Greenclose v National Westminster Bank plc
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, Greenclose v National Westminster Bank plc opines on the apparently harmless Notices Section (Section 12) of the 1992 ISDA. In particular, 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 common law, email does not count as an “electronic messaging system”.
Facts
The Loan and the interest rate hedge
Mr. Leach, of Greenclose, was the proverbial little old lady of the law. He was also, the court found, the sophisticated owner of a successful family business running small luxury hotels 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 it was NatWest, and they required Greenclose to buy an interest rate collar for five years with an option to extend it for a further seven.
The point was to guard against rising interest rates. Being an uncommonly low 4.5% in 2006, rates were generally expected to rise. Oh, how we weep with hindsight.
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. If thast happens, we lose. Therefore you must hedge your interest rate risk.”
You might think NatWest could better manage its own interest rate risk — being a bank, and everything — and lend to poor little Greenclose a fixed rate. But it’s so easy to be wise in the rear-view mirror.
So NatWest made Greenclose to buy an option to reduce the bank’s own risk to Greenclose. Because such an option is expensive, NatWest helpfully suggested Greenclose sell the bank an option on the 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?)
Greenclose therefore entered an extendable collar transaction under a 1992 ISDA Master Agreement — the edition is important — which would expire on 30 December 2012 unless NatWest gave proper notice of its extension before that time.
The collar renewal in 2012
Of course, come 2012, NatWest wanted to extend its collar — not because of any particular risk that Greenclose might default (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.)
NatWest’s errors
Schoolboy error no.1 was to have notice deadline which expired during the Christmas holidays. 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 as a rule of thumb it’s best not to have your options expire at Christmas.
- Learning Number 1: Don’t set options that expire in when everyone’s likely to be out of the office.
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 Wikipedia) counted as an “electronic messaging system”.
Wait - email is not an electronic messaging system?
This was the hinge point of the case: does email count as an electronic messaging system under 1992 ISDA? No, thought the court, because:
- “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.”
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.
The court compared the 1992 ISDA with the 2002 ISDA, which does include email, as a separate item from “electronic messaging system”:
12(a) Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner described below (except that a notice or other communication under Section 5 or 6 may not be given by electronic messaging system or e-mail) to the address or number or in accordance with the electronic messaging system or e-mail details provided (see the Schedule) and will be deemed effective as indicated:―
- (i) if in writing and delivered in person or by courier, on the date it is delivered;
- (ii) if sent by telex, on the date the recipient’s answerback is received;
- (iii) if sent by facsimile transmission, on the date it is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender’s facsimile machine);
- (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date it is delivered or its delivery is attempted;
- (v) if sent by electronic messaging system, on the date it is received; or
- (vi) if sent by e-mail, on the date it is delivered,
unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication will be deemed given and effective on the first following day that is a Local Business Day.
12(b) Change of Details. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system or e-mail details at which notices or other communications are to be given to it.
The intellectual endeavour here is interesting: Firstly, to deduce the meaning of the agreement, the court looked at the intentions of the person who drafted the form of 1992 ISDA, 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 agreed on ISDA's 1992 form, but it was signed in 2006, by which stage “email” was widely known and understood.
And why, in 2006, would parties deliberately include all electronic messaging systems 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?
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 1992 ISDA certainly weren’t contemplating Welsh hoteliers.
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 Schedule in any case. Simply put, there was no agreed email address to which NatWest could send Greenclose a message, however you construe Section 12. Therefore, valid communication by email “under Section 12” wasn’t possible. Case closed.
(The court was also exercised mightily about whether a non-conforming notification, even if in fact effective, would count for the purposes of exercising options under the ISDA Master Agreement. Here again it chose the path less travelled, in construing the statement “any notice or other communication may be given in any manner described below” to mean it may only be given in that manner.
Which raises a subsidiary question: what if the court had found that a notice, though non-compliant, had, in actual fact, been delivered to the recipient? Would the court still follow substance over form and disallow the claim?
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”?
The world is a less certain place.
Questions that won’t be answered for now, as NatWest has not appealed the decision.