The current problems in the eurozone could affect our clients in a variety of ways, both direct and indirect. In many cases, there are no clear answers. And even the questions can be difficult to formulate.
One direct consequence of these problems is prompting quite a bit of discussion. What will happen if a eurozone member state leaves the euro and adopts a new national currency instead? The answer is that we simply don’t know. It may be a truism, but in this case it’s true: much will depend on the particular circumstances of the transaction concerned.
Two questions in particular are being asked:
- How would a member state’s departure from the euro affect my existing transaction?
- What can I do to improve the situation as I plan for my new transaction?
The answer to both questions will depend on what actually happens.
For instance, will one or more member states pull out of the euro, but otherwise leave it intact? Will there be a complete break-up of the euro? Whatever happens, will it be done consensually? And what legislation will be passed to deal with the issue: at the level of the member state(s) pulling out, at the EU level or, indeed, in jurisdictions outside the eurozone (such as the United Kingdom or the United States)?
Right now, we don’t know the answers to any of these questions, and so any advice has to be tentative.
At a more specific level, a further question that is being asked is: will obligations which are expressed to be payable in euro be re-denominated into a new currency? The answer to this question depends on the way in which the break-up occurs and also on the nature of the transaction: the law governing it; which courts have jurisdiction in relation to it; the place of payment; and the place of incorporation of the payer.
And, of course, if there are two different courts which have to decide the issue, they may reach different conclusions - in which case, it then becomes a practical question as to which one is likely to be most effective in the circumstances.
Take an example: a company incorporated in a member state has borrowed money from a bank under a facility denominated in euro. That member state pulls out of the euro and adopts a new currency as its national currency. The euro continues to be the currency of the other member states. Is the borrower obliged to pay euro or its new national currency?
The answer will depend on two things: the way in which it pulled out of the euro; and the terms of the documents.
In practice, it will also depend on which courts hear the case.
A court in the affected member state is almost certain to decide that the obligation is now to pay in its new national currency. This is because the member state’s legislation will say so. An English court would be quite likely to decide that the obligation is to continue to pay euro. This is because an obligation to pay euro will continue to be an obligation to pay euro unless the euro has ceased to exist or it is reasonably clear from the documentation that the reference to euro was really intended to mean the currency of the affected member state from time to time. Where a currency is the currency of just one state (like sterling), a reference to that currency is likely to mean the lawful currency of the state from time to time. But, in the case of the euro, there would be no such presumption, because the euro is the currency of a number of different states and it does not necessarily follow that “euro” means “the lawful currency of the payer from time to time”. This is clearly so if the payer is outside the eurozone, but it is also likely to follow even if it is inside the eurozone.
In the case of new transactions, the extent to which we can draft round these issues will depend on the circumstances.
For instance, if we want the payer to continue to have to pay euro, we could ensure that there is a definition of “euro” which makes that clear; that the governing law is a law other than that of a member of the eurozone; that the jurisdiction clause is in favour of the courts of a jurisdiction other than a member of the eurozone; and that payment is to be made outside the eurozone. They may not be conclusive for all purposes, but they will certainly help.
There is no standard wording which will cure all possible ills. We encourage all our clients to talk to us about what they want to achieve in particular types of transaction, and we can then help them.
If you would like to discuss any of these issues further, please contact Claire Berwick, Oliver Sutter or Elena Tsohou.