Redmayne Bentley Stockbrokers v Isaacs & Ors

The Claimant, Redmayne Bentley (“RB”), is a firm of stockbrokers. The First Defendant, Mr Isaacs, is a solicitor who operated five share trading accounts with RB. The first, in his own name, was opened in November 2007. He also operated accounts in the name of his wife, the Second Defendant, and in the name of three limited companies which he owned and controlled, the Third to Fifth Defendants.

In these proceedings, RB claims for the amounts outstanding under the account of each of the five defendants, totalling £1,559,598 plus interest. Proceedings were issued on 23 December 2008, but on 26 February 2009 the Third to Fifth Defendants were all placed into creditors’ voluntary liquidation. They each filed a Defence, but on 29 July 2009 RB obtained summary judgment against them in the total sum of £690,671.13 plus interest. RB has been unable to make any recovery in the liquidation and it does not presently appear that it will be able to do so.

The Second Defendant, Mrs Isaacs, filed a Defence to the claim on 2 March 2009. On 5 May 2010 she accepted a Part 36 offer made by RB to accept 90% of its claim with interest, totalling £289,227.18, plus costs. Accordingly, the claim against Mrs Isaacs no longer proceeds.

It is therefore only the claim against Mr Isaacs that remains. The claim against Mr Isaacs is for the sum of £588,176.42 outstanding under his account with RB, plus interest.

Mr Isaacs does not dispute the calculation of that amount, but denies that he is liable on two grounds:

First, Mr Isaacs claims that his account with RB was Advisory (not Execution Only) and RB was in breach of contract in allowing him excessive credit, and in particular in allowing the value of the collateral that it held to fall below 25% of the total due across all five accounts. He says that RB should have placed a block on his account from 23 September 2008 and that he has suffered a loss of £831,780 on ten transactions concluded after that date, which loss he counterclaims. RB denies that it had any obligation to require Mr Isaacs to maintain a particular level of collateral, and even if it had placed a block on the account, Mr Isaacs would simply have paid sufficient outstanding amounts to be able to continue to trade.

Secondly, Mr Isaacs claims that six transactions under which shares were ‘bought’ on his account were done without his authority. He therefore seeks the reinstatement of the loss alleged to have been suffered when those shares were sold. RB says that those transactions were done with Mr Isaacs’ express authority, alternatively that they were ratified by Mr Isaacs, and that he has not in any event suffered any loss.

At the trial I heard evidence from Mr Barry Matthews, who was throughout the principal broker on Mr Isaacs’ account; Mr Nick Bettison, who is RB’s Head of Trading; Mr Stuart Davis, who is a partner of RB and had responsibility for monitoring RB’s credit exposure on its clients’ accounts, and Mr Isaacs. I also heard expert evidence on stockbroking practice from Mr John Cadwallader for RB, and Mr Jonathan Eardley for Mr Isaacs.

Mr Isaacs originally held a stockbroking account with another firm called SP Angel. He approached Mr Matthews to open this account in November 2003. Mr Matthews completed a ‘New Account Form’ on 25 November 2003. On the same date, Mr Matthews completed a ‘New Account Form’ for the Third Defendant, Landafar.

Thereafter, Mr Isaacs traded shares on both his own account and that of Landafar. RB contends that this trading was done on an Execution Only basis. This is disputed by Mr Isaacs.

In around October 2007, RB bought the stockbroking business of SP Angel and it was proposed that all of SP Angel’s existing accounts would be transferred to RB. SP Angel wrote to Mr Isaacs to that effect on 1 October 2007.

On 30 October 2007, SP Angel wrote again to Mr Isaacs, enclosing a pro forma letter from Keith Loudon, Senior Partner of RB. An ‘Advisory Service Agreement Form’ was enclosed with that letter, and a brochure with details of the Advisory service offered by RB. Copies of RB’s Terms and Conditions (the ‘Terms’) and Guide to our Services and Charges (the ‘Guide’) were also enclosed.

On 30 October 2007, Mr Isaacs signed the ‘Advisory Service Agreement Form’ enclosed with the letter from Mr Loudon. Mr Isaacs contends that the signing and return of this Form constitutes acceptance of RB’s offer to provide an Advisory service. RB denies that it agreed to provide Mr Isaacs with an Advisory service, and denies that any such service was ever provided.

Mr Isaacs commenced trading on his own account with RB on 26 November 2007. Mr Isaacs’ first purchase on the Landafar account was made on 21 December 2007.

As part of the acquisition of SP Angel’s stockbroking business, Mr Matthews had moved to RB and continued to act as broker on all of Mr Isaacs’ accounts. On 20 December 2007, he completed an internal ‘Credit Limit Application Form’ for Mr Isaacs, seeking a credit limit of £3 million on his account. In the event, a credit limit of £3.5 million was approved, with an annotation: “Need to establish a protocol for this say 4 times collateral, at present BM has access to and can transfer funds from CFD etc.”

On 31 December 2007, Mr Matthews also completed a ‘Credit Limit Application Form’ for Landafar, seeking a credit limit of “£3m plus” on Mr Isaacs’ and Landafar’s combined accounts, which was approved. Landafar was described as having “substantial” assets.

In around November 2007, Mr Isaacs enquired about opening a new account in the name of another company that he controlled, the Fourth Defendant, Polemanda. Mr Isaacs started trading on Polemanda’s account on 26 February 2008. Subsequently, Mr Matthews completed a ‘Credit Limit Application Form’ for Polemanda, and RB approved credit of up to £1 million for Polemanda.

In March 2008, a problem arose on Mr Isaacs’ accounts, when a substantial sum due on Polemanda’s account went overdue. It appears that this was caused (at least in part) by RB’s inability to accept a cheque for £352,806 drawn on the client account of Mr Isaacs’ law firm, the Doffman Isaacs Partnership.

No issue now arises in relation to this late payment, but Mr Isaacs claims that at this time RB set a limit of 1:4 on the size of position that he could trade

RB temporarily placed a block on further trading on the account on 19 March 2008, but this was soon resolved. On 28 March 2008, Mr Davis faxed Mr Isaacs as follows:

As to the levels of collateral required, paragraph 7.4.3 of the Claimant’s 2008 internal branch manual provided:

In the following months, Mr Isaacs opened two further accounts, in the name of the Fifth Defendant, Stakefield, and in the name of Mrs Isaacs.

Stakefield’s first trade was carried out on 7 April 2008. In July 2008, Stakefield’s credit limit was increased to £1 million.

On about 13 May 2008, Mr Isaacs spoke to Mr Matthews and opened an account for Mrs Isaacs. The first trade was carried out on 13 May 2008. The following month, the credit limit on Mrs Isaacs’ account was also increased to £1 million.

Throughout May to September 2008, Mr Isaacs continued to trade actively across all five accounts. He remained RB’s sole point of contact in respect of these accounts.

Mr Isaacs’ counterclaim arises out of transactions which took place on his account from 23 September 2008. In brief, he claims that the level of collateral held by RB fell significantly below 25% of the open positions across all five accounts and that RB should have put a block on the accounts. In the event, Mr Isaacs continued to purchase new shares up to 29 September 2009.

On 19 September 2008, Mr Matthews went abroad on holiday and only returned on Monday 29 September 2008. While Mr Matthews was away, Mr Isaacs bought further shares, through other brokers at RB.

On 25 September 2008, however, substantial sums fell due on Mr Isaacs’ accounts, which went unpaid. This caused concern within RB.

Whilst still on holiday, Mr Matthews had a long conversation with Mr Isaacs at 4.45pm on 25 September 2008, and reported to Mr Davis the following morning at 8.06am. Mr Isaacs then telephoned Mr Davis at 8.37am. This conversation will be considered further below but during the course of it Mr Davis confirmed that there were “four accounts that all need to be brought into line today” and asked Mr Isaacs to speak to Geoff Pluck, another broker at RB’s Locksbottom office in Kent.

It is RB’s case that, as discussed with Mr Isaacs, the way that the accounts were going to be “brought into line” was by ‘rolling’ shares previously bought by Mr Isaacs, where the settlement date had either passed or would shortly do so. A roll simply involves selling shares and immediately buying them back. In this way, the client obtains an extended settlement date, calculated from the date of the roll and not the original purchase. In Mr Isaacs’ case, shares could either be rolled within a single account, or rolled from one account to another.

During the course of the day Mr Isaacs spoke to Mr Pluck of RB at 9.59am. Later that day, Mr Isaacs spoke to another broker, John Linard, at 3.02pm. The rolling of his shares was discussed during these conversation in terms which will be considered further below.

The following Monday, 29 September 2008, Mr Matthews emailed Mr Isaacs to confirm that he had rolled further open positions. Mr Matthews then had a telephone conversation with Mr Isaacs on 3 October 2008, in which the rolling of further shares was discussed. Mr Isaacs claims that certain of the rolling transactions were done without his authority.

Mr Matthews spoke to Mr Isaacs again on 6 October 2008, confirming that he was “a little bit behind sorting things out but I, my intention is to do it all tonight … then we’ll sort of sort things and bring it up to date”. Later that day, Mr Matthew sent Mr Isaacs an email with the amounts due on each account, totalling £361,331.12. On 8 October 2008, Mr Isaacs sent an email confirming that he would “check the positions and clear my correct balance” .

On 10 October 2008, however, Mr Isaacs emailed again, stating that he had been ordered on medical advice “to have a complete rest until Monday” and that Mr Matthews should “stop hounding me”. He also commented that it “appears to me that stock and purchases have been rolled/placed into the wrong entities and contrary to what I instructed”. On 12 October 2008, Mr Isaacs emailed to say that he had been “admitted to hospital” and would “meet you as soon as I am out of hospital so that we can resolve everything then”.

Having heard nothing further from Mr Isaacs, Mr Matthews emailed him on 14 October 2008, informing him that RB would have to start selling his stock to clear the overdue balances, which he confirmed on 16 October 2008. This process was duly completed but, having received no further payment, RB commenced these proceedings.

The principal issues which arise are as follows:

Breach of contract

Was an Advisory agreement concluded?

Was it an implied term of any Advisory agreement made that RB would competently assess the risk being borne by Mr Isaacs and would not permit excessive risk taking both in terms of overall position size and exposure to market movements and in relation to individual investments?

Was RB in breach of the alleged implied term and/or Clause 1.10 of the Terms?

If RB was in breach of contract, what, if any, loss was caused thereby?

Lack of Authority

Was an instruction given not to roll shares into Mr Isaac’s account?

Was the rolling of shares authorised or ratified?

Breach of contract

Was an Advisory agreement concluded?

It was common ground on the expert evidence that the services provided to clients in the private client stockbroking industry fall into three main categories, namely Discretionary Management, Advisory and Execution Only.

Under a Discretionary Management Agreement the stockbroker generally assumes responsibility for the structure of a portfolio of investments having first established with the client his/her knowledge and experience, financial position, investment objectives and risk profile. The portfolio of investments is then managed by the stockbroker who has the authority to make changes to the investments without reference to the client who, nevertheless, receives contract notes detailing the transactions that the stockbroker has carried out on his/her behalf. The client will receive valuations at least half-yearly usually accompanied by a review and a performance analysis. An ad valorem fee based on the value of the portfolio is invariably levied for this service and there would be a Discretionary Management Agreement in place, signed by the client giving the broker the necessary authority to act with discretion. Contract notes would be marked ‘Discretionary’.

At the other end of the spectrum is Execution Only business where the prime role of the stockbroker is generally to execute any trade that the client wishes to undertake and to provide information about the company, market trends, availability of stock etc. upon request, but not to provide advice or recommend an investment. The client accepts sole responsibility for the trade and the stockbroker has no responsibility for the subsequent performance of the investment or indeed for keeping the client informed about future developments about the company, although he may choose to do so as a service to the client at no cost to the client. Contract notes would be marked ‘Execution Only’.

Advisory services can vary in terms of what is provided to the client by the stockbroker. For example, some stockbrokers make a distinction between Advisory Managed and Advisory Dealing.

Under an Advisory Managed Agreement a stockbroker would generally offer the services described above for a Discretionary Managed service except that the stockbroker would not have the authority to make changes to the portfolio without reference to the client although in practice the client would usually follow the stockbroker’s recommendation. Half-yearly valuations and reviews would take place and normally an ad-valorem fee would be charged. The stockbroker may or may not take responsibility for performance depending upon whether the client had routinely followed his advice.

Under an Advisory Dealing Agreement a stockbroker would generally not assume responsibility for the structure of a portfolio and in some instances might not know what other investments the client held as he/she could be dealing with other stockbrokers or have holdings in his/her own name which had not been disclosed. The role of the stockbroker is to advise on individual stocks whether suggested by the client or recommended by the broker to the client as a suitable investment to consider. There is no management involved and consequently no ad valorem management fee. In addition to commission payable on trades, a fixed charge for the use of the broker’s nominee facility or for the provision of an occasional valuation upon request might be levied.

On 21 April 2004 Markets in Financial Instruments Directive 2004/39/EC (“MiFID”) was adopted. It replaced the Investment Services Directive 93/22/EEC (‘ISD’). On 10 August 2006, the Commission adopted directive 2006/73/EC (‘MiFID Implementing Directive’) implementing further measures to ensure that investment firms complied with the principles set out in Art 19 of MiFID (as anticipated by Art 19(10)).

Articles 35-37 of the MiFID Implementing Directive contained detailed provisions for the implementation of Arts 19(4) and (5) of MiFID. These provisions were adopted by the FSA and were implemented in the form of Rules set out in the Conduct of Business Sourcebook (“COBS”), which came into effect on 1 November 2007.

These Rules were made pursuant to s.138 of Financial Services and Markets Act 2000. Under s.150 of that Act a contravention of Rules by an authorised person is actionable.

It is principally COBS 9 which is of relevance to the present case. It deals with “Suitability (including basic advice)”. The relevant provisions are considered further below.

It was Mr Isaacs’ evidence, which I accept, that it was intended that so far as possible the transfer of his account from SP Angel to RB would be “business as usual” and involve a continuation of the relationship which he had had to date with SP Angel. The nature and terms of that relationship is therefore an important background matter.

Mr Isaacs approached Mr Matthews to open his account with SP Angel in November 2003. Having discussed the opening of the account over the telephone with Mr Issacs, Mr Matthews completed a ‘New Account Form’ on 25 November 2003. He did not specify in this form whether Mr Isaacs was to be an ‘Advisory’ or ‘Execution Only’ client, but his evidence was that Mr Isaacs had said that he wanted an Execution Only service. On the same date, Mr Matthews completed a ‘New Account Form’ for the Third Defendant, Landafar, and this did specify that Landafar was to be an ‘Execution Only’ client.

On 28 November 2003, Mr Matthews completed an internal SP Angel ‘Client Profile’ form for Mr Isaacs. On this form, he noted that Mr Isaacs was an ‘Execution Only’ client (not Advisory). This supports his stated understanding of the oral instructions given by Mr Isaacs, as does Mr Matthews’ internal list of clients on which Mr Isaacs was marked “PE” for “Private Execution Only”. I find that Mr Matthews reasonably understood from his discussions with Mr Isaacs that he wished to open an Execution Only account.

Meanwhile, on 27 November 2003, Mr Isaacs completed a ‘Client Information Form’, indicating that his investment objective was capital growth, that he preferred a medium level of risk, and that he required both ‘Advisory’ and ‘Execution Only’ services. Mr Isaacs so stipulated because although he essentially wanted an Execution Only service he also wanted the ability from time to time to seek advice. These two stipulations were inconsistent with each other and SP Angel should have reverted seeking clarification of the position. Mr Matthews said that he did not recall seeing this form, and believed it may have been sent by the Compliance department. Whether or not he saw the form, it was nevertheless a document crossing the line between Mr Isaacs and SP Angel. At the same time, Mr Isaacs also signed SP Angel’s ‘Client Agreement Letter’ containing its terms of business, which were applicable to all services provided by SP Angel.

At the time of the first dealing on Mr Isaac’s account there was therefore an ambiguity as to the service he required. His oral instructions were for an Execution Only account but the Client Information Form indicated that he also wanted some form of Advisory service. This was never specifically addressed. The first dealing carried out was for an Execution Only transaction and the contract note was so marked.

It was Mr Matthews’ evidence that the account was understood from the outset to be an Execution Only account and was always so operated in respect of both Mr Isaacs and Landafar. It was Mr Isaacs’ evidence that he intended and understood that the account would be for both Execution and Advisory services, as reflected in the Client Information Form.

I find that the documents and the oral evidence do not demonstrate an objective agreement on this issue at the time of the opening of the account. At the time of that first dealing there was a contract between the parties on SP Angel’s terms and conditions but the precise nature of the service to be provided had not been agreed. I find that that agreement was established as a result of the parties’ subsequent dealings considered against the background set out above.

The Claimant has disclosed several hundred contract notes from SP Angel, almost all of which were marked ‘Execution Only’. Indeed, every contract note on Mr Isaacs’ account was so marked. On just four occasions, the contract notes were marked ‘Advisory’, but that was on Landafar’s account.

These contract notes are important documents, as Mr Isaacs, a sophisticated investor and a qualified lawyer, would have appreciated. They record the nature of the transaction carried out. At no stage did Mr Isaacs comment or protest about the designation of the transaction in question as being ‘Execution Only’. Although Mr Isaacs said in evidence that he did not read that designation, I do not accept that that can always have been the case. In any event, objectively he would reasonably be expected to read the contract notes and note that designation.

It was Mr Isaacs’ evidence that he understood that he was being provided with an Advisory Dealing service and that on a number of occasions he sought and was given advice. I accept that it is likely that there were a few occasions when advice was offered by Mr Matthews. The line between information, opinion and advice is not always clear. Further, Mr Isaacs and Mr Matthews were in very frequent contact with each other and would have had numerous discussions of shares and of the market. I accept that on occasion Mr Matthews is likely to have crossed the line and given what could be categorised as advice. However, such occasions were infrequent and do not alter the essential nature of the account and the relationship as reflected in the innumerable ‘Execution Only’ contract notes. Notwithstanding the letter of 30 October 2007 and its accompanying form, referred to below, I find that Mr Isaacs had an Execution Only account with SP Angel, albeit one in relation to which Mr Matthews on occasion gave dealing advice.

On 1 October 2007 SP Angel wrote to Mr Isaacs explaining that RB had bought the stockbroking business of SP Angel and that it was proposed that all of SP Angel’s existing accounts would be transferred to RB.

On 30 October 2007, SP Angel wrote again to Mr Isaacs, enclosing a pro forma letter from Keith Loudon, Senior Partner of RB. This letter referred to the agreement with SP Angel and stated:

An ‘Advisory Service Agreement Form’ was enclosed with that letter, and a brochure with details of the Advisory service offered by RB. Copies of the Terms and the Guide were also enclosed. It is RB’s case that this pro forma letter was sent out in error.

SP Angel also sent a letter to Landafar on 30 October 2007, which was in identical terms to its letter to Mr Isaacs. This too enclosed a pro forma letter from Mr Loudon, but this letter made no reference to an advisory account, stating:

On 12 November 2007, Mr Isaacs signed forms consenting to the transfer of his own account and Landafar’s to RB. By those forms, he confirmed that he had read and understood the Terms and the Guide and agreed to be bound by them.

The Terms were applicable to all services provided by RB, which included “Share Dealing” (i.e. an Execution Only service) and “Portfolio Services ~ Advisory and Discretionary Management”. They included the following provisions:

On 30 October 2007, Mr Isaacs signed the ‘Advisory Service Agreement Form’ enclosed with the letter from Mr Loudon. Among other things, he stated on that Form that he had an annual salary of over £300,000, net assets worth over £5 million and that he had a higher attitude to risk. He deleted the sections providing for a ‘Management Fee’ and an ‘Initial Fee’ as non applicable.

The brochure which contained details of RB’s ‘Advisory Service’ explained as follows:

The brochure also contained some ‘Advisory Terms and Conditions’, applicable to such accounts:

RB never in fact conducted a review of Mr Isaacs’ existing holdings, nor an assessment of the suitability of the individual investments contained within it, nor half-yearly valuations of the account (all of which were anticipated by the brochure relating to its Advisory service). Mr Isaacs was also never charged a distinct fee for any advisory service.

Mr Isaacs commenced trading on his own account with RB on 26 November 2007. Mr Isaacs’ first purchase on the Landafar account was made on 21 December 2007. The contract notes in respect of those first transactions stated in each case that they were Execution Only.

The contract notes had the following provisions printed on the reverse:

Over the following months, Mr Isaacs traded actively on his own account and on Landafar’s. Every contract note ever sent on those accounts stated that the accounts were Execution Only.

When, in around November 2007, Mr Isaacs enquired about opening a new account in the name of Polemanda, RB wrote to him in response on 15 November 2007 with “details of our Execution Only service”. Mr Isaacs replied on 12 December 2007, enclosing various documents, including a board minute of the same date, signed by himself and Mrs Isaacs, under which Polemanda resolved “to open an execution only account with Redmayne Bentley”. Mr and Mrs Isaacs also signed a ‘Nominee Account Agreement Form’ for Polemanda on the same date.

Mr Isaacs started trading on Polemanda’s account on 26 February 2008. The contract note for the transaction (and all subsequent contract notes on that account) reflected that the account was Execution Only.

In the following months, Mr Isaacs opened two further accounts, in the name of Stakefield, and in the name of Mrs Isaacs.

As to Stakefield, Mr Isaacs wrote to RB on 7 April 2008, referring “to the opening of an account for Stakefield Properties Limited and this has been discussed with Mr Barry Matthews”. He enclosed a board minute under which Stakefield resolved to “trade in shares and securities through Redmayne Bentley”. Stakefield’s first trade was carried out on 7 April 2008 and a contract note provided, confirming that the transaction was Execution Only.

On about 13 May 2008, Mr Isaacs spoke to Mr Matthews and opened an account for Mrs Isaacs. Mr Matthews completed a ‘New Client Proforma’ and Mrs Isaacs subsequently signed a ‘Nominee Account Agreement Form’ on 15 May 2008. The first trade was carried out on 13 May 2008. Once again, the contract note was marked Execution Only.

Mr Isaacs’ case is that the crucial contractual document is the “Advisory Service Agreement Form” which he completed and signed on 30 October 2007. That was a clear offer to provide an Advisory service to Mr Isaacs which he accepted by completing and signing the form. Alternatively, if the return of the form was a counter-offer, it was a counter-offer for an Advisory service to be provided which RB accepted by accepting his initial dealing instructions and agreeing to act on his behalf.

However, as RB points out, the offer made in the Form was in terms conditional. In particular:

The Form itself made it clear that RB would need to consider the information provided “in order for us to decide if the service described in this brochure is suitable for you”. Clause 3.8 of RB’s Terms stated that “If you have an Advisory or Discretionary account with us, you should answer all the questions on the agreement form(s), so that we can match our advice to your investment objectives and personal attitude to risk. If you do not complete all sections we may be unable to deal for you”. The Terms further stipulated that they would take effect “as soon as we have accepted you as a client”.

The contractual documentation also made clear that the only Advisory service provided by RB was an Advisory Portfolio service, for which there was “an annual management fee”. The management fee was to be “as detailed in the agreement form” and the Form itself stated that “Management fees will be agreed with your portfolio manager prior to the commencement of the service”. Mr Isaacs deleted the applicable part of the Form.

RB never acknowledged receipt of the Form, nor did they ever revert confirming Mr Isaacs’ suitability for an Advisory service. Further, the necessary fee which had to be discussed and agreed for any such service to commence was neither discussed nor agreed. Mr Isaacs said that this was incorporated in the agreed commission rate which was to be at the same rate as it had been with SP Angel, but I do not accept that a fee for an Advisory service was ever the subject of discussion or agreement.

In fact it is apparent that the only type of Advisory service which RB offered was an Advisory Portfolio Service, which would involve a management fee. Mr Isaacs accepted that he never wanted or understood that he had an agreement for an Advisory Portfolio Service. His evidence was that he understood that he had an Advisory Dealing Service. However, that was never on offer.

Again, the documents and the oral evidence do not demonstrate an objective meeting of minds on the issue of the nature of the account and I consider that the best evidence of that is to be found in the parties’ dealings both before and after the opening of the account.

As to their dealings before the opening of the account, it was clearly anticipated that Mr Isaacs’ existing service with SP Angel would continue, as Mr Isaacs confirmed in evidence. SP Angel’s letters of 1 and 30 October 2008 referred to the “transfer” of the account. As I have already found, this was on an Execution Only account, albeit that advice was occasionally given. The mutual intention of Mr Isaacs and Mr Matthews was that so far as possible the relationship would continue as before.

As to their dealings after the opening of the account, as set out above the contract notes are clear evidence that that was almost invariably on an Execution Only basis across all the accounts.

As had been the case with SP Angel, I accept that there were a few occasions when advice was given by Mr Matthews. However, the overwhelming majority of transactions were carried out on an Execution Only basis.

It was also suggested that there were occasions when Mr Matthews exercised a degree of discretion, which would be inconsistent with an Execution Only account. However, it would also be inconsistent with an Advisory Dealing account. In any event, I am not satisfied that this has been made out on the evidence.

In all the circumstances I am satisfied and find that Mr Isaacs had an Execution Only account with RB, as he had had with SP Angel, albeit one in relation to which Mr Matthews on occasion gave dealing advice.

If, as I have found, the account was Execution Only then Mr Isaacs accepts that the alleged term does not fall to be implied. This issue therefore only arises if I am wrong in so concluding.

In relation to the issue of implication I was referred to the Privy Council case of Attorney General of Belize v Belize Telecom Limited [2009] 1 WLR 1988. Giving the judgment of the Privy Council Lord Hoffman said that the essential question is “what that instrument, read as a whole against the relevant background, would reasonably be understood to mean” (at paragraph 21) and explained that the various different formulations which the courts have used all come back to this question and are different ways of saying “although the instrument does not expressly say so, this is what a reasonable person would understand it to mean..” (at paragraph 25).

The Belize Telecom case was considered in the Court of Appeal decision Mediterranean Salvage & Towage Limited v Seamar Trading & Commerce Inc [2009] 2 Lloyd’s Rep. 639. In that case it was emphasized that the touchstone remains necessity rather than reasonableness.

Mr Isaacs’ pleaded case on implied term was put on the basis of the requirements of business efficacy.

In support of the alleged implied term Mr Isaacs relied upon the regulatory background. It was Mr Eardley’s evidence that in the light of the changes made by MiFID it is no longer possible for a stockbroker to offer advice on occasions. If advice is offered at all then an Advisory service is being provided and the COBS assessment of suitability requirements would apply to all transactions carried out on that account, whether or not advice is sought or given in relation to them. The implied term was accordingly necessary to reflect regulatory requirements.

I do not accept that either MiFID or COBS has the effect claimed by Mr Eardley. Mr Eardley relied upon MiFID 19(4):

This has been implemented through COBS 9. COBS 9 is entitled “Making personal recommendations”. By Rule 9.1.1, that chapter applies “to a firm which makes a personal recommendation in relation to a designated investment.” (By COBS 9.1.3, the chapter also applies to a firm which manages investments).

COBS Rule 9 provides as follows:

The Glossary defines personal recommendation as follows:

COBS 9 therefore covers two scenarios: when a broker is making a personal recommendation and when a broker is managing a client’s investments and makes a decision to trade on the client’s behalf. Where a broker provides an advisory service, he is required to ensure that any “personal recommendation” made is suitable for his client. A personal recommendation involves “advice on investments” and a recommendation being made in respect of a “specific transaction”. There is nothing to prevent him from providing, in addition, an Execution Only service, and nothing in COBS 9 (or MiFID) that would require him to ensure that any such Execution Only transaction is suitable for his client.

Contrary to the evidence of Mr Eardley, there is accordingly no regulatory reason why a stockbroker cannot continue to provide an Advisory Dealing service, and it was Mr Cadwallader’s evidence that many firms continue to do so. Where advice is given in respect of a particular deal which amounts to a personal recommendation then the suitability obligation under COBS 9.2 would be engaged in respect of that transaction. However, where no advice or personal recommendation is given COBS 9.2 is not engaged and an Execution Only service can be provided, although the general requirements of COBS 10.2.1 are likely to need to be met.

Even if that analysis is wrong and COBS 9 does apply to all transactions on an Advisory account regardless of whether advice is being given, it does not follow that it is necessary to imply a term to similar effect into the contract. Indeed, if the position is in any event covered by regulatory requirements, in respect of which there would be a cause of action for breach of statutory duty, it is difficult to see any necessity for implication, or why the contract would be unworkable without such term.

In recognition of that difficulty Mr Isaacs’ principal case was that there was a need to imply such a term precisely because the matter was not covered by COBS. It was submitted that the reason why it is necessary to imply the term contended for is that COBS does not explicitly state that an omission to consider and advise against excessive risk taking represents a failure by the stockbroker, but that the clear tenor of COBS supports such a proposition. However, it would be very surprising if there was a lacuna in the very extensive European legislation which must be filled by an implied contractual obligation. Even more so, given that MiFID was intended to achieve “maximum harmonisation” (i.e. impose a consistent, and no higher standard, of regulation across Member States: see MiFID Implementing Directive, recital 7).

Mr Isaacs also relied on the expert evidence. It was common ground between the experts that in the light of MiFID and COBS a broker of an Advisory account would be under an obligation to consider the suitability of a particular investment where it provides advice in relation to that investment. As part of that, the broker must consider whether the amount of the investment, and the risk associated with it, is appropriate given the client’s attitude to risk, his investment objectives and his overall financial position.

It was also common ground that where a client under an Advisory account declined to follow a broker’s advice in relation to a particular investment it would be open to the broker to designate the transaction as Execution Only and thereby absolve himself of advisory responsibility in respect of the executed transaction.

The grey area concerned where a client instructed a broker to execute a transaction under an Advisory account and neither sought nor was given any advice. It was the evidence of Mr Eardley that the broker would nevertheless be obliged to consider the suitability of that investment. In his report, Mr Cadwallader suggested otherwise, but in evidence he essentially accepted this. His evidence was that there would be a duty to advise if the investment was unsuitable, but not if it was suitable. However, that necessarily involves a consideration of the suitability of the investment. He also accepted that even if no advice was given the transaction would be designated Advisory rather than Execution Only.

The essential basis of this evidence was the changes brought about by MiFID and COBS. However, as set out above, the resulting regulatory regime only applies where a “personal recommendation” is made – i.e. where advice is given. If no advice is sought or given and a transaction is designated as Execution Only neither MiFID nor COBS requires an assessment of suitability.

Mr Cadwallader also accepted in evidence that this duty to consider the suitability of the investment meant that the implication of the alleged term was justified. However, the alleged implied term involves a duty not merely to consider suitability and advise accordingly but to take action and positively “not to permit excessive risk taking”. I do not consider that this follows. The broker’s duty is advisory. The investment decision remains that of the client. Provided that proper advice has been given I do not accept that the broker would be under an implied obligation to go further and prevent any investment being made contrary to the advice given. That is not a necessary obligation for the working of the advisory relationship. It is also contrary to the broker’s duty as an agent to follow his principal’s instructions.

In any event, whether the alleged term is to be implied is a matter for the court, not the experts. This is not a case in which the implication of a term is sought on the basis of custom or market practice. The basis of the alleged implication is business efficacy. The experts approached their task on the basis of what terms would be usual, rather than the requirements of business efficacy and contract workability.

For all these reasons, I reject Mr Isaacs’ case on the alleged implied term. Further, even if such a term was to be implied, I do not accept that it would extend to the taking of positive action as opposed to the giving of advice.

My rejection of the implied term alleged does not mean that there may not be cases where a stockbroker does owe a duty to make an assessment of suitability and advise accordingly. As a business service provider a stockbroker will be under a contractual duty to exercise reasonable skill and care in carrying out the services required of him, as indeed will often be expressly acknowledged in its terms and conditions. COBS 9 and the assessment of suitability which it requires is likely to be highly relevant to what the duty of skill and care requires in any particular case.

Even if RB did owe an obligation competently to assess the risk being borne by Mr Isaacs and not to permit excessive risk taking both in terms of overall position size and exposure to market movements and in relation to individual investments, I am not satisfied that the matters alleged by Mr Isaacs establish a breach of such obligation.

Mr Isaacs’ case is that is that once he had failed to settle overdue balances and once his collateral had fallen below a ratio to open positions of 1:4 or 25% it was unsuitable to permit him to continue buying or rolling shares and a block should have been placed on his account at that point. That point was reached on 23 September 2008 when the collateral to open ratio fell to just over 15%.

Mr Isaacs contends that there was a precedent which RB ought to have heeded. In March 2008 RB did place a block on RB’s account. It then set preconditions in order to permit him to continue trading, namely, having no balances overdue at each settlement date and maintaining sufficient stock as collateral in RB’s nominee account. Sufficient collateral was regarded as 25% of open positions or a ratio of 1:4.

Mr Isaacs submits that the dangers of allowing a client to trade on low margin are self-evident. With margin as low as 8.125%, or a ratio of 1:12, a client could be wiped out in a single day. Even a ratio of 15% would lead to a client being wiped out in a month like August 1998, June 2002, September 2008. Over-leverage has been the ruin of many an investor. It behoved RB not to facilitate an inappropriate increase in leverage.

In relation to the overdue balances, the most substantial figures arose because shares were not rolled during the week while Mr Matthews was away. If the shares had been rolled, as both Mr Isaacs and Mr Matthews had intended that they should, the level of overdue payments would have been relatively small. Once the shares were rolled, the overdue payments were reduced. It is difficult to see how this had any bearing on the risk associated with the further transactions that took place on Mr Isaacs’ account after 23 September 2008. In any event the agreed overdue balance on 23 September 2008 was not particularly substantial, being in the region of £125,000, as opposed to the £1.1 million which Mr Isaacs had originally asserted.

In relation to collateral, the level of collateral held by RB was a matter for RB. It did not directly impact on the riskiness of the transactions that took place on 23 September 2008. In relation to those transactions, RB was entitled to proceed, as before, on the basis that Mr Isaacs had sufficient funds to pay for those shares in full, if the need arose (as required by clause 7.1 of the Terms and as stipulated on the contract notes). The most relevant factor, even if there was an obligation to consider suitability, was Mr Isaacs’ stated financial situation: a salary of £300,000+ and net asset of over £5 million. Even if Mr Isaacs had lost over £1 million while trading with RB, and even if this should have been known to RB, they were entitled to treat him as if he had net assets worth about £3.5-4 million. It was his obligation to notify RB if there was a material change in his circumstances (as expressly stipulated on the Advisory Service Agreement Form and in clause 3.8 of the Terms). Although Mr Isaacs claimed that it should have been obvious to Mr Matthews that his circumstances had changed in light of the property market downturn and that he was known to be a property investor, in the absence of specific, updated information being provided RB was entitled to rely on the statements made by Mr Isaacs in the Form he had provided. As stated in COBS 9.2.6, a firm is entitled to rely on information provided “unless it is aware that the information is manifestly out of date, inaccurate or incomplete”. RB was not so aware, save possibly if and to the extent that it should have known of the losses made on his account.

In the circumstances set out above I am not therefore satisfied that any breach of the alleged duty has been proved.

As to Clause 1.10, this provided as follows:

Mr Isaacs submits that in the context of an Advisory account this clause applies to any transaction carried out within such an account, since that is to be regarded as an Advisory transaction regardless of whether or not advice is sought or given and that the exercise of this duty should have led to a block being put on the account.

I agree with RB that this provision only applies where the broker does accept responsibility for the suitability of the advice or transaction, and that is usually only going to be the case where advice is sought or given. In relation to an Execution Only transaction, as reflected in the contract note, such responsibility is generally not being accepted.

In any event, even if the clause applied Mr Isaacs would face the same difficulties in establishing a breach as he does in relation to the alleged implied term.

I accordingly conclude that no breach of the alleged implied term or clause 1.10 has been established.

If RB was in breach of contract, what, if any, loss was caused thereby?

Mr Isaacs’ case is that the failure to put a block on the account cost him £831,779.53 (a net counterclaim of £243,603.11 after deducting the actual losses on the account).

RB denies causation and contends that if a block had been placed on the account, Mr Isaacs would have (1) paid some of the amount outstanding on his accounts or (2) provided further assets by way of collateral so as to allow him to continue to trade.

Mr Isaacs’ claim is calculated by comparing the price of all shares purchased after 23 September 2008 with the price at which those shares were eventually sold. However, this should be compared with what would have been the position had a block on the account been imposed on that date. That is not a straightforward matter. Even if, for example, RB do not make out their case that Mr Isaacs would have provided further funds to enable him to continue to trade so that the position would have been exactly as it was, he clearly strongly wished to continue trading and it is very possible that a combination of funds and sales would have enabled him to restore the collateral position relatively quickly. What that would or might mean in terms of share sales/purchases was not explored in evidence.

The causation issues are therefore potentially complex but, in the light of my conclusions above, it is not necessary to resolve them.

Was an instruction given not to roll shares into Mr Isaac’s account?

Was the rolling of shares authorised or ratified?

This issue concerns rolls of Partygaming and Regal shares that were made on 26 and 29 September and on 1, 2 and 3 October 2008.

Mr Matthews went on holiday on 19 September 2008. It was Mr Isaacs’ evidence that he spoke to Mr Matthews on Thursday 25 September 2008 and instructed him that because he was so exposed, he did not want any further shares of Partygaming or Regal to be rolled into his personal account. Any such rolls were to be done into one of the other four accounts, preferably Stakefield. This was denied by Mr Matthews.

Mr Matthews initially denied having any conversation with Mr Isaacs that day. In the light of telephone records produced he ultimately accepted that there was a telephone conversation of 34 minutes at 16.45pm on 25 September 2008.

Mr Matthews had no detailed recollection of that conversation. He remembered that Mr Isaacs had been complaining that he had not been allowed to buy HBOS shares. He also remembered that Mr Isaacs complained that rolls had not been carried out. He denied that he was instructed not to roll Partygaming or Regal shares into his personal account. His evidence was that there was little he could do as he was on holiday in Spain and the issues raised by Mr Isaacs were left to be dealt with by Mr Davis.

Mr Isaacs’ evidence was that he told Mr Matthews that there were to be no rolls of Partygaming or Regal shares into his personal account. He said that Mr Matthews advised him not to make an issue of this and to “keep things calm” when talking to RB’s office and that he would sort it out when he returned to the office on Monday, 29 September 2008.

Mr Isaacs kept things calm by not raising this issue when he discussed the rolls with Mr Davis the following day. He did so because he appreciated that this would have been unacceptable to Mr Davis, who expressed serious concerns to him about RB’s exposure generally and on the company accounts in particular. As Mr Isaacs stated in evidence, insisting to Mr Davis that the rolls (which he was very keen RB should agree to be carried out) should not involve rolling into his personal account, would have been like showing “a red rag to a bull”. He therefore did not raise this and indeed expressly approved the rolls made that day in the knowledge that they were being made into his account.

During his telephone conversation with Mr Davis at 8.37am on 26 September 2008, it was made clear that all overdue stock would need to be rolled and further rolls would be required as and when the settlement date arose. This was followed by a telephone conversation with Mr Pluck of RB at 9.59am on 26 September 2008, at which it was expressly agreed that 75,000 Regal Petroleum would be rolled from Mrs Isaacs’ account into Mr Isaacs’ account. There was then a further telephone conversation with Mr Linard of RB at 3.02pm on 26 September 2008, at which it was again expressly agreed that that 75,000 Regal Petroleum would be rolled into, and that 150,000 Partygaming shares would be rolled within, Mr Isaacs’ account.

It was Mr Isaacs’ evidence that these authorisations were given on the basis that Mr Matthews would sort the matter out on the Monday, as he had said he would, but no such qualification was made at the time he gave his authorisations.

I find that Mr Isaacs did raise the issue of rolling into his personal account in his conversation with Mr Matthews on 25 September 2008. He was concerned at the extent of the liability building up on his personal account and wanted to limit it so far as possible. However, he also appreciated that this was likely to be unacceptable to RB, hence he kept quiet about it in his discussions with Mr Davis and others on 26 September 2008. It may be that Mr Matthews did indicate on 25 September 2008 that he would try and do what he could to sort the matter out when he returned to the office, but I am satisfied that he gave no promise or undertaking to do so. He was not in a position so to do. The matter was out of his hands and with a higher authority, namely Mr Davis. At the most he would have said that he would do his best. I therefore find that Mr Isaacs gave no instructions to Mr Matthews not to roll shares into his account, or that no rolls should be made if that was not possible. His instructions to Mr Matthews were to roll his shares, albeit he hoped that Mr Matthews would do his best to ensure that the rolls were not into his account.

In any event, Mr Isaacs’ discussions with Mr Matthews do not alter or qualify the clear instructions given by Mr Isaacs on 26 September 2008. The instruction given by him on 26 September 2008 was to roll the shares without specifying that it should not be into his account, and he accepted the rolls made into his account. That instruction may have been given against the background of Mr Matthews’ earlier indication that he would do what he could to sort matters out later, but by the time that the rolls were carried out Mr Isaacs knew that he was in no position to insist that there be no rolls into his account, and that this would be unacceptable to Mr Davis. The transactions in question were clearly authorised at the time regardless of Mr Isaacs’ earlier discussions with Mr Matthews. The same applies to the later rolls complained of.

Mr Isaacs was informed by Mr Matthews of some of those rolls by email on 29 September 2008, but he did not seek confirmation that his alleged instruction had been followed in response to this email or to Mr Matthews’ telephone message. Nor did he do so during Mr Isaacs’ calls with Mr Matthews on 3 October or 6 October 2008.

The first suggestion of the issue being raised was long after the rolls had been carried out and contract notes issued in Mr Isaacs’ email of 10 October 2008. However, that was expressed in very general terms: “It also appears to me that stock and purchases have been rolled/placed into the wrong entities and contrary to what I instructed. More details on this will follow in due course if a dispute arises.” The first such further “details” were provided with his Defence in these proceedings on 2 March 2009.

I accordingly find that no instruction was given not to roll shares into Mr Isaacs’ account and that the rolls in fact made were authorised. In such circumstances no issue of ratification arises and it is not necessary to consider the issue of what, if any, losses may have been suffered in consequence.

For the reasons outlined above, I find that Mr Isaacs’ grounds of defence and counterclaim should be dismissed. RB is therefore entitled to judgment in the sum of £588,176.42 plus interest.