UK: The Eurozone and Commodity Contracts 1

Introduction

The possibility of one or more countries exiting the European Monetary Union (the "Eurozone") has been well publicised. It is becoming increasingly important for businesses to understand the implications of different scenarios for the future of the euro.

This is the first of two alerts that consider the legal risks for commodity and energy traders, arising from either a Eurozone Exit (i.e. where one Eurozone Member exits the Eurozone) or a Eurozone Break-up (i.e. the disappearance of the euro altogether).

This alert focuses on the risk of redenomination of euro payment obligations into a new national currency. The next alert will look at whether a Eurozone Exit or Eurozone Break-up will cause the "frustration" of contracts or trigger "force majeure" or "material adverse change" provisions.

Of course, it is imperative that other, more commercial risks are also assessed at this critical time in order to carry out fully effective "euro contingency planning", e.g. credit risk on counterparties affected by Eurozone events. In addition, it is important for traders to be prepared for the situation to be affected by events at the time. For example, the redenomination of a particular contract may be affected by how a Eurozone Exit takes place, e.g. whether an exit from the Eurozone by a Eurozone Member is accompanied by an exit from the EU itself.

Eurozone Exit

Redenomination

While most commodities are traded in U.S. Dollars, there are important markets where trading is in euros, including many European power and gas markets and the market for EU emissions allowances.

In the event of a Eurozone Exit, the exiting state may introduce a new national currency and redenominate debts owed in euros by its nationals or payable within its borders into that new national currency. Any euro payment obligations owed under a contract with an entity connected to the exiting state may therefore be subject to conversion into the new national currency. Various factors will affect how serious the risk of redenomination is. We consider a number of those factors in turn.

(a) The law chosen to govern the contract — The law which the parties have chosen to govern a given commercial contract and the jurisdiction in which the parties have agreed that disputes are to be heard will affect the risk of payment obligations being redenominated.

Where the governing law and jurisdiction of a particular contract is that of an exiting state, and the euro payment obligations fall within the scope of the exiting state's redenomination legislation, payment obligations under that contract will be redenominated into the new national currency, which is likely to be of depreciating value. This is also likely to be the case where a dispute is brought before a court of the exiting state, but the governing law of the contract is that of a non-exiting state, as the court is likely to apply its own redenomination legislation.

Similarly, where the governing law of a contract is the exiting state, but a dispute arising out of that contract is heard in the jurisdiction of a non-exiting state, the courts of the non-exiting state are likely to redenominate payment obligations into the new national currency, unless a court considers that public policy factors should prevent this.

Likewise, an arbitral tribunal resolving a dispute governed by the law of an exiting state would apply the redenomination law of the exiting state. However, English courts have held that, where appropriate, an English arbitral tribunal may refuse to enforce a foreign law provision (for example, on the basis of illegality), but an arbitral tribunal sitting in England is arguably less likely than an English court to refuse to enforce a foreign law provision on public policy grounds.

(b) Jurisdiction and seat of arbitration — Even where the contract provides for the exclusive jurisdiction of the English courts (or the courts of a state other than the exiting state), there is always a risk that the exiting state may assume jurisdiction. Where proceedings are initiated in the courts of the exiting state, the English courts will have to wait until the exiting state has declined jurisdiction. If the courts of the exiting state assumed jurisdiction, the redenomination legislation would likely to be applied and, importantly pursuant to the Brussels I Regulation, English courts are obliged to recognise a judgment of the courts of the exiting state unless it is manifestly contrary to English public policy.

Similar risks arise in relation to a contract that includes an arbitration clause. The New York Convention 1958 provides that when a court of a contracting state is seized in relation to a matter which the parties have agreed to arbitrate, the court must, at the request of one of the parties, refer them to arbitration unless it finds that the arbitration agreement is null and void, inoperative, or incapable of being performed. Under English law, the Arbitration Act 1996 gives effect to the New York Convention.

There may therefore be tactical benefits for a party to commence court or arbitration proceedings as soon as possible so as to avoid being pre-empted by proceedings being commenced by its counterparty in the exiting state.

(c) Intention as to which currency is to apply — Where a contract is governed by English law and a claim comes before the English courts or an arbitral tribunal, a key question will be whether the contractual intention is for the currency of payment to be (i) the single European currency, or (ii) the currency of the exiting state from time to time. The courts will look at the following factors to determine this.

  • Definition of "euro" - Where "euro" has been defined by reference to the single European currency, the risk of redenomination is lower, as an English court or arbitral tribunal is likely to conclude (subject to the place of payment – see below) that the single European currency is the intended currency of payment.  If "euro" is defined by reference to the currency of the exiting state, it is clear that the parties intend payment to be made in the currency of the exiting state from time to time and we would expect a court or arbitral tribunal to redenominate euro payment obligations into the new national currency.
  • Place of payment - Under English law, there is a presumption that the parties intend the currency of payment to be the currency from time to time of the country in which payment is required to be made. The presumption may be rebutted where the contract provides for a place of payment outside the exiting state or multiple places of payment in more than one country. But in the absence of other factors that outweigh the presumption, if the required place of payment is the exiting state, an English court would consider the currency of payment to be the new national currency.

(d) Conflict of laws and public policy — Any court to which a dispute is submitted will apply its own rules, including conflict of law rules, to determine the country whose domestic laws should resolve the matter.

Where a contract is governed by English law and a dispute comes before the English courts, an English court may choose to give effect to the exiting state's redenomination law, even where it is clear that the currency of payment is the single currency. This may be necessary where the place of payment is an exiting state and its redenomination law not only redenominates payment obligations into the new national currency, but also makes payment in euros illegal, for example, by establishing exchange controls (see below). An English court has no discretion to refuse to enforce those contractual payment obligations pursuant to the Rome I Regulation, unless to do so would be contrary to English public policy (e.g. because it is inconsistent with the EU treaties or is confiscatory or discriminatory).

It should be noted that the Rome I Regulation does not apply where the contract includes an arbitration clause or where the contract is made before 17 December 2009. Further, it is questionable whether the Rome I Regulation will apply where the exiting state does not remain in the EU. In any event, it is highly unlikely that a court or arbitral tribunal would order payment, which would be considered illegal in the place of performance.

Exchange controls

In order to stabilise the new national currency, the exiting state may introduce exchange controls.

Pursuant to the International Monetary Fund ("IMF") Agreement, the UK is obliged to enforce exchange control regulations relating to "exchange contracts" imposed in accordance with the IMF Agreement by an IMF member.

However, each IMF member may interpret differently what it classifies as "exchange contracts". English courts have interpreted the term narrowly such that the term is confined to the exchange of the currency of one country for the currency of another. Other IMF members have interpreted "exchange contracts" more widely so that any contract dealing with the exchange of goods or services which impact foreign exchange reserves is considered an exchange contract. Although we do not expect exchange contracts to be construed to include a contract for the sale and purchase of commodities (or options thereon), specific advice will be needed on a case-by-case and jurisdiction-by-jurisdiction basis.

It should be noted that generally the Treaty on the Functioning of the European prohibits the introduction of exchange controls, but an exiting state may justify exchange controls on grounds of public policy or public security. For this to apply, the exiting state must remain in the EU. A unilateral Eurozone Exit that has not been subsequently ratified by the EU is not likely to be regarded by the European Court of Justice as falling within this exemption.

Enforcement

Judgments made by the courts of the exiting state redenominating payment obligations could, in theory, be enforced throughout the EU under Brussels I Regulation, although an affected party may seek to resist enforcement on the ground that it is "manifestly contrary to public policy" in the enforcing state. Such ground for exemption from the obligation to enforce the judgment would apply, for instance, where the exiting state has exited in breach of EU legislation.

Equally, if payment obligations under a contract have not been redenominated, enforcing a judgment or arbitral award requiring payment in euros in the exiting state may be difficult, as the courts of the exiting state are unlikely to enforce a judgment that conflicts with its redenomination law.

Eurozone Break-Up

If the Eurozone broke up and the euro as a currency ceased to exist, then the currency into which euro obligations are redenominated would, absent legislation addressing the point, be determined using similar factors to those considered above.

In all likelihood, the UK and other European countries would introduce national legislation to deal with this issue, possibly reflecting an international treaty dealing with the new monetary landscape. Any such international treaty is likely to codify the "Eurozone Exit" factors detailed above so as to identify the state with the closest connection with the contract.

Managing Risks of Exposure

The following pro-active measures may help mitigate future risks:

  • Defining the "euro" – The "euro" should be defined in relevant commercial contracts by reference to the single European currency. This should reduce the circumstances in which a court or arbitral tribunal outside an exiting state will order payment in the new national currency.
  • Agreeing with the counterparty a new place of payment – The parties can agree that payments are to be made in a country outside the Eurozone or which is in the Eurozone but is viewed as unlikely to be an exiting state. This would help to avoid or reduce some of the risks arising from the exiting state being the place of payment (i.e. redenomination and frustration).
  • Law and jurisdiction – Where a counterparty is from a potential exiting state, the parties should choose the law and jurisdiction of a low-risk state, e.g. choose English law and submit to the exclusive jurisdiction of English courts.

Conclusion

Once an area of potential exposure has been identified, steps must be taken to manage and minimise its potential impact, such as reviewing key contracts, renegotiating and amending contracts, and taking legal advice. Any euro contingency plan should address not only the risk of redenomination, but also other risks such as contract termination risks (as will be examined in our next alert). Given the continuing uncertainty regarding the resolution of the Eurozone crisis, any contingency plan will need to remain flexible so as to allow modification as required.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.