Template:M detail 2002 ISDA 12

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, as documented, would be even possible. Here we see the unintended consequence of ISDA’s crack drafting squad™’s technophobia as regards email and {{{{{1}}}|electronic messaging system}}s writ large: with all souls in the industry forced to operate with paper bags on their heads from mancaves and diningroom tables in the world’s swankier neighbourhoods, and literally no-one in the office — itself, an unthinkable proposition, pandemic or no, when they published the 2002 ISDA — and jackbooted goons patrolling the financial services district firing warning shots at couriers, suddenly this disproportionate focus on the risks of service by email — now the one means of communication we are relatively safe relying upon — seems unfortunate.

What 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 {{{{{1}}}|electronic messaging system}} or email^[1] is not permitted. That’s according to settled law relating to implied terms in contracts: whatever else one can do to give business efficacy to the agreement, one can’t contradict its express terms.

What 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 (and not just impracticable or 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 {{{{{1}}}|12}} so that delivery need only be made to the public external part of the defaulting party’s place of business,^[2] 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.^[3] 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 disadvantaged because of it;
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 is substantively transmitted without being hamstrung by formal or non-material considerations. At the end of the day if you can prove that your counterparty received the message (for example, by replying to it) it is hard to see the justification for the notice being held invalid.

↑ 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 Limited.
↑ The bit designed for receipt of correspondence: you know; the letter box.
↑ 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?

[1] 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 Limited.

[2] The bit designed for receipt of correspondence: you know; the letter box.

[3] 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?

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