Sucden Financial Ltd v Fluxo-Cane Overseas Ltd & Anor

The Claimant, Sucden Financial Ltd, is a futures and options broker on New York’s ICE Exchange, and also on London’s LIFFE futures and options market, though this case has primarily centred on ICE. The First Defendant, Fluxo-Cane Overseas Ltd, is a BVI company which trades in physical sugar and sugar derivatives. The Second Defendant, Mr Manoel Fernando Garcia, is a Brazilian national who is its President and sole shareholder. Sucden acted as broker for Fluxo-Cane on both ICE and LIFFE, and Mr Garcia guaranteed its liabilities to Sucden. The claim arises following a notice of default served on Fluxo-Cane on 18 January 2008. Sucden claims US$5.6 million as the balance of the account said to be due following liquidation of Fluxo-Cane’s positions on both exchanges. (It obtained summary judgment against Mr Garcia on his guarantee on 13 November 2009, but Mr Garcia has not yet satisfied that judgment.) There have been two primary issues arising on the claim. First, Fluxo-Cane denies that Sucden was contractually entitled to liquidate its positions. Second, Fluxo-Cane says that, even if it was so entitled, Sucden conducted the liquidation in a culpable manner, giving rise to a counterclaim for damages.

In addition to the documents to which I was referred, I heard oral evidence from Mr Michael Overlander, who is Sucden’s CEO based at its London office. I found his evidence to be reliable. Fluxo-Cane’s President, Mr Garcia, is based in Sao Paulo. He and his companies are among the leading professionals in the Brazilian sugar trade, and Fluxo-Cane described itself in the New York proceedings that I refer to below as a leader in the sugar trading business. Witness statements have been filed by him, and he explains that he is in very poor health at present. He has not given evidence at the hearing (there was no proposal for videolink evidence). In addition, I heard expert evidence from Mr Samuel Levy on behalf of Fluxo-Cane, and Dr Desmond Fitzgerald on behalf of Sucden. Mr Levy is a consultant based in Rio de Janeiro specialising in the commodities futures and options market, particularly the sugar market. Dr Fitzgerald is based in England and specialises in the design of arbitrage, volatility trading and risk management strategies. He has extensive experience as an expert witness in derivatives litigation. Both were helpful witnesses, though as I shall explain, in relation to the specific disagreements between them, I prefer the evidence of Dr Fitzgerald. In fact, the areas of factual dispute were in general quite limited. Before setting out my findings of fact, I should mention that a number of other brokers have sued Fluxo-Cane for liquidation amounts arising out of the same events that gave rise to Sucden’s claim. In ED & F Man Commodity Advisers Ltd v Fluxo-Cane Overseas Ltd [2010] EWHC 212 (Comm), David Steel J gave judgment against Fluxo-Cane on one such claim. A number of matters dealt with in that judgment are relevant to the present case, and I shall mention these in due course.

The facts as I find them to be are as follows. The relationship between the parties goes back to 2005, but the operative facility which gives rise to this claim is dated 11 April 2007. It deals among other things with margin and with Fluxo-Cane’s trading limit, and it is subject to Sucden’s standard Terms of Business. Sucden was one of a number of brokers used by Fluxo-Cane. Its principal business is physical trading, but it uses the futures and options markets to price physical contracts and to hedge price risk. The present case concerns in particular Fluxo-Cane’s dealings in a standard futures contract traded on the ICE Exchange called the Sugar No.11 Contract, in this case for March 2008 delivery, and associated options and spreads.

Mr Overlander explains how these deals are structured. Although legally contracts for sale, futures such as the Sugar 11 do not usually result in physical delivery. A contract to sell a given quantity at a given date is usually liquidated or closed out by a matching contract to buy the same quantity at the same date (and vice versa to liquidate a contract to buy). Although the contracts will match as to quantity and date, they will typically be concluded on different dates, and therefore differ as to price. Performance is by payment of the price difference, rather than by physical delivery. Only members can trade derivatives on the ICE Exchange (both Sucden and Fluxo-Cane are members). They do not trade directly with one another however, because ICE operates on a clearing house basis. This means that all members contract with a central clearing house (equivalent to a central counterparty) on each trade. The clearing house then matches sellers and buyers who have traded for the equivalent quantities and dates. ICE’s clearing house is an entity called ICE Clear US.

Broker trading of ICE contracts involve a chain in which the client (here Fluxo-Cane) contracts with the broker (here Sucden) and the broker concludes an equivalent upstream contract. In addition, brokers like Sucden trade through a “clearing member” which adds another link to the chain. Sucden’s clearing broker was ADM Investor Services Inc. The contractual chain whenever Fluxo-Cane traded via Sucden was therefore Fluxo-Cane—Sucden—ADM—ICE Clear US.

The ICE Exchange rules typically require trading to be backed by margin, i.e. money which is deposited to cover potential future liabilities under trades. Margin requirements are calculated daily, and a margin call is made whenever additional margin is required as a result of a day’s trading. Under ICE Rules, margin operates on a chain basis too, so that in this case, ADM would deposit margin with ICE Clear US, Sucden with ADM, and Fluxo-Cane with Sucden. (LIFFE Rules also require margin, and Sucden’s margin calls on Fluxo-Cane included both ICE and LIFFE margin in a single call.) Sucden sent margin calls on the morning after the trading day in question (before the new day opened). Subject to a few exceptions which were generally due to holidays, Fluxo-Cane paid on the same day as the call.

It is clear that Fluxo-Cane was a substantial, and valued, customer of Sucden. The problems that have caused this litigation arose as follows. Towards the end of 2007, Mr Garcia took the view that because of oversupply, the price of sugar would fall. Through its various brokers (who of course did not know the overall extent of the company’s trading) it built up a substantial short position particularly in the March 2008 No.11 Contract. By dint of having a short position, Fluxo-Cane stood to gain if the price fell, but stood to lose if the price rose, which unfortunately from Fluxo-Cane’s point of view it did over the relevant period. In the ED & F Man case, David Steel J sets out at [18] and following paragraphs the events that transpired as a consequence, and I need only summarise them. Sucden’s case, which I accept, is that until the last minute, it was unaware of what was happening. On 13 November 2007 the Managing Director of Market Surveillance at ICE wrote to Mr Garcia to the effect that the Exchange remained concerned about the sensitivity of Fluxo-Cane’s positions to price changes. In other words, it considered the company over-exposed. Fluxo-Cane was asked to limit its net position to a maximum of 60,000 futures equivalent contracts in any single Sugar 11 contract month (there are a number of these annually fixed by reference to sugar harvests in various parts of the world). A further letter elicited a response from Fluxo-Cane’s New York lawyers taking issue with the restriction imposed on the company’s trading.

In January 2008, matters reached a critical stage. An email from the Exchange of 10 January is to the effect that Fluxo-Cane’s March position was in excess of 80,000 lots. On 11 January, the Exchange ordered the company to stop selling March 2008 futures, stating that it had been in violation of its position limit for 10 business days. By further email that day, it was told that if its trading activity that day did not bring its position into compliance with the position limit, the Exchange would act under its rules to instruct firms carrying its positions to reduce them by close of trading on Tuesday, January 15, 2008 (Sucden was such a firm).

Fluxo-Cane says that on 14 January, it made a proposal to ICE to reduce its short position over a period of five business days. However such a proposal did not find favour with the Exchange, which by letter of 14 January 2008 issued a direction under Rule 6.13(d) that an additional 20% margin on Fluxo-Cane’s positions was to be collected effective close of business on that day. As one of Fluxo-Cane’s brokers, Sucden was subject to this direction, which came entirely out of the blue so far as it was concerned. Mr Overlander says (and I accept) that it was a highly unusual step for the Exchange to take, and he understood it to mean that the Exchange was very concerned about Fluxo-Cane’s exposure. The calculation of the 20% so-called “super margin” was not however entirely straightforward, since Sucden’s margin calls included Fluxo-Cane’s LIFFE trading as well as its ICE trading. Nevertheless, Fluxo-Cane paid Sucden’s margin calls that day and up to and including 16 January 2008.

However, on 15 January 2008, a special meeting of the ICE Exchange’s Board of Directors was held. What was decided is set out in a letter to Fluxo-Cane dated 16 January 2008 addressed to Mr Garcia. The text is set out in full in the ED & F Man case at [29]. In summary, it records that the Board decided that there was a substantial question as to whether a “Financial Emergency” as defined in the Rules existed with respect to the company. The Board directed that all its sugar No.11 Contracts and any options on such contracts could only be placed through a clearing member. The decision was said to be based on the fact that Fluxo-Cane had significantly exceeded the position accountability levels established by the Exchange. It had, according to the letter, “refused to bring its positions into compliance with the levels established by the Exchange, notwithstanding repeated requests to do so by the Exchange; and Fluxo has increased its short futures equivalent position when instructed to reduce such position in the March 08 delivery month”. The letter noted that “due to the gravity of the situation” it was not practical for the Exchange to afford Fluxo-Cane a hearing before taking action. On a separate but related matter, the Exchange instructed each firm carrying positions for Fluxo-Cane in the sugar No.11 futures contract and/or options thereon to reduce it proportionately, and not to accept any orders that would increase the short position.

Pursuant to this decision, a document called “Notice to Liquidate Positions” and dated 16 January 2008 was sent by the Exchange to ADM and the various brokers concerned, including Sucden. At that point in time, taking account of its position as a whole with Sucden, that is to say options and the like in which it was long, Fluxo-Cane had a short futures equivalent position in the March 2008 contract of about 6,000 contracts. Sucden was instructed to reduce this to 3,600 contracts by no later than the close of trading on Wednesday January 23, 2008. Other brokers received similar instructions in relation to their positions.

As Mr Overlander puts it, this was a very surprising and alarming message. It was the first time in his 35 years experience of trading sugar that the Exchange had intervened by ordering the forced reduction in the positions of a particular trader. He was extremely concerned about the implications. He called the Exchange at about 14.30 London time that afternoon, and spoke to, among others, its President, Mr Tom Farley. He explained the difficulties of limiting the position to 3,600 futures equivalent contracts because Fluxo-Cane’s positions with Sucden were a combination of futures and options, and the options were both calls and puts, both in and out of the money. ICE responded that Fluxo-Cane was “hugely in excess” of the specific limits set for it. It had taken (Mr Overlander was told) an “enormous position”, and had refused all requirements of the Exchange over a period of time reduce it. It was the first time (at least in the knowledge of anybody attending on the call) that such a draconian measure had been taken. Mr Overlander explained his further concerns that liquidating positions as required would drive the market up, but the Exchange participants made it clear to him that he would have to manage the reduction as best he could. Other brokers who inquired were presumably told much the same.

Mr Overlander then called Mr Garcia, and asked whether he intended to pay the next day’s margin call (17 January 2008). Mr Garcia responded that he didn’t know yet, but that a conference call with all the brokers would take place the following day. It was (not surprisingly) a short call, given the pressure that Mr Garcia was under.

On 17 January, which was a Thursday, Sucden made a margin call of $1,326,497 at 08.23 London time. The meeting between Fluxo-Cane and its brokers that Mr Garcia had arranged took place about midday New York time. Some people were physically present in New York, others joined by conference call. Mr Garcia’s aim was to reach an agreement allowing for an orderly and coordinated reduction in the company’s positions, on the basis that he would pay outstanding margins the following day. The overall meeting was some three and a half hours, with Mr Garcia present for about two hours. David Steel J describes it at [35] to [37] of the ED & F Man judgment. Mr Garcia accepted that Fluxo-Cane had been in excess of its ICE limits. (I should say that insofar as it may be in dispute in this action, I am quite satisfied that Fluxo-Cane was in fact in breach of its position limits, as the Exchange said it was. The evidence suggests that it may have been as much as 30,000 lots in excess of such limits.) Mr Garcia tried to get the brokers to agree a coordinated reduction which he hoped would minimise the danger of a spike in prices caused by a forced liquidation. On their part, the brokers’ main concern was to obtain a commitment to pay outstanding margin. Sucden says that it had paid margin to ADM, and without receiving Fluxo-Cane’s margin, would be heavily exposed. It appears however that the payment of margin was going in practice to require support from Fluxo-Cane’s banks. The transcript of the meeting is long and involved, but it was submitted at trial on behalf of Fluxo-Cane that it is clear from the transcript that in the last part of the meeting Mr. Garcia did not say that he was refusing to pay margin. Accordingly, it is submitted that when Sucden (and the other brokers) left the meeting on the 17 January, it would only have been reasonable for them to believe that Mr. Garcia was expressing his commitment to try to pay margin. (It is not argued that any binding agreement was reached to the effect that the participating brokers would take no further action in closing out Fluxo-Cane’s positions until the meeting had taken place on the following day: Fluxo-Cane’s argument to that effect was rejected in ED & F Man Commodity Advisers Ltd v Fluxo-Cane Overseas Ltd [2009] EWCA Civ 406, on appeal in a summary judgment application in that case.)

However as Sucden puts it, fairly in my view, Mr Garcia’s basic position was that Fluxo-Cane had decided not to pay any margin unless and until some agreement was reached for a co-ordinated reduction. This is the view that David Steel J took of the meeting in ED & F Man at [37]. Whatever its contractual commitments may have been, it is plain that Fluxo-Cane had no incentive to pay margin unless it got such co-ordination. It seems to me that Mr Garcia also made it clear that, even if co-ordination could be agreed, he would have to consult the company’s bankers before he could give any form of commitment, at least going forward, since, as he put it at the meeting, it “make[s] no sense to pay margin calls today and have no support for tomorrow”. Essentially matters were left on the basis that the meeting would reconvene the following day.

Mr Overlander said, and I accept, that he was “absolutely petrified about the whole situation”. During the course of the meeting (which he attended by phone from London), he gave instructions for Sucden to buy some futures contracts, and later that day some March/May spreads (another form of derivatives contract) were bought. These were booked at that stage to Sucden, and this has given rise to an issue between the parties as to when the liquidation actually started, which I shall deal with later.

Mr Overlander phoned ICE again after the meeting, and made a proposal which was intended to prevent speculators exploiting Fluxo-Cane’s need to reduce its short position. ICE responded that it would need to take legal advice, and nothing came of the proposal. It is plain that despite Mr Garcia’s hopes for a co-ordinated response, which in essence Mr Overlander shared, heavy trading took place overnight, and extensive liquidation of Fluxo-Cane’s positions was already taking place across the board.

To complete the narrative of events on 17 January, on that date Fluxo-Cane began proceedings in the US District Court for the Southern District of New York seeking an injunction requiring the Exchange to suspend its action until such time as the company was afforded a full hearing. Fluxo-Cane maintained in its complaint that it had co-operated with the Exchange, but that the actions taken by the Exchange were designed to inflict the maximum pain on the company, even if that meant insolvency. (I do not think that Sucden was aware of these proceedings but that is not material in this action.)

The following morning, that is Friday, 18 January 2008, Sucden made a US$5,579,389 margin call at 08.23 London time (like the margin call the day before, this was never paid). The scheduled meeting began in the morning, New York time, and again there was a mix of participation in person and on the phone. Mr Overlander joined from London. Mr Garcia’s attendance took place later in the meeting and was very short. To quote Fluxo-Cane’s opening skeleton argument, Mr Garcia had learned immediately after the 17 January meeting that the company’s positions were already being liquidated by some parties: “He regarded this as a betrayal and contrary to the agreement which, in his view … had been reached.… With extensive liquidation already taking place, Mr Garcia concluded that further discussions with his banks, and therefore the commission and clearing houses, was futile. He therefore did not speak to his banks”. I infer from this that for Fluxo-Cane to meet its financial commitments, support from its banks would have been required, but that in the light of the liquidation that was underway such support was not in the event sought. This was in effect accepted by Fluxo-Cane at the trial.

Mr Garcia limited himself to making a short statement, and left the meeting immediately afterwards. Fluxo-Cane has criticised Mr Overlander’s evidence in this respect, saying that he “began by accepting that he had not heard what Mr. Garcia had said at all and had to rely on what the other brokers told him. However, as cross-examination went on he seemed to remember more and more, so much so that by re-examination he said that whilst he had not heard every word he had heard sufficient to justify his concern”. I reject this criticism, and find that though he was unable to hear most of what was said, he heard enough to get the gist, and the discussions continued among the brokers when Mr Garcia left when he was told what had been said. Mr Overlander’s understanding is shown by what he told Mr Farley (President of ICE) a few minutes later, namely that “we’re also now faced with a client who [has] declared himself in default”. I am satisfied that this was how he regarded the position.

An issue arises as to whether Mr Garcia in fact repudiated the contract by his statement on 18 January. Fluxo-Cane submits that assessed objectively the answer is plainly not, but Sucden takes the opposite position. For the present, I am concerned only to find the facts. Fluxo-Cane submits that Mr Garcia appears to have expressed clear unhappiness with the brokers and to have complained about the financial mess they had left him with. What he said was evidently hard to understand (given his broken English) and appeared to be coloured by emotion, but (it is submitted) it is hard to spell out from any of what he did say that he held a settled and irrevocable intention to walk away from his obligations at that point. I reject that submission. It is not only a matter of what was said, though that seems clear enough, but the circumstances in which it was said, and the fact that Mr Garcia left the meeting immediately afterwards. As David Steel J put it in ED & F Man, “there can be no doubt in my judgment that he [that is, Mr Garcia] was making it quite plain that he could not or certainly would not meet the margin requirements” (at [64]). I reach the same conclusion on the evidence in this case, and find that it was how Mr Overlander understood it so far as Sucden was concerned. He says, and I accept, that his primary concern thereafter was to limit Sucden’s losses as best he could.

In fact, so many short positions had already been liquidated, that Fluxo-Cane was by now back within the limits set by ICE. At some point during the day, the Exchange withdrew its Notice to Liquidate Positions, and also withdrew the additional super margin requirement. It maintained the requirement that any orders in the Sugar No.11 Contract and/or options thereon were to be entered into exclusively with clearing members of ICE. Fluxo-Cane may be correct to suggest in its closing submissions that notification from the Exchange was circulated shortly after about 16.55 London time that afternoon, apparently following a telephone meeting of the directors of ICE at about midday New York time. (I should mention that on this basis, the legal action that Fluxo-Cane had taken in the New York courts became otiose, and was not as I understand it pursued.)

However by then it was too late to stop the process that had been put in train, and the liquidation of all of Fluxo-Cane’s positions by its brokers was well underway. At 16:39 London time, Sucden had sent out a notice of default to Fluxo-Cane as follows:

Monday 21 January 2008 was Martin Luther King Day in the United States, and the Exchange was closed. Sucden performed a limited number of close-out transactions on 22 and 25 January 2008. On 28 January 2008, Mr Overlander flew to Sao Paulo to meet Mr Garcia to discuss the account with him. They met on 29 January, but nothing was resolved. In consultation with his fellow directors, Mr Overlander decided to continue the liquidation of Fluxo-Cane’s positions when the market opened the following day. Margin calls continued to be made, though not met. On 7 February 2008, solicitors for Fluxo-Cane wrote to the effect that the procedures adopted by Sucden were in breach of contract.

However by 12 February 2008, the liquidation was complete, and Sucden wrote to Fluxo-Cane as follows:

Sucden’s case is that following the liquidation of Fluxo-Cane’s positions as described above, there is a debit balance on its account with the firm in the sum of US$5,632,679.98, which it is entitled to recover together with interest. In summary Fluxo-Cane contends that no valid margin calls were outstanding from Fluxo-Cane by the time Sucden commenced its liquidation. Fluxo-Cane was not otherwise in breach of the Trading Facility as at the time Sucden issued its Notice of Default on 18 January 2008; thus Sucden was not entitled, it is submitted, to liquidate Fluxo-Cane’s position and/or it is not entitled to rely retrospectively on such matters. On the basis that the liquidation was commenced prematurely, Fluxo-Cane’s case is that any loss falls for Sucden’s account, but that in any event Fluxo-Cane is entitled to be reimbursed for the value of its positions as at the commencement of the liquidation. Further, Fluxo-Cane contends that even if Sucden was entitled to liquidate the position, its conduct in carrying out the liquidation was negligent. Fluxo-Cane counterclaims the loss caused by the allegedly negligent liquidation. Each of these assertions is denied by Sucden, which says that it was entitled to liquidate the account, that its duties in doing so are limited by the terms of the contract, and that in any case it did so with due care.

Fluxo-Cane’s contentions raise issues as to the construction of the contract between the parties, and it is convenient to set out the principal provisions before considering its points. The contract consisted of an 11 April 2007 Facility Letter incorporating a Schedule attached to the letter, the original Account Opening Form, and Sucden's Terms of Business (“TOB”). Sucden acted on an “execution only” basis, and in accordance with the contractual scheme I have explained above, it acted as principal in its transactions with Fluxo-Cane. As regards the TOB, the following are particularly relevant:

There are some other terms relied on, which I shall come to where they arise in the argument. Those being the contractual provisions, I will now consider the parties’ contentions in detail.

Fluxo-Cane’s case is that Sucden prematurely began the liquidation of its positions on 17 January 2008, at a time when it had no contractual right to do so. Sucden’s case is that the initial liquidation of Fluxo-Cane’s account began only after the meeting of 18 January 2008. As to the facts, it is not in dispute that Sucden bought 405 March futures starting at 18.41 London time (13.41 in New York) on 17 January, which was done during the meeting which Mr Overlander was a party to by conference call. Later that day, at 20.14, it bought 306 March-May spreads. These 711 contracts were transacted in Sucden’s own name and allocated to a Sucden account. I am satisfied that they were applied to Fluxo-Cane’s account after the 18 January meeting and after Sucden sent the 18 January 2008 default letter.

I accept the explanation given by Mr Overlander in this respect, who said that these trades were undertaken in order to comply with the ICE directive of 16 January by which Sucden was required to reduce Fluxo-Cane’s March position from about 6,000 to no more than 3,600 futures equivalent contracts by 23 January, and was expected to make some reduction each day. It is important to appreciate that as a member of the Exchange, these directions were binding on Sucden—compliance was not optional. This follows under Rule 6.13(b) of the ICE Rules. It is given effect to as a matter of contract between broker and client in clause 3 of Sucden’s Terms of Business. At the same time, I find that Mr Overlander was anxious to conduct matters in as orderly a manner as possible given his firm’s obligations. As he put it in oral evidence, under the “tricky circumstances”, these transactions would enable Sucden to demonstrate to the Exchange that the firm was reducing Fluxo-Cane’s March exposure as instructed. If however the situation improved, and it did not become necessary to liquidate any of Fluxo-Cane’s positions, the lots would continue to belong to Sucden. The fact that the brokers agreed on the phone at the 17 January meeting to divide a purchase by Natixis of 1000 lots equally so that each could demonstrate compliance with the ICE directive in no way affects this conclusion. Equally, it is in my view entirely consistent with the email which Mr Overlander sent Fluxo-Cane’s New York lawyer on the morning of 18 January saying that he hoped Mr Garcia would accept the purchases for his account as an act of good faith. It is obviously irregular (as the experts agreed) for a broker to buy lots on its own account on one day and allocate them to its customer’s account on the next day, but the circumstances in this case were wholly exceptional, and as Sucden has submitted, such irregularity did not in itself cause Fluxo-Cane any loss.

I do not therefore accept Fluxo-Cane’s submission that the 17 January trades were undertaken by Sucden on its account. I find that the liquidation began after the 18 January meeting, when Sucden applied to Fluxo-Cane’s account the futures and spreads which it had bought on 17 January, and bought 950 March call options (there is not a precise time for this purchase). It is correct, as Fluxo-Cane says, that by then so many of Fluxo-Cane’s positions had already been liquidated that the ICE directive had been revoked. But I also agree with Sucden that by now matters had moved far beyond that, and that the situation now in prospect was a mass liquidation of all Fluxo-Cane’s positions by its various brokers. Mr Overlander sent Mr Garcia an email at 17.49 London time setting out what had been done by Sucden. I quote from that email as showing Mr Overlander’s intentions at that time:

Fluxo-Cane paid margin in accordance with the margin calls up to and including 16 January 2008, but not thereafter. The underlying question, and one of the two principal issues in the case, is whether Sucden was contractually entitled by reason of that failure, or for any other reason, to take the steps it did to liquidate Fluxo-Cane’s account. This subdivides into a number of questions.

Mr Overlander explained that Sucden’s letter of 18 January 2008 (which I have set out above) was drafted by the firm’s compliance officer, and it seems to have been drafted in something of a hurry, which is perhaps not surprising in the circumstances. It is headed “Event of Default”, and it states that because of Fluxo-Cane’s failure to meet the margin call made on 17 January 2008, an Event of Default has occurred under clause 46.1(a) of the TOB, and that Sucden would therefore exercise its rights in accordance with the TOB based on the Event of Default. The letter also makes reference to clause 34.1 of the TOB, under which, as it states, margin is payable “on demand”. That is the provision which expresses Fluxo-Cane’s contractual obligation as regards the time for paying margin. It is common ground that though stated to be “on demand” it allows the customer a reasonable time, following demand, for implementing the mechanics of payment (see in the context of demands made by a lender under security, Bank of Baroda v Panessar [1987] Ch 335). Margin was normally paid on the day of the demand, and no impediments have been suggested as regards the mechanics of payment on 17 January 2008, and I find that Fluxo-Cane was in breach of contract in failing to make payment that day. But that in itself does not necessarily advance matters, because Sucden did not have to act on the breach.

The contractual scheme as set out in the TOB is as follows. If there has been an Event of Default, Sucden may exercise its rights to liquidate its customer’s transactions as set out in clause 46.2 and following provisions. Further, by clause 47.1(c), it is provided that on an Event of Default, Sucden is entitled without prior notice to close out, replace or reverse any transaction in such manner as it considers necessary to cover its losses or liabilities under the customer’s contracts. It is common ground between the parties that following the letter of 18 January 2008, Sucden proceeded under this clause (clause 47.1) and not under the liquidation provisions contained in clause 46.2.

Fluxo-Cane has a straightforward point on the exercise of these powers. Clause 46.1 (a) (set out above) expressly provides the time by which margin must be paid in order to trigger an Event of Default. An Event of Default occurs under clause 46.1 (a) if the customer fails to pay margin when due and “such failure continues for one Business Day after we [that is Sucden] give you notice of non-performance”. Until that happens, Fluxo-Cane submits, non-payment of margin cannot be treated as an Event of Default. Fluxo-Cane submits that the reference to “one Business Day” means one clear Business Day (I do not think that is disputed). On that basis, excluding Saturday and Sunday 19-20 January, as well as Monday 21 January 2008 (which as I have explained was a holiday in New York, margin being payable there in US dollars), this means that the earliest that one Business Day can have elapsed from the time of the letter of 18 January is some time on 22 January 2008. Accordingly, Fluxo-Cane had until some time on 22 January 2008 to pay the margin demanded on 17 January 2008 before clause 46.1(a) could operate. There was, therefore, it is submitted, no subsisting Event of Default under clause 46.1(a) of the TOB when Sucden began to liquidate the account on 18 January 2008.

Fluxo-Cane also submits that the letter of 18 January 2008 was notice of default, not notice of non-performance, and therefore the letter does not comply with the requirements of clause 46.1(a) and was ineffective for any purpose. I reject that particular submission. The letter was in my view plainly notice of non-performance of the obligation to pay margin. But Fluxo-Cane’s other points appear to me on their face to be correct. A business day should have been given for the payment, and was not. Sucden seeks to answer this in various ways. It submits that it was not obliged to give Fluxo-Cane notice of its failure to pay the 17 January margin when Fluxo-Cane knew that it had not paid and had made it clear on 17 January that it was not going to pay that day. Sucden was therefore (it is said) entitled to act at once without waiting for one business day to elapse. This is a variant of an argument rejected by David Steel J in ED & F Man at [52] and [53], and I also reject it. It is right that at the 17 January meeting Mr Garcia made it clear that payment of the 17 January margin calls would not be made that day, since he was looking for a coordinated approach and support from the company’s bankers. I have set out above my findings of fact in this regard. But it does not follow that Sucden was for that reason entitled to treat non-payment as an Event of Default under clause 46.1(a) of the TOB on 18 January 2008 entitling it to commence liquidation that day. The contract clearly provides the procedure that must be adopted if non-payment of margin is to be treated as an Event of Default, and it gives the customer one Business Day after notice of non-performance before it can be so treated. Barrett Bros (Taxis) Ltd v Davies [1966] 1 WLR 1334 relied on by Sucden had to do with whether notice had in substance been properly given by an insured so as to allow a claim to be made under an insurance policy. The court held that the insurers had all relevant information from another source, so notice was irrelevant. The issue was different, and the factual context was completely different, from the present case.

However I reject an alternative case that has been advanced by Fluxo-Cane to the effect that it had five business days in which to pay margin by reference to Rule 5.01 of the ICE Rules. As Sucden says, while this Rule defines “reasonable time” as “less than 5 Business Days”, it is plain that this is in the context of and for the purposes of the Rules themselves. The Rules lay down a maximum period within which margin must be paid in order to comply with ICE Rules and avoid regulatory sanction. The Rules do not purport to, and do not, lay down some minimum period to which the payer is absolutely entitled. Nothing in the ICE Rules prevents a broker and customer from agreeing a shorter period between themselves as a matter of contract. I reject therefore Fluxo-Cane’s alternative contention that it would not have been obliged to meet the margin calls made on 17 and 18 January until some time on 25 or 28 January respectively.

If the above conclusion is correct, and the notice given did not comply with clause 46.1(a), the question is as to the consequences. In addition to clause 46.1(a), Sucden relies on numerous other provisions of the TOB to justify its actions, and the issue is whether it is entitled to do so, or whether it is limited to the terms of the default letter of 18 January 2008. Fluxo-Cane submits that this raises a number of sub-issues as follows: (1) did Sucden in fact rely on any other provision at the time, (2) can Sucden rely on clause 47.1 notwithstanding it did not subjectively have in mind any particular event of default at the time, (3) if Sucden relied only on non-payment of margin, as a matter of law can it now retrospectively rely on other provisions, (4) if so, is that retrospective reliance justified?

The starting point of all the arguments it advances in this respect is Fluxo-Cane’s submission that all the contemporaneous documentary evidence demonstrates beyond any reasonable doubt, it says, that the only basis upon which Sucden justified the liquidation at the time was by reference to its (mistaken) view that Fluxo-Cane had failed to make margin payments in time. It points out that the “Event of Default” letter of 18 January 2008 only made reference to non-payment of margin and clause 46.1 (a), and it was for this reason alone that Sucden stated that it would “therefore exercise its rights in accordance with the TOBs based on the Event of Default”. That stance, it says, is repeated in Mr Overlander’s follow-up email sent later that same day saying that, “we have formally had to put you into default today following your failure to pay your outstanding margin calls”. Sucden repeated that position in its formal letter of demand on 12 February 2008 where the only alleged breach was the failure to make payment of a margin call. The first time that any of the other points now relied on are mentioned (and this I believe is correct) is in Sucden’s pleadings in this action.

The factual points made by Fluxo-Cane in this respect are accurate. As a matter of fact, only non-payment of margin was given as a reason for the liquidation at the time. But in my judgment, this must be put into the context of the extraordinary conditions in which the parties found themselves. I have found that until 14 January 2008, Sucden was unaware of the crisis that had been gathering between Fluxo-Cane and the Exchange. The concerns of the Exchange as to the short position which Fluxo-Cane had built up in March 2008 futures had to do with its overall position, not its position held with any particular broker. The Exchange’s concerns, it is to be noted, had to do with the potential adverse impact of Fluxo-Cane’s trading on the Exchange itself. This was plainly a very serious matter. The first that Sucden learned of it was when the super margin requirement was imposed on 14 January 2008. In its complaint for injunctive relief against ICE in the US District Court for the Southern District of New York Fluxo-Cane asserted that “super margins are essentially unheard of”, and that accords with the evidence in this case. The fact that Fluxo-Cane met its margin calls of 15 and 16 January 2008 (which included super margin) cannot obscure the fact that it faced, and Sucden understood it to face, a major crisis. Mr Garcia himself described the imposition of the requirement in his email to the Exchange of 14 January 2008 as a “sentence of death”.

The full extent of the concerns of the Exchange is shown by the decisions taken by the special meeting of its Board of Directors held on 15 January 2008. The Board decided that there was a substantial question as to whether a “Financial Emergency” as defined in the Rules existed with respect to Fluxo-Cane. It was following this decision that Sucden (and Fluxo-Cane’s other brokers) were instructed to reduce their positions. Mr Overlander was extremely concerned about the situation, and called the Exchange himself on a number of occasions. On the afternoon of 16 January 2008, those he spoke to at ICE included its President. Mr Overlander was told that Fluxo-Cane was hugely in excess of the limits that the Exchange had set, and had built up an enormous position. It had refused all requirements by the Exchange over a period of time to reduce it. ICE made it clear that the action it was taking was to protect the market. Mr Overlander said, “in all my years of trading sugar and it’s been quite a few, I’ve never known the Exchange to take such a draconian measure against one member firm”. Its Counsel (also on the call) responded saying that in twenty five years “this is the first time this has happened”. Mr Overlander was told that not only had Mr Garcia not listened to the Exchange and reduced his position, but he had increased it hugely. It is only fair to record that Mr Garcia himself does not accept the Exchange’s characterisation of his conduct. The material that I have seen, including his witness statements in this action, make it clear that he feels that he has been unjustly treated by the Exchange. But that complaint is outside the remit of this case. Mr Overlander was entirely entitled to believe, and I find that he did believe, what the officers of the Exchange told him.

At the same time, it is right the Exchange did not offer Sucden solutions as to how Fluxo-Cane’s position could be reduced, telling Mr Overlander that “we need you to manage it”. Mr Overlander spoke to Mr Garcia after that conversation, and asked whether he intended to pay the following day’s margin call. Mr Garcia said that he really didn’t know yet, to which Mr Overlander responded that if he was not in a position to pay then “somebody is going to press the button first” in other words put Fluxo-Cane into default. That indeed is what happened, as explained in the account of the events of 17 and 18 January 2008 which I have set out above. The fact that the Exchange lifted the position limits on Fluxo-Cane sometime early on the afternoon (New York time) of 18 January 2008 followed from the massive number of transactions that had already taken place. By then, it is plain that the damage had been done, and Mr Garcia was doing no more than face the inevitable in making the statement that he did to the brokers at the meeting that day. The fact that Mr Overlander tried to keep lines of communication open with Fluxo-Cane reflected the fact that Mr Garcia had been a valued client, but also, I find, a pragmatic desire to manage the aftermath with his consent if possible. Mr Overlander flew to Sao Paulo to see him, but nothing came of the meeting, and the bulk of the liquidation then ensued.

Against that background, I assess the evidence as follows. It was suggested to Mr Overlander in cross examination that the only default that he had in mind at the time of sending out the default letter was non-payment of margin. He responded to the effect that the dispute between Mr Garcia and the Exchange formed part of Sucden’s decision-making process. The telephone conversations that he had had were very much on his mind at the time, he says. Non-payment of margin was not exclusively what Sucden was thinking of. I accept his evidence in that respect, and further accept Sucden’s submission that it was not simply concerned about a one-off failure to pay a single margin call. The concern was whether Fluxo-Cane was going to default generally on its ongoing commitments to all of its brokers. If it did, that would trigger a mass liquidation and probably a spike in the market, as in the event happened. I accept Sucden’s submission that margin was therefore not an abstract consideration insulated from wider considerations, but was intrinsically bound up with questions of regulatory compliance and Sucden’s own financial exposure. That (in my view) puts the position fairly and accurately.

That being so, Sucden has contended that it is entitled to rely on various other matters in addition to non-payment of margin under clause 46.1(a). There are a considerable number of these, none of which was referred to in the default letter of 18 January 2008. These were TOB clause 3, clauses 46.1(d), (e), (j), (k), and (l) (Events of Default), and clause 47.1 (treating that provision as a freestanding one in two parts), and the 11 April Facility Letter, and (as Sucden puts it, “if necessary”) repudiation. One or more of these provisions applied, it submits, at all times from 17 January 2008, so that Sucden had “complete contractual coverage throughout the liquidation”. To assess that submission, I have now to consider each of the matters relied on, which involves construing the relevant contractual provisions (which are set out above) in the light of the facts. I should say that I found some of these contentions implausible, but in any case, the onus is plainly on Sucden to make good its case on the evidence.

TOB clause 3 is relevant to the 711 contracts bought on 17 January 2008. As explained previously, I accept the explanation given by Mr Overlander who said that that these trades were undertaken in order to comply with the ICE direction of 16 January by which Sucden was required to reduce Fluxo-Cane’s March 2008 position from about 6,000 to no more than 3,600 futures equivalent contracts by 23 January, and was expected to make some reduction each day. The direction was given under ICE Rule 6.13(b). The ICE Rules were “Applicable Regulations” within clause 3 of the TOB, and it follows that Sucden was obliged to obey the direction. Clause 46.1(j) of the TOB (also relied on by Sucden) does not (in my view) add anything since, as is common ground, it could only apply up to the time of ICE’s notice of 18 January lifting the restrictions on the company’s position limits. The real issue in this case concerns the subsequent liquidation of Fluxo-Cane’s positions. The timing of the purchase of the 950 March call options bought on 18 January is unclear, but it is referred to in Mr Overlander’s email of 18 January 2010 to Mr Garcia sent at 17.49. Sucden says that it came after the notice of default, and in the circumstances it falls to be treated in my view as part of the liquidation, and cannot be justified under clause 3.

As to clause 46.1(d), I agree with Sucden that the Events of Default comprehended within this sub-clause go beyond insolvency. The words in the sub-clause relied on are that “any indebtedness of yours is not paid on the due date therefor”. The indebtedness relied upon is the unpaid margin. That being so, I reject its case that clause 46.1(d) is applicable here. I agree with Fluxo-Cane that since unpaid margin is expressly dealt with in sub-clause (a), that it would be wrong to construe the agreement in such a way as to permit Sucden to put the account into default under sub-clause (d) thereby avoiding the need to give a Business Day to make payment.

Sub-clause 46.1(e) applies if Fluxo-Cane disaffirms, disclaims or repudiates any obligations under the agreement. I have set out above my findings of fact in relation to what happened at the meeting with the brokers on 18 January 2008. I am satisfied that Mr Garcia did repudiate Fluxo-Cane’s obligations under the agreement by his statement at that meeting, and that Mr Overlander understood him to have done so. It follows that sub-clause (e) does apply. Whereas at common law, Sucden would have been required to give notice accepting the repudiatory conduct as putting an end to the contract, the effect of sub-clause (e) is, in my view, that it was entitled following the repudiation to take the steps that it did to liquidate Fluxo-Cane’s positions under clause 47.1(c) (sub-clause (e) does not require notice to be given). Mr Sean Snook, counsel for Fluxo-Cane, contends that such a conclusion is inconsistent with the cancellation rights in respect of repudiation given by clause 41.7(d) of the TOB. Since the liquidation took place under Clause 47.1(c), he says this cannot have been a case of repudiation. However the rights set out in (d) appear to me to be additional to those set out in (c), and there is no reason to treat the fact that Sucden proceeded under (c) as showing that there was no Event of Default under clause 46.1(e). In my view, there clearly was in this case.

In the course of argument, Sucden placed particular reliance on clause 46.1(k). This sub-clause (including the opening under the rubric Event of Default) provides that, “If at any time … we [that is, Sucden] consider it necessary or desirable for our own protection / any action is taken or event occurs which we consider might have a material adverse effect upon your ability to perform of your obligations under this Agreement … then we may exercise our rights [to liquidate] under sub-clause 2 …”. (In fact, as I have said, Sucden did not exercise its rights to liquidate under sub-clause 2, but its rights under clause 47.1(c) to close out its customer’s transactions on an Event of Default. It makes no difference for present purposes). In ED & F Man, it was held that the claimant broker in that case was entitled to rely on a provision which gave the right to close out contracts if “we reasonably consider it necessary or desirable for our own protection”. The clauses are not identical, but are clearly to very similar effect. In that case, David Steel J concluded at [68] as follows:

The same considerations that led to that conclusion apply equally in the present case. The intervention of the Exchange, and the complaints to which that intervention related, were of a very high order of magnitude. Fluxo-Cane failed to pay the margin due on either 17 or 18 January 2008, and it became increasingly evident (I am satisfied) that it would not be in a position to do so. Other brokers were in the course of liquidating their positions. Because of the contractual structure which I have explained, Sucden was itself financially exposed to its own counterparty on the positions held by Fluxo-Cane. It was, as it submits, left financially exposed on open positions without margin to cover the exposure, while other brokers were commencing a mass liquidation of Fluxo-Cane’s position, which threatened to disrupt the market. Even before one gets to Mr Garcia’s repudiatory conduct at the meeting of 18 January, events had occurred which might, indeed certainly did, have a material adverse effect on Fluxo-Cane’s ability to perform its obligations under the agreement.

In its closing submissions, Fluxo-Cane submits that the wording of clause 46.1(k) plainly requires Sucden to actually form a view at the time that it seeks to rely on the clause. I agree that the use of the words “we consider” in the sub-clause show that it must form a view. However the sub-clause refers to the relevant rights being exercisable if Sucden “consider[s] it necessary or desirable for our own protection”. As Mr Nigel Eaton, counsel for Sucden put it, in my view rightly, sub-clause (k) does not say you must have in mind that it is desirable for you to take steps under that sub-clause, it says you must have in mind that it is desirable for you to take steps for your own protection.

I accept, of course, as Fluxo-Cane says, that an important indication of what Sucden considered itself to be doing at the time is what it said in the letter of 18 January, and that only makes reference to the non-payment of margin under clause 46.1(a). That is a powerful point and I do not diminish it in any way. Nevertheless, the circumstances were exceptional, and given the nature of the facts as I have found them to be, and Mr Overlander’s view of the situation that had arisen, clause 46.1(k) did in my judgment apply in this case. The fact that ICE withdrew its direction on 18 January does not alter the situation. The situation had gone beyond compliance with ICE’s position limits, because the brokers (in Mr Overlander’s words) were now faced with a customer who had “declared himself in default”. By close of business on 18 January, Fluxo-Cane had not paid the 17 or 18 January margin calls. Mr Garcia had made it plain at the meeting on 18 January that Fluxo-Cane was not going to pay margin. He told the meeting that his financial position was deteriorating “each minute”, that his credit lines were “blocked”, and that he was nearly bankrupt. The attitude of the Exchange was that the brokers should “do what you have to do”, which meant in effect, as Sucden puts it, a rush for the keyboards. All of this, as Sucden submits, transformed a risk that brokers would “push the button” into a certainty, and it was conscious of the risk of being left at the back of the queue. As I have said, it was left financially exposed on open positions with its counterparty ADM without margin from Fluxo-Cane to cover that exposure. I accept Mr Overlander’s evidence that in the light of the January 18 meeting, he believed that Sucden had no choice but to hold Fluxo-Cane in default and to commence liquidation of its position in a way which would minimise as much as possible its own losses. I am satisfied that its primary concern in this situation was to limit its own potential losses, and that its state of mind satisfied the requirements of clause 46.1(k). Considering it necessary or desirable for its own protection, it commenced the liquidation of Fluxo-Cane’s positions, a process that only got underway properly after Mr Overlander’s visit to Sao Paolo on 29 January 2008 to discuss the account with Mr Garcia, which turned out to be fruitless. Accordingly, in my view sub-clause 46.1(k) applied.

Clause 46.1(l) (which is the next provision Sucden relied on) is the cross-default clause. It applies, according to Sucden, by reason of the finding in ED & F Man that an Event of Default occurred under the relevant contract in that case. For the reasons given by Fluxo-Cane, in particular the commercial uncertainty that allowing such an outcome would produce, I reject this submission. I do not consider that the subsequent outcome of a different case can be treated on the facts of this case as sensibly resulting in an event of default some two years beforehand.

Sucden’s closing submissions state that the independent right to liquidate under clause 47.1 (in other words that part of the clause that comes after the reference to Events of Default giving, or purporting to give, an absolute discretion in the case of non-performance to close out a customer’s transactions under clause 47.1(c)) “adds little” on the present facts. It adds nothing in my view, and I do not propose to consider it further.

Finally, in terms of the provisions now relied on by Sucden, in the facility letter of 11 April 2007, Sucden reserved the right “at our absolute discretion” to reduce, withdraw or vary the facility. Despite submissions to the contrary, this was not a case, in my judgment, in which Sucden “withdrew the facility”. It relied upon the terms of the facility to liquidate its customer’s account which is a different thing. I agree with Fluxo-Cane that the terms of the facility letter do not take Sucden’s case any further forward.

In summary, I conclude that though non-payment of margin did not constitute an Event of Default at the time when Sucden began the liquidation on 18 January 2008, there were other subsisting Events of Default under both clause 46.1(e) and (k) of the TOB. By clause 47.1 therefore, Sucden was entitled to without prior notice to close out Fluxo-Cane’s various transactions, which is what it proceeded to do. On the facts as I find them to be, this is not a case in which the claimant is seeking retrospectively to rely on an Event of Default upon which it did not rely at the time. Despite the fact that neither point is mentioned in the letter of default, I am satisfied that in taking the action that it did, Sucden had in mind both Mr Garcia’s repudiatory statement of 18 January 2008, and the necessity to protect itself. I am satisfied on the facts that the situation demanded such action. Essentially the same conclusion was reached in ED & F Man at [58]. In that case also, the justification advanced by the brokers at the time was non-payment of margin, but no such default had occurred: “But”, as David Steel J said, “there is nothing to inhibit reliance on any other event of default”. The same applies in this case.

There are two other submissions of the parties which I should deal with. First, Sucden submits that even if it is wrong on all the above, a failure to operate the contractual procedure as regards non-payment of margin would only give rise to a right to damages had any loss been suffered by reason of the premature commencement of the liquidation. But if Sucden had not commenced liquidation on 18 January, Fluxo-Cane, it is contended, would have continued not to pay margin. It would still have walked away from its contractual obligations on 18 January, because Mr Garcia would still have taken the view that the actions of the other brokers, who liquidated a large portion of the account on 17-18 January, meant that it made no sense to go on. Sucden would therefore (it is submitted) have become entitled to liquidate Fluxo-Cane’s positions under the Events of Default provisions and under clause 47.1, and it would have done so. All of Fluxo-Cane’s positions would have been liquidated in any event, and so it cannot show any loss.

I initially thought that there was some force in this submission, because the fact is that the margin would not have paid. A default was inevitable. But on consideration I do not think that this approach can be correct. The day’s grace provided for in the Event of Default provision as regards non-payment of margin gives the customer a measure of protection, and in any case it is a contractual requirement. The letter of 18 January 2008 asserts that the failure to meet the margin call constituted an event of default under clause 46.1(a) and that Sucden would therefore exercise its rights in accordance with the TOB based on that Event of default. It was however not contractually entitled to do so because to count as an event of default, the failure had to continue for one Business Day after notice of non-performance. Having failed to give that day’s grace, I do not consider that the broker would be able to in law justify the action taken on the basis that the margin was not thereafter paid, so that the account would have gone into default anyway. If this were the only Event of Default in play in this case therefore, I consider that Fluxo-Cane would be correct to say that the entire liquidation would have been non-contractual. This may seem a harsh conclusion, but events of default clauses are standard in financial contracts, and if a default is called the party calling it must be able to show that the powers exercised were properly exercisable under the terms of the contract. However, as I have held, there were other operative Events of Default, so that this issue does not arise.

The second argument is made by Fluxo-Cane on the language of clause 47.1. This gives a right to close out customer’s positions in two eventualities, namely, an Event of Default, or at any time after Sucden determines in its absolute discretion that the customer has not performed (or may not be able or willing in the future to perform) any of its obligations. As regards this second discretionary power, it was submitted by Fluxo-Cane that where a contract confers wide discretionary powers on one party the court will readily construe it so as to impose on the party exercising the power an obligation not to act arbitrarily, capriciously or unreasonably: reliance was placed on Paragon Finance v. Nash [2002] 1 WLR 685, The Product Star (No. 2) [1993] 1 Lloyd’s Rep. 397, and The Vainqueur José [1979] 1 Lloyd’s Rep. 557.

Given the concept of “absolute discretion” expressed in the second part of clause 47.1, there may be some force in this submission so far as that part of the clause is concerned. But as I have noted, Sucden’s closing submissions were focused on the first part of the clause, where the close out power is exercisable on an Event of Default. Fluxo-Cane nevertheless submits that Sucden has to make its own determination as to whether the putative Event of Default is in fact made out so as to justify the exercise of rights under clause 47.1. Thus, if Sucden decides that it does wish to exercise its rights by reason of the Event of Default, it must actively decide to do so. It must, so the argument goes, make a choice from what may be a selection of potential Events of Default. So, Fluxo-Cane submits, on its true construction the whole of clause 47.1 is subject to the limits indicated in Paragon on the exercise of Sucden’s discretion. To allow a party to rely on such a clause retrospectively, it is submitted by Fluxo-Cane, when it was not relied upon at the time, would be unfair and contrary to the parties’ reasonable expectations. The scope of such a clause needs to be confined within reasonable bounds.

In my judgment, this argument is misplaced. As Mr Eaton pointed out, the authorities relied upon by Fluxo-Cane are concerned with contracts which give one party a discretion as to how it is to be performed. In certain cases, the courts will treat such discretion as subject to limits. In Paragon, the issue was as to the discretionary setting of interest rates under a mortgage. In The Product Star, the discretion related to determining whether or not a port was dangerous by reason of war. The Vainqueur José had to do with the discretion of the committee of a P & I club to decide matters under its rules. These authorities, in my judgment, have no application to the termination of a financial contract upon an Event of Default. The question in such a case does not concern the exercise of a discretion but whether the party concerned has the contractual right to terminate. So, in the present case, the broker was either contractually entitled to liquidate the customer’s positions, in which case (subject to the counterclaim) it can recover the balance on the customer’s account, or it was not, in which case it will be treated as acting on its own account. No authority has been cited to me to suggest that questions as to the exercise of a discretion enter into such a case, and in my judgment they do not. In the present case, I have concluded for the reasons set out above that Sucden was contractually entitled to liquidate Fluxo-Cane’s account, despite having identified an Event of Default in its default letter that did not in fact apply. It follows that I find in favour of Sucden on the liability issue, subject to the counterclaim. It also follows that I also reject Fluxo-Cane’s case that Sucden must account to it for the value of its positions immediately prior to the commencement of the liquidation, which it says was US$1,530,533.74 (Sucden does not accept this figure but did not put forward any alternative). I must now proceed to consider the question of the amount recoverable by Sucden in the liquidation.

It is not in dispute that the debit balance on Fluxo-Cane’s account following the close out of all its positions is US$5,632,679.98, and that on the basis of my findings on the liability issue this sum is recoverable subject to Fluxo-Cane’s counterclaim. In substance, Fluxo-Cane submits that the liquidation was conducted negligently, and that had it been conducted with due care, the debit balance would have been much reduced. It claims to be entitled to counterclaim the difference between the loss arising on Sucden’s allegedly negligent liquidation (i.e. US$5,632,679.98) and the negative value of Fluxo-Cane’s position had the liquidation not been handled negligently (i.e. US$1,804,554.04), namely US$3,828,125.84.

The first question is what degree of care Sucden had to exercise. In that regard, the parties are in disagreement as to the standards that Sucden had to observe when carrying out the liquidation. Fluxo-Cane has argued that when liquidating the account, Sucden was subject to the provisions set out in the New Conduct of Business Sourcebook (COBS) promulgated by the regulator, the Financial Services Authority. The sourcebook sets out the conduct of business requirements applying to firms with effect from 1 November 2007. It sets out rules to the effect that a firm must act in accordance with the best interests of its client, and must act subject to a best execution obligation. I believe it to be common ground that COBS would apply if Fluxo-Cane was categorised as a “professional client”. That is how Sucden did classify Fluxo-Cane in a letter of 26 October 2007. I have to say that Sucden has not satisfied me that in those circumstances the “Eligible Counterparty” exemption (which was decisive in ED & F Man) applies on the facts here. In any event, the annex to the letter of 26 October 2007 acknowledges a best execution obligation, and despite Sucden’s submissions to the contrary, I consider that this plainly overrides clause 9.6 of its standard terms of business which are inconsistent.

However, I am equally satisfied that the COBS (and the annex to the letter of 26 October 2007 so far as it creates an independent obligation) do not apply when the broker is liquidating the customer’s account pursuant to an Event of Default. That is because these rules apply when the broker is executing its customer’s orders, which is not the case in a liquidation. It is not correct either that in those circumstances the firm has to act in the best interest of its client. It cannot ignore the client’s interests, but as the present case shows, the firm has interests of its own to consider. Here, liquidation was required to eliminate Sucden’s own exposure with its counterparty. It was, in my judgment, entitled to put its own interest ahead of that of its client in that regard, although in practice both parties had a mutual interest in liquidation on the best terms possible. This conclusion is the same as that reached in ED & F Man at [75] and [76]. There David Steel J rejected the suggestion that the claimant was obliged to manage the defendant’s position as if it was still acting as the defendant’s broker, but (as he put it) at its own risk and without the provision of margin.

Assuming that this is correct, what standard does apply in the liquidation? In its submissions, Sucden relied upon TOB clause 48.1 which provides that it is not liable for losses suffered by the customer “unless arising directly from our … gross negligence, wilful default or fraud”. Fluxo-Cane challenges its right to rely on this clause in reliance on the Paragon line of authorities mentioned above, or alternatively on the basis that the clause contravenes the Unfair Contract Terms Act 1977, because it seeks to strike down liability for all but the most egregious negligence. For reasons set out above, I do not consider that Paragon is applicable in this context. Further, the court will be reluctant to strike down a contractual provision applying between two major market players on UCTA grounds. However, I found to be more persuasive Mr Snook’s submission that “gross negligence” is not a term of art at common law, and that such a standard may amount to little more in practice than simple negligence. The concept of negligence is quite flexible enough to adapt to the circumstances in point. Here, as a consequence of the enormous short position built up by Fluxo-Cane, the Exchange had taken extraordinary action against the firm, setting off a chain of events under which Sucden became entitled to, and did, put Fluxo-Cane’s account into default, and proceeded to liquidate its positions so as to reduce as far as possible its own exposure. That difficult exercise was conducted against the background of an initial spike in prices caused by the Exchange’s actions, as well as the inherent unpredictability that characterises any financial market. All these matters are capable of affecting the outcome of the liquidation process. I cannot myself see that the addition of the word “gross” to negligence adds much if anything. Notwithstanding, I have approached this question by asking whether Fluxo-Cane can demonstrate negligence, because unless it can, it will clearly be unable to demonstrate gross negligence. It is not suggested that this is a case of wilful default or fraud.

The evidence in this regard was as follows. First of all, Mr Overlander handled the liquidation of the account personally. He has long experience in the sugar trade, and as I have said I found him to be a reliable witness. He had every incentive to reduce the losses to the minimum, since Sucden was itself financially exposed, and once Fluxo-Cane ceased to pay margin (despite the continued calls for margin) recovery became at best uncertain. I have identified the parties’ expert witnesses in paragraph 2 of this judgment, and repeat that I found them both helpful. They approached matters from a slightly different angle, in the sense that Mr Levy based his evidence upon technical analysis, which is his particular field of expertise as a consultant. Dr Fitzgerald however said that he attached little merit to technical analysis in this kind of situation.

As a matter of background, it is to be noted that Sucden’s own technical analysis following the commencement of the liquidation was to the effect that the market was “trending upwards”. Mr Levy said that he was one of the few analysts at the time who was bullish on the market. Though I have not heard from him, it is reasonable to infer from the enormous short position that Fluxo-Cane had built up in March 2008 futures, that Mr Garcia himself was convinced that the market would fall. In fact, it did not fall, or at least, not until it was too late. Mr Levy told me that the price peaked at 15.06 on 3 March 2008. The March 2008 contract expired, he said, at the end of February. Mr Levy accepted that had Fluxo-Cane’s positions been allowed to run to maturity, that would have resulted in a much bigger loss than in fact occurred on the liquidation.

Fluxo-Cane gave no pleaded particulars of how Sucden was alleged to be negligent. This, as Mr Eaton pointed out, is of some significance, in that as a market professional it was in a position to do so if there really had been complaints available of a substantial nature. Fluxo-Cane’s case first emerged in Mr Levy’s report, which was served relatively close to trial. He makes a number of specific criticisms of Sucden’s conduct of the liquidation which I shall come to shortly.

Before considering these points of criticism, I should mention that Dr Fitzgerald gave evidence for the broker in the ED & F Man case. I gather from counsels’ submissions that his evidence in that case was that the brokers were entitled to liquidate immediately. Fluxo-Cane’s position (Mr Levy was not its expert in that case) was that the scale of trading on 18 January was excessive, and the broker should have deferred until after 18 January at which stage the market would have stabilised. The judge rejected its case in that regard. Based on this, Mr Snook for Fluxo-Cane cross-examined Dr Fitzgerald to considerable effect on his views as to the desirability of swift action. Dr Fitzgerald answered affirmatively a number of questions along the lines that, acting rationally and prudently, a risk-averse broker would close the position out quickly. The key, it was put to him, for a prudent broker is to act quickly, and liquidate as much as possible, as soon as possible. He answered to the effect that that would indeed be his view. On the basis, as was put to him, that liquidation could not start before a notice of default, he agreed that it was only on 22 January that the chance came to liquidate. Since Mr Levy’s evidence is that it was “negligent and wrong to miss the opportunity to liquidate the account when the opportunity presented itself” in the week of 22 January 2008, Fluxo-Cane submits that both experts agree in their view that the only right approach would have been to liquidate then. Thus, it is submitted, the way forward is clear, and the court should hold that it was negligent of Sucden not to liquidate the account during that week.

There are a number of problems with this submission. First, until closing, Fluxo-Cane’s case did not accord with that put to Dr Fitzgerald in cross-examination. Its case, through Mr Levy, was not that Sucden should have liquidated as quickly as possible, which would have exposed it to the spike on 17-18 January, but that it should have acted when prices were more propitious the following week. In fact, had the account been liquidated over 17-18 January, Dr Fitzgerald confirmed (and I accept), that the final loss would have been significantly higher than it was. Second, although Dr Fitzgerald stated that, in his view, a prudent broker in these circumstances would want to shed risk as soon as possible, he made it clear that that was his personal view, and that it did not follow that a different view was not reasonable. As he put it, “I would like to distinguish here between … what I would have done, if you like, and what might be considered reasonable. Yes, if it was up to me, with a position of this nature, and assuming I was allowed to do it, I would have tried to clean it all out on the 17th and 18th”. Third, he and Mr Levy were not in fact in agreement, as has been suggested by Fluxo-Cane in closing, because Mr Levy’s evidence was predicated on the view that to shed risk as soon as possible was not a sensible course in the prevailing circumstances. Finally, whatever propositions Dr Fitzgerald may have accepted in cross-examination, he did not resile from his opinion as expressed in his expert report. In it, he rejects criticism of Sucden’s failure to liquidate Fluxo-Cane’s position in the week of 22-25 January 2008, expressing the opinion that Mr Levy’s arguments are based on hindsight. Despite his personal preference for immediate action, it is certainly not his evidence that Sucden acted negligently.

There is an important further factor, in my judgment, to take into account. As the chronological account set out above shows, Mr Overlander flew to Sao Paulo on 28 January 2008 to meet Mr Garcia the following day to discuss the account with him. It was only after that meeting ended fruitlessly that the liquidation got underway in earnest. It was clear from Mr Overlander’s evidence that he bore Mr Garcia no personal animus. On the contrary, I am satisfied that he would have much preferred a consensual resolution of the matter had that been possible. It appears to me that it was entirely reasonable of him to take this approach. On that basis alone, I cannot see how Sucden can be criticised for withholding the bulk of the liquidation until the meeting had taken place. Dr Fitzgerald’s view was that it was reasonable. I cannot accept Mr Levy’s view that the attempt on Sucden’s part to try to get some instructions from Fluxo-Cane was in itself negligent.

In summary, the position on the evidence seems to me to be as follows. Mr Levy considers that Sucden should have liquidated the whole account in the period between 22 - 25 January. He says that there was a good opportunity during this week, and that the account could have been liquidated then at lower cost than the eventual actual liquidation. Dr Fitzgerald rejects Mr Levy’s criticism. Although he would personally have shed the risk as soon as possible, his opinion is that the steps which Sucden took were reasonable in the circumstances at the time, and that Mr Levy’s points are based largely on hindsight. Contrary to Fluxo-Cane’s closing submissions, I certainly do not conclude that the “overwhelming probability is that [it] would have traded the position on the terms most favourable to it, which … would have meant that it would have crystallised any loss in the position no later than the week of the 22 January”. That is contrary to Mr Garcia’s view of the market which had caused the problem in the first place. In any event, I accept Mr Overlander’s evidence which is that he spoke to Mr Garcia on several occasions and asked him for instructions as to how he would prefer to manage the liquidation, but that his position was that he would not give instructions, and that Sucden should “do what it had to do”.

With that in mind, I now come to Mr Levy’s specific criticisms of Sucden’s approach. One criticism was not pursued. Following their pre-trial meeting, both experts agreed that there was nothing to criticise in the spread trading carried out by Sucden on the 17 January 2008. Mr Levy agreed that the prices at which the futures were traded on 17 January 2008 were in line with prevailing market prices. (This point has to do with the 711 lots which Mr Overlander transacted during and immediately after the meeting on 17 January 2008.)

Mr Levy’s second criticism relates to the purchase of 950 March calls on 18 January. Mr. Levy believes that the options were so far out-of-the-money that the purchase was misguided. It was inevitable that they would expire worthless (as they did), at what he regards as a wasted cost of US$371,940.40. Dr. Fitzgerald considers that this deal can be justified because it reduced the option risk, was justified as a “category 3” trade and because, as he understands it, the scope for trading on the 18 January was limited. I prefer Dr Fitzgerald’s evidence in this respect, which has the additional support of Mr Overlander. He says that these calls were bought as protection against the worsening position that day. It was in any view a difficult day in the market, and I do not consider that it was negligent for Sucden to purchase these options. The fact that they expired without being exercised does not in any way indicate that their purchase was not justifiable as protection at the time.

As I have indicated, in monetary terms, by far the most important aspect of Mr Levy’s criticism of the conduct of the liquidation is his opinion that a reasonable market professional would have liquidated the entire position at what he describes as the favourable prices obtaining on 22-25 January 2008. Had that been done, the average net liquidating value of the account over the four days would have been $2,175,744.44, as opposed to the actual loss which Sucden claims. Mr Levy accepted Dr Fitzgerald’s point that his net liquidating values were based on settlement prices. Dr Fitzgerald did not criticise him for using settlement prices in the absence of other information, but said that settlement prices did not represent prices at which the account could in practice have been liquidated, and that the figure would therefore underestimate what the actual loss would have been had the account been liquidated on the relevant days. This appears to me to be correct, but I have not been given any alternative figures by Sucden, and despite an invitation to do so, it is not possible for me to quantify the overestimate. I accept therefore Mr Levy’s figure as a working measure of what could in principle have been achieved over that week. In fact what happened is that Sucden closed out substantially all of Fluxo-Cane’s positions on LIFFE on 24 January 2008, and no criticism is made in this regard. However only 820 ICE futures contracts were liquidated that week. On a rising market, Fluxo-Cane submits that no rational or prudent broker would have failed to take steps to liquidate the ICE contracts as well. Sucden’s behaviour, Fluxo-Cane submits, was not merely negligent, but grossly negligent. (I note that following the Sao Paulo meeting Sucden did not close out the entire account immediately, but adopted what it calls a measured approach. Mr Levy makes no criticism of the method which Sucden adopted once it had decided to complete liquidation of the account, and so it comes down to an issue of timing.)

I have discussed the evidence in this respect in some detail already. There are two principal reasons why in my judgment Fluxo-Cane’s submissions cannot be accepted. The first, I have already referred to, and is that it was not negligent to wait until after the meeting of 29 January 2008 in Sao Paulo before finally liquidating the account. On the contrary, this was (I am satisfied) a reasonable course to take. The other is that I am quite satisfied that Dr Fitzgerald is correct to express the view that it is only with the benefit of hindsight that it can be seen that liquidation during the period 22 to 25 January 2008 would have been most advantageous. The market might have risen, as Mr Levy thought it would, or Mr Garcia might have been proved correct in his conviction that the market would fall. I am satisfied that following the action taken by the Exchange, the liquidation of Fluxo-Cane’s positions was going to be extremely problematic, as indeed both Mr Garcia and Mr Overlander foresaw. I very much doubt in these circumstances whether there is a single template by reference to which it can be said that liquidation was, or was not, negligent. Be that as it may, I am satisfied in this case that the criticisms made of Sucden’s conduct of the liquidation are unfounded. The highest Fluxo-Cane puts the required standard is that Sucden was under a duty of care to act reasonably and to conduct the liquidation to the highest possible professional standards required in the circumstances. Even if that is correct as a matter of law, which is not something which I need to decide in this case, I do not consider that the duty has been breached. Negligence has not been established, let alone gross negligence.

It follows that the counterclaim is dismissed, and Sucden is entitled to judgment on its claim. I will hear the parties as to any consequent matters, and I am grateful to them for their assistance.