The Commercial Court held that a clearing broker exercising a right to close out an investment fund’s positions did not owe a duty of care to the fund. Nor did the clearing broker owe an implied contractual obligation (whether on the basis of s 13 of the Sale of Goods and Services Act 1982 or otherwise) to conduct the close-out of the portfolio using reasonable care and to a suitably professional standard.
Daniel Toledano QC and Sam O’Leary appeared for SEB in successfully defending Euroption’s €135 million claim for damages following the close-out of its fund of very large index option positions in the turbulent markets of October 2008.
Euroption (a volatility hedge fund) failed to meet margin calls after the markets moved against its positions in early October 2008 (and especially overnight between 9 and 10 October). Euroption’s clearing broker, SEB, was required to make its own margin payments to the clearing house and thus became heavily exposed to Euroption’s open positions. SEB responded by exercising its contractual right to close out those positions.
After a two week trial, Mrs Justice Gloster gave a thorough and important judgment on issues that have troubled the courts a number of times over recent years. In particular, the question whether a clearing broker owes its client a duty of care in closing out its portfolio remained unresolved after Sucden Financial v Fluxo-Cane [2010] 2 C.L.C. 216; ED&F Man Commodity Advisers v Fluxo-Cane [2010] EWHC 212 (Comm); and Marex Financial v Fluxo-Cane [2010] EWHC 2690 (Comm). SEB argued, successfully, that a broker is required only to exercise its discretion rationally and in good faith (applying Socimer International Bank v Standard Bank London [2008] EWCA Civ 116 to the context of a fund close-out).
The two-week trial also concerned issues as to whether various positions should have been closed earlier than they were; whether SEB had acted in breach of authority by executing “combination” trades (whereby one position was opened at the same time as another was closed); and whether Euroption was entitled to have its damages assessed on a “multiplier” basis by reference to future trading profits.
Daniel Toledano QC and Sam O’Leary were instructed by Clifford Chance LLP.