Since the recent credit crunch, there has been much attention on the duty of care owed by financial institutions regarding investment advice. In particular, is a bank obliged to warn their clients against substantial investment risks?
The landmark case of JP Morgan Chase Bank v Springwell Navigation Corporation  EWHC 1186 ("Springwell"), affirmed locally in Go Dante Yap v Bank Austria Creditanstalt AG  4 SLR 916 ("Bank Austria"), shows that the courts will not lightly find the existence of an additional duty within a banking relationship that is already governed by contract. For there to be a duty, there must be conduct amounting to an assumption of responsibility coupled with reliance. Factors relevant to determining if such conduct exists include the level of sophistication of the investment and whether the parties have contractually defined the terms upon which they will conduct business.
The relevant legal principles in determining duty
In Springwell, the defendant customer brought a counterclaim against the plaintiff bank in contract and in tort after it suffered losses to its portfolio as a result of the Russian financial crisis. The customer alleged that there was an advisory relationship between the bank and the customer which obliged the bank to advise what investments were appropriate for the customer, having regard both to the particular characteristics of individual investments and the balance of the portfolio as a whole.
Gloster J in Springwell identified the following "lower level" factors that serve as indicators of the existence or otherwise of any contractual or tortious duty of care:
- the contractual context (including the terms of the relevant contractual documents and disclaimers, and the absence of any written advisory agreement);
- what, if anything, was said to the customer by the bank's representatives;
- the roles played by the parties;
- the extent of the customer's financial experience or sophistication;
- the extent of the customer's reliance on the bank, including the extent to which it was foreseeable that reliance would be placed upon the investment advice that, allegedly, should have been given; and
- the regulatory background.
It was held that if there was an assumption of legal responsibility whereby one party undertakes to perform a task or service for another, the contract between the parties may modify or exclude the scope of any existing tortious duties arising out of that assumption of responsibility. However, if there was no assumption of responsibility by either party, the contract will generally be completely determinative of the scope of the parties' duties.
The court in Springwell referred to the decision in Titan Steel Wheels Limited v The Royal Bank of Scotland Plc  EWHC 211 (Comm) where it was held that the scope of the obligations owed by the bank to its client were fully defined in the contractual terms. Steel J held that these terms expressly provided that the bank would not provide advisory services and that any opinions expressed by the bank did not constitute investment advice and the client, Titan, was to take independent advice as might be necessary.
The terms outlined in the contracts between the parties were consistent with the conclusion that Titan and the bank were agreeing to conduct their dealings on the basis that the bank was not acting as an advisor nor undertaking any duty of care regardless of what recommendations, suggestions or advice were tendered.
Likewise in Credit Industrial et Commercial v Teo Wai Cheong  SGHC 155 ("CIC"), Philip Pillai JC decided that the question whether a private bank owes a duty to advise its client will ultimately depend on the contract and the conduct of the parties. CIC involved structured equity products known as accumulators and the dispute was whether or not the defendant had purchased the accumulators from the plaintiff.
The Singapore High Court held that the plaintiff was under no contractual obligation to ensure that the defendant understood the full import and implications of all the terms of the accumulators. The term sheet of the disputed accumulators had set out the relevant disclaimers relating to the defendant’s need to make his own risk assessments. It was up to the defendant to request information or clarification about terminating the accumulators if it was required.
Both cases were affirmed in Bank Austria. In Bank Austria, the plaintiff claimed that the bank had breached its duty owed to the plaintiff, in contract and/or tort, by failing to advise the plaintiff that it was imprudent to have maintained the investment portfolio that he was holding during the period of the Asian financial crisis. It was alleged that the bank owed concurrent and co-extensive duties in both contract and tort to advise him as to the prudence of his investment portfolio.
Adopting the lower level factors in Springwell, the court affirmed the principle in Springwell and CIC. The court held that a private bank is not acting as a trusted advisor of its client when the standard printed forms highlight that the client is responsible for the risks in his transactions and recommends that he takes advice from other professional advisers and that the bank does not make recommendations or give advice, the latter being borne out by the evidence of conduct and the extent of the investor's financial experience and sophistication, depending on the particular factual matrix concerned.
The nature and terms of the contractual relationship between the parties will determine the scope of the responsibility assumed and can, in some cases, exclude any assumption of legal responsibility to the plaintiff for whom the defendant has assumed to act.
The court held that the terms of the principal contractual documents upon which the bank relied on clearly showed that the parties were dealing with each other on a stipulated and accepted basis that, whatever advice or recommendations may have been given by the bank 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.
As financial products become more complex, financial institutions act in varying capacities vis-a-vis their clients. As investors naturally look to apportion blame in times of financial crisis, the decisions cited above are cause for relief for financial institutions. It is evident that a strict test remains in place for parties wishing to contradict clear contractual documentation governing the way these financial institutions transact with their clients.
In the absence of fraud, misrepresentation or the finding of any conduct amounting to reliance, the courts will treat the contractual documentation as normally precluding any implied terms incorporating a duty of care on the part of the financial institutions. A specifically contracted trading and banking relationship between the parties thus negates the assumption of a general or specific advisory duty.