ED&F Man Commodity Advisers Ltd v Fluxo-Cane Overseas Ltd

The court held that the claimant broker (MCA) was contractually entitled to liquidate the defendants' (FCO and Fluxo Comercio) short futures positions. The Customer Agreement authorised margin calls (Clause 14) and provided default remedies (Clause 16 and Clause 17), and Clause 16.1.14 permitted closing out where the broker reasonably considered it necessary or desirable for its own protection. Electronic notice rules in Clause 25.2 meant a margin e-mail was "deemed delivered" 12 hours after transmission and the contractual time for payment ran to the close of the next Business Day (Schedule 1(f)). The judge found that, after the defendants' representative made clear they would not meet margin obligations at the 18 January meeting, MCA was entitled to rely on Clause 16.1.14 and to close out. The court also held that MCA did not owe an operative duty of best execution in the circumstances (COBS/eligible counterparty issue) and that the liquidation was not mismanaged. Quantum claimed by MCA was accepted, the guarantee by the second defendant was valid, and the partial assignment to the claimant's affiliate was effective under Clause 24.8.1.

Background and parties. The claim arose from the liquidation of large short sugar futures positions held by Fluxo-Cane Overseas Ltd (FCO) and guaranteed by S/A Fluxo-Comercio e Assessoria Internacional (Fluxo Comercio). The first claimant (MCA) acted as broker under a Customer Agreement dated 1 February 2005 (originally with Cane International Corp Ltd). FCO had a substantial short position on ICE in March 2008 contracts. ICE directed clearing members to reduce FCO's position and to require additional margin.

Nature of the claim and relief sought. MCA sued for losses said to have been incurred in liquidating FCO's positions (US$22,056,154.62) and for sums under the guarantee. FCO counterclaimed, alleging the liquidation was premature and mismanaged. There was also a dispute about the validity and effect of an assignment of part of the debt to an affiliate (MSI).

Key issues before the court. (i) Whether MCA was contractually entitled to liquidate FCO's positions on the occasions in question (construction of Clauses 14, 16, 17 and Clause 16.1.14). (ii) If entitled, whether the liquidation had been conducted properly. (iii) Whether MCA owed any overriding duty of best execution under FSA/COBS that altered contractual rights. (iv) Validity of the guarantee and of the assignment.

Facts and procedural posture. ICE imposed limits and instructed clearing members to reduce FCO's March 2008 short position; ICE also required a 20% additional margin. There were broker meetings on 17–18 January 2008. MCA served margin communications, some transmitted out of UK business hours; Clause 25.2 deemed electronic mail delivered 12 hours after transmission and Schedule 1 defined "Business Day" by UK time. MCA began liquidation in the early hours of 18 January and continued through April. FCO disputed the timing and scale of trading and later sought extensive further disclosure; the judge refused the late applications. The Court of Appeal had earlier decided no coordinated-agreement to liquidate had been reached (cited at [2009] EWCA Civ 406), so the coordination issue fell away.

Reasoning and conclusions. The judge found the e-mail margin call of 17 January was "deemed delivered" within the contractual regime and that payment was due by close of business on the next Business Day (18 January London time). Early trades between 02:24 and 08:00 on 18 January produced better results and, even if marginally premature, caused no loss. After the 09:13–09:30 meeting on 18 January, the defendants' representative effectively communicated he would not meet margin obligations and that clearing lines were blocked; in those circumstances MCA reasonably considered liquidation necessary for its protection and was entitled to rely on Clause 16.1.14. On COBS and best-execution, the court treated the client as an eligible counterparty and rejected any overriding duty that would have prevented MCA acting to protect itself. The conduct and scale of liquidation were not shown to be outside contractual discretion or to have been mismanaged. The claimed quantum was supported by contemporaneous trade reports and the judge declined late, disproportionate discovery. The guarantee and assignment were upheld as valid and effective.

This first-instance claim succeeded. The court entered judgment for the claimants: the liquidation of FCO's positions by MCA was contractually authorised (notably under Clause 16.1.14 read with Clauses 14 and 17), the liquidation was not improperly conducted, the claimed loss (US$22,056,154.62) was established on the evidence, the guarantee by the second defendant was valid, and the assignment to the claimant affiliate was effective. The court refused the defendants' late disclosure applications and rejected the counterclaim based on mismanagement.