The U.S. dollar in Azerbaijani contracts: legal restrictions and practical reality

The U.S. dollar in Azerbaijani contracts: legal restrictions and practical reality

The use of foreign currency in contractual relationships raises an important legal question. Although the Azerbaijani manat is the country’s official monetary unit, contractual obligations are frequently expressed in U.S. dollars, particularly in loan agreements, commercial transactions, and other private-law relations. This practice creates an apparent contradiction: if the Constitution of the Republic of Azerbaijan prohibits the use of currencies other than the manat within the country’s territory, why do parties continue to denominate contractual obligations in foreign currency? The answer lies in the distinction between using foreign currency as a means of payment and using it as a unit of account to determine the value of a contractual obligation. This distinction was clarified by the Constitutional Court of the Republic of Azerbaijan in its decision of 14 May 2015. The decision provides an essential framework for understanding the legal treatment of foreign currency in Azerbaijani contractual practice.

Article 19, Part III of the Constitution of the Republic of Azerbaijan establishes that the use of monetary units other than the manat as a means of payment within the territory of Azerbaijan is prohibited. The purpose of this provision is to preserve the manat’s status as the national currency and the principal means of payment within the country. In practical terms, payments for goods, services and mandatory public obligations, including taxes and social insurance contributions, fall within the scope of this restriction. Accordingly, foreign currency cannot automatically be treated as an alternative domestic means of payment simply because the parties to a transaction agree to use it. However, the constitutional restriction does not amount to a general prohibition on possessing, transferring, or using foreign currency in every type of private-law relations. Such an interpretation would fail to distinguish between the circulation of foreign currency as property and its use as a means of settling payment obligations. This distinction is particularly important in loan and deposit agreements.

The Constitutional Court’s decision of 14 May 2015 established an important distinction between ordinary payment obligations and obligations arising from loan agreements. In an ordinary sale of goods contract, money functions as a means of payment: the buyer transfers money in exchange for goods. The same principle applies to payments for services, rent and other contractual performances. A loan agreement operates differently. Under Article 739.1 of the Civil Code, the lender transfers ownership of money or other fungible things to the borrower, who undertakes to return the corresponding amount of money or things of the same kind and quality. Article 739.2 further provides that a loan agreement whose subject matter is a sum of money is referred to as a credit agreement. In this context, money constitutes the subject matter of the agreement and is transferred as property, rather than being used merely as a means of payment for goods or services. The Constitutional Court therefore concluded that money transferred under a loan or deposit agreement may be denominated in either the national or a foreign currency. In such circumstances, foreign currency functions as the property to be transferred and subsequently returned. Consequently, the constitutional prohibition on using foreign currency as a means of payment does not, by itself, prohibit foreign-currency loans or deposits. This interpretation is consistent with the Civil Code’s recognition of money as an object of civil relationships and with the legislation governing currency transactions and banking activities.

Articles 439.1 and 439.2 regulate the expression and performance of monetary obligations. However, they must be interpreted based on the distinction between the currency in which an obligation is expressed and the currency in which it must be performed. Article 439.1 establishes the general rule that monetary obligations must be expressed in manat. It also provides that, where one of the parties is a foreign natural or legal person, the parties may determine the monetary obligation in a foreign currency, unless prohibited by law. The Constitutional Court clarified that the requirement to express monetary obligations in manat does not apply to relationships arising from loan agreements where the money itself constitutes the subject matter of the obligation. Article 439.2 addresses the performance of foreign currency monetary obligations within Azerbaijan. Under its general rule, where a foreign currency obligation is payable in Azerbaijan, payment must be made in manat unless the parties have expressly agreed that payment is to be made in the foreign currency. The Court clarified the application of this provision to loan agreements: the principal and interest may be paid in the currency stipulated in the credit agreement. If the agreement does not specify that payment must be made in foreign currency, the borrower is entitled to repay the principal and interest in manat, calculated using the applicable exchange rate at the place of payment. This clarification is essential. The currency used to calculate the amount owed does not necessarily determine the currency in which the obligation must be discharged. For example, an agreement may establish a debt equivalent to USD 10,000. That figure determines the contractual value of the obligation. Whether the borrower must transfer U.S. dollars or may discharge the obligation in manat depends on the applicable legal rules and the terms of the agreement. The mere appearance of a dollar amount in a contract does not, therefore, establish that a prohibited payment has occurred.

If the manat is the national currency and foreign currency is subject to restrictions as a means of payment, why do parties continue to use the U.S. dollar when drafting contracts? The explanation lies in the legal and economic functions of currency denomination. First, parties may use a foreign currency as a unit of account to establish the economic value of an obligation. This allows them to calculate the amount owed by reference to a specified currency, even where the obligation may ultimately be discharged in manat. Second, foreign currency denomination can provide a contractual reference point where the parties wish to allocate or manage exchange-rate risk. The extent to which this mechanism protects either party depends on the applicable legal rules and the specific contractual provisions. Third, the Civil Code expressly contemplates monetary obligations denominated in foreign currency and establishes rules for their performance. In particular, Article 439.2 provides a mechanism for converting a foreign currency obligation into manat when payment is to be made domestically and foreign currency payment has not been agreed upon. The Constitutional Court’s 2015 decision reinforces this distinction by recognizing that foreign currency may constitute the subject matter of a loan and that the principal and interest under a credit agreement may be payable in the currency specified in that agreement. Accordingly, the presence of a U.S. dollar amount in a contract does not, in itself, establish a violation of the Constitution. The relevant legal question is whether the parties are merely using the dollar to determine the value of their obligation or are actually performing a payment in foreign currency in circumstances governed by the constitutional restriction. These situations must be assessed separately.

A further question concerns the legal consequences of including a foreign-currency amount in a contract. The Constitutional Court’s decision of 14 May 2015 did not establish that contracts become invalid merely because their obligations are expressed in U.S. dollars. On the contrary, the Court recognized the legitimacy of foreign-currency-denominated loan obligations within the legal framework it interpreted. The inclusion of a dollar amount and the actual performance of a payment in dollars are legally distinct matters. Therefore, the mere fact that a contract specifies an amount in U.S. dollars cannot, without further analysis, be treated as sufficient grounds for concluding that the contract is invalid. Nevertheless, this does not mean that every foreign currency clause or payment arrangement is automatically lawful. The applicable statutory provisions, the nature of the transaction, the parties involved, the agreed payment method, and any relevant restrictions must all be examined. Similarly, the absence of an express sanction in the particular constitutional provision does not, on its own, establish that a violation carries no legal consequences. The consequences of non-compliance must be determined by examining the relevant legislation as a whole, including any applicable rules governing contractual validity and the performance of obligations. Thus, a legally sound analysis must distinguish between the validity of a contract, the legality of a particular payment method, and the remedies available where an obligation is performed contrary to applicable law.

The Constitutional Court also addressed Article 439.7 of the Civil Code, which concerns changes in the value of a monetary unit or the replacement of one currency with another. The Court clarified that Article 439.7 applies to monetary obligations expressed in manat. Unless the Civil Code or the contract provides otherwise, the relevant exchange rate is determined by reference to the time when the obligation arose. For contractual obligations, the Court interpreted the time when the obligation arose as the date on which the contract was concluded. The period before the payment deadline refers to the performance period established by the contract. This rule must be distinguished from Article 439.2, which governs the conversion of foreign-currency obligations into manat in the circumstances covered by that provision. The distinction matters because exchange-rate movements can substantially affect the economic burden of a contractual obligation. Where an obligation is denominated in foreign currency, the applicable conversion rule and contractual terms may determine which party bears the consequences of fluctuations in the manat’s value. Consequently, parties should not assume that every exchange-rate change automatically entitles a creditor to demand an increased amount or allows a debtor to reduce the amount payable. The outcome depends on the applicable provision and the terms of the agreement.

Overall, Article 19 (III) of Constitution prohibits using foreign currency as a means of payment within the country. However, the Constitutional Court’s decision of 14 May 2015 clarified that foreign currency may be used to denominate contractual obligations. Therefore, specifying an amount in U.S. dollars does not automatically invalidate a contract. The key distinction is between denominating an obligation and using foreign currency as a means of payment.

Bibliography: 

Civil Code of the Republic of Azerbaijan (1999).

Constitutional Court of the Republic of Azerbaijan, Plenary Decision.