Greece’s participation in the Euro has been fragile for at least 5 years now. But – for better or worse – it now looks as though matters are coming to a decisive head. The Greek government has taken a dramatic decision to impose capital controls, and has now become the first developed nation to default on its obligations, following a failure to repay €1.6bn owed to the IMF on 30 June. Everyone is now braced for a decisive referendum which will effectively determine whether Greece has any real prospect of remaining part of the Euro.
As stock markets react across Europe, what are the implications for commercial parties if Greece defaults on its obligations and ultimately leaves the Euro? And what can you do to minimise the risk for you and your business?
Indirect impact of Grexit
Any changes to the composition of the Eurozone would undoubtedly have a significant impact on the value of the Euro, and will in turn affect the commercial value of contracts providing for payment in Euros. But escape is not an option - established case law dating back to the 1950s makes it clear that currency fluctuations do not provide any right to avoid obligations on the grounds of frustration.
It is for this reason that all prudent banks and multinationals already undertake regular sweeps to reduce their avoidable holdings in volatile currencies – including, at this time, the Euro. In much the same way as individuals in Greece have been attempting to withdraw their money from Greek banks (deposits are now at an 11 year low), so banks and multinationals are minimising cash holdings in the Greek banking system. Businesses have also been hedging their future payment obligations through a range of financial instruments. Some complex challenges may arise in relation to longdated forward financial contracts (swaps, options, etc) but broadly speaking, amidst the turbulence that may be to come, such efforts may go some way to mitigate the indirect consequences of a Greek departure. There is much less that can be done to protect against the direct implications of such an event, which are truly without precedent.
Direct impact of Grexit: understanding Lex Monetae
To understand what might happen where one or more parties to a contract are Greek, or the contract in some other way is closely connected with Greece, one needs to appreciate the concept of lex monetae. This is the internationally recognised legal concept that all sovereign states retain the right to determine their national currency. It means that should a state change currencies, commercial parties are still bound by their contractual payment obligations, but redenominated to the new currency at a specified rate.
This concept has had historical relevance in situations where, for example, a state has been forced to redenominate to address a period of dramatic inflation or hyperinflation. But it is more problematic in the context of the European project. Economic monetary union compelled all Member States joining the Euro to transfer monetary sovereignty to the European Union “irrevocably”. There is no legal provision for unravelling that commitment should a Member State’s involvement become untenable. The way out is likely to be determined more by political motivations than it is by legal mechanisms.
We explored some of the possible options available to a country in Greece’s position in this previous article Disaster recovery: what happens to your contracts if the euro fails? However, assuming that the chosen route is a complete departure from the Euro, Greece will in effect be unilaterally reclaiming/reasserting monetary sovereignty. In accordance with lex monetae principles, the Greek government and courts would conclude that Greek businesses’ payment obligations were thereby converted to the replacement currency (eg a “new Greek drachma”) at the chosen statutory rate.
For transactions solely between domestic parties this may be tenable, but it could create chaos if asserted extraterritorially. The statutory exchange rate may be very different from the market rate, creating a huge disparity in the relative cost of the payment obligation, and leaving parties legally bound by contracts which became commercially untenable.
Mitigating the direct impact: the importance of a well-chosen jurisdiction and governing law
As the Greek situation has become vulnerable over the past few years, many organisations have looked at renegotiating their currency clauses away from Euros, or at least incorporating some form of contingency clause to provide clarity on their expectations for how their payment obligations should be met in the event of a dramatic restructuring/disbanding of the euro. This may well provide some protection, but given that there is no real precedent for what may come, there is probably more security in making every effort to secure “home advantage” by having the dispute heard by a favourable jurisdiction.
In the scenario above, it is anticipated that the Greek courts would redenominate payment obligations into a new Greek currency. That is, of course, only possible if they have jurisdiction over the contract in question in the first place. If the parties have chosen to give jurisdiction to the courts of another Member State, a different approach may be taken; depending upon the facts of the case, they may well consider that the payment obligation remains in Euros, or even to another currency entirely.
A close review of the jurisdiction and choice of law clauses employed in key and vulnerable contracts is critically important. If that contract does form the subject of a dispute, be aware that party autonomy is not always determinative, and may be overridden if, for example, the Defendant party enters an appearance before another Member State court, pursuant to Article 26 of the Recast Brussels Regulation 1215/2012.
These are uncertain and volatile times. Commercial dealings with Greek parties are likely to become fraught in the weeks and months to come. If you have not already done so, carefully review your commercial obligations and receipts, both in terms of the currency but also the applicable law and jurisdiction. If those contracts become problematic, it is important to act fast and take all precautions to ensure that a favourable court has jurisdiction wherever possible.