UK: “Salesman’s Opinion” Does Not Create Duty: JP Morgan Chase V Springwell Navigation Corp

Last Updated: 26 June 2008
Article by Tim Strong and Ivan Wilkinson

Following the Court of Appeal's ruling last year in IFE v Goldman Sachs, Gloster J's detailed recent judgment in JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm) has affirmed the principle of caveat emptor in the capital markets. The ruling indicates that "experienced investors" in the bond markets will face an uphill battle if they wish to argue that banks - via their salesmen - owe them any advisory duty or responsibility for investment decisions, where this would be inconsistent with the disclaimers and other terms expressly set out in the deal documentation.

Background

Springwell Navigation Corporation was the investment vehicle of the Polemis family, the owner of a large Greek shipping fleet. During the 1990s, Springwell invested heavily in emerging markets bonds and related instruments. The investments, whose face value exceeded US$700 million, were acquired through JP Morgan Chase ("Chase").

Much of the portfolio was invested in Russia and other CIS states and, following the 1998 Russian default, heavy losses were incurred. Proceedings seeking a declaration of no liability were commenced by Chase in 2001, with Springwell counterclaiming damages soon after - and hence becoming the effective claimant.

Springwell made a wide range of claims against Chase. Its primary claims, based on either breach of contract or negligent misstatement, were based on the contention that Chase owed Springwell a duty of care to advise on the overall balance of Springwell's portfolio and the suitability of new investments. This alleged advisory relationship was said to have arisen out of the regular discussions about potential investments which had taken place in 1990- 1998 between Adamandios Polemis ("AP"), who was responsible for investment decisions at Springwell, and Justin Atkinson ("JA"), a debt security trader at Chase. In the alternative, Springwell also claimed against Chase for misrepresentation and breach of fiduciary duty.

In its defence Chase relied, amongst other things, on the numerous disclaimers and limitations of liability contained in the contractual documentation relating to the transactions, including: a Master Forward Agreement, a Global Master Repurchase Agreement, two letters setting out terms for "Dealings in Developing Countries Securities", and also the terms of many of the instruments themselves, along with various associated term sheets and confirms.

Breach of contract/negligent misstatement

Springwell claimed that Chase owed contractual and tortious duties to advise it as to the appropriateness of investments and the overall composition of its portfolio. Springwell claimed that the opinions and recommendations expressed by JA to AP between 1990 and 1998 constituted ongoing financial advice from Chase, giving rise to a duty of care in contract or tort. Chase denied this, saying that any of Mr Atkinson's "recommendations" merely constituted marketing, which did not therefore give rise to any such duty.

It was clear on the evidence that the relationship between Chase and Springwell extended beyond a simple "execution only" relationship. JA and AP had had regular discussions about the merits of various investment products, and JA had clearly had an influence on Springwell's general overall investment strategy.

Mrs Justice Gloster accepted that JA was going beyond simple "execution only" transactions, and that this may have given rise to a low level duty of care (essentially requiring the accurate description of products). However, any such duty did not extend to providing "investment advice" entailing responsibility either for the selection of particular investments, or for monitoring the composition of the portfolio as a whole. In line with earlier authorities in this area1, she described the following as the significant factors against the finding of that wider duty of care:

  • Sophistication of Springwell. Although Springwell (as represented by AP) knew significantly less about the capital markets than Chase, and although AP did not always read contractual documentation before signing it, Springwell was nonetheless a sophisticated investor with commercial acumen and with significant experience in capital market investments.

  • None of the signs of an advisory relationship were present. There was no written agreement, which was not conclusive, but was a strong pointer against the existence of a duty (particularly given that Chase's, and the market's, standard practice was to record contractual relationships in written documents). Nor were there any telephone recordings or internal memoranda making reference to the existence of an advisory agreement, or any analyses of Springwell's investment objectives or portfolio statements (as one would have expected if there had been an advisory agreement).

  • Independence of Springwell's investment decisions. Although JA's recommendations and opinions had influenced AP, that latter did not always follow JA's recommendations and, in the final analysis, the judge found, it was AP's desire for high returns which drove the investments. Furthermore, the advice provided by a salesman, even if relied upon, did not create an investment advisory relationship with an associated duty of care.

  • The existence of a duty of care to advise was in any case clearly ruled out by the various disclaimers in the contractual documentation between the parties, and in particular by Springwell's acknowledgement that it had placed no reliance on any advice/representations from Chase in its decision to invest. As a result, Springwell would have been contractually precluded from claiming for losses based on its investment decisions, even if a prima_facie duty of care had otherwise been made out. Having contractually defined the scope of its relationship with Chase, Springwell was not entitled to make a claim in tort which went beyond the ambit of those contractual terms.

The judge gave short shrift to the various arguments that the bank should not be entitled to rely on its written disclaimers of liability. She rejected the challenges to their "reasonableness", under UCTA 1977, for two reasons. First and foremost, in line with the Court of Appeal's ruling last year in IFE v Goldman Sachs2 , she held that most of the relevant clauses were merely clauses defining the extent of the parties' relationship, rather than exclusion clauses, so did not fall within the ambit of UCTA (or, as regards misrepresentations, the Misrepresentation Act 1967). Second, to the extent that there were any residual disclaimers or exclusion clauses falling within the ambit of the statutory provisions, the judge held that they could not be construed as unreasonable given the commercial context and the fact that the parties were of equal bargaining power.

Springwell had also attempted to argue3 that it should not be bound by the various disclaimer wording, as its effect had not been clearly drawn to Springwell's attention. The judge, however, commented that this principle must have "a very limited application to signed contracts between commercial parties operating in the financial markets" and certainly did not apply in the present case - given that the relevant disclaimers were standard for the transactions in question, and did no more than to confirm that Chase did not have an advisory relationship and would not be responsible for Springwell's investment decisions.

Misrepresentation

Springwell claimed that Chase/JA had made a number of misrepresentations in relation to the suitability of various investment products and particularly misrepresentations about the Russian market.

The judge dismissed all of the misrepresentation claims. Again, this was in essence because of the effectiveness of the various contractual disclaimers, the result of which was that Chase had not made any actionable representations at all. Furthermore, Springwell also expressly confirmed in the contractual provisions that they were not relying on any representations and made the decision to invest independently. The judge concluded that JA's statements were a "salesman's opinion" and that no reasonable person would have placed reliance on these statements in the light of the contractual provisions. Springwell were therefore contractually precluded from bringing any claim for misrepresentation.

Breach of fiduciary duty

Springwell also claimed that Chase were in breach of their fiduciary duties by acting in their own interests, to the detriment of Springwell's interests, by taking advantage of AP's lack of expertise in order to offload unwanted bonds and also by failing to seek consent or failing to disclose the excessive profits they received.

All of these grounds were rejected by the judge - she held that, as it had been established that there was no advisory relationship, it followed that there were no fiduciary duties. In any event, she held that the investment proposals were consistent with Springwell's investment objectives and attitude to risk.

Other issues

In the light of the above, the judge did not strictly have to make any rulings on breach, causation, quantum, or contributory negligence. She did, however, make some interesting indicative rulings on these further areas. For example, she said that even if Springwell had been successful, its claim would have been reduced by up to 70 per cent for contributory negligence for an inappropriate reliance on an implied agreement. This was because it would be an abdication of Springwell's own responsibilities to expect a full advisory service but never to have agreed or confirmed the terms of that service, never to have clearly explained its investment objectives, and never to have raised any concern about the investments acquired.

Conclusion

Yet again this decision shows the UK courts' reticence to interfere with the express terms of capital markets contracts. It therefore illustrates the prime importance, for participants, of ensuring that the contractual documentation reflects the reality of the perceived commercial relationship - and in particular that well-drafted clauses can be effective in limiting the extent of a bank's relationship with investors, and disclaiming responsibility for the latter's investment decisions.

Perhaps most significantly, this ruling demonstrates that investors who sign up to capital markets activity as "sophisticated investors", on arm's length terms, will be treated by the courts as responsible for their own investment decisions - even if in practice they have much less knowledge and expertise than the banks with which they do business. If this is not the relationship they want with their bankers, they will have to ensure, if they can, that the parameters of any wider advisory relationship or investment mandate are clearly and expressly agreed in writing.

Having said that, every case of course turns on its own facts, and even this judgment - which appears to represent somewhat of a "high water mark" for banks' defence arguments - leaves open the possibility of successful claims being brought by investors in different circumstances, for example where particular products have been misdescribed by salesmen and where the facts might lead to a different view being taken on the enforceability of any applicable disclaimers. This ruling is therefore unlikely to be the last word on claims of this type.

Footnotes:

1 For example Valse Holdings v Merrill Lynch International Bank [2004] EWHC 2471, and Bankers Trust International PLC v PT Dharmala Sakti Sejahtera [1996] CLC 518.

2 [2007] EWCA Civ 811.

3 Following Interfoto v Stiletto [1989] 1 QB 433.

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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