Standard Chartered PLC v Guaranty Nominees Ltd & Ors

Where a long-term contract uses an index as machinery for calculating payments, the index’s subsequent unavailability does not ordinarily cause the contract to fail. The court may imply a term requiring use of a reasonable alternative rate where this is necessary to preserve the contract’s business efficacy and is sufficiently obvious, clear and consistent with the express terms.

The reasonable alternative is assessed objectively. It need not produce identical financial results to the discontinued index. In the circumstances, CME Term SOFR plus the ISDA Spread Adjustment was the reasonable alternative to three-month USD LIBOR.

Standard Chartered issued perpetual preference shares whose dividends became payable by reference to three-month USD LIBOR after an initial fixed-rate period. The contractual definition contained three fallback mechanisms, but publication of synthetic USD LIBOR ceased at the end of September 2024.

Standard Chartered sought declarations permitting calculation by reference to CME Term SOFR plus the ISDA Spread Adjustment. The ADS holders argued principally that the preference shares should be redeemed, or that another term should govern pending lawful redemption. The court determined the proper construction of the fallback provision, whether a term should be implied, and whether the Proposed Rate was reasonable.

1. Construction. The phrase “three month US dollar LIBOR in effect” referred to a LIBOR rate operative at the relevant time, including a previously published rate treated by the market as continuing in effect. It did not mean a rate which replicated or replaced LIBOR after publication had ceased.
2. Implied term. LIBOR was non-essential machinery for measuring changing borrowing costs. Applying the principles in Marks & Spencer, and the distinction between substantive entitlement and quantification machinery in Sudbrook Trading, the court implied a term that, when the express definition became inoperable, dividends were to be calculated using the reasonable alternative rate to three-month USD LIBOR at the relevant dividend date.
3. The term was necessary to give business efficacy, obvious, capable of clear expression, consistent with the express contract, and reasonable and equitable. The court was the ultimate arbiter of reasonableness, rather than Standard Chartered acting subject only to Braganza review.
4. The proposed automatic-redemption term failed the implication test. It was unnecessary, not obvious, inconsistent with the express redemption option, inconsistent with regulatory requirements applicable to Tier 1 capital, insufficiently clear, and subject to statutory restrictions on redemption of share capital.
5. Reasonable alternative rate. On the agreed expert evidence and the regulatory and market evidence, CME Term SOFR plus the ISDA Spread Adjustment was the most suitable available rate. A reasonable alternative need not reproduce LIBOR exactly; some financial divergence was inherent in the changed circumstances.
6. The court rejected Standard Chartered’s construction argument and made the declarations reflected in its conclusion. It observed that similar reasoning was likely to apply to debt instruments using LIBOR as non-essential payment machinery, although that observation was not necessary to the decision.