UK: The High Water Mark In The Defence Of Banks?

Last Updated: 28 September 2008
Article by Sue Millar

It was in August 2007 that the subprime problems in the American Mid-Western mortgage market began to emerge and the term "credit crunch" first entered the public consciousness. Twelve months on, the much vaunted deluge of litigation has yet to materialise but there has been a slow, steady trickle of claims entering the public domain. The litigation between Cassa di Risparmio di San Marino and Barclays Capital is just one example.

A recent judgment of Mrs Justice Gloster in the Commercial Court in JP Morgan Chase Bank –v- Springwell Navigation Corporation provides useful guidance as to how the English Courts are likely to approach these emerging claims. Although not itself arising out of the credit crunch, the Springwell litigation involved many similar issues.

First, a brief review of the facts: Springwell was the investment vehicle of the Polemis family, who owned and operated a large Greek shipping fleet. During the 1990s, Springwell invested very heavily in emerging markets, acquiring, through JP Morgan Chase Bank ("Chase"), a portfolio of debt instruments with a face value of over US$700 million. Springwell alleged that Chase owed it duties to give advice in relation to the investments which it bought; 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 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

In a 282 page, fact-heavy judgment, 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:

  • Springwell's Sophistication As An Investor

    The judge found that the Polemis family had vast experience in the highly competitive shipping industry and were well able to understand the correlation of risk and reward. AP had significant experience of banking and banking products and had rapidly acquired vast experience in emerging markets. Springwell was clearly a sophisticated investor;

  • The Absence Of An Advisory Agreement

    In the Chase operational environment of the 1990s when the evidence showed that it was its habitual practice to record the terms of its contractual relationships in written documents, the absence of any written advisory agreement was a further pointer against the existence of an advisory obligation on the part of Chase;

  • The Absence Of The Indicia Of An Advisory Relationship

    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. There was no substantive discussion about Springwell's investment objectives. Moreover, Springwell did not receive portfolio statements from Chase. Importantly, prior to the commencement of related litigation in the US, Springwell had never asserted that it had an investment advisory agreement with Chase;

  • The Salesman's Role

    The judge held that JA gave advice to Springwell during his telephone conversations with AP. That advice variously took the form of recommendations, expressions of views and opinions as to the state of the market, the relevant merits of various investments, or as to what course Springwell should take, whether in relation to a particular investment or more generally. 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;

  • The Role Of Chase

    The evidence showed that Chase had made a marketing presentation to Springwell in which it proposed a diversification of Springwell's portfolio. The judge held that this could not be characterised as an assumption by Chase of any responsibility to give Springwell wide-ranging investment advice as to the structure of its portfolio. In any event, however, the evidence also showed that AP was pointedly dismissive of Chase's diversification proposals. In those circumstances, he could not lay the responsibility at Chase's door for his own decisions to continue to invest so substantially in risky markets, by alleging that Chase had some free-standing, over-arching duty of care to speak out and advise him urgently to diversify a substantial proportion of the Springwell portfolio.

  • The Terms Of The Relevant Contractual Documents And Disclaimers

    During the course of the banking relationship, the parties had entered into various contracts which contained provisions falling broadly into three categories:

    1. provisions setting out the terms and conditions of business;
    2. representations or acknowledgments as to Springwell's sophistication and its non-reliance upon any advice from Chase; and
    3. conventional exclusion clauses.

The judge held, relying on Peekay Intermark v ANZ1 amongst other authorities, 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. In doing so, she placed particular significance on the judgment of Moore-Bick LJ in Peekay in which he stated:

"There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis of a transaction, whether it be the case or not. Where parties express an agreement of that kind in a contractual document neither can subsequently deny the existence of the facts and matters upon which they have agreed, as least so far as concerns those aspects of their relationship to which the agreement was directed. The contract itself gives rise to an 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.

Practical Implications

This decision is clearly to be welcomed by banks. It is particularly important in two respects:

  1. it confirms that a salesman in the City, 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;
  2. it 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.

The Springwell litigation was particularly hard fought. The sums at stake were large and the claims gave rise to serious reputational concerns. The trial alone lasted in excess of 60 days. It remains to be seen, however, whether it will form part of the "mood music" of credit crunch litigation, indicating the scepticism with which the Court will approach such claims or whether it will represent the high water mark in defence of banks, with the banks now entering choppier seas.

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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