Liability for Investment Losses – Court Explores Contractual Rights between Investor and Broker

Introduction

Investments are necessarily beholden to market movements – when markets fall, investment losses result. However, disputes may arise regarding liability for such losses, particularly when the investments are financed by another, such as a broker-dealer, in which the contractual relationship often provides the broker with broad discretionary powers to protect its interest and limit its exposure. Questions of contractual rights and issues of fact then take centre stage, as demonstrated in the decision of the Appellate Division of the Singapore High Court in Rajesh Harichandra Budhrani v INTL FCStone Pte Ltd and others [2024] SGHC(A) 29.

The investor in question had a margin trading account with the first respondent. As market prices fell precipitously, the investor was informed that his account was in an equity deficit. Following a series of conversations with the first respondent’s employees throughout the course of the trading day, the investor gave instructions to sell his contracts, and in the process realised the losses on those contracts. After the event, the investor sought to claim against the respondents for loss of profit. Among other claims, the investor alleged that the respondents were in breach of an “execution-only” contract, breached their duty of care, subjected him to illegitimate pressure and misled him into selling the contracts.

At first instance, the General Division of the High Court dismissed the entirety of the investor’s claims (see Rajesh Harichandra Budhrani v INTL FCStone Pte Ltd and others [2024] SGHC 18). For more information on the General Division’s decision, please see our earlier Legal Update here. This was upheld on appeal before the Appellate Division, which found that even if the investor had not given instructions for the sale of the contracts, the first respondent was contractually entitled to liquidate those contracts unilaterally to protect its own interests. In any case, the Appellate Division was not persuaded that there was any improper conduct on the part of the first respondent’s employees.

The respondents were successfully represented by Disa Sim and Jodi Siah of Rajah & Tann Singapore LLP.

Brief Facts

The investor, Mr Budhrani, was an accredited and experienced investor. He had a margin trading account with the first respondent (“FCStone“) as his broker-dealer for the trading of silver futures contracts on the Commodities Exchange. The second and third respondents were employees of FC Stone, whose job scope involved executing trade orders for clients including Mr Budhrani.

Pursuant to the contractual arrangement (the “Agreements“) between the parties, Mr Budhrani could furnish an Initial Margin and begin trading in silver futures contracts on margin. However,  the Agreement also provided that FCStone was entitled under the Agreements to liquidate Mr Budhrani’s contracts to protect its interests and require him to pay any shortfall. Under its policy, FCStone could liquidate the contracts if the equity in the trading account fell below 20% of the Initial Margin (“20% Policy“).

Following a precipitous fall in the price of silver futures contracts on 16 March 2020, Mr Budhrani was informed by employees of FCStone (the second and third respondents) that his account was in an equity deficit. After further conversations with the employees that trading day, Mr Budhrani gave instructions to sell his contracts in batches. By the end of the trading day, all the contracts were sold and Mr Budhrani’s account remained in deficit.

Mr Budhrani commenced a claim against FCStone and the employees for loss of profit on the sale of 66 contracts. Among other things, Mr Budhrani alleged that they had breached the Agreements as they were not entitled to interfere with his decisions in respect of the disposal or retention of his contracts, and further, that the contracts were wrongfully sold as a result of their undue influence, duress, misrepresentation and/or breach of duty of care.

The Judge in the General Division of the High Court (“Judge“) dismissed all of Mr Budhrani’s claims, finding that:

• The respondents were not in breach of the Agreements. The “execution-only” contract was a limit on the services the respondents were obligated to provide to Mr Budhrani, not a limit on what they were entitled to do.
• The margin call was made on 14 March 2020, a Sunday, and there was no reason to assume that margin calls could not be made on Sundays.
• There was no agreement to extend the deadline for Mr Budhrani to settle the margin call. In any case, FCStone had the discretion under the Agreements to liquidate Mr Budhrani’s contracts to protect its interests.
• The claims in duress and undue influence were untenable since they were not causes of action, but grounds for vitiating a contract. In any case, duress or undue influence was not made out.
• None of the alleged misrepresentations were made by the respondents.

The Judge also allowed FCStone’s counterclaim for the balance shortfall, and held that Mr Budhrani was contractually required to indemnify FCStone and its employees’ costs.

Mr Budhrani appealed against the Judge’s decision.

Holding of the Appellate Division

The Appellate Division dismissed the appeal, upholding the decision of the Judge.

In the Appellate Division’s view, the case boiled down to the issue of whether FCStone was entitled to liquidate Mr Budhrani’s positions unilaterally if he had not given instructions for FCStone to do so. If so, then it would be irrelevant whether FCStone had pressured or influenced Mr Budhrani (as alleged by Mr Budhrani) into giving instructions for the sale of his silver futures contracts.

On the facts, the Appellate Division found that FCStone was entitled to forcibly liquidate Mr Budhrani’s positions if he had not availed himself of the opportunity to manage the process himself, and that FCStone would indeed have done so.

• The Agreements provided FCStone with a broad discretionary power to take the necessary steps to protect its interests without notice to Mr Budhrani or prior demand for margin, or before the time given for meeting any margin call had elapsed.
• When the margin ratio fell below 20%, FCStone’s 20% Policy was triggered, under which specified escalation actions were to be taken, including the issuance of liquidation orders.
• Although the 20% Policy was not incorporated into the Agreements, the Agreements provided that FCStone could take steps necessary to protect its position, and the 20% Policy was thus relevant to how and when FCStone would come to the view that it needed to take such steps. In any event, Mr Budhrani was reminded of the 20% Policy on various calls.
• There was also evidence that FCStone had duly formed the view that it had to act on the basis of the 20% Policy given the fall in silver prices, and that Mr Budhrani had failed to liquidate his positions voluntarily, it would have issued instructions to proceed with a forced liquidation.

Given the above findings, the Appellate Division found that it did not matter whether Mr Budhrani was pressured or influenced to close his positions. In any event, the Appellate Division was not persuaded that the Judge had erred in finding that there was no threat, influence or misrepresentation. Instead, it was of the view that the call transcripts indicated that any pressure came from the fall in the market and not from any improper conduct on the part of FCStone’s employees.

In dismissing the appeal, the Appellate Division also awarded costs to FCStone and its employees on an indemnity basis as mandated under the Agreements.

Concluding Words

Margin trading necessarily involves a degree of risk, and it is important that such risk be clearly allocated in the contractual arrangements between investor and dealer/broker. Parties should be clear of their contractual entitlements, including in the event of margin calls. This is particularly important during times of market fluctuation, where even the slightest delay in action may result in serious losses.

The decision also highlights the distinction between the pressure of dealing with market fluctuations on one hand, and any pressure on the part of the dealer/broker on the other hand. The former is a natural part of the trading process and will not suffice to invalidate any resultant decision on the part of the investor.

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