Irish membership of EMU raises number of legal questions

IT is Government policy that, Ireland should be amongst the member states of the European Union (EU) eligible for economic and monetary union, (EMU) from its commencement.

The increasing likelihood of EMU, occurring in 1999 raises a number of legal questions.

Will contracts remain valid and binding following the introduction of a single European currency?

Irish law transactions are not likely to be affected adversely. Under Irish law, unless an agreement says otherwise, a party will not be able to alter its contractual obligations or extricate itself from a transaction unless the contract is in fact frustrated (rendered impossible to fulfil or perform).

However, there are certain contracts such as interest and currency agreements, some loan agreements, bond issues and other agreements denominated in ECUs where there could be uncertainties (see below).

For EU (non Irish) contracts the position is less clear and, because of the crucial significance of the point and in order to provide certainty and consistency across the EU, specific Irish and EU legislation will likely be required to provide for the non revocability of such contracts.

Contracts made by Irish companies/banks with non EU persons governed by non EU law, for example, New York or Japanese law are more likely to give rise to concern and Irish parties to such contracts should address the point at an early stage in a proposed transaction. There may well be a need for non EU jurisdictions to implement their own legislation to ensure continuity of contracts.

Will swap and derivative transactions be affected?

ISDA (International Swaps and Derivatives Association) has indicated that it is neutral on EMU. However, it has established a working party to examine relevant matters. It is also examining contracts to determine what changes (if any) will be required to address non EU countries' failure to have or pass facilitating legislation.

Swap contracts entered into to hedge foreign currency obligations may not be capable of being continued or there may be no point in continuing with them. An unplanned swap/derivative termination could have adverse financial implications.

There could also be difficulty in cases where fixed interest contracts are based on underlying Irish pound or existing EU currencies transactions and, where following the introduction of a single European currency, the actual interest rate is much higher than the market rate.

Even where the relevant party has a right to prepay the contract, it may be costly to do so. Again, new legislation, both EU and Irish, may be required in order to provide the certainty necessary for companies/banks to commit to new transactions.

What about ECU denominated contracts?

There is a limited but growing number of Irish companies and banks which are party to ECU denominated contracts. For them, the present proposal for ECU based contractual obligations to be substituted for euro obligations on a 1:1 basis unless otherwise provided for in the contract may be significant. The cost of such substitution may be considerably more than the parties intended - especially if some member states (perhaps the United Kingdom) do not participate in the single currency and the ECU basket is replaced with an euro basket whose component currencies are those of the strongest member states (ie where the single currency will not exactly replicate the ECU basket).

It may also not be what the parties intended. For example, many existing loan and bond agreements provide for readjustment of obligations or termination of contract if the ECU ceases to exist. New, transactions will need to address the issue expressly for without express provision the proposed 1:1 swap could lead to problems. Consequences of UK staying out

Ignoring the significant macro economic consequences, there could also be legal and practical consequences if the UK does not participate in EMU. Unless the UK implements a number of EU legislative changes, existing and new English law contracts could have adverse implications for Irish companies and banks (relevant matters would include netting of contracts, increased costs and force majeure clauses).

The City of London will bring strong pressure for most of the required legislation to be introduced; however, uncertainty about the speed of introduction and the nature of such legislation might lead to the assumption of unnecessary burdens by Irish parties.

What if Ireland fails to meet the criteria?

Even if we do not participate in monetary union upon its commencement, there will still be a need for new domestic legislation to take account of the adoption by other member states of a single currency and to enable Irish parties to access the financial markets without unnecessary legal or financial risk.

Conclusion

The anticipation, followed by the introduction, of a single European currency will produce some uncertainty to banking and finance transactions for Irish companies and banks. Both EU and domestic legislation will have to be enacted to remove these uncertainties and to enable Irish parties to engage fully in business transactions throughout the EU and beyond.

For the present, Irish corporates and banks need to take care and advice on both the risk analysis and allocation in many of their new proposed transactions. They might also review existing transactions to determine potential adverse exposures.