Azerbaijan: Constitutional Court Of Azerbaijan Rules On Legality Of Loans Denominated In Foreign Currency

Last Updated: 10 June 2015
Article by James Hogan, Kamal Mammadzada and Ulvia Zeynalova-Bockin

One consequence of this move was that loans granted by local banks to local customers in foreign currency became more expensive, because the Azerbaijani Manat was weakened by 25 percent. This raised a question of whether foreign currency denominated loans between Azerbaijani residents were even constitutional. Article 19, paragraph III of the Azerbaijani Constitution prohibits using any monetary unit as a means for payment on the territory of the Republic of Azerbaijan, other than the Azerbaijani Manat. At the same time, Article 439.1 of the Azerbaijani Civil Code, the cornerstone of commercial law in the country, states that monetary obligations must be denominated in Manats, except where one of the parties to a transaction is a foreign person or entity.

So the first issue presented before the Constitutional Court was whether foreign currency denominated loans were constitutional in light of the prohibition in the Constitution against using any currency other than the Azerbaijani Manat as a means of payment and the first sentence of Article 439.1 of the Azerbaijani Civil Code ("monetary obligations must be denominated in Manats"). Here, the Court essentially ruled that the wording in question does not apply to obligations arising out of loan agreements, because in lending transactions money is used not as a means of payment, but rather as a thing that is borrowed and must be returned.

The second issue was whether the second sentence of Article 439.1 of the Azerbaijani Civil Code ("if one of the parties is a foreign physical person or legal entity, the parties, if it is not prohibited by law, may specify monetary obligations in foreign currency") was unconstitutional. The Court interpreted this provision as providing only the right to indicate the obligation in foreign currency in certain circumstances and not the right to make payment in such currency, which means that it is not unconstitutional, because the Constitution only prohibits using foreign currency as a means of payment.

Because the Court addressed the constitutionality of Article 439.1 of the Civil Code, it necessarily also addressed the constitutionality of Article 439.2, which set forth the mechanism for the repayment of foreign currency denominated loans. Namely, it stated that if a foreign currency denominated obligation must be performed in Azerbaijan, it must be paid in Azerbaijani Manats, except where the payment is agreed to be made in foreign currency. It went on to state that, if the payment is to be made in Azerbaijani Manats, the amount to be paid must be recalculated at the rate effective at the place and time of payment. The Сourt ruled that payments under foreign currency denominated loans (both principal and interest) must be made in the currency agreed by the parties, or where the parties have failed to include such a term into the agreement, the loan may be repaid in Manats at an exchange rate prevailing at the place and time of payment.

A full version of the decision (in Azerbaijani language) can be accessed here.

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