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England and Wales Court of Appeal (Civil Division) Decisions
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Cite as:  EWCA Civ 406
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
Mr Justice Walker
Strand, London, WC2A 2LL
B e f o r e :
Vice-President of the Court of Appeal, Civil Division
LORD JUSTICE LONGMORE
LORD JUSTICE SCOTT BAKER
| ED&F Man Commodity Advisers Limited & Anr
|- and -
|Fluxo-Cane Overseas Limited & Anr
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7404 1424
Official Shorthand Writers to the Court)
Stephen Males QC and Sean Snook (instructed by Messrs Middleton Potts) for the Respondent
Hearing dates : 9th and 10th March 2009
Crown Copyright ©
Lord Justice Waller :
"Dear Mr Garcia
I am writing to advise you that a special meeting of the Board of Directors of ICE Futures U.S, Inc. (the "Exchange") was held on January 15, 2008, at which the following actions were taken pursuant to Exchange Rule 21.29:
(1) the Board of Directors determined that there is a substantial questions as to whether a "Financial Emergency", as such term is defined in Chapter 21 of the Exchange Rules, exists with respect to Fluxo-Cane Overseas, Ltd. and you; and
(2) the Board of Directors determined that all orders for the account of Fluxo-Cane Overseas Ltd, and its affiliates (including you)("Fluxo") in the Sugar No. 11 futures contract and any options on such Contract may only be placed or executed by or through a clearing member and not by or through any other person.
The decision of the board of Directors with respect to the placement of orders, as specified above, becomes effective on Wednesday, January 16, 2008 upon the posting of a Release to Members on the Exchange's website, and will remain in effect until further notice. The decision of the Board of Directors was based upon the facts, including but not limited to, that: Fluxo has significantly exceeded the position accountability levels established for it by the Exchange with respect to the futures equivalent position permitted to be held by Fluxo in the March 08 Sugar No. 11 delivery month and in all delivery months of the Sugar No. 11 contract, combined; Fluxo has refused to bring its position into compliance with the levels established by the Exchange, notwithstanding repeated requests to do so by the Exchange; and Fluxo has increased its short futures equivalent position when instructed to reduce such position in the March 08 delivery month.
Due to the gravity of the situation, it was not practicable for the Exchange to afford you a hearing before taking action. Accordingly, you and Fluxo may request a hearing before the Board regarding the actions described above. Any such request should be made in writing to the undersigned within five business days of the date hereof, and should specify when you would be available for such a hearing and whether you will appear in person or through counsel or other representative.
On a separate but related matter, in addition to the actions described above, please be further advised that pursuant to Rule 6.13, the Exchange has instructed each firm carrying positions for Fluxo in the Sugar No. 11 futures contract and/or options thereon to:
(a) reduce Fluxo's short futures equivalent position in the March 08 Sugar No. 11 delivery month to not more than a specified level, based on the proportion of Fluxo's position carried by each such firm, such that by the close of business on January 23, 2008 Fluxo is in compliance with the position limits established for it by the Exchange with respect to the March 08 delivery month, and to not increase the futures equivalent position carried in all Sugar No. 11 delivery months combined, beyond its current level.
(b) not accept any orders, electronic or otherwise, that would result in an increase of Fluxo's short futures equivalent position in the March 08 Sugar No. 11 delivery month or its short futures equivalent position in all delivery months combined; and
(c) not approve the transfer of any Sugar No. 11 futures or options contracts carried for Fluxo to an account at another clearing member, without first notifying the Exchange of the intended transfer.
You may obtain further details directly from your clearing members regarding the position reductions that have been requested of each such firm, or contact Susan Gallant at the Exchange at 212-748-4030.
Please also be aware that the foregoing action is not intended in any way to preclude the clearing members from further reducing positions or taking any other action which they may deem necessary or proper in light of the relevant circumstances."
"The Exchange is hereby notifying MF Global Inc. ("the Clearing Member") that the futures equivalent position of Fluxo-Cane Overseas Ltd, and its affiliates ("Fluxo") in the March 08 Sugar No. 11 contract, which is carried by multiple firms including E D & F Man Commodity Advisers, is significantly in excess of the Exchange's position limit established for Fluxo. In addition, Fluxo's all-months-combined position in the Sugar No. 11 contract exceeds the position limit set by the Exchange for all months combined in such Contract.
In accordance with rule 6.13, the Exchange is instructing the Clearing Member to reduce Fluxo's short futures equivalent position at E D & F Man Commodity Advisers in the March 08 Sugar No. 11 contract to no more than 8,000 futures equivalent contracts by no later than the close of trading on Wednesday, January 23, 2008 and not to increase Fluxo's short futures equivalent position for Sugar No. 11 in all months combined beyond the current level. The Exchange expects the Clearing Member to accomplish some reduction in Fluxo's positions each day until the specified levels have been achieved.
The Clearing Member is further directed not to accept any orders, electronic or otherwise, from Fluxo that would result in an increase in Fluxo's short futures equivalent position in the March 08 Sugar 11 contract or in all months combined. Accordingly, we request that the Clearing member establish procedures to ensure that it can affirmatively monitor or restrict Fluxo's order flow consistent with this restriction.
Please be advised that, as specified in the Member Release dated today, the Exchange is requiring that any orders in the Sugar No. 11 contract and/or options thereon for the account of Fluxo and/or its affiliates be entered exclusively with or by clearing members of ICE Clear US, Inc. and not by any other person."
How did the proceedings commence?
"29. Secondly, the Judge was correct to find it very telling that, when Mr Aylett was asked by his colleagues to obtain the terms of the contract, he sent them the Fenchurch terms. If the question is whether a term was incorporated into a contract, the subsequent conduct of the parties may be very relevant to the inquiry whether such a term was or was not agreed. Mr Flaux's submissions to the contrary were, with respect, a misapplication of the principle that the subsequent conduct of the parties cannot be relied on as an aid to the construction of the contract, see James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd  AC 1 Lloyd's Rep 269 at 9 271, col 1;  AC 583 at pp 603D-E per Lord Reid at p 279, col 2; p 615A, per Lord Wilberforce. No such principle exists in relation to the question whether an alleged term of a contract was, in fact, agreed."
"Most contracts are, of course, made expressly, whether orally or in writing. But here, on the evidence, nothing was said, nothing was written. So regard must be paid to the conduct of the parties alone. The questions to be answered are, I think, twofold: (1) Whether the conduct of the bill of lading holder in presenting the bill of lading to the ship's agent would be reasonably understood by the agents (or the shipowner) as an offer to enter into a contract on the bill of lading terms. (2) Whether the conduct of the ship's agent in accepting the bill or the conduct of the master in agreeing to give delivery or in giving delivery would be reasonably understood by the bill of lading holder as an acceptance of his offer.
I do not think it is enough for the party seeking the implication of a contract to obtain "it might" as an answer to these questions, for it would, in my view, be contrary to principle to countenance the implication of a contract from conduct if the conduct relied upon is no more consistent with an intention to contract than with an intention not to contract. It must, surely, be necessary to identify conduct referable to the contract contended for or, at the very least, conduct inconsistent with there being no contract made between the parties to the effect contended for. Put another way, I think it must be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract."
(1) The cause of the problems for FCO was the action taken by the ICE, or FCO's failure to respond to what it perceived to be an unfair ruling by the ICE. The exchange (a) had insisted on the brokers collecting super margin i.e. 20% more than normal margin, which as at 16th January FCO had paid; (b) was preventing FCO trading on its own behalf; (c) was insisting on the brokers not being entitled to accept orders from FCO to sell; and (d) was ordering FCO to reduce its short positions through its brokers. This latter was an instruction to FCO's brokers as well as to FCO.
(2) FCO's positions had to be reduced within the exchange's limits by 23rd January, but the exchange was expecting some closing of the short positions each day through the brokers.
(3) The brokers wished to obtain orders from FCO to reduce FCO's position but also had in mind the possibility that, if FCO did not give orders, they may have to act individually to manage FCO's positions with them in order to comply with the exchange's requirements. The brokers were also concerned about whether FCO could pay the margins already due and with prices rising margins which would be bound to become due over the next few days.
(4) As the 17th January conversations commenced FCO had not failed to pay margin but there had been calls for margin on 17th in respect of 16th. January. The first mention of margin, according to the transcript, is at page 126 where a broker is noting that FCO has not paid any money yet and has not placed any orders closing out his positions yet.
(5) When the meeting began already some brokers with open positions were not party to the same and indeed were acting individually, e.g. New Edge. Furthermore some who were party to the conversations were also doing some buying (ADM). There was no suggestion that it should be understood that while talks were going on there was an agreement that brokers would not trade individually, although no doubt in everyone's interest it was hoped that brokers would not do so or be compelled by the exchange to do so, so that a plan using spreads or an organised reduction acceptable to the exchange could be achieved.
(6) When Mr Garcia was first asked whether FCO were going to pay margins due, his response was that FCO were not going to until he had finance in place to deal both with margin due and margin to become due, but he pointed out forcibly that if all the brokers acted alone then it would be "crazy"[140/141]. One broker responded that brokers have to pay the exchange, therefore FCO must "pay us, and then we can reduce in an orderly fashion". A broker made clear unless the margin is met there can be no orderly reduction and all will act on their own . Thus both sides were putting down "reality" markers; FCO was saying they would not pay any margin, even that actually due, until they got finance for all margin, and that it would be crazy for brokers to close FCO out in the meanwhile; the brokers were saying they needed margin otherwise all would be bound to act on their own.
(7) At 146 a broker is recorded as saying "if Fluxo tells us . . . that the margin calls made are going to be paid, and that we can agree to this draw down of thirty thousand lots over the next three market days we're in the right direction . . . in order for us to make a commitment to you not to act unilaterally we need from you, the commitment that we're going to get paid the money that's due us." There is also at this stage some discussion as to whether brokers have been buying for FCO without instructions. One broker when asked says "not in a position to comment". The indication is that brokers, to the knowledge of all at the meeting or on the telephone, were certainly at this stage preserving their right to act unilaterally; thus at 147 it is appreciated that ADM or other brokers may be buying and that leads to others seeking [top of 148] a full picture from FCO of their physical positions and their futures position and cash position so that the matter can be taken to "my management and my credit committee and my business heads, Fluxo has the ability, and the, whether its physical sugar or the cash, to ride this out when the craziness stops . . .". There is further the recognition that there is a commitment to the exchange and that if people are to work collectively they will have to get the "OK" from the exchange.
(8) It is at this stage that a broker asked the question why they were sitting there talking instead of being in the market, covering their positions .The answer given is that the best bet is to spend time talking "to see whether we can come together in the middle". Still at  there is an appreciation that some brokers are liquidating positions and some are not. The unknown broker wants to know and wants FCO to know what the position is because that is "going to factor into the equation." That is inconsistent with any broker offering at this stage to be bound not to act individually.
(9) Mr Garcia then explains the plight of FCO and how it has arisen, before he withdraws from the meeting. There is then a period when Mr Garcia is not present. During this period the brokers are making guesstimates as to what FCO's position is [154-156]. There is further recorded how New Edge have been compelled by the exchange to do something . There is a suggestion that the exchange should be in on the conversation . AG says at  that "obviously it's difficult for everyone, perhaps to speak about committing round liquidation. Obviously you know we heard today . . . that ADM had already forced liquidated him". The suggestion is that the brokers should form some plan to get the positions down so as to comply with the exchange and that FCO should make a commitment to resume payment of margins and then "with the plan we have, we then going to have to go to the exchange to get them to sign up to the plan . . ." He then finishes by saying "I think the only way that we are going to resolve anything is for us to go as a group to come up with a plan that he agrees to, and we go and sell it to the exchange because, without that, increasingly, one or more of us are going into a forced liquidation position". AG then recognises that "it's difficult for everyone to commit but, I mean in principle, and I am not sure we can all, everyone of us is going to be able to give 100% commitment of our senior management, but I mean broadly, for the individuals that are here today, do we believe that as far as we can, that we will be able to commit to, you know, not liquidating his account, if he gives us an undertaking to pay margins." AG asks whether "there are people that, irrespective you know, its going to be beyond their control?"
(10) Thus AG is putting forward as a possibility that the brokers at the meeting put together a plan (unspecified) that can be taken to the exchange. It is not in the language of a binding contract. The response in any event is important . MCA say "He has to ensure he can pay margins - this is a condition from MCA – its too late for tonight, tomorrow morning he must pay cash, it has to be first thing". An unknown refers to the fact that "we are being asked to sit here with our head in our hands and the market runs up and they take more debt". MO [bottom 161] gives a calculation of what will have happened yesterday, i.e. probably a loss of $100 million, with Firmat and ADM having liquidated.
(11) There is a discussion about ADM being at the meeting; it seems having remained silent for a while that they were, and they present a very bleak picture of FCO's chances of persuading any banks to give him finance [bottom 162]. Just before that MO is saying that they need margin paid and that if that occurs then we can continue to discuss strategy but if not "I guess the only strategy that can be discussed is, how does everyone liquidate?"
(12) Then Mr Garcia comes back into the meeting at  - he makes a proposal. He says that for 1st payment yesterday "We think that we are ok to pay". (That seems to be a different approach to his original proposal which involved no margin being paid until all margin could be financed). He then says that for the second "we have no yet the numbers and I also don't know how many companies bought, and what they bought.." (That indicates he knows some brokers have been buying despite the meeting and is aware brokers are acting individually) He then said that he needs to talk to two of his banks for "second and the next day". He then hopes that they can work together –"if not, I don't know the result because I don't know if tomorrow one more will buy 10 thousand lots, and destroy the market tomorrow morning". He says he does not know what it will cost. (That seems to be a point made to persuade brokers in their own interest to avoid that result). He suggests without much specificity that he wants the brokers and FCO to work together and if FCO comes up with the money "You group will have a talk with exchange to have another solution to comply with them, and put down the mark, the spread, put down the position, without making a show the movements in price. In principle, that's it"
(13) The above does not seem to me to be an offer capable of acceptance to form even a conditional contract because it is quite unspecific but in any event the response to his proposal is first that FCO could be doing something by giving instructions now to buy. He is asked whether, if brokers got their money, FCO would agree to giving orders to reduce their position by 10,000 lots a day, and "we've spoken to Exchange". That seems to indicate that some brokers have sought to clear matters with the exchange, but during the next period of the conversation it becomes clear that the brokers wish to work to the timetable set by the exchange and not to negotiate with the exchange themselves. Certain of the brokers explore with Mr Garcia FCO's positions and what he might do [page 167] and it is at this stage that the brokers press FCO for instructions to buy before the market closes. The anxiety being expressed is for example by "Andy" that "they told me [that is the exchange] I have to cover something today." AG says "The exchange has said to me they expect every member to reduce their position by something today" . AG then announces that he has in fact bought one thousand March May . . . we are going to have to do something to the exchange" . It certainly does not appear that any broker at this stage is offering to agree not to act individually while obligations are owed to the exchange.
(14) No instructions are in fact forthcoming from Mr Garcia for FCO, and the market then closes. This is an important moment in the meeting because Mr Garcia has refused to give any instructions which might help to ease the position. The brokers as a result recognise they may have problems with the exchange – AG is saying the exchange is going to ask why there was no liquidation that day. IP of Man is also saying that it was not too late to give instructions. Some at least of the brokers want to explore whether there is still something that can be done and Mr Garcia is asked "what he feels he wants to do now?" . He says "I will try to have answer about money not for one day for few days for morning with the expectation that we will be together with me to manage this situation . . also . . . you talk one of you or all of you will talk with the exchange . . ." Bear Sterns offer to speak to the exchange but say they need some gesture from FCO "so at least the margin payments from yesterday is something that will be needed" IP of Man says "committed to help" but "I can't go any further if we don't have anything in hand". An unknown then says FCO cannot make selective margin calls "You've got to make everybody's margin calls, otherwise you are in default".
(15) None of what is being said by the brokers at this stage is the language of an offer to give up contractual rights. Most importantly Mr Garcia does not understand it to be so because his response is to say [mid 172] "I am not interested in this conversation to eliminate your rights, if you collectively tomorrow morning this time to liquidate I have no, no nothing to do against. Maybe I will only have later on, the possibility to claim against you because you made not? But you have the right and I am not here to tell you that you have no right. But believe me it was a surprise to me that was important to sell this morning before the meeting, it was a real surprise. Because of course there will be a lot of pressure everywhere, but everybody need be reasonable. . .".
(16) If there is any meeting of minds at all at this stage, it seems to me to be one recognising that the brokers have their contractual rights, albeit there is a hint that FCO might have a point on the brokers' contracts. This again seems to me an important moment at which for some brokers and possibly also FCO any attempt to reach even some loose non-binding arrangement has foundered.
(17) DY of Clifford Chance then seeks to suggest that there may be room to make progress, if FCO makes the brokers comfortable about their margin paying ability. One broker then asks whether he can go back to his managers and say "Manoel is going to make his call from yesterday?" [bottom of 172]. There is then an exchange in which an unknown broker seeks to get a commitment from FCO not simply that they will meet tomorrow and be told whether FCO will pay but whether FCO are actually going to pay on 18th. An unknown is recorded as saying that "I think we have to walk out of this room and go back to our managements with something concrete, and not just a commitment to meet tomorrow" Mr Garcia's response is to say he will work with his men but "it makes no sense to pay margin calls today and have no support tomorrow".
(18) Insofar as it can be said that the brokers were still interested in seeing whether some plan could be worked out that was only on the basis that they had a commitment that FCO would make a payment (something that previously Mr Garcia was prepared to give at least in relation to one day) but that is a commitment he would not now give. At this stage I would construe the conversation as having failed to reach any agreement.
(19) Thereafter however there is an agreement to divide up the 1000 lots, which one broker let it be known he had bought on FCO's behalf. There is then discussion as to the time of the meeting tomorrow and thereafter at  a broker Fabrice? is recorded as saying can we agree one or two more things - the first relates to whether the brokers should meet privately on 18th, and the second is "should we get, in order to show again activity and understanding from Manoel, should we get collectively another order . . so that we start something, we show something to the exchange to show we are as a unity? And also it show the commitment that we are not going to start buying for ourselves". Mr Garcia then says he will provide an overnight order for "three, four thousand".
(20) No broker states at this stage that they agree that they are committed not to start buying for themselves. Indeed many have been doing just that. Against the background of the obligations owed by the brokers to the exchange and of the fact that certain of the brokers had said categorically that they needed a commitment from FCO that margin would in fact be paid, which they had not got, in my view it is not arguable that silence in response to Fabrice's statement could be taken as acceptance by all brokers of a commitment that they were not going to be buying for themelves until the meeting the next day.
(21) In any event however there is then an important interchange:-"JC: This is John Coffin, may I suggest one thing, if we could be a bit more specific in this so that somebody can talk to the exchange and if we can get this concrete enough so that we can say to the exchange, we have a potential agreement to take the pressure off so that the exchange can tell the world that the pressure is off, and it will save a lot of problems. But we have to have something fairly specific to talk about.Unknown: An agreement. Well we could say in all honesty that an agreement has been reached in principle, if we don't get paid –Unknown: In principle's not what –Unknown: I think the big thing, the hold up on a lot of it is seen as a commitment of the cash and a commitment of it actually arriving, and I think that's ah going to be the key to us moving forward. I think its fair to say that if the money doesn't come in there's going to be ah -"
(22) It is not clear to me precisely what the agreement in principle is thought to be. Indeed JC seems to be saying that they have not yet got anything specific to talk about. An unknown also seems to be saying they do not have the commitment and also seems to recognise that if the money does not come in that will lead to only one result. It does not resonate with consensus.
(23) The next day the brokers met again; this meeting is ultimately of seven brokers who still have open positions. Some thus have closed out their positions with FCO completely but others including Man seem to have done some buying without closing all positions out. The brokers present at the meeting seek to discover whether brokers were acting unilaterally or whether they were acting on instructions from FCO. The response would seem to be clear that all acted without instructions. Mr Garcia ultimately arrives and is very upset about the extent of the trading that has taken place. He however does not allege any breach of contract. The comment recorded at page 211 after Mr Garcia had left the meeting is of interest "Unknown: Obviously what upset him the most was that we were all together yesterday in a room trying to work this out whilst some people were actually liquidating his positions." To which TF responds "Under exchange requirement that they do that" The unknown does then say "Well it seems to be a lot more than the exchange requirement is what he told us . . .". But even if some of the buying was due to "exchange requirement", the point remains. It was inherently unlikely that the brokers would be agreeing to give up a contractual entitlement to act individually particularly when they may be required by the exchange to act.
(24) I need no persuading that it was the hope of most of the brokers that those taking part in the meeting would so far as possible not act unilaterally while there was a hope of working out some plan with FCO that could be taken to the exchange and while there was a hope that FCO would meet margin calls. That itself is some distance from there being a contract that they would not do so. But once FCO refused to give instructions to buy and once Mr Garcia was making clear that he was not committed even to pay the margin actually due even that hope was fast disappearing. If one adds that many brokers were in fact acting unilaterally and the price was going up as a result, that hope was becoming even fainter.
(25) In that context it would be unlikely that the brokers would be offering to waive their contractual rights to act individually, and it was unlikely that Mr Garcia had any expectation that they would. I, in fact, suggest that his own words showed he had no expectation that they would give up their entitlement, and he did not understand them to be offering to do so. All he could do was to seek to persuade them by reference to the disaster that would occur, otherwise to try and make some plan for liquidating his positions or managing his positions to take to the exchange which would have the effect of minimising FCO's losses and thus the likely losses of the brokers.
Lord Justice Longmore:
Lord Justice Scott Baker :