Ehrentreu v IG Index Ltd (Rev 1)

A contractual term requiring a spread-betting firm to close positions after a margin default does not, without clear express language, impose a duty to protect a sophisticated customer from the consequences of choosing to continue to speculate. Its scope depends on the contractual language and setting. A former regulatory margin rule cannot supply a protective purpose absent from the agreement.

Where the customer could close the position but freely chose to leave it open, the firm’s late closure is merely the occasion for subsequent market losses, not their legal cause. The same voluntary choice means that the losses were reasonably avoidable and are not recoverable as damages.

The appellant was an experienced customer of the respondent spread-betting firm. Following margin calls on an open bet on the price of Royal Bank of Scotland shares, the respondent did not close the position at the point required by Term 16(4) of the Customer Agreement. The position was later closed, leaving a substantial debit balance.

In proceedings following a settlement agreement, the appellant pursued a counterclaim for breach of contract and breach of statutory duty. Supperstone J dismissed the counterclaim: although the respondent had breached the contractual close-out obligation, the breach had not caused the claimed loss and the appellant had wholly failed to mitigate it. The judge also found no breach of COBS 2.1.1R, a finding not challenged on appeal: [2015] EWHC 3390 (QB).

The appeal concerned whether Term 16(4) protected the appellant from continuing speculation and, if so, whether the breach caused the loss or prevented a finding of failure to mitigate.

1. Appeal dismissed. Flaux LJ, with whom Lindblom and Davis LJJ agreed, upheld the dismissal of the counterclaim.

2. On its true construction, Term 16(4) did not oblige the respondent to protect an individual customer from his own gambling or deliberate speculative choices. The opening words, “You acknowledge that”, and the related warning in Term 16(6), showed that the term provided certainty as to when positions would be closed. It protected the respondent and its customers generally from complaint about close-out. It did not create a personal protective duty.

3. Such a duty would be exceptional. The authorities, including Reeves and Calvert, showed that a duty to protect a person of full understanding from self-inflicted economic harm is rare. A contractual duty of that kind would require very clear express words. Term 16(4) contained none.

4. The deleted former margin rule, COB 7.10.5R, could not be used to give Term 16(4) a protective purpose. It had been replaced before the Customer Agreement took effect. The unchallenged conclusion that the respondent had not breached COBS 2.1.1R also supported the conclusion that it had not assumed responsibility for the appellant’s continuing speculation.

5. The respondent’s contractual breach was therefore only the opportunity for the loss. Applying Galoo, the operative cause was the appellant’s deliberate decision to leave the bets open after 24 September 2008, although he could have closed them himself. The judge’s findings on causation were open to him.

6. The court also upheld the alternative conclusion on mitigation. A reasonable person in the appellant’s position would have closed the position. Following the causation analysis in Bunge, a contract-breaker is not responsible for loss which the claimant could reasonably have avoided; the appellant’s choice to remain in the market was independent of the breach.

• Court of Appeal (Civil Division): Appeal dismissed: [2018] EWCA Civ 79.
• Queen’s Bench Division: Supperstone J dismissed the counterclaim. He found a breach of Term 16(4), but held that it caused no recoverable loss and that the appellant had wholly failed to mitigate: [2015] EWHC 3390 (QB).
• Court of Appeal (Civil Division): An earlier appeal concerning the settlement agreement held that it excluded set-off but did not preclude a separate cross-claim: [2013] EWCA Civ 95.