The Euro Zone Crisis and Commercial Contracts: What If …?

February 13, 2012

What would a complete or partial failure of the euro mean for the validity of commercial contracts? An analysis of the likely underlying legislative situation in such a situation is helpful in looking at this question. The picture may not be as bleak as first appears, although there will always be uncertainties.

First, a little history. When the euro was introduced in 2002 and the euro zone Member States (of which there are currently 17) relinquished their own currencies, EU regulations and national legislation were in place to provide for continuity of the contracts which were subject to the law of one of the new euro zone members. These rules prevented one party from using the change of currency as an excuse to invoke frustration or “force majeure”, or any other argument as to impossibility of performance, so as to avoid having to perform its obligations.

Countries sometimes put in place similar legislation covering contracts subject to their laws which use another country’s currency. For example, in 1997, the U.S. states of New York, Illinois and California enacted specific laws providing that contracts using any currency that was substituted or replaced by the euro would continue for the purposes of their law.

Two Possible Scenarios

As was the case when the euro zone was established, in the event that the reverse happens and the euro fails completely or is only retained as a valid currency by some of its current users, it is inevitable that EU and national legislation will be adopted to seek to deal with the situation.

An individual country leaving the euro zone would, pursuant to legislation, introduce a new national currency. This new currency law would be very likely to provide that, for the purposes of that country’s law, the change of currency would not operate to frustrate or discharge contracts which use the euro. The national currency (at the appropriate, floating, exchange rate) would simply replace the euro in these contracts (unless a freedom of choice is left to the parties). The continuity of euro contracts governed by the law of that country therefore should not be affected from a legal point of view simply because of the change. Euro-denominated contracts performed wholly or partly in the departing country, which were governed by the laws of another country, would not be affected by the new legislation and would need to be considered separately on a case-by-case basis. They might contain clauses concerning amendments to or termination of the contract in the event of a serious supervening event, but the redenomination of the currency of the departing country may not be sufficient to trigger such clauses. Nevertheless, a significant devaluation of the new national currency against the euro (and/or exchange controls introduced as part of the changeover to the new currency) could render the performance of the contract uneconomic, or force a company into default and trigger such clauses.

As with the departure of one member, in the event of the total collapse of the euro zone, there would necessarily be EU-level cooperation and EU and national legislation put in place to deal with the continuity of contracts subject to the laws of one of the (former) euro zone states. This legislation would have to provide for the re-denomination of euro contracts into a given new currency, setting the rates at which euros would be exchanged into the new currencies. This would send one back to the past, with a range of currencies all floating against each other within the old euro zone.

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