Background
Greenclose was a family business which owned and operated three luxury hotels. The majority shareholder and managing director was Mr John Leach who was described by the court as "an astute and sophisticated businessman". In practice he was in overall charge of running the business with the assistance of, among others, the finance director Mr David Reynolds. Greenclose entered into a collar transaction with NatWest under the 1992 ISDA Master Agreement (the Collar). The Collar was for five years, which NatWest could extend by "giving notice to" Greenclose by 11am on 30 December.
Section 12(a) of the 1992 ISDA Master Agreement provides that notices "may be given in any manner set forth", namely in writing delivered in person, or by telex, fax, registered mail or "electronic messaging system", except for notices under Section 5 and Section 6 which "may not be given" by fax or "electronic messaging system".
The contact details in the Schedule, to which notices were to be sent, gave Greenclose's office address and telephone number and the contact as its finance director.
NatWest purported to give notice of extension by email to Mr Leach at 9.45am on 30 December. The email was followed by a voicemail on his mobile telephone at 9.59am. Mr Leach claimed he did not read the email, or listen to the message, until after 11am. Greenclose claimed that no valid notice had been given.
Mandatory or permissive
The key issue was whether the methods of notice set out in Section 12(a) were mandatory or permissive and whether the phrase "electronic messaging system" embraced emails. Greenclose claimed that the methods were mandatory and did not extend to notice by emails.
It was common ground that if, on its true construction, the contract mandated the methods by which such a notice to extend was to be given, then NatWest would have to give notice by any prescribed method, and it would have to follow the contractual requirements strictly. Failure to do so would render the notice ineffective to extend the Collar. As the court observed, there is ample authority to support that approach: for example Lord Hoffmann's famous example in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 776:
"If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease."
Out-of-office
Over ten pages of the judgment were devoted to whether Mr Leach had in fact seen the email or heard the voicemail in question until after 11am on 30 December. Ultimately it was found that he had no actual knowledge of the notice before the time to extend had passed. This serves as a reminder of the scrutiny to which these matters will be subject and the importance that can attach to what may at the time seem insignificant. If at all possible records should be kept of all communications relating to the sending of contractual notices.
May … may not
Counsel for NatWest stressed the use of "may", as opposed to "must", in Section 12(a), in arguing that the methods of notice set out were not mandatory. However Andrews J held that "may" in context meant that that the person serving the notice had a choice between those prescribed methods but no others. She found support for this construction from the contrast with the methods that expressly "may not" be used (ie notices under Section 5 and Section 6), the fact that notice is to be given "to the address or number or in accordance with the electronic messaging system details provided", that the change of address provision in Section 12(b) refer to "details at which notices or other communications are to be given to it" and the fact that in Section 13 "the parties irrevocably consent to the service of process given in the manner provided for notices" in Section 13 (emphasis added).
User's Guides to the ISDA Master Agreements
Mrs Justice Andrews was "fortified" in her interpretation by the strong indications that ISDA itself regards Section 12(a) as mandatory. These indications were gleaned by an examination of the User's Guides to both the 1992 and the 2002 Master Agreements.
Counsel for NatWest argued that it should be impermissible for the court to have regard to the modifications to the Master Agreement suggested by ISDA in 2001 and implemented in the 2002 ISDA Master Agreement, even though those modifications were made before the Collar was entered into. The court did not accept this argument noting that it would be wrong in principle for the court to ignore any evidence that sheds light upon how ISDA (or the market) interpreted the 1992 Master Agreement at or before the time when the Collar was entered into, and the evidence about changes that were suggested by ISDA and eventually made to Section 12(a) of the 1992 Agreement and the reasons for those changes was plainly helpful in that regard.
The court also referred to the views of various commentators including from Allen & Overy who were of the view that the provisions were mandatory and from Clifford Chance and Linklaters who advanced a permissive construction.
"Electronic messaging system"
The court held that "electronic messaging system" did not include email. It held that email was not common in 1992 and it was not possible to say the meaning of the term had evolved. Moreover the ISDA definition of "Confirmation" drew a distinction between email and electronic messaging system. The court felt that the term was more consistent with the use of SWIFT (an example advanced by counsel for Greenclose).
Conclusion
NatWest had an absolute and unqualified right to extend the Collar. However, the express terms of the 1992 ISDA Master Agreement and the Schedule mandated the ways in which the Bank could give notice to Greenclose. The notice it sent by email was ineffective; it was sent by a method that was not permitted, to an address that was not specified, and it was not seen by Mr Leach prior to 11am on 30 December 2011.
Comment:
The cautionary tale is that when it comes to serving notices under the ISDA Master Agreement, or any contract for that matter, parties must do exactly what the contract says. There are significant financial consequences to not following the letter of the provisions in question.
The facts are interesting in that Greenclose was aware before the deadline that NatWest was proposing to exercise the option and had had debates with NatWest to try and dissuade it from doing so. This was not a case where the notice was a surprise so there was no prejudice to Greenclose. It was just that NatWest had not complied with the strict formalities.
At a first glance there is, perhaps, an appearance of inconsistency in that the judgment upholds the mandatory observation of the strict letter of the notice provisions, but it seems to suggest that if notice is sent to someone other than the person named in the Schedule, the notice can still be effective as long as the actual recipient is a person with authority. The counter argument to this would be that one can distinguish between these two aspects: the mandatory methods of service and receipt by a "responsible employee" and that this is the sort of balancing exercise that judges are required to do, in order to achieve the right result in the case.
Given that the principal reasons for the judgment were lack of compliance with one of the mandatory methods in Section 12, it is slightly unusual that the judge placed a good deal of weight on her finding of fact that Greenclose had no actual notice of the exercise before the deadline (notwithstanding the email, voicemails and fax sent).
The only potential exception to compliance with the mandatory notice provisions, in the case of the 1992 ISDA Master Agreement, at least, which requires "that transmission is received by a responsible employee of the recipient", would seem to be where the defaulting party is deliberately evading service, for example by turning off its fax machine.
Further information
This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.
