The Alternative Reference Rates Committee ("ARRC") proposed legislation for New York State, designed to provide clarity for legacy financial instruments and contracts that have no or inadequate fallback provisions addressing the cessation of LIBOR. The legislation is narrowly focused on legacy contracts and instruments whose fallback language is most likely to lead to disputes or unintended economic consequences.
Where a contract has no fallback provisions or falls back to a LIBOR-based rate (such as the last available LIBOR rate), the legislation would impose the ARRC's recommended replacement benchmark rate (SOFR) and spread. For contracts where one party is given discretion to choose a replacement benchmark, the legislation would provide a safe harbor for choosing the ARRC-recommended benchmark rate and spread. The legislation would also rescind legacy fallback provisions that require a party to conduct a poll for interbank lending rates. The legislation would have no impact on fallback provisions that lead to non-LIBOR replacement benchmarks (such as the prime rate) or on contracts where the parties mutually agree to "opt out" of its application.
For contracts with language within its scope, the proposed legislation would:
- prevent a party from backing out of contractual obligations or declaring a breach of contract due to LIBOR cessation or the use of the benchmark replacement recommended by the ARRC;
- confirm that the recommended benchmark replacement is both a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR; and
- provide a litigation safe harbor for the use of the recommended benchmark replacement.
The proposed legislation would play an important role in addressing some of the practical difficulties in the transition from USD LIBOR. Given the number of contracts that require remediation, it will be a significant logistical challenge to amend bilateral contracts. In the case of widely-distributed instruments (such as floating rate notes), amendments could require unanimous consent of investors. Because disputes about existing fallback language would be resolved by the governing law of the contract, the legislation would codify the law of New York, which applies to the vast majority of commercial contracts. While the New York law would not apply to contracts governed by the laws of other states (such as residential mortgages), it could serve as a model for the resolution of disputes in those jurisdictions.