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Following is the English translation of a speech by the Secretary for Financial Services, Mr Rafael Hui, at the second reading of the Euro Bill in the Legislative Council today (Wednesday):

Madam President,

The purposes of the bill are to provide for the substitution of the European Currency Unit (ECU) with the Euro and to put beyond any doubt the general continuity of legal obligations arising from the introduction of the Euro.

The Euro will be introduced on 1 January 1999 to replace the national currencies of the countries participating in the European Monetary Union (EMU). EC Regulation No. 1103/97 provides that the introduction of the Euro shall not have the effect of altering any term of a legal instrument or of discharging or excusing performance under any legal instrument, nor give a party the right unilaterally to alter or terminate a legal instrument. The Regulation also provides that as from 1 January 1999 every reference in a legal instrument to ECU is replaced by a reference to the Euro at a rate of one Euro to one ECU.

The continuity of contracts is also a concern to other financial centres. In New York State, a piece of new legislation was enacted on 29 July 1997 which contains provisions dealing with ECU/Euro conversion as well as continuity of contract in terms similar to those set out in the relevant EC Regulations.

In Hong Kong, as in other common law jurisdictions, the law of currency or the lex monetae principle applies which means that the definition of a contractual obligation governed by Hong Kong law, expressed in a foreign currency, is determined by the law of the relevant foreign country. Applying this principle, performance of a contract governed by Hong Kong law which provides for payment in a currency replaced by the Euro should continue to be possible as payment must be made in the Euro at the conversion rate between the replaced currency and the Euro determined by the EC. However, we consider that it is desirable to introduce specific legislation to put beyond any concern that parties to contracts might be able to argue that the advent of the Euro is a fundamental change of circumstances bringing a given contract to an end. Given the status of Hong Kong as an international financial centre and an important foreign exchange trading centre in the world, it is desirable not to leave any doubt in this respect.

We have consulted the banking industry on this issue. The banks that have been consulted are all concerned about the continuity issue, particularly in relation to the sizeable amount of transactions in ECU deposits and lending, e.g. whether the borrower will use the frustration of contract as an excuse to refuse repayment. They also indicated support for the introduction of specific legislation in Hong Kong to provide for the general continuity of legal obligations in relation to the introduction of the Euro.

The main provisions are -

(a) references to ECU in a contract will be replaced by references to Euro at a rate of one Euro to one ECU.

(b) the introduction of Euro shall not have the effect of discharging or excusing any performance required under the instrument or be a reason for unilaterally altering or terminating a contract unless the parties to the contract agree.

(c) the new legislation should not be taken to affect the operation of the law relating to the validity or enforceability of a legal obligation, e.g. the application of the lex monetae principle, in future cases of currency alteration.

Both the government and the banking sector think this bill should be implemented before 1 January 1999.

Thank you Madam President.

End/Wednesday, November 4, 1998

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