Sucden Financial Ltd v Fluxo-Cane Overseas Ltd & Anor

A contractual grace period for payment of margin must be respected before non-payment becomes an Event of Default where the contract expressly requires notice and one Business Day. However, a broker may rely on a different subsisting Event of Default, including repudiation or a material adverse effect on the customer’s ability to perform, even if that ground was not stated in the default notice. A broker exercising contractual close-out rights following default is not executing the customer’s orders and is not subject to best-execution or best-interests obligations applicable to order execution. The broker must nevertheless comply with any contractual standard, including the requirement concerning gross negligence.

Sucden Financial Ltd acted as broker for Fluxo-Cane Overseas Ltd in futures and options trading and claimed the debit balance arising after liquidation of Fluxo-Cane’s positions. Fluxo-Cane disputed Sucden’s contractual entitlement to liquidate and counterclaimed damages for allegedly negligent conduct of the liquidation.

The issues were whether non-payment of margin constituted an Event of Default when liquidation began; whether Sucden could rely on other contractual Events of Default; and what standard governed the liquidation process.

1. Entitlement to liquidate. Fluxo-Cane was contractually required by clause 34.1 of the Terms of Business to pay margin on demand, allowing a reasonable time for payment mechanics. It was in breach by failing to pay the margin call on 17 January 2008. Nevertheless, under clause 46.1(a), non-payment did not become an Event of Default until the failure continued for one Business Day after notice of non-performance. Sucden could not avoid that contractual grace period by relying on Fluxo-Cane’s known intention not to pay immediately.
2. The default notice was ineffective insofar as it relied on clause 46.1(a). However, Fluxo-Cane’s president repudiated its obligations at the meeting on 18 January 2008, engaging clause 46.1(e). The exceptional circumstances, continuing non-payment, regulatory intervention, Sucden’s exposure to its clearing counterparty and the evident threat to Fluxo-Cane’s ability to perform also engaged clause 46.1(k). Under clause 47.1(c), Sucden was therefore entitled, without prior notice, to close out the positions. Reliance on those operative Events of Default was not impermissibly retrospective.
3. The authorities concerning contractual discretions, including Paragon Finance v Nash [2002] 1 WLR 685, The Product Star (No. 2) [1993] 1 Lloyd’s Rep. 397 and The Vainqueur José [1979] 1 Lloyd’s Rep. 557, did not govern termination following an Event of Default. The question was whether the contractual right to terminate existed, not whether a performance discretion had been exercised reasonably.
4. COBS and the contractual best-execution obligation applied to execution of customer orders, but not to liquidation following an Event of Default. Sucden could prioritise protecting its own exposure, while remaining subject to the contractual exclusion of liability except for gross negligence, wilful default or fraud. In the circumstances, the liquidation was not negligent, still less grossly negligent. The counterclaim was dismissed and Sucden obtained judgment for US$5,632,679.98, subject to consequential matters.