Greenclose v National Westminster Bank plc: Difference between revisions

From The Jolly Contrarian
Jump to navigation Jump to search
No edit summary
No edit summary
 
(16 intermediate revisions by the same user not shown)
Line 1: Line 1:
{{fullanat2|isda|electronic messages|2002|Electronic messages|1992}}
{{essay|casenote|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, {{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]].
 
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 {{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====
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.
{{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 [[Amwell J|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]]”.
 
===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 {{1992ma}}? No, thought the court, 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]]''.
 
The court compared the {{1992ma}} with the {{2002ma}}, which ''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 agreement, the court looked 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 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 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?
 
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.
 
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.
 
(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 {{isdama}}. 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.

Latest revision as of 16:43, 12 June 2023

The Jolly Contrarian Law Reports™

The Jolly Contrarian holds forth™

Resources and Navigation

Editorial Board of the JCLR: Managing Editor: Lord Justice Cocklecarrot M.R. · General Editor: Sir Jerrold Baxter-Morley, K.C. · Principle witness: Mrs. Pinterman

Common law | Litigation | Contract | Tort |

Click ᐅ to expand:
Case notes
Index: Click ᐅ to expand:
Essays
edit

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”.

Premium content

Here the free bit runs out. Subscribers click 👉 here. New readers sign up 👉 here and, for ½ a weekly 🍺 go full ninja about all these juicy topics 👇
edit
  • 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?

See also

edit

References

[[category:Template:Casenote Essay]]

Retrieved from "https://jollycontrarian.com/index.php?title=Greenclose_v_National_Westminster_Bank_plc&oldid=75618"