Despite repeated assurances by Europe’s political leaders to the contrary, there is a growing fear that the euro cannot be sustained in its current form. The potential political, economic, and logistical turmoil has been the subject of much discussion in recent days. However, the possible legal implications remain largely unexplored.
This edition of Final Judgment considers what might happen to English law contracts which provide for payment in euros, should the euro undergo substantial reform or even cease to exist.
What could happen?
In broad terms there appear to be three potential scenarios if the status quo cannot be sustained:
- a limited number of Eurozone member states could abandon the euro, but the currency could nevertheless continue to be used by the remaining member states;
- the euro could undergo a substantial restructuring, forming a conceptually “new euro” adopted by a limited number of the existing Eurozone member states; or
- the EMU (the European Monetary Union) could breakdown entirely, with each of the Eurozone member states redenominating into national currencies.
This article does not explore the complex mechanisms by which one or more member states might leave the EMU. In fact, there is no explicit right of withdrawal under the various treaties introducing the euro, therefore the route by which a member state could depart on a consensual basis is still subject to negotiation by the affected members of the Eurozone. This article focuses solely on the potential legal consequences assuming the departure of one or more members of the Eurozone.
For the purposes of this commentary, it is assumed that any departing member states will still remain part of the European Union, since a collapse of the EU itself would create a multitude of complex and unprecedented problems beyond the scope of this article.
Scenario one: Limited withdrawal(s) from the euro
Any changes to the composition of the Eurozone would undoubtedly have a significant impact on the value of the euro. This would have a corresponding impact on the commercial worth of any contracts that provide for payment in euros. But could substantial currency movements ever give a party reason to seek to escape their contract?
Under English law, almost certainly not. There is established case law dating back to the 1950s which states that a sudden depreciation (or indeed appreciation) in the value of a currency will not frustrate a contract. Nor do currency fluctuations constitute grounds to claim frustration; after all, it is for a contracting party to manage such risk when negotiating contracts. A party is extremely unlikely to be able to avoid a contract in this scenario.
Moreover, this scenario may impact upon how the English courts interpret certain a payment provisions which are designated in euros. Consider, for example, if the member state to depart the euro was Greece, and the English courts were asked to interpret an English law contract between Greek parties, which required both performance and payment in Greece.
Applying the unique laws applicable to monetary obligations, the English courts may find that the parties had not contracted for payment in euros per se, but were in fact agreeing that payment should be made in the prevailing Greek currency from time to time. The English courts would then interpret the contractual payment obligation in the “new Greek drachma”, applying such exchange rate as would presumably be prescribed under Greek legislation. Considering that the statutory exchange rate may be very different from the market rate, this currency conversion may have a dramatic effect on the relative cost of the payment obligation.
It is therefore conceivable that this scenario could leave parties legally bound by contracts which became commercially untenable as a result of dramatic changes in the value of the euro and/or a redenomination of the payment provision. Such consequences could be mitigated by domestic and European legislation, which is more probable if the departing Eurozone member states withdraw by consent. However, such legislative clarity cannot be assured, especially if matters reach a crisis point and certain Eurozone member states take the unilateral (and almost certainly unlawful) decision to depart the euro forthwith.
Scenario two: Establishment of a “new euro”
Another possibility is a substantial reconfiguration of the European Monetary Union - to exclude, for example, weaker Eurozone states in order to remove risks stemming from their potential or ongoing default. Such restructuring may be so significant that, it could be argued, a fundamentally different “new euro” has been introduced in substitution for the “old euro”.
From a legal perspective, this scenario is unlikely to have a different impact to scenario one. As in scenario one, contracts are not likely to be deemed frustrated by the English courts - and again it is conceivable that a euro payment obligation may be redenominated into the substitute currency of a departing member state. The commercial viability of impacted contracts is rendered even more uncertain since they will be significantly impacted by the specific form of reconfiguration of the EMU and the detail of any enacting legislation.
Scenario three: An end to the euro
The worst case scenario entails a complete collapse of the Economic Monetary Union. In those circumstances, each Eurozone member state would be forced to introduce their own new currencies, and presumably declare through domestic legislation that such currencies were the new legal tender within their jurisdiction. But if the euro ceases to exist at all, how can a party enforce a contractual payment prescribed in euros?
As a matter of English contract law, a contract may be discharged if it provides for a specific method of performance which becomes impossible. For example, in Nicholl v Ashton (1901), a contract was made for goods to be shipped “per steamship Orlando from Alexandria during … January”. The Court of Appeal held that performance in this instance was required only in the stipulated manner, and so the contract was frustrated and unenforceable once this method of shipping became impossible.
Nevertheless, it seems extremely unlikely that the English courts would be prepared to find that all contracts governed by English law, which provide for payment specifically in euros, are suddenly unenforceable. The difficulty facing the courts would be determining the appropriate alternative currency for payment.
In order to save the judiciary from such unprecedented issues, the Council of the European Union would be likely to provide legislation with direct effect across all EU member states. Such a Regulation would need to:
- confirm that the member states’ redenomination out of the euro would not discharge or excuse performance under any euro denominated contracts;
- prescribe effective exchange rates between the outgoing euro and the new currencies of the various member states; and
- provide a clear rule establishing which currency should be applied in substitute for the abandoned euro in any such contracts.
Similar transitional legislation was enacted by the Council of the European Union when the euro was first established (though that legislation did not have to address the third issue above, because the member states were converging towards a single currency rather than disbanding into several). In that instance, individual member states also enacted transitional domestic legislation, which may also be required as part of this outcome.
Whether the legislation comes from Europe or from the national legislature, the English courts would then have binding authority determining how to interpret euro-denominated contracts - but once again there is considerable uncertainty over what impact these developments would have on the value of such contracts.
One significant issue arising in all three scenarios is the limited jurisdiction of the Council of the European Union. Any Regulations by this body will not have legal effect in jurisdictions outside the EU; accordingly, they do not provide an answer where, for example, the contract in question is governed by New York law.
Many organisations are currently considering whether it is appropriate to re-negotiate currency clauses in their contracts. In view of the uncertainties created by the current situation, such precautions are recommended at least in relation to key contracts. A contingency clause may provide welcome clarity, and avoid either party being bound by a commercially unfavourable payment provision in the event of a restructuring/disbanding of the euro.
It is also advisable to ensure that the place for payment of any euro denominated obligations is outside any jurisdiction which is perceived at risk of departing the EMU. This will reduce the risk that the euro payment provision might be redenominated into the substitute currency of a departing member state