London Inter-Bank Offered Rate (LIBOR)
LIBOR is historically, an interest rate that is calculated from values submitted by leading banks in London. LIBOR has often been used by lenders including banks and other financial institutions as a reference point for determining interest rates on different debt instruments. Examples of debt instruments are mortgages, corporate loans and credit cards.
The use of LIBOR will be permanently discontinued from the end of 2021. This could potentially cause issues with some existing legal documents.
There are many contracts in place that rely on LIBOR, many of which were drafted when the parties did not foresee that LIBOR might end. There may be a number of financial and legal implications if the contracts do not contain fallback provisions that were drafted to deal with the possibility that there would be a discontinuation of LIBOR. This could lead to renegotiations and amendments.
It is unlikely that contracts drafted before 2017 will have sufficient fallback provisions for a permanent cessation of LIBOR, possibly having only an interim solution that was intended to deal with a situation where LIBOR was temporarily unavailable. For example the contract might provide for the variable interest rate to be switched to a fixed interest rate, but it is not likely that this would be a desirable solution long term.
Where the fallback provisions are unclear, open to different interpretations or leave one of the parties at a disadvantage there is an obvious risk of a dispute arising.
If an appropriate way forward is not agreed, the parties may contemplate using a range of legal arguments to claim that the end of LIBOR means they are discharged altogether from obligations under an unfavourable contract. These arguments could include “frustration” or a “force majeure” event.
Any renegotiation of commercial terms should be agreed and documented by the end of 2021. These renegotiations will need to be recorded formally and undertaken in line with whatever variation provisions the contract contains. This may include consent and notice requirements and appropriate authorisations. This will all need to be done correctly to ensure the validity of any variation.
For any company that is not already considering the LIBOR transition the time to act is now. If not there is a very real danger of disputes and litigation.
The Business Services Department at Barker Gotelee has particular expertise in drafting, redrafting, negotiating and amending contracts which will be invaluable to a business at risk when the LIBOR regime ceases at the end of 2021. Whether it is by pre-emptively dealing with relevant contract provisions or dealing with any disputes that may arise following the change, the Business Services Department has the expertise to assist and advise in a legal and pragmatic way to ensure a smooth transition for your business.
Clare Richards is a partner and corporate law specialist in the business services department at Barker Gotelee Solicitors in Ipswich.