UK: Sugar Trader Found In Breach Of Obligation To Meet Margin Call

Last Updated: 16 September 2010
Article by Daniel Jones and Reema Shour

Sucden Financial Ltd (formerly Sucden UK Ltd) v (1) Fluxo-Cane Overseas Ltd and (2) Manoel Fernando Garcia [2010] EWHC 2133 (Comm)

Background facts

Sucden, a futures and options broker, was one of a number of brokers acting on behalf of Fluxo-Cane, a company trading in physical sugar and also sugar derivatives on New York's ICE Exchange, a futures and options market. The dispute in this case arose out of Fluxo-Cane's dealings in a standard futures contract traded on ICE , the Sugar No. 11 Contract for March 2008 delivery. The parties dealt with each other on Sucden's standard Terms of Business (TOB). It is worth noting that a number of other brokers have also sued Fluxo-Cane for liquidation amounts arising out of the same events that gave rise to this claim. In particular, Mr Justice Steel in EDF & Man Commodity Advisers Ltd v Fluxo-Cane gave judgment against Fluxo-Cane on one such claim.

In essence, Fluxo-Cane built up a substantial short position at the relevant time through its various brokers, particularly in the March 2008 No. 11 Contract, on the basis of a belief that the price of sugar would fall due to oversupply. Instead, the price of sugar rose. During January 2008, there were various discussions and some correspondence between the ICE Exchange, Fluxo-Cane and the various brokers, including Sucden, who were acting on behalf of Fluxo-Cane.

In summary, the Exchange

  1. considered Fluxo-Cane was over-exposed and asked it to limit its net position;
  2. when Fluxo-Cane failed to do so, the Exchange held the company in violation of its position limit and instructed the various brokers carrying Fluxo-Cane's positions to reduce them (in other words reduce the number of futures-equivalent contracts). This was apparently a very unusual step for the Exchange to take;
  3. made an additional super-margin call of 20 percent on Fluxo-Cane's positions (in other words a cash call), which applied to Sucden among others. Usually, Sucden would pay additional margin after a day's trading on behalf of Fluxo-Cane, send the margin call to the latter the next morning and generally Fluxo-Cane would pay on the same day as the call. In the present case, Fluxo-Cane paid its margin calls up to 16 January 2008 but not thereafter.

An initial meeting between Sucden, the other brokers involved and Mr Garcia, President and sole shareholder of Fluxo-Cane, failed to produce agreement on a co-ordinated reduction in Fluxo-Cane's positions such as to minimise, in Mr Garcia's view, the danger of a spike in prices caused by a forced liquidation of Fluxo-Cane's positions. On 17 January 2008, Sucden made a substantial margin call payment of over US$5 million and entered into some transactions in a bid to comply with the ICE directive to reduce the number of Fluxo-Cane's short positions (which many of the other brokers were also doing). Following a further meeting on 18 January, Sucden's understanding from what Mr Garcia had said was that the 17 January margin call would not be paid. Later that day, therefore, Sucden sent Fluxo-Cane a notice of default relating to its failure to meet the margin call made on 17 January and, on the same day as the notice of default, started closing out its transactions placed on behalf of Fluxo-Cane.

By the time that Fluxo-Cane was back within the limits set by ICE and the Exchange withdrew the "Notice to Liquidate Positions" and the additional margin requirement, it was too late for the brokers to stop the process of liquidating Fluxo-Cane's positions. Sucden subsequently commenced proceedings against Fluxo-Cane in the English High Court to recover the debit balance on the company's account.

Fluxo-Cane contended in its defence that (i) no valid margin calls were outstanding from the company by the time Sucden commenced its liquidation, (ii) that Sucden was not therefore entitled to commence the liquidation at the time that it did and that the liquidation was premature and (iii) that, in any event, even if it was not premature, the liquidation was conducted negligently. Fluxo-Cane counterclaimed the loss caused by the allegedly negligent liquidation.

Commercial Court decision

Was liquidation commenced prematurely?

The judge rejected the submission that Sucden began the liquidation of Fluxo-Cane's positions prematurely. He found rather that the trades that were undertaken by Sucden prior to 17 January 2008 were transacted in Sucden's own name and allocated to a Sucden account. They were only applied to Fluxo-Cane's account after the meeting between Fluxo-Cane and the brokers on 18 January and after Sucden sent the 18 January 2008 default letter. The judge added that these trades were undertaken in order to comply with the ICE directive and that as a member of the Exchange, these directions were binding on Sucden and compliance was not optional. Furthermore, the relevant ICE Rules were given effect to as a matter of contract between Sucden and Fluxo-Cane in the former's TOB. Whilst the judge accepted the expert evidence that it was irregular for a broker to buy lots on its own account on one day and allocate them to its customer's account on the next day, "the circumstances in this case were wholly exceptional, and...such irregularity did not itself cause Fluxo-Cane any loss."

Was Sucden entitled to liquidate Fluxo-Cane's positions?

The event of default which Sucden's letter of 18 January 2008 referred to was Fluxo-Cane's failure to meet the margin call made on 17 January 2008. Whilst the TOB gave Sucden the right, in case of any event of default, to liquidate Fluxo-Cane's transactions without further notice, where the event of default in question was a failure to meet a margin call then Sucden had to give Fluxo-Cane one business day's notice before treating failure to pay margin as an event of default. In starting to close out its transactions with Fluxo-Cane on the same day as the notice of default was sent, i.e. without giving one business day's notice, the judge held that Sucden had failed to comply with the applicable procedure under the agreement.

Could Sucden rely on other matters to justify the liquidation?

Whilst only non-payment of margin was given as a reason for the liquidation in the notice of default, the judge said this had to be put into the context of the extraordinary conditions in which the parties found themselves. The judge accepted witness evidence to the effect that at the relevant time, a one-off failure to pay margin was not exclusively what Sucden was thinking of and that its concern was more whether Fluxo-Cane was going to default generally on its ongoing commitments to all of its brokers, thereby triggering a mass liquidation and probably a spike in the market. As the judge said, "margin was therefore not an abstract consideration insulated from wider considerations, but was intrinsically bound up with questions of regulatory compliance and Sucden's own financial exposure". Consequently, the judge found that whilst non-payment of margin did not constitute an event of default at the time Sucden began the liquidation on 18 January 2008, there were other subsisting events of default at that time.

First, one of the events of default provided for in the TOB was where Fluxo-Cane disaffirmed, disclaimed or repudiated any obligations under the agreement. The judge was satisfied that Mr Garcia had repudiated the agreement at the meeting on 18 January, when he indicated that the margin call of 17 January would not be paid. Whilst at common law, Sucden would have been required to give notice accepting the repudiatory conduct as putting an end to the contract, the relevant provision in the TOB, according to the judge, entitled Sucden to liquidate Fluxo-Cane's positions following the repudiation without any notice being required.

Secondly, Sucden was entitled to exercise its rights to liquidate where it considered this necessary or desirable for its own protection and/or if any action was taken or event occurring which Sucden considered might have a material adverse effect on Fluxo-Cane's ability to perform its obligations under the contract. The judge accepted Sucden's evidence that it had been left exposed by open positions and it was necessary to cover that exposure in the absence of margin from Fluxo-Cane by commencing liquidation to minimise its losses.

As a result of these subsisting events of default, the judge held that Sucden was entitled to close out Fluxo-Cane's various transactions when they did, without prior notice. The fact that these events of default were not mentioned in the notice of default did not prevent Sucden from relying on them. Rather, the judge was satisfied that in taking the action that it did, Sucden had in mind both Mr Garcia's repudiatory statement and the necessity to protect itself.

Alleged negligence in conducting the liquidation

The judge dismissed Fluxo-Cane's counterclaim. There was some expert evidence relating to whether more favourable prices could have been obtained had Sucden liquidated the whole account during 22 to 25 January. However, the judge accepted that it had been reasonable for Sucden to await the outcome of a further meeting with Fluxo-Cane on 29 January to discuss the account before putting the liquidation underway in earnest. Furthermore, as one of the experts had testified, it was only with the benefit of hindsight that it could be seen that liquidation during that period would have been most advantageous. The judge concluded that the criticisms made of Sucden's conduct of the liquidation were unfounded and dismissed the counterclaim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions