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Regulating away frustration

For several months, lawyers have been fretting over the prospective introduction of Emu. Why? Christopher Stoakes explains.

On January 1 1999, the European Union will adopt a single currency. The euro will be substituted for national currencies. After a transitional period ending on January 1 2002, the old currency notes and coins will be withdrawn. This raises important legal issues that will be felt most keenly in London ­ the EU's most important financial market and one where most international financial transactions are written under English law.

To get a flavour of what this aspect of economic and monetary union (Emu) means, consider a Deutschmark/yen currency swap. Replacing the Deutschmark with the euro will fundamentally alter what the parties contracted to exchange. Using the English law doctrine of frustration, one or other party might claim to be excused from continued performance if the change was to destroy the objective of the swap. Where the swap involves two participating currencies, the contract might even become pointless as each party had entered into it to exploit currency volatilities. Remove them and the contract is dead. How will each party react? That is the sort of uncertainty markets dread. By replacing major trading currencies, such as sterling and the Deutschmark, the euro will have far-reaching legal consequences for all markets.

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