Following the permanent cessation of the publication of all "panel bank" US dollar LIBOR settings at the end of June 2023, the final milestone in the seven-year transition away from LIBOR is now just around the corner. After 30 September 2024 (the Deadline) there will be no further publication of any synthetic US dollar LIBOR settings (Synthetic LIBOR). (For a recap on Synthetic LIBOR, see our earlier article Dentons - Hot topic of the month: Synthetic US dollar LIBOR - What is it? Can you use it? Should you use it?). So what should parties do if they still have LIBOR contracts on their books?

LMA reminders

In an effort to motivate one final market push to reduce the tail of remaining LIBOR exposures after the Deadline, on 6 September 2024 the Loan Market Association (LMA) circulated a further reminder to all market participants, imploring them to:

• check for any remaining exposures relying on Synthetic LIBOR;
• check the fallbacks contained in any contracts still relying on Synthetic LIBOR;
• check the process / consent levels for making amendments to the interest rate provisions; and
• consider all options available and timing (e.g. consider whether interest resets may be possible on 30 September 2024). 

It would be prudent for market participants to heed the LMA's guidance to remove the likelihood of being left with remaining LIBOR exposures after the Deadline. Check now!

What happens after the Deadline to remaining LIBOR exposures?

Where an English law or UAE law contract has fallbacks that apply when LIBOR is no longer available, those fallbacks will apply in that contract after the Deadline if the contract is not transitioned by the Deadline. So a fallback would apply to calculate interest or profit under the contract on and from the beginning of the immediately succeeding Interest Period after the Deadline instead of Synthetic LIBOR. That's very clear and simple.

However, we have recently fielded a number of calls from clients querying what happens to contracts that do not have such fallback provisions and also are not able to be amended before the Deadline. Could the contract be frustrated? If not, what rate would apply? The answers here are less straightforward, and may depend on the governing law of the contract.

Under English law, a contract is said to be frustrated when a supervening event occurs which so fundamentally affects the performance of that contract (not just making it more burdensome) that the contract is automatically terminated as a matter of law, with both parties being discharged from any further obligation to perform it.

In our view, an English court would be unlikely to decide that a LIBOR-referencing English law contract has been frustrated simply because LIBOR is no longer available after the Deadline. Instead, if the parties were unable to agree on the nature and extent of the LIBOR-referencing obligation after the Deadline, we anticipate that an English court would likely substitute the Financial Conduct Authority (FCA) imposed Synthetic LIBOR methodology referred to in our article above in place of LIBOR within the contract. This would be consistent with the approach the English courts have taken in the past in lease contracts with incomplete pricing mechanics, such as where the English courts have required a "fair and reasonable" price to be paid (see, for example, Sudbrook Trading Estate v. Eggleton [1983] 1 AC 444). Given that the FCA imposed the Synthetic LIBOR methodology prior to the Deadline, in our view it would be challenging for a party to argue that this is not a fair and reasonable substitute following the Deadline. However, as always, the drafting and context of each contract would need to be carefully considered on a case-by-case basis.

There is likely to be even greater uncertainty for contracts governed by UAE law that still refer to LIBOR after the Deadline. As also noted in our earlier article on Synthetic LIBOR referred to above, the automatic application of Synthetic LIBOR to UAE law contracts has been less certain than for English law contracts, because of the lack of any supporting UAE legislation. As such, whether a UAE law contract's reference to US dollar LIBOR is broad enough to include Synthetic LIBOR has purely been a question of contractual interpretation. Accordingly, the reasoning above in respect of the approach the English courts might take to English law contracts after the Deadline does not export well into the UAE. Attempting to amend any remaining UAE law LIBOR referencing contracts as soon as possible is therefore arguably a matter of even greater urgency.

Finally, just a reminder that in US law governed LIBOR contracts with inadequate or no fallbacks, references to LIBOR are likely to have already been automatically replaced with an alternative statutory benchmark, under US legislation. For more information, see our earlier article on Synthetic LIBOR referred to above.

Do not delay

Market participants should do all they can to prioritise migrating the final batch of their remaining LIBOR referencing contracts to mitigate the possibility of being left in a somewhat legally uncertain situation after the Deadline. Time is almost completely out for LIBOR. Act now!

We are still actively helping clients to transition their remaining LIBOR exposures onto alternative benchmarks. If you have any queries on the above or require assistance from our Banking and Finance team, please contact us.

This article is also available in Arabic, click here to download.