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Traders with Greece should include consequences of a euro exit in their contracts, expert warns

Traders with Greece should ensure that their contracts include provisions for Greece withdrawing from the euro in order to ensure that payments continue, an expert has said.21 Nov 2012

Nigel Kissack, a dispute resolution expert with Pinsent Masons, the law firm behind Out-Law.com, said that payments in any replacement currency created by Greece may not be legal under the contract unless provision is specifically made for that event. He also warned that a replacement currency might depreciate in value.

He was commenting as the BBC reported that European finance ministers had been unable to reach a deal on a third round of financial assistance for the struggling Greek economy.

Kissack said that it "seemed likely" that Greece would default on its international financial obligations and withdraw from the euro if additional funds were not made available. A 'New Drachma' or other replacement currency would likely depreciate in value quickly, he added.

"The Sunday Times has suggested that the Mayor of London has bet with Lord Mandelson that Greece will exit the euro by Christmas," he said. "Greece is not raw material rich, has a limited industrial base and a banking sector which, in the absence of domestic investment, has relied on the European Central Bank (ECB). In the longer term the Greek Government will invest in infrastructure, education and industry but that will only follow a period of extreme financial difficulty and civil unrest."

According to the BBC, the 'Eurogroup' group of finance ministers is set to meet again on Monday to complete "technical work" on a package of measures intended to reduce Greek public debt. The country has so far received nearly €149 billion in two bailout loans from the eurozone and the International Monetary Fund (IMF). Public debt in Greece is projected to rise to 189% of gross domestic product (GDP) by next year, according to the BBC. The bailout programme aims to reduce its debt to 120% of GDP.

The BBC said that the Eurogroup was in favour of giving Greece an extra two years, until 2022, to reduce its debt. However the IMF, as Greece's other creditor, is against the idea of an extension.

Kissack said that as trade with Greece would continue regardless of the outcome of the ministers' discussions, UK suppliers should keep financial arrangements with Greek customers as simple as possible.

"It is simplistic to suggest that all Greek customers pay their British suppliers in advance, but with a new currency there may well be complications with the legality let alone value of payment," he said. "Letters of credit and similar guarantees could be locked for some time so simplicity in financial arrangements must be sensible."

He said that suppliers should ensure that contracts were governed by English law where possible, and consider early termination rights and the right to assign the contract to another party. Contracts should also deal with the possibility of redenomination, or changing the currency under the contract, and consider 'force majeure' provisions which would protect a party against breach of contract claims if they are unable to fulfil their obligations due to the occurrence of events outside of their control.

Those with longer-term investments in Greek companies would be likely to be faced with more complex arrangements in the event of a euro exit, Kissack said. Investors should be aware of bi-lateral investment treaties and the potential for claims under the Washington Convention, which allows international investors to recover their losses in some circumstances.

"From time to time when working internationally, businesses are faced with extra-commercial risks, often from Governments which may directly expropriate assets or, more subtly, apply some form of anti-competitive discrimination, a lapse in security or protection of assets," he said. "Losses suffered by international investors are recoverable under the Washington Convention, designed to support the international flow of private investment, as well as under contract. If your business is faced with losses abroad derived from Government action - or inaction - a claim under the Washington Convention may be the answer."

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