This will be of interest to our energy industry clients if you are a party to a contract with a company in the Eurozone, where payments under the contract are to be made in euro.

The Euro, the Eurozone, and the current crisis

Euro and Eurozone

The euro (€) is a “single currency” created as part of the economic and monetary policy of the European Union.

The EU presently comprises 27 countries. The Eurozone (officially called the “euro area”) is an economic and monetary union of 17 of those EU member States that have each adopted the euro as their common currency and sole legal tender. The eurozone currently comprises: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The eurosystem comprises the European Central Bank (the “ECB”) and the Eurozone States’ national central banks. The ECB has the exclusive right to authorise the issue of euro banknotes within the EU.

The crisis

Break-up of currency unions is not new, but a Eurozone break-up would be far more complex, if only because of the number of Eurozone States it would affect and the number of possible permutations a break-up could take: a single State or group of States could leave; the euro could disappear completely or re-emerge with a new name; the Eurozone could break-up into different blocks; or to protect their economies as the recession deepens, non-Eurozone States could join or unilaterally adopt the euro or peg, or link, their domestic currency to the euro.

As we write, most commentators are of the view that the more likely outcome is that one or more States will withdraw from the Eurozone, abandon the euro and create a new domestic currency. This is what we will assume for this discussion.

How would a Eurozone State leave the Eurozone?

The EU treaties contain no right of expulsion. There is a mechanism for withdrawal from the EU as a whole (not the Eurozone alone) with the approval of the European Council (by a qualified majority), or two years after a request if no approval is given. The EU treaties could be amended to provide for withdrawal or expulsion rights or a negotiated exit. None of these offer a quick exit route and time could be of the essence.

Unilateral withdrawal from the Eurozone in contravention of the provisions of the treaties is possible, although this would be a breach of obligations owed to the remaining Eurozone States and technically would give rise to the possibility that these States or EU institutions could take proceedings before the European Court of Justice.

If a State withdraws, what will it likely do with regard to its new currency and the protection of it?

The State would pass a monetary law to create its new currency. That law would prescribe substitution rates at which obligations denominated in the euro would be converted into the new currency (“exit rate”) e.g., one conversion rate for foreign trade sales and another for foreign direct investment. The law would also prescribe which obligations the law applies to e.g., to debtors resident in the withdrawing State, or to obligations where the place of payment is in the withdrawing State, or that the substitution rates only apply to wholly domestic transactions.

Despite the exit rate, history tells us that the new currency will likely devalue against the euro. There will be a rush to get euros out of the withdrawing country to avoid conversion into the new devalued currency. To protect its new currency the withdrawing State would certainly introduce currency controls. If, following withdrawal, the State remained in the EU, it would in principle be prohibited from introducing capital controls or a moratorium on the movement of capital or payments, although there are exceptions (based on grounds of public policy or public security). Alternatively, the State would seek a Treaty amendment or it could be part of the exit arrangements made with the remaining EU Member States.

Of course, if the new domestic currency is worth, say, 50 percent or 60 percent of the euro, its goods and services for export will become cheap and competitive in the international market place. Other countries may well impose tariffs on these imports.

Key legal issues

There are two key legal questions in relation to contracts under which the currency of payment is the euro:

  • Will the monetary obligations arising under the contract remain to be performed in the euro or must they now be performed in the new domestic currency?
  • Will this affect the validity of the contract itself?

The analysis below assumes the contract is governed by English law.

What is the currency of the contract?

While generally issues of contractual interpretation and performance are determined by the governing law of the contract, monetary obligations are different - where a contract refers to a particular national currency there is an implicit choice of the law of that country, lex monetae (the “law of money”), to determine the identification of that currency. This is the legal principle of “nominalism.”

Unfortunately this principle does not help when the euro continues to exist as a currency. The lex monetae of the eurozone member States will identify the euro as the currency of obligation, whilst the lex monetae of the withdrawing State will point to the new currency. So, which prevails?

Interpreting the contract

The currency in which a debt is expressed (the “currency of account”) will be ascertained by construing the contract in accordance with its governing law. Did the parties intend to contract by reference to the lex monetae of the withdrawing State or by reference to the lex monetae of the continuing Eurozone States?

It is highly unlikely that parties to contracts pre-dating the euro crisis addressed their minds to this issue, when no one would have imagined the withdrawing State exiting the Eurozone. Their intention will therefore have to be inferred from the terms of the contract and the surrounding circumstances.

First, one caveat - English cases on lex monetae all concern States that have their own currencies. Arguably, the euro is a different creature and an English court could choose to disregard the case law, distinguish the euro, and decide accordingly that parties who contract for payments in euro intend the law of the Eurozone to continue to govern payment obligations under the contract. However, absent any direct legal precedent, it is safer to assume that an English court would follow what precedent there is.

Where the intentions of the parties with regard to the lex monetae of the contract are to be inferred, the lex monetae is presumed to be provided by the country with the closest connection with the obligation in question. Precedent provides us with some legal presumptions (rebuttable on other evidence of intention to the contrary):  

  • if the contract designates a place of payment, there is a presumption that they intended the currency of that place to be the “money of account”;
  • the status of the debtor - government bodies and public authorities will be presumed to have intended to contract in their own currency;
  • a prior course of dealing in a prior currency; and
  • setting the contract - taking all the circumstances of the contract into account, the State that the parties would have had in mind had they thought about it.

Some practical examples

Here are a few examples of how the law might be applied to commercial contracts (on the basis of these presumptions):

  • Contract for the sale of goods by a company, the seller, carrying on business in the withdrawing State (and manufactured by that company in the withdrawing State) to a US company, the buyer, providing for payment in euro.

If the purchase price for the goods is expressly calculated on a cost plus basis (and the manufacturing and material costs of the buyer will now be incurred in the new currency), then a court may infer, on the basis of “setting the contract,” an intention that the parties intended the lex monetae to be the new local currency. However, if the contract provided for payment to an account outside the withdrawing State, then a court would likely hold that the buyer remains obliged to pay in euros.

  • A ministry of the withdrawing State enters into a production sharing contract with a US company providing for the payment of surface fees in euros.

A court may infer based on the presumptions of “setting the contract” that, being an instrument of state, the Ministry intended to contract in its own currency and, therefore, the euro prices will be converted to the new local currency.

  • Contract for the (on market) sale of shares of a company whose shares are listed on the stock exchange of the withdrawing State.

A court would be likely to infer that because the contract must be settled in the currency which is local to that exchange, the parties may be taken to have selected the lex monetae of the withdrawing State.  

  • Contract for the sale of goods by a company carrying on business in the withdrawing State, to a US company entered into prior to the introduction of the euro and providing for payment in pre-euro local currency, subsequently amended by course of conduct to euro prices.

A court may infer, based on a prior course of conduct, that the parties always intended to apply the lex monetae of the withdrawing State  

  • Contract for the sale of goods by a company carrying on business in the withdrawing State to a subsidiary of a US company carrying on business in the withdrawing State providing for payment in euro.

In these circumstances, it is likely that the contract would, by virtue of the new currency implementing legislation, be redenominated into the new currency.

However, as mentioned earlier, these presumptions can be rebutted by evidence of intention to the contrary. For example, if the contact defines “euro” as “the lawful currency for the time being of” the withdrawing State, then language could be taken as evidence that the parties intended that payment would be in any currency that replaces the euro as the lawful currency of the withdrawing State.

One further important point to mention is that if a State exits the Eurozone unilaterally in contravention of the provisions of the Treaties, this would significantly increase the risk that the withdrawing State’s decision to do so would not be recognised by other EU member states with the consequence (under EU law) that any associated redenomination of existing euro liabilities into local currency would also not be recognised. In this event, an English court would be likely to disregard the new monetary law of the withdrawing State because its application would be manifestly contrary to public policy (and this is taken to include EU public policy) with the result that all relevant obligations would remain outstanding in euro.

Enforcing the obligation to pay in euro

Would an English court order specific performance of a payment obligation in euro?

If the withdrawing State’s new monetary law prohibits payments in euros, then, subject to the point made above, an English court would be reluctant to order specific performance of that obligation because in doing so it would expose the payor to penal sanctions under its domestic law.

However, because English law still governs the contract, the quantum of the debt to paid will be determined by English law and the court would determine the exchange rate to be used when converting the amount of the euro-denominated debt into the new domestic currency.

Could the payee enforce a damages judgment?

If the payor fails to pay, the payee may be presented with problems when, having obtained a euro judgment in an English court, it attempts to enforce it against assets of the payor in the withdrawing State (by taking the judgment to a local court in the withdrawing State).

Even assuming the Brussels Regulation (EC Regulation 44/2001) dealing with the reciprocal enforcement of judgments still applies to the withdrawing State following withdrawal from the Eurozone (and it may not), a local court may be prevented either by legislation or public policy from recognising as valid or enforcing judgments that are not in its new replacement currency.

So, a bank or a party to a commercial contract that may have been given security for its euro payment obligations by way of charges over assets in the payor’s country or a parent company guarantee, may not have valid security.

If the payee has assets elsewhere, then most courts outside the withdrawing State should recognise the euro denominated judgment.

Contracts governed by the law of the withdrawing State

Finally, if a contract is either governed by the law of the withdrawing State or provides that disputes are resolved in its courts, then it is highly likely that those courts would decide that redenomination laws would prevail and that any debt should be satisfied in the new domestic currency (converted at the “exit rate”).

Is the contract still enforceable?

The doctrine of frustration discharges parties from their contract if a supervening event occurs that renders it impossible (physically or commercially) to perform it or transforms the agreed contractual obligations into obligations that are radically different from those agreed.

Five tests must be met (Davis Contractors Ltd v Fareham UDC [1956] AC 696):

  • a change in circumstances relevant to the contract has occurred since the contract was made;

There must be some connection between the withdrawing State and the parties (e.g., one of the parties is incorporated or carries on business in the withdrawing State, or the supplies under the contract are sourced from the withdrawing State, so the Seller’s costs are incurred in euro in that withdrawing State).

  • the change was outside the control of the parties;
  • the contract does not provide for the change;

Many contracts expressly deal with changes in circumstances and suspend performance of the affected obligation until the circumstances cease and performance can be resumed (force majeure clauses), but usually do not contain provisions dealing with a change in the nature or composition of the money of account. Even if the substitution of the currency is a force majeure event under the contract, then it is unlikely to prevent performance of the contract because of the application of the lex monetae principle (see above).

  • the change was not contemplated by the parties when the contract was made; and
  • as a result, performance of the contract in accordance with its terms would be unlawful or impossible, or would otherwise be radically different from that contemplated by the parties when it was made.

Will the performance of the contract in new local currency be ‘radically different’ from the contracted payment in euro? Probably not. The application of the lex monetae means that the contract remains to be performed in accordance with its original terms. Even if the substitution of the new currency turns out to be more expensive, this is not a ground on which the doctrine of frustration can be applied.

It is unlikely that the doctrine of frustration could be relied upon to discharge the parties from their contract.


In future editions of this Newsletter we will examine other contractual provisions that might be affected by the euro crisis and look at provisions that should be considered for inclusion in contracts where payments under the contract are to be made in euro.