Josh Hogan and Philip Murphy

The English High Court has published a judgment on how a LIBOR-referencing contract should be interpreted now that LIBOR is no longer published as a benchmark rate. The case (Standard Chartered PLC v Guaranty Nominees Ltd and Ors [2024] EWHC 2605 (Comm)) was decided under the ‘Financial Markets Test Case Scheme’ for cases which raise issues of general importance to the financial markets.

Background

For well-publicised reasons, the London Interbank Offered Rate (LIBOR) was discontinued. The majority of financial contracts were transitioned to alternative benchmark rates before the final LIBOR publication. However, that was not possible for all contracts, leaving a so-called “tough legacy”.

In this case, certain preference shares and related American depositary shares had been issued. The terms of those Shares included that they were perpetual (redeemable only at Standard Chartered’s option) and that they would pay dividends at a floating rate of 1.5 per cent plus three-month LIBOR.

Following final publication of (synthetic) US Dollar LIBOR at the end of September 2024, it was no longer possible for Standard Chartered to calculate the original rate. Standard Chartered’s attempts to amend the terms of the shares to provide for a replacement rate were unsuccessful.

Consequently, Standard Chartered applied to the High Court for a declaration that their suggested replacement rate should apply. The defendants counter-argued that the shares included an implied term that required Standard Chartered to redeem the shares if it was no longer possible to calculate the original rate due to the unavailability of the underlying LIBOR benchmark.

Judgment

The High Court viewed this dispute as primarily a matter of contractual interpretation. Applying well-established principles, it was noted that English law adopts a flexible approach to the interpretation of long-term contracts and seeks to continue to give effect to the parties’ common intention, even as circumstances change. The court also noted that a term may be implied into a contract where it is necessary to give “business efficacy” to the contract or where it is so obvious that it goes without saying.

Applying those principles, the court held that it was clear that the common intention of the parties was that LIBOR should function only as a mechanism to measure the changing value of a bank’s funding costs over time. The court also noted that the inclusion of various fall-back mechanisms, for circumstances where LIBOR was temporarily unavailable, indicated that the contract should continue to operate even if LIBOR was not available.

Applying the analysis to the facts, the court held that business efficacy required it to imply a term into the contract that it should continue to operate even where LIBOR (as defined) had ceased to be capable of operation. In those circumstances, the replacement rate suggested by Standard Chartered (which had been generally accepted by regulators and the markets as a reasonable successor rate) should be applied. In the court’s view, the defendant’s counter-argument that the contract should instead be terminated did not carry much weight.

Comment

While a matter of English law and reliant to an extent on the terms of the contract being interpreted, this judgment should be highly persuasive to any other court considering how to interpret a “tough legacy” contract.

It seems likely that, once a court can find a reasonable basis for inferring that the common intention of the parties was that the contract should continue (notwithstanding the unavailability of the LIBOR benchmark) the court is likely to do so.

This judgment should be welcomed by regulators and financial market participants alike, underscoring as it does the legal system’s support for stability and the continuation of contractual relations where that is possible.

• Josh Hogan and Philip Murphy are partners at McCann FitzGerald.