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| A fine example of that old legal maxim ''[[anus matronae parvae malas leges faciunt]]'': Little old ladies (and, in this case, aggrieved Welsh hotel owners) make bad law, {{casenote|Greenclose|National Westminster Bank plc}} opines on the apparently harmless {{isdaprov|Notices}} Section (Section {{isdaprov|12}}) of the {{1992ma}}. In particular it considers the meaning of “[[electronic messaging system]]” and, saucily, finds that it does not include [[email]].
| | {{essay|casenote|Greenclose v National Westminster Bank plc|}} |
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| Let me say that again, in case you missed it: in the eyes of the common law, '''[[email]] does not count as an “[[electronic messaging system]]”'''.
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| ===Facts===
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| ====The Loan and the interest rate hedge====
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| Mr. Leach, of [[Greenclose]], was a little old lady of the law. He was also, the court found, a sophisticated and successful owner of family business running small luxury hotels in and around Wales. But not sophisticated enough to avoid being the wrong end of the [[interest rate swap mis-selling scandal]], wherein banks lent to unwitting merchants on condition that they hedge their interest rate risk with derivatives. In this case NatWest required Greenclose to buy an interest rate collar for five years with an option to extend it for a further seven.
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| The point of the hedge was to guard against rising interest rates. Being at an uncommonly low 4.5% in 2006, rates were generally expected to rise.
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| Now the bank’s theory here is interesting: “We will lend to you at a floating rate for ten years,” it said. “But, if interest rates rise, you may default on your loan. In that case, ''we'' lose. So therefore ''you'' must hedge ''your'' interest rate risk.” You might think NatWest could better manage its own interest rate risk and lend at a ''fixed'' rate. But it’s so easy to be wise in hindsight.
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| So to cut a long story short, NatWest made Greenclose buy an option to reduce the bank’s own risk to Greenclose’s insolvency. Because capping exposure to rates that you expect to rise is expensive, NatWest suggested Greenclose also limit its ''downside'' “interest rate risk” also, making the option a “collar”. (You might think the bank could just as easily have lent at a fixed int ... Oh. I’ve already made this point, haven’t I?)
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| Greenclose therefore entered an extendable collar transaction under a 1992 {{isdama}} - the edition is important - which would expire on 30 December 2012 unless NatWest gave proper notice of its extension before that time.
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| ====The collar renewal in 2012====
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| Of course, come 2012, NatWest wanted to extend its collar — not because interest rates suddenly presented a real risk that Greenclose might default on its loan (since the start of the loan rates had headed ever lower, and still have not recovered) — but because they would make a ton of money. (Marginal note: This is what banks like to do, first and foremost.)
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| Ironically, a financial product designed to protect Greenclose against usurious interest rates was now exacerbating that very problem and, extending it would ''increase'' the very risk of insolvency NatWest first required the collar to guard against.
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| Let’s be clear here: in the abstract, this was fair enough: NatWest had priced its lending operation so as to avoid this risk. It would be bad business for a bank not to exercise a valuable option. But all the same, it still managed to make itself look like a big, bad bank.
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| ==NatWest’s errors==
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| Schoolboy error no.1 was to have notice deadline which expired during the Christmas holiday period, when Greenclose was highly likely to be out of the office. But that’s as may be. (In fairness, it’s not ''that'' outlandish to expect a hotel to be open in the Christmas holidays.) But generally, don’t have your options expire at Christmas.
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| {{Box|'''Learning Number 1''': Don’t set options that expire in when everyone’s likely to be out of the office.}}
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| Error no. 2 – less of a schoolboy one, in this reviewer’s opinion – was to presume that an [[email]], being, after all, an '''electronic''' mail '''message''' sent over a computer '''system''' (so sayeth [https://en.wikipedia.org/wiki/Email Wikipedia]) counted as an “[[electronic messaging system]]”.
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| ===Wait - [[email]] is ''not'' an [[electronic messaging system]]?===
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| This was the hinge point of the case: does [[email]] count as an [[electronic messaging system]] under {{1992ma}}? No, thought Andrews J. because:
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| {{box|“In 1992, email was not in common use and thus the reference to “[[electronic messaging system]]” is unlikely to have been intended to include it.”}}
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| The court does not seem to have heard any evidence on this point. A cursory glance at Wikipedia would suggest this is wildly wrong: the SMTP protocol, over which email is still transferred today, was published in 1982. It is true that the ''expression'' “email” didn’t enter the lexicon until 1993 – ''but that is consistent with nascent email being treated as a kind of [[electronic messaging system]]''.
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| Andrews J compared with the equivalent provision in the {{2002ma}}. This ''does'' include [[email]], as a separate item from “[[electronic messaging system]]”:
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| {{box|{{ISDA Master Agreement 2002 12}}}}
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| The intellectual endeavour here is interesting: Firstly, to deduce the meaning of the words in the agreement, Andrews J looks at ''the intentions of the person who drafted the form of {{1992ma}}'', and not those of the parties who negotiated this actual agreement. Here’s the point: ''ISDA was not a party to the contract''. It may have been ISDA's 1992 form, but it was signed in 2006, by which stage “[[email]]” was widely known and understood.
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| Why would parties deliberately include all [[electronic messaging system]]s ''except'' [[email]], especially since email is the only system vaguely answering the description of an “[[electronic messaging system]]” than a hotel owner in Wales would be likely to have?
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| The court also needed also to draw a peculiar, narrow meaning of the word “system” to rule that while email may be a means of communicating electronic messages, it is not a “system”. [[SWIFT]], thought the court, is a messaging system. [[SMTP]] over the [[Internet]] it thought, is not. You have to squint really hard and hold your head in a funny way to follow that logic. Hotel owners in Wales ''can’t'' communicate by [[SWIFT]]. whether or not they had modern email in mind, the drafters of the {{1992ma}} certainly weren’t contemplating Welsh hoteliers.
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| What’s oddest about this is that the court needed to make ''none'' of these assertions to find NatWest’s attempted service invalid, because ''Greenclose hadn’t specified an email address in the ISDA {{isdaprov|Schedule}} in any case''. Simply put, ''there was no agreed email address to which NatWest could send Greenclose a message'', however you construe Section {{isdaprov|12}}. Therefore, valid communication by email under Section {{isdaprov|12}} ''wasn’t possible''. Case closed.
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| (Andrews J also was exercised mightily about whether a notification, even if undisputedly effective, not consistent with Section {{isdaprov|12}} would count for the purposes of exercising options under the {{isdama}}. Andrews J chose the path less travelled, in finding that “any notice or other communication ''may'' be given in any manner described below” meant it may ''only'' be given in that manner. Which raises a subsidiary question: what if the court had found that a non-compliant notice had, in actual fact, been delivered to the recipient? Would the court still follow substance over form and disallow the claim?
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| And what would the court have found if [[Greenclose]] ''had'' specified an email address? That he was wrong to do so, because that wasn’t an identifier of a valid “[[electronic messaging system]]”?
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| Questions that won’t be answered for now, as NatWest has not appealed the decision.
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Greenclose v National Westminster Bank plc [2014] EWHC 1156 (Ch) is a fine example of the JC’s old legal maxim anus matronae parvae malas leges faciunt: Little old ladies (and, in this case, aggrieved Welsh hotel owners) make bad law, Greenclose v National Westminster Bank plc (judgment) opines on the apparently harmless Notices Section (12) of the 1992 ISDA. It considers the meaning of “electronic messaging system” and, saucily, finds that it does not include email.
Let me say that again, in case you missed it: in the eyes of the current common law email does not count as an “electronic messaging system”.
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