Spreadex Ltd v Sekhon

A spread-betting firm must close a private customer’s open position when a margin call remains unmet for five business days, unless a specified exception applies. Temporary elimination of the deficit by market movement does not meet the call where no payment or equivalent communication occurs.

Credit avoids the closure requirement only if granted in accordance with the applicable lending rule, including prior written consent to a maximum amount. A subsequent, effective change in customer status may break the chain of causation for later losses. Damages for breach may also be reduced for contributory negligence, while giving proper weight to the rule’s protective purpose.

Spreadex, a spread-betting company, claimed approximately £695,000 due after closing Dr Sekhon’s positions. Dr Sekhon counterclaimed under section 150 of the Financial Services and Markets Act 2000. He alleged that Spreadex had contravened the Conduct of Business Rules by failing to close his positions after an unmet margin call.

The court considered the meaning and operation of the contractual margin provisions, whether COB 7.10.5 R required closure, whether subsequent credit complied with COB 7.9.3 R, and whether Dr Sekhon was effectively treated as an intermediate customer from 5 October 2006. It also determined causation and contributory negligence.

1. Contravention established. A communication constitutes a contractual margin call when the firm asks the customer to pay money and, in context, the words reasonably convey to a reasonable recipient that margin is being demanded. No particular terminology or specified sum is essential. Spreadex made such a call on 4 September 2006. Dr Sekhon did not meet it within the contractual period or the further five business days allowed by COB 7.10.5 R. Spreadex was therefore required to close his positions early on 14 September 2006.
2. A temporary disappearance of the deficit through market movement did not satisfy the call where no payment was made and there was no communication treated as equivalent to payment. The relevant deficit was assessed at the end of the contractual payment period. Later market movement could not cure the resulting default.
3. The credit exception in COB 7.10.5 R required credit to be granted in accordance with COB 7.9.3 R. Merely providing effective credit was insufficient. Section 151(2) of the Financial Services and Markets Act 2000, concerning the validity and enforceability of transactions, did not alter that conclusion. Spreadex had obtained no written consent to a maximum amount of credit because no maximum had been identified. It therefore contravened COB 7.10.5 R by failing to close the positions.
4. Spreadex’s written warning about reclassification omitted the loss of protection under COB 7.10.5 R, so the requirements of COB 4.1.9 R were not fully satisfied. Nevertheless, the loss of that protection had been fully and clearly explained orally. Spreadex had therefore taken reasonable steps to classify Dr Sekhon for the purposes of COB 4.1.4 R and could treat him as an intermediate customer from 5 October 2006.
5. The arrangements made on 5 October 2006 broke the chain of causation. From that date Dr Sekhon agreed that his positions could remain open and exercised his own judgment about them. Spreadex was liable only for deterioration between 14 September and 5 October 2006.
6. Contributory negligence was available notwithstanding the rule’s purpose of protecting the customer from his own decisions. Dr Sekhon was experienced, remained capable of rational choice and was the principal moving force in keeping the positions open. Giving proper weight to the protective policy of COB 7.10.5 R, responsibility was apportioned 85% to Dr Sekhon and 15% to Spreadex. The parties were to calculate the resulting amount.

not stated in the judgment.