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Capital Markets Law Journal, Vol. 6, No. 1
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The euro—fragmentation and the financial markets
Charles Proctor*
Key points
When the introduction of the euro was originally mooted in the 1990s, there was considerable concern
that this might prejudice the continued validity of financial contracts.
In the event, EU institutions put in place a robust legal framework for the single currency, and all went
smoothly.
However, for reasons of high politics, the EU treaties did not contain an exit route for a Member State
which might wish to depart from monetary union and re-create its own currency.
The absence of an exit door exacerbated the recent Greek debt crisis. Many commentators were
convinced that Greece would have to leave the zone, but there was no pre-set procedure for that purpose.
This article accordingly examines how an exit could occur and its consequences for financial market
contracts.
1. Introduction
The sovereign debt crisis which has gripped the eurozone over the course of 2010 requires
neither introduction nor explanation from the present writer.
The role played by the single currency in accentuating the crisis is largely an economic,
rather than a legal issue.1 But the resultant possibility of a eurozone withdrawal and its
consequences for financial market contracts do require some analysis from a legal
perspective.2
A country faced by a debt crisis usually has various instruments at its command. A
proportion of its sovereign obligations will be denominated in its own currency. The
government may reduce interest rates, increase the money supply and take other steps
designed to depreciate its currency. Amongst other things, this would help to restore
international competitiveness and place the country back on the path to economic
growth.3
* Charles Proctor LLD is a Partner with Bird & Bird LLP, London.
1 It should be acknowledged that not all commentators would agree that the euro has had this effect, and they would also point to
the undoubted benefits which eurozone Member States have derived from the single currency over the years.
2 For a discussion of some of the wider, treaty and institutional consequences of such a withdrawal, see C Proctor, ‘The Future of
the Euro – What Happens if a Member State Leaves?’ (2006) 17 EBLR 909.
3 It should be appreciated that a currency depreciation specifically designed to secure a competitive advantage over other
countries may be subject to legal constraints. For example, EU Member States outside the eurozone are required to regard their
exchange rate policies as a matter of ‘common interest’ under Art 142, TFEU. This language may well preclude a deliberate and
competitive devaluation. Similarly, Art IV(1) (iii) of the Articles of Agreement of the International Monetary Fund requires
member countries to ‘. . . avoid manipulating exchange rates or the international monetary system in order to prevent effective
balance of payments adjustments or to gain an unfair advantage over other members . . .’. The ongoing dispute between the USA
and China over the valuation of the renminbi illustrates that treaty obligations of this type often acquire a significant profile.
But matters of this kind are beyond the scope of this article.
ß The Author (2010). Published by Oxford University Press. All rights reserved. For Permissions, please email: [email protected]
doi:10.1093/cmlj/kmq031
Accepted 21 October 2010 Advance Access publication 23 November 2010
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As a member of the eurozone, these prescriptions are denied to Greece since a single
currency requires a single monetary policy and, under the Treaty on the Functioning of
the European Union (TFEU), this competence lies exclusively in the hands of the
European System of Central Banks (ESCB).4 The printing of additional bank notes5 is
forestalled because such issues must be authorized by the European Central Bank (ECB).
Equally, to the extent that an exchange rate policy for the euro is required, this lies in the
hands of the Council of Ministers.6
Member States within the eurozone thus retain only fiscal policy—the power to
control government spending and levels of taxation—as a means of domestic economic
adjustment. Levels of government debt and deficit were, of course, themselves supposedly
subject to restriction under the well-known stability and growth pact. But the credibility
of that pact had been fatally undermined when the eurozone’s two key members—France
and Germany—secured from the Council a deferral of proceedings under the excessive
deficit procedure.7 The result was that the fiscal rectitude contemplated by the Stability
and Growth Pact has not materialized in practice.
At the time of the Greek debt crisis, both the level of public debt and the deficit far
exceeded the limits contemplated by the Pact. Whilst the EU ultimately negotiated a
bailout package and the International Monetary Fund (IMF) also offered parallel support,
the price of this support was a massive fiscal adjustment. In the case of the IMF assistance,
this type of condition accorded with its long-standing practices. In the case of the EU
arrangements, heavy conditionality was necessary to assuage (or at least to mitigate)
German anger at the prospect of bailing out a profligate Member State. The required
fiscal adjustment has to be achieved without the benefit of a currency depreciation which
might help to stimulate exports or to boost the underlying economy. This situation has
led to rioting and political instability in Greece, and rating agency downgrades of Greek
debt have obviously affected both its access to the financial markets and its cost of
borrowing.
Under these circumstances, the possibility that Greece might have to withdraw—or be
expelled—from the eurozone has been publicly mooted, even in high political circles.8
4 The ESCB is responsible for both the definition and the implementation of a single monetary policy for the euro: see Art 127(2),
TFEU.
5 Now usually referred to as ‘quantitative easing’.
6 See Art 219, TFEU. It may be noted, however, that the Council may only act in this area on a recommendation from the ECB,
or on a recommendation from the Commission after consulting the ECB. The provisions of this article have not yet been invoked.
7 It is true that aspects of this deferral were later found to be unlawful in Case C-27/04, Commission v Council [2004] ECR-I 6694.
But the damage had already been done. The excessive deficit procedure is now set out in Art 126, TFEU, and proposed reforms to
the fiscal rules supporting monetary union are currently the subject of hot political debate.
8 In the light of recent events and for ease of illustration, the ensuing discussion will assume that Greece is to withdraw from the
zone and that it will create a new currency known as the ‘new drachma’. But it should not necessarily be assumed that such a
withdrawal would occur from a position of weakness. It is perhaps equally likely to occur from a position of strength. As is well
known, there has been some political momentum in Germany for withdrawal, and a group of academics took steps to that end by
instituting proceedings before the Federal Constitutional Court. See also the comments noted in footnote 18 below.
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It is true that, over the late summer of 2010, the previously fevered speculation that
Greece might have to withdraw from the single currency became muted, and market
conditions have generally improved for the troubled eurozone Member States. Yet the
economic outlook remains uncertain, and the possibility that the current crisis could lead
to a withdrawal remains on the agenda.9
Such a withdrawal would clearly have far-reaching consequences for the European and
international banking systems. But such a crisis could only be exacerbated by legal
uncertainty concerning the continued validity of contracts and the identity of the
currency in which obligations are to be paid.10
As Hamlet, recognizing that fate is beyond human control, noted:11
‘If it be now, ’tis not to come;
If it be not to come, it will be now;
If it be not now, yet it will come.
The readiness is all’.
In harmony with Hamlet, we cannot know if the eurozone will suffer a terminal crisis,
nor can we know when or how such a crisis might occur. The best that the lawyer can do
is to seek to understand the problems which might confront him in such a situation, and
to hope that the availability of legally rigorous solutions might at least help to mitigate
some of the chaos which would undoubtedly descend on the financial markets.
It should be appreciated in this context that creditors may face significant losses as a
result of a Greek eurzone withdrawal, if and to the extent to which those obligations are
validly redenominated into the new drachma. They will have originally funded their
investments in euro, but will find themselves holding new drachma obligations at the
legally prescribed exchange rate. On the assumption that the new drachma depreciates in
terms of its market value as against the euro, those investors will find that the value of
their assets—even if fully serviced on the applicable payment dates—is less than their cost
of funding those assets.
Accordingly, the purpose of this article is to consider the financial and contractual
implications of a eurozone withdrawal. Those implications do, however, depend to some
extent on the manner in which such a withdrawal is in fact achieved. Accordingly, the
remainder of this article is arranged as follows:
(a) first of all the various modes of withdrawal from the eurozone will be considered;
(b) second, the monetary law consequences of a withdrawal will be outlined;
(c) third, the continued validity of euro-denominated contracts will be discussed;
9 See eg D Lachman, ‘Euro will Unravel, and Soon—Collapse could imperil US Economy’ (2010) American Enterprise Institute
for Public Policy Research 5www.aei.org/outlook/1009904 accessed 1 October 2010.
10 It may be noted that a discussion of the possibility of a eurozone withdrawal is no longer a taboo even with EU institutions.
See P Athanassiou, ‘Withdrawal and Expulsion from the EU and the EMU—Some Reflections’ (2009) ECB Legal Working Paper
Services No. 10 5www.ecb.int/pub/pdf/scplps/ecblwp10.pdf4 accessed 1 October 2010. It should however be noted that these
papers do not necessarily reflect the official views of the ECB itself.
11 Hamlet V ii, 234–37.
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(d) fourth, the currency of payment under affected contracts will be outlined, together
with a number of associated issues;
(e) fifth, a few relevant jurisdictional issues will be noted; and
(f) finally, a few general conclusions will be stated.
2. Modes of withdrawal
Introductory remarks
Thus far, this article has referred to the possibility of a eurozone withdrawal as a given
fact. But the TFEU is a legal document and the existence—or otherwise—of a right to
withdraw from the eurozone must be derived from the treaty itself.
In theory, a voluntary withdrawal from the eurozone could occur either (i) through a
unilateral right of withdrawal conferred by the TFEU itself; or (ii) through a specific
agreement with all of the other parties to the treaty. These two alternatives will be
considered separately. Thereafter, the possibility of a unilateral withdrawal in defiance of
the TEFU will be considered along with any right of expulsion on the part of other
Member States.
Right of withdrawal
So far as monetary union is concerned, it is clear that eurozone Member States were not
originally intended to have a unilateral right of exit. There is no explicit right of this kind
in the treaties and, insofar as any inferences can be drawn from the terms of the TFEU,
they tend to negate the existence of such a right. For example, it is stated that the
substitution of the euro for legacy currencies is ‘irrevocable’.12
Some years after the introduction of the single currency, however, Member States
ratified the Lisbon Treaty. As a result, Article 50 of the Treaty on European Union (TEU)
now allows for withdrawal from the EU as a whole. But that article does not contemplate
a possible withdrawal from monetary union alone. It merely provides that ‘Any Member
State may decide to withdraw from the Union in accordance with its own constitutional
requirements’, and then makes provision for the associated negotiations.
Although not explicitly stated, Article 50 must necessarily imply that a withdrawal
from the EU carries with it an obligation to withdraw from monetary union. It is possible
to make this assertion with some degree of confidence because:
(a) the right of withdrawal is given to any Member State, and this expression necessarily
includes the eurozone States;
(b) there are various indicators in the TFEU itself to the effect that the euro can only be
the lawful currency of EU Member States. For example, Article 128, TFEU provides
that bank notes issued by the ECB and national central banks within the eurosystem
shall be the only notes which enjoy legal tender status ‘within the eurozone’. Likewise,
12 See Art 140(3), TFEU. On implied rights of withdrawal from treaties generally, see art 56, Vienna Convention on the Law of
Treaties.
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only the central banks of participating Member States can be members of the
eurosystem within the European System of Central Banks;13 and
(c) it has been asserted that the use of the euro by non-eurozone States is inconsistent
with the treaties and unlawful.14
It follows from the above analysis that a Member State may withdraw from the EU as a
whole but, if it elects to do so, it must at the same time withdraw from monetary union.
The latter step is an inescapable consequence of the former decision.
It also follows that the treaties confer no independent right to withdraw from
monetary union. In this sense, Article 50 has not changed the position of eurozone
Member States. If a Member State wishes to depart from the eurozone but wishes to
remain a member of the EU, then this could perhaps be achieved by: (i) an outright
withdrawal from the EU under the provisions of Article 50, TEU; and (ii) the rapid
re-admission of that Member State—shorn of the euro—to the EU.15 Re-admission
would, however, be subject to ratification by all Member States and it may be imagined
that practical politics might stand in the way of such a process. Nevertheless, this would
seem to be the only means by which a eurozone withdrawal could be achieved in a
manner consistent with the treaties.
Consensual withdrawal
If the procedure suggested above cannot be utilized, then it seems that a lawful exit from
monetary union could only be achieved by unanimous agreement among the Member
States and appropriate amendments to the TFEU itself.
This would obviously be a time-consuming process to complete, and would be
impossible to achieve in the necessary timeframe against the backdrop of a monetary and
financial crisis. But the theoretical possibility remains.
Unilateral withdrawal
There is little to be said about unilateral withdrawal from monetary union in
contravention of the provisions of the TFEU. Such a step would plainly involve a
breach of obligations owed to the other Member States.16
It is not necessary here to consider the wider implications of such a withdrawal or the
possibility that EU institutions or other Member States may elect to take proceedings
against the departing Member before the European Court of Justice. It is sufficient to
note that such a step would be unlawful and that this would have consequences for the
international recognition of domestic monetary and other laws passed by Greece to
13 See art 282(1), TEU and Art 1, Statutes of the European System of Central Banks and of the European Central Bank.
14 See eg ‘Official Dollarization /Euroization: Motives, Features and Policy Implications of Current Cases’ (2004) ECB Occasional
Paper Series No 11 5www.ecb.int/pub/pdf/scpops/ecbocp11.pdf4 accessed 1 October 2010.
15 On the procedure for re-admission in such a case, see Art 50(5), read together with Art 49, TEU.
16 It should be emphasized that ‘Member States’ includes the UK and other ‘out’ States, since they are parties to the TFEU and
have the right to participate in the single currency project at a later date.
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that end. The implications of this state of affairs for contractual obligations are
considered at a later stage.17
Expulsion
The fall out from the Greek crisis perhaps renders it a little more likely that—on a future
occasion—the eurozone Member States may wish to expel one of their number which is
in serious and persistent breach of the Stability and Growth Pact or any arrangements
that may replace them.18
Once again, however, there are no specific provisions in the TFEU allowing the
eurozone States to require the withdrawal of an errant member of the group. Reference
has already been made to the TFEU provisions about the ‘irrevocable’ nature of monetary
union.19 These provisions cut both ways, both for the State that wishes to leave, and the
States which wish to order its departure.
3. Monetary law consequences of a eurozone withdrawal
Whether a withdrawal from the eurozone is voluntary or enforced, lawful or unlawful,
certain consequences will inevitably follow.
Most importantly, the departing Member State will need to create a new currency.20
The creation of a new currency by Greece—which, as noted earlier, we will label the
‘new drachma’—would be an essential part of the process of eurozone withdrawal.
A new, Greek monetary law21 would be required to create the new drachma as a
domestic monetary unit, and that law would have to prescribe a substitution rate at
which obligations denominated in the euro would be converted into the new drachma.22
But the euro will nevertheless clearly continue to exist alongside the new drachma. It is
therefore pertinent to inquire:
(a) whether the splitting of the eurozone in this way may have an impact on the
continuing validity of contracts expressed in the single currency; and
(b) assuming that such contracts remain enforceable, how will it be possible to determine
whether the monetary obligations arising under such a contract (i) remain to be
performed in the euro or (ii) must now be performed in the new drachma by virtue
of the new Greek monetary law?
17 See Section ‘External courts’.
18 This notion is not as fanciful as it may at first appear. At a Eurogroup meeting in Brussels on 15 March 2010, the German
Finance Minister observed that ‘. . . we need stricter rules—that means, in an extreme emergency, having the possibility of removing
from the euro area a country that does not get its finances in order . . .’. Two days later, in an address to Germany’s lower house of
parliament, Chancellor Merkel also noted that ‘. . . we need to have an agreement under which, as a last resort, it is possible to
exclude a country from the eurozone if again and again it doesn’t fulfil the requirements [of the stability and growth pact] . . .’
19 See Section ‘Right of withdrawal’.
20 There would clearly be no point in withdrawing from the eurozone’s legal and administrative processes, and yet continue to
use the currency. Such an arrangement would almost certainly be unlawful in any event: see Section ‘Right of withdrawal’.
21 In line with the so-called ‘State theory of money’, money must be created by the State under its legislative processes. There is
accordingly no alternative method of creating a new monetary system. On the State theory of money generally, see C Proctor,
Mann on the Legal Aspect of Money (6th edn Oxford University Press, Oxford 2005) paras 1.15–1.26.
22 A State which replaces its currency is probably under an international obligation to prescribe such a rate—known as the
‘recurrent link’ between the old and the new currency. On the recurrent link generally, ibid para 2.34.
Charles Proctor The euro—fragmentation and the financial markets
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These issues are explored below.
4. Validity of contracts
Introductory remarks
So far as English law is concerned, a contract, once made, must be performed. Contracts
must be binding if they are to have any legal or commercial value.
In the present context, the only potentially relevant exceptions to this statement of
principle are offered by (i) the concept of common mistake and (ii) the doctrine of
frustration. It is thus pertinent to consider whether a fragmentation of the eurozone
might trigger the operation of either of these principles.
Common mistake
It seems to be clear that the doctrine of common mistake could not be invoked in order
to avoid a euro-denominated contract which had been entered into by the parties prior to
an exit from the single currency zone. A contract may only be avoided on the basis of
common mistake if both parties had a positive belief that a particular set of circumstances
existed. In practice, the parties will simply have contracted on the unspoken assumption
that the euro is the single currency of the participating Member States. A general
assumption of this kind is not sufficient to bring the doctrine of common mistake into
operation.23 Furthermore, it seems that the mistake must relate to a matter which is
central to the performance of the contract,24 and it is doubtful whether this test is met in
relation to the existence of a specific monetary unit, for monetary systems are frequently
replaced or redenominated.
In any event, it appears that a common mistake will only vitiate a contract if that
mistake operated as at the date on which the contract was made, since the mistake must
effectively destroy the required contractual consent.25 This fundamental requirement will
not be met, since the euro will exist as at the point of time at which the contract is
concluded.
The legal impact of a later or supervening change of circumstances is more closely
associated with the doctrine of frustration, to which it is now necessary to turn.
The doctrine of frustration
The nature of the doctrine
In very general terms, the doctrine of frustration may operate to discharge the parties
from their contract on the occurrence of a supervening event which renders it physically
or commercially impossible to perform the contract or transforms the duties arising
23 Chitty, Contracts (30th edn Sweet & Maxwell, London 2009) para 5-006.
24 The Great Peace [2002] 4 All ER 689 (CA).
25 Chitty (n 23) para 5-009; Bell v Lever Bros Ltd [1932] AC 161.
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under the contract into obligations which are radically different from those envisaged by
the parties when the contract was made.26
The doctrine is designed to mitigate the hardship which parties may otherwise suffer if
they are required to perform their contract under changed circumstances which were
beyond their contemplation at the time of their agreement. It will be appreciated that the
doctrine comes into direct conflict with the principle that contracts should be upheld and
enforced according to the terms agreed between the parties. As a result, the courts will not
lightly apply the doctrine in doubtful cases.27
In the present context, it may be as well to recall that, in the period leading up to the
creation of the euro in 1999, some commentators argued that a cross-currency swap
between (say) German marks and French francs would be amenable to the doctrine of
frustration. A swap of this kind pre-supposed the existence of two separate currencies
which could fluctuate in value against each other, and the introduction of the euro
defeated that expectation. The present writer did not subscribe to that view, largely
because (i) the reciprocal obligations under the swap remained capable of being
performed by reference to the fixed substitution rates and (ii) the monetary obligations
arising under a contract cannot generally be the source of a frustrating event,28 except in
those cases where the payment itself becomes unlawful as a result of supervening
illegality.29 But however that may be, the issue was ultimately put to rest by one of the EU
regulations creating the legal framework for the euro, which provided that:30
The introduction of the euro shall not have the effect of altering any term of a legal instrument or of
discharging or excusing performance under any legal instrument, nor give a party the right unilaterally
to terminate or alter such an instrument. This is subject to anything parties may have agreed.
A potential departure from the eurozone presents the converse problem. Parties will have
entered into their contract on the basis that the euro is the money of account, but the
nature of that unit may in some respects have been changed by the Greek withdrawal. The
application (or otherwise) of the doctrine of frustration must be considered as a matter of
general principle in this situation, for it must be assumed that—in contrast to the
provision reproduced above—the EU would be loathe to legislate for the contractual
consequences of a eurozone departure, even if it has the treaty competence to do so.
Ingredients of the doctrine
Following the well-known decision of the House of Lords in Davis Contractors Ltd v
Fareham UDC,31 there are essentially five tests which must be met before the court will
hold that a contract has been discharged by frustration, namely:
26 Chitty (n 23) para 23-001.
27 Chitty (n 23) para 23-0005.
28 See eg Universal Corporation v Five Ways Properties Ltd [1979] I All ER 552 (CA) and Bank of America NT & SA v Envasaes
Venezolanes 740 F Supp 260 (1990).
29 A point acknowledged in Libyan Arab Foreign Bank v Bankers Trust Company [1989] QB 728, although the observation was
not ultimately a necessary part of the decision.
30 See Art 3, Council Regulation (EC) 1103/97 on certain provisions relating to the introduction of the euro, OJ L 162, 19 June
1997, p1.
31 [1956] AC 696 (HL).
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(a) a change in circumstances relevant to the contract has occurred since the date on
which the contract was made;
(b) the change was outside the control of the parties;
(c) the contract does not provide for the changed circumstances which have arisen;
(d) the change was not contemplated by the parties at the time when the contract was
made; and
(e) as a result of that change, performance of the contract in accordance with its stated
terms would be unlawful or impossible, or would otherwise be radically different
from that contemplated by the parties when the contract was originally made.
It should be emphasized that the doctrine can only be invoked if all five of these tests are
met in a given case. If the party asserting frustration fails to satisfy just one of these
requirements, then the contract remains alive and must be performed in accordance with
its terms.
It is therefore necessary to consider various aspects of some of these criteria.32
Change in circumstances
First of all, does the departure of the relevant Member State from the eurozone constitute
a ‘change in circumstances’ for the purposes of the doctrine? In view of the issues about
to be discussed, it is necessary to emphasize the obvious point that the change in
circumstances must have some relevance to the performance of the contract at hand.
For the sake of argument, it will be assumed that this test can be met where the
contract has some material nexus with Greece as the withdrawing Member State. This
may include factors such as the residence of the debtor or creditor in Greece, or the
intention of the parties that Greece should be the source of supply of materials required
for the purpose of performing the contract.33
Where, however, there is no such nexus, then it is submitted that there is no relevant
change of circumstances which can engage the doctrine of frustration. For example, it
cannot seriously be argued that a euro-denominated loan contract between a London
bank and a German borrower is affected in any material way by a Greek departure from
the single currency zone. The contract can still be performed in the manner originally
contemplated by the parties, and in the same way.34
It follows from the above analysis that the vast majority of continuing contracts would
clearly remain valid and effective. The doctrine of frustration could only seriously be
invoked in relation to contracts which have some demonstrable link with Greece, and the
32 As will become apparent, it is the writer’s view that the doctrine of frustration plainly cannot be invoked as a result of
eurozone withdrawal. It is thus proposed only to deal with some of the more salient issues.
33 This last point is more likely to be relevant to contracts of a commercial (as opposed to financial) character.
34 By parity of reasoning, it may be observed that no one appears to have suggested that contracts were frustrated when new
Member States were subsequently admitted to the eurozone. In this context, it is perhaps significant that the International Swaps
and Derivatives Association (ISDA) issued an EMU Protocol (Greece) on 10 October 2000 confirming that swap contracts formerly
expressed in Greek drachma would continue to be effective in euro, but allowed the point to pass on subsequent eurozone
accessions.
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mere fact that Greece was formerly a member of the eurozone will not of itself be a
sufficient nexus for these purposes. Even in those limited cases, however, it is submitted
that the party pleading frustration will only pass first base. Some of the additional
considerations noted below will prevent him from completing a home run.
Impact of contractual terms
As noted above, a contract will not be frustrated if the document makes provision for the
changed circumstances which have arisen. In such a case, the agreement can continue to
be enforced in accordance with its terms.
In modern times, parties tend to negotiate commercial contracts in some depth and
will often make provision for supervening events by means of a force majeure or similar
clause. In such a case, the court will give effect to the terms of the contract and the
doctrine of frustration is thereby effectively displaced.35 Yet, for all their sophistication,
contracts executed in the financial markets do not generally contain provisions dealing
with a change in the nature or composition of the money of account in a general sense.36
No doubt this follows from the facts that (i) in practice, parties simply accept the risk and
consequences of a domestic currency substitution37 and (ii) in the case of a possible
dissolution of a monetary union or similar catastrophic event, it is very difficult to know
exactly what the agreement should say. A contractual attempt to deal with the possible
consequences of a eurozone withdrawal at an unknown future date would require
complex and intricate drafting work and there could be no guarantee that it would cover
the precise circumstances which might eventually arise or, if it did, that it would operate
fairly as between the parties. In other words, such a provision would at best amount to
educated guesswork. As a result, even contracts executed within the financial markets—
where money is not merely the means of payment but goes to the very core of the
contract—do not seek to legislate for this thorny issue. It is therefore safe to approach
the subject as a matter of general principle and in the fairly certain knowledge that
the outcome will not be materially affected by the contents of the particular contract
at hand.
In terms of the criteria for the doctrine, the party asserting that the contract has been
frustrated will generally be able to satisfy the test noted in paragraph (c) above. His
victory will, however, be of the Pyrrhic variety.
35 For an example, see Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyds Rep 209.
36 It is true that, on 6 May 1998, ISDA published its ‘EMU Protocol’, which was designed to deal with the impact of the
substitution of the euro for the legacy currencies in the context of swap contracts and addressed matters such as continuity of
contracts and the identification of price sources. But the Protocol dealt with a known set of circumstances, rather than the abstract
consequences of a future, hypothetical currency substitution. It is also true that some market standard contracts make general
provision in relation to accession of new currencies to the euro: see eg clause 29.9 (Change of Currencies) in the standard form of
facility agreement published by the Loan Market Association. However, such clauses in effect merely recognize the inevitable
consequences of such an accession and that the prescribed substitution rate must be applied.
37 The acceptance of such a risk perhaps flows inevitably from the lex monetae principle, on which see Section ‘The lex monetae
principle’, below.
Charles Proctor The euro—fragmentation and the financial markets
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The ‘Radically Different’ test
In the perhaps unlikely event that the party asserting frustration of the contract has
managed to surmount the first four hurdles noted above, he will still have to satisfy the
fifth test by demonstrating that performance of the obligation in new drachma would be
‘radically different’ from the contracted payment in euro. There would be several
difficulties in his way:
(a) first of all, it can only be argued that there is a radical change—or, indeed, any
change—in the rights and obligations of the debtor and creditor if the debtor is now
required or entitled to make payment in the new drachma, rather than the euro. The
substitution of the unit of payment will only occur if the parties have contracted by
reference to the lex monetae of Greece, and that specific issue is discussed at a later
stage;38
(b) where the parties have contracted by reference to the lex monetae of Greece, then
Greek law will determine the appropriate method of discharging an obligation
expressed in euro by means of payment in the new drachma;
(c) the new Greek monetary law will prescribe the substitution rate at which the euro
obligation is to be paid in new drachma;
(d) there is thus no radical change in the nature of the obligation. To the contrary, the
application of the lex monetae in this situation means that the contract remains to be
performed in accordance with its original terms; and
(e) even if it could be said that the substitution of the new drachma in some way renders
the performance of the contract more expensive,39 this is not in any event a ground
on which the doctrine of frustration can be applied.40
It follows that an argument to the effect that the introduction of the new drachma has the
effect of frustrating the contract must inevitably fall at this final hurdle.
Validity of contracts—conclusions
It is accordingly possible to conclude that a Greek withdrawal from the eurozone and the
creation of the new drachma would not have the effect of vitiating contracts or
terminating agreements governed by English law. Such arrangements would remain
legally valid and effective in accordance with their terms.
5. The currency of payment
Introductory remarks
The foregoing discussion has hopefully helped to demonstrate that contractual
obligations expressed in euro would remain valid and binding notwithstanding the
‘splintering’ of the euro.
38 See Section ‘The lex monetae principle’.
39 In this context, an English court would doubtless be reluctant to embark upon an inquiry into the economic consequences or
fairness of the substitution rates prescribed by the new Greek monetary law, and it is probably not entitled to do so.
40 Davis Contractors Ltd v Fareham UDC [1956] AC 696 (HL); Transatlantic Financing Corp v United States 363 F 2d 312 (1996).
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Yet it is one thing to state that such contracts remain legally effective; it is quite
another to determine the currency in which relevant monetary obligations are to be
performed.
The situation may be contrasted with the circumstances which arose on 1 January 1999
when the euro was created. Obligations expressed in participating national currencies had
to be replaced by obligations in euro at the corresponding substitution rates. The legacy
currencies ceased to exist and, regardless of arguments over legal niceties, there was no
other alternative avenue available. A secession from the eurozone would create the
opposite problem. The euro would continue to exist but the new drachma would exist
alongside with it. Which unit would assume the status of the currency of obligation or
payment? The answer to this question involves an examination of the lex monetae
principle.
The lex monetae principle
It is well known that questions touching the interpretation and performance of a contract
are generally determined by the law applicable to the arrangement.41 However, in the case
of monetary obligations, this general principle is subject to an important variation.
Where a contract refers to a particular national currency,42 there is an implicit choice of
the law of that country to determine the identification of that currency.43 Thus, a contract
concluded in 1998 and involving an obligation to pay 1000 French francs became, on 1
January 1999, an obligation to pay 152.45 euro.44 The EU regulations providing for the
substitution of the French franc were directly applicable in France and formed part of its
monetary law, with the result that the euro substitution rules were legally effective in that
country. This rule is generally referred to as the lex monetae principle, and it must usually
be applied regardless of the system of law which governs the contract as a whole, or any
other matter. This is, in many ways, obvious; even if an international financial contract is
governed by English law, only the law of the US can define a ‘US dollar’ and identify the
notes which are legal tender for payment in that currency.45 In general terms, since a
sovereign State has the right under international law to regulate its currency, both the
initial creation and any subsequent substitution of the national unit are entitled to
41 On this general rule, see Art 12, Regulation (EC) no 593/2008 of the European Parliament and of the Council of 17 June 2008
on the law applicable to contractual obligations (Rome I), OJ L 177, 4.7.2008, p6.
42 Where there is doubt about the identity of the chosen currency—eg because the parties have merely referred to ‘dollars’—then
a decision as to whether the parties intended to refer US dollars, Canadian dollars or some other currency under that label will be a
question of contractual interpretation to be determined by the law applicable to the contract as a whole in accordance with Art 12,
Rome I. However, once identified, the lex monetae will govern questions touching the currency of obligation. For an interesting case
which had to deal with this type of issue, see Goldsbrough Mort & Co Ltd v Hall [1949] HCA 2 (High Court of Australia).
43 The application of more that one system of law in the context of a single contract is specifically sanctioned by Art 3(1), Rome I
(n 41).
44 This calculation results from (i) the French franc/euro substitution rate of one euro ¼ FF 6.55957 specified in Council
Regulation (EC) No 2866/98 of 31 December 1998 on the conversion rates between the euro and the currencies of Member States
adopting the euro, OJ L 359, 31 December 1998, p1 and (ii) the application of the rounding rules in Art 4 of Council Regulation
(EC) No 1103/97 of 17 June 1997 on certain provisions relating to the introduction of the euro, OJ L 162, 19 June 1997, p1.
45 There is, therefore, an implied selection of US law to determine matters relating to the currency of payment.
Charles Proctor The euro—fragmentation and the financial markets
17
recognition by other States, including their courts and official bodies.46 The rules relating
to the lex monetae may be said to represent the domestic manifestation of the
international rule, and the validity of that rule has been accepted by domestic tribunals
on a number of occasions.47 But—important though it is—the lex monetae principle
cannot solve the present problem, for the lex monetae of the continuing eurozone
Member States will identify the euro as the currency of obligation, whilst the lex monetae
of Greece will point to the new drachma, substituted by reference to the recurrent link.
The problem is—which of the two competing lex monetae is to prevail?
This question must, in turn, depend upon the original, contractual intention of the
parties, and this will be determined by reference to the law applicable to the contract as a
whole. Did the parties intend to contract by reference to the lex monetae of Greece, in
which event the euro obligation will be substituted by a new drachma obligation at the
prescribed substitution rate? Or did they contract by reference to the lex monetae of a
continuing eurozone Member State,48 in which event the obligation will remain
outstanding in euro? It hardly needs to be stated that parties contracting in euro will not
have given any thought to this issue which, to say the least, exists at a certain level of
abstraction. The intention of the parties will therefore have to be inferred from the terms
of the contract and the surrounding circumstances, and will inevitably depend on the
weight of factors connecting the contract with Greece. This formulation may well be
legally accurate but it is of rather limited practical value. It may therefore be helpful to set
out a few indicators which may assist in the identification of the lex monetae in difficult
cases:
(a) first of all, it is occasionally said that a government is rebuttably presumed to contract
in terms of its own monetary system;49
(b) second, where a transaction is to be effected on a stock exchange, it may be inferred
that the contract is to be settled in the currency which is local to that exchange.
Consequently, where a transaction relates to securities listed on the Athens Stock
Exchange, the parties may be taken to have selected a Greek lex monetae, so that the
payment obligation would be converted from euro into the new drachma when that
currency is created; and
(c) in the absence of any other indicators as to the selection of the money of account,
there is a general (but rebuttable) presumption that the parties intended to select the
46 On this statement of the lex monetae principle, see Proctor (n 21) Part III. The duty of States to recognize the monetary
systems of other States (and, correspondingly, the right to recognition of one’s own system by those other States) is derived from
the decision of the Permanent Court of International Justice in the Serbian and Brazilian Loans Case, PCIJ, Ser A., No. 20, 1929.
47 See eg Ottoman Bank v Chakarian (No2) [1938] AC 260 (PC), Pyrmont Ltd v Schott [1939] AC 145 (PC) and Marrache v
Ashton [1943] AC 311 (PC).
48 In practice, it will not be necessary to identify the continuing Member State concerned; for present purposes, it will be
sufficient to determine that the parties did not intend that Greece should supply the lex monetae.
49 See eg Bonython v Commonwealth of Australia [1950] AC 201 (PC). It is submitted that this must now be a relatively weak
presumption: see the discussion under Section ‘Sovereign Obligations’.
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law of the place of payment as the lex monetae of their contract.50 This leads to the
important conclusion that, in general terms, parties will not have contracted by
reference to the lex monetae of Greece where their contract expressly provides for
payment in different jurisdictions.
Armed with this essential knowledge, it is now possible to examine the differing
approaches which may be adopted by Greek courts and external tribunals, and to
consider the application of the lex monetae principle in the context of particular
instruments.
Greek monetary law
First of all, it has been noted above that the creation of the new drachma will require the
introduction of a new Greek monetary law. This would not only create the new currency
but would stipulate for a legally binding substitution rate or recurrent link.
It is immediately obvious that the Greek law cannot apply to all obligations expressed
in euro. All national legislation must be subject to some form of territorial limitation,
whether express or implied. As a matter of common sense, a Greek monetary law cannot
impact upon a contract between a French debtor and a German creditor governed by
English law.
A court sitting in Greece would clearly be required to apply the new Greek monetary
law in accordance with its terms, regardless of some of the wider considerations which
may affect courts in other jurisdictions.51 It is unusual for a monetary law of this kind to
contain express provisions about its territorial scope or application, so the Greek court
would be left to draw appropriate inferences from the law itself and the objectives which
it was intended to serve. As a matter of general principle, it is suggested that a Greek court
could consider the application of the new monetary law in the following situations:
(a) where the contract is governed by the laws of Greece;
(b) where the debtor is resident in Greece; or
(c) where Greece is the place of payment.52
If none of these tests is met, then it is submitted that the contract concerned would lack
the appropriate territorial nexus with Greece. Should any such contract fall for
consideration by a Greek court, then it is submitted that it should hold that the
obligations concerned remain to be performed in euro. In practice, of course, cases
coming before the Greek courts will generally involve at least some degree of nexus with
that country. It will therefore be for the Greek courts to determine, as a matter of
statutory interpretation, whether or not the new Greek monetary law applies to the
particular contract at issue.
50 For authorities to this effect, see Adelaide Electrical Supply Co v Prudential Assurance Co Ltd [1934] AC 122 (HL), Auckland
Corporation v Alliance Assurance Co [1937] AC 587 (PC) and National Mutual Life Association of Australia Ltd v A-G for New
Zealand [1956] AC 369 (PC).
51 See Section ‘External courts’.
52 On this problem generally, see Proctor (n 21) ch 6.
Charles Proctor The euro—fragmentation and the financial markets
19
External courts
It has been seen that the application of the new Greek monetary law may thus cause
difficulties even for the Greek courts, where the law will of course form a part of the
general domestic law. It hardly needs to be stated that the position will be even more
difficult for external courts, where the link to the new monetary law will be more tenuous
and the court will be called upon to apply that law solely by reference to the lex monetae
principle.
Where such a question falls for consideration by an English court, it is submitted that
the following principles should apply:
(a) where the contract is governed by English law and, on an analysis of the contract,
Greece does not supply the lex monetae, the court should find that the Greek
monetary law cannot vary or discharge the substantive obligations arising under the
contract.53 As a result, the English court should find that such obligations remain
outstanding in euro. There is no basis for the application of the Greek monetary law
under these circumstances;
(b) where an assessment of the connecting factors leads to the conclusion that Greece was
intended to supply the lex monetae, then an English court should hold that the
obligation is payable in the new drachma at the substitution rate prescribed by the
Greek monetary law. It should be appreciated that this rule would apply regardless of
the system of law applicable to the contract as a whole;
(c) in the perhaps rare cases in which the English courts may have to consider a contract
governed by the laws of Greece, it would not necessarily follow that the obligation
would be converted into new drachma. The court would generally have to apply
Greek law to determine the lex monetae intended by the parties, and it is quite
possible that this would lead to a lex monetae other than that of Greece itself;
(d) it should be appreciated that there may be exceptions to the dominance of the lex
monetae principle in this area. For example, if Greece had withdrawn from the
eurozone without the consent of the other Member States and in breach of the terms
of the TFEU, then it would be manifestly contrary to English public policy54 to give
effect to a new Greek monetary law passed in flagrant disregard of treaty obligations
owed to the UK itself;55 and
(e) the net result seems to be that at least so far as an English court is concerned, the
substitution of the new Greek drachma for euro obligations will only be recognized
53 That is this would be an application of the principles set out in Art 12 of Rome I and the decision of the House of Lords in
National Bank of Greece and Athens SA v Metliss [1957] 3 All ER 608.
54 In accordance with well established principles, an English court may refuse to give effect to a rule of a foreign law where its
application would be manifestly contrary to public policy: see Art 21, Rome I. In the present context, it is significant that the
reference to public policy is to be taken to include Community public policy: see the commentary in the Giuliano-Lagarde Report
on Art 16 (‘ordre public’) of the predecessor Rome Convention on the law applicable to contractual obligations, OJ L 1980 C 282,
p1. This factor reinforces the view that it would be contrary to public policy to give effect to monetary laws introduced as part of a
process of unilateral eurozone withdrawal in defiance of the treaties.
55 By way of authority for this proposition, see Royal Hellenic Court v Vergottis [1945] Lloyds Rep 292. The fact that the UK is not
itself a eurozone member would not appear to affect the principle stated on the test.
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and enforced in this country if (i) Greece supplies the lex monetae of the contract and
(ii) Greece’s withdrawal from the eurozone occurred on a lawful and consensual (as
opposed to a unilateral and unlawful) basis.
Having ascertained some of the general contractual rules which would apply in the event
of a eurozone withdrawal, it is now possible to consider a selection of more specific
issues.
Loan agreements
By way of illustration, we may examine a relatively standard case in which a London bank
has made available a euro-denominated loan to a Greek customer. What is the position
when the new Greek monetary law seeks to convert this facility into the new drachma?
In the ordinary case, the agreement will provide for the borrower to make payments by
credit to the lender’s euro account in London. There is an immediate difficulty with any
presumption that the law of the place of payment supplies the lex monetae, because the
euro is not the currency of the UK. Nevertheless, the choice of London as the place of
payment may be sufficient to negative any inference that the parties intended to contract
by reference to the lex monetae of Greece, with the necessary result that the facility
remains denominated in euro even after Greece’s eurozone departure.
It is submitted that this view would continue to apply even though the facility had
other connecting factors with Greece—eg it was intended to finance a project or new
business within that country. The fact that the loan had been arranged in an international
market where the euro represents the lex monetae of a large number of Member States
would suggest that the parties did not intend to contract exclusively according to Greek
monetary law.
In such a case, it is submitted that the euro obligations owing to the London bank
would only be substituted by the new drachma if the agreement stipulated for payment to
an account of the lender within Greece itself. Such a provision would quite clearly point
towards an intended selection of the lex monetae of Greece.56
Swaps and derivatives
Suppose that a London bank has entered into a euro denominated fixed/floating rate
swap, with a Greek counterparty governed by English law. What will be the position when
the new drachma is introduced in substitution for the euro in Greece?
Applying the principles described above, it would appear that:
(a) provided that it has stipulated for euro payments to be made to it outside Greece, the
London bank will generally be entitled to receive payments in euro calculated by
reference to the euro price sources stipulated in the agreement. As in the case of a
loan agreement (above), this will follow from the fact that the place of payment is an
indicator of the lex monetae, with the result that the Greek monetary law will be
inapplicable;
56 See Section ‘The lex monetae principle’.
Charles Proctor The euro—fragmentation and the financial markets
21
(b) the same principle will apply to the Greek counterparty provided that it too has
stipulated for payment outside Greece;
(c) if, however, the Greek counterparty has stipulated that payments are to be made to it
within Greece then (i) for the reasons given above, Greece supplies the lex monetae of
the payments due to the counterparty57 and (ii) as a result, the London bank would
be required to pay in new drachma at the appropriate substitution rate and with
interest calculated by reference to the most nearly corresponding price sources; and
(d) once again, however, if the new drachma had been created in flagrant breach of the
TFEU and without the consent of the other Member States, then the new Greek
monetary law would be disregarded and so far as English courts are concerned, with
the result that all relevant obligations would remain outstanding in euro.
Sovereign obligations
Much of the above commentary has focused on general obligations, the impact of the
governing law, the importance of the lex monetae and particular types of financial market
contracts. But the very need for the present discussion arises from the fact that the Greek
Government encountered difficulties in accessing the financial markets. As a result of
measures taken in an effort to alleviate the crisis, many bonds issued by the Greek
Government are now held by the ECB, whether as investor or by way of collateral for
liquidity provided to credit institutions. It is understood that most, if not all, of these
instruments would be governed by Greek law.58 What would be the position if Greece
withdrew from the euro and the ECB or other investors found themselves compelled to
enforce payment of those bonds?
It is tempting to think that there should be an easy and uniform answer to this
question, but matters may not be quite so straightforward in practice. It has been shown
earlier that the crucial issue in determining the lex monetae in this context is the weight of
connecting factors with Greece. Thus:
(a) if a particular issue of bonds was directed solely to local investors, were not expected
to be traded outside Greece and payment was to be made in that country, then the
weight of connecting factors would seem to be overwhelming. In such a case, the
parties would be taken to have selected Greece for the lex monetae, with the result
that the payment obligations would be redenominated in new drachma at the
substitution rate stipulated in the Greek monetary law;59
57 It is perfectly possible for a contract to have more than one lex monetae where several currencies are involved. The oddity in
the present case is that all of the obligations on the face of the contract will be expressed in euro, yet the obligations of each party
are subject to a different lex monetae. This produces the curious result stated in the text. It would also be open to an English court
to conclude that, implicitly, both parties intended to contract by reference to the same lex monetae, in which case all payments
would remain due in euro. But the action of the Greek creditor in seeking payment within Greece would suggest that it was looking
to hedge its borrowing costs within Greece itself and, for that reason, it is suggested that the English courts should give effect to the
Greek lex monetae in this type of case.
58 If this is not expressly stated to apply, it would nevertheless apply in any event by virtue of the ‘characteristic performance’ test
in Art 4(2), Rome I (n 41).
59 To this extent, the weak presumption derived from Bonython v Commonwealth of Australia [1950] AC 201 (PC) may be said to
apply: see the discussion under Section ‘The lex monetae principle’.
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(b) where, however, the bonds had been issued with a view to their resale to international
banks and investors based in other EU financial centres, the connecting factors with
Greece become necessarily more tenuous. In such a case, it is difficult to assert that
the parties mutually intended to contract by reference to the Greek lex monetae, with
the result that such obligations should remain payable in euro;60 and
(c) it is quite possible that some long-term bonds which were issued before the euro was
created still remain outstanding today. If those bonds were expressed in the ‘old’
drachma, then this will represent a clear choice of the Greek lex monetae. In such a
case, those bonds—having been redenominated into the euro in 1999—would now
be converted into new drachma at the prescribed substitution rate.
Events of default
Thus far, the present section has proceeded on the basis that financial obligations will not
be frustrated as a consequence of a eurozone withdrawal, and that such obligations will
still have to be performed in accordance with their terms. It is true that there may be
some difficulty over the identity of the currency in which those obligations are to be
performed where Greece provides (or may be argued to provide) the lex monetae of the
contract. It has, however, also been suggested in some quarters that a withdrawal from
the eurozone and the creation of a new domestic currency may have wider contractual
implications and may, for example, of itself constitute an event of default under
outstanding bonds and similar instruments. This state of affairs would obviously have
serious consequences for the withdrawing Member State because—at the option of the
creditor—amortizing or long-term obligations may be declared to be immediately due
and payable. It is therefore necessary to briefly investigate this possibility.
In the writer’s view, the substitution of the new drachma for the euro would not of
itself amount to an event of default under financial agreements governed by English law.
As noted earlier, bonds and other instruments do not in practice contain express terms
dealing with the fragmentation of the single currency zone, nor would it be feasible or
appropriate to formulate an implied term to the effect that this would constitute an event
of default entitling the creditor to accelerate the obligation. Accordingly, withdrawal from
the eurozone is not a ‘self-standing’ event of default.
Nevertheless, it is possible to envisage two situations in which such a withdrawal could
lead on to the occurrence of a default:
(a) first of all, suppose that the Greek Government elected to pay interest under some of
its sovereign bonds in new drachma at the substitution rate prescribed by the Greek
monetary law. The holders of the instruments argue that this is not a sufficient
payment under the bonds, which stipulate for payments in euro. They accordingly
declare an event of default on the basis of non-payment and accelerate the bonds. If a
court later finds that payment was indeed required to be made in euro in accordance
with rules discussed earlier, then a default will indeed have occurred and the
60 See the discussion under Section ‘Loan agreements’.
Charles Proctor The euro—fragmentation and the financial markets
23
creditors’ actions will have been justified. Accordingly, the bonds will be immediately
due and payable regardless of the originally agreed maturity date; and
(b) second, some loan contracts with corporate borrowers61 will contain ‘material
adverse change’ defaults, which will allow the lender to accelerate the facility on the
occurrence of any circumstances which might adversely affect the borrower’s ability
to meet its future obligations under the agreement. A borrower established in Greece
and which derives its main sources of revenue within that country would clearly find
itself in difficulty if (i) its loan obligations remain outstanding in euro but (ii) the
market value of the new drachma deteriorates significantly as compared to the legal
substitution rate. Such a situation may well justify the acceleration of the facility on
the basis of the ‘material adverse change’ provision.
Price sources
Where the English courts do recognize that Greek law supplies the lex monetae for any
given contract, it will often not be sufficient simply to give effect to the new drachma
substitution at the Greek prescribed exchange rate.
It will often also be necessary to calculate future interest, and the contract will often
refer to EURIBOR in relation to interest calculations for euro-denominated debt. This
rate is directed to the euro and would obviously be inappropriate to the new drachma
obligation.
In such a case, it is submitted that it would be an implied term of the contract that the
rate is to be calculated by reference to the nearest comparable index or source. Thus, if
the contract provides for the euro rate from Reuters screen, reference should instead be
made to the Reuters rate for that currency if available or, otherwise, to corresponding
price data provided by another reputable supplier of financial market information. There
is no conceptual difficulty with the use of an implied term in this type of case. A borrower
would clearly not expect to be excused from his interest obligation in this type of case.
The only appropriate issue for dispute is the identification of the most nearly comparable
information source for rates in the new currency.
Recovery of losses
It was noted earlier that investors whose assets are affected by the new drachma
substitution may suffer serious losses if the market value of that currency depreciates as
compared to the euro.
It is perhaps to be expected that creditors will look for a source which might be
compelled to compensate them for those losses. In terms of legal recourse, however, it is
suggested that the search will prove to be fruitless. The possible targets for such a claim
61 It should be noted that clauses of the type about to be discussed are now commonly found in corporate loan agreements but
are rarely encountered in sovereign debt documents.
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would include (i) the borrower or counterparty to an affected transaction, (ii) the EU and
(iii) the Greek State itself. Taking these alternatives in turn:
(a) the corporate borrower whose obligations are validly converted into the new
drachma merely owes an obligation to make payment in the new monetary unit. The
creation of the new currency was not an act of the corporate borrower and does not
involve a breach of contract on its part. Payment in the new unit in accordance with
the Greek lex monetae will discharge the debtor’s obligations in respect of the amount
concerned. There is therefore no legal ‘peg’ on which to hang a claim against the
borrower or counterparty itself;
(b) in relation to the EU, it is true that it may be required to pay compensation for any
damage caused in the performance of its functions, and that the extent of its
non-contractual liability is to be determined in accordance with the principles
common to all Member States.62 However, a unilateral withdrawal will be an act on
the part of Greece, and the EU is not liable for the separate acts of its Member
States.63 In addition, any measures taken by the Union itself to assist Greece in its
withdrawal process will be taken in order to effect a policy objective, and action of
that kind will not generally result in any form of non-contractual liability on the part
of the Union;64 and
(c) any attempt to claim damages against Greece in an English court would clearly fail.
First of all, there is no clear legal basis for such a claim. It cannot realistically be
asserted that, in deciding to contravene the terms of the TFEU and withdrawing from
the eurozone, Greece assume a duty to compensate creditors who might suffer loss as
a result. In any event, withdrawal from monetary union and the creation of a new
monetary structure are plainly sovereign (as opposed to commercial) acts, and any
claim against Greece before domestic courts would be barred by the doctrine of
sovereign immunity.65
6. Jurisdictional issues
Introductory remarks
As noted above,66 the location of the court in which any relevant proceedings take place
may have a significant impact on the outcome of a particular case. It is therefore a matter
of some importance to determine the identity of the courts which would have jurisdiction
in given cases.
62 Art 340, TFEU. The European Court of Justice has exclusive jurisdiction in relation to such claims: Art 268, TFEU.
63 See eg Case T-113/96, Edouard Dubois et Fils SA v Council and Commission [1998] 1 CMLR 1355.
64 Case 54/76, Compagnie Industrielle et Agricole du Comte Laheac v Council and Commission [1977] ECR 645.
65 See Section 1, State Immunity Act 1978. In particular circumstances, it may be that there could be an international claim
against Greece if the currency substitution were perceived to be discriminatory or to amount to an act of expropriation. But this is
very unlikely to arise in practice and the complexities of that subject lie beyond the boundary lines of the present article.
66 See Sections ‘Greek monetary law’ and ‘External courts’.
Charles Proctor The euro—fragmentation and the financial markets
25
It will be necessary to consider this point both in relation to corporate borrowers and
counterparties located in Greece and in the context of bonds and other obligations issued
by the Greek state. Since the answers appear to be different in each case, it is proposed to
consider these two aspects separately. Before doing so, however, it is necessary to consider
whether EU rules on jurisdiction and judgments would continue to apply in the rather
unusual circumstances now under discussion.
Application of judgments regulation
Corporate obligors
Where the debtor or swap counterparty is domiciled in Greece for the purposes of the EU
Judgments Regulation,67 the situation would appear to be as follows:
1. the starting point is that the Greek counterparty should be treated by a Greek court as
domiciled in Greece if it is so treated in accordance with the internal law of Greece;68
2. in addition, however, the debtor or counterparty may be sued in the place in which
payment of the relevant obligation was due to be made.69 The place of payment will be
the country in which the payee’s bank is located as specified in the contract or, failing
that, the country in which the creditor itself is based.70 In a cross-border contract
expressed in euro, the creditor’s receiving account will almost invariably be outside
Greece, and the location of that account will be the place of payment; and
3. finally, if the financial contract contains an express submission to the jurisdiction of
the English courts, those courts will generally be able to exercise jurisdiction over the
debtor,71 although proceedings may be delayed if the debtor has first commenced
proceedings in Greece.72
In very broad terms, therefore, the English courts will be able to assume jurisdiction over
a Greek corporate counterparty in relation to an international financial contract where
either (i) the contract stipulates for payment by way of transfer to a euro account of the
creditor in England or (ii) the contract contains an express submission to English
jurisdiction. In cases of this kind, and subject to certain considerations arising in the
context of the lex monetae principle which have been discussed earlier,73 it will generally
be the case that obligations will continue to be payable in the single currency,
notwithstanding a Greek departure from the eurozone.
67 Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial
matters, 2001 OJ L 12, as amended. A claim for payment on a swap, loan or other financial contract would plainly constitute a ‘civil
or commercial matter’ for the purposes of the Judgments Regulation.
68 Art 2, read together with Art 59(1), Judgments Regulation.
69 Art 8(1)(a), Judgments Regulation.
70 See AV Dicey and others, The Conflict of Laws (14th edn, Sweet & Maxwell, London 2006), para 11–294.
71 Art 23, Judgments Regulation.
72 Arts 27–30, Judgments Regulation; Case C-116/02, Erich Gasser GmbH v MISAT srl [2003] ECR I-14693; JP Morgan Europe Ltd
v Primacom AG [2005] EWHC 508 (Comm).
73 See Sections ‘The lex monetae principle’ and ‘External courts’.
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On the other hand, the Greek courts will usually have exclusive jurisdiction where the
contract involves a Greek debtor, a Greek creditor and Greek law. In such an exclusively
domestic context, it may readily be assumed that the euro obligation will be treated as
converted into the new drachma.74 This is a reasonable result since, in a case of that kind,
the parties must be considered to have contracted by reference to—and to have assumed
the risk of—the laws of Greece as the lex monetae.75
If, in an extreme case, Greece had withdrawn not only from monetary union but also
from the EU as a whole, then it may be that the Judgments Regulation would no longer
apply, since EU legislation would cease to be binding on Greece.76 In such a case, the
ability of the English courts to exercise jurisdiction over the Greek debtor would depend
on more general jurisdictional rules which are discussed below in the context of sovereign
obligations.
Sovereign obligations
Given that the debt crisis in Europe had at least some of its origins in the difficulties
encountered by Greece in accessing the financial markets, it is pertinent to explore the
position in the event of proceedings against Greece to enforce its bond or other
obligations.
The initial question is—does the Judgments Regulation apply where the debtor or the
defendant is itself an EU Member State? As a matter of first impression, the regulation
should apply because:
(a) the issue of debt instruments is a ‘civil and commercial matter’ for the purposes of
the Judgments Regulation, even though the issue is effected to finance a government
deficit and is made pursuant to sovereign or governmental authority;77 and
(b) whilst disputes concerning ‘. . . revenue, customs or administrative matters . . .’ are
specifically excluded from the scope of the Judgments Regulation,78 an issue of bonds
would fall outside the scope of this expression.
On the face of it, therefore, the requirements of the Judgments Regulation are satisfied.
However, further examination of the Regulation suggests that it was not intended to
74 See Section ‘Greek monetary law’. If the new drachma was created as a result of a unilateral (and, hence, unlawful) withdrawal
from the eurozone, then it is possible that the Greek courts should disregard the new monetary law on the basis that its
introduction was inconsistent with EU law. Given the circumstances, however, it must be most unlikely that a Greek court would
adopt such an approach in practice.
75 Indeed, even if a claim on such a contract came before a court outside Greece, it is submitted that the court should respect the
exclusively domestic nature of the contract and apply the new Greek monetary law in accordance with its terms. This view would,
however, be subject to the public policy considerations noted under Section ‘exernal courts’.
76 In any event, this would be the case if Greece had withdrawn in compliance with the procedures outlined under Section ‘right
of withdrawal’.
77 Compare Section 3(1), State Immunity Act 1978, which deprives a State of its sovereign immunity from proceedings before
the English courts in cases involving ‘commercial transactions’ such as loans and guarantees. For a case in which the ‘commercial
activity’ exception deprived the issuer of bonds of immunity, see the decision of the US Supreme Court in Republic of Argentina v
Weltover Inc 504 US 607 (1992). As an incidental matter, it may therefore be observed that an action against Greece on instruments
of this kind could not be defeated by a plea of sovereign immunity.
78 See Art 1(1), Judgments Regulation.
Charles Proctor The euro—fragmentation and the financial markets
27
apply where the defendant is itself a Member State. The writer has formed this view
because:
(a) the essential theme of the jurisdiction provisions set out in the Judgments Regulation
is that, subject to various exceptions, a defendant should be sued in the Member State
in which he or it is ‘domiciled’;79
(b) the concept of a domicile is driven towards natural persons, corporations and other
forms of association;80 and
(c) the concept of domicile is not easily extended to a State or its government. Greece is
not ‘domiciled’ in Greece—it ‘is’ Greece.
For these reasons, it is suggested that the Judgments Regulation would not apply to
enforcement proceedings against Greece itself.81
Under these circumstances, a creditor seeking to enforce the obligations of the Greek
State in an English court would have to overcome a different set of jurisdictional hurdles:
(a) he would have to obtain the permission of the English court to serve the proceedings
outside England. In the present type of case, permission would usually only be given
if (i) the relevant contract was made in England, (ii) the contract is governed by
English law, (iii) the contract contains a submission to the jurisdiction of the English
courts or (iv) the relevant breach of contract occurred within the jurisdiction (ie
payment was required to be made in England);82 and
(b) the claimant would also have to show that (i) the claim has a reasonable prospect of
success and (ii) that England is the proper place in which to bring the proceedings.83
Thus, a creditor of the Greek government seeking to enforce payment of a euro obligation
in the English courts will only be able to do so if he can meet the criteria outlined in
paragraph (a) and (b) above. If the creditor can pass these tests then, unless it can be
shown that the parties intended to select a Greek lex monetae, the English courts would
generally give judgment in euro, notwithstanding that Greece had withdrawn from the
eurozone and notwithstanding the terms of the new Greek monetary law.84
Failing that, the creditor may have to begin proceedings in Greece. The local courts
would certainly have jurisdiction over the Greek government, but it is perhaps likely that
79 Art 2(1), Judgments Regulation.
80 Arts 59–65, Judgments Regulation.
81 In Case C-285/05, Lechouritou and others v Dimosio tis Omospondiakis tis Germanias [2007] 2 All ER (Comm) 57, the
European Court of Justice considered a claim in the Greek courts against the German State seeking compensation for action taken
by German forces in Greece during the Second World War. The court decided that the claim involved sovereign acts on the part of
Germany and thus did not amount to a ‘civil and commercial matter’ for the purposes of the Judgments Regulation. Unfortunately,
from the perspective of the present discussion, the court did not consider the broader question of whether the jurisdiction
provisions of the regulation could apply where the defendant is itself a Member State. It may be argued that a positive answer to
that question is implicit in the judgment, although this is never a particularly sound basis for an important proposition. As far as
the writer has been able to discover, there is no case in which the issue has been addressed directly.
82 On these points, see CPR r 6, Practice Direction 6B.
83 CPR, r 6.37. The latter test may not easily be satisfied where the defendant is a sovereign debtor. Note that additional
requirements apply when serving process on a foreign State: see Section 12, State Immunity Act 1978.
84 See the discussion in Section ‘Greek monetary law’.
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Capital Markets Law Journal, 2011, Vol. 6, No. 1
the creditor would have to be satisfied with a judgment expressed in the new drachma at
the substitution rate prescribed by the new Greek monetary law.
It will be apparent that it will be crucial for creditors to ensure that they can litigate
their claims in a court of their choice and, where feasible, new contracts should be drafted
to include appropriate jurisdiction clauses.
7. Conclusions
It hardly needs to be stated that a departure from the eurozone is very difficult to
contemplate in practical terms and, should such an event occur, it would no doubt lead
to very serious economic and financial market disruption.
It is, however, suggested that a careful and measured analysis of a contract in the
context of the lex monetae principle will provide clear and commercially sensible results
in the vast majority of cases. As has been shown, contracts which are essentially domestic
to the Greek economy would be redenominated into the new drachma, whilst contracts
with a significant international dimension would remain outstanding in euro. In the
event that Greece withdrew from the eurozone unilaterally and in contravention of the
treaties, then external courts would decline to recognize the new monetary law and would
accordingly continue to give judgments in euro in relation to any relevant contractual
obligations.
It is therefore possible to conclude that the principles discussed in this article would
seem to provide a solution in most cases, with the result that contractual and legal
certainty can be preserved, notwithstanding the onset of a eurozone crisis.