IN the event of independence, Scotland’s choice of currency will have far-reaching implications for deals and contracts, says Charles Livingston
One of the key issues in the Scottish independence debate has been whether an independent Scotland would retain sterling or adopt a new currency. The answer to that question would have significant consequences for businesses in the event of a Yes vote on 18 September, 2014.
The Scottish Government’s current proposal, its “Plan A”, is a “sterling zone” (ie a currency union) with the rest of the UK (“rUK”).
Establishing a sterling zone would, however, depend on the agreement with rUK. An independent Scotland might therefore have to adopt its own currency if the rUK declined to participate in “Plan A”, or would do so only if Scotland accepted onerous conditions.
The EU may also have a key role to play on currency, as membership of the European Union, and the possibility that an independent currency may be required in advance of joining the euro, would likely be significant elements of any political negotiations on an independent Scotland’s EU status.
One of the biggest potential impacts of a currency change could be on pre-existing contracts.
Historically, when countries have adopted a new currency, contracts and claims denominated in the old currency have had to be redenominated because the old currency has ceased to exist.
For example, when France adopted the euro, contracts containing obligations denominated in francs redenominated into euros at the official conversion rate. They could do nothing else, as the franc ceased to exist following the change-over.
However, sterling would continue to exist even if an independent Scotland changed to another currency, a scenario that is almost unprecedented among developed economies.
So what would happen to sterling-denominated contracts?
Legislation adopting a new currency for Scotland could expressly require the redenomination of existing contracts into that new currency. That would automatically convert sterling figures in Scots law contracts into the new currency, at an official conversion rate (contracts could be changed back into sterling, but only if both parties agreed).
Legislation could also automatically convert claims brought in the Scottish courts into the new currency.
In the absence of express legislation, the question of redenomination would be based on complex but long-established legal principles, which apply across jurisdictions and so may also affect contracts that related to Scotland but were not subject to Scots law. The terms of the contract would be key. If a court thought the contract parties had referred to “sterling” because it happened to be the currency of Scotland at the time, it would likely decide that the contract should redenominate into the new Scottish currency.
Alternatively, if the court thought the parties intended obligations to be in sterling regardless, the contract would probably not redenominate.
It is therefore possible that a foreign exchange risk could be introduced into existing contracts. That could cause significant tensions between contract parties where each would favour a different outcome. Creditors may want to keep loan obligations in sterling to protect the underlying value of the loan from exchange rate fluctuations, yet debtors whose income would be in a new Scottish currency may prefer to have the loan redenominate to avoid the exchange rate risks of borrowing in a foreign currency.
Businesses may be particularly keen to avoid the risk of a currency “mismatch” between their obligations and their revenues, as will public authorities engaging in, for example, long-term project agreements – they would likely prefer to have their payment obligations under the agreement in the same currency as their revenues (ie tax receipts and other sources of public income), and so may favour redenomination.
Scottish employees may prefer to have their employment contracts redenominate, though that would impose exchange risks on employers based elsewhere in the UK.
Unlike many other aspects of the independence debate, there are things that can be done now to manage the potential consequences of a change in currency.
Existing contracts can be revisited and new contracts drafted in ways that would make them more likely to remain in sterling even if Scotland adopted a new currency (or vice versa, if preferable).
Businesses planning for the possible risks and opportunities of independence should therefore be seeking advice on this key issue.
• Charles Livingstone is an associate in the public law team of Brodies LLP www.brodies.com