On February 2, 2022, the Quebec Court of Appeal confirmed in part Mr. Justice Thomas M. Davis’s trial decision in KPH 11 c. Richardson Wealth Limited (Richardson GMP Limited), 2022 QCCA 148 condemning two clients of a securities broker to pay close to 5 million dollars after having failed to cover margin calls. This post only addresses the first ground of appeal tied to the margin calls and subsequent liquidation of securities in the clients’ accounts.

The facts of this case are simple. Two sophisticated clients of brokerage firm Richardson traded heavily on margin. Richardson uncovered a flaw with its platform that affected the calculation of allowable margins and subsequently proceeded with a recall of its clients’ margins. After the margin calls went unanswered for several days, the broker liquidated the securities in its clients’ accounts. The sales resulted in a hefty overdraft which the broker claimed from its clients. The broker was successful at trial.

On appeal, the clients attacked the trial judge’s finding that the broker had not acted abusively in connection with the margin calls and subsequent liquidation of the securities in the accounts. The Court of Appeal dismissed this ground of appeal as the clients failed to demonstrate that the key findings of the trial judge were tainted by one or more palpable and overriding errors.

Here are the key findings of the Court of Appeal:

  • The margin calls flowed from the discovery of a mistake made by the broker in good faith in the calculation of allowable margins.
  • This mistake allowed for equity deficiencies that exposed the broker to intolerable financial risk and amounted to a breach of the contractual agreements with its clients and a breach of the relevant regulatory requirements.
  • The relevant contractual provisions
  • afforded the broker extensive discretion regarding the margins made available to its client,
  • required that any margin call be promptly met and
  • allowed the broker to liquidate securities from the accounts if a margin deficit was not rectified when called.
  • The Court record contained evidence that the discretion afforded in the contractual documents reflected industry standards and practices.
  • The clients had extensive experience and expertise in options trading. Therefore, they knew or should have known that the broker enjoyed extensive discretion in relation to the margins and that any margin call would have to be promptly met. They also knew or ought to have known of relevant usages as well as applicable regulatory requirements, including that a margin call could quickly be enacted by the broker.
  • The broker afforded the clients several days to cover the margin calls, way above the industry practice of 24 hours, and liquidated the securities over a 30 day period. During this timeframe, the trial judge found that the clients had made little effort to respond satisfactorily to the margin calls.
  • Last but not least, there are strong public policy reasons in upholding the contractual rights of brokers to make margin calls and to insist that they be promptly met, which explain why clients’ claims asserting that their brokers acted abusively while making margin calls are rarely successful.

The author would like to thank Mr. Simon Mayrand, student at law, for his valuable contribution to this article.