This case concerns the Financial Markets Test Case Scheme which was set up during the transition from London Inter-Bank Offered Rate (‘LIBOR‘) to alternative benchmark rates.
LIBOR was a borrowing rate calculated by reference to various banks’ lending rates and overseen by the British Bankers’ Association. Although it had been used for decades, from 2017 regulators decided to phase out LIBOR and urged banks to take active steps to move to alternative benchmark rates. In 2021 the Financial Conduct Authority (FCA) announced that “the lack of an active market makes LIBOR unsustainable, and unsuitable for the widespread reliance that has been placed upon it“. The last LIBOR rate published was in late 2024. Its demise has been closely watched by many City institutions – banks, corporations, funds and lawyers. Speculation was rife as to whether, in the case of contracts referring to LIBOR, courts would interpret them as if a different rate applied or imply terms, or alternatively treat them as frustrated which would terminate the contract. It is believed to be the first time that there has been litigation since LIBOR stopped being published and is interesting to see the effect that this has had. It is only the second case to be brought under the Financial Markets Test Case Scheme, the first one being concerned with business interruption insurance.
The facts of this case are that Standard Chartered PLC (the ‘Bank‘) issued a series of preference shares valued at USD 750 million in 2006. Dividends at a floating rate of 1.51% plus on these shares were calculated at a rate linked to a three-month USD LIBOR. The High Court was asked to consider the consequences for the preference shares of the cessation of publication of USD LIBOR and to issue a declaration on the use of the alternative benchmark rate to calculate the dividends payable on the preference shares. Alternatively the Bank argued that the preference shares contained an implied term that a reasonable alternative rate could be used.
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The trial was expedited and held at the end of September 2024. The High Court prescribed that the case should be heard within the Financial Markets Test Case Scheme in the Financial List. This Scheme is designed to consider claims giving rise to ‘issues of general importance in relation to which immediately relevant authoritative English law guidance is needed’. The case was heard before two judges and, after reviewing all relevant UK precedent, the judgement was handed down on 15 October 2024.
What would a reasonable alternative rate be? The Court felt that this was straightforward, an “objective question” and followed experts on both sides of the case and UK and US regulatory precedent. Three – month CME Term Secured Overnight Financing Rate (‘SOFR‘) rate plus the ISDA adjustment spread was a reasonable alternative rate to use. The Court went on to say that arguments in favour of implied terms are likely to be as persuasive when considering the effect of the demise of LIBOR on debt instruments or other legacy financial instruments. The key findings and principles set out by the Court are widely applicable. The Court would not necessarily recommend the same alternative rate in all circumstances but will consider expert evidence, market conditions and practice and in all cases, how to give effect to the original arrangement.
The outcome of this case brings a degree of stability within the industry but a cautionary note remains. Cases can turn on different language used in other types of contract, and their interpretation may still lead to necessary future litigation.
Link: Standard Chartered PLC v Guaranty Nominees Ltd & others [2024] EWHC 2605
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