Spreadex Ltd v Sekhon
| Jurisdiction | England & Wales |
| Judge | Mr Justice Morgan:,MR JUSTICE MORGAN |
| Judgment Date | 23 May 2008 |
| Neutral Citation | [2008] EWHC 1136 (Ch) |
| Docket Number | Case No: HC06C04212 |
| Court | Chancery Division |
| Date | 23 May 2008 |
[2008] EWHC 1136 (Ch)
The Hon Mr Justice Morgan
Case No: HC06C04212
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Francis Tregear QC (instructed by Streathers) for the Claimant
Mark Vinall (instructed by Mishcon De Reya) for the Defendant
Hearing dates: 11 th, 12 th, 13 th, 14 th, 15 th February & 5 th March 2008
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
The Claimant, Spreadex Limited (“Spreadex”), is a spread betting company. The Defendant, Dr Sekhon, is an experienced spread better. I will describe what is involved in spread betting later in this judgment. Between October 2005 and 22 nd November 2006, Dr Sekhon carried out a large number of spread betting transactions with Spreadex. On 22 nd November 2006, Spreadex closed all of Dr Sekhon's positions at a time when Dr Sekhon's account with Spreadex showed that he owed Spreadex some £695,000. Dr Sekhon has not paid anything towards that sum. In these proceedings, Spreadex seeks to obtain judgment for that sum, together with interest. Dr Sekhon has defended the claim on the basis that Spreadex is liable to him, under section 150 of the Financial Services and Markets Act 2000 (“ FSMA 2000”), which applies where Spreadex is in breach of a rule contained in the Conduct of Business Rules (“COBR”) made by the Financial Services Authority (“FSA”) and Dr Sekhon asserts that Spreadex has broken such a rule. In particular, he contends that Spreadex ought to have closed his open positions, against his will, in September 2006 and if it had done so, Dr Sekhon would not then have owed Spreadex any money, or at any rate much less money. Further, he points to the fact that in September and October 2006 he paid in excess of £300,000 to Spreadex and if he had not paid that money he would have owed a sum of around £1,000,000 to Spreadex on 22 nd November 2006, as a result of his positions remaining open until that date. Accordingly, he says that the deterioration in his account with Spreadex between a date in September 2006 and 22 nd November 2006 is loss and damage which he is entitled to claim from Spreadex as damages for breach of statutory duty. Spreadex denies that it broke any rule in the COBR and says that, even if it did, such a breach did not cause Dr Sekhon any loss and, in any event, the greater part of Dr Sekhon's losses are attributable to Dr Sekhon's own decision to keep his positions open so that he was contributorily negligent in relation to the losses for which he now claims against Spreadex.
There is very little dispute of fact as to the relevant events which took place in this case. When I have made my detailed findings of fact it will be necessary to construe a number of provisions in the contractual document entered into by Spreadex and Dr Sekhon, referred to as the Two Way Customer Agreement (“the Agreement”), to construe a number of provisions in the then current COBR of the FSA, to apply those documents to the facts as found, to consider various arguments as to causation of loss and, finally, to consider and apply the law as to suggested contributory negligence on the part of Dr Sekhon.
It is accepted by the parties that the transactions in this case comprised a “regulated activity” within section 22 of FSMA 2000 and that they were governed by the COBR of the FSA. In this judgment, where I refer to the COBR, I refer to the rules in force at the relevant time. Those rules have since been altered. Conversely, the transactions in this case were not governed by the general legislation which deals with betting or gambling: see section 412(1) of FSMA 2000.
Mr Tregear QC appeared on behalf of Spreadex and Mr Vinall appeared on behalf of Dr Sekhon.
Spread betting
A useful account of the nature of spread betting is given in the judgment of Rix LJ in Spreadex Ltd v Battu [2005] EWCA Civ 855 at [2] – [4]:
“Spread betting
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.
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.
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.”
Rix LJ explained what was meant by “notional trading risk” or “NTR” and “margin” at [5] – [12]:
“The credit risk, margin and security
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.
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.
It will immediately be obvious that these two forms of security could either overlap or be accumulated. If the operator wishes to have the maximum security possible to be available at all times, then it will ensure that it always keeps in hand security for future potential losses: and, entirely separately, will ensure that each day, or perhaps even several times a day, it will demand further security for any running losses incurred in the course of the day on open trades. In that way, it will, as far as it can, end each day fully secured for such running losses and in addition will be able to begin each new day secured in advance for further potential losses yet to be incurred. On that basis, these two forms of security are cumulative, or, to put it another way, the security to be provided in advance merely as a condition of trading is always to be kept entirely insulated from being used as security in respect of running losses.
On the other hand, such demands may kill the goose that lays the golden eggs. If the customers are required to put up too much security, they may decline to trade, or be unable to trade. Moreover, on one view, such cumulative security, although perfectly understandable from the point of view of the operator, can also be seen as a form of double counting: since the running losses, if they occur, are...
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