A Euro Break-Up: Impact On Financial Documentation

On 1 January 2012, many of us brought in the New Year with a celebratory glass of champagne, just as the Europeans did 10 years ago when their drinks were paid for in shiny new Euros. Minted and printed for the first time amid considerable excitement and optimism, the currency issued in twelve member states of the European Union, formed the basis of the Economic and Monetary Union ("EMU") that we commonly refer to as the single currency. Ten years on, however, and the single currency is in crisis. The spectre of sovereign default looms threateningly over the financial markets, while a burdensome combination of ratings downgrades, record-breaking borrowing costs and social unrest, all point towards increasing instability and the very real possibility of either the fragmentation or complete dissolution of the single currency.

For the purpose of this briefing, we have concentrated on two possible scenarios – the withdrawal by one or more member states ("Departing Member State" or "DMS") from the EMU and subsequent redenomination of the Departing Member State's national currency (a "fragmentation"), or the complete dissolution of the single currency of the Eurozone ("dissolution").

A fragmentation, while resulting in a change of currency for the Departing Member State, would see the Euro continue to exist as the legal currency for the Member States remaining in the EMU. It is possible that fragmentation, as well as involving the redenomination of the relevant national currency, would necessitate the imposition of exchange controls and restrictions on the use of the single currency in order to help stabilise the new currency of the Departing Member State.

In contrast, a dissolution of the single currency (albeit a much less likely event) could result in all of the countries that currently use the single currency, having to revert to their former currencies or implement new versions of those currencies. From a practical viewpoint, it seems inconceivable that dissolution could happen without the implementation of one or more EU treaties which would establish provisions for effective currency redenominations in the EMU member states.

While it would be impracticable (if not impossible) to consider every possible legal and contractual ramification of a fragmentation or dissolution, this update aims to provide an overview of some of the main provisions which might be relevant to parties who have entered into Euro-denominated or Euro-linked financial contracts. Consideration is also given to the broader legal principles which may assist parties as they seek to determine their rights amid the inevitable confusion that would ensue if one of these events were to occur.

For those who are party to financial contracts (e.g., loans, derivatives or securities such as bonds), the first point of analysis will always be the detailed provisions of the financial contracts themselves. Discussed below are a number of key provisions which will be relevant to determining a party's rights in the event of either a fragmentation or dissolution of the Euro.


When reviewing a financial contract to determine the currency of payment, it is important to consider the governing law of the contract because this is the law which is relevant for the purpose of construing the terms of the agreement reached between the parties.

English law will first give effect firstly to the express provisions of the contract. Where the contract is silent or ambiguous regarding the currency of payment which would apply in the event of a fragmentation or dissolution, English law will now require that a determination is made of the intention of the parties at the time the contract was entered into. Often this is not a simple task. When, for example, a German bank enters into a Euro-denominated loan arrangement with a Dutch borrower, very little thought is given to whether it was intended that a specification of payments in "Euros" should be taken to mean the currency of Germany or the Netherlands or the single currency of the EMU (since at the time of the agreement they are all the same currency). However, in the context of fragmentation or dissolution, it is a very important question. This is because once the governing law of the contract has been applied to determine which currency is the relevant currency of payment; it is actually the law of the country which issues that currency which determines the composition, character and value of that money, or in other words determines what is legal tender to discharge a debt expressed to be payable in such currency. This is known as the lex monetae principle.

Where the governing law of a financial contract is that of a Departing Member State, it seems, at first glance, likely that such law would give effect to any legal redenomination by such Departing Member State. However, it is also possible that DMS law could conclude that the intended currency of payment was the single currency of the EMU, and therefore that DMS law, since it was not the lex monetae of the relevant contract, would not be applied to the question of what was legal tender for payment obligations under that contract. If the English courts had jurisdiction (see "Jurisdiction" below), they would generally give effect to a choice of DMS law as the governing law of the contract under the Rome I Regulation1, unless the choice were contrary to English public policy or unless this would conflict with an English law of mandatory application.


In addition to considering the governing law of the contract, the jurisdiction of the proceedings is also highly relevant. The courts of a particular country may have jurisdiction by reason of the domicile of one or more of the parties to the contract, or by virtue of an express provision in the contract, agreeing to submit to the jurisdiction of those courts.

If the courts of the DMS were to have jurisdiction, it is possible that these courts would, or may be required to, give effect to any redenomination legislation by the DMS, irrespective of the law chosen by the parties to govern the contract and irrespective of the way in which the currency of payment is defined in the contract.

Even if this were to result in a decision contrary to what the English courts would have decided, the English courts would generally be required to recognise and enforce the judgment of the DMS courts under the Brussels I Regulation2, (presuming the DMS had not terminated its membership of the European Union and withdrawn from the EMU), unless such recognition would be manifestly contrary to English public policy.


Assuming that a contract is governed by English law and subject to the exclusive jurisdiction of the English courts, the starting point for any Euro-denominated financial contract party that is concerned about its rights and obligations following a fragmentation of...

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