Greenclose v National Westminster Bank plc: Difference between revisions

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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|}}
 
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 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.
 
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.
 
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.
 
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?)
 
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.
 
====The collar renewal in 2012====
Interest rates were even lower in 2012, and the collar was massively out of the money for poor old Greenclose, now facing the ugly prospect that it might be extended for seven more years. Of course NatWest wanted to extend its collar, even though interest rates presented no real risk to Greenclose (four years later, they are lower still), but because they would make a ton of money. Ironically, because the collar significantly increased Greenclose's running interest costs, extending it would ''increase'' the very risk of insolvency NatWest first required the option to guard against.
 
Now let’s be clear here: 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 look like a big, bad bank.
 
===NatWest’s errors===
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 outlandish to expect a hotel to be open in the Christmas holidays. But generally, don't have your options expire between Christmas and New Year.
{{Box|'''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 [https://en.wikipedia.org/wiki/Email Wikipedia]) fell within the meaning of an “[[electronic messaging system]]”.
 
===[[Email]] is not an [[electronic messaging system]]?===
This was the hinge point of the case: does [[email]] count as an [[electronic messaging system]] under {{1992ma}}? No, thought Andrews J. because:
 
{{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.”}}
 
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]]''.
 
Andrews J compared with the equivalent provision in the {{2002ma}}. This ''does'' include [[email]], as a separate item from “[[electronic messaging system]]”:
 
{{box|{{ISDA Master Agreement 2002 12}}}}
 
The intellectual endeavour here is interesting: Firstly, to deduce the meaning of the words in that agreement Andrews J looks at ''the intention of the person who crafted the {{1992ma}}'', and not the intentions of the parties who actually negotiated the agreement. It may have been the 1992 edition of the ISDA form, but it was signed in 2006, by which stage email was widely known and understood. It seems fanciful to suggest parties would intend to 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. There is a long disquisition on what {{ISDA}} intended which, this reviewer submits is quite beside the point because ''ISDA was not a party to the contract''.
 
Andrews J 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]], though 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]]. The drafters of the {{1992ma}} may not have had modern email in mind, but they 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 {{isdaprov|Schedule}}''. Simply put, ''there was no agreed email address to which NatWest could send Greenclose a message'', however you construe Section {{isdaprov|12}}. Therefore communication by email (within in the contemplation of Section {{isdaprov|12}}) wasn’t possible. Case closed.
 
(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 the question: what if the court had found on the facts that a non-compliant notice had, nonetheless made its way to the relevant person and been appropriately adverted to: 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 on a valid “[[electronic messaging system]]”?

Latest revision as of 16:43, 12 June 2023

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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, 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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  • The loan and the interest rate hedge: the strange history of banks ripping off small businesses by selling them unnecessarily complicated loan and swap packages
  • Schoolboy errors, and pricing options to roll off during the grundle
  • Is email an “electronic messaging system”? It is, right? Right? GUYS?

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