Notices - ISDA Provision
2002 ISDA Master Agreement
Section 12 in full
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The major change between the versions of Section 12 (Notices) was the 2002 ISDA’s inclusion of e-mail as a means of communication in addition to the 1992 ISDA’s electronic messaging system. Also, fax and electronic messaging system are not permitted means of serving close-out communications (i.e., under Sections 5 and 6) under the 1992 ISDA, but fax is permitted under the 2002 ISDA, whereas electronic messaging system and email are not. Got all that?
No-one, it is humbly submitted, until Andrews, J. of the Chancery Division, was invited to opine on Greenclose v National Westminster Bank plc, the kind of “little old lady” case that makes bad law. The learned judge does nothing to dispel the assumption that lawyers are technological Luddites who would apply Tip-Ex to their VDUs if they didn’t have someone to do their typing for them (and if they knew what a VDU was).
For there it was held that email is not an “electronic messaging system” and, as such, was an invalid means for serving a close-out notice under the 1992 ISDA, which doesn’t mention email. Read in depth about that case here.
And that was before the entire, interconnected world decided, as an orchestrated whole, to cease the conduct of the business as a physical idea for an indefinite period in early 2020. Suddenly, a widely-used and, it was assumed, well-tested notices regime started to look like it might not work.
Mandatory, or not?
Section 12 specifies a variety of different formats by which a party “may” deliver notices under the ISDA Master Agreement. Ordinarily “may” implies discretion and optionality on a party, such that if it wishes it might choose something different. We have waxed lyrical elsewhere about the potential redundancy of such optional clauses. However, this is not how Andrews J saw this particular “may” in the idiosyncratic, but unappealed, case of Greenclose. This “may” means “must” and, as long as Greenclose remains the unchallenged last word in British jurisprudence, it excludes any other means of delivering a notice. Since hand-delivery and delivery by courier are mentioned but the ordinary post isn’t, this probably rules it out. (But if it’s important, who would use snail mail anyway?)
On the other hand it hardly needs to be said that all of the ordinary day-to-day communication under the ISDA Master Agreement between trading and back-office staff of each party — inconsequential matters like trading, payments, settlements, reconciliations, and margin — will happen by telephone and email, in naked disregard for the terms of the ISDA Master Agreement which, at that point, will be languishing languishing unobserved in an electronic document repository to which operations staff might not even have access. This somewhat gives the lie to Greenclose’s rather quaint apprehensions about how ISDA Master Agreements operate in practice.
Close-out notice restrictions
However curious Andrews J’s reasoning on “may”, note the overriding restriction on forms of notice for closing out: no email, no electronic messages. But note another dissonance: in the 1992 ISDA, close-out notification by fax was expressly forbidden; in the 2002, it is not: only electronic messaging systems and e-mail are verboten. Ironic, seeing how faxes have got on as a fashionable means of communication in the decades since they were sophisticated enough to be a plot McGuffin for a John Grisham novel.
Merriam Webster says it means “to take and hand over to or leave for another”.
The Collins Dictionary of British English, in a rather modishly modern English format, tells us “If you deliver something somewhere, you take it there”.
A bit more challengingly, the Lexico Oxford Dictionary says it means “bring and hand over (a letter, parcel, or goods) to the proper recipient or address”. Oxford’s language suggests a “handing” from sender to recipient, though a commonsense application of delivery through a letterbox to an address says the only “hands” involved are the sender’s.
An agent for the recipient does not need to be there; just that the notice is conveyed to the appointed place. It is no good refusing to answer the door, hiding behind the sofa or blocking up your letterbox with Araldite: if the sender’s agent brings a notice to your designated address, even by regular post, the sender has “delivered” it.
If it is, literally, impossible to arrange even an agent to hand-deliver a package, what then? Before the spring of 2020, most learned commentators would have regarded such a scenario as so absurd as to not dignify an answer. By April, ISDA was seeking advice about it.
The well-intended and, we think, presumed harmless — even modern — addition of email in the 2002 ISDA, in addition to “electronic messaging system”, persuaded the Chancery Division of the High Court to conclude that “electronic messaging system” and “email” are mutually exclusive things, rather than a basic commentary on ISDA’s crack drafting squad™ inability to let things go — a conclusion which the JC finds hard to accept, as you will see if you read the Greenclose v National Westminster Bank plc case note.
For details freaks
Closeout in a time of global mass-hysteria
By March 2020, competent authorities worldwide were taking steps previously unthinkable outside a time of war to prevent the spread of a virus pandemic. Assuming you were not comatose throughout this period you may remember it. Some regulatory action was so draconian to raise a possibility that no means of service of a close-out notice under an ISDA Master Agreement, as documented, would be even possible.
Here we see the unintended consequence of ISDA’s crack drafting squad™’s technophobia as regards email and electronic messaging systems writ large: with all souls in the industry forced to operate with paper bags on their heads from man-caves, dens, studies and dining room tables in the world’s swankier neighbourhoods, and literally no-one in the office — remote working might be the new normal now, but it was unthinkable, pandemic or no, when they published the 2002 ISDA eighteen years ago — and jackbooted goons patrolling the financial services district picking off escaping morlocks and firing warning shots at couriers, suddenly this disproportionate focus on the risks of service by email — the one means of communication left that we are safe to rely on — seems unfortunate.
ISDA a commissioned learned memorandum, which is worth a read if you can get behind the paywall — though one clarification worthwhile: a firm can’t really steal an option by requiring you to deliver your notice to “Marjory the Teal-lady in her kitchenette on the 14th floor,” the cupboard under the stairs or so on, and then point blank refuse to let you past the security barriers with your envelope. But in a multi-tenanted building, if your counterparty is a couple of guys with a spreadsheet and a high-speed connection to the LSE, and they are stuck in a small office on the fourth floor of a building with no communal reception, you might have a problem — at least in a time of force majeure or lockdown.
What terms can’t be implied
Let’s start with the easy part: the ISDA Master Agreement is clear: communication of close-out notices and related items by electronic messaging system or email is not permitted. The law relating to implied terms in contracts is settled: whatever else one can do to give business efficacy to the agreement, one can’t imply a term in a contract that contradicts its express terms. So no electronic messaging under either, no email under the 2002 ISDA, and as for email under the 1992 ISDA — well, punk: are you feeling lucky?
What terms can be implied?
This will depend to an extent on the edition of your ISDA Master Agreement and law you have chosen to govern it, but probably not much: English law and New York law, by their own idiosyncratic routes, tend to arrive at more or less the same place: You are likely to be able to imply a term allowing an alternative means of delivering close-out notices provided that:
- (i) delivery by any of the means set out in the contract is impossible (i.e., not just impracticable or expensive — though given the sums usually at stake when closing out an ISDA Master Agreement, it is hard to see how serving a notice could be prohibitively expensive);
- (ii) that form of notice is commercially reasonable and no less likely to be actually received by the counterparty then one of the specified forms in the agreement; and
- (iii) the selected form of notice is not expressly barred by the terms of the ISDA Master Agreement.
These musings have not been approved by the JC’s opinion committee — because it doesn’t have one — is not based on common law so much as common sense and, as with every other pearl that drops from the JCs’ honeyed lips is not legal advice, and should you rely on it to your detriment, that will be your hard cheese.
Look out: Protocol Ahoy
In any case, Mystic Meg here says, look out for the 2021 ISDA Notices In Time Of Mayhem, Pandemic, And War Protocol. Some aspects that protocol might like to consider:
- Clarifying where delivery needs to be made: Recrafting Section 12 so that delivery need only be made to the public external part of the defaulting party’s place of business, with no need for a human “receiver” as such, or to reach some internal sub-division in the organisation. Some firms like notices to be delivered to “the legal department” or “the fourth floor”, or another arbitrary sub-division of its operation. Given how apt these arrangements are to change, an alert negotiator should, of course, decline any such designations, but that is not always possible. But any firm’s organisation — usually so Byzantine as to be impenetrable even from the inside — is beyond its swap counterparties’ control (and comprehension) and they should certainly not be disadvantaged because of it;
- Evidence of receipt: Allowing any form of communication, whether or not now in existence, including email, where the delivering a party has evidence of receipt, to the extent of the evidence of that receipt. This puts the onus on the delivering party to ensure that the message really is transmitted, without being ankle-tapped by silly formal requirements. At the end of the day, if you can prove the guy on the desk at your counterparty actually did receive the message (for example, by replying to it), even if by email, it is hard to see any equitable justification for holding the notice invalid.
- As the JC always says, anus matronae parvae malas leges faciunt.
- See: I never said you couldn’t.
- https://dictionary.cambridge.org/dictionary/english/deliver. Make your words meaningful™.
- Now there is an argument that email is not expressly forbidden as a communication format in the 1992 ISDA. Seeing as email had only just been invented at the time and, once ISDA’s crack drafting squad™ worked out what it was, its attitude towards email (in the 2002 ISDA) was hostile, we think it is a bit tendentious, especially in light of the curious decision in Greenclose v National Westminster Bank plc.
- The bit designed for receipt of correspondence: you know; the letterbox.
- Some counterparties — usually institutional asset managers drunk on their own self-importance — have been known to steal an option, quite literally, by making it so hard to serve notices that their brokers delay serving while they check the details and figure out a means of robust literal compliance, or even do not serve at all. Sound absurd? Consider how hard it is to negotiate a hard grace period directly into a failure to pay provision, and how hard it is to negotiate one’s own address in the notices section. Does any negotiator ever challenge an address?