Australia: Redenomination risk - managing contract obligations in the Eurozone

Last Updated: 18 August 2012

1. What is the lex monetae1 principle?

Lex monetae is a legal principle recognised by most developed jurisdictions to the effect that the currency of a debt expressed in a foreign currency is determined by the law of the country in whose currency the obligation is expressed. Where it applies, this principle applies irrespective of the law governing the contract in question. In practice this means that if a German borrower takes out a US dollar loan facility which is governed by English law, only US law can determine what a "US dollar" is for the purpose of payment obligations by the German borrower under such loan facility.

2. What is the problem with applying the lex monetae principle to euro denominated contracts?

As a matter of EC law, the euro is the legal currency of the participating member states of the Eurozone and replaced their national currency upon joining the Eurozone. The problem is that if a member state exits the Eurozone and adopts a new currency, the euro will continue to exist as a currency leaving two possible outcomes for euro denominated contracts connected with that departing member state: either payment obligations continue to be payable in euro (the lex monetae of the remaining Eurozone member states); or payment obligations are redenominated into a new currency (the lex monetae of the departing member state). A number of factors may determine which of the two currencies applies.

3. What factors may be taken into account under the lex monetae principle to determine whether payment obligations are in euros or in the new currency of a departing member state?

Intention of the parties

The intention of the parties as to nominated currency may be a factor taken into consideration by the relevant Court with jurisdiction. Until recent concerns over the Eurozone, it is highly unlikely that parties gave any thought to the possibility of euro denominated contracts being redenominated and so this is unlikely to be a relevant factor in most cases. The intention of the parties may be a more relevant factor in relation to new transactions to the extent that parties are looking to draft in protections to make a choice of currency explicit.

Debtor is a sovereign entity

There is a rebuttable presumption that a government contracts in its own currency so for example a bond issued by the government of a departing member state would be presumed to be payable in that state's redenominated currency. This presumption may well be easier to rebut in say an international Eurobond issue than a purely domestic bond issuance to domestic investors.

Place of payment/performance

There is rebuttable presumption that the parties intend the place of payment to be the lex monetae of the contract so if a contract states that the place of payment is in a departing member state, that contract is presumed to be payable in the redenominated currency of the departing member state.

4. Why might the definition of currency be relevant to determining the currency of payment obligations?

The definition of euro in the contract may be relevant depending on whether the definition refers to the euro as the lawful currency of the Eurozone and not the lawful currency of a member state. If the currency definition refers to the lawful currency of a member state from time to time, there is more risk of a departing member state unilaterally changing any euro currency obligations to a redenominated local currency.

5. Why might governing law be relevant to determining the currency of payment obligations?

If the governing law of a contract is that of the departing member state it is more likely to be at risk of being redenominated into the currency of the departing member state. This is either because the departing member state also has jurisdiction to hear any disputes2 and therefore applies its own laws (including redenomination laws); and even if the courts of a non departing member state hear the dispute, that court may be bound to recognises the choice of law of the parties and, with it, that departing state's redenomination legislation.

6. Why might jurisdiction be relevant to determining the currency payment obligations?

If there are two different courts which have to decide the issue, they may reach different (and contradictory) conclusions - in which case, it then becomes a practical question as to which one is likely to be most effective in the circumstances.

A court of an exiting member state is almost certain to decide that in relation to a disputed contract, a euro obligation is payable in its new national currency. This is because the member state's legislation will say so.

In the absence of a sufficient connection or nexus with the departing member state (such as a place of payment or governing law clause) an external court may decide otherwise. An English court in the absence of a sufficient connection with the departing member state is more likely to decide that the obligation is to continue to pay euro. This is because an obligation to pay euro will continue to be an obligation to pay euro unless the euro has ceased to exist or it is reasonably clear from the documentation that the reference to euro was really intended to mean the currency of the affected member state from time to time.


1The law of the place of the currency

2Note that it is common to match the governing law of the contract clause with the courts of the state whose laws are being chosen for reasons of convenience and certainty.

View Eurozone risk matrix

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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