Greenclose Ltd v National Westminster Bank Plc
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Andrews |
| Judgment Date | 14 April 2014 |
| Neutral Citation | [2014] EWHC 1156 (Ch) |
| Docket Number | Case No: HC 12D02057 |
| Court | Chancery Division |
| Date | 14 April 2014 |
[2014] EWHC 1156 (Ch)
Mrs Justice Andrews DBE
Case No: HC 12D02057
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Stephen Auld QC and Saul Lemer (instructed by Bryan Cave LLP, 88 Wood Street, London EC2V 7AJ) for the Claimant
Andrew Mitchell QC and James Cutress (instructed by Dentons UKMEA LLP, One Fleet Place, London EC4M 7WS) for the Defendant
Hearing dates: 25–27 March 2014
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The issue at the heart of this case is whether the Defendant ("the Bank") validly exercised its contractual right to extend the term of a 5 year interest rate collar transaction ("the Collar") for a further two years by giving notice to the Claimant ("Greenclose") before 11am on 30 December 2011. The Collar was an interest rate hedging transaction that was entered into as a prerequisite to the Bank affording Greenclose loan facilities of £15 million under a Loan Agreement dated 5 October 2006. Although the Loan Agreement pre-dates the Collar, drawdown was not permitted until the hedge was in place.
In simple terms, a Collar combines two products to generate a maximum (cap) and minimum (floor) level of interest payable. The party seeking to hedge his exposure to the risk of interest rate movement simultaneously buys a cap from, and sells a floor to, the trading counterparty. If the base rate remains at or between those two levels the hedging party (in this case, the borrower) pays nothing to, and receives nothing from, the counterparty, (in this case, the lender). Thus if the Collar is entered into in order to hedge the interest payable under a variable rate loan, as it was in this case, the borrower continues to pay the lender that variable rate for so long as the base rate remains between the floor and the cap. If the base rate rises above the cap, the lender pays the borrower the difference. If the base rate falls below the floor, the borrower pays the lender the difference. The risk of the base rate dropping below the floor is the price the hedging party has to pay for the trade. It is an alternative to paying an upfront premium, which explains why these products are sometimes referred to as "zero coupon". Therefore, if the borrower is hedging at a time when interest rates are high, it is to his advantage to keep the floor level as low as possible.
In order to determine the notice issue, I must construe the provisions of Section 12 of the 1992 ISDA Master Agreement (Multi Currency-Cross Border Form) read in conjunction with the other contractual documents including the Schedule to the Master Agreement and the transaction Confirmation. ISDA (which stands for the International Swaps and Derivatives Association) is a not-for-profit corporation incorporated in the State of New York. In Lomas and others v JFB Firth Rixon Inc and others (ISDA intervening) [2010] EWHC 3372 (Ch), [2011] 2 BCLC 120 at [7] Briggs J. noted that:
"It has over 820 member institutions, including most of the world's major institutions that deal in OTC derivatives, as well as businesses, government entities and other end users that rely on derivatives to manage the risks inherent in their core economic activities. Its primary purpose is to encourage the prudent and efficient development of privately negotiated derivatives business. For that purpose it has developed standard contractual wording and transaction architecture for market participants. This first occurred, historically, in relation to swaps. Since 1992 its standard terms have been used for numerous other types of derivatives, including pure contracts for differences, caps and floors. Thus, interest rate swaps are a sub-class of an original and still very important class of derivatives for which ISDA's standard forms, and the master agreement in particular, are routinely used".
As Briggs J. went on to explain, at [8]:
" The 1992 version of the Master Agreement was the first to be designed in a form applicable to derivatives other than just swaps, and to accommodate both financially and physically settled transactions. The 2002 version replicates many of the provisions of the 1992 version, but with adjustments based on lessons learnt since 1992, in particular from experience of periods of market turmoil in the late 1990s. Nevertheless the publication of the 2002 master agreement did not lead to its invariable use in preference to its predecessor."
In this case, the parties chose the 1992 form to govern the transaction, despite the fact that the effective date of the Collar was 4 January 2007.
Given that this is a version of a standard form which is still in regular use as a template throughout the world, the way in which I determine the issues of construction is bound to have ramifications beyond this case. In particular, I have to decide whether the different means of giving notice set out in s.12 are mandatory or permissive, and whether the phrase "electronic messaging system" used in the 1992 form embraces emails. Unfortunately, unlike Briggs J. (and the Court of Appeal) in Lomas v JFB Firth Rixon, I do not have the assistance of submissions from ISDA itself, and there has been no expert evidence on market practice.
If I conclude that the Bank did give notice which was effective to extend the term of the Collar, I then have to decide whether, as Greenclose alleges, there were any terms to be implied in the Collar that precluded the Bank from exercising its option in the circumstances in which it sought to do so. Greenclose submits that there were terms that:
a) The Bank would not extend the Collar if extending was not reasonably necessary to protect Greenclose against interest rate fluctuations or rises so as to protect the Bank against the risk of Greenclose being unable to service its repayments under the Loan Agreement ("the Protection Condition");
b) The Bank would not extend the Collar if doing so would materially increase the risk of Greenclose being unable to service the loan and defaulting ("the Risk of Default Condition");
c) The Bank would act in good faith and/or in accordance with the principles of fair dealing ("the Good Faith condition").
In the light of the argument that there were implied terms, it is necessary to set out the factual background to the transaction in more detail than might otherwise have been sufficient.
Greenclose is a family business which owns and operates three luxury hotels, two in the New Forest and one in Wales. It opened a Spa in one of the hotels, Careys Manor, in around August 2004, having spent around £5 million on the project. In large part due to the success of that venture, Greenclose has managed to cope with the adverse impact of the recession on the leisure industry. It currently employs around 350 people and has a turnover of around £12 million per annum. The majority shareholder and managing director is Mr John Leach. In practice he is the man in overall charge of running the business with the assistance of, among others, the finance director Mr David Reynolds. Greenclose's office is at Mr Leach's home in Lymington, Hampshire, Pennington House. Mr Leach is an astute and sophisticated businessman who follows the market movement of base rates and LIBOR. He was rightly described in one of the Bank's internal emails as " capable of making an educated and informed decision on hedging".
In the late summer of 2005, Greenclose was looking to refinance its facilities with Allied Irish Bank. Mr Leach entered into discussions with the Bank, which seemed keen to solicit his custom. However, the Bank had concerns about Greenclose's ability to service the debt, and initially turned down Greenclose's application. Despite that initial setback, in January 2006 the Bank did agree to lend £1.5 million to Mr Leach personally, to be used to inject funds into Greenclose. It took a charge over Pennington House as security.
Negotiations for a 15-year term loan to Greenclose, coupled with an overdraft facility, continued through much of 2006. In order to allay the Bank's concerns about debt servicing, the Bank proposed that Greenclose should enter into some form of interest rate hedging product – a step referred to within the Bank as "Interest Rate Management" ("IRM" for short). Mr Leach was reluctant to commit Greenclose to an interest rate swap, which would fix the rate of interest, because he expected base rates would peak and then fall. He did not want his business to be locked in to a high interest rate. The Bank made it clear at an early stage that some form of interest rate hedge was going to be a precondition of any agreement to provide the facilities to Greenclose. Nevertheless, the Bank was prepared to allow Greenclose some flexibility in the choice of products and time of the hedging.
On 24 May 2006, Mr Leach had a meeting with Mr Michael Harrison, then the designated senior commercial banking relationship manager, and Mr Matthew Jones, then an associate in the Bank's UK Treasury Solutions division of the RBS Global Banking & Markets department, ("GBM") based in their Bristol office. Mr Jones' role was to meet clients and discuss interest rate risk management with them. He was also the interface between the client and the Bank's trading desk, and the person to whom Mr Leach spoke on the telephone when he placed the order for the Collar and two subsequent IRM transactions.
Mr Jones (who now works for one of the Bank's competitors) gave evidence at the trial. He confirmed the favourable impression of him that I had formed on reading the documents,...
To continue reading
Request your trial
-
Lehman Brothers International (Europe) (an unlimited company incorporated under the law of England and Wales) ((in Administration)) v Exxonmobil Financial Services BV
...delivery of notices by email. 126 A different conclusion was reached in the context of a 1992 ISDA Master Agreement in Greenclose Ltd v National Westminster Bank PLC [2014] EWHC 1156 (Ch). However, standard financial contracts of this kind may or may not permit the giving of notices by ema......
-
Monde Petroleum SA v Westernzagros Ltd
...though, doubtless, initially each may have thought, hoped and assumed that the contract would run its full term 263.4. In Greenclose Ltd v National Westminster Bank plc131 the issue was whether the bank had validly exercised its contractual right to extend the term of a five year interest r......
-
Nicholas John Knight v Basil Constantine Goulandris
...does not mean that it is not compulsory to use one method or the other.” 32 The same view was taken by Andrews J in Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch), also in a contractual context, where the issue was whether the defendant bank had validly exercised a rig......
-
Dennis Edward Myers and Another v Kestrel Acquisitions Ltd and Others
...146 Con LR 39. Particularly illuminating in this context was the following passage from the judgment of Andrews J in Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch) at [150]: "So far as the "Good Faith" condition is concerned, there is no general doctrine of good faith ......
-
COVID-19 And Duties Of Good Faith Under English Law
...para [98]. 16) Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB); Greenclose Ltd v National Westminster Bank Plc [2014] EWHC 1156 (Ch); Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 17) Bates v Post Office (No. 3) ......
-
COVID-19 and Duties of Good Faith Under English law
...Ibid [131]. 16) Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB); Greenclose Ltd v National Westminster Bank Plc [2014] EWHC 1156 (Ch); Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 17) Bates v Post Office (No. 3)......
-
High Court Finds That Bank's Notice Of Event Of Default Under Section 5(a)(i) Of The 2002 ISDA Master Agreement Is Valid
...As per Deutsche Bank AG v Sebastian Holdings Inc [2013] EWHC 3463 (Comm) and Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch), the whole point of section 5 (a)(ii) and section 2(a)(iii) is to provide an opportunity to remedy the failure which gave rise to the event of de......
-
Did you notice that clause at the back of the contract?
...may be required to validly exercise key contractual rights. The recent case of Greenclose Limited v National Westminster Bank PLC [2014] 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 i......
-
The Journey of Good Faith: Where Does It belong in General Contract Law?
...of Good Faith in the Performance of a Contract; Why still a Bete noir for the Civil and Common Law?” (2017) 6 JBL 441, 452. 102 [2014] EWHC 1156 (Ch), [2014] 2 Lloyd’s Rep 169. [2019] Vol.9 commercial parties negotiating at arms’ length’103. There is a hesitancy to use Yam Seng as creating ......