When the use of LIBOR as a reference rate in financial contracts is phased out at the end of 2021, those contracts currently utilizing LIBOR may face costly litigation, renegotiation and market disruption.
On October 28, 2020, New York State Senate Bill S9070 (“S9070”) was introduced and is intended to possibly pre-empt much of that disruption for the many variable-rate, New York-law governed financial contracts incorporating LIBOR (“LIBOR-reliant contracts”) as a reference rate. Simultaneously, S9070 would guide the U.S. market toward a benchmark replacement eventually to be selected by the Board of Governors of the Federal Reserve Board (“FRB”), the Federal Reserve Bank of New York, or the Alternative Reference Rates Committee (“ARRC”). The ARRC is a group of private sector market participants organized by FRB and the FRBNY to help facilitate a successful transition from LIBOR to its recommended alternative, the Secured Overnight Financing Rate (“SOFR”).
In essence, S9070 adopts the language of the “legislative solution” proposed by the ARRC for New York in March 2020. We discussed ARRC’s LIBOR legislative proposal in a previous blog post.
If passed into law, S9070 would add a new Article 12 to New York’s Uniform Commercial Code. Its key points are as follows:
- Automatic Incorporation of Recommended Benchmark Replacement in Silent Contracts. Upon discontinuation of LIBOR, Section 12-102 would, by operation of law, formally substitute a benchmark rate recommended by the FRB, FRBNY or ARRC (a “recommended benchmark replacement”) to replace LIBOR in those LIBOR-reliant contracts which lack operative fallback provisions or whose fallback provisions still incorporate a LIBOR value or LIBOR-like reference bank polling.
- Preservation of Appropriate Fallback Provisions. Section 12-102 additionally would permit, but not require, the selection of a recommended benchmark replacement in those LIBOR-reliant contracts whose fallback provisions call for the eventual selection of a to-be-determined new benchmark rate. Section 12-102 also would not impair those contracts whose fallback provisions pre-select replacement benchmarks (such as the Prime Rate) which ultimately may not be formally recommended by the FRB, FRBNY or ARRC.
- No Internal or External Contractual Triggering Events. Section 12-103 would deem the use or implementation of a recommended benchmark replacement to be neither an amendment of a LIBOR-reliant contract nor a material or adverse effect under any contract, apparently including third-party contracts.
- Commercial Reasonableness and Uninterrupted Performance. Section 12-103 would provide for the commercial reasonableness of using a recommended benchmark replacement in place of LIBOR, which would also constitute substantial performance of LIBOR-reliant contract terms. Similarly, Section 12-103 would provide that LIBOR discontinuance or the effects of implementing a recommended benchmark replacement does not create a right to excuse performance (e.g. by asserting force majeure) or a right to suspend performance of LIBOR-reliant contracts and will not result in the breach or nullification of LIBOR-reliant contracts.
- Safe Harbor for Use of Recommended Benchmark Replacement. Crucially, Section 12-103 additionally would provide that there is no right of action in law or in equity resulting from the use or implementation of a recommended benchmark replacement. Closing the loop, Section 12-103 would also provide that no person shall have liability or be subject to equitable relief because of the use or implementation of a recommended benchmark replacement.
- Validity of Non-Recommended Benchmark Replacements. Despite S9070’s language intentionally nudging the market toward an official recommended benchmark replacement, Section 12-103 also would provide that there is no negative presumption regarding the validity or enforceability of other, non-LIBOR benchmark replacements which ultimately are not recommended by the FRB, FRBNY or ARRC.
As can be seen from the summary, S9070 promotes the FRB’s, FRBNY’s and ARRC’s eventual recommended benchmark replacement. That recommended benchmark replacement would be shielded from liability, contractual triggering events and performance disruption in apparently any instance where it is applied, whether voluntarily or automatically. Non-recommended benchmarks would not be outright invalidated, but otherwise would receive none of the benefits given to the recommended benchmark replacement under New York law. The result would likely be the gradual consolidation of a standard benchmark rate in New York-law governed contracts according to the Federal Reserve’s preference.
If S9070 is enacted into law, there may be a constitutional challenge. Commentators previously noted that the ARRC’s March 2020 proposed statute may violate the New York Constitution’s Non-Delegation Clause (as the FRB, FRBNY or ARRC, rather than the New York State Legislature, would be determining the recommended benchmark replacement) and the U.S. Constitution’s Contracts Clause (as a state government would be varying the terms of private contracts). The same analysis applies to S9070, which would be the legislative adoption of the ARRC’s proposal.
Norton Rose Fulbright has assembled a group of its attorneys from around the globe to stay on top of these issues and assist clients in the transition to new reference rates. More information can be found on our dedicated IBOR website