The High Court has issued an important judgment in a case brought under the Financial Markets Test Case Scheme by Standard Chartered plc (‘Standard Chartered’) to determine the effect of the cessation of the publication of the London Interbank Offered Rate (‘Libor’) on a series of perpetual preference shares which provide for dividends to be calculated with reference to that rate.
The preference shares in question were denominated in dollars and had been marketed in 2006 to investors in the United States who held the economic interest in the shares in the form of ADSs. Standard Chartered sought the Court’s determination that the quarterly dividends payable on the preference shares should now be calculated with reference to a reasonable alternative rate. It invited the Court to determine that a reasonable alternative rate was embodied in CME term SOFR plus the appropriate ISDA spread adjustment (‘term SOFR’). The FCA had directed the IBA to publish that rate as ‘synthetic Libor’ until 30 September 2024 after which publication ceased.
The relief sought by Standard Chartered was opposed by the holders of a minority of ADSs (‘the dissenting minority’). They contended that when the publication of Libor ceased, Standard Chartered was obliged to redeem the preference shares in the outstanding amount of USD 750 million.
The High Court rejected the dissenting minority’s position as ‘wholly untenable’. It accepted Standard Chartered’s case that a term should be implied into the terms governing the preference shares permitting Standard Chartered to adopt a reasonable alternative rate when publication of Libor ceased.
Reviewing relevant authorities the Court held that they supported an approach which, when a contract is required to be performed in (non-frustrating) circumstances which the parties did not foresee and for which they did not provide, seeks to ascertain the purpose or structure of the relevant aspects of the parties’ bargain, and to adopt an interpretation which best serves or is most consistent with that purpose in the changed circumstances. It held that as well as cohering with the intentions of reasonable parties to long-term contracts, the approach also gives effect to an important policy of English contract law which is reluctant to contemplate the failure of partly executed contracts merely because they do not address a particular circumstance or eventuality which has come to pass.
In the result, the Court held that dividends should be calculated by Standard Chartered using the reasonable alternative rate to three-month USD Libor at the date the dividend fell to be calculated, which in this case was term SOFR.
The High Court’s judgment is of considerable potential significance in cases where a contract provides for payments to be made with reference to a benchmark rate such as Libor, but where it fails to provide a fall-back mechanism to deal adequately with the permanent cessation of the benchmark. It also appears to be the first occasion on which the courts in England and Wales have had to consider the effects of the cessation of Libor publication.
Kenneth MacLean KC (leading Andrew Thornton KC of Erskine Chambers and Anthony Pavlovich of 3 VB) acted for Standard Chartered. The dissenting minority was represented by Lord Wolfson KC and Saul Lemer.
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