Shurbanova v Forex Capital Markets Ltd [2017] EWHC 2133 (QB)
In this case, the court considered whether the defendant's decision to revoke trades placed by the claimant was an exercise of a contractual discretion and therefore not to be exercised arbitrarily, capriciously or irrationally, or simply a contractual right and not subject to those conditions. It provides a further example of the careful analysis required in deciding whether a contract contains a right or a discretion, following the decision of the Supreme Court in Braganza v BP Shipping [2015] 1 WLR 1661, a recent case in the "Socimer" line of authorities (Socimer International Bank Ltd v Standard London Ltd [2008] EWCA Civ 116).
The defendant, Forex Capital Markets Ltd (FX), was an online broker. The claimant, Mrs Shurbanova, claimed FX had breached an implied duty of good faith in its terms of business when it revoked very profitable trades that she placed through a dealing platform FX operated for retail clients.
Mrs Shurbanova is a retired teacher from Bulgaria. On 8 November 2013 at precisely 8.30am New York time, data for the US Non-Farm Payroll (NFPD) was released. A positive NFPD result normally leads to a rise in the dollar and a decline in the value of gold. At 8:30.01am New York time, Mrs Shurbanova placed 25 orders to sell gold and 18 orders to buy US dollars (on a basket basis). Within 30 seconds, Mrs Shurbanova had closed out the same trades by giving instructions to buy back the gold and sell the dollars. The total amount committed by Mrs Shurbanova on these trades was US$130 million and her profit on the trades was US$463,410. Not too bad for less than a minute's work.
The FX platform used by Mrs Shurbanova is designed for non-professional traders and is structured such that the quoted prices react more slowly (in relative terms) to particular events, with the intention of allowing individual traders more time to think about the trades that they wish to make. With such "throttling" of quoted prices comes the potential for abuse.
FX revoked the trades later that day. Underlying FX's decision to cancel the trades was a concern that, by using a combination of software able to (i) process results of news events very fast and (ii) place appropriate buy and sell orders automatically according to predetermined settings, Mrs Shurbanova had been able to place trades that were not based on intelligent predictions of a particular news result, but in knowledge of what that result was. The trades abused the "price latency" which was built into the platform. Further, FX was concerned that Mrs Shurbanova was in fact acting as a front for her husband, Mr Shurbanov, whose activities had been restricted by FX previously, including for placing trades similar to the trades placed by Mrs Shurbanova, and/or for their son, whose trading activities had also previously been restricted by the broker. Mrs Shurbanova denied the allegations and brought a claim against FX for breach of contract.
In its defence, FX relied on two provisions within its terms which permitted it to amend or cancel trades. The first line of defence concerned a clause which allowed FX to amend a transaction where there was "Manifest Error". The judge held that the provision did not apply to the circumstances as there had been no pricing error or misquote in relation to the trades. As regards the pricing, the platform operated as intended.
The second line of defence concerned a provision in FX's terms allowing it to revoke transactions if there had been abusive trading. The question of whether FX was acting within its contractual right in revoking Mrs Shurbanova's trades required the judge to consider whether the act of revoking was the simple exercise of a contractual right, or the exercise of a discretion, such that FX was under a duty to conduct its determination in a way that was not arbitrary, capricious or irrational in the public law sense. The judge referred to these limitations on the exercise of a contractual discretion as the "Braganza Duty", alluding to the Braganza case decided in 2015.
In support of her argument that the contractual provision amounted to a discretion, Mrs Shurbanova identified that FX had a range of options open to it in the event of abusive trading (including revoking, amending or doing nothing). The judge did not find that characterisation to be correct; the clause conferred a simple and absolute right to revoke, and a separate right to make adjustments to the account. On the face of the clear words in the clause, it was for the court (and not for FX) to determine finally whether, as a matter of fact, there was abusive trading. Under its terms, if FX exercises its contractual power to revoke a trade, it runs the risk of "calling" the transaction wrongly by revoking based on abusive trading where the court later determines that there was none. The Judge drew the distinction between this situation and, on the other hand, a contractual power of the type considered in Braganza, that arises from the evaluation of some state of affairs which one party makes as decision-maker, but which affects both parties, thereby giving rise to a potential conflict of interest. As Asplin J put it in Property Alliance Group v. RBS, if a power depends on a decision requiring the contracting party to make some kind of assessment or to choose from a range of options, then it is the exercise of that power which renders necessary the implication of a term that it should not be exercised arbitrarily, capriciously or in an irrational manner.
Mrs Shurbanova further identified that the clause provided for FX to intervene at its "sole discretion" in relation to the operation of accounts tainted by abusive trading or "gaming". The judge found this to be a separate matter to any action that FX took in response to a particular trade, and that it did not affect the analysis of whether FX had a contractual right or a discretion to revoke abusive trades. The judge did note that the final part of the relevant clause provided that FX had sole discretion to resolve disputes arising from quoting or execution errors. The judge decided that this discretion could only relate to those isolated factors, and that it would run counter to the clear words of the clause for the discretion to apply to its entirety.
On consideration of all the evidence, including expert evidence from both sides, the judge was also clear that Mrs Shurbanova's trades were a case of "classic abusive trading". Mrs Shurbanova's case was not assisted by the presentation of the evidence to support her claim: her own testimony was described as implausible and inconsistent and therefore unreliable, as was (to a lesser extent) that of her son; and the absence of evidence from Mr Shurbanov, when he could easily have supported his wife's claim, was considered telling. The judge was satisfied that Mrs Shurbanova was a "front" for her husband and/or her son.
Whilst it was not necessary in the light of the above findings, the judge also found that Mrs Shurbanova had made a series of misrepresentations when opening her trading account with FX, with the result that FX could have claimed damages and, in so doing, cancelled out any liability on its part for damages due to Mrs Shurbanova had the judge found in her favour. The claim was dismissed in its entirety.
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