How to avoid some of the most common drafting errors in agreements

If you are not a lawyer, please look away now.

Gone? Jolly good!

For the rest of us legally trained bods, today's post will concentrate on common drafting errors in agreements.

So let's start with an easy one:

Per cent v percentage points

As you know, interest rates are typically referred to as being [x] 'per cent'—as opposed to [x] 'percentage points'—above the relevant rate (such as the base rate of the Bank of England).

This is technically incorrect.

I know. This surprised me a bit when I first came across it. Like many lawyers, I am not exactly what you call mathematically gifted.

The problem is that the terms ‘per cent’ and ‘percentage points’ are often used interchangeably with most lawyers favouring the former.

For example, Directive 2000/35/EC (on combatting late payment in commercial transactions) refers to 'percentage points' (at article 3(d)) whereas the Late Payment of Commercial Debts (Rate of Interest) (No 3) Order 2002 (which sets out the current statutory interest rate) refers to 'percentage' (at article 4).

No wonder lawyers are confused.

Arguably the manner in which the term 'per cent' is used in this context is known and accepted by many lawyers. So perhaps the use of ‘per cent’ is effectively correct? Everybody knows what you mean.

On balance, my view is that the safer route is to follow the approach of, for example, the Bank of England and to favour the use of the term 'percentage point' when quoting an interest rate (eg '[x] percentage points above the base rate of [specify bank]').

If you don’t believe me, perhaps this on-line discussion will help.

Now, talking of base rates ...

Base rate v Bank rate

The term 'base rate' is used by the UK's main clearing banks and accordingly in countless agreements; typically in the clauses which deal with interest.

On the other hand, the 'bank rate' is the 'base rate' of the Bank of England which is officially known as the 'Official Bank Rate'. This rate is determined by the boffins at the Monetary Policy Committee of the Bank on a monthly basis. It is commonly known as the base rate of the Bank of England although this term should not be used (rather, it is best to use 'Official Bank Rate of the Bank of England').

In the past the Official Bank Rate was also known as the 'Minimum Lending Rate'; 'Minimum Band 1 Dealing Rate'; and 'Repo Rate'. These terms should also no longer be used unless you are bored and fancy a cheap thrill by making your contract incorrect.

By the way, details of, or links to, various UK bank base rates can be found on The Institute of Chartered Accountants in England and Wales' (ICAEW) website.

Moving on.

Today’s final tip is on …

LIBOR

Many lawyers like to be fancy and to use a more sophisticated interest rate. Who'd blame them? We all have to live life on the edge from time to time.

Accordingly, the parties may decide that it is appropriate to use a more technical rate such as the LIBOR rate (the 'London Inter-bank Offered Rate'). This is often because, in the current financial climate, the LIBOR rate more closely reflects the higher commercial interest rates that are available (in comparison with base rates and the Official Bank Rate which are at historically low levels).

It is also worth noting that LIBOR has changed recently and is now calculated by ICE Benchmark Administration (IBA), part of the Intercontinental Exchange Group (ICE) and is known as 'ICE LIBOR'. It is no longer administered by the British Bankers' Association (BBA) when it was known, unsurprisingly, as 'BBA LIBOR'.

  • ICE LIBOR is now quoted in five currencies with seven maturities quoted for each currency (ie overnight (1 day), 1 week, 1 month, 2 months, 3 months, 6 months and 12 months), producing 35 rates each business day.
  • All ICE LIBOR rates are quoted as an annualised interest rate.
  • ICE LIBOR is an average of the interest rates that the contributor banks (which number between 11 and 18, depending on the currency in question) quote at just prior to 11 am on each day for an unsecured inter-bank loan.

Therefore it is incorrect to simply state in an agreement that interest will be payable at '[x]% above LIBOR'; instead the relevant type of LIBOR should be quoted: eg '[x] percentage points above the sterling three month LIBOR rate'.

Right. That's probably enough for a Monday afternoon. If you want us here at Comet to look into any other drafting conundrums, please let us know by commenting below.

In the meantime, have a productive week folks!

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