| Contingency plans for financial contracts in the case of a counter party’s country exiting EMU |
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| James Richards outlines the issues that a contracting party should be aware of in the event of its counterparty’s country exiting the European Monetary Union. |
The types of contracts which could rather loosely be described as finance contracts is extensive. At the obvious end of the spectrum these would be, for example, loan agreements, bonds, derivatives, finance leases. At the other end these could be joint ventures, shareholders’ agreements and investment agreements. A direct consequence of an exit from EMU would be a redenomination by the exiting country of existing euro liabilities into the new currency. A redenomination could be done in many different ways. It would probably be coupled with the imposition of exchange controls. | | James Richards |
The commonality between these different types of contracts is that payments are due at certain points in time, either unilaterally or on a multilateral basis. Some of the issues highlighted below apply equally to payment obligations against the provision of goods or the delivery of services, even though they could not be described as finance agreements.
There are too many variables for a blue print to be set out in this article of the potential issues, relevant principles and exceptions if a participating member state (PMS) exited EMU. Issues of EU law, international law, conflict of laws and domestic laws all come into play as of course do the terms of each specific contract. This is further complicated by the manner in which a PMS might exit EMU. Notwithstanding that there are some issues which it would be prudent for a contracting party to a finance agreement to start thinking about, even if only from a risk management point of view for contingency planning.
How to exit
Although the relevant treaties in respect of EMU do not contain express provisions for a PMS to exit the euro, the Treaty on European Union does give a member state the right to leave the European Union. There is a process for a negotiated exit or a two year notice period. An exit from the European Union would, as a matter of course, have to deal with leaving EMU as well. Alternatively, there could be a treaty amendment just dealing with EMU, if the PMS agreed.
There has been talk in the press of expelling Greece, but there is no provision for expulsion. A managed 'consensual' exit would in effect be an expulsion. It would be very much in the interests of the remaining PMSs to deal comprehensively, both economically and legally, with the transition of a PMS exiting EMU and possibly the EU. It would be prescient to establish a protocol of issues and principles to be applied to contracts by the remaining participating member states and the exiting state.
The greater danger (if it is a real possibility) is where the exiting state does so unilaterally and with relatively little notice. In principle a unilateral exit would be contrary to EU law. That would leave the choice of whether to recognise such an exit or not with the remaining PMSs. Unfortunately, as with many things, it is not that simple since as a matter of international law and conflicts of law, other issues, for example only, the power of self determination by sovereign states is relevant.
Consequences of exit
A consequence of non-recognition by the remaining participating member states would be that any re-denomination by the exiting state of existing euro liabilities of that state or entities within it into a local currency would not, under EU law, be recognised. Since non-recognition would only add to the legal problems, is that likely? So where does this leave payment obligations in the contracted currency under finance agreements, the right to terminate such agreements and the ability to enforce the right to payment in euros as the contracted currency, if that right survived the exit.
Many contracting parties will have entered into contracts which are governed by Irish law and also contracts governed by English law.
They will also have submitted in some contracts to the jurisdiction of the Irish courts and in others to the English courts. On such issues Irish law and English law, in terms of basic principles, are similar. The comments below set out some general principles of approach and not any differences of detail between the two systems.
Termination of contracts/Jurisdiction/ Governing Law and Enforcement
Typical finance agreements, let alone other contracts, do not in general contemplate as specific termination events an exit from EMU or the EU. Such an event though may, but unlikely with any certainty, afford the opportunity to terminate under provisions dealing with material adverse change, unlawfulness, frustration and non-payment.
Assuming the exiting state has not withdrawn or purported to withdraw from the EU then there are existing EU regulations which require the national courts of the member states to give effect to certain contractual provisions. If the relevant contract provided that it was governed by English or Irish law and payments were to be made in euro then that would be the currency of payment, even if the euro was no longer the payer's currency of account. A difficulty arises where the legislature of the exiting state passes laws providing that payments cannot be made in euros. Here the exiting state is exercising it's right of monetary sovereignty.
English/Irish courts would be unlikely to intervene by requiring specific performance as the payer from the exiting state is caught in a conflict of laws situation. They are even less likely to intervene if the exiting state has withdrawn from the EU as the redenomination would be legitimate as a question of local law.
The payer could be seriously penalised to its detriment if it breached its own laws and the local courts are unlikely to accept foreign judgements in euros from another jurisdiction.
Though under English/Irish law the English/Irish courts would still have regard to an appropriate exchange rate to determine the quantum of debt and damages as a consequence of payment not being in the contracted euro.
If due to the submission of jurisdiction provisions in a contract such an issue was required to be heard before the local courts of an exiting state then in theory, if they remained in the EU they should adopt the same approach as above, subject to having to balance and give effect to overriding provisions of local law. However if the exiting state also ceased to be part of the EU then such questions within that state would be determined solely as a matter of local law.
An ideal exit
It can only be hoped that an exiting state does so in an orderly way and its redenomination of its liabilities in its new currency is recognised by the remaining PMSs.
Ideally on a treaty basis or with an agreed protocol in place for dealing with the numerous legal and economic issues which will arise including, for example, the legality of supporting exchange and capital controls imposed by the exiting state. |
James Richards is a banking and capital markets partner at Dillon Eustace.
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