With Europes leaders locked in debate over what to do
next, IFLR takes a look at the complex rules of redenomination
that are set to determine the future of the worlds second
biggest currency in the coming weeks.
Here are the eight principles that, according to Philip Wood
of Allen & Overy, are the main points clients should
address when examining the risks of a country leaving the
1. The first rule applies if the only
available courts are local. In this case, regardless of
governing law, these courts will have jurisdiction. They will
apply the local redenomination and exchange controls.
2. Second on the list is where there are
foreign courts, but local law a local law bond for
example (most Greek bonds are local law). In this case, the
national government can change the law and this will be
recognised by most countries.
3. According to Wood, the
third rule is that a Greek law (for example) cannot change a
foreign law: so Greece has no jurisdiction over settled UK law.
But there are exceptions to this and this is
where the rules begin to get complicated and cause more
4. The main carve-out applies if there are
local insolvency proceedings. Enforcement prospects will be
weak as local courts will have jurisdiction.
A paper claim gives parties a negotiating advantage
but its hard to enforce, said Wood. But in
practice, its much better to have a paper claim, even
though it creates practical problems of enforcement, than not
to have a claim at all.
In 1998, when a moratorium was imposed during the Russian
crisis, any Russian law obligations were subject to this
moratorium. But anyone with an English or New York law
obligation was not subject to this moratorium. This made a
material difference to peoples position.
5. Rule 5 is the lex monetae
principle. Under this law, if Japan, for instance, changed its
currency from the yen to the ducat, all contracts would be
changed and wherever the word yen appeared it would read ducat.
Courts in most countries have said its a universal
rule that if the country changes its currency you follow the
currency, said Wood.
The result of this is that a country can change its currency
regardless of the foreign law, so foreign law offers no
It follows that if the eurozone went through a complete
break-up and was left with no currency, the region would
instead have 17 new currencies and wherever a contract stated
euro, contracting parties would be required to read deutsche
mark, drachma, or whatever the local currency turned out to be.
A system of weighting the currencies would also need to be
6. Another situation lawyers have mentioned
is where a euro obligation as a Eurobond exists, denominated in
Europe. But its clear that the intention of the
contracting parties was that if the currency changes then
Greece could change it.
Even if investors had a foreign law obligation they would be
subject to Greek law in this situation and so the rule
constitutes another exception to the insulating effect of the
governing law. It means that parties could be forced into a
But according to Wood this is a tiny [carve out] and people
have made much of the risk. When contracting parties talk about
the euro, they generally mean the euro.
7. The next rule which is also relatively
minor but has gained a lot of attention occurs if, according to
the contract, the only place payment can be made is Athens for
example and exchange controls make it illegal to pay in foreign
currency in Athens. In this case, the English courts would not
force payment in foreign currency because its illegal in
the place of performance.
But most agreements provide for an alternative place of
payment: there are already terms in the major standard
documents such as the Loan Market Agreement standard forms,
most international bonds and the Isda master agreement.
8. The final major rule to be considered
addresses the IMF agreement, and the provision stating that
exchange contracts contrary to the exchange controls of a
member state that are consistent with the IMF agreement are
unenforceable in member states.
Some countries have treated this as applying to loans
and sale contracts, but other countries like England and New
York dont apply it to anything except foreign exchange
contracts, said Wood.
If this applies it would mean that if Greece introduced
exchange controls and obtained IMF approval for the type of
exchange controls it had, this would override the foreign law
insulation and give Greece a one way option to change the deal,
lawyers have told IFLR.
This wont happen in England and New York, but it
could happen in France and possibly Luxembourg. But even there,
most commentators say it doesnt apply retrospectively.
Theres a lot of doubt about it, said Wood.
These are the significant rules which will be on the minds
of many of Europes governments this week, but many
believe that the eurozone is still in the very early stages of
deciding what it should do.
Some people might be changing some things but on the
whole I dont think there is a mass movement to
reformulate documents, said Wood. A lot depends on
how the situation unfolds.
Click here to read about the litigation
worries around exchange controls.
Click here for the key concerns of a