Canada: Foreign Exchange Issues In Damage Quantification: Part II – Applying The Concepts

In the previous post, we presented a basic framework for analyzing the impact of foreign exchange fluctuations on quantifying financial remedies. We argued that the treatment of foreign exchange should be consistent with the principal underlying the financial remedy being awarded; we referred to this as a "matching principle".

In this post, we extend that basic logic to consider other scenarios.

What if we are not sure how to match?

Consider Mr. Canuck, an executive working for a Canadian subsidiary of a US-based public company is wrongfully terminated. As a result, the stock options to which he would have been entitled as of July 2009 did not vest. He sues for wrongful dismissal, and is successful. His damages are assessed as the difference between the exercise price ($1 USD per share) of the options and the market value of the stock on July 2009 ($10 USD per share). The trial occurs in 2011, and an award for damages is granted shortly thereafter.

Arguably, the appropriate exchange rate will depend on particular findings of fact:

  • Assume that the court determines damages based on the profit that could have been earned by exercising the options on the date they vested, and immediately selling the shares thus acquired and converting the proceeds into Canadian dollars (to buy a new sportscar). Under this set of assumptions, the relevant exchange rate is the rate in effect on the vesting date, since that is the date Mr. Canuck would have converted his $USD-denominated assets into $CDN. Converting his award based on the current exchange rate will not provide Mr. Canuck with sufficient funds to buy his sportscar!1
  • Conversely, supposing that Mr. Canuck held a large $USD-denominated stock portfolio at the time he would have exercised his options. In that case, it may be more appropriate to assume that he would have simply rolled his company stock into another US investment, which he would have continued to hold. If so, then his damages award should be based on the exchange rate in effect at the award date; Mr. Canuck can take his award, convert it into USD and purchase the same portfolio of stock that he would have purchased following the exercise of his options.

Future Losses

Let us now turn to the example of a personal injury claimant, Ms. Nascar. She is a US resident, and is injured in a motor vehicle accident in Canada, and will never be able to work again. What sort of foreign exchange rate should be applied to her prospective losses?

But for her injuries, Ms. Nascar would have continued to work in the US, earning USD. Her lump sum damages award will be calculated in USD; she will then need to be given a CDN amount such that she will be able to use it to purchase a USD stream of income (e.g. a portfolio of US government bonds) sufficient to replace her lost income. This will be accomplished by looking to the current exchange rate on the award date.

(Some may argue that if the exchange rate on the award date is unusually high or low, it may be fairer to apply some sort of long term forecast exchange rate. I would argue that generally speaking, actual exchange rates are the best reflection of anticipated future rates; to the extent that they are not, the defendant can always enter into a hedging arrangement.

Suppose the liability insurer of the defendant feels that the exchange rate of $1 USD = $1.25 CDN is abnormally high, and that a "fairer" exchange rate to use would be $1 USD = $1.10 CDN. The insurance company could simply borrow USD now, exchange the USD for CDN at the "favourable" exchange rate, and then pay back the USD when the exchange rate "normalizes" to $1 USD = $1.10 CD.)

Damages and Profits

Consider the case of Maple Leaf Technologies Inc. ("MLT"), a Canadian firm who infringes a patent by manufacturing goods in Canada and selling them in the United States. Most of the MLT's operations are in Canada.

Under Canadian law, the patent owner – a US based firm, Stripes and Stars Inc. ("SSI") – may sue for either damages on its lost sales, or an accounting of the defendant's profits from the infringing sales. I would argue that the appropriate exchange rate to use may depend on the type of financial remedy that is being pursued.

In an award for damages, the goal is to return the plaintiff to the position it would have been in had the wrongdoing not occurred. The analysis centres on the plaintiff. In the case of the SSI, whose patent was infringed, arguably the treatment of the damages award should depend on what it would have done with its USD sales. Since SSI's operations are all US-based, the damages award needs to be such that SSI can take the award (based on the exchange rate in effect on theaward date) and convert it into USD.2

The analysis in an accounting of profits case is different. The focus is on the profit taken by the infringer, which in this case is a Canadian company, MLT. MLT is in the practice of converting the proceeds of its USD sales into CDN, since virtually all of its operations are carried out in the Canada. In order to eliminate the benefit received by MLT from its wrongful sales, it would be more appropriate to quantify the profits to be disgorged based on the actual historic rate at which Maple Leaf Technologies had converted its USD sales into CDN, and not on the rate in effect on the award date.

If this analysis is correct, then fluctuations in foreign exchange rates may be a relevant factor for SSI in deciding which remedy to pursue. Assuming that SSI's lost profits and MLT's incremental profits from the infringing sales are very similar (i.e. that any sales MLT made would have been made by SSI, and the two companies have similar cost structures), and the value of the Canadian dollar has depreciated relative to USD by 20%, then SSI will be better off electing damages.


Finally, consider a Canadian firm, Stick and Puck Ltd. ("SPL"), which was unable to make sales to the US as a result of its contractor's negligence. SPL does a steady volume of business in the US, and in order to reduce its exposure to fluctuations in foreign exchange rates, it typically enters into forward contracts to sell USD and purchase CDN. How does one treat the hedging arrangements that Stick and Puck had entered into? Do they matter?

There are many types of such arrangements, but two common ones which we will consider here are:

  • Forward contracts: These contacts obligate the Canadian firm to exchange a certain amount of USD at a certain date at a certain price.
  • Option contracts: These contracts give the Canadian firm the right (but not the obligation) to exchange a certain amount of USD at a certain date at a certain price.

Let us suppose that SPL lost $1M (USD) in sales as a result of the incident. At the time, the spot exchange rate was $1USD = $1.2CDN, but SPL had entered into a forward contract a number of months prior to that, according to which it agreed to trade $1M USD to its counterparty in exchange for $1.15M CDN.

At first glance, one might think that the relevant exchange rate to apply would be the forward contract rate of $1USD = $1.15CDN, on the grounds that, but for the incident, SPL would have taken its $1M (USD) and exchanged it for $1.15M CDN.

This is not correct, however. A forward contract has an intrinsic value of its own, regardless of whether it is being used to hedge against exchange rate risk or for purely speculative purposes. A contract that requires me to sell $1M (USD) for $1.15M (CDN) when the spot exchange rate is in fact 1 (USD):1.2 (CDN) has a value of negative $0.05M to me, and that needs to be considered. In reality, one should really think of there as being two separate transactions that would have occurred:

  1. Receive sales proceeds of $1M (USD), convert to $1.2M (CDN) at spot rate
  2. Take $1.2M (CDN), convert it to $1M (USD), and give the $1M (USD) to the counterparty in exchange for $1.15M (CDN).

Had SPL been able to complete both transactions, its net result would have been to have $1.15M (CDN) in its pocket. However, because it was not able to make the sale for $1M (USD) (Transaction #1), it is left with a loss of $0.05M as a result of the forward contract (Transaction #2). Combining the sales proceeds of $1.15M (CDN) that SPL would have had with the negative $0.05M that they now are stuck with, the aggregate loss is $1.2M.

In short, even if a company enters into forward contracts, the relevant exchange rate will be the spot rate at the time the lost sales would have occurred, not the forward contract rate.

What if SPL had the right, but not the obligation, to sell $1M (USD) in exchange for $1.15M (CDN)? In our example, such an option would have a negative intrinsic value (since the spot rate is $1USD=$1.2CDN); SPL would not have exercised the option, but would have simply exchanged its $1M (USD) received from the sale of its goods based on the spot rate. Again, it is the spot rate that is relevant, not the contracted rate.


Foreign exchange rates can add complexity to financial loss calculations. My central argument in this post has been that the choice of exchange rate should never be a mechanical exercise; rather, it should be a function of how best to achieve the underlying goal of the financial remedy in question. Carrying this line of thinking through to its logical conclusion can yield interesting results.


1. This was essentially the approach adopted by the trial judge in Bailey v. Cintas Corporation, 2008 CanLII 12704 (ON SC),

2. This was the approach adopted by the trial judge in Alliedsignal Inc. v. du Pont Canada Inc., 1998 CanLII 7464 (FC),; upheld on appeal (Alliedsignal Inc. v. Dupont Canada Inc., 1999 CanLII 7409 (FCA),

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions