Ehrentreu v IG Index Ltd

The Court of Appeal held that a settlement agreement in which the defendant irrevocably acknowledged a specific debt and agreed specific staged payments excluded the defendant's right to rely on equitable set-off as a defence to the creditor's claim. The court applied principles of contractual interpretation and commercial common sense in concluding that the settlement dealt with both liability and cash flow and thus precluded set-off. The Financial Services Authority rules (COBS) did not render the settlement unenforceable because section 151 of the Financial Markets and Services Act 2000 prevents contraventions of FSA rules from making a transaction unenforceable.

The court also considered whether there was a real prospect of the defendant's counterclaim for damages for alleged breach of the customer agreement and for breach of statutory duty; it concluded there was a real prospect and that questions of causation, scope of duty and contributory negligence required fuller investigation at trial. Nonetheless, because the settlement excluded equitable set-off and was enforceable, the appellant was entitled to summary judgment for the debt, while the respondent remained free to pursue his standalone counterclaim.

Background and facts:

• In 2007 the respondent entered into a Customer Agreement with IG Index, a spread-betting firm. After a failed bet on RBS in September 2008 and several unpaid margin calls, IG Index closed positions on 15 October 2008 leaving the respondent with a debit balance of £1,270,350.75. On 30 April 2009 the parties executed a Settlement Agreement in which the respondent irrevocably acknowledged the Debt and agreed staged repayments.

Nature of the proceedings and procedural posture:

• IG Index sought summary judgment for the Debt. The respondent defended on the basis that IG Index had breached the Customer Agreement (by failing to close out positions upon non-payment of margin) and FSA rules, giving rise to a cross-claim for damages which could operate by way of equitable set-off. Master Fontaine granted judgment for IG Index on most of the claim but permitted the respondent to defend part of it. On appeal Macduff J gave summary judgment for IG Index for the whole claim; the respondent appealed that decision to the Court of Appeal.

Issues framed by the court:

1. Whether the respondent had a real prospect of succeeding in his claim for breach of contract or breach of statutory duty for failure to close positions on specified dates;
2. If so, whether those claims were extinguished by the Settlement Agreement;
3. If not, whether they provided a valid defence by way of equitable set-off to IG Index's claim.

Court's reasoning and conclusions:

• The court accepted there was a real prospect that the respondent had a valid cross-claim in damages (both contractual and statutory under FSA rules) and that issues of causation, scope of duty and contributory negligence required fuller examination at trial.
• On contractual interpretation the court concluded the Settlement Agreement, by acknowledging the whole Debt and prescribing the timing and mechanics of payment, addressed both liability and cash flow and thereby excluded the right to equitable set-off. The court relied on conventional canons of interpretation and commercial common sense in reaching that conclusion.
• The court addressed the submission that FSA rules (COBS) rendered the Settlement Agreement unenforceable. It held section 151 of the Financial Markets and Services Act 2000 prevents contraventions of FSA rules from making a transaction unenforceable; accordingly the settlement remained enforceable.
• The consequence was that IG Index was entitled to summary judgment for the debt. The respondent's counterclaim was not extinguished by the settlement and could be pursued as a separate, free-standing claim, but it could not be relied upon as an equitable set-off to defeat the present claim.

The appeal was dismissed. The Court of Appeal held that the Settlement Agreement unambiguously excluded the defendant's right to equitable set-off because it dealt with both liability and the timing/mechanics of payment, and that the agreement was enforceable despite the regulatory context because section 151 of the Financial Markets and Services Act 2000 prevents contraventions of FSA rules from rendering a transaction unenforceable. Accordingly IG Index was entitled to summary judgment for the debt; the respondent's counterclaim nevertheless survived as an independent claim to be pursued separately and required fuller factual investigation.

Appeal from the Queen's Bench Division (Macduff J, QB201210150). At first instance Master Fontaine had given judgment for IG Index on most of the claim but allowed the respondent to defend part. Macduff J thereafter gave summary judgment in favour of IG Index for the whole claim. The present judgment dismisses the respondent's appeal against Macduff J's order.