Eurozone fallout – will it affect your business?

Has your business taken adequate steps to protect it from any future eurozone currency changes, considers Stephen Sidkin.

For many, the question on their lips is which country will be the first to exit the eurozone.

Whether an existing eurozone member jumps or is pushed is irrelevant. The consequences for many businesses are likely to be severe. This is particularly so because there is no English or EU law which addresses the legal effect of a change of currency resulting from a eurozone exit. This stands in stark contrast to the situation in certain US states that have such laws.

Take, for example, a British company selling into the Italian market. What will happen if Italy leaves the eurozone and the new lira emerges as the Italian national currency? For some businesses there will be a formal agreement providing for it to be governed by English law and for the English courts to determine disputes. However, even if this is the case does the agreement provide that payment can only be made in sterling or euros, or is it written in such a way that the Italian buyer might try and pay in new lira?

Does the agreement include a force majeure clause? If so, is the clause written in such a way as would enable the Italian buyer to claim that exiting from the eurozone is an event of force majeure allowing it to claim that it is no longer required to perform the agreement? Where, however, there is no formal agreement – good luck!
The converse is also the case where a British buyer is purchasing goods from a business located in, say, Greece, another prospective exitee from the eurozone. The possibility of being able to pay in heavily devalued new drachma may be a very attractive option. But will the British buyer be able to take advantage of it?

In view of this, where you are selling to businesses in countries that may exit the eurozone the steps that you should be taking now are as follows:

Existing agreements

Firstly look at the provisions in your contracts that deal with currency and payment. Run some scenarios to test if these provisions work in your favour. If they do not, seek to accelerate performance of the contract so as to reduce or limit your risk. Do your existing agreements provide for force majeure? If so, what would be the results if the buyer should be in a country that exits the eurozone? Do you use a credit insurer? How robustly does your agreement with it deal with the buyer being in an exiting country? Does the credit insurer have a way out if a prospective exitee exits? Lastly, do you rely on a third party guarantee of your buyer’s obligations? If so, consider how all of these issues may apply to the guarantor.

New agreements

‘Forewarned is forearmed’ so in respect of agreements which you will enter into during the course of 2012, you should ensure that the agreement is expressed to be governed by English law and that the English courts will determine any disputes between the parties. As the seller, a failure to do so is likely to leave you exposed.

Consider issues such as what is to be the currency of payment? How are you going to be paid? You should also ensure that the contract provides for payment in an exact currency, for example, sterling. To include a provision where payment is to be made ‘in the currency of the Republic of Portugal’ is only likely to result in very severe problems.

Will you require the buyer to put in place a letter of credit? If so, ensure that the letter of credit is confirmed by the nominated bank; this may help avoid the problem where the bank issuing the letter of credit is in an exiting country. It is equally important that the letter of credit is stated to be irrevocable. This will avoid the issuing bank revoking it and you losing out.

Where you are trading with businesses in countries that may be about to exit the eurozone the above steps should be taken; they should help you find the best way to ensure that a eurozone exit is a grey cloud which may actually have a silver lining.

In some ways, the problems caused for businesses by the eurozone crisis have been a long time in coming. For those companies trading with businesses in likely exitees from the eurozone, the widely publicized problems may be about to come to a head.

Published by Darrenmoss

CAT magazine's in-house reporter and self-confessed petrol head

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