QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| SUCDEN FINANCIAL LIMITED
(Formerly SUCDEN (UK) LIMITED)
|- and -
|(1) FLUXO-CANE OVERSEAS LIMITED
(2) MANOEL FERNANDO GARCIA
Mr Sean Snook (instructed by Hill Dickinson LLP) for the Defendants
Hearing dates: 19, 20, 21, 27 July 2010
Crown Copyright ©
MR JUSTICE BLAIR:
Event of Default
We refer to our telephone call of 17th January 2008 whereby we advised you that your account numbered 1198 was on call. That margin call has not been met.
The position is therefore that you are currently in default to meet the Margin Call.
Under clause 34.1 of the Terms of Business between us (the "TOBs") you agreed to pay us on demand such sums by way of margin as we in our discretion reasonably require. Your failure to meet the Margin Call constitutes an Event of Default under clause 46.1(a) of the TOBs.
Sucden will therefore exercise its rights in accordance with the TOBs based on the Event of Default.
Later that day, Sucden applied to Fluxo-Cane's account the derivatives which it had bought the day before, and it also bought 950 March call options which Mr Overlander says he saw as protection in a volatile market. Both these transactions are in issue, and I will return to them.
Our Trading Facility
We refer to our Trading Facility with you, as amended.
As you are ware, you failed on or about 17th January, in breach of the Terms of Business agreed between us, to make payment to us of a Margin Call. The non-payment of such Margin Call constituted an Event of Default under our Terms of Business, and we duly gave you notice therefore by our letter dated 18th January, which further informed you that we would in consequence proceed to exercise the rights afforded us under the Terms of Business in such circumstances.
We have accordingly since that date proceeded to exercise our rights in accordance with clause 47.1 of the Terms of Business.
As at the date hereof, the debit balance on your account with us now amounts to the sum of US$5,632,679.98.
Accordingly, we hereby require you to make payment, forthwith, of the sum of US$5,632,679.98 in satisfaction of the debit balance presently on your account with us, always without prejudice to any and all other sums as may be, or subsequently become, due from you to us in accordance with the Terms of Business between us.
Fluxo-Cane denied liability, and these proceedings were in due course brought.
The parties' contentions summarised
"3. APPLICABLE REGULATIONS AND EXCHANGE REQUIREMENTS
3.1 Subject to Applicable Regulations: This Agreement and all Transactions are subject to Applicable Regulations so that: (i) if there is any conflict between this Agreement and any Applicable Regulations, the latter will prevail: (ii) nothing in this Agreement shall exclude or restrict any obligation which we have to you under Applicable Regulations; (iii) we may take or omit to take any action we consider necessary to ensure compliance with any Applicable Regulations; (iv) all Applicable Regulations and whatever we do or fail to do in order to comply with them will be binding on you; and (v) such actions that we take or fail to take for the purpose of compliance with any Applicable Regulation shall not render us or any of our directors, officers, employees or agents liable.
3.2 Exchange action: If an Exchange (or intermediate broker or agent, acting at the direction of, or as a result of action taken by, an Exchange) takes any action which affects a Transaction, then we may take any action which we, in our reasonable discretion, consider desirable to correspond with such action or to mitigate any loss incurred as a result of such action. Any such action shall be binding on you.
34 MARGINING ARRANGEMENTS
34.1 Margin call: You agree to pay us on demand such sums by way of margin as are required from time to time under the Rules of any relevant Exchange (if applicable) or as we may in our discretion reasonably require for the purpose of protecting ourselves against loss or risk of loss on present, future or contemplated Transactions under this Agreement.
46.1 Events of Default: If at any time:(a) you fail to make any payment when due under this Agreement or to make or take delivery of any property when due under, or to observe or perform any other provision of this Agreement and such failure continues for one Business Day after we give you notice of non-performance;
(d) you are unable to pay your debts as they fall due or are bankrupt or insolvent, as defined under any bankruptcy or insolvency law applicable to you; or any indebtedness of yours is not paid on the due date therefore or becomes, or becomes capable at any time of being declared, due and payable under agreements or instruments evidencing such indebtedness before it would otherwise have been due and payable, or any suit, action or other proceedings relating to this Agreement ("Proceedings") are commenced for any execution, any attachment or garnishment, or distress against, or an encumbrancer takes possession of, the whole or any part of your property, undertaking or assets (tangible and intangible);
(e) you or any Credit Support Provider (or any Custodian acting on behalf of either of you) disaffirm, disclaim or repudiate any obligation under this Agreement or any guarantee, hypothecation, agreement, margin or security agreement or document, or any other document containing an obligation of a third party ("Credit Support Provider"), or of you, in favour of us supporting any of your obligations under this Agreement (individually a "Credit Support Document");
(j) we consider it necessary or desirable to prevent what we consider is or might be a violation of any Applicable Regulation or good standard of market practice; or
(k) we consider it necessary or desirable for our own protection/any action is taken or event occurs which we consider might have a material adverse effect upon your ability to perform of your obligations under this Agreement; or
(l) any Event of Default (however described) occurs under any other agreement which you are a party to;
then we may exercise our rights under sub-clause 2 of this clause ….
46.2 Termination on notice: subject to sub-clause 3 of this clause, at any time following the occurrence of an Event of Default, we may, by notice to you, specify a day on which we will commence the termination and liquidation of Transactions…
47.1 Default: On an Event of Default or at any time after we have determined in our absolute discretion, that you have not performed (or may not be able or willing in the future to perform) any of your obligations to us, we shall be entitled without prior notice to you:…
(c) to close out, replace or reverse any transactions, buy, sell, borrow or lend or enter into any other transaction or take, or refrain from taking, such other action at such time or times and in such manner as at our sole discretion, we consider necessary or appropriate to cover, reduce or eliminate our loss or liability under or in respect of any of your contracts, positions or commitments; and/or"
"Business Day" means a day (other than Saturday or Sunday) on which:i) in relation to a date for the payment of any sum denominated in (a) any Currency (other than euro), banks generally are open for business in the principal financial centre of the country of such Currency; or (b) euros, settlement of payments denominated in euros is generally possible in London or any other financial centre in Europe selected by us in the Individually Agreed Terms Schedule; and
ii) In relation to a date for the delivery of any property, property of such type is capable of being delivered in satisfaction of obligations incurred in the market in which the obligation to deliver such first property was incurred; and
iii) for all other purposes, is not a bank holiday or public holiday in London;"
When did the liquidation begin?
"It is our intention to try and manage an orderly liquidation of the position and will make every effort to minimise the extent of your loss. However as you know only too well the market continues to be highly volatile and therefore we cannot guarantee being able to liquidate the position favourably. At this difficult time I hope that you will find a way to recover from this terrible event and I'm sure we both look forward to the day when life can return to normal."
Was Sucden entitled to liquidate Fluxo-Cane's positions?
Fluxo-Cane's failure to pay margin: clause 46.1(a) of Sucden's TOB
Can Sucden rely on other matters to justify the liquidation?
(1) TOB clause 3 is relevant to the 711 contracts bought on 17 January 2008. As explained previously, I accept the explanation given by Mr Overlander who said that that these trades were undertaken in order to comply with the ICE direction of 16 January by which Sucden was required to reduce Fluxo-Cane's March 2008 position from about 6,000 to no more than 3,600 futures equivalent contracts by 23 January, and was expected to make some reduction each day. The direction was given under ICE Rule 6.13(b). The ICE Rules were "Applicable Regulations" within clause 3 of the TOB, and it follows that Sucden was obliged to obey the direction. Clause 46.1(j) of the TOB (also relied on by Sucden) does not (in my view) add anything since, as is common ground, it could only apply up to the time of ICE's notice of 18 January lifting the restrictions on the company's position limits. The real issue in this case concerns the subsequent liquidation of Fluxo-Cane's positions. The timing of the purchase of the 950 March call options bought on 18 January is unclear, but it is referred to in Mr Overlander's email of 18 January 2010 to Mr Garcia sent at 17.49. Sucden says that it came after the notice of default, and in the circumstances it falls to be treated in my view as part of the liquidation, and cannot be justified under clause 3.
(2) As to clause 46.1(d), I agree with Sucden that the Events of Default comprehended within this sub-clause go beyond insolvency. The words in the sub-clause relied on are that "any indebtedness of yours is not paid on the due date therefor". The indebtedness relied upon is the unpaid margin. That being so, I reject its case that clause 46.1(d) is applicable here. I agree with Fluxo-Cane that since unpaid margin is expressly dealt with in sub-clause (a), that it would be wrong to construe the agreement in such a way as to permit Sucden to put the account into default under sub-clause (d) thereby avoiding the need to give a Business Day to make payment.
(3) Sub-clause 46.1(e) applies if Fluxo-Cane disaffirms, disclaims or repudiates any obligations under the agreement. I have set out above my findings of fact in relation to what happened at the meeting with the brokers on 18 January 2008. I am satisfied that Mr Garcia did repudiate Fluxo-Cane's obligations under the agreement by his statement at that meeting, and that Mr Overlander understood him to have done so. It follows that sub-clause (e) does apply. Whereas at common law, Sucden would have been required to give notice accepting the repudiatory conduct as putting an end to the contract, the effect of sub-clause (e) is, in my view, that it was entitled following the repudiation to take the steps that it did to liquidate Fluxo-Cane's positions under clause 47.1(c) (sub-clause (e) does not require notice to be given). Mr Sean Snook, counsel for Fluxo-Cane, contends that such a conclusion is inconsistent with the cancellation rights in respect of repudiation given by clause 41.7(d) of the TOB. Since the liquidation took place under Clause 47.1(c), he says this cannot have been a case of repudiation. However the rights set out in (d) appear to me to be additional to those set out in (c), and there is no reason to treat the fact that Sucden proceeded under (c) as showing that there was no Event of Default under clause 46.1(e). In my view, there clearly was in this case.
(4) In the course of argument, Sucden placed particular reliance on clause 46.1(k). This sub-clause (including the opening under the rubric Event of Default) provides that, "If at any time … we [that is, Sucden] consider it necessary or desirable for our own protection / any action is taken or event occurs which we consider might have a material adverse effect upon your ability to perform of your obligations under this Agreement … then we may exercise our rights [to liquidate] under sub-clause 2 …". (In fact, as I have said, Sucden did not exercise its rights to liquidate under sub-clause 2, but its rights under clause 47.1(c) to close out its customer's transactions on an Event of Default. It makes no difference for present purposes). In ED & F Man, it was held that the claimant broker in that case was entitled to rely on a provision which gave the right to close out contracts if "we reasonably consider it necessary or desirable for our own protection". The clauses are not identical, but are clearly to very similar effect. In that case, David Steel J concluded at  as follows:"It is difficult to imagine a situation in which it could be more obvious that it was in [the claimant's] interests to liquidate the position so as to limit its own exposure. [Fluxo-Cane] had evinced the clearest possible intention not to comply with the contractual terms against a background of taking a speculative position so large as to create a "Financial Emergency" from the perspective of ICE. There can be no doubt in my judgment that [the claimant] was entitled to rely on [the relevant provision] as from the end of the meeting [of 18 January] and the closing out of positions thereafter was legitimate."
(5) The same considerations that led to that conclusion apply equally in the present case. The intervention of the Exchange, and the complaints to which that intervention related, were of a very high order of magnitude. Fluxo-Cane failed to pay the margin due on either 17 or 18 January 2008, and it became increasingly evident (I am satisfied) that it would not be in a position to do so. Other brokers were in the course of liquidating their positions. Because of the contractual structure which I have explained, Sucden was itself financially exposed to its own counterparty on the positions held by Fluxo-Cane. It was, as it submits, left financially exposed on open positions without margin to cover the exposure, while other brokers were commencing a mass liquidation of Fluxo-Cane's position, which threatened to disrupt the market. Even before one gets to Mr Garcia's repudiatory conduct at the meeting of 18 January, events had occurred which might, indeed certainly did, have a material adverse effect on Fluxo-Cane's ability to perform its obligations under the agreement.
(6) In its closing submissions, Fluxo-Cane submits that the wording of clause 46.1(k) plainly requires Sucden to actually form a view at the time that it seeks to rely on the clause. I agree that the use of the words "we consider" in the sub-clause show that it must form a view. However the sub-clause refers to the relevant rights being exercisable if Sucden "consider[s] it necessary or desirable for our own protection". As Mr Nigel Eaton, counsel for Sucden put it, in my view rightly, sub-clause (k) does not say you must have in mind that it is desirable for you to take steps under that sub-clause, it says you must have in mind that it is desirable for you to take steps for your own protection.
(7) I accept, of course, as Fluxo-Cane says, that an important indication of what Sucden considered itself to be doing at the time is what it said in the letter of 18 January, and that only makes reference to the non-payment of margin under clause 46.1(a). That is a powerful point and I do not diminish it in any way. Nevertheless, the circumstances were exceptional, and given the nature of the facts as I have found them to be, and Mr Overlander's view of the situation that had arisen, clause 46.1(k) did in my judgment apply in this case. The fact that ICE withdrew its direction on 18 January does not alter the situation. The situation had gone beyond compliance with ICE's position limits, because the brokers (in Mr Overlander's words) were now faced with a customer who had "declared himself in default". By close of business on 18 January, Fluxo-Cane had not paid the 17 or 18 January margin calls. Mr Garcia had made it plain at the meeting on 18 January that Fluxo-Cane was not going to pay margin. He told the meeting that his financial position was deteriorating "each minute", that his credit lines were "blocked", and that he was nearly bankrupt. The attitude of the Exchange was that the brokers should "do what you have to do", which meant in effect, as Sucden puts it, a rush for the keyboards. All of this, as Sucden submits, transformed a risk that brokers would "push the button" into a certainty, and it was conscious of the risk of being left at the back of the queue. As I have said, it was left financially exposed on open positions with its counterparty ADM without margin from Fluxo-Cane to cover that exposure. I accept Mr Overlander's evidence that in the light of the January 18 meeting, he believed that Sucden had no choice but to hold Fluxo-Cane in default and to commence liquidation of its position in a way which would minimise as much as possible its own losses. I am satisfied that its primary concern in this situation was to limit its own potential losses, and that its state of mind satisfied the requirements of clause 46.1(k). Considering it necessary or desirable for its own protection, it commenced the liquidation of Fluxo-Cane's positions, a process that only got underway properly after Mr Overlander's visit to Sao Paolo on 29 January 2008 to discuss the account with Mr Garcia, which turned out to be fruitless. Accordingly, in my view sub-clause 46.1(k) applied.
(8) Clause 46.1(l) (which is the next provision Sucden relied on) is the cross-default clause. It applies, according to Sucden, by reason of the finding in ED & F Man that an Event of Default occurred under the relevant contract in that case. For the reasons given by Fluxo-Cane, in particular the commercial uncertainty that allowing such an outcome would produce, I reject this submission. I do not consider that the subsequent outcome of a different case can be treated on the facts of this case as sensibly resulting in an event of default some two years beforehand.
(9) Sucden's closing submissions state that the independent right to liquidate under clause 47.1 (in other words that part of the clause that comes after the reference to Events of Default giving, or purporting to give, an absolute discretion in the case of non-performance to close out a customer's transactions under clause 47.1(c)) "adds little" on the present facts. It adds nothing in my view, and I do not propose to consider it further.
(10) Finally, in terms of the provisions now relied on by Sucden, in the facility letter of 11 April 2007, Sucden reserved the right "at our absolute discretion" to reduce, withdraw or vary the facility. Despite submissions to the contrary, this was not a case, in my judgment, in which Sucden "withdrew the facility". It relied upon the terms of the facility to liquidate its customer's account which is a different thing. I agree with Fluxo-Cane that the terms of the facility letter do not take Sucden's case any further forward.
Fluxo-Cane's counterclaim arising from the liquidation