In Springwell Navigation Corporation v JP Morgan Chase Bank (formerly Chase Manhattan Bank) and Others  EWCA Civ 1221, the Court of Appeal has confirmed the decision of Mrs Justice Gloster and rejected claims by an investor for damages for negligent misstatement and misrepresentation.
Springwell was the investment vehicle of the Polemis family, who owned and operated a large Greek shipping fleet. During the 1990s, Springwell invested heavily in emerging markets, acquiring, through JP Morgan Chase Bank ("Chase"), a portfolio of debt instruments (principally GKO linked notes ("GKOs")) with a face value of over US$700 million. Springwell alleged that Chase owed it duties to give advice in relation to these investments; that that advice should have been given by reference to Springwell's conservative investment objectives, which were capital preservation and liquidity; that, instead, the Chase salesman involved, JA, recommended numerous emerging market instruments which were inappropriate and unsuitable, individually and collectively; and that the consequence of Chase's breach of duty was that when the Russian economy collapsed in 1998, Springwell suffered substantial losses, because it held a large portfolio of high risk and illiquid securities including derivatives devised by Chase.
Chase denied that it acted in an investment advisory capacity to Springwell; it contended that all it did was act as a seller of debt securities and that all investments sold by Chase to Springwell were sold on "an execution-only basis". Moreover, the claim that Springwell was conservative in its investment objectives and attitude to risk was belied by the facts. Chase asserted that the composition of the portfolio was the product of Springwell's own investment strategies and decisions and, in particular, the pursuit of high yields. Whilst Chase accepted that JA discussed market developments and products on the telephone with AP (who was the individual largely responsible for Springwell's investment portfolio) and, on occasions, offered his opinion on investment opportunities, it contended that none of this constituted investment advice in any real sense.
The decision of the lower court
Mrs Justice Gloster concluded that Chase owed no duty of care to advise Springwell either as to appropriate investments or as to the structure of its portfolio. She referred to a number of factors pointing to or against the existence of such a duty, including:
1 The Polemis family had vast experience in the highly competitive shipping industry and significant experience of banking and banking products. They were well able to understand the correlation of risk and reward;
2 The absence of any written advisory agreement was a further pointer against the existence of an advisory obligation on the part of Chase;
3 There was no evidence that, at any time, AP raised or discussed with JA, or anyone at Chase, the existence or scope of the advisory agreement that Springwell alleged that it had with Chase;
4 The Judge held that JA gave advice and recommendations to Springwell during his telephone conversations with AP. However, the giving of such recommendations and advice was part and parcel of the normal role of a salesman in the City of London and did not predicate the existence of a wider advisory relationship;
5 The Judge took into consideration a handful of internal Chase documents that referred to Chase as Springwell's "trusted financial advisor". She held that these documents did not pass between Chase and Springwell, nor did they reflect the terms of anything that was said at a meeting between them, or of anything that otherwise passed between the parties. More importantly, however, they were wholly inconsistent with the terms of the formal contractual documentation, which were unambiguous about the absence of advice or of any reliance by the customer on such advice; and
6 During the course of the banking relationship, the parties had entered into various contracts which contained provisions falling broadly into three categories:
- provisions setting out the terms and conditions of business;
- representations or acknowledgments as to Springwell's sophistication and its non-reliance upon any advice from Chase; and
- conventional exclusion clauses.
The Judge held that the terms of the principal contractual documents which had been entered into between the parties clearly showed that Springwell and Chase were dealing with each other on a stipulated and accepted basis that, whatever advice or recommendations may have been given by Chase in the course of their trading relationship, no obligations to give appropriate investment advice, or duties of care as an investment advisor, were being assumed. She found that the contractual documentation showed that the parties specifically contracted upon the basis of a trading and banking relationship which negated any possibility of a general or specific advisory duty coming into existence. On every occasion on which the parties came to document their contractual relations, they agreed that Chase was not required to give any advice, was not to assume investment advisory obligations or responsibilities, and that Springwell acknowledged that it was relying on its own judgement in entering into the transaction.
Springwell argued that it could avoid the consequences of the contractual provisions it had agreed with Chase because they were inconsistent with the existing advisory relationship between Chase and Springwell. Mrs Justice Gloster found, as a matter of fact, that there was no pre-existing advisory relationship between the parties but she went on to hold that the contractual provisions operated as a contractual estoppel. Accordingly, Springwell was precluded from making assertions of fact which contradicted the effect of the contractual provisions which Springwell had freely entered into with Chase.
Springwell appealed against certain aspects of this decision. This article focuses on some of the key findings of the Court of Appeal.
The misrepresentation claim
The Court of Appeal concluded that the misrepresentations alleged had, in fact, not been made. It further concluded that even if the alleged representations had been made they did not amount to actionable misrepresentations. The context was key. AP was a sophisticated investor who understood the significant risks attached to the GKOs. Chase's employee, JA, was merely giving his opinions on the qualities of the GKOs, as a salesman to a sophisticated investor, and was not stating particular facts. For a misrepresentation claim to succeed under the Misrepresentation Act 1967, Springwell had to show that each time JA had given an opinion on the nature of the GKOs it carried with it an implied statement of fact that he had reasonable grounds for holding that opinion. The Court of Appeal held that there was no such implied statement, because of the nature of the relationship between JA and AP, and AP's understanding of the statements made to him.
There was also no negligent misstatement. The Court of Appeal agreed with the Judge that there may be a "low level" duty of care on the part of a salesman not to make any negligent misstatements, and to use reasonable care not to recommend a highly risky investment without pointing out the nature of the investment. However, the Court of Appeal held that the duty of care must be viewed in the relevant context. Because there was no general duty of care on Chase to give advice, and given the Judge's findings on the nature of the statements made by JA and what AP knew about the GKOs and Russia, there were no actionable misstatements at all, let alone negligent ones.
The contractual framework
Chase argued that the non-reliance provisions in its contractual documentation meant that Springwell was contractually estopped from asserting that Chase had made any actionable misrepresentations concerning the GKOs. Springwell argued that a statement in a contract that one party acknowledges certain past facts, known by both parties to be false, cannot be converted into a contractual obligation on the giver of the acknowledgment that he will do or will not do acts in the future on the basis of that acknowledgement.
The Court of Appeal rejected Springwell's argument. It held that, subject to any reasonableness argument under Section 3 of the Misrepresentation Act, there was no legal principle which prevented such statements from being converted into a contractual obligation. The Court of Appeal concluded that Springwell, by signing the contractual documentation, must be taken to have read and understood it and was contractually bound by its acknowledgment that no representation or warranty had been made by Chase in relation to the purchase of the GKOs. Springwell was, therefore, contractually estopped from asserting that any actionable representations were made by Chase. Springwell was also precluded from claiming reliance on any of the alleged misrepresentations. Springwell had contractually agreed that the relevant Chase entity was not assuming any responsibility for statements made by JA. Further, a clause which stated that Chase was not liable for any loss unless such loss was caused by Chase's gross negligence or wilful misconduct excluded Chase's liability in any event.
Section 3 Misrepresentation Act 1967
The Court of Appeal then considered whether the relevant contractual provisions were caught by Section 3 of the Misrepresentation Act 1967 and, if they were, whether they fell foul of the reasonableness regime under the Unfair Contract Terms Act 1977 (UCTA). A term will fall within Section 3 if it excludes or restricts a party's liability due to any misrepresentation made by it before a contract was made by reason of such a representation. If it does, it will only be effective if it satisfies the requirement of reasonableness as set out in UCTA. The Court of Appeal held that a number of the provisions merely set out the terms on which Chase was agreeing to contract with Springwell and, therefore, fell outside the scope of Section 3. Although the restrictions on liability for loss, as well as the non-reliance provisions, were exemption clauses and therefore caught by Section 3, given the context, and in particular the fact that AP was a sophisticated investor in emerging market investments who was aware of the risks involved, the Court of Appeal found that the terms were reasonable.
This decision is clearly to be welcomed by banks. It confirms that a bank's salesman who, as a normal part of his role, offers personal opinions and recommendations, is not thereby assuming any wider investment advisory responsibility to his clients. It also reasserts the importance in English law of freedom of contract and contractual certainty. Parties are free to regulate or define their relationships in almost any way that they choose and the English Courts will be slow to disapply or circumvent freely entered into contractual provisions save where there is compelling evidence of clearly egregious behaviour. That said, in this case Springwell was a sophisticated investor which understood the risks in relation to its investment. Where a claimant is less sophisticated, it might be able to argue successfully that a higher duty of care should be owed and that non-reliance provisions fail the UCTA reasonableness test. Further, a claimant would not be bound by non-reliance provisions if it were able to establish a fraud claim.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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