The transition away from LIBOR has created a new category of contractual dispute. We map the emerging litigation landscape and identify the key risk areas.
The cessation of LIBOR has given rise to a new and rapidly evolving category of contractual dispute. Parties to long-term financial contracts are discovering that the fallback provisions they agreed to years ago do not function as intended in a post-LIBOR world. The result is a growing body of litigation in which courts are being asked to interpret ambiguous contractual language, imply terms, and in some cases rectify agreements.
We have been instructed in a number of these matters and have developed a clear view of where the legal risk lies and how it can be managed.
The core problem is that many contracts written before 2014 contain fallback provisions that were designed to address a temporary unavailability of LIBOR, not its permanent cessation. When applied to a world in which LIBOR no longer exists, these provisions produce results that neither party intended. In some cases, the fallback rate is significantly higher or lower than the parties expected. In others, the fallback mechanism fails entirely, leaving the contract without a functioning interest rate provision.
English courts have so far taken a relatively conservative approach, declining to imply terms or rectify contracts where the existing language, however imperfect, produces a workable result. The US courts have been somewhat more willing to consider extrinsic evidence of the parties' intentions, though the outcomes remain unpredictable.
Parties with significant LIBOR-linked exposure who have not yet reviewed their contract portfolios should do so as a matter of urgency. The limitation period for claims arising from the transition is running, and early legal advice is significantly cheaper than late litigation.
This article represents the personal analysis of the author and does not constitute legal advice. It should not be relied upon as a substitute for specific legal counsel on your particular circumstances. If you have a legal matter you wish to discuss, please contact us directly.
