In an attempt to minimize the legal uncertainty and adverse economic impacts associated with the transition away from U.S. dollar LIBOR (LIBOR) in contracts that lack adequate fallback provisions, on March 24, 2021, the State of New York enacted a new article 18-C of the New York General Obligations Law.
In an attempt to minimize the legal uncertainty and adverse economic impacts associated with the transition away from U.S. dollar LIBOR (LIBOR) in contracts that lack adequate fallback provisions, on March 24, 2021, the New York State Legislature passed a Senate Bill to address these issues. Then on April 6, 2021, New York Governor Andrew Cuomo signed the bill into law. The law is in new article 18-C of the New York General Obligations Law.
The legislation provides that, upon a “LIBOR discontinuance event,” by operation of law, the recommended benchmark replacement shall be the benchmark replacement to LIBOR on the benchmark replacement date in any contract, security, or instrument where (i) there is no fallback to LIBOR, or (ii) the fallback is based in any way on a LIBOR value (e.g., the last available LIBOR value). Given the definitions of relevant terms in this law, this will result in a fallback to a Secured Overnight Financing Rate (SOFR)-based rate plus the credit spread adjustment recommended by the relevant governing body. As a result, the SOFR plus a credit spread adjustment and appropriate conforming changes will be introduced into affected contracts.
“LIBOR discontinuance events” follow the recommended language of “Benchmark Transition Events” published by the Alternative Reference Rates Committee and so capture, amongst other things, (a) public statements by the ICE Benchmark Administration that it will cease to provide LIBOR where, at the time of such statement, there is no successor administrator to provide LIBOR, and (b) the UK’s Financial Conduct Authority (FCA) announcing that LIBOR is no longer representative. The FCA has already stated that one-week and two-month LIBOR will cease to be published after the end of 2021 and that the other tenors of LIBOR (the overnight, one-month, three-month, six-month and 12-month settings) will cease to be published on a representative basis after June 30, 2023.
Under the legislation, a “determining person” will have the right to select the recommended benchmark replacement as the benchmark replacement on or after a LIBOR discontinuance event, where a “determining person” is someone with the authority, right, or obligation to (a) determine the benchmark replacement that will take effect on the LIBOR replacement date; (b) calculate or determine a valuation, payment, or other measurement based on a benchmark; or (c) notify other persons of the occurrence of a LIBOR discontinuance event, a LIBOR replacement date, or a benchmark replacement. If the determining person uses the power conferred on them by the legislation, then the recommended benchmark replacement will irrevocably replace LIBOR for the purposes of determining the benchmark from the “LIBOR replacement date.” It is important to remember that the determining person may decide not to use the power.
It is worth noting that the legislation would not apply where a party could use linear interpolation under the contract or where another available tenor of LIBOR can be chosen under the contract. In addition, the legislation does not override a non-LIBOR-based fallback in a contract, such as where a loan agreement falls back to the Prime rate should LIBOR be discontinued. The fallback to the alternative base rate would be retained.
Other key aspects of the law are that it (i) prohibits parties from refusing to perform contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR or the use of a replacement, (ii) provides a safe harbor from claims and causes of actions for the use of the recommended benchmark replacement and/or the implementation of benchmark replacement conforming changes in accordance with the terms of the law, and (iii) provides that the selection of a recommended benchmark replacement shall be deemed to be both commercially reasonable and “substantial performance by any person of any right or obligation relating to or based on LIBOR.”
Although many financial contracts in the United States are governed by New York State law, other governing laws are used in financial contracts and instruments that would not benefit from this law. At present, discussions and advocacy for similar laws to be passed in other states and at the federal level are taking place.
Finally, although this law and other laws that may be enacted are critical in addressing LIBOR transition, it is not a replacement for parties amending their LIBOR-based contracts and instruments when they can do so to provide for more contractual certainty and details (e.g., the use of lookback periods and compounded or non-compounded mechanics) as to how those contracts and instruments will be amended.