Court of Appeal upholds High Court decision to grant summary judgment in FX de-pegging case

The Court of Appeal has upheld the High Court’s decision to grant summary judgment in favour of a bank defending a claim brought by a foreign exchange (FX) broker seeking to recover losses incurred on FX spot transactions during the 2015 “Swiss Flash Crash”: CFH Clearing Ltd v MLI [2020] EWCA Civ 1064.

In doing so, the Court of Appeal has confirmed that the bank’s terms and conditions of business (TOB) did not import into the FX transactions a contractual obligation to comply with “market practice”, so as to require the bank to re-price the transactions, or otherwise cancel them.

This decision will be of broader interest to financial institutions in that it provides reassurance that English courts are prepared to determine decisively, at the summary judgment stage, that the express terms of market standard master agreements will be enforceable and will not readily incorporate vague concepts of market practices into such contracts. This will be the case even if the claimant can point to its loss arising from unusual or important market events – a sophisticated claimant investor will be held to the consequences of an agreement in which they have failed to provide for market disruption.

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 a 2002 ISDA Master Agreement (the ISDA Agreement) together with an electronic confirmation. The FX transactions took place on the same day (and shortly before) the Swiss National Bank ‘de-pegged’ 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 in those currencies. 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.

High Court decision

The High Court granted summary judgment in respect of all claims, holding there was no real prospect of the claim succeeding and that there was no other compelling reason for the claim to proceed to a trial. 

The High Court’s reasoning is summarised in our previous blog post here.

The claimant appealed.

Court of Appeal decision

The claimant contended that the effect of the bank’s TOB imported into the FX transactions a contractual obligation to comply with “market practice”, so as to require the bank to re-price the transactions at the EBS low, or otherwise cancel them. This was on the basis that the bank’s TOB provided that:

“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 any applicable rules, the applicable rules shall prevail…"

The Court of Appeal dismissed the appeal, finding that there was no arguable basis for holding that such an agreement had been made by the parties. The words “subject to” did not incorporate “market practice” into the contract; rather it meant that neither party was required to act contrary to such market practice (in which case it would be relieved of its contractual obligations).

The starting point for the contractual analysis was that the parties had agreed that their FX transactions would be governed by a standard ISDA Master Agreement, had negotiated the specific terms of the Schedule and had incorporated the 1998 FX Definitions, which would have permitted them to provide for market disruption. The transactions were therefore governed by a detailed contract which on industry standard terms reflected market practice and was tailored by the parties for their specific business relationship. The Court of Appeal also referred to the well-known observation of Briggs J in Lomas & Ors v JFB Firth Rixson Inc & Ors [2010] EWHC 3372 that the ISDA Master Agreement is probably the most important standard market agreement used in the financial world and that it was obvious that it should be interpreted in a manner that met the objectives of clarity, certainty, and predictability, so that the very large number of parties using it should know where they stand. The suggestion that the parties had agreed to incorporate “market practice” generally, even though not reflected in the ISDA Agreement and, indeed, overriding its provisions, therefore must be treated with considerable caution.

In the Court of Appeal’s view, it was also difficult to see how a “market practice” overriding the ISDA Agreement’s standard terms could be derived from the International Code of Conduct and Practice for the Financial Markets (the Code). Indeed, the Code itself recognised that Master Agreements should be entered into to reflect market practices and to provide for exceptional circumstances. The claimant in its arguments had focused on only one provision of the Code whilst ignoring the more fundamental recognition in the Code that legal certainty, including as to market practices and exceptional circumstances, should be ensured by adopting a Master Agreement.

Furthermore, the Court of Appeal considered that the alleged “market practice” was far too vague and uncertain to be incorporated as a contract term. It was not clear precisely what obligation was said to have arisen with regard to re-pricing (there being no reference in the Code to the “authenticated market price” or the “official low”), and when a party must re-price and when it must cancel. In the Court of Appeal’s opinion, the inclusion of those two very different routes would give rise, at best, to an unenforceable agreement to agree. The fact that the other liquidity providers “readily” complied with the alleged practice was deemed by the Court of Appeal to be rationalisation after the event, in circumstances where the terms of the relevant contracts with those counterparties were unknown to the court.

Finally, the Court of Appeal also firmly rejected the suggestion that the unusual and important nature of the market events was itself a compelling reason that the matter should be allowed to proceed to trial. The Court of Appeal remarked that there was no reason why the claimant should not be held to its bargain on the basis that it: (a) was a sophisticated commercial party who had entered into automatic transactions at the next available price without specifying a limit; and (b) had negotiated and agreed with the bank the ISDA Agreement, an agreement in which it could have but did not provide for market disruption.