LIBOR Cessation, Implied Terms & Alternative Reference Rate: English High Courts Decides

LIBOR cessation is one of the most important issues in commercial law in the recent times. With trillions of dollars with contracts indexed to LIBOR and its recent cessation, it is important that courts world over deal with it in a fair manner. This article may be looked at for how international arbitral tribunals have dealt with LIBOR cessation.

Recently, the English Court in Standard Chartered plc v. Guaranty Nominees Limited, [2024] EWHC 2605 (Comm) has dealt with the issue. As has been noted in the aforementioned Some jurisdictions provided legislative solutions by prescribing the alternative reference rate through statute or delegated legislation. In some jurisdictions, courts read in an implied term of alternative reference rate. Standard Chartered plc v. Guaranty Nominees Limited decided by the English High Court is an example of the latter approach. Here, the English Court decided that where the three month USD LIBOR ceased or was incapable of operation, a reasonable alternative rate to it was an implied term.

The crucial question is how should courts (and arbitral tribunals) arrive at the alternative reference rate. Standard Chartered provides some guidance on the criteria:

• such rate is to be based on “robust underlying market”;
• while determining such alternative reference rate, courts should “have regard to the liquidity of that underlying market over time, market functioning issues, usefulness to all market participants and the ability to produce and maintain the alternative rates…”
• Such rate should “be able to test the rate by reference to historical data…”;
• It should “consider resilience to changing market conditions, structures and regulations; placing weight on the diversity of market participants, the stability of their participation and their credit quality over time; how changes in participation could affect the benchmark; the transparency of the benchmark and the need for an ongoing ability to assess the rate’s quality…”According to the court, such a rate was the “CME Term SOFR and adding the ISDA Spread Adjustment”.

The decision of the English High Court provides important guidance on two aspects. One, on the legal basis for implying a term on alternative reference rate to 3 months USD LIBOR, and two, determination of the alternative reference rate. 

In House Counsels as Judicial Members in Tribunals such as NCLT and NCLAT

 Please refer to the recent decision of the Hon'ble Supreme Court of India in SBI v. The Consortium of Mr. Murari Lal, 2024 INSC 852, where it has been held:

"183. The Members often lack the domain knowledge required to appreciate the nuanced complexities involved in high-stake insolvency matters in order to properly adjudicate such matters. It has been noticed that the benches of NCLT(s) and NCLAT don’t have the practice of sitting for the full working ours. They are particularly lacking in the capacity to manage the growing number of cases and giving undivided attention required in such matters. There are serious issues in the manner in which the insolvency matters are listed. There is no effective system in place before the NCLTs for urgent listings."

Since liberalisation and globalisation, and after the advent of national law schools, there has been a considerable expansion in the legal profession. One such set of legal professionals are the in house counsels. They are not just legal professionals but also combine as excellent management professionals.

Unfortunately, the Indian legal system has not been able to tap this excellent resource for selection in tribunals and courts. On the one hands higher courts such as High Courts and Supreme Court keep complaining about the lack of professionalism in the tribunal members but on the other hand, excellent and well-qualified professionals are, it is understood, not eligible for being appointed as judicial members of tribunals. It appears as per the current state of law that they are at the most eligible for appointment as technical members.

In this background, the following two solutions could possibly be considered: One, In house counsels could be considered for selection as technical members, in the short run, so that the tribunals are equipped with people who understand not only the mechanics of law but also of business, and two, in the long run, the relevant statutes/ rules can be amended to enable appointment of in house counsels as judicial members of such tribunals.