In JP Morgan v Springwell ( EWHC 1186 (Comm)) an investment bank was found not to be liable to an investor for losses the investor had sustained by investing in Russian bonds. The case suggests that the traditional approach of the English courts to limiting investors’ ability to recover money by suing their financial advisers will continue. This may hold lessons for investors tempted to turn to the courts in seeking to recover losses sustained in the recent financial crisis.
The Case of JP Morgan Chase Bank v Springwell
The dispute followed from the Russian and Asian financial crises of 1997-8. The collapse of the Thai currency in 1997 initiated a loss of confidence in the Thai economy which spread to much of Asia. This led to a financial crisis, the effects of which were also felt in Russia.
The facts of the case are as follows. Springwell Navigation Corporation (Springwell) was an investment vehicle for a wealthy Greek shipping family. Springwell had built up substantial investments in Russian bonds, so that they comprised a significant part of its investment portfolio. The investment bank, JP Morgan Chase (Chase) had been involved in selling many of these bonds to Springwell. As a result of the financial crisis, Russia defaulted on its bonds, leading to large losses on the part of Springwell. It claimed some US$280 million damages from Chase as representing the difference between what the portfolio was worth and what it should have been worth and Springwell also claimed recovery for profits that would have been earned by the ships that would have been bought with the expected proceeds of the investments.
The relationship between Springwell and Chase was the subject of conflicting evidence at the trial. Springwell argued that the bond salesman who sold it the Russian bonds had been described by Chase as an investment adviser, that Chase undertook to supervise the bond salesman’s advice, that the relationship between banker and customer per se gave rise to an advisory relationship, and that Chase had contracted to advise Springwell on its investments.
Chase, on the other hand, argued that the bond salesman was just a salesman and not an adviser, that Chase was simply engaged in the marketing of investment products, that there was no written advisory agreement, no indicia of an advisory relationship, that the terms of the agreed contract showed that Chase was not acting as an investment adviser, and that neither Chase nor the bond salesman ever acted in the role of an investment adviser to Springwell. On her findings of fact, Mrs. Justice Gloster agreed with Chase’s arguments on almost every point.
Causes of Action
Springwell pleaded four separate causes of action against Chase. These were breach of contract, the tort of negligence, breach of fiduciary duty and misrepresentation. Springwell was unsuccessful in each of these claims, for the following reasons: as regards both contract and tort, Chase did not have a duty of care in contract or in tort as pleaded by Springwell, any breach did not cause the loss, and contractual exclusions would have been effective to prevent a cause of action arising in any event; there was no fiduciary obligation on Chase because the bank had not entered into a fiduciary relationship with Springwell; and Chase made no misrepresentations to Springwell about the investment products.
Duty of Care
The judge found that Chase owed no duty of care to Springwell either in contract or in tort. Springwell had pleaded in wide terms that Chase owed it a duty “to advise Springwell as to appropriate investments, and to use reasonable care and skill in so doing”. In relation to its case in tort, Springwell argued that Chase had a duty of care giving rise to liability for economic loss. They were therefore arguing that the case came under the Hedley Byrne v Heller ( A.C. 465) principle, which is that, in contrast to the usual position in tort, in certain limited circumstances pure economic loss (investment losses, for example) are recoverable in tort (contrast this with the position for breach of contract where economic losses within the reasonable contemplation of the parties when the contract was made are always recoverable).
It is clear from the case of Henderson v Merrett ( 2 A.C. 145) that it is possible for there to be concurrent liability in contract and tort. Normally the scope of the contractual duty between the parties will be relevant to the duty of care in tort. The judge spoke of the “fundamental importance of the contractual matrix in determining the existence and scope of any duty of care”.
She held that the terms of the contract between Springwell and Chase showed that there was not an advisory relationship, stating 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”.
Furthermore, the relationship between the bond salesman and Springwell did not give rise to a duty of care in contract or tort. As the judge stated, “the fact that ... the salesman employed by Chase to buy and sell emerging market debt securities to Chase customers, was, in that capacity, giving … advice and making recommendations … does not in my judgment predicate that a duty of care arises on the part of the salesman … nor does the fact that [the salesman] was, no doubt, extremely keen to make profits for Chase and that this may have been influencing his enthusiasm to recommend Russian products.”
Likewise, the relationship between Chase as a private bank and Springwell as an investor did not in itself give rise to a duty of care in either contract or tort. It can therefore be seen that a court will not strain to find a duty of care between a sophisticated investor and sellers of investments. The judge cited approvingly a generally statement of the law, that “if a buyer of a product does not understand the product, he should obtain proper advice and pay for it”. (Philip Wood, Regulation of International Finance).
It is clear from Springwell that under English law it will often be difficult to prove that any breach of duty on the part of investment sellers has caused loss to investors. The judge found that even if there had been a duty of care owed by Chase to Springwell and even if that duty had been breached then this breach had not caused any loss. The judge found on the facts that Springwell’s investment manager “knew and determined for himself the direction of the portfolio.”
The judge concluded, for this reason, “that Springwell has failed to show that the particular investments comprised in its portfolio at the date of default were held as a result of breaches of duty [by Chase] … rather than on the basis of [Springwell’s investment manager’s] own decision”.
If, as usually would be the case, a seller of investments has dealt with the buyer on the basis of express contractual terms, most likely the seller of investments will have included in those terms a raft of contractual provisions purporting to limit its liability. This was certainly the case with Chase’s relationship towards Springwell. Springwell attempted a wide variety of arguments to show that Chase could not rely on its contractual disclaimers. But the judge rejected them all and found that, if necessary, the contractual disclaimers would have been effective. This was because they were contained in signed documents and therefore incorporated into the contract, and there were no misrepresentations justifying rescission of the contract, and no grounds to invoke the “drastic” remedy of unilateral mistake. Chase was not by its representations or conduct estopped from relying on the disclaimers, and the terms were not unreasonable, in a commercial context, under the Unfair Contract Terms Act 1977. The contractual disclaimers made clear that Springwell was prevented from bringing a claim in misrepresentation and that Chase was not assuming responsibility for statements that were made.
Credit Crisis Litigation
Springwell shows that English law does not make it easy for investors to recover investment losses. Sophisticated investors are generally considered, in the absence of strong evidence that someone has undertaken a duty of care towards them in the course of advising them about their investment, to be responsible for their own risks and own losses from pursuing investments for profit. Despite widespread predictions of a flood of litigation following the credit crisis, investors will in many cases find it difficult to make good their losses through the courts.