The competing positions 

Standard Chartered issued preference shares to Guaranty to satisfy certain regulatory capital requirements. Guaranty was the sole registered shareholder as nominee for a depository which issued American depository shares. It was the holders of those depository shares—known as the Funds—who held the economic interest in the preference shares.

Dividends were payable at “1.51% plus Three Month LIBOR”. For well publicised reasons LIBOR has been replaced.

The LIBOR provision had several express fallback positions. As a matter of interpretation none dealt with the present situation.

Both Standard Chartered and the Funds agreed that it was necessary to imply a term but differed on what that should be. 
 
Standard Chartered asked the court to imply a term that it should be able to apply a reasonable alternative rate as determined by its board. Standard Chartered proposed that would be a rate produced by taking CME Term SOFR and adding the ISDA Spread Adjustment. The Funds argued that the implied term should be that the shares be redeemed. 

What the court said 

The court sided with Standard Chartered but added two elements to the implied term. First that the identification of the reasonable rate was to be assessed objectively (with the court being the final arbiter if required) rather than Standard Chartered’s decision only being able to be challenged on rationality grounds (also called the Braganza duty). Second that the assessment as to what the reasonable alternative rate was should be made afresh on each date the dividend fell to be calculated, rather than the reasonable alternative rate being determined on a “once and for all” basis following the cessation of LIBOR. 

Factors relevant to the court’s decision included that: 

• The preference shares were intended to be perpetual, and the court has more leeway in long term contracts to find a solution to issues which were not anticipated by the parties at the outset of the contract. 
• The role of LIBOR here was essentially to provide a measure to link the amount of the dividend to the changing costs of borrowing over time.
• The LIBOR provision was part of the non-essential “machinery” of the contract (Sudbrook Trading v Eggleton); LIBOR itself was imprecise and had become progressively less effective at measuring what it was intended to measure. 
• It was clear from fallback provisions that the parties did not intend issues with the availability of LIBOR to prevent the continued performance of the contract. 

The court agreed with Standard Chartered that, “as matters stand” its proposed rate met the requirements of the implied term. Not least because there had been widespread use of it. However, it did not rule out that this situation might change in the future and an alternative rate might become more suitable, hence its reluctance to adopt the proposed “once and for all” approach. 

The Funds’ argument was rejected by the court for the following reasons: 

• It was not necessary to bring the contract to an end. 
• It was not so obvious that it went without saying that an outside event should lead to the determination of the contract. 
• It was inconsistent with the express terms of the contract which only sanctioned redemption by Standard Charted and in prescribed circumstances. 
• The proposed term, which was lengthy, convoluted and multi-stage, was not sufficiently clear. 

Comment 

When this issue was being debated in the late 2010s, the result the court has ultimately reached was the one that was being widely predicted (by reference to the Sudbrook case). It is reassuring that the court has taken a very sensible approach, but the facts were especially helpful to that outcome. The court went out of its way to say the same analysis should also apply to debt instruments where there is no effective fallback. Beyond LIBOR, and in relation to implied terms generally, it is worth bearing in mind the approach the court will take in relation to the machinery of an agreement since it may get you out of a fix. 
 
Judgment: Standard Chartered v Guaranty Nominees