Britain considers legal fix to avoid clogging courts with Libor lawsuits

By Huw Jones

LONDON (Reuters) - Britain said on Monday it was considering a legal fix to avoid disgruntled users of Libor clogging up the courts and disrupting markets after the tarnished interest rate benchmark is scrapped in December.

Libor, or the London Interbank Offered Rate, is being replaced in Britain by the Bank of England's Sonia overnight rate, a huge undertaking for outstanding contracts that range from credit cards to home loans.

So-called "tough" legacy contracts still based on Libor at the end of December may have to use a form of Libor which will be calculated differently, meaning users could lose out financially and look to the courts for compensation.

The finance ministry asked in a public consulation on Monday whether it should introduce a "safe harbour" so that a forced shift to a different rate cannot be deemed a breach of contract basis for a lawsuit.

If the ministry went ahead, a safe harbour provision would be added to the financial services bill currently being approved by parliament.

"A safe harbour is novel and will be welcomed by the financial services sector," said Ceri Morgan, a professional support consultant at Herbert Smith Freehills law firm.

Morgan said that without a safe harbour, there could be mass class action claims related to legacy contracts.

"There could be significant volumes of litigation, ultimately taking time and money for banks, and clogging up the courts system, with market disruption as a consequence of claims being brought," Morgan said.

A safe harbour would also be an incentive for market participants to sort out legacy contracts before December, given there would be no point in holding out for possible compensation from the courts.

It would only apply to contracts written under law in Britain, the finance ministry said.

There is a proposal in the United States for a safe harbour, but the European Union does not have such a provision in its revised rules for benchmarks.

(Reporting by Huw Jones; Editing by Kirsten Donovan)