Bass, Berry & Sims attorney Chris Lazarini analyzed the court’s enforcement of an exculpatory clause in the context of a Trading Advisory Agreement. Where parties elect to include exculpatory clauses in their contracts, such clauses will be narrowly construed and will not be enforced unless the wording is unmistakable and clearly describes what the party is contracting away.
Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
RQSI Global Asset Allocation Master Fund, Ltd. vs. Apercu International PR LLC, No. 16-5559 (6th Cir., 3/27/17)
*Under Kentucky law, a gross negligence claim requires that the defendant acted with malice, willfulness, or with such an utter and wanton disregard of the rights of others that malice or willfulness may be assumed.
**Where parties elect to include exculpatory clauses in their contracts, such clauses will be narrowly construed and will not be enforced unless the wording is unmistakable and clearly describes what the party is contracting away.
In early 2015, RQSI entered a Trading Advisory Agreement (“TAA”) with Apercu, under which Apercu was to trade stock futures and options on margin. To facilitate the activity, RQSI opened a margin account at Societe Generale (“SG”). RQSI instructed Apercu and its principal officer to keep the margin balance in the $600,000 to $700,000 range, as it intended to close the account at year-end. Volatility in the options markets caused the margin balance to balloon and, in August 2015, SG issued a $42 million margin call. RQSI terminated Apercu, borrowed money to meet the margin call, and liquidated the portfolio. This suit followed, with RQSI alleging gross negligence, fraud, and breach of contract by Apercu and its principal officer. RQSI alleged multiple categories of damages resulting from Defendants’ actions.
The TAA had two damages provisions. Under Section 2, Defendants bore no liability to RQSI for losses, damages, costs, or expenses related to SG’s actions. Section 8 limited Defendant’s liability to losses caused by its gross negligence or willful misconduct. The district court dismissed all claims, finding that RQSI had waived losses related to the maintenance of the margin account under Section 2 of the TAA, and had not alleged malice sufficient to meet the standard for gross negligence under Section 8.
Conducting a detailed analysis, the Court reverses on the gross negligence and breach of contract claims, finding that RQSI stated a plausible malice claim by alleging that Defendants acted contrary to its instructions in retaliation against the stated intent to close the account at year-end. The Court reverses on some fraud claims, and affirms on others, drawing distinctions between facts and opinions.
The Court next finds the district court’s analysis of RQSI’s damages categories inadequate. First, applying Kentucky contract law, the Court holds that Section 2 of the TAA takes priority over Section 8, as Section 2 is more specific. Then, the Court considers which of RQSI’s damages categories may be precluded by Section 2’s waiver. Exculpatory clauses, it teaches, should be narrowly construed and their wording must be clear, so that a knowledgeable party knows what he is contracting away. If liability is proven, the district court should assess whether the claimed damages arose out of RQSI’s relationship with SG (in which case they would be waived) or stemmed from Defendants’ gross negligence or willful misconduct (in which case they would not be). If the damages result from both the relationship with SG and Defendants’ actions, the Court continues, those damages are recoverable. The Court remands the matter to the district court.
While the appeal was pending, the CFTC sued Apercu’s principal officer. RQSI asked the Court to take judicial notice of the CFTC proceedings and requested leave to amend its complaint. Defendants opposed, and the Court declines to rule, sending it back to the district court with a reminder that leave to amend should be freely granted when justice so requires.