IG Index Ltd v Ehrentreu

A spread-betting operator was contractually required to close a customer’s open positions after margin calls remained unpaid for five business days, unless it consciously exercised a reasonable discretion to keep them open having regard to the customer’s financial circumstances. The operator’s failure to exercise that discretion constituted breach of contract. However, the customer’s own decision to keep the bets open was the effective cause of the loss, and he failed to mitigate it. The general best-interests rule in COBS 2.1.1R did not revive the former, more prescriptive margin-closing requirements in COB 7.10.5. On the facts, there was no breach of the statutory duty.

The claimant, a spread-betting company, sued for sums due under a settlement agreement arising from the defendant’s substantial losses on RBS spread bets. Earlier proceedings established the claimant’s entitlement to the judgment sum, while preserving the defendant’s counterclaim.

The counterclaim alleged that the claimant had breached the Customer Agreement and its statutory duty under the FSA Conduct of Business Rules by failing to close the positions earlier. The issues included the compatibility of the counterclaim with the earlier judgment, the contractual and statutory obligations to close out, causation, mitigation and contributory negligence.

1. Counterclaim. The counterclaim was compatible with the earlier judgment. A claim capable of operating as an equitable set-off remained a free-standing cross-claim. The settlement agreement acknowledged the debt calculated by reference to the actual closing of the bets; it did not exclude a claim alleging that the claimant had breached duties by failing to close them earlier.
2. Contractual obligation. Terms 16(4) and 16(5) required the claimant to close the bets after unpaid margin calls had remained outstanding for five business days, unless it had consciously exercised a reasonable discretion to keep them open based on the defendant’s financial circumstances. The evidence did not establish any such exercise of discretion. The obligation first arose on 24 September 2008, five business days after 16 September.
3. Statutory duty. COBS 2.1.1R could not be construed by reference to the former COB 7.10.5 rule. The FSA had deliberately removed the prescriptive requirement to close out positions after an unpaid margin call. Having regard to the defendant’s experience, his previous payments, his promises to pay and the principle that consumers take responsibility for their decisions, the claimant had not breached the best-interests rule.
4. Causation and mitigation. Applying the effective or dominant cause test, the defendant’s decision to remain in the market caused the loss. He understood the risks, received daily statements and could close the bets himself. The claimant’s breach was therefore not the effective or dominant cause. The defendant also wholly failed to mitigate his loss.
5. The statutory-duty issue of contributory negligence did not arise. Alternatively, if there had been a breach, the defendant would have been responsible for 95 per cent of the loss.

The counterclaim failed.

• Court of Appeal: The claimant obtained judgment in the earlier proceedings. The Court of Appeal dismissed the defendant’s appeal in [2013] EWCA Civ 95, while leaving the counterclaim to be pursued.
• High Court (Queen’s Bench Division): The defendant’s counterclaim was heard and dismissed.