European Monetary Dissolution – The Effect on Contracts with Payments in Euro

1. European Monetary Dissolution – The Effect on Contracts with Payments in Euro Ian Paterson, Partner 10939572_3

2. Introduction • Background • Monetary obligations and currencies • How might the EMU dissolve? • Analysis – what does your contract say? • Express terms of the contract • No contractual definition of euro? • What if there is no euro? • Determination of the “lex monetae” • Supervening doctrines • Illegality • Frustration • Force majeure • Enforcement • Jurisdiction • Recognition of judgments • Other contractual issues • Risk mitigation • Worked examples 10939572_2

3. Background – Monetary obligations and currencies • All monetary obligations need a currency in which they are measured and a currency in which they are payable • If a monetary obligation is denominated (measured and payable) in euro and the euro is no longer constituted as it currently is: • does an obligation denominated in euros continue to exist? • in which currency is the obligation enforceable? • is the obligation able to be enforced effectively? • Legal effect will depend on: • the way in which the eurozone dissolves and what laws are made to deal with it • what your contract says • what the parties are taken to have intended happen • public policy considerations 10939572_2

4. Background – How might the EMU dissolve? • Break-up scenarios: • Case 1: A weak country leaves the euro (e.g. Greece) • Case 2: A strong country leaves the euro (e.g. Germany) • Case 3: A group of strong euro states leave the euro (e.g. northern states) • Case 4: Euro dissolves by treaty (e.g. adopting ECU-2) • Case 5: Euro dissolves in disorder • In all cases, the departure is likely to be accompanied by changes in the domestic laws of the leaving state(s), establishing: • a new currency for obligations of the departing state and its residents, at a new rate of conversion • restrictions or prohibitions on payments in old currency, in its territory, or by its nationals • Departure might be lawful (i.e. negotiated) or unlawful by European Union law • Countries in the EU which have not departed (e.g. UK) may make their own special laws dealing with the situation 10939572_2

5. Analysis – What does your contract say? • There is no general rule that a monetary obligation is discharged because the currency in which it is expressed to be payable is replaced by another currency • There is no general rule that a monetary obligation is discharged because a member state in a monetary union departs that monetary union • BUT you should consider: • Does your contract expressly or impliedly provide for there to be any change in what constitutes performance in these circumstances? • Does your contract require performance which is now illegal by a relevant law? If so, what is the effect of the illegality? • Has the change frustrated the contract? 10939572_2

6. Express terms of the contract • Are there provisions expressly contemplating the event? • If none initially incorporated, will they be introduced, e.g. through industry protocols? • How has the contract defined euro? • “Euro … means the lawful currency of the member states of the European Union that adopt the single currency in accordance with the EC Treaty” (ISDA, 2006 Definitions) • “ ‘EUR’, ‘€’ and ‘euro’ denote the single currency unit of the Participating Member States” • “Participating Member State means any member state of the European Communities that adopts or has adopted the euro as its lawful currency in accordance with legislation of the European Community relating to Economic and Monetary Union.” • “References to … ‘euro’ are to the currency introduced at the third stage of the European economic and monetary union, and as defined in Article 2 of Council Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro (as amended)” 10939572_2

7. Express terms of the contract • An express definition of euro may make it clear that payments are intended to continue in the euro, namely the currency of the remaining euro-zone participants • An express contractual choice should be effective, except to the extent that supervening doctrines of relevant law apply (illegality, frustration) • Questions of construction of the contract are decided by its governing law • Contrast “the currency of a jurisdiction” • What if there is no contractual definition? • What if there is no euro at all (Cases 4 and 5)? • Determination of the “lex monetae” 10939572_2

8. No contractual definition of euro? • Possibilities: • Did the parties intend that payment be made in the currency of the surviving eurozone participants? • If so, the analysis will be the same as for an express choice (i.e. payment is in euro subject to application of supervening doctrines – on which see below) • Did the parties intend that payment be made in the currency for the time being of the departing eurozone participant (i.e. the law of that country was the “lex monetae” of the contract)? • If so, the obligation is liable to be re-denominated into the currency of the departing jurisdiction • For factors relevant to that intention, see below under “Determination of lex monetae” 10939572_2

9. What if there is no euro? • Unless the contract is treated as wholly unlawful or frustrated (see below), then the obligation has to be treated as re-denominated into an obligation of one of the departing member States. • It remains to identify the relevant departing member State • This too takes us to the “lex monetae” – a choice of the “law of the money” based on the parties intention as divined by interpretation and construction • Lex monetae is not the same as the law governing the contract (e.g. a contract can be governed by New South Wales law, but provide for payment in US Dollars: the lex monetae (i.e. the law determining what is a US Dollar) is the law of the United States. 10939572_2

10. Determination of the lex monetae • Factors relevant to the parties intention: • A government will be presumed to contract in its own monetary system • A payment to be made in a jurisdiction is presumed to be intended to be made in the currency determined by the laws of that jurisdiction • A payment on a contract to be settled on an exchange is presumed to be settled in the currency of the jurisdiction where the exchange is located • The choice of law governing the contract • Less important factors • The jurisdiction in which parties reside or are incorporated • The jurisdiction where the contract is made • Intention may not be recognised if contrary to public policy of the forum • Consider illegal withdrawals where the forum is an EU member state 10939572_2

11. Supervening doctrines • Illegality • Frustration • Force majeure (?) 10939572_2

12. Illegality • Doctrine of illegality • A contractual obligation is unenforceable if its performance is or becomes unlawful by: • its governing law • the law of a recognised sovereign state where the contract is required to be performed in that state • Application to eurozone dissolution • Departing state makes payment in the circumstances required by the contract unlawful (e.g. contrary to exchange control) • Contract is governed by the law of the departing state • Place of payment of a particular contract is exclusively in the departing state 10939572_2

13. Frustration • Doctrine of frustration • Performance of a contract is excused where: • change in circumstances outside the control of parties, not contemplated by the parties • the change makes the obligation impossible to perform or of a radically different nature • Its application is rare and it is not applied merely because the parties did not foresee the event occurring or there is a loss of or fluctuation in value • Application to eurozone dissolution • If one state leaves the euro, the obligation is not radically different • If euro dissolves, may appear to be impossible to pay in euro but … • the meaning of euro remains defined by lex monetae • euro obligations will be converted in accordance with lex monetae • Unlikely to be triggered except where there is a close connection with the departing jurisdiction and the terms of the departure render performance impossible or radically different 10939572_2

14. Force majeure • Doctrine of “force majeure” • not a separate doctrine of common law • force majeure clauses may be included by express terms of the contract • Force majeure clause • contract may excuse the performance of obligations in certain situations • effect of clause will depend on the particular wording of the clause • break up of euro is unlikely to fall within most force majeure clauses, except where there is a close and necessary connection with the departing state and laws of that departing state prevent or prohibit performance 10939572_2

15. Enforcement – Jurisdiction • Jurisdiction: in which courts may proceedings be brought to enforce? • May be provided under the contract (exclusive or non-exclusive) • May be founded by process in accordance with rules of service of the relevant court • A court which recognises the continued validity of an obligation in euro is likely to award a judgment in euro • A court which will enforce the obligation only on the basis it has been re-denominated into the new currency is likely to give a judgment only in that currency • Mandatory local law is binding on courts of the forum • If a departing State passes laws effecting re-denomination, the courts of the departing state are likely to be bound by that law to give effect to the re-denomination 10939572_2

16. Enforcement – Recognition of judgments • Will a judgment be recognised and enforced without re-trial on the merits? • Ajudgment of a foreign court (e.g. for payment in euro) in a departing eurozone state: • this is likely to depend on the laws of the departing state (note that the EU Judgments Regulation providing for recognition of judgments of EU member states applies among all the member states, whether or not in the eurozone, but a mandatory rule of the departing state might seek to override that) • A judgment of a court in the departing state (e.g. for re-denomination) • enforcement in a EU member state is problematical: how would the court reconcile EU recognition of judgment legislation with a departure and related capital rules which are in breach of EU treaties? • enforcement outside the EU (e.g. in Australia) would be a matter for ordinary principles 10939572_2

17. Other contractual issues • Events of Default • Consider obligations in the light of analysis of contract and whether there has been a breach • Material Adverse Effect Clauses • Margining • Eurozone dissolution will bring volatility and may test valuation mechanisms • Delivery Obligations (e.g. to deliver euro denominated bonds) • Reference Prices and Indices in euro • Currency Indemnification Clauses 10939572_2

18. Risk mitigation • Know your contract • In new contracts, carefully choose governing law, jurisdiction and place of performance, avoiding those of countries liable to depart the eurozone (unless you think that would be to your advantage!) • Clearly define euro in accordance with your intentions and hoped for result if the eurozone dissolves • Provide alternative places of payments to increase likelihood that payment may lawfully be made • Consider termination rights and force majeure clauses • Consider specific provisions relating to the eurozone dissolution (in particular any industry protocols) 10939572_2

19. Worked examples – German counterparty (Part 1) 10939572_2

20. Worked examples – German counterparty (Part 2) 10939572_2

21. Worked examples – Greek counterparty 10939572_2

22. Worked examples – Non-eurozone counterparty 10939572_2