Greenclose v National Westminster Bank plc: Difference between revisions

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{{cn}}A fine example of that old legal {{t|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}} ([https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2014/1156.html&query=(title:(+greenclose+)) judgment]) opines on the apparently harmless {{isda92prov|Notices}} Section ({{isda92prov|12}}) of the {{1992ma}}. 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  current [[common law]] '''[[email]] does not count as an “[[electronic messaging system]]”'''.
 
===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 that 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.)
 
===Where NatWest went wrong===
Error no.1 — a bit of a schoolboy error, frankly — 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. Anyway, the learning here is this: ''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 [[Jolly Contrarian|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:
 
:''“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 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 it being treated back then as just 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]]”'':
 
Side note: This is the only plausible grounds for the decision: Clearly, by 2002, someone at ISDA had decided that email and electornic messaging systems were different things. A curious view — but then, isn’t so much of our beloved {{isdama}} delightfully curious?
 
The intellectual endeavour here is interesting: Firstly, to interpret the agreement, the court looked at ''the intentions of the committee who drafted the form of {{1992ma}}, and not those of the parties who negotiated this actual agreement''. But ''ISDA was not a party to the contract''. Sure, it may have been on [[ISDA]]’s 1992 form, but it was signed in 2006, by which time “[[email]]” ''was'' common. The expectations of some Luddite banking specialists when they crafted a standard form nearly two decades earlier really ought to have been besides the point.
 
In any case, why — in 2006 — would parties deliberately include all [[electronic messaging system]]s ''except'' [[email]]? All the more so, since email is the only means of communication even vaguely corresponding to “an [[electronic messaging system]]” than a Welsh hotelier 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]] 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 service invalid, because ''Greenclose hadn’t supplied an email address in the {{isdaprov|Schedule}} in any case''. However you construe Section {{isdaprov|12}}, ''there was no agreed email address to which NatWest could send Greenclose a message''. Therefore, valid communication by email “under Section {{isdaprov|12}}” ''was not possible''. Case closed.
 
(The court was also exercised mightily about whether a non-conforming notification, even if effective, would count for the purposes of exercising options under the {{isdama}}. Here again it chose the path less traveled, construing the statement “any notice or other communication ''may'' be given in any manner described below” as meaning it may ''only'' be given in that manner.
 
Which raises another question: what if the court had found that a notice, though non-compliant, ''had'', in fact, been delivered to Mr. Greenclose? Would it still follow [[Substance and form|substance over form]] and disallow the claim?
 
And what if Mr. [[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]]”?
 
Questions that won’t be answered for now, as NatWest did not appeal the decision. The world is a less certain place.
 
{{sa}}
*[https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2014/1156.html&query=(title:(+greenclose+)) [[Andrews J]]’s Judgment]
*[[The Victory of Form over Substance]]

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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