UK: JPMorgan Chase Bank v. Springwell Navigation Corporation, Part 1: A Banker´s Duty to Advise - Part 1

Last Updated: 25 November 2008
Article by Barry Donnelly

Introduction

In two recent judgments of Gloster J in JPMorgan Chase Bank v. Springwell Navigation Corporation [2008] EWHC 1186 (Com) and [2008] EWHC 1793 (Com), the English Court has highlighted a number of the issues and legal principles likely to be faced by banks and other financial institutions and their counterparties in mis-selling and trading claims emerging from the global credit crisis. Whilst the judgments do not strictly make new law, the judge's interpretation of existing principles in Springwell, which may well become the subject of appeal, merits detailed analysis.

This first part of a series of Commentaries in relation to particular aspects of the judgments considers the judge's conclusion in the first judgment that, irrespective of the terms of relevant transactional and customer classification documentation, various entities in the JPMorgan Chase group, principally the Private Bank and the Investment Bank (together "Chase"), did not owe contractual or tortious duties of care to give general investment advice to its longstanding customer, Springwell Navigation Corporation ("Springwell"), and to use reasonable skill and care in so doing.

Subsequent Commentaries in this series will address the exclusions, disclaimers and representations in the contractual documentation relied upon by Chase in support of its contention that it had no duty to give general investment advice; Springwell's claim that Chase was liable for negligent misstatement or misrepresentation and for breach of fiduciary duty; the scope and relevance of the financial services regulatory framework; and the Court's ruling as to whether certain pass-through instruments achieved their purpose.

In deciding whether or not Chase owed contractual or tortious duties of care to give general investment advice to Springwell, the judge set out in great detail aspects of the dealings and relationship between the parties spanning more than 12 years (1986–1998). These consisted of a number of representatives of the Private Bank liaising with Springwell in relation to its financial investments and a bonds salesman in the Investment Bank engaging directly with Springwell's principal decision maker for the purposes of buying and selling financial investments, including emerging markets debt instruments. For the period from May 1997 to August 1998, taped telephone conversations between the Chase salesman and Springwell's principal were available, amounting to thousands of hours of conversation.

In essence the judge decided, based upon the facts set out in her judgment, that whilst the Chase salesman did make recommendations and provide advice to Springwell on a regular basis throughout the relevant period in relation to both particular investments and Springwell's portfolio, such recommendations and advice did not in themselves give rise to duties of care to give general investment advice.

It remains to be seen whether the Court of Appeal might take a different view of the facts. Although this judgment is heavily fact-dependent, not all of the facts are disclosed; there is very little quotation of correspondence and oral evidence, and none whatsoever of the taped telephone conversations. It is therefore necessary to be careful at this stage about expressing general propositions as to a bank's duty to advise in the context of this particular case.

Nevertheless, the judge helpfully sets out the principal factors that, in her judgment, served as indicators of the existence (or otherwise) of a contractual or tortious duty of care, including the absence of any written advisory agreement, the extent of Springwell's financial experience or sophistication and of its reliance upon both the bonds salesman and other Chase personnel, and the regulatory background. When balancing these factors against the extensive dealings between the parties in the relevant period, the judge determined that Chase did not assume a duty to give general investment advice and to use reasonable skill and care in so doing.

The judge acknowledged in her first judgment that the case might go to the Court of Appeal, and in case she were to be wrong in her conclusions in relation to the duty to advise, the judge stated that, nevertheless, the terms of the contractual documentation entered into between the parties during their relationship militated against a duty of care.

Factual Background

The Polemis family. Springwell (incorporated in Liberia) was the investment vehicle of the Polemis family, one of the longest-established Greek shipping families. The principals of Springwell were the Polemis brothers, AP and SP (together "the brothers"), with AP taking all of Springwell's important decisions. The Polemis family's relationship with Chase spanned 50 years, and AP and SP had had dealings with Chase for over 30 years.

Foreign exchange speculation. In the early to mid-1980s, the brothers were active traders in foreign exchange ("FX"), not just for the purposes of hedging currency exposure connected with the shipping business, but also for profit through speculation. During 1982, the Polemis group traded US$383 million with Chase. In 1984, Chase internally recorded a concern about these "speculative tendencies", which had generated a cash loss of £7.5 million in that year, which Chase considered to be "diametrically opposite" to the brothers' conservative investment strategy in the shipping markets. FX speculation continued over a three-year period until about 1985/1986, by which time it ceased.

Acquisition of Springwell. Springwell was acquired in June 1986 in order to carry out the treasury function for the Polemis group, holding the profits that flowed from the shipping operations. Previously, it was the family's practice to place their excess liquid funds on time deposits in the names of one or other of their shipping companies. This spare liquidity was now transferred to Springwell.

Springwell's account with the Shipping Department. Springwell opened an account with the Shipping Department in London in 1986. At that time, Mr Mellis ("EM") was head of the department.

Introduction to alternative investments. Between late 1987 and March 1988, the Shipping Department suggested an alternative investment to AP in the form of European Commercial Paper ("ECP"), which bore a higher rate of interest than time deposits. At some stage during this period, Chase (EM) introduced AP to Mr Atkinson ("JA"), an employee of the Investment Bank, who at that time was a salesman on the Chase Money Market Desk in London, selling ECP. By March 1989, Springwell's investments in ECP with Chase had grown to approximately US$48 million. By this time, JA had also been selling a wider range of investments, including emerging markets debt instruments. Indeed, by 1990, Springwell had started to invest in debt instruments in emerging markets in Latin America.

JA specialises in selling emerging markets debt. In July 1990, JA joined the London Debt Arbitrage Group, which was subsequently renamed the Developing Countries' Capital Markets Group and, later, the International Fixed Income Group ("IFI"). This move meant that JA began to sell to Springwell predominantly emerging markets debt, a more specialised asset class than ECP, as the emerging markets debt market began to expand rapidly in the 1990s.

EM and Springwell's account move to the Private Bank. By now EM had moved from the Shipping Department to join the Private Bank, and Springwell's account, along with several other Greek shipping customers, was moved from the Shipping Department to the Private Bank on or about 20 August 1990.

Investment Management Accounts ("IMAs"). From late 1990 onwards, Springwell opened various different types of account with Chase, entered into various different facilities with Chase and signed various different trading agreements with Chase in respect of its banking and investment business. These products included IMAs, being accounts in which funds were invested in a range of assets and managed on a discretionary basis in accordance with the broad investment objectives specified by each customer on its application form. There was a quarterly management fee of 0.5 percent on the whole of the customer portfolio, and Springwell's investment objectives were stated, in late 1990, as "balanced".

Petrobras and the introduction to leverage. In August 1991, Springwell purchased a substantial tranche (US$40 million) of a US$250 million Eurobond issue by the Brazilian state oil company, Petrobras, using a US$15 million loan facility from the Private Bank, secured on the existing IMA with the Private Bank, as well as securities held by the Investment Bank. This Investment Grade Facility was then for a time used regularly and increased periodically in order to leverage Springwell's emerging markets portfolio, including Brazilian government "C" bonds (restructured defaulted loans).

By now, Springwell's portfolio at Chase had begun to grow exponentially, with Springwell's emerging markets investments mainly concentrated in Mexican and Brazilian instruments but also including Argentinean and Venezuelan instruments, during the early days of the emerging markets debt market.

Introduction of the Margin Forward Programme. In early 1992, Chase developed a Margin Forward Programme in relation to emerging markets debt investments, which enabled the purchaser to leverage against the security of the emerging markets debt instrument which it was seeking to purchase, under the terms of a Margin Forward Agreement ("MFA"), rather than (as previously under the Investment Grade Facility) against the security of other assets that were required to be of investment-grade quality. Indeed, Springwell's use of the Investment Grade Facility declined as its use of the Margin Forward Programme and related facility increased.

Customer classification and related documents. At about this time, as a result of a change in the regulatory regime, as the Securities Association was replaced by the Securities and Futures Authority (the "SFA"), and Chase became required to classify its customers in accordance with the new SFA Conduct of Business Rules (which came into effect on 1 April 1992), the Private Bank began to develop documentation designed to satisfy the "know your customer" and other regulatory requirements, whilst pre-qualifying new clients who wished to enter the Margin Forward Programme. These documents included an Experienced Investor Questionnaire ("EIQ") and, ultimately, a letter setting out terms of business applicable to clients' "Dealing in Developing Country Securities" (a "DDCS letter"). In addition, the Private Bank Credit Guide identified required characteristics for customers to be eligible to trade in emerging markets debt, including sophistication, capacity to withstand loss, prior experience and the fact that they were not looking to Chase for advice.

Springwell was classified as a non-private customer and so was not entitled to the benefit of regulatory obligations imposed on firms in respect of private customers, such as the obligation to recommend only suitable investments and to take reasonable steps to enable the private customer to understand the nature of the risks involved.

Leverage under the MFA. As from April 1992, Chase provided leverage to Springwell under the MFA in many transactions involving purchases by Springwell of emerging markets debt. This continued for more than five years until the MFA was replaced by another market standard document, the Global Master Repurchase Agreement ("GMRA"), issued by the Public Securities Association in New York, although subject to English law and jurisdiction.

The 1992 and 1993 DDCS letters and EIQ. By a DDCS letter dated 23 November 1992, written on the Private Bank's notepaper and signed on behalf of both the Private Bank and the Investment Bank, the Private Bank and the Investment Bank notified Springwell of its classification by them as a non-private customer for the purposes of the SFA Rules and of the effect of the classification. The letter did not appear to have been signed and returned to Chase. Subsequently, an EIQ for Springwell was completed and signed by the Private Bank on or about 8 May 1993, stating that Springwell was classified as "a sophisticated investor" who had "traded extensively in [emerging markets] debt for well over 3 years" and who was "fully aware of the speculative nature of this investment", including certain defined risks. It also stated that Springwell was "purchasing all emerging markets paper on an execution-only basis and was not looking to Chase for advice". According to EM, the body of the questionnaire would have been prepared with the customer before being signed by him. A further DDCS letter in the same terms as the 1992 DDCS letter was signed by AP, on behalf of Springwell, on 28 May 1993.

Emerging markets debt investments by early 1994. By March 1994, less than three years after Springwell's first purchase of emerging markets debt with leverage (the Petrobras bonds) in 1991, Springwell had increased its forward margin line up to US$350 million, which represented almost 45 percent of the total existing allocation to Greek customers of the Private Bank of US$785 million at that time.

EM leaves the Private Bank. At the end of March 1994, EM left Chase, and Mr Sheehan ("FS"), EM's assistant in the Shipping Department, became Springwell's relationship manager. JA continued to be one of the "product specialists" within the IFI team of the Investment Bank, to whom access was permitted to eligible Private Bank clients only.

The Tequila Crisis. In December 1994, the Mexican peso was devalued, which precipitated a strong sell-off in the emerging markets (the "Tequila Crisis"). JA described it to FS on 22 December 1994 as "the biggest meltdown . . . in emerging markets history". A period of instability followed as the peso continued to lose 50 percent of its value in the succeeding months and contagion spread into other Latin American countries. As a result, spreads on Mexican par and discount bonds widened and the price of bonds fell sharply. Spreads on Mexican par and discount bonds increased from about 250 basis points on 8 December 1994 to over 600 basis points between December 1994 and January 1995. In response to the crisis, Springwell invested heavily in Mexican and other Latin American securities, such that by 31 July 1995, the proportion of Mexican assets in Springwell's portfolio by face value had risen from about 13 percent in December 1994 to about 30 percent, or US$140.57 million. Despite a sharp fall in values in Springwell's emerging markets portfolio, which AP had discussed with Chase on 15 March 1995, AP did not take any action to reduce Springwell's emerging markets portfolio, but instead bought substantially in Mexico.

Springwell's dealings with Merrill Lynch. In early 1996, Springwell opened an emerging markets account at Merrill Lynch International ("ML"), obtaining a leverage facility of US$43 million, which was soon increased to US$70 million. Between April 1996 and July 1998, Springwell maintained an active portfolio of emerging markets investments at ML, purchasing bonds with a face value of US$127 million. Like Chase, ML also classified Springwell as a non-private customer for the purposes of the SFA Rules, and Springwell signed a letter accepting this classification. The ML account was used by Springwell and was also used for the transfer of certain assets from Chase to ML, so as to bring the account at Chase within the relevant limits. There were three transfers in total, two in 1996 and one in 1998.

Build-up of Springwell's Russian portfolio. Springwell, like many other non-resident investors, was attracted by the high yields in certain sovereign Russian debt instruments and, to a lesser extent, in the sovereign Eurobond market. The Russian Ministry of Finance had started to auction short-term zero-coupon rouble-denominated securities issued by the Russian Federation and known as "GKOs", in May 1993, to fund the Russian budget deficit. These bonds were initially restricted to Russian resident accounts and were not available to offshore investors. However, after intense lobbying from foreign investors, the rules were changed in 1996 to allow direct participation from non-residents in the GKO market.

GKO-Linked Notes. Springwell, having amassed a very sizable emerging markets portfolio, started investing in Russia in March 1996. Chase's structured products group had developed a structured GKO-Linked Note, by which Chase intended that the return, as well as the full risks, of making the underlying GKO investment should pass through to investors. All but one of the GKO-Linked Notes purchased by Springwell had foreign exchange hedges embedded in them, being forward contracts for the conversion of the GKO rouble proceeds into dollars. Such structured investments were very common at the time, with many banks offering similar products. From 28 March 1996, Springwell invested on a recurring basis, and for the most part successfully, in GKO-Linked Notes. Springwell bought a total face value of US$428.6 million GKO-Linked Notes through Chase, with a purchase consideration of US$429.6 million (42 separate purchases). Of these, a total of US$325.4 million matured at par before the Russian financial crisis and default by Russia on certain of its financial obligations on 17 August 1998, realising a total net gain for Springwell on the non-impugned GKO-Linked Notes, after coupon and financing costs, of US$19.9 million.

As at 17 August 1998, Springwell held 11 GKO-Linked Notes in its portfolio, with a total purchase cost of US$87,837,270 and a nominal maturity or redemption amount of US$95,259,716.

New Russian dollar-denominated debt instruments—sovereign and corporate debt. Between November 1996 and August 1998, Springwell also invested in three Russian sovereign Eurobond issues. In addition, following numerous Russian regions, municipalities, banks and corporate issuers taking advantage of market conditions in 1997 to issue corporate bonds or notes, Springwell purchased corporate bonds or notes with a total purchase cost of US$81,726,870. These included bank bonds issued by Russian banks from among the 20 largest Russian banks by assets. Springwell also made purchases of other Russian bonds and former Soviet Union instruments.

Repo Programme and the Global Master Repurchase Agreement ("GMRA"). In about September 1997, the emerging markets leverage programme was changed from the Margin Forward Programme to a repurchase ("Repo") programme, under the terms of which the Private Bank agreed to provide, by means of purchase and repurchase contracts between it and the customer, the financing arrangements for the securities which the customer was purchasing from the Investment Bank. All new leverage transactions after 3 October 1997 were carried out under GMRAs rather than under the previous Margin Forward Programme.

The 1997 DDCS letter. A third DDCS letter, dated 17 September 1997, in similar terms to the 1992 and 1993 letters, was delivered to Springwell in view of the merger between Chase and Chemical Bank in which the transactional business of the Investment Bank transferred from one entity within the Chase group to another. The letter was again on the Private Bank's paper but signed on behalf of the Private Bank and the Investment Bank. It was also signed and returned by way of purported acceptance by Springwell.

The Asian Crisis and Springwell's Indonesian investments. As part of its complaint, Springwell included three Indonesian investments purchased in October 1997. These purchases were made against the backdrop of the Asian Crisis. On 2 July 1997, Thailand allowed the baht to fall, provoking a burst of selling in the currency markets which spread quickly to Indonesia, the Philippines and Malaysia. AP discussed this with JA on 16 July 1997. The crisis primarily affected domestic currencies and financial markets, initially in Thailand and subsequently in other Asian countries, including Indonesia, Malaysia, the Philippines, Hong Kong and Japan.

Restructured debt of the former Soviet Union: Prins and IANs. In late 1997 and throughout the first eight months of 1998, Springwell bought significant holdings in what were known as Prins (restructured principal obligations) and IANs, or Interest Arrears Notes (restructured interest obligations). Prins were loans maturing in 2020 which had a settlement period of 10 days and paid interest partly in cash and partly in IANs. IANs were bonds maturing in 2015. They were cleared by the Euroclear system and settled in three days. From December 1997 to March 1998, Springwell bought and sold IANs through Chase and Prins through ML. Subsequently, from April 1998, Springwell began to build up a substantial position in Prins, buying incrementally and frequently against the backdrop of a falling market. In June and July 1998, there were opportunities to take profits on some of Springwell's Prins when the market temporarily moved upwards. However, because prices had not appreciated to the levels at which AP wanted to sell, Springwell continued to buy Prins into late July and into August 1998 as prices fell very low. By 17 August 1998, Springwell held Prins and IANs with a total purchase cost of US$87,050,000. Eventually, following the Russian default, newly issued sovereign bonds were exchanged for the defaulted Prins and IANs, which were fully serviced since their issue.

Attempts by Chase to persuade Springwell to diversify after March 1996. Springwell contended that the person responsible for Greek customers from 1996, SG, accepted in his evidence that the role of the Private Bank involved advising Springwell as to appropriate investments and, in particular, as to diversification. From March 1996, SG was ultimately responsible for customer satisfaction, Private Bank credit exposure and the profitability of the group of Greek customers. During his meetings with AP, SG made repeated suggestions to AP to diversify Springwell's holdings. SG tended to stress the need for diversification to all of his customers. AP's response, however, to SG's diversification suggestions was to say that he did not make enough money from investing in anything other than emerging markets assets. In April 1998, SG sent two letters to Springwell, putting forward two formal diversification proposals to invest in managed funds. In his letters, he expressed opinions not only as to the products being recommended, but also as to the appropriate level of diversification in Springwell's portfolio as a whole and, in particular, as to Springwell's emerging markets investments. However, AP never read the letters, and he regarded SG's approaches as a nuisance.

Springwell contended that the Private Bank, whether by SG or otherwise, did not give advice to Springwell as to the need to diversify within its emerging markets portfolio or to reduce the extent of the Russian concentration within the portfolio. Nor did the Private Bank ever advise that there was ever a need for immediate and substantial diversification out of the emerging markets asset class on the basis that the undiversified portfolio was very high-risk, highly concentrated in Russia and dangerously exposed to loss.

Chase contended that the specific proposals for diversification put to AP by SG to invest in managed funds were in effect marketing approaches by the Private Bank. However, Springwell submitted that the role played by SG in connection with the diversification issue was wholly inconsistent with the notion that he was merely playing the role of a salesman.

Springwell's losses following the Russian default. Springwell had invested very profitably in GKO-Linked Notes from March 1996 and by 1998 had acquired a portfolio of emerging markets debt instruments with a face value in excess of US$700 million. However, it incurred significant mark-to-market losses following the Russian default on 17 August 1998 of more than US$200 million. As part of the measures imposed in Russia during the financial crisis, the referenced GKOs under Springwell's outstanding GKO-Linked Notes defaulted and were restructured. In addition, Springwell's other investments, not only in Russia but also in other states of the former Soviet Union as well as Indonesia, were heavily marked down in the aftermath of the Russian crisis.

Commencement of the English Proceedings

On 9 April 2001, Chase commenced proceedings in the English Court seeking a declaration that it had no liability to Springwell in respect of any of the relevant transactions. Springwell's claim, by way of counterclaim in the English proceedings, in respect of the loss in value of its investment portfolio, as at the commencement of the Russian financial crisis on 17 August 1998, was that no reasonable advisor could have advised Springwell to have held such a portfolio of emerging markets investments. Had Chase acted in accordance with its contractual, tortious and fiduciary duties, then in August 1998 Springwell would have held a different portfolio.

Springwell's Investment Objectives

Springwell contended that it should have held a portfolio which was well diversified, predominately in liquid and low-risk investments, and structured in such a way that there would have been no appreciable risk that the capital value of individual investments, or the portfolio as a whole, would be substantially reduced, such as by having to sell into a falling market. Springwell contended that its portfolio would have included time deposits and/or gilts, T-bonds and other blue-chip bonds, together with other fixed-income investments, possibly including emerging markets assets and managed funds—all of which would have been variously for income, liquidity and capital preservation.

Springwell further contended, if appropriate advice had been given, that the portfolio would not have been leveraged to such an extent that Springwell could be exposed to substantial margin calls or would have been forced to sell into a falling market. In the circumstances, Springwell contended that neither the Russian nor the earlier Asian financial crisis would have had any, or any substantial, effect on the value of its holdings and/or would not have caused any or any substantial loss to Springwell, because it would not have been required to sell any holding to produce cash.

Springwell's Claim

Springwell alleged that as a result of Chase's breaches of duty:

  • its portfolio collapsed in value after the Russian financial crisis in August 1998;
  • it had no cash inflow from the GKO-Linked Notes on their due dates;
  • it was unable to transfer cash into its principal business, shipping; and
  • it had very substantial liabilities in respect of borrowings from Chase and had no option but to enter into a term loan with Chase on 15 January 1999 in order to pay off those liabilities.

Springwell claimed damages calculated by reference to the value of the investments in its portfolio as at 15 January 1999 (the date of the term loan) as compared with the portfolio that it should have had at that time, had Chase advised it properly. Springwell also contended that any increases in the value of its investments after 15 January 1999 were irrelevant as a matter of law.

The Introduction of JA and His Role

Springwell asserted that JA was introduced as someone who would be providing advice on alternatives to time deposits, that he was part of EM's team, that EM would be supervising him to ensure that JA's advice was in accordance with what EM understood to be Springwell's requirements and that only suitable investments would be offered. In other words, Springwell claimed that it was being offered an advisory service from JA, supervised by EM.

It was an important part of Springwell's case that JA gave it investment advice throughout his dealings with it over the next 11 years and that Chase, through JA, performed the role of investment advisor. Springwell asserted that the fact that JA was actually a salesman was not explained to it at the time of his introduction. In the alternative, Springwell contended at various times during the trial that even if JA was originally no more than a salesman, he nevertheless became, over time, a fully fledged investment advisor. On the other hand, Chase contended that it was quite apparent that JA was working in a department within the Investment Bank which was mainly focused on a limited asset class, namely buying and selling ECP. It was in his capacity as a non-advisory execution-only salesman that JA bought investments from, and sold investments to, a number of Chase customers, including Springwell.

Existence of an Advisory Obligation: Contract

Springwell's case in contract was that each of the Private Bank and the Investment Bank had a contractual obligation to advise Springwell as to appropriate investments and to use reasonable skill and care in so doing, in return for the reasonable profits, fees and commissions which Springwell, by AP, knew and impliedly consented to those entities earning from their dealings with Springwell. Springwell contended that the Private Bank's contractual obligations to advise as to appropriate investments arose under the terms of the banking contract concluded between itself and Springwell in 1986, when Springwell first became a customer of the Private Bank, such investment advice being a service provided pursuant to the terms of that contract.

Furthermore, Springwell contended that when EM introduced AP to JA (who was at that time a salesman on the Chase Money Market Desk selling ECP), he held JA out as acting on behalf of the Private Bank and by doing so offered Springwell an advisory service which was accepted by Springwell "when it first received and acted upon advice from JA". As for the Investment Bank, its contractual obligation to provide appropriate investment advice arose in the same manner as alleged in respect of the Private Bank, such that, according to Chase, AP was offered an investment advisory service jointly by the Private Bank (acting by EM and JA) and by the Investment Bank (acting by its employee, JA).

Existence of an Advisory Obligation: Tort

Springwell's case in tort was that both the Private Bank and the Investment Bank had tortious obligations to give appropriate investment advice to Springwell. In essence, Springwell contended that Chase assumed a responsibility to give such advice to Springwell by reason of a number of matters, including the circumstances in which JA was introduced to AP/Springwell by EM; the fact that EM allegedly made statements to AP to the effect that he would be looking after Springwell and that Chase was able to offer a full private banking advisory and wealth management service; the fact that Chase knew AP was not an expert or sophisticated investor and had no experience of investment or fund management and that Springwell did not have any employees with which to carry on an investment or fund management business; the fact that JA did give investment advice to Springwell and held himself out to Springwell as giving such advice and as managing and taking care of Springwell's portfolio with AP; the fact that it was or should have been apparent to JA that AP was relying entirely on JA to advise him as to what investments were appropriate for Springwell; and the fact that AP understood JA to be giving advice as part of an advisory role in which he recommended investments to Springwell, as AP himself lacked both the information and expertise to select and assess which investments were suitable.

Therefore, Springwell relied on both the arrangements which it alleged were put in place at the start of its investment relationship with Chase and on the course of the dealings between the parties thereafter. Springwell submitted that Chase's undertaking to advise Springwell and its giving of advice represented a paradigm example of a Defendant "tendering skilled advice or services in circumstances where he knows or ought to know that an identified party will rely on his advice"1.

Springwell's Reliance on the Early Period to Avoid Exclusions and Disclaimers

According to Gloster J, it was in order to avoid the potential consequences of certain exclusions and disclaimers in the contractual documentation between Springwell and Chase as from 1992 onwards that Springwell contended that Chase assumed a duty to advise at the outset in 1986 or 1987. Furthermore, Springwell contended that as a result of the advice given and relied upon for the five years thereafter (as well as subsequently), Chase was prevented from relying upon the relevant exclusions and disclaimers. These matters are to be considered in Part 2.

The Extent of the Duties of Care Alleged Against Chase

The duties of care which Springwell alleged that Chase owed from 1986/1987 onwards were described by Gloster J as being of a very wide-ranging and onerous nature. The "advisory role" was said to have given rise to a duty of care which had numerous necessary incidents. These included contentions that the Private Bank and the Investment Bank were bound:

  • To establish in discussion with AP Springwell's investment expertise, investment objectives and attitude to risk having regard to Springwell's strategic function;
  • At regular intervals to review Springwell's investment objectives and attitude to risk so as to identify any changes in them;
  • To take reasonable care in advising Springwell that particular investments and the portfolio as a whole were appropriate, having regard to what had been established as being Springwell's investment objectives and attitude to risk;
  • To give adequate explanations to AP so as to enable him to understand the risks inherent in particular investments and to understand the balance of risk inherent in the portfolio as a whole;
  • To give adequate explanations to AP of all documentation to be signed by Springwell (including, if and to the extent that the relevant provisions (i.e., exclusions, disclaimers, representations, etc.) had the effect contended for by Chase, explaining the existence and effect of the relevant provisions in the relevant documentation).

Springwell contended that these duties were continuing duties which subsisted throughout the period of Springwell's dealings with Chase.

As well as putting its case on the basis of JA's introduction by EM to AP at the outset and on the basis of how the relationship developed over the period between 1986/1987 and 1998, Springwell's case in regard to the Private Bank shifted over the course of the trial. Springwell's principal allegation had been that the advisory relationship was with the Investment Bank (through the advice provided by JA) and that the Private Bank's obligations were to supervise the Investment Bank and JA. This case developed into a more closely and narrowly defined one, to the effect that as Springwell's portfolio became larger and more concentrated in Russian securities, the Private Bank itself, irrespective and independently of the role of JA, became subject to a duty to warn Springwell of risks inherent in the Russian concentration in its portfolio and the need for greater diversification. However, Springwell never identified during the course of the trial a date when the Private Bank assumed responsibility to advise in such a way.

In summary, according to Springwell, Chase was responsible for selecting and constructing Springwell's entire portfolio and providing ongoing investment advice about it, on what became effectively a daily basis, throughout all of Springwell's dealings with Chase. Under Springwell's "general advisory" claim, it was alleged that because there was an "advisory relationship", every time that JA offered an investment for sale to Springwell, he was obliged to give, and was implicitly giving, advice as to the suitability and risk characteristics of that investment, both on its own and as part of Springwell's overall portfolio, whether or not this followed an express request by AP to find a particular type of investment, such as GKO-Linked Notes, or to find investments that met particular requirements, such as price. Since Springwell sought damages for failure to advise Springwell to sell investments, it appeared to the judge that Springwell's case, at its highest, was that JA was obliged to give, and implicitly gave, ongoing and updated advice as to the merits of retaining every investment which Springwell had previously purchased.

Furthermore, Springwell's case was that, even disregarding the circumstances of JA's introduction and the role of EM and his successors at the Private Bank, Chase (through the activities of JA) held itself out as advising and willing to advise on an ongoing basis both on particular investments and on the general composition of the client's portfolio as a whole. Springwell relied in particular on transcripts of the thousands of hours of taped telephone conversations between JA and AP relating to the period from May 1997 onwards (transcripts of earlier conversations not being available).

The Ambit of the Factual Enquiry

In light of the way in which Springwell put its case, therefore, it was necessary for the Court not only to consider the position at the date, and as a result, of the introduction of JA to Springwell, but also to consider the ongoing relationship (a) between Springwell (acting by AP) and JA (whether acting on behalf of the Private Bank or the Investment Bank) and (b) the Private Bank (acting through other personnel) and Springwell (acting by AP) over time, so as to see whether the relationship had developed into something different by 1996–1998.

Therefore, when considering the evidence for the purposes of an analysis as to whether the alleged duties of care existed, Gloster J did so by reference to three different periods in the chronology, namely the time of the introduction of JA to Springwell in late 1987/early 1988; the period 1990 to April 1994 (when EM left Chase), during which Springwell's account was with the Private Bank under the supervision of EM; and as at 17 August 1998, by reference to what occurred during the period 1994–1998 and, in particular, the period 1997–1998, during which Springwell's emerging markets portfolio built up a substantial concentration in Russian securities, so that it constituted 45.5 percent of Springwell's emerging markets portfolio by market value as at 31 July 1998.

The Legal Landscape

The relationship between Springwell and Chase was both the conventional one of banker and customer and one of trading counterparties.

From a contractual point of view, the bank mandate signed by Springwell when it first opened its account with Chase in July 1986, on standard terms, did not expressly provide any basis for the advisory relationship of the sort alleged. It did not refer to any obligation on Chase's part to advise Springwell, nor was Gloster J prepared to imply such a duty merely from the express terms of the form.

This was, in fact, a case where the alleged contract and the alleged duty of care were concomitant and co-extensive, such that an analysis of the relationship between the parties, by means of an objective analysis of the relevant facts relating to the dealings between the parties in the relevant contextual scene, informs the Court both as to whether a contractual duty and/or a tortious duty of care exist2. The primary focus had to be on exchanges (i.e., statements and conduct) which crossed the line between the parties3.

Cases that address the circumstances in which one party will owe a duty of care in tort giving rise to a liability in economic loss4 are often "quasi-contract" cases, where the relationship between the parties is said to be one of, or akin to, contract and where the contractual and tortious analysis is essentially the same.

In Commissioners of Customs and Excise v. Barclays Bank5, the House of Lords recently reviewed the relevant cases and referred to the three tests which have been used in deciding whether a Defendant causing pure economic loss to a Claimant owes the Claimant a duty of care in tort, namely:

(i) The assumption of responsibility test, coupled with reliance;

(ii) The "three-fold test": whether the loss is reasonably foreseeable, whether the relationship between the parties is of sufficient proximity and whether in all the circumstances it is fair, just and reasonable to impose a duty; and

(iii) The incremental test (see below).

However, all of these tests operate at what the House of Lords termed "a high level of abstraction", so each of them requires, at a lower level, an analysis of all of the relevant facts in the overall determination so as to identify, as in the case of contractual liability, what could reasonably be inferred from the parties' conduct against the background of all the circumstances of the case6. Because the question of whether a Defendant has assumed responsibility is a legal inference to be drawn from his conduct against the background of all the circumstances of the case, it is nevertheless by no means simply a question of facts. Questions of fairness and policy will enter into the decision, and it may be more useful to identify these questions rather than simply to "bandy" terms like "assumption of responsibility" and "fair, just and reasonable"7. In Morgan Crucible Co Plc v. Hill Samuel & Co Ltd [1991] Ch 295, at 301, Lord Hoffmann had tried to identify some of these considerations in order to encourage the evolution of lower-level principles which could be more useful than the high abstractions or high-level generalisations commonly used.

The incremental approach recommended by the House of Lords in Caparo8 required an analysis of the factors which have been treated as relevant to the existence, scope or non-existence of a duty in earlier cases so as, by analogy, to deduce the lower-level principles which could be applied to new or novel situations.

In short, concepts such as proximity and fairness are just convenient labels ready to be attached to features of different specific situations. A detailed examination of all the circumstances of the case is required, so as to enable the law to recognise pragmatically whether a specific situation gives rise to a duty of care of a given scope8.

Footnotes

1.Commissioners of Customs and Excise v Barclays Bank [2007] 1 AC 181, per Lord Mance at paragraphs 92 and 93.

2.See Williams v. Natural Life Health Foods Ltd [1998] 1 WLR 830 (HL) at 835 F.

3.Ibid.

4.See Hedley Byrne v. Heller [1964] AC 465 (HL).

5 [2007] 1 AC 181.

6. [2007] 1 AC 181 at 199C per Lord Hoffmann (paragraph 35).

7.See [2007] 1 AC 181 at 199F per Lord Hoffmann (paragraph 36).

8.See Caparo Industries Plc v. Dickman [1990] 2 AC 605 at 617–618, per Lord Bridge; Bankers Trust International v. PT Dharmala Sakti Sejahtera [1996] CLC 518 at 577G, per Mance J.

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