A financial services institution has a portfolio of LIBOR-referencing contracts. Some of the contracts are in hardcopy. Others are scattered throughout the company's document management systems. The company's primary regulator has notified the company that starting in 2022 all LIBOR-referencing instruments will need to be rewritten to no longer reference LIBOR. Accordingly, the company needs to locate all the affected contracts, “repaper” them with appropriate terms and manage them going forward. And it needs to do all of this quickly.
Overview and Practical Applications
The London Interbank Offered Rate (“LIBOR”) has been described as the financial world's most important number—at least until now. Historically, over $350 trillion of mortgages, loans and derivatives have hinged on it. But LIBOR is going away. After 2021, UK regulators will no longer require banks to quote the information needed to set LIBOR rates. Firms will thus need to transition their contracts from LIBOR to alternative reference rates.
With the demise of LIBOR, insurance companies, banks and a wide range of other financial institutions are faced with identifying, reviewing and remediating all active contracts that reference an IBOR rate. These institutions are quickly learning that that process is much less daunting if those instruments are centralized in a digital contract management tool.
Digital contract management tools are software products that locate, track, analyze and change contracts. In the past, they were little more than databases that organized contracts in a central location. Modern contract management tools have incorporated artificial intelligence, allowing them to perform advanced searches and analytics on a repository of contracts.
Today's digital contract management tools have a variety of useful applications, including:
- Managing a complex and voluminous body of contracts. Modern tools scan file systems, identify relevant contracts and load them into the platform. From there, users access all of the contracts through a single interface. The tool can then identify specific covenants throughout the set of contacts, isolate contracts with nonstandard provisions and help in replacing provisions (“repapering”). With artificial intelligence, the tools can also quickly compile data about all contracts in the system (e.g., based on expiry dates) and generate custom reports. If used correctly, the tools save time, increase contract “visibility” and reduce the incidence of non-compliance.
- Addressing black swan events, such as the current upheaval caused by COVID-19. Digital contract management tools are invaluable for identifying force majeure clauses and other contract provisions that may have been triggered by unforeseen economic conditions. With this functionality at their fingertips, users have been able to react quickly and intelligently to the crisis caused by the pandemic.
- Investigations and discovery in litigation. The most obvious application is in breach-of-contract cases, such as those involving commercial mortgages, where detailed and accurate information about specific contracts is critical. But there are other litigation applications. For example, information gleaned from contract management tools might support a company's position in a discrimination case where it has been alleged that the company's contracting policies are discriminatory. Other applications could include bankruptcy and tax cases, which often involve the management and production of large volumes of contracts in discovery.
Application to LIBOR Transition
In the LIBOR transition context, companies will likely confront several challenges, including:
- Identifying and collecting all potentially impacted contracts in the company's electronic file systems and hardcopy records,
- Isolating specific contracts in need of remediation,
- Identifying LIBOR-referencing provisions within the contracts and repapering them with fallback language, and
- Renegotiating the agreements with counterparties and executing the amendments.
Veterans of modern litigation will recognize the first two challenges: litigators find, collect and review documents in discovery all the time. Traditionally, litigators have done so with help from an e-discovery tool such as Relativity, Concordance or Brainspace.
But the latter two challenges present workflows not typically encountered in litigation. And while traditional discovery tools may still be useful, companies should consider leveraging contract-specific tools as well, such as Seal.
Digital contract management tools underpin custom workflows that automate and streamline projects such as LIBOR repapering and identifying contracts with force majeure clauses. Without such tools, companies are faced with a much more manual, lengthy and costly scenario. For companies with large numbers of these contracts, a digital contract management tool may be worth the investment.
Contract management had been the province of corporate transactional lawyers. But companies are finding that traditional litigation and discovery techniques often intersect with novel contract-management issues. LIBOR-remediation and force majeure identification projects using digital contract management tools are cases in point.
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