On March 6, 2020, the Alternative Reference Rates Committee (ARRC) convened by the Federal Reserve Board and the Federal Reserve Bank of New York released a proposal for New York State legislation that is intended to reduce some of the legal uncertainty and adverse economic impacts associated with the transition from LIBOR.
Many existing financial contracts that reference LIBOR either do not have fallback language that adequately addresses a permanent LIBOR cessation or have language that may significantly alter the economics of contract terms if LIBOR is discontinued. Although existing financial contracts may be amended, such an amendment process may be challenging given the number of contracts involved and the nature of the consents needed. ARRC has proposed New York State legislation to address this issue because a substantial number of financial contracts that reference U.S. dollar LIBOR are governed by New York law.
The proposed legislation would (i) prohibit a party from refusing to perform its contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR or the use of the proposed legislation's recommended benchmark replacement rate, (ii) establish that the recommended benchmark replacement rate is a commercially reasonable substitute for and is a commercially substantial equivalent to LIBOR, and (iii) provide a safe harbor from litigation for the use of the recommended benchmark replacement rate.
The proposed legislation would (i) override existing fallback language in a contract that falls back to a LIBOR-based rate and instead require the use of the legislation's recommended benchmark replacement rate, (ii) nullify existing fallback language if that language requires polling for LIBOR or other interbank funding rates, and (iii) include the recommended benchmark replacement rate as the LIBOR fallback in financial contracts that do not have any existing fallback language.
The proposed legislation affords the parties the right to exercise discretion or judgment regarding the fallback rate and to avail themselves of the litigation safe harbor if they select the recommended benchmark replacement as the fallback rate. In addition, the parties may mutually opt out of the application of the proposed statute, in writing, at any time before or after the occurrence of the various events signaling the discontinuance of LIBOR.
The proposed legislation will not override existing contract language that specifies a non-LIBOR-based rate (such as the Prime rate) as a fallback to LIBOR.
A copy of the proposed legislation and ARRC's detailed explanation of the operation of the proposed legislation can be found here.
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