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# Construction Law/exchange rate on price escalation

Question
QUESTION: Dear Sir,

We have contract in Sri Lanka where payments are made in USD. Applicable index currencies are SLR (Sri Lankan Rupees) and INR ( Indian Rupees). Contract provides for Escalation as per FIDIC.

While there is an appreciation in index, there is depreciation of Indian Rupees against USD.

Kindly clarify whether Escalation to be calculated
1. Current Month work Executed (USD 1000) X (Current index(1.0) on the current exchange rate(0.3) divided by base index(0.8) on base exchange rate(0.4)=1000 + 1000 X (0.3 - 0.32)= 1000 - 20 = 980
or
2. Current index(say 1.0) minus base index(0.8) = Derived value(0.2) X (Current exch rate 0.3 minus base exchange rate 0.4)

= 0.2 - multiplied by (0.2 multiplied by minus 0.1)
0.2- 0.02 = 0.18
= 1000 + 1000 X 0.18 = 1000 +180 = 1180.

In other words, Kindly clarify whether our present contract value is protected even if there is depreciation in index currency against the Contracted Currency.

Thanks and Regards,

S. IYAPPAN

When Fidic contracts  are signed with the clause 13.8 effective, then the indices are set at the time of tender and such indices might or might not include the currency index. if such currency index is set as inactive then the contract price will not be calculated with any consideration to such index and visa versa

---------- FOLLOW-UP ----------

QUESTION: Dear Sir,

Thank you very much for your valuable input.

While clause 13.8 is effective, Particular conditions of contract specify all conditions as per clause 13.8 except exchange rate clause. As per your advice, since exchange rate clause is mute in particular conditions of contract, escalation clause will be applied only cost of index only without currency index ?

Thanks and Regards,

S. IYAPPAN

Dear S. Iyappan

The contract price should be established and calculated on the basis of local or any other foreign currency. The FIDIC 1999 is clear about the transfer form one currency to the other : (   each index shall be converted into the relevant currency of payment at the selling rate, established by the central bank of the Country, of this relevant currency on the above date for which the index is required to be applicable. )
I hope this clarifies the matter

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