Spreadex Ltd v Sekhon

The court held that Spreadex contravened COB 7.10.5 R by failing to close the defendant's open spread‑betting positions after a margin call made on 4 September 2006 was not met within the period required by the parties' contract and the Conduct of Business Rules. The judge construed the customer Agreement (notably paragraph 25) to define when a margin call is made, how payment deadlines operate and how fluctuations in the market affect the assessment of any deficit. The court found that Spreadex did not grant credit in accordance with COB 7.9.3 R and so could not rely on the statutory exception in COB 7.10.5 R; therefore Spreadex should have closed the positions early on 14 September 2006. The court found, however, that Spreadex had taken reasonable steps to reclassify the defendant as an intermediate customer on 5 October 2006 and that reclassification broke the causal chain for later losses. The defendant was awarded damages for the deterioration in positions between 14 September and 5 October 2006 but those damages were reduced for contributory negligence (85%).

Background and parties:

Spreadex is a spread‑betting operator and Dr Sekhon an experienced spread bettor. Spreadex sought judgment for a trading deficit (approximately £695,000) after it closed Dr Sekhon's positions on 22 November 2006. Dr Sekhon countered that Spreadex had breached FSA Conduct of Business Rules (COB), in particular COB 7.10.5 R, by failing to close positions after an unmet margin call and that, under section 150 FSMA 2000, he was entitled to damages for the deterioration of his positions.

Nature of the claim and procedural posture:

• Claim: Spreadex sought recovery of the trading deficit from Dr Sekhon.
• Defence/counterclaim: Dr Sekhon relied on section 150 FSMA 2000 for damages arising from alleged breach of COB 7.10.5 R (failure to close after margin call) and argued that, had Spreadex closed positions earlier, his losses would have been materially less.

Issues framed by the court:

• Construction of the parties' Two Way Customer Agreement (notably paragraph 25 on margin calls and paragraph 16 on trading limits).
• Whether particular communications and statements amounted to margin calls and when payment obligations accrued.
• Whether Spreadex contravened COB 7.10.5 R and, if so, whether it fell within the COB 7.10.5 R exception for credit granted in accordance with COB 7.9.3 R.
• Whether Spreadex validly reclassified the defendant as an intermediate customer under COB 4.1.9 R and the effect of any reclassification on causation of loss.
• Whether contributory negligence reduces any damages recoverable by the defendant.

Court's reasoning and conclusions:

• Contract interpretation: paragraph 25 of the Agreement requires a request for payment to be understood as a margin call where a reasonable recipient would so understand; the amount due is assessed by reference to the deficit at the relevant time and, absent payment, should be assessed at the end of the contractual period for payment (not by temporary intra‑period favourable market movements).
• Margin calls and COB breach: a margin call was made on 4 September 2006 and was not met within the contractual time limits; the five business day period in COB 7.10.5 R ran to 13 September 2006 and Spreadex ought to have closed positions on 14 September 2006. Spreadex did not grant credit in accordance with COB 7.9.3 R (no prior written consent to a maximum amount of credit), so it could not rely on the COB 7.10.5 R exception.
• Client classification: although the written warning did not expressly warn the defendant that COB 7.10.5 R protection would be lost, the court accepted that Spreadex took reasonable steps to classify the defendant as an intermediate customer because the contents had been fully explained orally on 5 October 2006. The reclassification was therefore effective for subsequent periods.
• Causation and scope of damages: Spreadex was liable for deterioration in the defendant's positions between 14 September and 5 October 2006. Losses after 5 October 2006 were not recoverable because the reclassification (and the parties' subsequent arrangements) broke the causal chain.
• Contributory negligence: the defendant was principally responsible for continuing to run losing positions and persuaded the court that an apportionment for contributory negligence of 85% against him was just and equitable. Damages for the recoverable period were reduced accordingly.

First instance: The court held that Spreadex contravened COB 7.10.5 R by failing to close the claimant’s (defendant’s) open positions after an unmet margin call of 4 September 2006 and had not granted credit in accordance with COB 7.9.3 R; accordingly Spreadex should have closed the positions on 14 September 2006. Spreadex’s reclassification of the customer as an intermediate customer on 5 October 2006 was effective because reasonable steps had been taken to inform and obtain consent, and that reclassification broke the causal chain for later losses. Spreadex was liable for deterioration in positions from 14 September to 5 October 2006 but damages were reduced by 85% for contributory negligence. The court directed counsel to produce calculations and to be heard on the form of order.