High Court decides contractual discretion to make margin call is subject to implied duty of rationality, even when express duty to act reasonably

The High Court has allowed a summary judgment application by a broker for unpaid sums due on a trading facility following several margin calls: Sucden Financial Ltd v TMT Metals AG & Ors [2024] EWHC 1051 (Comm).

This is the latest in a recent line of decisions considering the exercise of contractual discretions in a financial services context (see our previous blog posts here).

In particular, although the contract imported the standard of reasonableness in respect of the broker's exercise of its contractual discretion to make a margin call, the defendant company argued that the broker owed a separate, implied obligation not to act in an arbitrary or capricious manner. The court noted that, while rationality is not the same as reasonableness, an express reference to reasonableness does not oust an implied obligation not to act arbitrarily or capriciously. The court also confirmed that the broker was under an implied duty not to prevent performance by the company of its obligations under the contractual documentation (which it said was entirely conventional).

On the facts of the present case, the court was satisfied that there was no realistic prospect of the company establishing that the broker had breached either of these implied duties. The key factors influencing the court's decision were: (i) the commercial rationale behind the broker's request to the company to regularise its debt position; (ii) the broker's contractual entitlement to act as it did; (iii) the timing of various close outs made by the company, which were spread over a period of two months; and (iv) the fact that the company had not complained of the broker's conduct until proceedings had been issued against it.

We consider the decision in more detail below.

Background

In 2010, the claimant broker provided a futures and options trading facility to the defendant company. The relevant contractual documentation governing the facility contained clauses outlining the parties' rights and obligations in the event of margin calls, default, and market disruption. In particular, the margin arrangements were as follows:

"Margin call: You agree to pay us on demand such sums by way of margin as are required from time to time under the Rules of any relevant Market (if applicable) or as we may in our discretion reasonably require for the purpose of protecting ourselves against loss or risk of loss on present, future or contemplated Transactions under this Agreement."

In early 2022, the company had established a large net short position in nickel. However, the Russian invasion of Ukraine in February 2022 caused a 270% appreciation in the price of nickel on the London Metal Exchange (LME) over three days. This caused a significant margin shortfall in the company's open ledger positions, and accordingly the broker made margin calls. Following the LME's temporary suspension of the nickel market in March 2022, the company closed out its trades and incurred losses. The company did not pay in full the margin calls made by the broker to cover those losses.

The broker served a notice of default on the company in January 2023. Despite part payments toward the debt by the company and the sale by the broker of certain assets provided by the company as security for the debt, a significant sum remained outstanding.

The broker initiated legal proceedings and applied for summary judgment. In its defence, the company argued that the broker had: (i) wrongfully pressured it into closing positions thereby locking in the loss and preventing the company from paying the margin calls; and (ii) acted arbitrarily and capriciously in exercising its contractual entitlements.

Decision

The High Court found in favour of the broker and allowed its summary judgment application. The key issues which will be of interest to financial institutions are set out below.

Implied duty not to prevent performance

The court confirmed that the broker was under an implied duty not to prevent performance by the company of its obligations under the contractual documentation. The duty was entirely conventional.

However, the court said it was not persuaded that the prevention case should be permitted to go to trial. It was satisfied that the case had no real prospect of success. On the evidence of call transcripts between the company and the broker in March 2022, in which the broker urged the company to take action to regularise its outstanding debt, the court did not see anything more than a creditor (here, the broker) asking for the position to be clarified in relation to monies that were due and owing. The court said it struggled to see how that could be the type of pressure that would justify a conclusion that here the creditor (the broker) was preventing performance by the debtor (here the company) of its contractual obligations.

In the court's view, the broker did what it commercially considered itself entitled to do, and what the contract documentation indeed did entitle it to do. It made good commercial sense for the broker to tell the company to close its trades. Keeping them open exposed the company and the broker to further loss if the market moved against it.

Contractual discretion to make margin call

As noted in the background section above, the contract imported the standard of reasonableness in respect of the broker's exercise of its contractual discretion to make a margin call.

The court acknowledged that there was also an implied obligation on the broker to not to act in an arbitrary or capricious manner when exercising its contractual discretion. While rationality is not the same as reasonableness, the court interpreted the decision in Hays v Willoughby [2013] UKSC 17 as confirming that an express reference to reasonableness does not oust an implied obligation not to act arbitrarily or capriciously, instead they operate side by side.  

However, the court said it could see no real basis on which it could be suggested that the broker did act arbitrarily or capriciously or unreasonably. Such a case had no real prospect of success. The timing of various close outs made by the company did not really support on a causation basis the case now advanced. The various close outs were not all done in one go, but on the contrary were spread out over a period of around two and half months. Also, on the evidence, the court did not see any complaint by the company as to the conduct in which the broker was engaging. From a practical perspective, if it was thought that there was illegitimate pressure on a contemporaneous basis, one would have expected that to have been complained about.

Accordingly, for all the reasons above, the court found in favour of the broker and allowed its summary judgment application.

Note: In July 2024, the Court of Appeal refused the company's application for permission to appeal.