Monetary Union and Monetary Obligations


A. Introduction


B. Termination and the English Courts


The applicable law


English law—general principles


English law—specific contracts


Foreign law contracts


C. Termination and Foreign Courts


General considerations


Position in the United States


Other jurisdictions


D. Fixed and Variable Interest Rates Fixed Interest Rates


Variable interest rates


E. Private ECU Obligations


A. Introduction


It has been noted earlier1 that a monetary obligation cannot generally be the source of frustration under a contract. Leaving aside the possibility of supervening illegality either under the law applicable to the contract or the law of the place of performance,2 the performance of a monetary obligation cannot be rendered factually or objectively impossible, even if the monetary unit in which it was originally expressed has ceased to exist. It is, however, to be noted that monetary union in Europe involved the effective disappearance of eleven national currencies with effect from 1 January 1999.3 As noted earlier, the physical indicia of those currencies remained in circulation until the early part of 2002, but during this transitional period, they were ‘subdivisions’ or ‘representations’ of the euro. The substitution of the euro thus involved a very large economic area and was achieved in the context of advanced economies and against the background of very sophisticated financial and banking systems. Whilst, ultimately, the question was for certain purposes resolved by legislation, it is appropriate to consider whether the substitution of so many convertible and internationally traded currencies could have had the effect of frustrating or otherwise terminating contracts which were expressed in the legacy currencies, and which had been entered into before the creation of the single currency had been contemplated or agreed.4 This point was of significant importance in the international bond markets, where obligations may frequently be contracted with maturities of twenty or more years—bonds issued during the 1980s or even during the early 1990s would not have contemplated the introduction of a substitute currency within such a relatively short time frame. But the point could be of equal importance in the context of any long-term contract expressed in a legacy currency and which ‘spanned’ the introduction of the euro; and matters were further complicated by the existence of certain types of contract which were intended to create a ‘hedge’ between different participating currencies, and which could thus be said to presuppose the continuing availability of the separate national currencies. Apart from the issues which are specific to the single currency itself, the episode carries lessons which are of general relevance in the context of currency substitutions.5


Whilst monetary union offered many important lessons in this area, it is important to retain a sense of proportion about the scope and extent of the principles about to be discussed. For the most part, these would apply only to contracts entered into before 1 January 1999 and which contained payment obligations which had to be performed after that date. In other words, the present discussion is principally concerned with legacy currency contracts (hereafter, ‘transitional contracts’) which spanned the changeover period. It should not, however, be thought that the points about to be discussed are of purely historical interest; they will become relevant again as and when further Member States move to the third stage of economic and monetary union, and their national currencies are thus subsumed into the euro.6 Against this background, it is proposed to consider the following matters:

(a) the termination of contracts before the English courts;

(b) the termination of contracts before foreign courts;

(c) the impact of the euro on fixed and variable interest rates; and

(d) the position of obligations expressed in the private ECU.

B. Termination and the English Courts


As noted elsewhere, every State enjoys sovereignty over the organization of its national monetary system. As a result, it may change the unit of account and provide for a ‘recurrent link’ between the old and the new currencies, ie it may stipulate that debts expressed in the old currency may be restated and settled in the new currency at a stated rate of conversion. These rules are ultimately derived from the lex monetae principle, under which questions touching the identity of the currency, its status as legal tender, and the substitution of the national monetary system are ascribed to the law of the issuing State.7 Since the lex monetae principle enjoys universal recognition, it follows that the English courts must give effect to those provisions of the euro legal framework8 which provide for the creation of the single currency, which ascribe to it the status of legal tender, and which provide the conversion rates for participating national currencies. However, provisions dealing with the continued enforceability of contracts do not form part of the lex monetae; such questions must be dealt with by reference to the law applicable to the contract.9 It has been suggested in some quarters that the creation of the euro has in some respects broadened the scope of the lex monetae principle, and that the EU provisions for the enforceability of contracts should thus be recognized and applied by foreign courts even when the contract concerned is governed by a third system of law.10 This position cannot be accepted; whether or not a contract remains enforceable following a change in circumstances is a question which all systems of private international law ascribe to that system of law which governs the obligation as a whole.11


Nevertheless, it must be recognized that monetary union in Europe was a major initiative in the monetary field. It involved a number of States whose currencies were (to a greater or lesser extent) freely traded on international markets. Monetary union also occurred at a time when financial contracts of a fairly sophisticated nature—including derivatives, currency, and interest rate options—were created and traded in many centres on a daily basis. Under these circumstances, it was necessary to ask whether the substitution of the euro for so many major currencies might have broader or deeper consequences than those which had applied in the context of earlier monetary changes. In particular, there was a fear that contracts of an essentially financial character might be frustrated or otherwise terminated by the introduction of the euro.12


Against this rather general background, it is necessary to consider a variety of issues which the English courts would have to decide if a party sought to claim that the substitution of the euro for the participating national currencies had the effect of terminating a contract which was expressed in one of the legacy currencies or which had assumed the continuing and separate existence of those currencies. In particular, it would be necessary to consider (a) which system of law governs the contract at hand and (b) the consequences of the introduction of the euro under that system of law, be it English or a foreign system of law.

The applicable law


The terms and effect of the Rome I Regulation on the law applicable to contractual obligations have already been considered.13 It is thus not necessary to repeat the process which the court must undertake in order to identify the law applicable to a particular contract. It is merely necessary to record that:

(a) whether or not a contract has validly come into existence is a question essentially to be determined by reference to the applicable law;14

(b) if a contact has come into existence, then the question of the extinction or termination of that contract is likewise governed by the applicable law.15


How, then, could the introduction of the euro affect contracts, entered into before the beginning of the third stage of monetary union, which are expressed in a legacy currency and contain monetary obligations to be performed after the beginning of that third stage? In broader terms, it would appear that the validity of the contract might be challenged on the basis that the continued and separate existence of particular legacy currencies was a fundamental assumption of the parties. The continuity of the contract may be challenged on the basis that the introduction of the euro constituted a fundamental change of circumstances, with the result that the parties should not be held to their bargain. The resolution of both of these questions is assigned to the law applicable to the contract.

English law—general principles


What, then, is the position if the court finds the transitional contract to be governed by English law? It seems that a party could seek to impugn the essential validity of the contract on the basis that it was concluded on the footing of a common mistake or misapprehension, ie that the relevant legacy currency would continue to exist. The continuity of the contract may be attacked on the grounds that the introduction of the euro is a new and supervening event, which ought to lead to the frustration of the contract.


As to the first possibility, it must be said that the law on the subject of common mistake is by no means free from difficulty.16 But it does seem clear that a contract governed by English law is to be treated as void ab initio if

(a) it was entered into on the basis of a particular contractual assumption;

(b) that assumption was fundamental to the validity of the contract or was a foundation of its existence; and

(c) that assumption proves to have been untrue.17

Could the continued existence of a particular legacy currency be said to constitute a fundamental assumption upon which the contract was based? In virtually every case, this question must necessarily be answered in the negative. Money provides both the measure of an obligation and the means by which that obligation may be satisfied. Where a reorganization of the relevant monetary system occurs during the lifetime of a contract, the lex monetae principle is applied so that the contractual obligations can be redenominated, recalculated, and performed as appropriate. To put matters another way, the parties may have assumed that France will have a lawful currency and that monetary obligations may be settled in Paris; but the assumption that such currency would at all times be labelled the ‘French franc’ cannot be regarded as fundamental.18 It follows that the introduction of the euro could not have formed the basis of a challenge to the initial validity of a contract on the grounds of common mistake.


A contract expressed in a legacy currency was thus valid and binding from the outset; but could the introduction of the euro have the effect of terminating the contract? Could the English law doctrine of frustration apply to a transitional contract, solely because of the substitution of the euro for the legacy currency or currencies in which that contract was expressed? In order to answer this question, it is necessary to formulate the tests which must be met in order to invoke the doctrine, and then seek to apply those tests to a transitional contract. In considering this subject, it is necessary to remember that English law sets great store by the enforceability of the contractual bargain.19 Whilst the doctrine of frustration exists in order to mitigate the injustice which might follow from the literal enforcement of contracts in changed circumstances and thus reach a fair and reasonable result as between the parties, nevertheless the doctrine should not be lightly invoked and must be confined within narrow limits.20 In other words, the doctrine of frustration should be applied with restraint, because it detracts from the sanctity of the contractual bond. These formulations perhaps set out the state of mind with which one should approach the subject, but it is now necessary to examine the specific tests in more detail.


The modern law on the subject of frustration was outlined by the House of Lords in Davis Contractors Ltd v Fareham UDC.21 A contract may be frustrated22 if all of the following criteria are met:

(a) a change in circumstances relevant to the contract has occurred since the date on which the contract was made;

(b) the change in circumstances is outside the control of the parties;

(c) the contract does not provide for the changed circumstances which have arisen;

(d) the change in circumstances was not anticipated or foreseen by the parties at the time of the contract; 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.


If a contract governed by English law is found to have been frustrated, then the contract is terminated automatically and neither party is obliged to perform any of the obligations expressed to arise after the occurrence of the frustrating event.23 If necessary, the court can order various payments as between the parties in an effort to secure fairness in their respective positions.24 This point is, however, noted purely for the sake of completeness. As will be seen, in the view of the present writer, the doctrine of frustration could not have been invoked in relation to any transitional contract merely as a consequence of the substitution of the euro for the participating national currencies.


Returning, then, to the basic theme—could the criteria listed in points (a) to (e) of paragraph 30.11 be said to be met in the context of transitional contracts? The points noted in points (a), (b), (c), and (d) can be disposed of rapidly, and we will then return to the more crucial test noted in point (e).


First of all, the test outlined in point (a) of paragraph 30.11 would inevitably be met in the case of a transitional contract. Such a contract involves monetary obligations expressed in a legacy currency which would cease to exist in consequence of the introduction of the euro. The creation of the single currency is clearly a supervening event which is relevant to the bargain originally made between the parties.


As far as point (b) is concerned, the doctrine of frustration can apply only if the introduction of monetary union was beyond the control of the contracting parties. In other words, a contracting party which is itself responsible for the relevant change in circumstances will not be able to invoke the doctrine.25 This test will so obviously be met that it is hardly necessary to explore it further. Even where an individual participating Member State is party to the contract concerned, it cannot be argued that it bears sole responsibility for the creation of the single currency


The test outlined in point (c) of paragraph 30.11 is self-explanatory. Occasionally, parties may anticipate a possible change in circumstances and will provide for it in their contract. Provided that, on a proper interpretation, the contract covers those circumstances, then the contract will not be frustrated—it will remain in effect, to be performed in accordance with the terms agreed by the parties.26 During the period leading up to monetary union, there was much uncertainty concerning the EMU project and many doubted the political will to see the project through to completion. Equally, many were doubtful about the likely external value of the euro. As a result of these concerns, some transactions completed during this period specifically provided that the legacy currency obligation would be converted into a third currency (usually US dollars) if the euro came into existence. Sophisticated contractual clauses were created in order to deal with these requirements. Whether these were necessary or desirable may be a matter for debate, but there seems to be no doubt that the English courts would enforce such a contractual provision in accordance with its stated terms.27


The application of the test noted in point (d) of paragraph 30.11 is rather more problematical. If the introduction of the euro was foreseeable at the time the parties entered into their contract, then the subsequent introduction of the single currency could not have the effect of frustrating the contract. The key question, then, is—at what point of time did the introduction of the euro become foreseeable for these purposes? Given that we are here concerned with contracts governed by English law and which were expressed in a legacy currency, it is perhaps safe to assume that the parties have sufficient knowledge of the European political scene.28 On that basis, at what point of time did the creation of the euro become a foreseen event? The point would be important because contracts entered into after that date could not be frustrated on the grounds that the single currency was indeed subsequently created. It could be said that the publication of the Delors Report in 1989 gave adequate advance notice of the single currency for these purposes. However, this must be doubtful, because the Delors Report did not specifically require the creation of a single currency; it contemplated that separate national currencies could continue to exist within the framework of a monetary union.29 The Delors Report was thus not a sufficiently unequivocal signal for these purposes.30 Likewise, it may be argued that the introduction of the euro became foreseeable on 7 February 1992, when the Treaty on European Union was signed and the broad framework for the single currency project was thus established. However, in the view of the present writer, the correct date for these purposes would be 30 November 1993, the point at which the Treaty on European Union came into effect following its ratification by all Member States. At that point, aspiring eurozone Member States had agreed to make the transfers of national monetary sovereignty which would be necessary to achieve monetary union. Although the analysis would inevitably be subject to factual situations arising in particular cases, it is thus suggested, in the most general terms, that (a) the creation of the single currency was an event which contracting parties would have foreseen from 30 November 1993, and (b) on that ground, contracts entered into after that date were not amenable to the doctrine of frustration as a result of the creation of the single currency. One cannot, however, dismiss the application of frustration to transitional contracts generally on this ground, partly because the foregoing conclusions are of a tentative nature and partly because some contracts would pre-date whichever event is chosen for ‘foreseeability’ purposes.


It thus remains to consider the test outlined in paragraph 30.11, point (e)—did the introduction of the single currency render the performance of a transitional contract either unlawful, impossible, or radically different from that contemplated by the parties? Given that the criteria listed in points (a), (b), (c), and (d) have been met or have been assumed, in certain cases, to have been met, it follows that a transitional contract could have been affected by the doctrine of frustration, if the point (e) criterion were also met.


So far as English law is concerned, the introduction of the euro plainly did not render the performance of a transitional contract unlawful. On the contrary, English law was required to respect and give positive effect to the introduction of the euro, for the reasons described later in this section. Likewise, it cannot be said that the performance of the monetary obligations arising under a transitional contract became ‘impossible’ as a result of the substitution of the euro for the legacy currencies. It may be that this involved a decision as to the amount required to be paid in the single currency, but the substitution rates were clearly set out in the relevant legislation,31 and a purely mathematical calculation is all that is required. The theory of the ‘recurrent link’ is clearly applicable in this type of case.32


It thus remains to ask—did the introduction of the single currency render the performance of the contract ‘radically different’ from that originally contemplated by the contracting parties? Whilst it was relatively easy to decide whether performance had become ‘unlawful’ or ‘impossible’—because those tests involve a significant degree of objectivity—the application of the ‘radically different’ test poses rather more difficulty. Whilst still, in theory, an objective test, the application of this test is rather more difficult since it involves a large measure of appreciation.