abnormal amount. He proves this from a separate ruling in the Shulchan Aruch: If one sells a field and accepts liability for anything that may transpire, the seller is only liable for events that could have been anticipated at the time of the sale. However, if something very uncommon occurs, he is not held accountable. Similarly, says the Taz, one is not bound to perform on the agreement if an extraordinary price movement occurs, since it was not anticipated by the original agreement. Of course, this applies only to abnormal price movements. Small or typical price fluctuations would clearly not qualify for this exclusion, and the parties would remain bound to the contract.
Shaar Mishpat disagrees with the comparison the Taz draws between the two cases. He argues that in the case where one sold a field, the default halachah in the absence of any stipulation is that the seller has no liability for future events. If the seller chooses to accept such liability, his liability will obviously be limited to what he actually accepted. Accordingly, an event that was not anticipated at the time of the deal would clearly not be included in his acceptance, and he would not become liable for it. However, where one agrees to provide food for a period of time, the obligation is immediate and unambiguous. While the cost may change, the object of his obligation does not, and therefore he has no basis to avoid performing on the contract. In other words, although accepting liability for future events will not include unexpected circumstances, a clear and immediate obligation remains binding even if the cost or outside factors change.
The Shaar Mishpat brings a proof to this from a case where a person committed to pay a certain sum of money, and subsequently lost his fortune. It is clear that the person would not have accepted the obligation had he known what would happen; nevertheless, his obligations remain. This proves that external changes do not release a party from honoring their commitments.
It would seem that in our case, the supplier’s obligation to perform would depend on the abovementioned dispute. A currency surge of this magnitude for a reserve currency is certainly an abnormal event that would not have been anticipated at the time of the contract. Therefore, according to the Taz, the supplier would not be bound by the contract under these conditions. In contrast, Shaar Mishpat would maintain that the supplier is bound to deliver the goods, and a change in the external price cannot release his clear and unambiguous obligation under the contract.
There is however, another factor to consider. It is standard business practice for international companies to hedge their foreign exchange exposures (unless they make an active decision to try to profit from their exposures). Had the supplier followed normal business practice and hedged the transaction, the entire issue would have been moot. As the loss was caused by the supplier’s violation of business norms, he arguably retains all risk inherent to such actions. The supplier therefore would not be able to use the Taz to repudiate the contract, and would be bound to deliver the watches at the original dollar price. This rationale will have some fascinating ramifications. If at the time of the transaction, hedging instruments were not available, the argument falls away. Thus, deals involving currencies for which there is no developed forex market would be subject to the dispute between the Taz and the Shaar Mishpat, while transactions involving more developed markets would not. In addition, the argument is limited to sophisticated business entities. In contrast, two USA consumers or local businesses who happened to have transacted in francs would be subject to the dispute between the Taz and Shaar Mishpat.
In addition, the abovementioned arguments would certainly not apply to a derivatives dealer that had sold currency futures. The entire basis of such transactions is to transfer risk between the parties; the ability to default on the contract because of unanticipated price changes would undermine the entire rationale for the trade. As such, the Taz would concede that the parties implicitly accept even extreme price movements. Similarly, an insurance company would be liable to cover even highly unusual losses, since that is clearly the intent of the parties involved.
There is another technical aspect to consider. As discussed in the previous article, Halachah generally views currency depreciations as an increase in the price levels, as opposed to a decrease in currency value. In other words, Halachah views the fact that imported goods in Switzerland decreased in price as a change in the price of the goods, as opposed to considering the franc as having increased in value. Accordingly, an argument can be made that currency fluctuations are immaterial as a matter of Halachah and therefore cannot impact the parties’ obligations. (See, however, Beis Efraim, C.M. 4 that seems to reject this argument.
Many poskim reject the position of the Taz. Nevertheless, since it is a dispute amongst the poskim, a beis din may decline to compel someone to perform under contract terms when an extreme event occurs.
This discussion illustrates some of the challenges in applying Halachah to modern-day scenarios. As such, the purpose of this article is to create awareness of the halachic issues and to stimulate discussion. It is not intended to be used for a psak halachah, and one should consult a competent halachic authority for all such matters.
 Aruch Hashulchan 204.
 It should be noted that a long-term agreement to supply goods may have problems of lo ba l’olam; however, these issues are beyond the scope of this article.
 E.H. 114:1.
 Ibid., 2.