CA-2024-001533 - [2025] EWCA Civ 1369

Contracts for Differences

Before summarising the facts, given their importance to the issues in the case, I should briefly outline the nature of CFDs. As indicated above, CFDs are financial derivatives – i.e. a financial product, the value of which is derived from another financial product.

The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 defines CFDs as including a contract, the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to the fluctuations in the value or price of a specified piece of property, an index or any other factor designated for that purpose (often referred to simply as “the underlying”).

One essential difference between becoming a party to a CFD and buying or selling a specified piece of property, such as a share in a company, is that the parties to a CFD do not intend the underlying property which is the subject of the CFD actually to be delivered, but that only a monetary difference shall be payable at the end (close out) of the contract. In City Index v Leslie [1992] QB 98, Leggatt LJ explained that,

“A contract for differences is a contract intended by both parties to end in the payment of differences. For this purpose a difference is the difference between a sale (or purchase) price at the time when a contract is made and the corresponding purchase (or sale) price when it is closed out. In order to give rise to a difference, the price by reference to which the sale or purchase is notionally supposed to take place is the published price of a stock, commodity or other property, or alternatively of an index.”

Because CFDs do not require actual delivery of the underlying assets, they create a financial exposure to fluctuations in the price of a specified quantity of the underlying assets, without any need for the buyer actually to pay the full (or any) price for those underlying assets. This means that the price of a CFD is different from the price of the underlying assets. Such ability of CFDs to create a financial exposure to movements in the price of potentially large quantities of underlying assets without the need to pay the price for them is generally referred to as “leverage” or “gearing”, and can result in gains or losses for a counterparty which are many times the price of the CFD itself.

These characteristics of CFDs have the consequence that whilst CFDs can be used for strategic management of the risks attached to other investments (hedging), they are more frequently used for pure speculation. Indeed, a number of old cases held that cash-settled CFDs were void as gambling contracts, contrary to the Gaming Act 1845: see Universal Stock Exchange v Strachan [1896] AC 166.

Trading in CFDs is usually done by reference to “lots”. The concept of a “lot” refers to a standardised quantity of the particular underlying asset to which the CFD refers. However, the size of a standardised lot varies from market to market, so without further information as to the particular underlying asset and the particular market to which the CFD relates, it is impossible to calculate the size of the transaction and the exposure to which it might give rise. It is, however, clear that the greater the number of lots or proportion of a lot to which the CFD relates, the greater the potential exposure for the investor.