Implications of the Eurozone crisis for UK businesses

In a recent blog we looked at how the Eurozone crisis could affect UK property owners & but what about businesses here with continental connections’ Business lawyer Richard Abbott considers the implications of an unstable European economy for UK companies. The continuing uncertainties in the Eurozone raise a number of issues for businesses that trade in the Eurozone countries. One concern is the danger of banks failing, thus preventing businesses and individuals from accessing their accounts. Banks operating in the UK are regulated by the FSA and there is some protection for deposits of individuals and small businesses under the Financial Services Compensation Scheme which protects deposits up to £85,000. However, larger businesses are not covered by this scheme and do not enjoy this protection. Businesses should also be aware that UK banks process payments on behalf of some foreign banks. In the event of the overseas bank getting into difficulties, the British banks may refuse to honour payments made by the struggling bank. If a British business has an account with an overseas bank, this will not be covered by the FSA but may fall within local protection schemes operating in the country in which the bank operates. The same will apply to a UK business’ foreign customers. To prevent uncertainty, businesses should check the rules relating to any overseas bank in which they have an account. In addition, if a business has concerns about a customer’ ability to pay its bills on time, it should consider asking for payment on account of costs. A major risk is that contracts valued in Euros will be subject to severe currency fluctuations. If the Euro falls against sterling, this will result in Euro valued contracts falling in value, thus causing significant losses for UK based suppliers. Wherever possible, UK suppliers should require payment in sterling. This provides the UK supplier with the security of knowing that the contract value is protected. Of course, if the British business is the customer, paying in Euros may well be seen as an advantage in these circumstances. A stable exchange rate throughout the term of a contract provides certainty. At present sterling is the stronger currency but this may not always be the case. Another factor is that if the pound rises significantly against the Euro, a Eurozone based company may struggle to pay the UK supplier and a Eurozone supplier may struggle to serve its UK customer at the contract price. The reverse situation applies if the Euro is the stronger currency. To counter this uncertainty, a provision can be put into the contract providing a mechanism to re-calculate the charges payable in the event of fluctuations in the exchange rate above a certain amount. There is a risk that one or more Eurozone countries may revert to their own currencies. This is something that Europe’ politicians are determined to avert, but it cannot be ruled out. If a contract is valued in Euros, payment will still be due in Euros even if the national currency of one of the parties to the contract changes. The likelihood is that, in the period immediately following adoption of a new currency, there will be a period of volatility in the exchange rate. Under these circumstances it makes sense to retain the Euro as the contract currency as it is likely to retain the confidence of the markets vis a vis an un-tested new currency. However, the parties will need to discuss how the adoption of a new currency will affect the contract and may need to use the change control procedure to introduce new clauses, such as a review of pricing in the event of currency fluctuation. In the event of an escalation in the Euro crisis, there are likely to be disputes around terms of payment. For instance, we could see parties to a contract claiming that the crisis was a force majeure event, entitling it to suspend or terminate the contract. In these uncertain times, the best advice is for parties to a contract to maintain a close dialogue with each other, so that issues can be dealt with before they escalate. This demonstrates the value of incorporating governance and change control procedures in contracts. We live in uncertain economic times. The best legal advice that can be given is to ensure that contract provisions are robust and to ensure that parties to a contract maintain open communications, so that problems can be dealt with at an early stage and do not escalate into something more serious. Richard Abbott This information is for guidance purposes only and is does not constitute legal advice.