Marex Financial Ltd v Fluxo-Cane Overseas Ltd & Anor

A broker may close out a client’s positions without prior notice where the contract makes that right exercisable on an event of default or where the broker reasonably considers close-out necessary or desirable for protection. A client’s refusal to pay margin on demand, or insistence on a condition inconsistent with that obligation, may amount to repudiation and an event of default. In assessing a close-out, the broker’s relevant objective is risk reduction or elimination. It is not required to speculate on future market movements or await a more favourable price. Best-interests and best-execution obligations applicable to order execution do not govern a contractual close-out carried out under an independent default right, particularly where the client is an eligible counterparty. The contractual exclusion of liability applied, so liability required gross negligence, wilful default or fraud; no gross negligence was established.

Marex claimed US$4,246,094.97 and interest from S/A Fluxo Comercio e Assessoria Internacional under a guarantee of the liabilities of Fluxo-Cane Overseas Ltd. The underlying liabilities arose after Marex closed out Fluxo-Cane’s sugar positions on 17 and 18 January 2008 amid exchange intervention, market volatility and unpaid margin.

The claim against Fluxo-Cane and its counterclaim were stayed following the appointment of liquidators. The hearing proceeded against the guarantor, which did not appear. The central issues were whether Marex had contractual entitlement to close out, whether the margin demand was valid and immediately payable, and what standard governed the conduct of the liquidation.

Judgment for Marex against the guarantor. The claim against Fluxo-Cane and its counterclaim were stayed. The guarantee preserved Marex’s right to proceed against FCA without first obtaining judgment against Fluxo-Cane.

1. Margin demand. Although the contractual notice clause stated that communications by email were ineffective, the parties’ consistent course of dealing established that margin could be demanded by email. Fluxo-Cane was estopped or had waived any objection to that method. A contractual obligation to pay margin “on demand” allowed reasonable time for the mechanics of payment, but did not confer a fixed period of two or five business days. The 10.50 a.m. demand on 17 January 2008 had remained unpaid by 6.30 p.m., and the failure was a breach.
2. Events of default. Fluxo-Cane’s statements that it would not pay until a co-ordinated liquidation agreement had been reached clearly disaffirmed, disclaimed or repudiated its obligation to pay margin on demand. This constituted an event of default under clause 13.1(e). The circumstances also justified Marex’s conclusion under clause 13.1(k) that close-out was necessary or desirable for the protection of Marex and Fluxo-Cane, and might be necessary because of a material adverse effect on Fluxo-Cane’s ability to perform.
3. Close-out right and standard. Those events entitled Marex to close out without prior notice under clause 14.1, or the equivalent New Terms provision. The best-interests and best-execution rules did not apply to eligible-counterparty business and, in any event, did not apply to a broker exercising an independent contractual close-out right rather than executing the client’s orders. The relevant contractual standard was gross negligence, wilful default or fraud. A broker conducting a close-out should seek prompt risk reduction or elimination and should not speculate at its own risk on a future price reversal. The liquidation was professionally and competently conducted and was not grossly negligent.
4. The counterclaim was dismissed. Marex was awarded US$4,246,094.97 plus contractual interest against FCA.

First-instance decision. The judgment refers to related Commercial Court proceedings, including ED&F Man Commodity Advisers Ltd v Fluxo-Cane Overseas Ltd [2010] EWHC 212 (Comm) and Sucden Financial Ltd v Fluxo-Cane Overseas Ltd [2010] EWHC 2133 (Comm), but this was not an appeal from either decision.