City law firms and the eurozone crisis

Hannah Langworth looks at the legal issues that economic turmoil in the EU is forcing City lawyers to consider

Ongoing uncertainty about the fate of the eurozone economies, and the euro itself, is generating some interesting legal questions. As the political situation has progressed over the past few months, City law firms have been assessing these developments, their legal implications, the commercial risks they pose to their clients and, crucially, what their clients should be doing to protect themselves against these risks.

The problems

One of the most serious legal black holes that lawyers analysing the European situation are confronting is the absence of a legal mechanism in the EU treaties allowing a member nation to leave the single currency without leaving the EU too. The issue is a serious one because departure from the single currency is no longer a theoretical scenario but a real possibility, particularly in the case of Greece. The absence of legal provision for this eventuality not only means that there could be procedural issues if a country opts out, but also that any new debt instruments issued by that nation after its departure would have an uncertain legal status.

The new fiscal treaty has been touted as a way by which departures from the euro might be avoided in the future, but it throws up legal problems of its own. Can the signatories to the new agreement, which is technically not an EU one as some member states - most notably the UK - have refused to sign up, legally use EU-funded facilities and institutions? And most significantly, can its provisions be enforced by the European Court of Justice?

The eurozone situation also poses legal questions for individual businesses. The departure of a eurozone member from the single currency and the resurrection of an extinct national currency could cause severe disruption to financial activities. For example, the temporary shutdown of the banking sector, measures to prevent money leaving the country, and practical issues arising from the physical issuance of a new currency in paper form could all affect any business with an interest in that country. Legal provisions would have to be made to cover the wide-reaching effects of such a change and the resulting disruption to all contracts involving the payment of money in that country - from repayments on large corporate loans to dentists' bills.

Lawyers are also considering when in such a scenario financial obligations in euros in commercial contracts would still be legally payable in euros and when they would be redenominated into a new national currency. And, if a new national currency rapidly falls in value against the euro after redenomination, the answer could be very financially significant. Answering this question is a complicated process - in simple terms, it depends on what national law governs the contract, how the payment clauses in the document which deal with currency are worded, and where the contract states payment is to be made.

A very important linked issue is the question of whether a still-valid clause requiring payment in euros could actually be enforced. Normally courts in various European nations would endorse each other's judgments, but, after a nation leaving the eurozone has undergone a currency redenomination process, it may choose not to, or may not be able to, put into effect an order from another national court that a payment in euros should be made.

The solutions?

City law firms have come up with potential answers to some of these difficult issues. On the treaty problem, an obvious solution would be to pass an amendment to allow an EU nation to leave the single currency while remaining in the EU. However, such a move would require the consent of all member states, which could throw up political and practical hurdles.

Turning to the issues facing businesses, several firms have prepared checklists of terms which they feel their clients should consider inserting into commercial agreements, where possible, to avoid some of the potentially difficult situations which the crisis could generate. The insertion of clauses dealing specifically with potentially disruptive eurozone-related events that may occur in the future is widely recommended, so that all parties are clear what their rights are under these circumstances. Lawyers are also suggesting that the place of payment, governing law, and dispute resolution location in new contracts should all be non-eurozone so that the effect of future eurozone-related turmoil on contract payments, and enforcing these payments where necessary, is minimised

As well as recommending new clauses for commercial agreements, City law firms are also advising that their clients take further steps, where applicable to them, to protect themselves from eurozone-related risks. For instance, companies should, some firms suggest, seek advice on whether they are legally required to disclose their financial exposure to the eurozone crisis in their financial reports, and should also consider the extent to which potential joint venture partners and acquisition targets are exposed to eurozone risk.

The outlook

Despite the efforts of City law firms to reduce the negative effects of the crisis on their clients, the reality is that the volatility of the situation means that the eurozone crisis still has the potential to be very damaging. Lawyers have been looking to comparable situations in the past, for example, the breakup of the Soviet Union and the Argentinian financial crisis, for clues to how events might unfold and templates for legal solutions. However, with such a complex set of circumstances, no-one can predict with certainty what's going to happen, or what the best course of action might be - and lawyers are no exception.

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