By Jeremy Sharman


The danger of email communications was highlighted recently when Jeremy Sharman and Genevieve Hardy of Bird & Bird’s London office acted for a client, a financial institution, in a dispute with an investment bank arising out of a derivatives product. Derivatives are complex financial instruments whose value is dependent on, or derived from, the value of some underlying asset. Typical examples include swaps, options and futures. The derivatives market is huge with an estimated value of approximately US$110 trillion a year.

In this case, the client had issued Spanish bonds on which it had an obligation to pay the bondholders a fixed rate of interest in pesetas. In order to hedge its risk the client entered into an interest rate swap whereby it, in effect, swapped its obligation to pay a fixed rate in pesetas for an obligation to pay what turned out to be a very favourable floating rate in US dollars. The swap was for a period of 12 years but with early termination provisions.

The investment bank counterparty sought to terminate the swap early by e-mail. The client disputed the attempted early termination arguing, among other things, that the email communications failed to comply with the relevant notice provisions in the International Swaps and Derivatives Association (ISDA) Master Agreement (the ISDA Master Agreement governs the vast majority of derivative transactions). If early termination was permitted then, because of the movement in exchange rates, it would have cost the client approximately €10 million to put in place a replacement swap.

Email communications are now very much the norm in day-to-day business communication but their efficacy, particularly where the communication is meant to have legal effect, is not always clear. The notice provisions in the ISDA Master Agreement did not refer expressly to notice by email and it was far from clear whether notice by email could be said to constitute "notice in writing" or an "electronic message". The general consensus was that it could not.

The dispute was infact resolved on confidential terms shortly before trial so the court did not get to consider the issue. The case does however illustrate that, where parties communicate by email and intend their communications to have legal effect, careful consideration needs to be given as to whether the terms of the agreement will infact give effect to such communications.