The eurozone has been having a difficult time recently and the situation in Cyprus demonstrates just how bad it has become. If you have a customer in the eurozone paying you in euros, you will already be at the mercy of fluctuations to the exchange value of the euro.

But Nick Mallett warns that things could get worse. What will happen, for example, if the country requires a rescue by the European Central Bank – such as with Cyprus. Or, if that country imposes capital controls limiting the amount of cash that can be withdrawn, or exchange controls limiting the freedom to exchange euros for other currencies? In the worst case, your customer’s country might exit the eurozone and revert to its former currency and this currency will be weaker and the remaining euro currency may become stronger without the weaker country.

Where would this leave you? We recommend you analyse your risks now. Would an exit or eurozone break-up be a default under the contract, or would it be a “material adverse change” or a “force majeure” event? Would the contract become illegal to perform or would it be “frustrated” as a matter of law? Would capital or exchange controls be detrimental to your business?

Until quite recently, nobody voiced in public the possibility that a member state might exit the eurozone. There is no provision for it in the legislation. There are now at least six countries said to be at risk out of the 17 member countries – Cyprus, Estonia, Greece, Ireland, Italy, Malta, Portugal and Spain – so the risk is real. The potential consequences for your business, even though outside the eurozone, are significant.

Back in 1997, when the euro was introduced, it was clear that contracts with obligations expressed in the currency of a eurozone country had to be changed so as to take effect in euros. The more sophisticated businesses set about amending contracts. EU member states – including the UK – introduced legislation to sweep up the rest. It is likely that a country exiting the eurozone will introduce its own legislation to deal with the exit, including the redenomination of currency obligations from euro to its own new currency. Maybe the UK will legislate for this too. Rather than wait to see what the legislation will say and take your chances on how this will affect your business, we recommend you take action now.

Key ways to reduce your euro risks

If you haven’t expressly covered euro risks in your contracts, overcoming the problems won’t be straightforward. There are some relatively simple steps you can take to reduce your risks. We recommend you add these terms to new contracts. You might also be wise to renegotiate these into your current contracts:

  1. Where possible, ensure the law and courts governing your contracts aren’t that of an “at risk” eurozone country. In fact, choose a non-eurozone jurisdiction, such as the UK, or New York
  2. Take care that if a contract has payments in euros, that “euro” is defined as the EMU currency so that it can’t be interpreted as the currency of a particular eurozone country.
  3. Place of payment should be outside the eurozone
  4. “Payment business day” definition should be outside the eurozone country, bearing in mind the long “bank holiday” just endured by Cyprus
  5. Include other clauses specifically to cover what will happen in the event of an exit by the customer’s country or a break-up of the eurozone.