High Court considers exercise of contractual discretion to close out a customer's position

The High Court has dismissed claims brought by a customer against a spread betting services provider alleging breach of contract, breach of fiduciary duty, misrepresentation and breach of the Conduct of Business Sourcebook (COBS) rules in relation to the close out of certain positions on his account when it fell into default: De Boinville v I G Index Ltd [2021] EWHC 3326 (Comm).

Although set in the context of spread betting services, the decision will be of broader interest to financial institutions given its potential application to other types of trading accounts. In particular, the court held that the customer was not owed a duty obliging the services provider to close out Mr de Boinville's positions within a certain timescale or at all (either pursuant to the customer agreement or statutory duty). The court noted that the customer agreement conferred an "absolute discretion" to the services provider to close all or part of any bet where there had been a failure to provide margin amounting to an event of default, which gave rise to an entitlement to the services provider, rather than obligation.

The decision contains some interesting analysis of established legal principles relating to contractual discretion and duties owed in the context of conducting a close out for a customer in default (see our previous blog posts here).

We consider the decision in more detail below.

Background

In January 2012, the claimant (Mr de Boinville) opened an account with the defendant (IGI), a provider of execution-only spread betting services. The account was governed by a customer agreement. Mr de Boinville used the account to open and close spread bets.

In June 2012, Mr de Boinville placed several spread bets online. However, the account was flagged by IGI as being in significant default. The market also moved against Mr de Boinville's positions around the same time. IGI, in reliance on its contractual discretion to do so under the customer agreement, subsequently closed out all of the spread bets linked to Mr de Boinville's account.

In 2018, Mr de Boinville commenced legal proceedings against IGI, which included a claim for: (i) losses arising from a transfer of funds out of his spread betting account (to his debit account) and the subsequent closure of his open positions (the Transfer Claim), which had been subject to a settlement agreement between the parties and which Mr de Boinville sought to rescind on the grounds of negligent misrepresentations by IGI; (ii) losses arising from occasions when IGI was alleged to have failed in its regulatory duties under COBS when closing his positions by delaying or allowing a delay in executing his order, leading to losses caused by adverse market movement (the Best Execution Claim); and (iii) losses arising from alleged misrepresentations made by IGI's compliance department to the FOS (the FOS Claim).

IGI denied the claim and brought a counterclaim against Mr de Boinville for sums paid under the settlement agreement and extra losses in relation to certain spread bet positions.

Decision

The court found in favour of IGI and dismissed Mr de Boinville's claims.

The key issues which will be of broader interest to financial institutions are summarised below.

1) The Transfer Claim

The court highlighted that in order to succeed in a claim for misrepresentation, a claimant has to show: (i) the alleged representations were made; (ii) those representations were false; and (iii) they relied upon the representations in the sense that they operated on their mind and caused them, or helped to cause to them, to act as they did. Further, the burden of proof was on the representee.

The court held that the Transfer Claim fell at the second hurdle for establishing misrepresentation, as the representations made by IGI were not false and IGI was not negligent in making them. The position as represented to Mr de Boinville was accurate on the facts. Accordingly, the settlement agreement was not set aside, and the counterclaim was not engaged.

In reaching its conclusion, the court examined the representations made by IGI to the effect that the closure of the positions was a result of data being released to the market which had caused an adverse movement, rather than as a direct result of the transfer of funds out of Mr de Boinville's account such that there was insufficient collateral to keep the positions open. In the court's view, none of the representations amounted to a misrepresentation.

The court also noted that Mr de Boinville had been aware of the true position from his discussions with IGI and entered into the settlement agreement on that basis.

2) The Best Execution Claim

In its analysis as to whether IGI owed Mr de Boinville a duty of best execution, the court highlighted the following key legal principles:

• Where a customer agreement includes the words "You acknowledge that" at the beginning of a provision, this does not mean it is a provision for the benefit of the customer. It will instead be construed as the customer acknowledging what follows is a provision for the protection of the respondent rather than the customer (as per Ehrentreu v IG Index [2015] EWCA (Civ) 79; see our blog post).
• The duty of best execution has to do with the mechanics of acquiring or selling securities, not the merits or otherwise of the trade. It applies only on the execution of a client order. It has nothing to do with the underlying investment decision (as per Första AP-fonden v Bank of New York Mellon SA/NV [2013] EWHC 3127).
• A person exercising its right to close out positions in the event of default has a duty to act rationally, i.e. honestly, in good faith and not arbitrarily, capriciously, perversely or irrationally (as per Euroption Strategic Fund Limited v Skandinaviska Enskilda Banken AB [2012] EWHC 584 (Comm); see our blog post).
• There is no room for the imposition of a tortious duty of care, which is more extensive than that which is provided for under a mandate (as per Euroption).

In reaching its conclusion that the Best Execution Claim failed, the court considered three questions:

• Whether, in the event of default, IGI was obliged by any contractual provision in the customer agreement, statutory duty or other duty to close out Mr de Boinville's positions within a certain timescale (or at all)?
• In closing positions as a result of an act of default, whether IGI was subject to the duties of best execution set out in COBS or any other duty?
• If IGI was subject to any duty, whether it was in breach of the duty?

Contractual duty to close out positions

The court found that there was no contractual provision obliging IGI to close out Mr de Boinville's positions when he went into default or at any particular time thereafter.

The court noted that the customer agreement: (i) conferred an entitlement rather than obligation within the exercise of IGI's "absolute discretion" to close all or part of any bet where there had been a failure to provide margin amounting to an event of default; (ii) conferred a contractual reasonable discretion to keep a bet open where there had been a failure to meet demand for margin; and (iii) included a provision that stated "you acknowledge and agree that, if we agree to allow you to continue to place Bets or to allow your open Bets to remain open [where a margin demand has not been met], this may result in your incurring further losses…", which following Ehrentreu, was not for the benefit of the customer, but rather to protect IGI.

The court rejected the plea that there was an implied term that IGI would exercise its discretion fairly and in the best interest of Mr de Boinville, on the basis that the customer agreement set out the circumstances and ways in which IGI could exercise its discretion. It was therefore not necessary to imply such terms in order to give business efficacy to that agreement. However, the court said that the exercise of the absolute discretion would be subject to an implied term that it will not be exercised in a manner which is irrational, perverse, capricious or arbitrary (as per Euroption).

There was no plea that IGI's exercise of its discretion was irrational, perverse, capricious or arbitrary, and in the court's view, nor could there be. Mr de Boinville had accepted that IGI's internal system flagged accounts for a dealer to investigate, and if there were closures to be made to work out what order to close the various positions. That would take time.

Statutory duty to close out positions

The court found that there was no duty, statutory or otherwise, on IGI to close out a customer's position either immediately that customer becomes in default, or immediately he becomes in significant default or at any particular time thereafter.

COBS/Fiduciary/Common law duty of best execution

In the court's view, there had been no breach of COBS. The court said that, following Första, IGI's best execution policy related to the mechanics of acquiring or selling securities, rather than the anterior decision as to whether or not Mr de Boinville's positions should be closed.

As to the existence of any fiduciary duties, the court commented that as IGI provided services on an execution-only basis, all the duties it owed Mr de Boinville were fully contained in the customer agreement and certain statutory regulations.

Further, the court highlighted that, following Euroption, it did not accept that the common law duties contended for by Mr de Boinville, in particular that there were duties at common law, akin to those imposed by statute, or that there was any additional obligation at common law imposed upon IGI, given that it was operating an execution-only service. In the court's opinion, IGI had not assumed responsibility for the management of Mr de Boinville's money and its obligations in relation to Mr de Boinville's money were set out in the customer agreement and certain statutory regulations.

The court noted that, had such fiduciary or common law duties existed, it would not have found any breach for the same reasons that there was no breach of contractual or statutory duty by IGI.

Breach of duties

The court commented that even if IGI were subjected to the duties contended by Mr de Boinville, there had been no breach of them.

The court noted that there was insufficient evidence to establish that the conduct of IGI was unreasonable, in light of Mr de Boinville's acceptance that IGI's internal system flagged accounts for a dealer to investigate, and if there were closures to be made to work out what order to close the various positions.

Further, the court said that Mr de Boinville himself could have taken active steps to close out the positions, having failed to provide sufficient margin and, with one exception, did not do so.

3) The FOS Claim

The court said that having found that the Best Execution claim failed, it followed that the FOS reached the correct decision. That decision was not based on incorrect statements from IGI, and therefore there was no breach of any duty, contractual, statutory or any other duty and as a result no loss had been suffered by Mr de Boinville.

Accordingly, for all the reasons above, the court found in favour of IGI and dismissed Mr de Boinville's claims.

Note: In February 2022, the claimant applied to the Court of Appeal for permission to appeal.