Marex Financial Ltd v Creative Finance Ltd & Anor

A contractual close-out power may permit a broker to execute equal and opposite transactions and then calculate the resulting balance under a separate liquidation procedure. Those rights may operate cumulatively where the agreements, read together, support that construction.

A broker has no contractual right to add a discretionary profit margin to close-out prices unless the contract expressly provides for it. In exercising a close-out power conferred for its own protection, the broker’s duty is to act rationally. The court asks whether the strategy adopted was arbitrary, capricious or perverse, rather than whether it was the objectively most careful course.

Marex, an FX broker, claimed approximately US$7.96 million from Creative Finance Ltd and Cosmorex Ltd following the close-out of substantial NZDJPY and EURJPY positions after severe market disruption following the Japanese earthquake and tsunami.

The defendants alleged that the close-out was irrational, negligent or grossly negligent. They also disputed Marex’s contractual entitlement to recover losses calculated through the combined operation of the FEOMA and Professional Client Agreement, and challenged mark-ups added to the close-out trades.

The principal issues were whether the contractual close-out and liquidation provisions operated cumulatively, whether Marex could charge a profit, and whether it owed duties of reasonable care in addition to the duty to act rationally.

1. Contractual scheme. The expression “close out” in the FEOMA meant the execution of an equal and opposite transaction which cancelled the position and established the net position between the parties. The FEOMA and the PCA were to be read side by side. Marex could therefore close out through market transactions under the PCA and the FEOMA Schedule, then calculate the final balance under the FEOMA liquidation procedure. The PCA netting procedure applied where no equal and opposite closing transactions had been executed.
2. Profit margin. The agreements did not confer a contractual right to add a discretionary mark-up to close-out trades or related swaps and rolls. A customer agreed to the price, including any mark-up, when placing an ordinary order. A close-out price was imposed under the contractual power. The contractual right extended only to a price covering the cost of matching transactions in the market. The claim failed to the extent that it included the disputed mark-ups.
3. Applicable duty. The only duty owed in exercising the close-out power was to act rationally, namely not arbitrarily, capriciously or perversely. The court’s focus was on the decision-maker’s actual strategy, not on substituting an objectively preferable strategy. No separate duty of reasonable care arose under the exclusion clause, Supply of Goods and Services Act 1982, an implied contractual term, or tort.
4. Rationality and application. The purpose of the power was to protect Marex, although an effective close-out could indirectly reduce the defendants’ liability. The objective was to close the entire position as quickly as possible at the best price possible. Marex’s failure to consider a full-amount risk-transfer order did not itself make the adopted strategy irrational. That alternative carried substantial risks in the exceptionally volatile and illiquid market. It was not perverse to use Currenex and “at best” orders through established market makers.
5. The clauses excluding liability for reasonable care on close-out were reasonable under the Unfair Contract Terms Act 1977. Marex’s claim succeeded, subject to the excluded mark-ups, and the defendants’ counterclaim was dismissed.

First-instance decision. No appellate history is stated in the judgment.