Application Of The Braganza Duty When Closing Out A Trading Account

• Published date: 14 November 2022
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Financial Services, Trials & Appeals & Compensation
• Law Firm: Debevoise & Plimpton
• Author: Mr Christopher Boyne, Patrick Swain, Julia Caldwell, Luke Duggan and Emma Laurie-Rhodes

Key Takeaways

• The High Court has considered the application of the Braganza duty to the closeout of a spread betting account.
• The Braganza duty requires a decision maker to exercise its discretion honestly, in good faith and in the absence of arbitrariness, capriciousness, perversity and irrationality.
• The court will consider detailed evidence and the circumstances in the round where a decision maker is alleged to have breached its Braganza duty.
• It is important to implement and evidence robust processes and procedures when offering services to individuals or other persons in which a decision maker may exercise a discretion in order to best protect all parties

Introduction. InCMC Spreadbet PLC v Tchenguiz [2022] EWHC 1640 (Comm) the High Court considered the Braganza duty in deciding whether a spread betting firm had breached its duty to act rationally and reasonably in exercising its discretion to close out and to liquidate an individual's trading account. In summary, the court found that the firm had not breached the statutory, regulatory or Braganza duties it owed the defendant. The firm had given the defendant sufficient warnings concerning his voluntary reclassification from retail to professional investor. It had not acted arbitrarily or unreasonably in refusing security (but not full top-up payment) that he offered to stabilise his trading account, under conditions of market volatility during the COVID-19 pandemic.

The Facts. The parties entered a spread betting agreement (the "SBA"), and in the course of trading, the defendant incurred losses of '1.3m. (Spread betting is a form of contract for differences. It allows the parties to speculate on the occurrence of future events, typically price movements in markets.) The claimant, a spread-betting firm, sought to recover a debt (or alternatively a sum payable in contract) from the defendant, which the defendant resisted on two principal bases.

First, the defendant alleged that the claimant had breached its duties under the Financial Conduct Authority's Conduct of Business Sourcebook's Rules when it categorised him as an elective professional client rather than as a retail client. The defendant alleged that the claimant did not give him the warnings it was required to provide regarding the loss of protections resulting from his reclassification from retail to elective professional client.

Second, the defendant alleged that if the claimant had been entitled to classify him as an elective professional...