Contractual right or discretion needed for purpose?
SHURBANOVA v FOREX CAPITAL MARKETS [2017]
This case looked at when a party can exercise an absolute contractual right or whether it has to use its discretion in a fair way in applying a contractual right.
Facts:
- Shurbanova (“S”) had an account with Forex Capital Markets (“F”) and on one day raised several orders with F to sell gold and buy US dollars.
- Later the same day F revoked the trades based on alleged breaches by S of its terms of business, saying that the trades placed by S were ‘abusive’. S had access to software developed by her husband and son which allowed her to take advantage of small in built delays in F’s systems in reacting to certain news events (so-called ‘price latency’). S was therefore suspected of being able to trade based on actual knowledge of news instead of by predicting what the outcome of a news event would be.
- S’s husband and son had a history of trading disputes with F and had been restricted in their access to F’s systems and products. F claimed S was acting on behalf of her husband and son and that she had misrepresented her position on the application form requesting an account.
- F’s terms of business provided:
- Clause 24.2: “Upon the occurrence of an Event of Default, in its sole and absolute discretion [F can] take all or any of the following actions ...
(e) reverse any Transactions (as if they had never been entered into in the first place)”.
“Event of Default” was very widely defined to include misrepresentation and F having reasonable grounds to believe a material breach, such as abusive trading, had occurred.
- Under Clause 26.1, a “Manifest Error” was defined as “a manifest or obvious misquote by the Company”.
- Clause 26.2 went on to say: “The Company will, when making a determination as to whether a situation amounts to a Manifest Error, act fairly towards the client …”.
- Clause 27.1 was aimed at trades exploiting price latency. It stated: “… Transactions that rely on price latency opportunities may be revoked, without prior notice. [F] reserves the right to make the necessary corrections or adjustments on the Account involved without prior notice. Accounts that rely on abusive strategies may at [F’s] sole discretion be subject to intervention by [F]. Any dispute will be resolved by [F] in its sole and absolute discretion”.
- S argued that F’s revocation of the trades was made in breach of contract for the following reasons:
- if there had been ‘abusive trading’, F had not exercised its discretion to revoke the trades properly and the revocation was invalid;
- there was an implied term of the contract that F should have acted reasonably and/or in good faith towards her; and
- she had never misrepresented her position as trading for herself and not as a proxy for her husband or son.
Decision:
- The Court seemed to quickly form the view that S was acting for her husband and son and that her evidence was “riddled with implausibilities and inconsistencies”. Nevertheless, to determine whether the trade revocations were validly made by F, the judge had to consider the effect of the contractual provisions in relation to whether there had been:
- a ‘Manifest Error’; and
- any trading by S that was ‘abusive’ as that term was used in its terms of business.
- Manifest Error
- The judge said that the express requirement for F to act fairly when considering if there had been a ‘Manifest Error’ in Clause 26.1 encompassed a more limited implied duty that discretion needs to be exercised in a way that is not ‘arbitrary, capricious or irrational’ (which arose out of the case of Braganza v BP Shipping (SC) [2015] and has become known as a ‘Braganza duty’). That duty also would have required F to ensure there was a proper process to make the decision in question including taking into account the material points and not taking into account irrelevant considerations. In addition it would involve not reaching an outcome which was outside what any reasonable decision-maker could decide, regardless of the process adopted.
- Even if there had been no express requirement for fairness in the contract, the judge thought a ‘Braganza duty’ would have existed in any event. This does not mean that the Court can substitute what it thinks would have been the most reasonable decision to make. However, the Court determined that in this particular case there had been no ‘Manifest Error’.
- Abusive trading
- The Court decided that the trades by S were classic ‘abusive trading’. By using her husband and son’s software, S was able to trigger the trades immediately upon receipt of the certain news which meant those trades were placed with knowledge of the outcome. She was therefore able to take advantage of the price latency inherent in the prices offered by F.
- It was also concluded that, when considering whether abusive trading had occurred, F did not owe S a ‘Braganza duty’. Instead, the Court agreed with F that it had a range of options including revocation, amendment or doing nothing. Its choice of which contractual right to exercise was a free one unfettered by any concepts of fairness or rationality. It was relevant that the contract did not reserve F’s right to determine finally whether there had actually been abusive trading.
- Consequently, there was no breach of contract by F in revoking the trades since, once abusive trading had been identified, it was at its discretion whether to revoke the trades or not.
Points to note:
- In Watson v Watchfinder [2017] which we reported on in November, the same judge said that company directors considering whether to give consent were under a ‘Braganza duty’ and that not imposing such a duty in those circumstances would have led to an ‘anomalous result’. The option to purchase shares in that case would have otherwise been rendered completely worthless at the whim of the directors which would have been uncommercial and pointed to some restrictions being imposed on the directors’ ability to withhold consent. Here, there was nothing compelling the judge to impose additional obligations on F. Once abusive trading had been established, F’s right to revoke made commercial sense on its own.
- This decision is a reminder that when it comes to exercising contractual rights triggered by a breach of contract, a Court is unlikely to interfere with the choice made by the innocent party of what remedies to exercise even if the consequences for the other party could be very different. The distinction between using a contractual discretion and deciding which absolute contractual right to exercise should not be confused.
- What the case also makes clear is that contractual wording which suggests that a contracting party can act in its ‘sole and absolute discretion’ is unlikely to be effective. Where it applies, the implied ‘Braganza duty’ will take precedence over any such wording.