In this alerter, we highlight the recent case of Greenclose Limited ("Greenclose") vs National Westminster Bank plc ("NatWest"), which gives guidance on the construction of the Notices section (Section 12) of the 1992 ISDA Master Agreement (Multicurrency - Cross Border) (the "1992 ISDA Master Agreement").
In January 2007, NatWest sold Greenclose a five-year interest rate collar (the "Collar") as a hedge for Greenclose's interest payment obligations under a loan facility. The Collar was documented by a confirmation under a 1992 ISDA Master Agreement and was extendable on the fifth anniversary of the Collar for a further two years by NatWest giving notice to Greenclose. NatWest gave notice to Greenclose to extend the Collar on the relevant exercise date, initially by fax but, when that failed, by email and a subsequent voicemail message (which itself referred to both the failed fax and the email notice). Some time later, Greenclose claimed, among other things, that notice to extend had not been effectively given and demanded a refund of payments made by it to NatWest under the Collar subsequent to the extension date. The case therefore considered the effectiveness of the extension notices given by NatWest.
The court found in favour of Greenclose and held that the notices were ineffective. In arriving at its decision, the court reached the following conclusions:
Section 12(a) of the 1992 ISDA Master Agreement contains an exhaustive list of the ways in which a party may give effective notice under the 1992 ISDA Master Agreement;
if Part 4 of the Schedule does not contain certain information necessary for service by a prescribed method (for example, if a fax number is missing), then the contract must be construed as being limited to the other prescribed methods unless and until the missing information is notified under Section 12(b) or the contract is formally amended;
the inclusion of additional contact details in Part 4 of the Schedule (for example, a telephone number) will not, of itself, result in that method of communication being effective unless Section 12 has been amended to permit that method of communication; and
e-mails do not constitute an "electronic communication system", and are therefore not an effective means of communication under the 1992 ISDA Master Agreement unless Section 12 has been amended to include e-mail.
In reaching these conclusions, the court had regard, amongst other things, to modifications suggested by the International Swaps and Derivatives Association, Inc. ("ISDA") in 2001 for the express inclusion of e-mail as an effective means of communication, which modifications were ultimately implemented in the ISDA 2002 Master Agreement and described in the User's Guide to the ISDA 2002 Master Agreement.
While the conclusion relating to whether e-mail constitutes an "electronic communication system" reflects the previously widely-held view, the case is of broader interest in terms of giving guidance as to how a court will interpret the 1992 ISDA Master Agreement, both in relation to Section 12 (Notices) and more generally.
In relation to Section 12 (Notices), the conclusions relating to the exhaustive nature of Section 12 and the interaction of that section with Part 4 of the Schedule should be a timely reminder to market participants to ensure that their ISDA Master Agreements contain all the methods of communication that they wish to use (together with appropriate and up-to-date contact details in Part 4). It also serves as a reminder to check the formal notice details in the contract, rather than relying on normal correspondence addresses. The analysis used by the court in reaching its conclusions would also appear to suggest that, if a party were to move address or change its contact details without formally notifying the other party under Section 12(b) of the ISDA Master Agreement, any notice that is given to that party's new address or contact details would not be effective. This will be of interest to many market participants who have faced the difficulty of deciding whether to give notice to the new or old contact details of counterparties (some insolvent) who have refrained from formally updating Part 4 of the Schedule.
In relation to the 1992 ISDA Master Agreement more generally, the case is another example of how, in construing that contract, the court may look at the broader context beyond the intention of the parties themselves, including how ISDA (or the market more generally) interpreted the contract at the time at which it was entered into.
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