Commercial Court grants summary judgment in favour of defendant bank in FX de-pegging case

The Commercial Court has granted summary judgment in favour of a bank defending a claim brought by a foreign exchange ("FX") broker seeking to recover losses it suffered when the Swiss franc was de-pegged from the euro in 2015: CFH Clearing Limited v MLI [2019] EWHC 963 (Comm).

The decision represents a robust approach by the court in response to an attempt to shift losses caused by market forces to the defendant bank, through a suite of alleged express/implied contractual obligations and tortious duties. It is an example of how the court will be prepared - in appropriate cases - to summarily determine claims, without the need for a full trial and all the time and costs involved. As such, the decision should be welcomed by financial institutions.

In the present case, the broker argued that since its FX transactions with the bank were entered into at a time of severe market disruption, the bank was obliged to make a retrospective adjustment to the price of those transactions (which the broker said were automatically liquidated at a price below the official low), or to cancel them. In particular, the broker relied upon: (i) an alleged express/implied contractual obligation to follow market practice; (ii) the alleged incorporation of a contractual term based on the bank's own best execution policy; and (iii) an alleged tortious duty to take reasonable care to ensure that transactions were priced correctly and, in circumstances where orders were wrongly priced due to market turbulence, to retrospectively re-price them.

The Commercial Court rejected all of the alleged contractual/tortious duties and granted summary judgment in favour of the defendant bank. In doing so, it emphasised the significance of the ISDA Master Agreement governing the specific FX transactions, which it said prevailed over the bank's standard terms and conditions (rejecting the broker's submission that the standard terms should be regarded as having primacy). The court held that the ISDA Master Agreement did not incorporate any express provisions relating to market practice/disruption, and pointed against the incorporation of an implied term to that effect and the alleged tortious duty.

Background

This case concerned FX transactions which the claimant broker entered into with the defendant bank on 15 January 2015, in which the claimant bought Swiss francs and sold euros, and were documented by an ISDA Master Agreement together with an electronic confirmation. The FX transactions took place on the same day (and shortly before) the Swiss National Bank 'depegged' the Swiss franc from the euro, by removing the currency floor with respect to the value of the Swiss franc against the euro. This led to severe fluctuations in the foreign exchange market. The extreme rates triggered automatic liquidation of certain client positions of the claimant at prices below the official low set by the e-trading platform for Swiss franc interbank trades, known as the Electronic Broking Service ("EBS"). Later that day, other banks amended the pricing of trades which they had executed with the claimant to prices at or above the official EBS low. The bank agreed to improve the pricing of its trades, but to a level below the EBS low.

The claimant's case was that since the FX transactions were entered into at a time of severe market disruption, the bank was obliged to make a retrospective adjustment to the price of those transactions (e.g. to adjust the price to a rate to the EBS low, in accordance with alleged market practice), or to cancel them, in accordance with its express or implied contractual obligations and/or pursuant to a duty of care in tort.

The bank applied for strike out and/or summary judgment.

Decision

The court granted summary judgment in respect of all claims, holding there was no real prospect of the claim succeeding/no other compelling reason for a trial. The key issues which are likely to be of broader interest to financial institutions are summarised below.

1. Express term as to market practice

To establish an express term as to market practice, the claimant relied on clause 7 of the bank's terms and conditions, as follows:

“All transactions are subject to all applicable laws, rules, regulations howsoever applying and, where relevant, the market practice of any exchange, market, trading venue and/or any clearing house and including the FSA Rules (together, the “applicable rules"). In the event of any conflict between these Terms and applicable rules, the applicable rules shall prevail subject that nothing in this preceding clause shall affect our rights under clause 15.” (Emphasis added)

The claimant alleged that the effect of the words "subject to" was to incorporate all applicable laws rules and regulations (and market practice) into the contract. It said that this imposed a number of obligations on the bank. In particular, in the case of extreme events where deals took place outside of the market range (i.e. those shown on the EBS platform), to immediately adjust the deal within the EBS range or to cancel it. The claimant alleged that the bank was in breach of clause 7 because it did not act in accordance with good market practice, by failing to rebook the relevant trades within the EBS range at the time or cancel the trades.

Applying established principles of contractual interpretation, the court held that the objective meaning of the language of clause 7, was that market practice was not imported into the contract as an express term of the contract giving rise to contractual obligations. Rather, clause 7 was intended to relieve a party of contractual obligations that would otherwise place it in breach of its contract, where it was unable to perform its obligations by reason of relevant market practice.

One of the key factors influencing the court's decision was that the standard terms stated they were subject to any specific transaction documentation, which the court held clearly included the ISDA Master Agreement governing the FX transactions. The court held that the ISDA Master Agreement prevailed over the standard terms (rejecting the claimant's submission that the standard terms should be regarded as having primacy), and added that the ISDA Master Agreement was the appropriate place for the parties to have specified express provisions dealing with market disruption, and they had not done so in this case.

In the court's view, this was not a case where there were reasonable grounds for believing that a fuller investigation into the facts would add to or alter the evidence on the issue of the express term. Accordingly, the court was prepared to "grasp the nettle" and decide the point finally on the application.

2. Implied term as to market practice

In the alternative, the claimant asserted that it was an implied term of the contracts relevant to the FX transactions that the parties would act in accordance with market practice.

Applying the test for implied terms in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, the court held that there was no real prospect of the claimant establishing the implied term as alleged. In particular, the court noted that in circumstances where the parties had entered into an ISDA Master Agreement, which contained extensive and comprehensive provisions used widely in the market, it could not be said that a general implied term for the incorporation of relevant market practice was either necessary for business efficacy or so obvious that it went without saying.

3. Contractual term based on the bank's best execution policy

The claimant also alleged that the bank's best execution policy was incorporated into the standard terms and conditions. It relied again upon clause 7, which stated (in addition to the part of the clause quoted above in relation to an alleged implied term as to market practice):

"Your orders will be executed in accordance with our order execution policy (as amended from time to time), a summary of which will, where applicable, be provided to you separately…"

The court held that the fact that the bank was obliged to follow the best execution policy did not mean that it was incorporated as a contractual term. In particular, the court highlighted that the best execution policy derived from the regulatory rules and emphasised that it was clear from the authorities that obligations on banks to comply with the Conduct of Business rules did not confer direct rights on their clients except and to the extent that the statute expressly provided. Further, given that only a summary of the best execution policy was provided to the claimant, this supported the bank's submission that the best execution policy was not intended by the language of clause 7 to be incorporated into the standard terms and conditions as a contractual term. In the court's view, even if the best execution policy was incorporated as a contractual term, there was no real prospect that it would extend to a requirement to retrospectively adjust the pricing of the trades, or to cancel them, where the price of the trades was affected by market turbulence.

4. Duty of care in relation to execution and settlement of orders

The claimant alleged that the bank assumed a duty to take reasonable care to ensure that transactions were priced correctly and, in circumstances where orders were wrongly priced due to market turbulence, to retrospectively re-price them.

The court found that there was no real prospect of the claimant establishing such a duty of care in the circumstances, given that both parties were professionals dealing at arm's length. The court relied in particular on the terms of the ISDA Master Agreement and the standard terms and conditions, which expressly provided that the bank was not acting as a fiduciary. In the court's view, the duty alleged had not been breached in any event.

Accordingly, the court granted the bank's application for summary judgment, holding that there was no real prospect of the claim succeeding and no other compelling reason to allow the claim to proceed.

Note: In July 2019, the claimant applied to the Court of Appeal for permission to appeal, which was allowed. The appeal is listed as being due to be heard by 2 November 2020.