Court dismisses appeal against spread-bet losses

The Court of Appeal has dismissed an appeal by a customer of a spread-betting company (IG Index), who claimed IG Index’s failure to close out in accordance with its terms of business caused him to incur greater losses than need have been the case.

IG Index’s terms said, among other things, that it had absolute discretion as to the customer’s overall position when calculating deposit and margin calls, and that the customer acknowledged that IG Index would close any bets in certain circumstances, including where the customer had failed to pay a deposit or margin call or exceeded its credit for more than 5 days. The terms also said that, subject to the (then) FSA rules, the firm could use its reasonable discretion to allow the continued placing of bets and that the customer acknowledged that this may cause it to incur further losses.

As bets the customer made started to go wrong, IG Index started to make daily margin calls. The customer promised the moneys but did not provide them. Eventually, the customer pleaded with IG Index not to close his position, as he would go bankrupt if it did. But IG Index did close the position the following day. The customer then claimed IG Index was in breach of the provision of its terms that said it would close bets where payments were more than 5 days overdue.

At first instance, the judge held there had been no breach of statutory duty (the duty to act in the client’s best interests) by IG Index, and this was not appealed. However, the judge also concluded there was no evidence the firm had exercised its discretion to leave the account open, and therefore was in breach of contract as it should have closed out once the requested payment became 5 days overdue. But he accepted IG Index’s argument that it was the customer’s decision to continue that was the cause of the loss, not the firm’s failure to close out. The judge held the customer had wholly failed to mitigate his loss by keeping the contract open when he could have closed it.

The appeal focused on arguments that:

  • the judge failed to appreciate that part of the obligation under the terms was for the firm to protect the customer from running the risks of the open contract and that, therefore, the judge should have concluded the breach was at least an effective cause of loss; and
  • for the same reasons the decision that the customer had wholly failed to mitigate his losses was wrong – and the judge had not considered what a reasonable man in the customer’ position would have done.

There was much discussion about the old COB rule 7.10.5, which was deleted when MiFID 1 was implemented and replaced by the broader client’s best interests rule. There was also discussion around whether the clause requiring the contract to be closed was there for the protection of the firm, or of the customer. The judge agreed with the judge at first instance that there was no indication it was for the customer’s protection. As a result, the appeal failed on that basis and the cause of the loss was therefore the customer’s decision to leave the position open.

Emma Radmore