Discontinuation of LIBOR – Impact on Commercial Contracts

The London Interbank Offered Rate (LIBOR) was for decades the globally accepted interest benchmark for trillions of dollars of financial products.

LIBOR was also commonly used as a benchmark interest rate in default interest provisions of commercial agreements, including those in the yachting sector. For instance, the 2005 MYBA MOA, which is still commonly used in the sale and purchase of yachts, uses “Libor + 2% per annum” as its default rate of interest. Similar provisions are present in many management agreements and refit contracts.

Following the global financial crisis and various notable insider trading cases, regulators and the financial markets decided to move away from LIBOR (which was based on estimates provided by banks and therefore at risk of manipulation) to various transaction-based alternative reference rates, including the Secured Overnight Financing Rate (SOFR) for US dollars and the Sterling Overnight Index Average (SONIA) for sterling. From 31 December 2021 LIBOR was gradually phased out and it was finally retired on 30 June 2023, with “synthetic” LIBOR ceasing to be published from 30 September 2024. 

Although financial products have since moved away from LIBOR, many ongoing commercial contracts (and indeed some being signed today) still reference LIBOR in their default interest clauses and will not have been amended or replaced to deal with this discrepancy. What then is the position in those contracts if those clauses referencing LIBOR need to be enforced? In the recent English judgment of Standard Chartered Plc v Guaranty Nominees Limited¹, the English courts clarified the position.

Standard Chartered Plc (SC) had issued perpetual preference shares worth US$750 million which, after 10 years, paid a variable dividend of 1.51% plus 3-month US$ LIBOR. Following the discontinuation of LIBOR, SC could no longer calculate the dividend payments due under the terms of the shares. The question was whether a term should be implied that a reasonable alternative rate should be substituted for LIBOR or whether the contract should be brought to an end as it could no longer be performed.  The court ruled that the parties did not intend for the unavailability of LIBOR to prevent the continued performance of the contract and so the contract contained an implied term that, in the absence of LIBOR, the dividends should be calculated using a “reasonable alternative rate”. In this instance, the court determined, on the basis of expert analysis, that the reasonable alternative rate should be SOFR as, of all the available rates, this rate was closest to LIBOR. The judgment suggests that, for US dollar contracts, SOFR is likely to be the “reasonable alternative rate” and for sterling, SONIA.

It is important to note that each case will be decided on its own facts and, in order to ensure certainty, it is worth revisiting any contracts which reference LIBOR and ensuring that an appropriate substitute is agreed with the counterparties to avoid the need for the courts to impose one.

Footnote

1. Standard Chartered Plc v Guaranty Nominees Limited [2024] EWHC 2605 (Comm)