Gearing up for the launch of the euro

Patricia Godfrey explains the main legal issues surrounding European monetary union and the planned single currency. Patricia Godfrey is a partner at Nabarro Nathanson.

Although the future of the single currency is by no means decided, the threat of its postponement or derailment has receded following the Amsterdam summit in June.

Current indications are that the UK will not participate in the first wave of monetary union, which starts on 1 January 1999. Even if the UK never joins, the introduction of the euro in participating member states will have wide-ranging consequences for many UK businesses.

In particular, companies which continue to trade in the euro zone and UK corporates with foreign subsidiaries in participating member states will be affected from the very outset. This article considers some of the key legal issues surrounding the introduction of a single currency.

Continuity of contract has been identified as the most important issue. A careful balance needs to be maintained between upholding the principle of non-revocability of contract arising from the introduction of the single currency and the equally important principle of freedom of contract.

The legal framework dealing with the introduction of a single currency is contained in two EU regulations. The first is based on Article 235 of the EU Treaty. It was adopted at the Amsterdam summit on 17 June and came into force on 20 June.

The significance of the 235 regulation is that it binds all member states, irrespective of whether they participate in monetary union. It deals with continuity of contract, the substitution of the euro for the ecu, and certain conversion and rounding rules. The second regulation – 109L (4) – is in draft format and deals with the mechanics of monetary union.

Article 3 of the 235 regulation provides that: “The introduction of the euro shall not have the effect of altering any term of a legal instrument or of discharging or excusing performance under any legal instrument, nor give a party the right unilaterally to alter or terminate a legal instrument. This provision is subject to anything which parties may have agreed.”

In other words, the regulation seeks to ensure that the introduction of the euro will not – subject to contrary agreement – give a party the right unilaterally to terminate or alter any term of a contract, excuse or discharge performance, or have the effect of altering any contractual term.

The provision dealing with continuity of contract is necessary because, under English law, a party to a contract may seek to argue that the introduction of the single currency invokes the doctrine of frustration.

To successfully argue that a contract has been frustrated, a party would need to establish a change in circumstances or an unexpected event which renders the contract either impossible to perform or deprives it of its commercial purpose.

The doctrine of frustration is kept within narrow confines: it is not applied simply on the grounds of inconvenience or increased cost. Equally, it does not apply where there is an express provision in a contract covering the event, or where the risk is foreseeable.

The 235 regulation does not leave the contractual issue entirely free from doubt. In particular, only the introduction of the euro is addressed, not the economic or commercial consequences arising from it.

But does this go far enough? Eminent bodies, including the Financial Law Panel in London and the Zentraler Kreditau-schuss in Germany, have given detailed consideration to this issue.

The latter body has suggested that the regulation should provide that neither the introduction of the euro nor the economic consequences which arise from or in connection with it should enable a party to terminate or vary a contract. The regulation does not address the situation where the economic or commercial effect of the euro is what is alleged to trigger the rights concerned.

The provision is stated to be “subject to anything which parties may have agreed”. The overriding principle of freedom of contract means that the parties remain free to make specific provision for any issues arising from the introduction of the single currency.

Because many force majeure and change-of-circumstance clauses are widely drafted, a party to what has become a bad bargain may argue that the clause affords either an exit route or an opportunity to vary the contractual terms.

Article 2 of the 235 regulation provides that every reference to the ecu in a legal instrument shall be replaced by a reference to the euro at a conversion rate of one ecu to one euro. Potentially difficult issues include:

v the differing nature of the ecu and the euro;

the treatment of private ecu contracts; and

the possibility of the euro being a “harder” currency than the ecu.

Although the 235 regulation clarifies legal issues on contracts governed by the laws of member states and binds all member states irrespective of whether they participate in the first wave of the single currency, or at all, it does not determine the effect of a change in currency on non-member states. In particular, will a foreign state:

recognise the replacement of the national currency or the ecu by the euro? and

uphold the principle of non-revocability so that the introduction of the euro does not trigger a right unilaterally to terminate or vary a contract?

The answer to these questions depends in part on whether the relevant member states subscribe to the lex monetae principle of private international law. This recognises a sovereign state's ability to change its currency.

The effect is that a debt denominated in a currency is treated as an obligation to pay the amount outstanding in whatever currency exists at the time of payment. Although many countries subscribe to this principle, there are a number who do not.

The 109L (4) regulation deals with implementation issues. It will not be adopted until the participating member states (due to be established in mid-1998) become known.

The regulation will bind only participating member states and not those who are either ineligible or choose not to participate. In essence, this regulation deals with:

the substitution of the euro in place of national currencies;

the provisions intended to apply during the transitional period; and

issues concerning euro bank notes and coins.

Naturally, UK businesses need to make preparations for the introduction of a single currency. Companies need to address many issues, including legal, information technology, Treasury, strategic and operational factors.

Even if the UK remains outside the single currency, a UK business operating across a variety of countries should carefully consider the ramifications of a single currency and take whatever preparatory steps are necessary. Although legislation will assist greatly, it may not be a panacea.

Recently there has been a lot of speculation about whether the single currency will be postponed or even abandoned. Some argue that the worst possible scenario would be the introduction and the subsequent failure of the euro.

However, as matters stand, the single currency is still due to start at the beginning of 1999. The message is clear: businesses must gear up for the introduction of a single currency, irrespective of whether the UK opts in or out.