By Alex Hawley and Kirsty O’Connor
The London inter-bank offered rate (LIBOR) is set to be completely phased out by the end of 2021. Although other inter-bank offered rates and other types of reference rates do remain and are being proposed as a replacement, the transition is not automatic.
This is likely to have an impact on any business or individual with a contract, loan, or financial instrument where some terms, such as the calculation of payment or interest, are based on the rate of LIBOR. Whereas, until now, it would have been straightforward to find how much was owing or indicated by a clause by looking up the current published LIBOR rate, when rates cease to be published, that calculation may suddenly become impossible, throwing the whole contract into doubt. There are steps businesses can take now to avoid disputes on this point, but over the next few years we are likely to see a new landscape of arbitration and litigation on this issue.
What are the steps businesses should take now?
1. Review contracts / contractual clauses connected to LIBOR: The most important step to take now is to check through the business’ contracts and loans to see which have a clause based on LIBOR, including late payment clauses, and then seek to renegotiate those contracts with the counterparty. It is not always as simple as replacing the word “LIBOR” with another rate, as the shift can alter the commercial reality of the contract and give rise to tax or transfer pricing implications. Given the current uncertainty and changes in the market due to the Covid-19 pandemic, this is also a good opportunity to revisit agreements and check whether the terms still reflect the intentions of the parties.
