Potential problems exist for all business transactions which are in certain European currencies and which continue to operate after 1 January 1999. The issues concern performance of contracts (including payment obligations) and price/interest rate calculations.
On 1 January 1999, the Euro will become the currency of the following EU member states:
CONTINUITY OF CONTRACT
A key issue for businesses is 'continuity of contract' - whether the introduction of the Euro will excuse a party from performance of its contractual obligations where:
- payments under the contract are denominated in one of the 11 European currencies referred to above or the ECU; or
- payments under the contract are calculated by reference to one of those 11 European currencies or the ECU.
'Continuity of contract' concerns have been resolved in respect of:
- contracts governed by the laws of EU member states and certain US states; and
- ISDA Master Agreements where the parties have formally adhered to the ISDA EMU Protocol.
It is, however, a 'live' issue for other contracts, including those governed by Australian law.
CONTRACTS GOVERNED BY AUSTRALIAN LAW
The chief concern under Australian law is that the introduction of the Euro may permit a party to escape liability under an existing contract on the grounds of frustration (on the grounds that performance is impossible or that the original obligation to perform has been converted into something substantially different).
In addition, the introduction of the Euro may constitute a 'force majeure' (act of God) event under the actual terms of the relevant contract.
Apart from these matters, a number of other specific contractual provisions may be affected by the introduction of the Euro (for example, where amounts to be paid under a contract are calculated by reference to a European interest rate such as the French PIBOR).
ISDA MASTER AGREEMENTS
The International Swaps and Derivatives Association (ISDA) has established a protocol for the multi-lateral amendment of ISDA Master Agreements in light of the introduction of the Euro. The Protocol applies to all ISDA Master Agreements, irrespective of their governing law.
This EMU Protocol allows a derivatives user, by formally adhering to the Protocol, to effect the inclusion of ISDA's standard form 'continuity of contract' provisions in all of its ISDA Master Agreements with other Protocol-adhering parties.
The adherence period has, however, recently closed.
CONTRACTS GOVERNED BY THE LAWS OF AN EU MEMBER STATE
EU Council Regulation No. 1103/97 deals with the issue of continuity of contracts in the EU member states. This Regulation came into force on 20 June 1997.
The Regulation provides that the introduction of the Euro will not have the effect of discharging or excusing performance under any 'legal instrument' (which is defined to include contracts).
It applies in all EU member states, without the need for specific legislative adoption, and irrespective of whether a state (such as the United Kingdom) is participating in the changeover to the Euro.
CONTRACTS GOVERNED BY THE LAWS OF CALIFORNIA, ILLINOIS AND NEW YORK
The States of California, Illinois and New York have enacted legislation based on Regulation No. 1103/97 providing for continuity of contracts where the contract currency will be replaced by the Euro.
Similar legislation (as that outlined for California, Illinois and New York) is expected to be enacted in Michigan and Pennsylvania, and also in Hong Kong and Jersey.
In contrast, Canada, Malaysia, South Africa and Switzerland have indicated that they do not intend to enact legislation specifically dealing with the introduction of the Euro.
PROPOSED COURSE OF ACTION
Where payment obligations or pricing sources under a contract will be affected by the introduction of the Euro, the following steps may need to be taken:
(i) the inclusion of a 'continuity of contract' clause (a clause which specifically provides that the introduction of the Euro will not of itself result in the discharge or cancellation of the contract or entitle one of the parties to rescind or terminate the contract);
(ii) the amendment of the force majeure clause;
(iii) review of the specific payment or pricing provisions.
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.
For further information please contact:
Ralph Ayling Direct phone: (+61 2) 9210 4805 E-mail: Click Contact Link Paul Ali Direct phone: (+61 2) 9210 4961 E-mail: Click Contact Link Direct fax: (+61 2) 9210 4691 Minter Ellison 44 Martin Place Sydney NSW 2000 AUSTRALIA Phone: (61 2) 9210 4444 Fax: (61 2) 9235 2711 E-mail: Click Contact Link
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The information contained in this article has been prepared by the Minter Ellison Legal Group.Professional advice should be sought before applying the information to particular circumstances.