A bond salesman's word may not be his advice

Gloster J's detailed recent judgment in JP Morgan Chase v Springwell Navigation [2008] EWHC 1186 (Comm) indicates that 'experienced investors' in the bond markets will find it difficult 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.

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$700m, were acquired through JP Morgan Chase (Chase).

Much of the portfolio was invested in Russia and other Commonwealth of Independent 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's primary claims, based on either breach of contract or negligent misstatement, alleged 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 relationship was said to have arisen out of the regular discussions about potential investments which had taken place in 1990'“8 between Adamandios Polemis (AP), who was responsible for investment decisions at Springwell, and Justin Atkinson (JA), a debt security trader at Chase. Alternatively, Springwell also claimed against Chase for misrepresentation and breach of fiduciary duty.

In its defence Chase relied, among 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 JA'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 portolio as a whole. In line with earlier authorities in this area (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), 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 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: for example there was no written agreement, nor were there any other records referring to the existence of 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. AP's investment decisions were primarily motivated by the desire for high returns. 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. Further, having contractually defined the scope of its relationship with Chase, Springwell could not make a claim in tort beyond the ambit of those contractual terms.

The judge dismissed the various arguments that the bank should not be entitled to rely on its written disclaimers of liability. She rejected the challenges to its '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 Sachs ([2007] EWCA Civ 811), 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, any residual disclaimers or exclusion clauses falling within the ambit of the statutory provisions could not be construed as unreasonable given the commercial context and given that the parties were of equal bargaining power.

Springwell had also argued (following Interfoto v Stiletto [1989] 1 QB 433) 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 '“ as the relevant disclaimers were standard for such business, and only confirmed 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 investments 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. Springwell had also expressly confirmed in the contractual provisions that it was not relying on any representations and had 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 was therefore contractually precluded from bringing any claim for misrepresentation.

Breach of fiduciary duty

Springwell also claimed that Chase was in breach of its 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 off-load 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 a implied agreement. This was because it would be an abdication of Springwell's own interests to expect a full advisory service but never to have agreed or confirmed the terms of that service, and never to have clearly explained its investment objectives.

Responsible for own decisions

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 this judgment '“ which appears to represent somewhat of a 'high water mark' for banks' defence arguments '“ leaves open the possibility that even sophisticated and experienced investors may in other circumstances have more success in bringing claims: for example where there has been a breach of the seller's (it appears unavoidable) implied duty to act in 'good faith' or where there is a claim under s 90 of the Financial Services and Markets Act 2000 (FSMA) '“ see box. More obviously where an investor can establish that he was not acting in a professional capacity, he will have much stronger grounds for arguing that he was owed more onerous duties of care and for challenging any applicable exclusion clauses or disclaimers. Such investors will probably also be 'private persons' under FSMA and therefore able, under s 150 of FSMA, to sue authorised persons for losses resulting from contraventions of the FSA's rules.

Given the frequent asymmetry of information between sellers and buyers of financial products, there will undoubtedly continue to be tensions in future misselling claims between the needs of 'fairness' (redressing that balance in favour of buyers) on the one hand, and contractual certainty (upholding sellers' disclaimers of liability) on the other. It will be interesting to see how judicial sentiment develops on these issues as the credit crunch unfolds over the coming months.