CFH Clearing Ltd v Merrill Lynch International
| Jurisdiction | England & Wales |
| Judge | Lord Justice McCombe,Lord Justice Phillips,Lord Justice Holroyde |
| Judgment Date | 14 August 2020 |
| Neutral Citation | [2020] EWCA Civ 1064 |
| Year | 2020 |
| Date | 14 August 2020 |
| Docket Number | Case No: A4/2019/1412 |
| Court | Court of Appeal (Civil Division) |
[2020] EWCA Civ 1064
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERICAL COURT (QBD)
MRS JUSTICE MOULDER
[2019] EWHC 963 (Comm)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice McCombe
Lord Justice Holroyde
and
Lord Justice Phillips
Case No: A4/2019/1412
Stephen Auld QC and Michael d'Arcy (instructed by Withers LLP) for the Appellant/Claimant
Andrew Twigger QC and Pia Dutton (instructed by Stephenson Harwood LLP) for the Respondent/Defendant
Hearing date: 4 February 2020
Approved Judgment
Introduction
At about 9.30am CET on 15 January 2015 the Swiss Franc was “de-pegged” from the Euro (having been pegged at the rate of 1.2 CHF to 1 Euro), resulting in a short period of extreme volatility in the exchange rate between those currencies. At 9.47am the appellant (“CFH”), through its automated clearing system, placed 27 electronic market orders directly with the respondent (“MLI”) to trade a total of €20,479,000 for Swiss Francs at the next available price. MLI's automated system filled the orders almost instantaneously at an average rate of 0.1821969 CHF and executed the trades. On the main platform for EUR/CHF trading (“the EBS platform”), the “official low” was declared at 0.85 CHF. Later the same day the rate on the EBS platform stabilised at about 1.000 CHF.
The issue on this appeal is whether it is arguable, as CFH contended, that the effect of MLI's Terms and Conditions of Business (“MLI's Terms”) is to import into the transactions a contractual obligation to comply with “market practice”, so as to require MLI to re-price the 27 transactions at 0.85 CHF, the “official low” of the EBS authenticated market range, or otherwise to cancel them. As MLI had offered to re-price the transactions at 0.75 CHF, an offer CFH accepted under protest, CFH's principal claim is for damages of 0.10 CHF per Euro, amounting to 2,047,900 CHF.
In a reserved judgment dated 9 April 2019 Moulder J rejected CFH's contention, together with other arguments based on implied terms and alleged duties in tort, and therefore dismissed CFH's claim against MLI on a summary basis pursuant to CPR 24.2.
CFH now appeals that decision, permission to appeal being limited to the issue identified above.
The facts
The parties and their contractual relationship
CFH was in the business of providing clients with foreign exchange (“FX”) liquidity from major FX market participants such as investment banks, including MLI, part of the Bank of America Merrill Lynch group.
One route by which CFH provided liquidity was by entering bilateral electronic FX spot transactions on its own account with a liquidity provider, back to back with orders placed with CFH by its own clients. CFH was a “straight through processing venue”, meaning that the processes by which CFH received orders from its clients and placed corresponding orders with liquidity providers were largely automated.
CFH's relationship with MLI was governed by a number of agreements, the relevant contracts for present purposes being:
i) an ISDA 2002 Master Agreement dated 27 June 2013, subsequently amended by a written agreement dated 4 December 2013 (“the ISDA Master Agreement”);
ii) a Foreign Exchange Confirmation Agreement dated 10 July 2013;
iii) MLI's Terms, emailed to CFH on 14 November 2013.
The ISDA Master Agreement comprised the standard 2002 terms and a schedule (“the Schedule”). The preamble to the standard terms recorded that the parties “have entered and/or anticipate entering into one or more transactions (each a “Transaction”) that are or will be governed by this 2002 Master Agreement, which includes [the Schedule] and the documents and other confirming evidence (each a “Confirmation”) exchanged between the parties …”. The standard terms also included the following:
“1(c) Single Agreement All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties.. and the parties would not otherwise enter into any Transactions.
……..
4(c) Comply with Laws [Each party] will comply in all material respects with all applicable laws and orders to which it may be subject if failure to so comply would materially impair its ability to perform its obligations under this Agreement …
……..
9(a) Entire Agreement This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter…
…….
9(e) Counterparts and Confirmations
…..
(ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree those terms (whether orally or otherwise). A Confirmation will be entered as soon as practicable and may be…created…by an exchange of electronic messages on an electronic messaging system …, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such…electronic message…constitutes a Confirmation.
The Schedule expressly incorporated the 1998 FX and Currency Option Definitions (“the 1998 FX Definitions”) in respect of FX transactions between the parties. Part 6(b) further provided that, unless otherwise agreed in writing, each FX Transaction entered between them would be a Transaction under the ISDA Master Agreement and would be part of and subject to it. It was further agreed that electronic messages or other confirming evidence exchanged between the parties confirming such Transaction would constitute Confirmations for the purpose of the ISDA Master Agreement.
By the Foreign Exchange Confirmation Agreement the parties further agreed that, instead of written confirmations being prepared and sent, FX transactions between them would be confirmed for the purpose of the ISDA Master Agreement by electronic exchange.
The preamble to MLI's Terms stated that they applied to all investment and connected business which MLI might carry on with CFH, but subject to any documentation relating to a specific transaction or transactions between MLI and CFH. Clause 2 provided that the FSA Rules were not incorporated into MLI's Terms. Clause 7, which forms the central plank of CFH's claim in these proceedings, includes the following:
“…We may take or omit to take any action we think appropriate to ensure compliance with applicable rules and we shall not be required to do anything which would in our opinion infringe any such applicable rule…
All transactions are subject to all applicable laws, rules, regulations howsoever applying and, where relevant, the market practice of any exchange, market, trading venue and/or any clearing house and including the FSA Rules (together the “applicable rules”). In the event of any conflict between these Terms and any applicable rules, the applicable rules shall prevail…”
The events leading to CFH's losses on the 27 transactions
In 2011 the Swiss National Bank sought to resist upward pressure on the Swiss Franc by declaring a lowest acceptable limit on the EUR/CHF exchange rate at 1.2 CHF, thereafter intervening in the market to buy unlimited amounts of EUR at that rate to maintain that floor.
When that floor was unexpectedly removed at 9.30 CET on 15 January 2015, there was an immediate and massive strengthening of the Swiss Franc against the Euro, causing severe fluctuations in the foreign exchange market for about 40 minutes.
By 9.47am CET the extreme rates being quoted had triggered the automatic liquidation of certain positions of CFH's clients, which in turn caused CFH to send 348 orders to liquidity providers during the period of market turbulence, including the 27 market orders to MLI. MLI was at that time streaming prices for EUR/CFH at very low levels, but CFH's automated orders were not subject to any price limitation (as they could have been) and were filled and executed by MLI at rates between 0. 14668 and 0.20111.
CFH's case was that, later on 15 January 2015, Barclays, UBS and JP Morgan each confirmed that any trade they had executed with CFH below 0.85 CHF would be re-booked at that rate to reflect the official low.
MLI, however, did not agree to adjust the rate for the 27 transactions to 0.85 CHF, but on 16 January 2015 offered to change the rate to 0.75 CHF after first making a margin call based on the average rate of 0.1821969. Later the same day MLI further notified CFH that MLI was terminating its prime brokerage relationship with CFH, with the effect that MLI had to agree a final settlement with MLI so that it could transfer its remaining balance to another prime broker. On 19 January 2015 CFH, under protest, accepted the adjustment of the rate for the 27 transactions to 0.75 CHF.
The issue
On 19 September 2018 CFH commenced these proceedings, contending (among other arguments) that:
i) the effect of clause 7 of MLI's Terms, providing that all transactions were “subject to … market practice of any exchange, market, trading venue and/or any clearing house” was to incorporate relevant “market practice” into the contract between CFH and MLI;
ii) the market practice so incorporated was not limited to the practice of specific markets or exchanges, but extended to the practices of “markets” more generally, such as to the “foreign exchange market”;
iii) therefore, in entering the 27 FX transactions in question, CFH and MLI agreed...
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