IG Index Ltd v Ehrentreu

IG Index Ltd, the Claimant, is a spread-betting company authorised and regulated by the Financial Services Authority (“FSA”). Mr Ehrentreu, the Defendant, had been a customer of the Claimant since 2001. The written agreement that the Claimant had entered into with the Defendant that governed the relationship between the parties at all material times took effect on 15 December 2007 (“the Customer Agreement”). Over the years he had placed various spread bets upon the movement of the market. One of the bets, placed in the summer of 2008, on the movement of the share price of Royal Bank of Scotland (“RBS”), went, as Lewison LJ has observed, “disastrously wrong” ([2013] EWCA Civ 95 at para 1). The result of this bet was that by 14 October 2008 the Claimant’s account was over £1.2 million in debit.

On 30 April 2009 the parties entered into an agreement for the payment of the debt (“the Settlement Agreement”). The Defendant made some payment pursuant to its terms, but he did not maintain the payments, and on 4 January 2011 the Claimant issued proceedings for the sum of £1,070,350.75 under the Settlement Agreement. On 10 February 2011 a Defence and Counterclaim was filed and served by the Defendant. In summary the Defendant alleged that the Claimant was in breach of the Customer Agreement in failing to close out his position on the RBS bet sooner and hence causing his loss. In addition he claims damages for breach of statutory duty, relying on the FSA Conduct of Business Rules.

On 20 July 2011 Master Fontaine gave judgment for the Claimant on most of its claim and allowed the Defendant to defend the balance. On appeal from Master Fontaine on 29 June 2012 Macduff J gave summary judgment for the Claimant for the whole of its claim. On 22 February 2013 the Court of Appeal dismissed the appeal from the decision of Macduff J. However Lewison LJ (at para 48) noted that there is no order dismissing the Defendant’s counterclaim. Accordingly the effect of dismissing the Defendant’s appeal against Macduff J’s order is that while the Claimant is entitled to the judgment sum, the Defendant is free to pursue his counterclaim. Lewison LJ added that if the Defendant does pursue it, “it will be open to [the Claimant] (after proper amendment of its statement of case) to advance the argument on the interpretation of the Customer Agreement that Mr Mayall sought to develop; and to argue that the counterclaim is incompatible with the judgment in favour of [the Claimant]”.

This is the hearing of the Defendant’s counterclaim.

Mr David Mayall appeared for the Claimant and Mr Alan Gourgey QC appeared for the Defendant.

A very helpful account of the nature of spread betting is given by Rix LJ in his judgment in Spreadex Ltd v Battu [2005] EWCA Civ 855 at paragraphs 2-6:

“2.

Spread betting is not so much or not merely a bet, although it can be described as such, as a form of contract for differences. It enables a customer to take a position on a market (or an event) for a very small stake. Thus if the Dow Jones index is, say, at 10,000, one can “buy” or “sell” the market at a spread around the index of, for the sake of example, 10 points either way, 9990 to 10010. If one buys, one is betting that the market will rise above 10010. If one sells, one is betting that the market will fall below 9990. If one buys and the market rises, one stands to gain £1 for every point that the index exceeds 10010. If one sells and the market falls, one stands to gain £1 for every point that the index drops below 9990. If, however, one calls the market wrong, then one will stand to lose £1 for every point that the index exceeds the spread point in the wrong direction. Thus if one sells at 10,000 with a sell spread point at 9990, one will make £1 for every point the market falls below 9990 and lose £1 for every point the market rises above 9990. Until the bet or “trade” is closed, the gains and losses are merely “running” gains or losses. They are real enough, but constantly changing with every change in the index, and have not yet been fixed. Closing the bet will fix the position, win or lose. Unlike a classic bet, the customer can of course lose more than his stake. Indeed, on the example given, of a sale spread point of 9990 when the market is at 10,000, if the market does not move an inch, the customer will lose £10 for every £1 staked. Nor, again unlike a classic bet, are his winnings fixed at the outset by an agreement on odds. In theory winnings based on rising markets are infinite (in practice of course they are not) and losses based on falling markets are limited only in so far as they cannot exceed the consequences of a fall in the index to zero.

3.

Normally, of course, to gain by £1 for every rise (or fall) of a single point in a stock market index such as the Dow Jones would take an investment of significantly more than £1. In effect, one’s £1 bet commands a position in the market significantly greater than the stake. In other words, there is a large element of gearing in the trade, and the situation is correspondingly volatile. Where the market in question is itself in a volatile phase, the risks become even greater. Thus, if the Dow Jones is capable of moving within a range of 100 or 200 points in a single day, the customer can be £100 to £200 richer or poorer per £1 stake within a matter of hours of his trade. On a trade of £100, those figures become £10,000 to £20,000.

4.

The spread betting operator who accepts these trades does not bet against the customer, but lays off the trade elsewhere. Ultimately, I suspect, the trade is accumulated in some form of derivative transaction on a futures exchange, but I do not know. The operator, however, by laying off the bet elsewhere seeks to profit by means of the spread. The means by which it does that, and the terms on which it does that, however, are not a matter for the operator’s customer: nor, in the present case, have the applicable terms been disclosed.

The credit risk, margin and security

5.

If the customer’s trade is efficiently laid off, the spread betting operator does not retain a market risk, but, since its customer is open to volatile swings and losses which are potentially out of all proportion to his initial stake, it does retain a credit risk, which it has to be able to monitor closely. Typically, it seeks to limit that risk by controlling the level of its customers’ trading and by taking security for its customers’ exposure.

6.

Such security, or margin arrangements, may take two forms, responding to two kinds of risk. Even at the outset of a trade, indeed at the outset of a relationship, the operator may require funds to be deposited with it as security for the customer’s potential losses. The size of such a deposit may reflect, of course, the level of the customer’s trading and also the volatility of a market in which that trading takes place. The more volatile the market, the greater can be the potential losses. Secondly, security for running losses already incurred in open trades may be required.”

Term 1(3) provides that:

“Nothing in this Agreement will exclude or restrict any duty or liability owed by us to you under the Financial Services and Markets Act 2000 [‘the 2000 Act’] or the FSA Rules and if there is any conflict between this Agreement and the FSA Rules, the FSA Rules will prevail.”

Term 2 of the Customer Agreement warns the customer that “Entering into Bets with us carries a high level of risk and can result in losses that exceed your initial deposit”.

Term 6 explains how a customer can open a bet. Term 6(1) states:

“You will open a Bet by ‘buying’ (wagering that a specified Index will go up within a specified period) or ‘selling’ (wagering that a specified Index will go down within a specified period). In this Agreement, a Bet that is opened by ‘buying’ is referred to as an ‘Up Bet’ and a Bet which is opened by ‘selling’ is referred to as a ‘Down Bet’…”

Term 8 explains how he can close a bet.

Term 8(1)

“Subject to this Agreement and any requirement we may specify in relation to Linked Bets, you may close an open Bet or any part of such open Bet at any time prior to the Determination Date for the Index in respect of which the Bet is made by entering into a further Bet in respect of the same Index and Determination Date, but in the opposite direction. For the purposes of this Agreement references to closing a Bet (other than in the case of Controlled Risk Bets) may be taken as meaning the crystallization of winnings or losses in the manner set out in Term 7”.

Term 8(9)

“Upon closing a Bet:

(a)

you will pay us the difference between the Opening Level of the Bet and the Closing Level of the Bet multiplied by the Stake if the Bet is:

(i)

a Down Bet and the Closing Level of the Bet is higher than the Opening Level of the Bet; or

(ii)

an Up Bet and the Closing Level of the Bet is lower than the Opening Level of the Bet; and

(b)

we will pay you the difference between the Opening Level of the Bet and the Closing Level of the Bet multiplied by the Stake if the Bet is:

(i)

a Down Bet and the Closing Level of the Bet is lower than the Opening Level of the Bet; or

(ii)

an Up Bet and the Closing Level of the Bet is higher than the Opening Level of the Bet.

Unless we agree otherwise, all sums payable by you pursuant to Term 8(9)(a) are due and payable immediately upon the Closing Level of your Bet being determined by us and will be paid in accordance with Term 15. Sums payable by us pursuant to Term 8(9)(b) will be settled in accordance with Term 15(3).”

Term 14 enables the Claimant to require a customer to provide deposits and margin in cleared funds.

Term 1

“From time to time we may require you to provide deposits and margin which may only be provided in the form of cleared funds in our bank account…”

Term 14(2)

“In making any calculation of the deposit or margin that we require from you under this Term 14, we may, at our absolute discretion, have regard to your overall position with us including any of your net unrealised losses (i.e. losses on open positions).”

Term 14(8) and (9)

“(8)

Unless otherwise agreed by us on the business day on which you open a Bet, you will immediately, make margin payments sufficient to provide us with an amount which, when a movement adverse to your Bet has taken place, you would lose on the Bet if it was closed on the basis of our current quotation for the Index concerned.

(9)

Where, following margin payment becoming due and/or a margin call being made, positive movements in your open Bets result in you no longer being marginable, we may, at our absolute discretion, deem that the margin payment is no longer due or the margin call to have been satisfied.”

Term 15 is concerned with payments and set-off. Term 15(1) provides:

“All payments to be made under this Agreement (other than payments under Terms 14(6) and 14(8) that are due and payable in accordance with those Terms respectively) are due immediately on our Communicating a demand. All payments must be paid by you, and must be received in full by us for value, by (a) where the demand is Communicated before 12 noon on any day, not later than 12 midday on the business day following the day on which our demand (including our deemed demand in accordance with Terms 14(6) and 14(8)) is Communicated; or (b) where the demand is Communicated after 12 midday on any day, not later than 4pm on the business day following the day on which our demand (including our deemed demand in accordance with Terms 14(6) and 14(8)) is Communicated. These timeframes are subject to the rules of any Underlying Market that have been advised to you by us in the event that the Underlying Market requires payment of margin to be made sooner.”

Term 16 concerns default and default remedies. The material parts of Term 16 provide:

“(1)

Each of the following constitutes an ‘Event of Default’:

(a)

your failure to make any payment (including any deposit or margin payment) to us or to an Associated Company of ours in accordance with Term 15;

(b)

your failure to perform any obligation due to us;

…

(2)

If an Event of Default occurs in relation to your account(s) with us or in relation to any account(s) held by you with any Associated Company of ours, we may at our absolute discretion at any time and without prior notice:

(a)

close all or any of your Bets at a Closing Level based on the then prevailing quotations or prices in the relevant Underlying Markets or, if none, at such levels as we consider fair and reasonable;

(e)

close any or all of your accounts held with us of whatever nature and refuse to accept further Bets from you.

…

(4)

You acknowledge that:

(a)

where you have failed to pay a deposit or margin call in respect of one or more Bets five business days after such payment becomes due, we are (except as provided in Term 16(5) below) obliged to close out such Bets; …

(5)

Subject to the FSA Rules, in the event of your failing to meet a demand for deposit or margin or your being in excess of any credit limit placed on your account, we may exercise our reasonable discretion to allow you to continue to place Bets with us, or allow your open Bets to remain open, but this will depend on our assessment of your financial circumstances.

(6)

You acknowledge that, if we agree to allow you to continue to place Bets or to allow your open Bets to remain open under Term 16(5), this may result in your incurring further losses.”

Term 19 provides, so far as is material:

“(1)

You represent and warrant to us, and agree that each such representation and warranty is deemed repeated each time you open or close a Bet by reference to the circumstances prevailing at such time, that:

(a)

the information provided to us in your application form and at any time thereafter is true and accurate in all respects…”

Term 28 states, so far as is material:

“(1)

If any Financial Index becomes subject to possible adjustment as the result of any of the events set out in Term 28(2) below (a ‘Corporate Event’) affecting a related financial instrument, we will determine the appropriate adjustment, if any, to be made to the size and/or value and/or number of the related Bet(s) (and/or to the level of any Order) to account for the diluting or concentrating effect necessary to preserve the economic equivalent of the rights and obligations of the parties in relation to that Bet immediately prior to that Corporate Event, to be effective from the date determined by us.

(2)

The events to which Term 28(1) refers are the declaration by the issuer of a financial instrument (or, if the financial instrument is itself a derivative, the issuer of the security underlying that instrument) of the terms of any of the following:

(a)

a sub-division, consolidation or reclassification of shares, a share buy-back or cancellation, or a free distribution of shares to existing shareholders by way of a bonus, capitalization or similar issue; …”

Term 31 (“Interpretation”) provides that:

“‘Business day’ means any day other than a Saturday, Sunday and a UK public holiday.

‘Closing Level’ means the level at which a Bet is closed.”

The Claimant is bound by the FSA Conduct of Business Rules (“COBS”). The relevant rule in force at the material time is Rule 2.1.1 which states:

“A firm must act honestly, fairly and professionally in accordance with the best interests of its client. (The client best interests rule)”

Section 5 of the Financial Services and Markets Act 2000 provides:

“(1)

The protection of consumers objective is: securing the appropriate degree of protection for consumers.

(2)

In considering what degree of protection may be appropriate, the Authority must have regard to—

(a)

the differing degrees of risk involved in different kinds of investment or other transaction;

(b)

the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity;

(c)

the needs that consumers may have for advice and accurate information; and

(d)

the general principle that consumers should take responsibility for their decisions.”

Section 150 of the 2000 Act provides:

“A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.”

The Defendant and Mr Philip Waters, who is employed by the Claimant as Credit Operations Manager (UK and Australia), gave evidence. Mr Waters was not employed by the Claimant at the time when the events with which we are concerned occurred.

The relevant facts are not materially in dispute. I therefore proceed to set out my findings of fact.

The Defendant is a property developer. He bought residential properties through a company called Grindale Ltd (“Grindale”) which he owned jointly with his wife and of which he was managing director. The properties were then rented out through a business called Broadhurst Estates, of which he was a partner. He said that in 2008 he owned about 400 residential properties.

In July 2001 the Defendant was interested in trying margin trading, he says, “purely as a hobby”. He had no previous experience of margin trading, contracts for differences or spread betting. He opened a margin trading account with IG Markets Ltd, a company in the same group of companies as the Claimant. Later that year, in November 2001 he opened a spread betting account with the Claimant.

At the time of opening the account with the Claimant the Defendant provided a letter from his accountants, Langstreth & Hunter, dated 8 November 2000 in which it is stated:

“This is to confirm that we act for the above (Mr A Ehrentreu and group of companies) and the total gross assets of the above exceed £10 million with a net value of around £3.5 million.”

On 24 September 2001 Langstreth & Hunter stated in a second letter that

“[The Defendant] today largely buys properties for his own companies.

…

The group of companies has made substantial profit recently (in excess of £160,000) and the net value of his investments is increasing steadily.”

The Defendant said that the only information as to his financial position he provided on the Claimant’s application form was the value of his property, less mortgage, which he stated to be £250,000.

Following the opening of the account with the Claimant, the Defendant conducted substantial trading over the period from December 2001 to October 2008.

The Defendant stated that his activity on the spread betting account varied considerably between 2001 and 2008. He said in his witness statement made on 19 June 2015 that his usual stake was between £10 and £100 (para 34). He said that was his recollection when he made his witness statement. However the statements of account which are now before the court show that whilst the majority of the Defendant’s bets during the period 2001-2008 were in the £50 to £100 range, there were a number of bets significantly above those figures, and in the £1,000-plus range during 2007 and 2008. The Defendant said that now he has seen the record of his dealings (Trial Bundle 3/498-594) he accepts that he was betting large amounts on RBS and some other companies during 2007 and 2008.

The Defendant said he placed bets on RBS from December 2007 as a result of a couple of articles he had read in December 2007 which recommended RBS as an investment. He said that “betting on RBS seemed like a sure thing: the opportunity of a lifetime”. The relevant history in relation to the bet on RBS that caused the losses to the Defendant’s account that are the subject of the present proceedings began on 11 August 2008.

The statement of the Defendant’s account dated 11 August 2008 (2.08am) showed that he had two “up” bets on RBS of £5,225 and £2,193.05 respectively, totalling £7,418.05. They were quarterly bets, opened on 17 June 2008, due to expire on 16 September 2008. On 3 September 2008 Mr Tom Gillard of the Claimant sent an e-mail to the Defendant notifying him that there was a margin of £97,000 required. However for reasons I shall explain (see para 69 below) the first margin that requires consideration is that of 15 September 2008.

On 9 September 2008 the Defendant informed the Claimant that he had decided to roll over his two “up” bets on RBS, for which the last dealing day was 16 September 2008, until the end of the next quarter, 16 December 2008. His existing “up” bets were closed and an equivalent up bet for the same total of £7,418.05 was opened for a closing date of 16 December 2008.

On 15 September 2008 there was a Stock Dividend adjustment for RBS. The terms were 2.500% with an adjustment factor of 1.025. The Claimant therefore adjusted the Defendant’s positions in RBS to reflect the Stock Dividend; the amendment also incorporated the price dilution in the share price.

On the same day, 15 September 2008, Mr Nabille Helal of the Claimant sent an e-mail to the Defendant requesting payment of the margin of £197,195, on his account.

On 16 September 2008 Mr Helal called the Defendant at his offices and spoke to his secretary, who advised that he was on another call and would return his telephone call. At 16:24 on that day the Defendant e-mailed Mr Helal, apologised for missing his call and said:

“Please note that I have arrange a transfer to your account on Friday

Please confirm.”

Friday was 19 September 2008.

On Monday 22 September, the funds not having been received from the Defendant, Mr Helal telephoned the Defendant and left a message on his mobile phone to return his call.

On Tuesday 23 September Mr Helal called the Defendant’s mobile and left a message for him to return his call. He also contacted the Defendant’s office and left a message asking for the Defendant to call him back. By e-mail timed at 13:17 on 23 September the Defendant wrote:

“Thanks for your phone call

Please note that I have transfer last Friday 2 transfer of £100,000k each

Please advise, it should come from oversee bank…”

With regard to his e-mail on 23 September explaining that he had arranged for two separate transfers of £100,000 from an overseas account on the previous Friday, this was a reference, the Defendant said, (see Defendant’s witness statement, para 77) to an account that he had in Turkey where he had approximately £500,000 of savings.

On Friday 26 September 2008 Mr Helal called the Defendant’s office and left a message. He was advised that the Defendant was at a meeting.

On Monday 29 September Mr Helal called the Defendant’s mobile, and then his office, and left a message for him to return his call.

On Wednesday 1 October Mr Helal called the Defendant’s office and left a message asking for the Defendant to call him back.

On Thursday 2 October Mr Helal called the Defendant at his office and was advised that the Defendant would call him back in 5-10 minutes.

On Friday 3 October Mr Helal called the Defendant at 9.43am and spoke to him. The Defendant said:

“… Did you get the money?”

Mr Helal said “No we didn’t. Were you able to check with your bank?”

With regard to this conversation with Mr Helal on 3 October when the Defendant said that he would send £100,000 at least within 24 hours and then a further £100,000 each day during the following week, he said in his evidence that he thought that this was “achievable if difficult”.

On Tuesday 7 October, at 11.09am and 2.46pm Mr Helal attempted to make contact with the Defendant. They spoke at 4.11pm when Mr Helal phoned again. Mr Helal asked the Defendant if he had checked his account and was advised he had not. He explained that no funds had been received and the amount due was now over £1.2 million. Mr Helal continued:

“Now I have to ask you that we receive at least half of that by tomorrow. Because the original margin call has been due for about three weeks now, so we have been fairly sort of lenient. I know you’ve had a holiday in the meantime but I can’t allow the exposure to remain without receiving any funds because it is quite a bit… I mean the majority of it is a deficit on the account, it’s not just a margin or a deposit funding needed, erm, so it needs to be getting its way to be cleared by Friday, but I would require half of it by tomorrow or you need to send a TT and sort of show that those funds are coming in…”

The Defendant replied:

“OK. Leave it to me, I’ll sort it out for tomorrow morning. Come back to me and I’ll give you a call lunchtime.”

In relation to this conversation on 7 October, the Defendant said that he wanted the Claimant to believe he was sorting it out. He thought he had access to funds.

On Wednesday 8 October the Defendant’s secretary called and spoke to Mr Helal and said:

“He [the Defendant] said that he wanted me to ring to let you know he’d done the transfer.”

Mr Helal asked whether she knew how much he did it for and she replied “£500,000”. She said:

“He did it around lunchtime, it would have been about 1, 2 o’clock.”

She said the Defendant said that he had given instructions to the bank to make the transfer. The £500,000 was coming in from Turkey.

On Thursday and Friday, 9 and 10 October, Mr Helal attempted to contact the Defendant but was unable to speak to him.

At paragraph 89 of his witness statement the Defendant said:

“Around this time (i.e. 9-10 October 2008) I had ascertained that if I were to bring money in from abroad, the money would be subject to significant taxation at around 30%. Given the circumstances and what was happening in the economy I could ill afford to lose 30% of my money by transferring it into the UK, particularly when it was now such a huge sum. The whole situation was crazy, a mess and had spiralled completely out of control. Accordingly, I intended to refinance some property within the UK, where I had equity. I considered that I could find the £1.2 million needed and hoped that the RBS shares might recover.”

On Monday 13 October Mr Helal attempted to contact the Defendant on his mobile and at his office. At 10.40am he spoke to the Defendant’s secretary. Mr Helal said:

“I still haven’t heard from him [the Defendant], this is the problem. I can’t stress the urgency of this now. I mean when I spoke to you on Thursday wasn’t it, sorry Wednesday, you passed on some information that he had sent money, erm… we still haven’t received that…”

Mr Helal continued:

“Tell him that I need to speak to him before 4pm today and he should understand the reason for that so…”

At 11.19am on 13 October the Defendant called Mr Helal. He said that the money was abroad and that if he brought it into the UK he would have to be taxed, which he wasn’t aware of. The Defendant continued:

“I’ve gone through my bank, I’ve got a lot of equity in property in the UK. … What I am doing now, I’m going to re-finance and that will leave me equity of about £1.2 million.”

The Defendant added:

“… I’m really sorry, please bear, don’t close my position… Please leave, you’ve got to understand one thing… if you close my position, … because it’s in my own name, it’s not my company, if I’ve not got the money I could go bankrupt so I will send you the money, please bear with me a couple of days.”

Mr Helal advised the Defendant that the problem was the amount due was fluctuating but at present it was at £1.8 million. He asked if the Defendant had equity of £1.2 million where would the Defendant find the additional sum. Mr Helal asked about the £500,000 that had previously been referred to. The Defendant explained that that money was in a bank account in Turkey and that he was told that if he brought the money into the UK he would have to pay tax. The transcript of the conversation continues:

“[Mr Helal] This is the problem, I mean as you say, I mean of course given the circumstances I’ve kind of allowed a certain amount of time because I didn’t think you weren’t going to be paying, I mean I just assumed you had complications in transferring the money.

[The Defendant] Yeah, now I realise, now I realise what the complication. Tell you what, let’s discuss again on Friday, right. And if I don’t get any, I’ll let you have a letter from my bank, the money’s coming.

[Mr Helal] The problem I’m going to be having, Sir, is that I’m not going to be able to authorise that, I’m going to have to discuss this with my manager anyway, erm, I mean I’ve already been told that if we can’t establish that funds are on their way, we need to basically get on to closing the positions which I know you said is something you don’t want to do. Obviously the culprit of this has been the RBS position hasn’t it, continued to fall and now it’s kind of going up and down but we have to think of it as an exposure point-of-view, you’re not purely maintaining a margin here, you’re running a deficit on your account which is a, I mean, if you think of it in theory, it’s a hole in IG’s balance sheet, it’s not like we’re just letting you open a position without funding it which would be perhaps another scenario, we may have a different view on that, as it’s literally a running loss, you know, and if we did close the position at this point of time you would owe IG £1.26 million so I’m not going to be able to give you an answer this second, so I’ll speak to my credit director who obviously has already been kind of liaising with me about this, erm, and I need you to sort of say, if you can tell me perhaps, when we can sort of expect to receive this money, a realistic period of time would be what?

[The Defendant] I’ll speak to my bank manager and come back to you. I can show you the letter from my bank manager and the e-mail about the re-finance.

…

[Mr Helal] Ok, well if you could check what you say you need to check and if you could ring me back within the next sort of half an hour to an hour, erm, because I struggle to get through to you, I’m sure you’re busy but obviously we need to talk… I’ll speak with David who is my credit director and if in the meantime you can find out the implications of what you’re saying and then we’ll speak shortly, yeah.

[The Defendant] Yeah, I appreciate your patience.”

The Defendant thought he could have access to £1.2m in a couple of days. In his evidence he said that he should have said ten days; a couple of days may have been an exaggeration. However he thought he could obtain the monies, but he said he misjudged the banking crisis. He said that at the time of the conversation on 13 October he hoped the share price would recover. He said: “I was desperate for the positions to stay open in the hope that the RBS bets might come good” (Defendant’s witness statement, para 93).

In answer to questions from Mr Mayall, the Defendant said that whenever he said that he would send money to the Claimant he meant it. He said that he intended the Claimant to believe it. He said:

“It is what I wanted them to believe – we had a good relationship.”

In relation to the conversation on 7 October he said that he thought he had access to funds. I accept this evidence of the Defendant, which was not challenged.

At 12.25pm on 13 October Mr Helal called the Defendant’s office and asked for the Defendant or his secretary. He was advised the Defendant was out and the secretary at lunch. He left a message for the Defendant to return his call. The Defendant said: “I do not know why I did not call back but it is possible that I could not face the situation” (Defendant’s witness statement, para 98).

On 14 October, there having been no call from the Defendant and no funds received, after 12pm the Defendant’s positions were closed and the debt was crystallized.

A summary of the margin calls on the Defendant from 15 September 2008 is as follows:

The Defendant was shown abbreviated accounts for Grindale. As at 31 December 2007 the net assets were stated to be just over £25.3 million. The abbreviated accounts dated 31 December 2009 showed net assets for 2008 at a sum in excess of £35.4 million; the net assets for 2009 were £7.82 million. The Defendant explained that the 2008 figure had been calculated on the historical cost convention basis, and in any event by September/October 2008 liquidity was a real problem. The Defendant said that in 2008 he and his wife had £35m assets in Grindale. However in October 2008 they were not liquid assets. He could not say now what his net asset value was in October 2008. He said that when Grindale went into administration it had debts owed to the bank in the sum of £63m.

The Defendant said that in 2008 the property market entered an extremely difficult time which was enormously stressful for him. It was, he said, exceptionally stressful for him in September/October 2008. The Chief Executive’s report in the Claimant’s 2009 Annual Report refers to the turmoil in the financial markets in 2008, and notes: “During October we saw extreme volatility, the collapse in share price of many banking stocks and a severe market crash”. In addition the Defendant pointed out that this was also a time of year when there were a number of Jewish holidays which he observed: 30 September, 1 October, 9 October and 14 October 2008.

At the outset of the hearing Mr Mayall and Mr Gourgey identified the following issues for determination:

Having regard to the judgment of the Court of Appeal and the transcript of the hearing before the court, Mr Mayall indicated at the outset of his closing submissions that he would no longer pursue this point. I have no doubt that he was correct to adopt that course.

The Court of Appeal rejected what appeared to be Mr Mayall’s submission that a claim which can operate as a set-off cannot also exist as a free-standing claim. At paragraph 18 of his judgment Lewison LJ referred to Mr Mayall’s skeleton argument, repeating the submission he had made to the judge to this effect:

“It is not disputed that, had the Claimant been suing on the Customer Agreement, the Defendant would have been entitled to set off such damages as were awarded on his counterclaim (whether the breach of contract or breach of duty).”

Lewison LJ continued (at para 20):

“After some questioning from the court Mr Mayall again appeared to me to accept that the facts asserted by Mr Ehrentreu in the counterclaim could amount to a valid claim (in the sense that it was not demurrable). If, for example, Mr Ehrentreu had immediately paid what IG Index said he owed he could have brought his claim on the following day. What he appears to me to be saying was that a claim which can operate as a set-off cannot also exist as a free standing claim. I reject that submission. The starting point is the existence of a cross-claim. Whether a cross-claim can operate as a set-off is covered by well known principles. But the important point is that cross-claims that can be deployed by way of set-off are a sub-set of cross-claims. They do not cease to be members of the set of cross-claims merely because they are also part of the sub-set of cross-claims capable of being set-off…”

At paragraph 21 of his judgment Lewison LJ noted that “in the course of oral submissions Mr Mayall began to develop an argument based on the construction of the Customer Agreement to the effect that the facts alleged by Mr Ehrentreu did not amount to a counterclaim at all.

The way the Claimant now puts this argument is set out in paragraph 19 of the Reply and Defence to Amended Counterclaim:

“Further and in the alternative it is averred that the breaches of duty alleged (but denied) do not give rise to a counterclaim. They amount to no more than a denial that the Claimant is entitled to recover the difference between the Opening Level of the Bet and the Closing Level pursuant to Clause 8 of the Agreement.”

Further information was given in relation to this pleading pursuant to a request by the Defendant. The material part of that information reads as follows:

“(iii)

By the Settlement Agreement the Defendant irrevocably acknowledged and agreed that the Debt (i.e. the difference at the time the bets were actually closed) was properly due and owing to IG in its entirety and therefore acknowledged and agreed that the Claimant was entitled to recover the Debt under Clause 8.

(v)

The breaches alleged seek to claim that the Claimant was not properly entitled to close the bets out at the time it did and thus recover the Debt. In particular it is alleged that the bets should have been closed at an earlier time when the difference would have been less.

(vi)

In all the circumstances the allegations of breach and any claim for damages arising therefrom are wholly incompatible with the Settlement Agreement and the Judgment of the Court of Appeal.”

Mr Mayall submits that the Claimant has always acknowledged that, in the absence of the Settlement Agreement, the claim for breach of contract, if proved, would amount to an equitable set-off to a claim based upon the Customer Agreement. This was the position of the Defendant throughout. In the Court of Appeal Lewison LJ stated, “As I have said where equitable set-off applies all that is legally due is the net balance” (para 40). By the Settlement Agreement, however, the Defendant irrevocably acknowledged and agreed that “the Debt” (i.e. the whole of the sum calculated in accordance with the Customer Agreement) was properly due and owing in its entirety. Mr Mayall submits that the counterclaim amounts to no more than a claim that the whole sum calculated in accordance with the Customer Agreement was not properly due and owing in its entirety. This is incompatible with the judgment of the Court of Appeal.

Mr Mayall submits that what the court has to do is to look at the reality of what is being put forward on the Defendant’s behalf. If the reality is that the claim amounts to a defence under the Customer Agreement or an equitable set-off that is incompatible with the terms of the Settlement Agreement. In effect if what the Defendant is saying is that the money was not properly due and owing that is incompatible with the terms of the Settlement Agreement. The counterclaim is based on a breach of contractual duty and breach of statutory duty; as such it is a defence, submits Mr Mayall. What is pleaded is the denial of liability.

I do not accept this submission. Mr Mayall’s argument appears to be based on Term 8(9) of the Customer Agreement (see para 10 above). This allows the Claimant to recover from customers the difference between the Opening Level of the Bet and its Closing Level. The Claimant contends that because the Defendant is arguing his bets should have been closed at an earlier time than they in fact were, he is seeking to claim that the Claimant was not entitled to close out the bets when it actually did, and thus recover money on the basis of which the bets were in fact closed. However the definition of “Closing Level” is not the level at which a Bet should be closed; “Closing Level” is defined in the Customer Agreement as “the level at which a Bet is closed” (see para 16 above). I accept Mr Gourgey’s submission that the Defendant’s argument is not a denial of liability under the Customer Agreement, since such liability is triggered by the actual closing of the bets, not a situation when they should have been closed.

It is not in dispute that the Defendant failed to pay margin calls within five business days on numerous occasions during September and October 2008. It follows that the Claimant is prima facie in breach of Term 16(4) of the Customer Agreement. However that term is subject to the proviso in Term 16(5) (see para 13 above).

It is common ground that in order for the Claimant to rely on the proviso in Term 16(5) it must establish on a balance of probabilities that it performed conscious exercises of discretion to keep the Defendant’s bets open. Any such exercises of discretion had to be reasonable and made on the basis of the Claimant’s assessment of the Defendant’s financial circumstances.

The Defendant’s primary position was that the margin call made on 3 September 2008 was not met by payment (which is admitted), nor was there any evidence it was deemed met by an exercise of discretion under Term 14(9). However during the course of the hearing Mr Gourgey indicated that he would not pursue that submission. In relation to the margin call made on 3 September, before five full business days would elapse, on 8 September, as a result of movements in his favour, the Defendant came off margin. Further, on 9 September the Defendant himself closed out the losing bets, and opened a further bet on RBS which was due to expire on 16 December 2008 (see para 31 above).

However there was, he submitted, no evidence that there was an exercise of discretion to keep the Defendant’s bet open, as required by Term 16(5), within five business days of the margin call of 15 September 2008, or in respect of any other period of five business days starting with the margin calls made almost daily from 16 September 2008.

There is an issue between the parties as to the calculation of five business days (see para 101-106 below). However whether the demand for £197,195 made on 15 September was required to be paid by 23 September, as the Defendant contends, or 24 September on the Claimant’s calculation, matters not for present purposes.

The Claimant sent the Defendant statements of account on a daily basis. Mr Mayall accepts, on his calculation, that payment of £279,138.35 required in the statement of account of 16 September was due by 25 September; £458,159.19 required in the statement of account of 17 September by 26 September; £627,982.42 in the statement of account of 18 September by 29 September; £676,202.72 in the statement of account of 19 September by 30 September; £241,580.56 in the statement of account of 22 September by 1 October; £211,173.90 in the statement of account of 23 September by 2 October; £333,714.11 in the statement of account of 24 September by 3 October and £304,326.02 in the statement of account of 25 September by 6 October.

Mr Mayall accepts that there is no express evidence that the Claimant did exercise its discretion pursuant to Term 16(5) in respect of the margin calls before 7 October 2008, but he invites the court to infer from the evidence that it did in fact do so. He submits that it is implicit in the Claimant’s request for payment, that if payment is not made it will have to close the Defendant out of the market.

Such an inference, he submits, can properly be drawn in respect of each margin call in issue from all the evidence, in particular (1) the Claimant’s knowledge of the Defendant’s financial circumstances, (2) the fact that he had always made payments in the past when requested to do so, and (3) his repeated assurances between 16 September and 3 October 2008 that he had transferred or had arranged to transfer £200,000 to the Claimant’s account (see paras 34-42 above).

Mr Gourgey cautions me against drawing any such inference in circumstances where no witnesses have been called on the Claimant’s behalf to give evidence that the discretion was exercised. Mr Gourgey observes that the only witness to be called, Mr Waters, was not employed by the Claimant at the material time. Mr Helal is still employed by the Claimant and could have been called to give evidence, but he did not. Mr Waters said that he did not speak to Mr Helal.

Mr Gourgey submits that the evidence that has been adduced on the Claimant’s behalf, namely the transcripts of telephone conversations between Mr Helal and the Defendant and the e-mail correspondence, for the whole period from 15 September to 13 October 2008, is equally consistent with the Claimant merely pressing for payment of monies that were due and following up when payments were not made into its account when the Defendant said that transfers had been made.

As at the end of 23 September there was a margin call of £333,000-odd, substantially in excess of the £200,000 that the Defendant had promised. The Claimant observes that the Defendant had had a recent history of daily defaults, as high as £676,000 on 19 September. By the time of closure of business on 6 October there was no promise to pay in excess of £600,000, with a margin call of £877,680, against a history of continued default. There is, Mr Gourgey submits, no evidence that the Claimant considered whether to exercise its discretion under Term 16(5) to keep the bets open, having regard to the Defendant’s financial circumstances.

I note that during the telephone conversation at 11.19am on 13 October (see paras 50 above) Mr Helal referred to the need to speak to his manager/credit director and that he had “already been told that if we can’t establish that funds are on their way we need to basically get on to closing the positions”. Whether any exercise of discretion under Term 16(5) could be taken by Mr Helal, or at least would require the involvement of his credit director is unclear. However the fact is there is no evidence from Mr Helal or any other person who was concerned on the Claimant’s behalf with the Defendant’s account at the material time that there was any exercise of discretion to keep his bets open, having regard to his financial circumstances.

The knowledge of the Defendant’s financial circumstances was limited. The only evidence relied upon by the Claimant is contained in the two letters from the Defendant’s accountants of 8 November 2000 and 24 September 2001 (see paras 24 and 25 above), which by September 2008 were at least 7 years out of date; and the information the Defendant provided in his application form (see para 26 above).

Further, despite the size of the margin calls that fell to be met by 6 October, the communications between the Claimant and the Defendant before the conversation on 3 October had only concerned the transfer of a sum of £200,000 to the Claimant’s account to cover the margin of £197,195 requested on 15 September.

I consider that in all probability any concerns that the Claimant had in relation to the non-payment of the margins on the due dates was allayed by the knowledge that the Defendant had made payments in the past when requested to do so and his repeated assurances between 16 September and 3 October 2008 that he had transferred £200,000 from his accounts, and from 7 October 2008 by his assurances that he would be able in time to make the payments required (see paras 44-50 above).

I am not satisfied on the evidence that the Claimant at any time exercised its discretion under Term 16(5) of the Customer Agreement as it was required to do, and most certainly during the material period not before 7 October 2008.

Accordingly I find that the Claimant was obliged to close out the Defendant’s positions by reason of Terms 16(4) and 16(5) of the Customer Agreement, and that it failed to do so.

It is the Defendant’s case that by leaving the Defendant’s positions open (and thereby allowing his net overall position to deteriorate) the Claimant did not act in his best interests and therefore acted in breach of its obligation under COBS 2.1.1R, for which the Claimant is liable in damages. (See paragraph 19.3 of the Amended Defence and Counterclaim).

COBS 2.1.1R came into force on 1 November 2007. Before this date COB Rule 7.10.5 was in operation and imposed a requirement on firms such as the Claimant in the following terms:

“A firm must close out a private customer’s open position if that customer fails to meet a margin call made for that position for five business days following the date on which the obligation to meet the call accrues, unless:

(1)(a) the firm has received confirmation from a relevant third party that the private customer has given instructions to pay in full; and

(b)

the firm has taken reasonable care to establish that the delay in its receipt is owing to circumstances beyond the private customer’s control; or

(2)

the firm makes a loan or grants credit to the private customer to enable that customer to pay the full amount of the margin call in accordance with the requirements of COB 7.9.3R (Restrictions on lending to private customers).”

The purpose of COB 7.10 (Margin requirements) is explained by COB 7.10.2. The guidance refers to Principle 3, which requires a firm to have adequate risk management systems, and also to Principle 6 which requires a firm to pay due regard to the interests of its customers and treat them fairly. It is stated that COB 7.10 aims to ensure that a firm does not expose itself to unacceptable levels of credit risk, while managing its margin requirements. It also aims to ensure that a firm manages a private customer’s exposure to contingent liabilities by diligently monitoring the firm’s relevant provision of credit.

Mr Gourgey submits that in deciding how to respond to the failure to meet margin calls in September 2008 the Claimant had to act in the best interests of the Defendant, and was under obligations to implement, maintain and follow credit risk policies. Rules 7.1.9 to 7.1.12 refer expressly to credit and counterparty risks in respect of BIPRU firms; the Claimant failed to do so and thereby breached COBS 2.1.1.

I do not accept that in construing COBS 2.1.1R regard may be had to the position prior to 7 November 2007 when COB Rule 7.10.5 was the operative rule. The evidence, in my view, supports Mr Mayall’s submission that the FSA took a deliberate decision to remove the margin requirement regulation when introducing COBS 2.1.

In October 2006 the FSA produced a consultation paper (06/19) titled “Reforming Conduct of Business Regulation (including proposals for implementing relevant provisions of the Markets in Financial Instruments Directive, and related changes to SYSC, DISP, TC, SUP and other Handbook modules)” (“the paper”). The paper noted that the provisions in the current COB set out requirements for firms relating, inter alia, to margin requirements (16.1.22). Paragraph 16.1.26 states that with regard to margin requirements

“MiFID requires firms to disclose a general description of the nature and risks, including those related to margin requirements, of financial instruments to adequately address the potential for consumer detriment. Under MiFID firms are required to make disclosure of such risks in good time before an agreement is entered into.”

The proposal in the paper is to delete current COB provisions, including margin requirements, and copy-out the relevant MiFID articles “since they provide for an adequate level of consumer protection” (para 16.1.27). Under the heading “Implications for firms and consumers” the paper continued:

“16.1.28

COB requirements in respect of realisation of a private customer’s assets are more prescriptive than MiFID. They are more specific about the information that is to be disclosed and the timing and manner of provision. However we consider that the high level requirements in MiFID provide a similar level of consumer protection. Our proposal to rely on these high-level requirements is also consistent with our policies of reviewing COB and a move towards principles-based regulation.

…

16.1.32

Firms will no longer have a regulatory requirement to obtain from a private customer any margin payable, nor to close out a position to which that margin relates where there is a failure on the part of the private customer to pay. These requirements were designed to prevent firms from allowing a position of a private customer from running up potentially unlimited losses at the customer’s risk.

16.1.33

It is not anticipated that this deletion will have any material impact on consumer protection because the requirements relate to execution-only and non-advised transactions. We understand the consumers in these markets to be relatively sophisticated. While it is conceivable that this provision would prevent losses to customers in certain situations, firms do not have commercial incentives to create or encourage such losses on the part of their customers. On the contrary, we understand market practice to be to close margin accounts in deficit in a shorter period than five days, usually one day. We further consider our proposals, in respect of the risk control function in SYSC also provide for adequate credit risk management on the part of the firm and therefore prevent a negative impact on market confidence.”

Under the heading “Cost-benefit analysis” there is the following:

“16.1.34

We believe that the costs and benefits arising from the proposals for realisation of a private customer’s assets and lending to private customers described in this chapter will be of minimal significance. Therefore no cost-benefit analysis is required.

16.1.35

Although the proposals for margin requirements are deregulatory in nature and therefore do not give rise to increased costs to firms, we believe there will be fall in consumer protection. However we consider this will be of minimal significance because of the sophistication of the clients and current practices of firms and exchanges. Therefore no further cost-benefit analysis is required.”

In May 2007 the FSA produced Policy Statement 07/6 “Reforming Conduct of Business Regulations”, which included feedback on the consultation paper. At paragraph 14.5.2 it was noted that question 52 in the paper asked: “Are there any aspects of COB 7.10 that in your view should be retained in NEW COB? Would any of these provisions be more appropriately expressed in industry guidance?”

Paragraph 14.5.3 of the Statement records:

“Respondents generally agreed with our proposal to delete these provisions on the grounds that they are provided for by our implementation of the high-level MiFID requirements, as well as it not being in the commercial interests of firms to allow their customers to accumulate unlimited losses. However, some respondents indicated that industry guidance was not appropriate in this area, and that any necessary guidance should be provided by the FSA.

Our response: we propose to delete COB 7.10 on the basis set out in CPO6/19. We do not intend to provide guidance in this area.”

The high level MiFID requirements referred to at paragraph 16.1.26 and 16.1.27 of the paper did not include the margin requirement or the requirement under COBS 2.1.1 to act honestly.

I accept Mr Mayall’s submission that no assistance can be obtained from the old COB Rule 7.10 when interpreting the new rule. That just leaves the duty as it stands in COBS 2.1.1. All the Defendant is left with is the best interests requirement not informed by a requirement to close down. Mr Mayall observes that the Defendant thought it in his best interests to stay in the market when he could close his bets out (as he could do at any time under Term 8(1) of the Customer Agreement). The Defendant would know that if he did not close his RBS bets down they would continue until the quarter date.

Mr Gourgey submits in circumstances where the Claimant did not have adequate material on which to make an assessment of the Defendant’s financial circumstances or in circumstances where promises of payment fell substantially short of margins required during the period from 24 September, any exercise of discretion by the Claimant under Term 16(5) was not in compliance with its obligation under COBS 2.1.1.

Mr Gourgey suggested, in reply, that when it came to the stage of the Defendant’s liability under margin calls being significantly higher than the sums he indicated he could pay, that was the point at which the bets should have been closed. That time might have been, he suggested, on 30 September when £602,000 was required on the account and he had only promised to pay £200,000. On the other hand the Defendant had paid £1.1m over a one month period earlier in the year, and made a net payment of £1.3m in the first three months of 2008.

When considering the purpose behind the statutory duty, Mr Mayall submits it is necessary to consider section 5 of the 2000 Act (see para 18 above) as a whole. The Claimant’s services to the Defendant were execution only and non-advised (see Term 2(4) and (5) of the Customer Agreement). In November 2007 the FSA made a deliberate decision to de-regulate the margin requirement (see paras 88-93 above). They acknowledged that it may lead to a fall in consumer protection, but nevertheless that was the proposal which was implemented.

The Claimant contends that it was for a sophisticated investor to decide what was in their best interests. The Defendant did not inform the Claimant that his financial circumstances had changed. The Defendant had paid monies due to the Claimant on many occasions (see para 96 above).

In my judgment the Claimant was not in breach of its duty to act in the Defendant’s best interests by not closing out his bets in the period from 15 September to 14 October 2008. In reaching this conclusion I have regard to (1) the fact that it is clear from the evidence that after 7 years the Defendant was a sophisticated and experienced trader, (2) he had made payments in the past when requested to do so: (3) he promised to make the payments requested during this period and in making those promises he intended the Claimant to accept them; and (4) the general principle behind the rules is that consumers should take responsibility for their decisions.

I conclude that the Defendant’s cause of action for breach of statutory duty is not made out.

Mr Gourgey refers to the passages in Chitty on computation of time, and in particular to paragraph 21-025 (Period from a Date or Event):

“Where the time is to be computed from a certain date, or an act to be done on the happening of an event, the mode of calculating the time must depend on the circumstances of the particular contract. The general rule is now well established that where a particular time is given from a certain date, within which an act is to be done, the day of the date is to be excluded, but ‘there is no absolute rule with regard to the inclusion or exclusion of the day on which a particular event takes place’, and the court has to decide the meaning of the particular contract. The mode of calculation must therefore depend on the wording of the contract, and where the act done is one to which the party against whom time runs is privy the computation may be inclusive as he has had the benefit of some portion of the day included, but where this is not so and the event is foreign to the party against whom time runs, the general rule will be adopted. …”

The Defendant’s pleaded case is that, in respect of the margin call for the sum of £197,195 made on 15 September 2008, under Term 16.4(a) the Claimant ought to have closed the bets by 22 September 2008 (see Amended Defence and Counterclaim, para 14A.2). Mr Gourgey, in his oral submissions, was prepared to accept closure by the following day, 23 September.

Mr Mayall submits that the payment demanded by the margin call (as opposed to the sums becoming automatically due) became payable by 4pm on the following business day (Term 15(1)). He submits in relation to the margin call sent out on 15 September that there was an obligation to pay on the following day, the 16^th, but an obligation to close down (subject to Term 16(5)) five days hence on 24 September.

It is common ground that the exercise under Term 16(5) needs to be carried out in relation to each margin call that remains unsatisfied after each five day period. Since there were daily margin calls from 15 September which remained unsatisfied, that exercise needed potentially to be carried out on a daily basis from 23/24 September. The provision in relation to margins, Mr Gourgey submits, is paragraph 14(8). In this case the computation of time is one to which the Claimant is privy (see Chitty at para 101 above). On that basis, given the wording of the customer agreement which by para 15(1) requires sums immediately due to be paid by a particular time the following day, the court should calculate the five day period to include the day from which payment becomes due and not to exclude that day. Even if he is wrong about that Mr Gourgey submits the five business days should begin on the day the sum becomes due (i.e. immediately, not on the day payment is to be made, the following day). If Mr Gourgey is correct on both points then the margin call on 15 September would expire on 22 September, but he does not resile from his original submission that 23 September is the material date for present purposes.

Mr Mayall points out that the Agreement distinguishes between monies due and a call. Term 16(4) is dealing with a deposit or margin call. Term 15(1) refers to a demand. What is relied on by the Defendant is an obligation that arises five days after a margin call is made. If at the end of those five days the market has moved in the customer’s favour with the result that the customer is no longer marginable the Claimant may, pursuant to paragraph 14(9) deem that the margin payment is no longer due or the margin call to have been satisfied.

I accept Mr Mayall’s submissions. In my view the contractual obligation to close out first arose on 24 September, being five business days after 16 September 2008.

The principles of law are not in dispute. The Defendant may recover damages for a loss only where the breach of contract was the “effective” or “dominant” cause of that loss (see Chitty on Contracts, Vol.1, at para 26-032). In Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360, Glidewell LJ stated at 1374G:

“The passages which I have cited from the speeches in Monarch Steamship Co. Ltd v Karlshamns Oljefabriker A/B [1949] AC 196 make it clear that if a breach of contract by a defendant is to be held to entitle the plaintiff to claim damages, it must first be held to have been an ‘effective’ or ‘dominant’ cause of his loss. The test in Quinn v Burch Bros. (Builders) Ltd [1966] 2 QB 370 that it is necessary to distinguish between a breach of contract which causes a loss to the plaintiff and one which merely gives the opportunity for him to sustain the loss, is helpful but still leaves the question to be answered ‘How does the court decide whether the breach of duty was the cause of the loss or merely the occasion for the loss?’

The answer in my judgment is supplied by the Australian decisions to which I have referred, which I hold to represent the law of England as well as of Australia, in relation to a breach of duty imposed on a defendant whether by contract or in tort in a situation analogous to the breach of contract. The answer in the end is ‘By the application of the court’s common sense’.”

Mr Mayall refers to the observations of HHJ Mackie QC in IG Index plc v Leung-Cheun [2011] EWHC 2212 (QB) at paragraphs 43-46, where he considered both issues of causation and the duty to mitigate. The judge recorded the submissions of Mr Mayall for the Claimant (at para 43) and Mr Mallin for the Defendant (at paras 44 and 45), and concluded at paragraph 46:

“If a breach of contract is assumed and the acts complained of were taken in isolation then it seems to me that Mr Mallin’s view of causation might be preferred. If one assumes the breach (and also the absence of ‘such bets’ issue) then a loss caused because bets were closed out some days later than they should have been would have been caused by the breach. However this involves making assumptions about the facts in circumstances where Mr Leung-Cheun was actively trading each day and would have been forcefully opposed to his positions being closed out five days after the ‘margin calls’. I find it difficult to see how he could have successfully recovered damages for a failure to close out which he would have strongly opposed and which he could have remedied by closing out himself.”

Mr Gourgey referred to the observations of Lewison LJ in the Court of Appeal judgment at paragraphs 28-30, commenting on an argument that the Defendant had caused the relevant loss by not having closed out his bets: “whether this is a single question of causation or a question of the scope of IG Index’s duty is not, to my mind, an easy question. It is a question of construction of the rule, in its regulatory context, whether breach of the rule renders IG Index liable for all such losses” (para 29).

In Environment Agency v Empress Car Co. (Abbertillery) Ltd [1999] 2 AC 22 at 31, Lord Hoffmann said: “One cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule”. The Defendant contends that the obligation to close out a debt is to protect the customer. The whole point of the closure of bets rule is, Mr Gourgey submits, to crystallize the Defendant’s liability and therefore avoid the liability continuing on an open bet.

Mr Gourgey submits that the purpose and scope of COBS 2.1.1 when engaged by the need to exercise discretion under a clause such as Term 16(5) is to ensure that the client’s exposure to contingent liabilities from his or her open spread bets is monitored and managed in his best interests and, as is apparent from Term 16(5), having regard to his financial circumstances. There would seem little point, he submits, in the imposition of this rule on regulated firms (such as the Claimant) if they were easily able to avoid liability for its breach by relying on a customer’s failure to close his bets (see Cooper v Carillion plc [2003] EWCA Civ 1811, per Keene LJ at [13]): that was a tortious claim but the same principle, Mr Gourgey submits, applies to a contractual claim.

Mr Gourgey submits that in the present case there was a direct causal link between the failure to close the bet and the loss arising at a later date. The passage on which Mr Mayall relies in Leung-Cheun is, Mr Gourgey observes, obiter.

The problem, it seems to me, with this submission is that for the reasons I have given (see paras 88-93 above) COBS 2.1.1 cannot be interpreted by reference to COB Rule 7.10.5. Accordingly the purpose of COB 7.10 (Margin requirements) is not material.

In the alternative Mr Gourgey submits, following Galoo, regard must be had to the obligation which has been breached. Paragraph 16(4) creates an obligation to close down bets, for the benefit of the Defendant, otherwise there is no need to have the obligation. Mr Gourgey suggests that if the Claimant’s contention that even though the Claimant has acted in breach of paragraph 16(4) it is not that breach which caused the Defendant’s loss because it was always open to the Defendant to close down his bet, that would emasculate the very obligation the Claimant has accepted under the Agreement.

However statements of his position were produced shortly after midnight on the day in question and they were sent to the Defendant on a daily basis. The statements amount to a margin call. It follows, Mr Mayall submits, that on each day the Defendant made a conscious decision not to close down his bets. At the very least he decided to continue with his trading. This is a classic case, submits Mr Mayall, of breach of contract being the opportunity for, not the cause of, the loss that subsequently resulted.

The Defendant had 7 years’ experience of spread betting. He traded on a regular basis. He plainly understood that during 2008, and in particular in September 2008 the market was in a volatile phase and the risks were even greater than usual. However he considered betting on RBS to be “like a sure thing: the opportunity of a lifetime” (see para 29 above). To cover the margin calls he intended to make transfers from his various bank accounts, and subsequently to refinance his assets in property, no doubt, as he said, in the hope that the market would turn in his favour (see para 51 above). In my view it is highly likely that he would have been opposed to his positions being closed out five days after the margin calls between 15 September and 14 October. He was informed of his daily position during that period, but took no steps to close the bets himself despite the improvement in his position between 22 and 29 September and the opportunities to do so. After 19 September the markets were rising in the Defendant’s favour (until 30 September). On 13 October (by which time he was heavily in debt) he voiced his opposition when closure of his positions was raised with him. The Defendant said that he could not anticipate that the financial crash would be as serious as it was. However the Defendant accepted that at the time he could have closed his positions if he had wanted to, but he kept them open. It was his decision because he thought share prices would go up.

I recognise that it was a stressful time for the Defendant during 2008 due to the collapse in the property market and in particular by September 2008 when the market in shares was very volatile, exceptionally so in relation to banking shares following the collapse of Lehman Brothers on 15 September 2008, but I am satisfied that he himself decided to remain in the market rather than closing his bids and cutting his losses.

In my judgment the decision by the Defendant to continue with his bets was the cause of his loss. I am not satisfied that the Claimant’s breach of contract was the effective or dominant cause of the loss he sustained.

Chitty on Contracts (31^st Edition, Vol.1) states the principles of mitigation at paragraph 26-077:

“There are three rules often referred to under the comprehensive heading of ‘mitigation’: they will be considered in turn. First, the claimant cannot recover damages for any part of his loss consequent upon the defendant’s breach of contract that the claimant could have avoided by taking reasonable steps…”

At paragraph 26-079 Chitty observes that the first rule:

“… imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.”

The commentary continues:

“It is not strictly a ‘duty’ to mitigate, but rather a restriction on the damages recoverable, which will be calculated as if the claimant had acted reasonably to minimise his loss. Only the claimant’s net gain from his mitigating effort will be deducted – he may set off against his substitute profits or earnings the reasonable expenses incurred in obtaining them. The onus of proof is on the defendant, who must show that the claimant ought, as a reasonable man, to have taken certain steps to mitigate his loss and that the claimant could thereby have avoided some part of his loss.”

Mr Mayall took Issue 6 (causation) and Issue 7 (mitigation) together. He submits that an alternative route to the conclusion that the dominant or effective cause of any further losses by the fact that the bets were not closed was the decision of the Defendant to keep the bets open is that the Defendant has wholly failed to mitigate his loss. As the basis of the Defendant’s claim is that he was caused loss by the failure to close out the bets, it is difficult, Mr Mayall submits, to see how it could not be a reasonable step for him to have closed out the bets himself when he had every opportunity to do so. There is, Mr Mayall submits, no real distinction on the facts between Leung-Cheun and the present case. In both cases the Defendants did not want their bets to be closed out. It was the Defendant’s positive decision, says Mr Mayall, to keep his bets open that caused his loss. He could have closed them at any time if he had wished to do so.

In response Mr Gourgey submits that it was not unreasonable for the Defendant to take the view that the RBS price might go up. He had no information that it would continue to go down. It was a volatile market. If a reasonable person as at 28/29 September could properly have taken the view that the price of shares might go up, Mr Gourgey asks why is it unreasonable for the Defendant to keep his bets open.

I reject this submission. The Defendant could, in my view, have avoided any loss by taking reasonable steps. He could have acted in his best interests, if he viewed it as such, and closed himself down.

I consider that the Defendant wholly failed to mitigate his loss for the same reasons that led me to the conclusion I reached on causation (see paras 116-118 above).

In the light of my finding that there was no breach of statutory duty (see para 100 above), this issue does not arise for determination.

If I am wrong to find there was no breach of statutory duty or, contrary to my view, this is a category 3 case where the breach of contract is co-extensive with the breach of the tortuous duty (see Chitty on Contracts, 31^st Ed., Vol.1 at para 26-075) contributory negligence can be relied upon by the Claimant to reduce the Defendant’s damages.

In that event Mr Mayall submits that the Defendant was, by September/October 2008 a very experienced spread-better; he did not have the liquid funds (although he said he did) to meet the margins; and in those circumstances, any reasonable person would have concluded by the time he reached the margin of about £600,000 that he should close his bets.

Mr Gourgey sought to distinguish the facts in Spreadex Ltd v Sekhon from the present case. The purpose of COB 7.10.5R, in issue in that case “was not to prevent Dr Sekhon from engaging in spread betting; it was to prevent him from being given credit in inappropriate circumstances” (para 182). Morgan J was of the view that Spreadex must bear some responsibility for the losses because one part of the purposes of COB 7.10.5R was to require Spreadex to protect Dr Sekhon from himself, at any rate in relation to the giving of credit to Dr Sekhon (para 180). As to relative blameworthiness and responsibilities for the losses in that case, the judge regarded Dr Sekhon as “the principal source of his own misfortunes… He wanted to keep his positions open and it was he who persuaded Spreadex to permit him to do so” (para 177). That is not so, Mr Gourgey submits, in the present case.

I do not accept that the cases can be distinguished as Mr Gourgey suggests. In the present case before 7 October 2008 there was an absence of persuasion on the Defendant’s behalf, but the evidence suggests he plainly wished at all material times to keep his bets open and he did not close them down, as he could have done.

The new Rule, COBS 2.1.1, is plainly not to be interpreted by reference to the old rule, COB 7.10 (see para 94 above). However if contrary to my view there is a breach of COBS 2.1.1 (construed without regard to COB 7.10) or this is a category 3 case, I would have concluded that the Defendant was responsible for his loss to the extent of 95%. That would, in my view, give proper regard to the purpose of COBS 2.1.1 to protect the best interests of the customer, whilst at the same time having regard to the terms of s.5(2) of the 2000 Act, in particular the general principle that consumers should take responsibility for their decisions (sub-paragraph (d)), and the deliberate decision by the FSA to remove the margin requirement (see paras 89-93 above).

In summary I have reached the following conclusions on the issues for determination:

For the reasons I have given this counterclaim fails.