Legal Updates

Commercial Law – Shares – Security – Liability - Indemnity Against Losses

The case of Walker Crips Stockbrokers Ltd v Savill [2007] concerned a claimant who was engaged by the claimant as an associate stockbroker acting as an agent for enterprises for the purpose of obtaining business from customers. His terms of engagement were set out in a written agreement.

After company restructuring, the claimant gave the defendant an associate agreement to sign. It was a term of that agreement that:

“…If as a result of any transaction carried out by an associate or any action on the part of any client of the associate or any failure to fulfil its obligations of a contract, any member of the [claimant group] suffers a loss and that loss was caused by the associate or his client directly or indirectly, then the associate would be responsible for the total loss”.

It was also a term of the associate agreement that:

“…An associate would not do or omit from doing anything in relation to his activities to cause the claimant to be in breach of any in-house dealing rules”.

In-house dealing rules stated that speculative positions would have to be conducted through a nominee account. Furthermore, it stated that a 25% security was required by way of stock or cash on deposit before any transaction could be carried out.

The associate agreement was signed by the administrative director of the claimant. However, the defendant amended the associate agreement, and then returned it to the administrative director. The administrative director subsequently struck through the amendments made by the defendant.

The defendant, in his capacity as an associate stockbroker (accepted as security for shares of a company called NADE) shares traded on an unlisted and unregulated market in the United States known as the Pink Sheet Market (“the Pink Sheet Market Shares”).

The claimant therefore brought proceedings.

It contended that the Pink Sheet Market Shares were the United States equivalent of AIM or OFEX stocks and thus should not have been accepted as security by the defendant. It further argued that it was an implied term of the associate agreement that the defendant would act on behalf of the claimant with due care, skill and diligence. In addition, the claimant said that the defendant had agreed to indemnify the claimant against losses which it sustained as a result of the failure of his clients to fulfil their obligation under the associate agreement.

The defendant contended that the provisions of the associate agreement were not binding upon him due to the fact that his amendments were struck out after he had signed. He stated that those deletions had not been agreed.

The court held that in this case the question of whether the defendant was bound by the associate agreement depended upon:

• The circumstances in which his amendments came to be deleted; and
• The legal consequences of such deletions in those circumstances.

The court felt that the defendant, in accepting the Pink Sheet Market Shares as security for shares of NADE was clearly taking a risk. This was because he understood that the claimant was not prepared to take such a risk and accept such shares as security.

In accordance with the in-house rules, the defendant should have ensured that worthwhile security was provided before undertaking the purchase of NADE shares for his client. Furthermore, the court believed that there had been a duty on the defendant to act with reasonable care, skill and diligence.

The court stated that in the performance of his duty to act with reasonable care, skill and diligence, he was under an obligation not to purchase NADE shares without there being adequate, realisable security of a value amounting to at least 25% of the price which was going to be incurred in acquiring the shares (despite his client’s instructions).

The substance of the obligation was not to accept inadequate security, including shares which have been difficult to sell for adequate amounts in the context of the trade to be secured. In such circumstances, it was held that the defendant had acted in breach of the implied term in relation to exercising reasonable care, skill and diligence in accepting Pink Sheet Market Shares as security for the purpose of the NADE shares.

Accordingly, the defendant was liable to indemnify the claimant in respect of the relevant losses it had sustained as a result.

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© RT COOPERS, 2008. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.