THE 1992 ISDA MASTER AGREEMENT:
TO EMAIL OR NOT TO EMAIL?
DERIVATIVES AND TRADING
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);
INTRODUCTION
Much existing business in the global swaps and OTC derivatives
markets is transacted subject to the standard form 1992 ISDA
Master Agreement and, despite the availability of a more recent
edition of the ISDA Master Agreement (the 2002 version), it is
not uncommon for new counterparties to elect to use the 1992
version, even now, more than two decades on.
The problem, it turns out, is that the 1992 version appears to
have pre-dated the dawn of the email era.
This month, Mrs Justice Andrews, sitting in the Chancery
Division of the English High Court, had the opportunity in
Greenclose Ltd v National Westminster Bank plc 1, to consider
emails as a method of communication in the context of
the notice provisions of an English law 1992 ISDA Master
Agreement. In the case, a term in the trade confirmation for
an interest rate collar transaction allowed the bank to roll the
trade if it gave notice to its counterparty by a certain time on a
certain date. The transaction was governed by an English law
1992 ISDA Master Agreement. The bank did indeed seek to
exercise its option to extend the collar and, after its attempt to
fax the notice failed, it sent an email for that purpose. The court
considered whether the notice was valid and effective.
Notice provisions of the 1992 ISDA Master Agreement
For ease of reference, Section 12 of the 1992 ISDA Master
Agreement reads as follows:
“12. Notices
a)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:-
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 that
transmission is received by a responsible employee
1
Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch)
iv. 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
v. if sent by electronic messaging system, on the date
that electronic message is received….
b)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.”
In contrast to the 2002 version of the ISDA Master Agreement,
the word “email” does not appear in the 1992 version. The
closest expression to it is reference to an “electronic message”
sent by an “electronic messaging system”, which appears in
Section 12(a)(v) of the 1992 version.
The decision
The judge decided that the phrase “electronic messaging
system” in the 1992 ISDA Master Agreement does not include
email.
As the judge said: “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. Nor is it possible
to conclude that over time, with the developments in computer
technology, the meaning of that expression altered or that
the expression must necessarily be construed as including
any types of electronic messaging system that became more
prevalent or were developed after the form was originally
drafted. The distinction expressly drawn in the ISDA definition of
‘Confirmation’ [in the 2000 ISDA Definitions] between electronic
messaging systems and email, the suggested amendment
to section 12(a) in 2001, the changes to that section in the
2002 Master Agreement to include email for the first time,
and the reasons given for this by ISDA itself, make it plain that
the expression was never intended to embrace email, and
that specific provision had to be made to include email after it
became a common form of communication.” 2
2
Greenclose supra para 129
ŠŠ Expansion of the list of notice methods: The list of
prescribed methods can also be expanded by studied
amendment to the agreement. However, simply adding
communication details into the Schedule, that fall outside
the prescribed methods of communication, such as a
telephone number, will fall short of what is required in
this respect. Mrs Justice Andrews stated: “I do not regard
the fact that the office telephone number was set out in
the Schedule as a reason for construing [Section 12(a)]
as permissive, or construing this contract as permitting
oral notices to be given… One cannot properly infer an
intention to vary the methods by which notice can be
given simply from the presence of that telephone number.
Matters would have been different if the Schedule or the
Confirmation had said, in terms, that ‘notices may also
be given by telephone’.” 5 With such an amendment, the
parties should also specify when the notice is deemed
effective. Similarly, a course of dealing (at least on the facts
in Greenclose) was not enough to signify an agreement
that email became an additional permitted method of
delivery or that, if it did, where the Schedule is silent as
to the email address, a course of dealing (on the facts in
Greenclose) could not operate to “provide” the missing
information. Thus, Section 12(b) would need to be
complied with.
Further, and in any event, email was not a means of notice or
communication set out in the Schedule to the 1992 Master
Agreement. The result was that the purported notice sent by
email was not a valid and effective notice and it did not operate
to extend the term of the collar transaction.
General guidance for practitioners
The case throws into focus two contrasting technological
eras: the time when the 1992 ISDA Master Agreement was
published and the time it was adopted by the parties (it was
signed in 2006 to govern an interest rate collar executed in
2007). As the judge implicitly observed, email only became
commonplace sometime after 1992.
Certain practical pointers can be extracted from the judgment:
ŠŠ Limited number of notice methods: The court
concluded that the choice of notice method for the
person sending the notice extends only to the prescribed
methods listed in Section 12(a). “Therefore, the natural
interpretation of [Section 12(a)] is that there are a limited
number of permitted means of giving notice…” 3
ŠŠ Email excluded from the list: The limited list of
permitted means of giving notice in Section 12(a) of
the 1992 version does not include email as a permitted
method of giving notice. So if email is an intended notice
method, then appropriate amendments need to be made
(see below). This is in contrast to the 2002 version of the
ISDA Master Agreement, which permits email for certain
purposes.
ŠŠ Notice provisions concern deemed effectiveness,
not deemed receipt: It is important to remember that
Section 12(a) is not concerned with deemed receipt,
but with deemed effectiveness. “Thus the function of
[Section 12(a)] cannot be to shift the risk of non-delivery
or non-receipt to the intended recipient if any of the
stipulated forms of notice are adopted… this provision
is not an evidential risk-shifting mechanism. Plainly, if the
contracting parties stipulate that a certain type of notice
has to be served by a specified time of day on a particular
date, service before that deadline must be proved in the
normal way.” 6 Consider using “read receipts” for each
notice provided by email to support any argument as to
receipt (as to the significance of which, see final bullet
point below).
ŠŠ Missing information limits the list of notice methods:
The list of permitted methods in Section 12(a) can be
further restricted if the relevant communication details are
simply not specified in the Schedule to the 1992 ISDA
Master Agreement. “If the Schedule does not provide
certain information necessary for service by a prescribed
method, then the contract must be construed as limiting
the prescribed methods to those expressly permitted by
the Schedule unless and until the missing information is
notified under Section 12(b) or the contract is formally
amended.” 4 Therefore, it is important to ensure that Part 4
of the Schedule is complete and accurate for each method
of communication which is intended to be used for notices
under the contract.
3
4
ŠŠ The 1992 ISDA, as a standard form, requires
objective interpretation: Even though the parties traded
their one and only transaction some 15 years after the
1992 ISDA Master Agreement was published, in a very
different technological era, the court concluded that
Greenclose supra para 94
Greenclose supra para 121
5
6
2
Greenclose supra para 124
Greenclose supra para 103-105
“… the way in which the ISDA Master Agreement is to
be construed cannot differ depending upon the identity
of the parties to a specific contract made using those
terms as a template. In my judgment, 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 is plainly helpful in that regard.” 7
judge observed that “the Confirmation makes it clear that
the right is to be exercised by ‘giving notice to Greenclose’,
not by serving a notice on Greenclose. ‘Giving notice to’
can mean different things in different contexts, but as a
matter of plain English it involves actual communication
of the subject-matter of the notice to the person who
receives it.” 9
Points not addressed?
It remains to be seen whether the decision will be subject to an
appeal, in which case the progression of the case through the
courts will be followed closely by the market. In that context the
following points may be relevant:
ŠŠ Contrast to New York law: The court was construing a
1992 ISDA Master Agreement governed by English law,
but the judge recognised that the 1992 ISDA Master
Agreement is used by the global derivatives markets, so
is often instead governed by New York law. The judge
observed: “My view that the specified methods of giving
notice are mandatory is consistent with that of Justice
Duffy of the US District Court in New York in a very similar
case, albeit that the form under consideration was a 1987
ISDA Master Agreement (which did not make provision for
notices to be served by fax.) New York law and English law
are the two systems that are usually chosen by the parties
to ISDA Master Agreements to govern their transactions.
The case was First National Bank of Chicago v Ackerley
Communications Inc (2001) WL 15693 (SDNY). As in
the present case, the bank, First Chicago, had a two year
option to extend a derivative – in that case, an interest rate
swap. It claimed to have given effective notice by fax of its
election to extend the agreement. The Judge referred to
the fact that the relevant 1987 ISDA Master Agreement
did not provide for facsimile transmission as an acceptable
means of notification between the parties.” 8
ŠŠ The judge rightly, of course, took notice of the fact
that email usage has only become common post1992. However, it was not just the use of email that
was different then: the swaps market itself was also
very different back in 1992. At that time, swaps and
derivatives were mainly traded between professional
swaps dealers, whose businesses dictated that they had
access to more advanced and sophisticated technology
and communications systems than the ordinary person
or firms operating in some other industries. It follows
that the limited extent of email usage outside of the
professional capital markets is, arguably, not relevant.
After all, there could not have been many businesses
in the hospitality sector (the Greenclose business) that
signed the 1992 ISDA Master Agreement back in 1992.
Things have changed and over time industries outside of
the professional capital markets industry have had reason
to sign the 1992 ISDA Master Agreement. ISDA will of
course be aware how the demographic of its membership
has changed since 1992. After all, it changed its name
from the “International Swap Dealers Association, Inc.” to
the “International Swaps and Derivatives Association, Inc.”
presumably to reflect the fact that it had become a broader
church. So it may be that those drafting the ISDA in 1992
had in mind not whether email usage was commonplace in
the world at large, but whether it was commonplace in the
narrow group of firms that traded swaps. If that is the case,
ISDA may well have had emails in mind and simply did not
use the expression “email” in the standard form agreement
because, as appears from its Wikipedia definition,
“electronic mail” was only coined “email” in circa 1993.
ŠŠ Confirmations and transactions: The mandatory
provisions of Section 12(a) do not extend to confirmations,
any more than they do to transactions. The way in which
a transaction is made, or a confirmation is recorded, has
no bearing on the question of how a notice can be validly
given.
ŠŠ Drafting bespoke provisions incorporating notice
requirements: When drafting rights and options
containing notice provisions (e.g. optional early termination
provisions) it is important to consider what the notice
provision means in practice. In the Greenclose case, the
7
8
Greenclose supra para 110
Greenclose supra para 115
9
3
Greenclose supra para 135
ŠŠ The judge considered that it was significant that the 1992
version does not simply refer to “electronic messages”
but that the expression is accompanied by the phrase
“electronic messaging system” which suggests something
more: “The focus is on the ‘system’, which in that context
suggests a recognized system that was expressly set up
for the purpose of transmitting electronic messages, which
a computer is not.” 10 However, no argument appears
to have been made as to whether there is a difference
between electronic messages sent “by” a system or “on”
a system. The 1992 version uses both expressions; there
may well be a difference.
ŠŠ Does it follow that just because the 2002 version uses
the word “email” and has also retained the old phrase
“electronic message” that the latter phrase, as used in the
1992 version, must mean something different to email?
There may be other explanations. For example, the New
York General Obligations Law Section 5-701 specifically
uses that phrase in the context of amending the statute
of frauds in respect of derivative transactions, so it is right
that users of the agreement wish to retain that phrase,
despite the introduction of email into the 2002 version.
ŠŠ It should not be forgotten that 1992 does not represent
the year dot. There was a derivatives market before
1992. The 1987 ISDA Interest Rate and Currency
Exchange Agreement did not expressly cover electronic
messaging or electronic messaging systems. So, if
anything, 1987 represented the dark ages – a time where
ISDA did not contemplate email. Perhaps less so when
it came to 1992, when the changes to the agreement
represented an acknowledgement by ISDA that methods
of communication were moving towards an electronic age.
But, as discussed above, ISDA simply did not have the term
of art available to it. Rather than email, the judge thought
this might refer to something more akin to, say SWIFT
messaging. However, SWIFT has been operating since
the 1970s so ISDA certainly had an opportunity consider
it in 1987, but (and this is pure speculation) it may well not
10
have been thinking of SWIFT in 1987 or 1992 because of
its standardised messaging facility, and whether this had
the flexibility at the time to incorporate the terms and text
of increasingly complex financial transactions.
ŠŠ By saying that the definition cannot then or now
contemplate email appears to be an appraisal that the
1992 version has a want of foresight. Perhaps, however,
the generic phrase was intended to have foresight and
capture future technology including email which, in 1992,
just was not called email. After all, the agreement was, and
is, a standard form intended for use by parties in 1992 or
at any point in the future and it has no fixed end date.
Douglas Adams, on the subject of emails, once said: “It’s quicker,
easier, and involves less licking” 11. He was right of course, but
clearly had not looked at it from the point of view of rolling an
interest rate collar under a 1992 ISDA Master Agreement.
11
Adams D (2002) The Salmon of Doubt New York: Macmillan and Harmony
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APRIL 2014
Greenclose supra para 131
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