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 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. Weren’t they just the days.
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 the Bank could better manage that risk by lending at a fixed rest rate and hedging its own interest rate risk. But it’s so easy to be wise in hindsight.
So to cut a long story short, NatWest charged Greenclose to reduce its own risk to Greenclose’s insolvency. With a kicker: Of course, capping exposure to rates that you expect to rise is an expensive business: To reduce the cost, NatWest suggested Greenclose limit its downside interest rate risk also, and make it a collar - thus limiting Greenclose’s exposure to interest rates between 5.07% and 6%. This locked in a rate of at least 5.07% on the loan. (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 borrowed 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
If interest rates were low in 2006, they were even lower in 2012. The collar was massively out of the money for poor old Greenclose, and there was this prospect that it might be extended for seven more years. NatWest wanted to extend its collar, notwithstanding that interest rates presented no real risk to Greenclose (as I write, four years later, interest rates are even lower), but because they would make a ton of money. Ironically, because it significantly increased Greenclose's running interest costs, extending the collar would increase the very risk of insolvency the bank at required it to guard against.
Now ignoring for a moment the fact that Greenclose was a little old lady, let’s be clear here: this is fair enough. NatWest had priced its lending operation so as to avoid this risk. But 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.
- 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) fell within the meaning of an “electronic messaging system”. Not so, thought Andrews J. 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.
Andrews J compared with the equivalent provision in the 2002 ISDA. This '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 words in that agreement Andrews J looks at the intention of the person who crafted the 1992 ISDA, and not the intentions of the parties who actually negotiated the agreement. The agreement 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 systems except email, especially since email is the only system vaguely answering the description of an “electronic messaging system” than a caravan park owner in Wales would be likely to have. There is a long disquisition on what ISDA intended which, this reviewer submits is utterly irrelevant 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 is a messaging system. SMTP over the Internet is, apparently, not. You have to squint really hard and hold your head in a funny way to follow that logic. Again: most Caravan park owners in Wales don't have SWIFT.
What’s oddest about this is that the court needed to make none of these assertions to find NatWest’s attempted service wasn’t valid, because Greenclose hadn’t specified an email address in the ISDA Schedule. Simply put, there was no agreed email address to which NatWest could send Greenclose a message, however you construe Section 12. Therefore communication by email (within in the contemplation of Section 12) wasn’t possible. Case closed.
(Andrews J also was exercised mightily about whether a notification, even if undisputedly effective, not consistent with Section 12 would count for the purposes of exercising options under the ISDA Master Agreement. 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”?