The demise of Libor and the risk to contracts

by Steven Stuart-Steer on 24 November 2018

The United Kingdom Financial Conduct Authority has announcedthat it will phase out the London Interbank Offered Rate (commonly abbreviatedas "LIBOR") by the end of 2021. LIBOR is a benchmark rate indicating the unsecured loan rate at whichbanks within the UK are prepared to borrow from one another.  As such, this has been widely used as a dependable variable rate of interest rate by financial institution throughout the world as well as for purposes of many commercial contracts (especially for cross-border transactions).   

Given its LIBOR's use for last 50 years or so, it is not surprising that many contracts may not have provided for a scenario where this benchmark rate would fall away.

At this stage, there does not appear to be any indication that the UK legislator will intervene to legislate an alternative reference rate be deemed to apply.  Even if such an intervention were to made, it would be of limited avail as it could not extend beyond its own jurisdiction.

If an agreement has not provided for such a fall-back position (such as providing for an alternative reference rate to be used or for determination through a dispute breaking mechanism), this would leave the interest rate without any point of reference.  As interest can often be a material term, the demise of LIBOR could lead to a number of unintended consequences.  Such consequences could include a boiler plate force majeure or severability clauses being triggered.  The agreement may, however, not have been drafted with this in mind, which could lead to drastic remedies, including termination. 

With the phasing out of LIBOR planned to take place within the next 3 years, it is important that agreements which contain a rate of interest referencing LIBOR be carefully reviewed to assess the impact of this change.  

If necessary, the agreement may need to be amended by way of concluding a suitable addendum.  

An alternative rate being proffered by the financial regulator in the UK is the Sterling Overnight Average Index (commonly abbreviated as "SONIA"), but it remains to be seen if this will enjoy the same widespread adoption that the LIBOR rate enjoyed.   


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