UK: The Discontinuation Of LIBOR And Arbitration: Issues Of Substance And Procedure For Parties And Arbitrators

Last Updated: 21 February 2019
Article by Nicholas Peacock and Hannah Ambrose

The global financial markets are currently preparing for the phasing out of the London Inter-bank Offered Rate (or LIBOR) and other Inter-bank Offered Rates (or IBORs). LIBOR is the most widely used benchmark interest rate globally, employed in an estimated US$350 trillion worth of financial contracts worldwide. LIBOR may also be used in commercial contracts – for example, in price adjustment mechanisms in share purchase agreements, price escalation clauses or as a reference rate for contractual interest on late payments. LIBOR may also be specified in arbitration clauses as a benchmark rate for interest on the award.

Many financial instruments affected by the discontinuation of LIBOR will include arbitration clauses. As discussed below, whilst the substantive disputes arising from the end of LIBOR will be the same whether they are resolved in a court or by an arbitral tribunal, there are some additional considerations particular to the arbitration process which are relevant in the context of LIBOR discontinuation disputes. Further, even when determining a dispute which does not arise from the end of LIBOR, arbitral tribunals may have to grapple with how to award interest where an arbitration clause uses LIBOR as a reference point. Read more in the E-bulletin here.

Arbitration clauses in financial instruments and "end of LIBOR" disputes

As noted in the ICC Commission Report on Financial Institutions and International Arbitration, "[a]rbitration is increasingly a part of the strategic options considered for cross-border banking and financial disputes". Arbitration clauses are included in all types of financial instruments in the loan, bond, securitisation and derivatives markets. As such, it is likely that some of the inevitable disputes arising from the phasing out of LIBOR will fall to be determined by arbitral tribunals.

Disputes may arise out of (i) legacy contracts which contain inadequate fall-back mechanisms to address the phasing out of LIBOR; and (ii) contracts entered into now whilst the replacement for LIBOR is uncertain, containing placeholder or temporary replacements for LIBOR. The nature of disputes arising in the loan, bond, securitisation and derivatives markets are discussed in detail in this E-bulletin. The E-bulletin focuses on English law agreements and illustrates the uncertainty of outcomes, where standard English contract law principles of construction are applied or attempts are made to imply terms to address the discontinuation of LIBOR in an anticipated range of different situations. Of course, similar issues will apply in relation to other IBORs, for each of which replacement risk-free rates are being developed, and tribunals may consider similar disputes under various different governing laws.

Arbitration of LIBOR discontinuation disputes – considerations for parties

There are a number of additional considerations when it comes to resolving disputes by arbitration relating to the end of LIBOR. These are relevant when legacy contracts contain arbitration clauses, as well as in the context of new contracts (or existing contracts which are being amended to address end of LIBOR uncertainty), where the parties are considering their dispute resolution options:

  • Identity of arbitrator – parties who have chosen arbitration may be able to nominate an arbitrator. In view of the likely nuances behind the use of LIBOR in any given financial contract and the arguments that could be raised as to whether the replacement should be treated as an applicable substitute in the circumstances of a particular transaction, a party may wish to appoint an arbitrator with a solid practical knowledge of both the financial instrument in question but also the operation of that particular financial market. (See, for example, the reference to "a material "winner" and a material "loser" as a result of the transition from LIBOR" in the context of loan agreements, here).
  • Challenges on a point of English law – as described here, LIBOR discontinuation disputes are likely to raise complex issues of English law. Under English law, an award can be appealed on the basis of an error on a point of English law (English Arbitration Act 1996, section 69). However, many of the institutional arbitration rules (such as the LCIA Rules and ICC Rules – model clauses for both of which are included in ISDA's Arbitration Guide) exclude any non-mandatory rights of challenge to an award. The parties' choice of institutional rules will typically determine whether section 69 challenges are automatically excluded and therefore whether any alleged error in the application of a potentially evolving area of English law by a tribunal sitting in London can be appealed.
  • Non-precedential value of an arbitral award – an award will bind only the parties to it, and will not create a binding precedent. As a consequence, the resolution of a dispute by arbitration will not introduce any legal certainty with regard to the resolution of the same dispute under a financial instrument with the same contractual terms with a different counter-party. Where a party enters into multiple financial instruments on the same terms but with different parties and with the same potential for LIBOR discontinuation disputes, this could lead to multiple parallel proceedings with the attendant costs, delay, management distraction and potential for inconsistent outcomes.
  • Powers of the tribunal – it is possible that a situation may arise in which, if there is no LIBOR, the tribunal is asked to step in and determine an applicable interest rate. As described in the E-bulletin, there is English jurisprudence which addresses the situation where a third-party determination is required for operation of a contractual formula. However, whether a tribunal can make a similar discretionary determination of a replacement reference rate will be dependent on the scope of the tribunal's powers under the arbitration agreement, law of the seat and any applicable rules.

Arbitration of LIBOR discontinuation disputes – considerations for financial market institutions

As described in the E-bulletin, various financial market institutions such as ISDA and the LMA have made proposals for how to deal with LIBOR discontinuation and they may wish to intervene in significant disputes concerning the interpretation of their market documentation in the context of the end of LIBOR. Third party interventions in civil proceedings in the English court are possible (for example, ISDA has intervened in civil proceedings concerning the interpretation of provisions of the ISDA Master Documentation). Third party intervention is usually not possible in commercial arbitration and, where it is possible, it usually requires the consent of at least one of the parties and the tribunal. Moreover, even if a financial market institution intervened in an arbitration concerning LIBOR discontinuation, the impact would be limited by any confidentiality restrictions concerning the arbitration and publication of any award.

Pre-award interest, post-award interest: selection of an interest rate

Many arbitration clauses do not address the award of interest, leaving the award of interest (including the rate) to be determined by the tribunal under the powers granted by the law of the seat. For example, neither the LMA Developing Markets Loan Documentation which includes an arbitration clause, nor the model arbitration clauses in the ISDA Arbitration Guide, include any express provisions on interest.

However, there are contracts which specify that the tribunal shall award interest by reference to LIBOR. Depending on how it is drafted, such an interest provision may displace the default powers to award interest which a tribunal would otherwise have under the law of the seat. This leads to uncertainty as to whether the tribunal has any power under the law of the seat to substitute another reference rate.

Comment

The disputes risk arising from the phasing out of LIBOR is significant and multi-jurisdictional. The forum for dispute resolution may understandably be further down the parties' list of key concerns with the present focus at least being on the mitigation of risks associated with LIBOR discontinuation. However, for parties who have included arbitration clauses in legacy contracts with LIBOR discontinuation implications, or who are reviewing their dispute resolution options in such contracts now, there are a number of considerations to bear in mind. One of the most noteworthy is the ability to appoint an arbitrator with significant market experience and expertise, in order that the tribunal's decision will not be made in isolation from the operation of the financial markets in which the financial instrument was entered into.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
Fenwick Elliott LLP
 
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
Fenwick Elliott LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions