Ehrentreu v IG Index Ltd (Rev 1)

The Court of Appeal dismissed the appellant's appeal against the trial judge's dismissal of his counterclaim for breach of contract. The judge below had found that the respondent breached Term 16(4)–(6) of the Customer Agreement by not closing out the appellant's bets, and that the contractual obligation to close out first arose on 24 September 2008. The appeal was limited to issues of causation and mitigation.

The Court rejected the submission that Term 16(4) was intended, at least in part, to protect the customer from himself. On construction, read in context, Term 16(4) was not a provision for the benefit of the individual customer but a provision to make the firm's position and market practice clear. Because the provision was not for the customer's protection, the respondent's breach was only the opportunity for the loss, not its cause. The appellant's deliberate decision to leave his bets open after 24 September 2008 was the effective cause of his losses. The Court also held that the appellant failed to mitigate: a reasonable person in his position would have closed out the positions.

The Court noted the regulatory context: the former COB 7.10.5R (which imposed a five-business-day rule to close out private customers) had been deleted and replaced by COBS 2.1.1R (the client best interests rule), and there was no appeal against the trial judge's finding that there was no breach of COBS 2.1.1R.

Background and parties: The appellant (a long-standing spread-betting customer) brought a counterclaim against IG Index Limited after large losses on spread bets in 2008. The relationship was governed by a written Customer Agreement effective December 2007. The respondent closed out the appellant's RBS positions on 14 October 2008 leaving the appellant with a large debit balance; a later settlement agreement and subsequent proceedings followed. The counterclaim alleged breach of contract (Term 16(4)/(5)/(6)) in failing to close bets earlier and breach of statutory duty under the FSA Conduct of Business Rules.

Procedural history: The counterclaim was tried before Supperstone J ([2015] EWHC 3390 (QB)). The judge found breach of contract (failure to exercise discretion under Term 16(5) so obligation to close under Term 16(4) arose on 24 September 2008) but rejected any breach of COBS 2.1.1R. On causation and mitigation he held the breach was the opportunity, not the cause, of loss and that the appellant had failed to mitigate. The appellant obtained permission to appeal limited to causation and mitigation.

Issues before the Court of Appeal: (i) Whether Term 16(4) was, at least in part, for the benefit of the customer such that the respondent's breach caused the appellant's loss; (ii) whether the trial judge erred in concluding the appellant had wholly failed to mitigate by not closing his positions; (iii) (cross-appeal) an issue on consistency with the settlement agreement was not pursued.

Court's reasoning: The Court examined the contractual text and context, the regulatory framework (including deletion of COB 7.10 and the introduction of COBS 2.1.1R) and authorities on duties to protect a person from self-inflicted harm (Reeves; Calvert). The Court held that Term 16(4) is not a provision for the benefit of the individual customer: wording such as "You acknowledge that" and the surrounding provisions indicate the clause informs customers of what the firm will do and protects the firm's position rather than imposing an obligation to protect the customer against his own speculative choices. The Court rejected reliance on the old COB 7.10.5R because the Customer Agreement post-dated the deletion of that rule and the new client best interests rule was narrower. Applying principles from Galoo, The Elena D'Amico and Bunge (as to mitigation and market substitution), the Court concluded that the appellant's deliberate choice to leave positions open was the effective cause of his losses and that, as a matter of fact, a reasonable trader in his position would have closed out and thus mitigated loss.

Relief sought: The appellant sought damages for breach of contract and breach of statutory duty arising from the respondent's alleged failure to close out positions sooner.

Disposition: The appeal was dismissed and the trial judge's findings on causation and mitigation were upheld.

Appeal dismissed. The Court held that Term 16(4) of the Customer Agreement was not a contractual provision intended to protect the customer from his own speculative choices; accordingly the respondent's breach (failure to close bets) was the opportunity for loss rather than its cause. The appellant's deliberate decision to keep bets open after 24 September 2008 was the effective cause and, alternatively, he failed to mitigate by not closing positions; therefore the trial judge's dismissal of the counterclaim was upheld.

This is an appeal from the decision of Supperstone J in the Queen's Bench Division ([2015] EWHC 3390 (QB)). Earlier interlocutory steps included summary judgment occurrences at first instance (Master Fontaine, July 2011) and on appeal to Macduff J (29 June 2012). The Court of Appeal previously considered related aspects of the parties' dispute in Ehrentreu v IG Index Ltd [2013] EWCA Civ 95, where the Court held the settlement agreement precluded set-off but allowed the counterclaim to proceed. The present judgment is [2018] EWCA Civ 79.