On the two-year anniversary of when the world shut down, I found myself reflecting on how my life as a commercial litigator has changed. COVID-19 has disrupted the entire judicial system as we once knew it, forcing courts with already congested dockets to shutter and quickly embrace modern technological advances to enable remote proceedings. With rare exception, Zoom hearings have now become the default, as have years-long delays and undesirable uncertainty—all of which lead to increased costs. While as counsel we have always been faced with the dilemma of how to most effectively and efficiently resolve contentious business disputes consistent with our clients’ objectives, with the COVID-related backlogs courts across the country are facing, arbitration and mediation offer desired alternatives.
Arbitration and mediation are confidential proceedings, whereas litigation is not. Court proceedings are open to the public and copies of nearly all filings are accessible to anyone. Thus, particularly in high-stakes disputes, many businesses prefer the opaque nature of alternative dispute resolution.
What are the primary differences between arbitration and litigation?
• Generally speaking, arbitration is more flexible, less formal, less expensive, simpler, and quicker than a trial.
• Arbitration affords flexibility in the selection of panelists, whereas judge assignments are purely random and, for defendants, depend entirely on where the plaintiff files the case. With arbitration, the parties can select arbitrators with a specific expertise or background in the relevant industry or subject matter of the dispute.
• With arbitration, parties have greater flexibility and control over deadlines and the discovery process. Among other things, parties can limit the types of discovery exchanged as well as the number of depositions.
• Arbitration promotes finality. When the arbitration panel renders a decision, this terminates the dispute (subject to a court’s confirmation of the award, or any of the very limited grounds for challenging an award), whereas the appeal of a court decision can prolong the proceedings for years to come.
What are the primary differences between arbitration and mediation?
• In arbitration, a neutral third-party acts as the judge, hears evidence, and makes a binding decision.
• In mediation, a neutral third-party offers non-binding recommendations and negotiates with the parties to assist them in reaching a resolution. However, unless all parties agree to specific deal points and terms of a resolution, the process is non-binding.
• Parties can agree to mediate a dispute at any point, whereas with arbitration, the hearing typically happens only after motion practice, discovery, and pre-hearing briefing.
The best method of dispute resolution depends on the particular facts and circumstances of your case. Bearing in mind that some disputes are contractually required to be resolved via mediation and then arbitration, having counsel experienced in business disputes is critical to evaluating the risks and benefits of each option. If you would like to discuss these or similar issues in more detail, please contact Katherine A. Grosh at (312) 368-0100 or email@example.com.
Sometime in 2021, the most important benchmark for setting interest rates on commercial (and many variable rate residential) loans will be eliminated. Trillions of dollars of such loans are governed by LIBOR, which is short for the London interbank offered rate. LIBOR is determined on a daily basis and is the interest rate that London banks would use to borrow amongst themselves. There is a separate LIBOR rate determined for different time periods (e.g., a 30 day LIBOR rate, 1 year LIBOR rate, etc.). A lender making a variable rate loan based upon LIBOR will determine its interest rate by adding an agreed-upon spread to the applicable LIBOR rate on a particular date. For example, the interest rate may be equal to the 30-day LIBOR rate in effect on the first business day of each month plus a spread of 5%. The advantage of this method of calculation is that the LIBOR rate is publicly disclosed on a daily basis and the corresponding interest rate under the loan is easily calculated.
Unfortunately, LIBOR has proven to be susceptible to manipulation. In response, bank regulators have called for the index to be eliminated. Given its pervasive use in capital markets, regulators determined that the rate cannot be abruptly replaced. Accordingly, regulators have given the industry a long lead time to establish alternative indices, however, that lead time will be coming to an end in 2021. To date, there is no consensus as to what index will become the predominant replacement for LIBOR.
New loans initiated today are still using a LIBOR benchmark. However, for loans which have a maturity date beyond the 2021 LIBOR phase out, there is a question as to what benchmark will be substituted by lenders. Most loan documents contain generic language to the effect that if LIBOR can no longer be determined, that the lender has the discretion to pick a substitute index. However, it is important for borrowers to make sure that there are limits on the lender’s method of replacing LIBOR. While it should be relatively easy for lenders to pick a replacement index that is relatively stable and easily determined, there needs to be some consideration as to how that index compares to the corresponding LIBOR rate. For example, if the replacement index is 0.25% higher than the LIBOR in effect as of the transition, it is important that the spread be adjusted so that the corresponding interest rate under the loan will be equivalent to the rate established by LIBOR. Otherwise, a borrower could face an increased interest rate solely on account of the change in index.
Although the elimination of LIBOR is still some two years away, it is important for borrowers and lenders to address its implications in new loans with a maturity date that extends beyond the elimination of LIBOR. Similarly, existing loans may have language that attempts to address the issue; however, those provisions may not have received much attention when the parties negotiated the loan documents. As such, it is important for lenders and borrowers to review outstanding loan documents to determine if the language addressing the absence of LIBOR will lead to a fair and adequate substitute index and method for determining variable interest rates.
For further information regarding the consequences of the elimination of LIBOR and commercial lending in general, please contact:
Jeffrey M. Galkin: firstname.lastname@example.org or 312-368-0100.