Spreadex Ltd v Sekhon

Factual and Procedural Background

The Plaintiff, Company A, is a spread betting company and the Defendant is an experienced spread better. Between October 2005 and 22nd November 2006, the Defendant conducted numerous spread betting transactions with Company A. On 22nd November 2006, Company A closed all of the Defendant's positions when the Defendant's account showed a debt of approximately £695,000. The Defendant has not paid any part of this sum. Company A seeks judgment for this amount plus interest.

The Defendant defends the claim alleging that Company A breached a statutory duty under section 150 of the Financial Services and Markets Act 2000 ("FSMA 2000") by contravening Conduct of Business Rules ("COBR") made by the Financial Services Authority ("FSA"). Specifically, the Defendant contends that Company A should have closed his open positions in September 2006, which would have prevented or reduced the losses. The Defendant also points to payments exceeding £300,000 made in September and October 2006, arguing that without these payments, the debt would have been around £1,000,000 on 22nd November 2006. Company A denies any breach of COBR, denies causation of loss, and alleges contributory negligence by the Defendant.

The transactions were regulated activities under FSMA 2000 and governed by the COBR in force at the time. The parties agree the transactions were not governed by general betting or gambling legislation.

The procedural posture involves detailed factual findings, contractual construction of the Two Way Customer Agreement ("the Agreement"), application of COBR, causation analysis, and contributory negligence considerations.

Legal Issues Presented

1. Whether Company A made margin calls on the Defendant in accordance with the Agreement and COBR.
2. Whether the Defendant failed to meet margin calls within the required time, triggering an obligation on Company A to close positions under COB 7.10.5 R.
3. Whether Company A breached COB 7.10.5 R by failing to close the Defendant's positions timely.
4. Whether Company A granted credit to the Defendant in accordance with COB 7.9.3 R, thus potentially excusing non-closure under COB 7.10.5 R.
5. Whether the Defendant was correctly classified as an intermediate customer from 5th October 2006, affecting the applicability of COB 7.10.5 R.
6. The extent of loss causation resulting from any breach and the effect of reclassification on loss periods.
7. Whether contributory negligence applies to reduce the Defendant's damages.

Arguments of the Parties

Appellant's Arguments (Company A)

• Company A contends it made valid margin calls and that the Defendant failed to meet the first margin call by the deadline.
• It argues that after 5th October 2006, the Defendant ceased to be a private customer and was reclassified as an intermediate customer, thus COB 7.10.5 R no longer applied.
• Company A submits that even if credit was granted without strict compliance with COB 7.9.3 R, such failure does not affect the validity of credit for the purposes of COB 7.10.5 R.
• Company A argues that any losses after 5th October 2006 are not attributable to breaches of COB 7.10.5 R because the duty ended upon reclassification.
• Company A denies causation of loss from any breach of COB 7.9.3 R, contending that the Defendant would have acted identically had the rule been complied with.

Appellee's Arguments (Defendant)

• The Defendant asserts that Company A breached COB 7.10.5 R by failing to close his open positions within five business days after the margin call on 4th September 2006.
• He argues that Company A did not grant credit in accordance with COB 7.9.3 R, specifically lacking prior written consent to a maximum credit amount, thus failing to meet the exception to COB 7.10.5 R.
• The Defendant contends he remained a private customer throughout, disputing the validity of the reclassification as intermediate customer on 5th October 2006 due to inadequate written warning and insufficient time to consider implications.
• He claims damages measured by the deterioration of his positions from the date they should have been closed to the actual closing date.
• The Defendant accepts contributory negligence may be a defence but disputes the extent to which it should reduce damages.

Table of Precedents Cited

Court's Reasoning and Analysis

The court commenced by interpreting the contractual provisions concerning margin calls, concluding that a margin call requires a communication requesting payment of money, which need not explicitly use the term "margin call" but must reasonably convey that request to a reasonable recipient. The court held that the amount demanded under a margin call fluctuates with market movements, but compliance must be assessed at the end of the allowed payment period. Market fluctuations temporarily removing the deficit within that period do not constitute compliance if a payment is not made by the deadline.

Applying these principles, the court found that Company A made a margin call on 4th September 2006, which the Defendant failed to meet by 9:15 a.m. on 6th September 2006. The Defendant also failed to meet the margin call within the subsequent five business days as required by COB 7.10.5 R, triggering an obligation on Company A to close the Defendant’s positions on 14th September 2006.

Company A did not close the positions at that time, constituting a breach of COB 7.10.5 R. The court further found that Company A did not grant credit to the Defendant in accordance with COB 7.9.3 R, specifically failing to obtain prior written consent to a maximum credit amount, thus invalidating the exception to COB 7.10.5 R that might have excused non-closure.

The court then examined the classification of the Defendant as an intermediate customer from 5th October 2006. Although Company A failed to provide a written warning that the Defendant would lose protections under COB 7.10.5 R, it gave a full oral explanation and sufficient time to consider the implications. The court held that this amounted to reasonable steps under COB 4.1.4 R(2), permitting Company A to treat the Defendant as an intermediate customer from that date.

This reclassification meant that COB 7.10.5 R no longer applied from 5th October 2006. The court held that the duty to close positions under COB 7.10.5 R was either a one-off duty or, alternatively, that the new arrangements and classification broke the chain of causation for losses after that date. Therefore, Company A’s liability for breach of COB 7.10.5 R is limited to losses between 14th September 2006 and 5th October 2006.

Regarding contributory negligence, the court accepted that Company A could rely on this defence. Drawing on principles from Reeves, the court recognized that the Defendant deliberately chose to keep positions open despite the risks, thus bearing principal responsibility for his losses. The court found the Defendant 85% contributorily negligent for losses before 5th October 2006, and, hypothetically, 95% if liability extended beyond that date.

Holding and Implications

The court held that Company A breached COB 7.10.5 R by failing to close the Defendant’s positions within five business days of the margin call on 4th September 2006 and did not grant credit in accordance with COB 7.9.3 R to excuse this breach.

Company A effectively reclassified the Defendant as an intermediate customer on 5th October 2006 after taking reasonable steps, including oral explanation and allowing sufficient time, despite failing to provide a full written warning. This reclassification limited Company A’s breach liability to the period from 14th September 2006 to 5th October 2006.

Company A is liable for losses suffered by the Defendant due to the breach during this period but subject to an 85% reduction for contributory negligence. No liability arises for losses after 5th October 2006 as the duty under COB 7.10.5 R ceased to apply.

No new precedent was established; the decision applies existing principles of statutory duty breaches, contractual interpretation, client classification under regulatory rules, causation, and contributory negligence in the context of spread betting.