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England and Wales High Court (Queen's Bench Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Byblos International Fund Llc v IFX Markets Ltd  EWHC 346 (QB) (27 February 2009)
Cite as:  EWHC 346 (QB)
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| Byblos International Fund LLC
|IFX Markets Limited
(formerly known as IFX Limited)
Mr Francis Tregear QC and Mr Alexander Pelling (instructed by Streathers) for the Defendant
Hearing dates: 28-30 January, 2-5 February 2009
Crown Copyright ©
Mr Justice Simon :
IFX will, on the terms described in this Agreement, undertake general investment and dealing services with Customers … introduced to IFX by the Introducing Broker, including, without limitation, execution of transactions both on exchange and off exchange (which may include margined transactions), in or in connection with the following investments and other assets and interest in them: Foreign exchange, currencies, certificates of deposit, securities … Contracts for Difference … and any spot transaction, forward, futures, option … swap, index or derivative, whether or not relating to any of the foregoing, or combination of these; and any other services agreed upon between IFX and the Customer.
The Introducing Broker will comply with all applicable provisions of law and regulations …
3. Services to be Performed by IFX
In addition to the obligations required by paragraph 1 and 2, IFX will perform the following services provided IFX and the Introducing Broker have been duly authorised by the Customer where appropriate and subject always to IFX's Terms of Business, a copy of which is attached:
3.2 [a] IFX will maintain an accurate set of books and records of all transactions executed or cleared through it. Inadvertent omission or inaccuracy in such prescribed books and records shall not be deemed a breach of this Agreement provided such omission or inaccuracy is promptly cured after discovery.
3.2 [b] IFX shall have no obligation to the Introducing Broker or Customers to investigate the facts surrounding any transaction that it may have with the Introducing Broker or Customers or that the Introducing Broker may have with the Customer or other persons. Notwithstanding the foregoing, IFX may take any action it deems necessary and proper on behalf of any Customer's account, without prior notice to the Introducing Broker, as IFX, in IFX's discretion and judgement, deems necessary for the protection of such Customer's account.
4. Duties of the Introducing Broker with Respect to Customer Accounts
In addition to the obligations required by paragraph 2, the Introducing Broker will be responsible for the following:
4.1 … prior to introducing any Customer account to IFX, the Introducing Broker shall explain in writing … to each Customer the relationship between the Introducing Broker and IFX, including, but not limited to, the fact (i) that IFX and Introducing Broker are separate business entities and are not affiliated in any way, (ii) that IFX will execute transactions for Customers solely as principal and that IFX will deal on an execution only basis and will not provide or be under any obligation to provide 'best execution' or any advice on the merits of any transaction …
6. Independent Intermediary/Supervisory Responsibilities
IFX and the Introducing Broker will, independent of one another, supervise the activities and training of their respective … employees … in the performance of their functions, and neither shall be responsible for the other's officers …
Nothing in this Agreement shall constitute a partnership or joint venture between the parties or constitute either party hereto the employee or agent of the other and, in particular, shall not constitute the Introducing Broker as the agent of IFX for any purpose, the Introducing Broker [is] acting as agent of or advisor to the Customers ...
The Introducing Broker will be entitled to receive 50% of the Net Income generated by accounts directly introduced to IFX by either the Introducing Broker or by one of the Introducing Broker's clients or contacts, to be paid monthly in arrears, during the term of this agreement. Net Income is defined as gross income generated by such clients (including, but not limited to, any trading, mark up, commission, rebate and/or fee income), less any trading errors, third party commissions and any [Account Executive] and/or [Introducing Broker] payouts.
Associated Employee Costs will be deducted from the Introducing Broker's 50% share of the Net Income. Associated Employee Costs are defined as the salaries and the Employer's National Insurance Contributions of, and any travel and entertaining costs incurred by, any employees of IFX who are employed specifically by IFX to service accounts introduced by the Introducing Broker, each to be agreed on a case by case basis.
IFX shall have the right to set-off and apply any Net Income not yet paid by it to the Introducing Broker against any amounts in respect of which the customer is in default to IFX.
12. Confidential Information
… IFX represents and warrants that the names and addresses of the Customers of the Introducing Broker which come to the attention of IFX under this Agreement are confidential.
13. Entire Agreement, Termination, Assignment, Waiver
13.1 This Agreement contains the entire Agreement of the parties with respect to the subject matter hereof … This Agreement may be modified only in writing signed by both parties. This Agreement may be terminated without cause by either party on 45 days' prior written notice to the other … [The obligations set forth in paragraphs 9-12 will survive termination] … Failure or delay in exercising any right under this Agreement is not a waiver thereof …
13.2 Notwithstanding the above, IFX undertakes to continue to pay to the Introducing Broker any Net Income due to the Introducing Broker, under the terms described in clause 10 above, on all accounts already introduced to IFX, either by the Introducing Broker or by one of the Introducing Broker's clients or contacts, and for as long as such accounts continue to trade with IFX.
13.3 In the event that this Agreement is terminated by either party, for whatever reason, for as long as there are accounts trading with IFX, which have been introduced to IFX either by the Introducing Broker or by one of the Introducing Broker's clients or contacts, then the Introducing Broker … will be entitled, subject to giving reasonable notice, to review the books of IFX in order to verify the calculation of the Introducing Broker's 50% share of Net Income and any subsequent deductions.
(1) The transactions covered by the IBA (which were defined in Clause 1) are expressed widely, and included Contracts for Differences and Swaps.
(2) IFX was under an obligation (Clause 3.2[a]) to maintain an accurate set of books and records of all the Byblos transactions executed or cleared through IFX.
(3) IFX was described (in Clause 4) as executing business for customers 'on an execution only basis' and without any obligation to provide 'best execution', or advice on the merits of any the transaction.
(4) Although they were employees of IFX, the work of the Associated Employees in the Byblos team was to be supervised by Byblos, in the person of Mr Hachem (Clause 6).
(5) There was an inherent tension between the confined role which the members of the Byblos team were obliged to perform under their FSA authorisation, and the terms of Clause 6, which envisaged Byblos advising clients.
(6) The general intention of Clause 10 was that, although the Byblos team were employees of IFX, as a matter of accounting, the costs of the Byblos team would be deducted from Byblos's 50% share of the net income.
(7) The entitlement to remuneration under Clause 10 was drawn widely.
The nature of trading at IFX and the claims in the Action
Profits from CFDs
Profits deriving from 'Further Interest Charges'.
An account of the relationship between the parties
Complaints along these lines are commonplace to organisations where sales desks trade with each other because of the inherent conflict that arises in these situations … If we were satisfied that in fact the desk had not quoted a fair price either myself or the officer concerned (as appropriate) would see to it that the price was changed.
During the last hour of trading the day's value date could you please book any deals done straight into the account number given by [the customer] and allocate the 3 pips mark-up to 48100. This way any late deals done appear on the customer's statement.
Another example is an email sent in relation to a different customer,
Could you adjust both trades by 1 pips pls and pay to ZZZZN.
You have raised with us an issue concerning the proper calculation for monies due to us in respect of CFD trades and you have claimed that IFX have overpaid us £36,000.
We have been carefully looking into the position and in particular we have been considering the terms of our contract dated 27 November 2000.
It seems to us that a much wider issue is the calculation of monies due to us generally under the terms of the contract. Clause 10 of the contract stipulates that Byblos is entitled to receive '50% of the Net Income generated by accounts introduced to IFX by either the Introducing Broker (Byblos) or by one of the Introducing Broker's clients or contacts …', subject to certain deductions …
It seems to us on the basis of our investigations so far, for the purposes of your claim, that you have in fact only accounted for a proportion of Net Income. For example, it seems to us you have not included trading profits from positions initiated as a result of client trades, or profits generated by "the desk" which are dealings within the agreed definition of Net Income.
We would therefore request a full account of all sums due to us to date.
The issue of any monies claimed to be due to IFX can of course be dealt with as part of that issue, but obviously the overall position is what we must arrive at.
The reference to £36,000 was to a claim which IFX had made against Byblos.
Our client tells us that you have, since November 2000, only made payments to Byblos on the following basis. First, you only accounted to Byblos for Net Income from transactions where calls to IFX from Byblos' clients were first taken by Mr Hachem and his team. An arbitrary proportion of the profits and losses from those transactions went into a special account. Half of the profits were then attributed to Byblos. You then purported to deduct Associated Employee Costs as defined in clause 10 of the Agreement. You have therefore only accounted to Byblos for a proportion of the Net Income which is due to it under clauses 10 and 13 in respect of foreign exchange transactions.
In addition, the following are activities carried out by you which are within the definition of Net Income and for which, we are instructed, you have never accounted for any profits:
(1) profits from positions initiated by you as a result of clients' trades
(3) (sic) the profits generated by SWAPS (ie, rollovers of customers' open positions)
(4) interest on clients' money and other associated transactions
(5) profits generated by you from Byblos clients trading contracts for difference ('CFDs') …
The Claims and the issues
(1) Profits generated as a result of internal transactions ie, the IFX main desk transactions.
(2) Profits from foreign exchange transactions directly between the IFX main desk and Byblos's customers.
(3) Profits from swaps/rollovers.
(4) Profits from CFDs.
(5) Profits deriving from 'further interest charges'.
The applicable law
Approach to construction
Estoppel by convention
Estoppel by convention may arise where both parties to a transaction 'act on assumed state of facts or law, the assumption being shared by both or made by one and acquiesced in by the other.' The parties are then precluded from denying the truth of that assumption, if it would be unjust or unconscionable to allow them (or one of them) to go back on it. Such an estoppel differs from estoppel by representation and from promissory estoppel in that it does not depend on any representation or promise. It can arise by virtue of a common assumption which was not induced by the party alleged to be estopped but which was based on a mistake spontaneously made by the party relying on it and acquiesced in by the other party. It seems, however, that the assumption resembles the representation required to give rise to other forms of estoppel in that it must be 'unambiguous and unequivocal.'
The estoppel does not, however, apply prospectively: once the common assumption is revealed to be erroneous, the estoppel does not apply to future dealings, see Chitty §3-112.
Discussion and Conclusion
The factual background
(1) The parties were operating in a market with which they were both familiar and experienced.
(2) There was a common understanding that forex transactions might involve,a) large trades (up to $200million),b) relatively small profits for Byblos and IFX on each transaction,c) a large number of transactions so as to yield profits, andd) high market volatility, with prices changing in a matter of seconds.It was, to use Mr Tregear's phrase, 'a high speed market'.
(3) The extent to which either party could 'adopt a position', or trade as a principal, was confined by mandates.
(4) A main trading desk would have a large number of different positions with many customers and market counterparties which would make it difficult to determine a profit from any particular transaction in which it engaged. The evidence of Mr Owens, which both sides relied on, was that it would be virtually impossible in the case of relatively small trades.
1. Profits generated as a result of internal transactions: the IFX main desk transactions.
Estoppel by Convention
2. Profits from foreign exchange transactions directly between the IFX main desk and Byblos's customers.
3. Profits from rollovers
4. Profits from CFDs
5. Profits deriving from 'Further Interest Charges'
Payment of bonuses
Form of Relief
(1) Byblos is not entitled to any relief in relation to Claim 1.
(2) Byblos is entitled to declaratory relief in relation to Claim 2.1 limited to unaccounted internet trades by Byblos customers with the IFX main desk, prior to 3 November 2003.
(3) Byblos is not entitled to a declaration in relation to Claim 3, save in relation to the period after 31 January 2004.
(4) So far as Claim 4 is concerned, (i) IFX are not entitled to deduct costs in respect of overheads in respect of commission payable after termination of the IBA; and, (ii) Byblos is not entitled to a declaration in relation to the financial charges in respect of CFDs, save in relation to the period after 31 January 2004.
(5) Byblos is not entitled to a declaration in relation to Claim 5, save in relation to the period after 31 January 2004.