The recent case of Greenclose Limited v National Westminster Bank PLC  EWHC 1156 (Ch) considered the effect of a notice purported to be given by one contract party otherwise than in strict compliance with the notices clause in the contract boilerplate provisions.
A bank tries to exercise an option at the last minute
As a condition of National Westminster Bank granting loan facilities of £15 million to Greenclose Limited, Greenclose was required to enter into an interest rate collar transaction. The parties selected the 1992 ISDA Master Agreement (Multi Currency-Cross Border Form) to govern the interest rate collar transaction.
The Bank had the option to extend the initial two-year term of the transaction for a further two years, if notice was given to Greenclose prior to 11am on 30 December 2011. By December 2011 the Bank was generating significant profits from its "in the money" position under the transaction, and internally had determined to exercise its right to extend. The managing director of Greenclose (Mr Leach) had been requesting that the Bank not extend the term of the transaction, at least up until 23 December 2011 when he left the office for the Christmas break.
Notwithstanding that the notice to extend could be given any time before 11am on 30 December 2011, the responsible employee at the Bank (Mr Tew) elected not to send a notice until the morning of 30 December. On that morning at 9.35am Mr Tew attempted to send a fax to Greenclose's fax number giving notice of the Bank's decision to exercise its right to extend the collar. The fax transmission failed.
At 9.45am Mr Tew proceeded to email Mr Leach, copying other employees of Greenclose, enclosing a copy of the fax that had previously failed. At 9.58am, Mr Tew then called the Greenclose office telephone number. However, there was no response. A no doubt increasingly anxious Mr Tew then rang Mr Leach's mobile number which went through to voicemail. Mr Tew left a message on the voicemail advising Mr Leach that a failed fax and an email had been sent. Mr Tew also indicated in the voice message the Bank's intention to extend the collar. Ultimately it was held that the voicemail message was not an attempt to give notice, but instead a way to draw Mr Leach's attention to the fax and the email.
Although there was some conjecture around the sequence of events, the Court ultimately agreed with Mr Leach's evidence that he did not see the email or hear the voicemail message left by Mr Tew until after 11am on 30 December 2011.
Issues for consideration: was the contractual right validly exercised?
The key issue for determination was whether the Bank validly exercised its contractual right to extend the term of the interest collar rate transaction by giving notice to Greenclose before 11am on 30 December 2011.
Specifically, the question for the Court was whether the different means of giving notice in the ISDA Master Agreement are mandatory or permissive.
How could notice be served?
Section 12 of the ISDA Master Agreement says:
- Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner set forth (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated:-
- if in writing and delivered in person or by courier, on the date it is delivered;
- if sent by telex, on the date the recipient's answerback is received;
- if sent by facsimile transmission, on the date that transmission 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);
- if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested) on the date that mail is delivered or its delivery is attempted; or
- if sent by electronic messaging system, on the date that electronic message is received…
- Change of Addresses. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it." [emphasis added]
Part 4 of the Schedule to the ISDA Master Agreement did not contain a fax number or email address for the named contact at Greenclose, or for anyone else.
In determining whether section 12(a) is mandatory or permissive, the Court analysed the phrase "may be given in any manner set forth" in section 12(a). Given that "may" is followed by a list of various methods of serving notice, the person serving the notice has a choice between the prescribed listed methods. In the ordinary course the word "may" is most commonly interpreted as being permissive. However, in this case the surrounding context led the court to determine that "may" was mandatory, in sense of "may only". Notice can therefore be given in any manner listed, but not in any other way.
In arriving at this conclusion the Court had regard to, amongst other things, the phrase "notices or other communications are to be given" in section 12(b). That phrase indicated that the details provided in the Schedule to the ISDA Master Agreement mandate the means of notification.
Accordingly notice has to be given by the means prescribed by section 12(a), and in accordance with the details provided in Part 4 of the Schedule to the ISDA Master Agreement (unless an amendment has been made under section 12(b) to update the notice details). For example, if an agreement specifies that facsimile is a permitted mode of notice, but a fax number is not provided, notice by facsimile will be invalid.
Was the email effective notice?
In light of the finding that the methods in section 12(a) are mandatory, the Court had to decide whether the email to Mr Leach constituted effective notice. It found that, regardless of whether "electronic messaging system" as referred to in section 12(a) includes email (most likely it would not), as no email address was provided in the Schedule to the ISDA Master Agreement, notice by email was not permitted.
The Court made the further comment that even if email had been expressly permitted, notice would still not be valid, as the email was not opened or seen by Mr Leach until after the deadline. Actual communication of the subject matter is necessary. There was some dispute as to whether Mr Leach had accessed his voicemail before the deadline, but in any event, as noted earlier, the Court found that the voicemail was not itself intended to be a notice of the extension.
Ultimately, the Court held that it could not accept that at the time of entering into the collar transaction, the parties had agreed that sending an email to someone who is not identified in the notice section of the ISDA Master Agreement Schedule and who would not be expecting notice by email, would suffice as effective notice of the extension of the term of the transaction.
It is increasingly common for communication to be done by way of email, and increasingly rare for it to be done by way of fax. Nevertheless, boilerplate notices clauses may not have always kept up with the intended or likely means of communication.
If a notices clause is expressed in mandatory terms (which can include the use of the word "may" as in the ISDA Master Agreement), parties need to ensure that the clause reflects how communication will occur, and that they adhere to the requirements of that clause, including by updating contact details where required.
And if there is a deadline for notice to be given, don't wait until an hour beforehand to start trying to send that fax!
Thanks to Talia Lirosi for her help in writing this article
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