The Court of Appeal's decision earlier this week in Springwell v JP Morgan Chase Bank and ors  EWCA Civ 1221 is the latest in a series of English judgments which have seen sophisticated investors struggle to make good damages claims against financial institutions in relation to poorly performing investments. In the majority of these cases, the investors have sought to rely on the existence of an express or implied misrepresentation which is alleged to have been made by the financial institution. The cases demonstrate that the English courts will seek to uphold market standard contractual documentation used by financial institutions in such transactions which seeks to limit the circumstances in which representations can be said to arise and which aims to operate as a contractual estoppel preventing investors from being able to pursue such claims.
Springwell, which acted as the treasury company on behalf of a Greek shipping group, sought damages in the order of US $700 million from various JP Morgan entities (the "Bank") through which it had invested in derivative instruments relating to Russian debt known as GKO Linked Notes. Following the Russian financial crisis in 1998, the value of Springwell's Russian investments were materially impacted.
While the Court of Appeal's judgment is detailed and fact specific, there are a number of points which emerge which are of more general interest for financial institutions.
A substantial part of Springwell's appeal concerned the extent to which one of the Bank's employees had made representations to Springwell about the nature and risks of the underlying instruments in which Springwell invested. Springwell pursued these claims on the basis of a claim under section 2 of the Misrepresentation Act 1967 and for alleged negligent misstatement. Springwell appealed against the trial judge's finding that the employee had not made representations that the investments were conservative, liquid and without currency risk. The Court of Appeal considered that any statements made by the employee had to be considered in their proper context and that words "cannot be lifted like a fish out of water". The Court of Appeal agreed with the trial judge's finding that Springwell was a sophisticated investor which was aware of the material risks of investing in "emerging markets".
The Court of Appeal then went on to consider the question whether, contrary to its finding that the misrepresentations had not been made, they would qualify as actionable misrepresentations in any event or instead were simply expressions of opinion without any representation as to the maker (the Bank's employee) having objectively reasonable grounds for his views. The Court of Appeal considered the trial judge had been correct to characterise the individual statements attributed to the Bank's employee about the quality of the Russian derivatives as opinions; the individual was not stating facts but was making a judgment about the Russian derivatives by comparison with other possible investments, in similar or other markets and conditions.
For the purposes of Springwell's claim under the Misrepresentation Act, which is concerned with misrepresentations of fact and not opinion, Springwell needed to establish that each time the individual gave an opinion on the nature of the Russian derivatives it carried with it an implied statement of fact by the individual that he had reasonable grounds for holding that opinion. The Court of Appeal agreed with the trial judge that while there was a relationship between the parties, that was not enough to create as a matter of law an implied representation that there was a reasonable basis for the opinions which the individual had given.
With regard to the common law claim for negligent misstatement, the Court of Appeal was prepared to accept the existence of a "low level" duty of care on the part of a sales person not to make any negligent misstatements and to use reasonable care not to recommend a highly risky investment without pointing out that it was such. The Court of Appeal considered that the question of whether one contracting party owes the other a duty of care and, if so, what duty, required a consideration of all the circumstances (Approving the judgment of Mance J in Bankers Trust International PLC v PT Dharmala Sakti Sejahtera  CLC 518 at 533). Given the trial judge's conclusion that there was no general duty of care on the Bank to give advice and given the trial judge's finding on the nature of the statements made by the Bank's employee and what Springwell knew and understood about the Russian derivatives and Russia, there simply were no actionable misstatements at all, let alone negligent ones.
Notwithstanding that the Court of Appeal agreed with the trial judge's findings that no actionable misrepresentations had in fact been made, it nevertheless went on to consider the extent to which the Bank's 'non-reliance' contractual documentation had the effect of precluding Springwell from being able to rely on any representations or warranties made with respect to the advisability of purchasing the Russian derivatives.
A previous Court of Appeal authority (Lowe v Lombank  1 WLR 196 (CA)) had been viewed as authority for the proposition that a statement in a contract that one party acknowledges certain past facts known by both parties to be false could not be converted into a contractual obligation from the first party that he would do or would not do acts in the future on the footing of that acknowledgement. The Court of Appeal considered there was no legal principle which stated that parties could not agree to assume that a certain state of affairs is the case at the time the contract is concluded or has been so in the past, even if that is not the case, so that the contract is made upon the basis that the present or past facts are as stated and agreed by the parties. In principle, the Court of Appeal considered that parties A and B could agree that A had made no pre-contractual representations to B about the quality or nature of a financial instrument which A was selling to B.
The Court of Appeal considered (as did Moore-Bick LJ in Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd  EWCA Civ 386) that there was commercial utility in such clauses being enforceable, so that parties knew precisely the basis on which they were entering into their contractual relationship. The Court of Appeal reviewed the Lowe v Lombank decision and found that the statements which had been relied upon by Springwell were not a necessary part of that decision and were not, therefore, binding authority for the far-reaching proposition that there could never be an agreement in a contract that the parties were concluding their dealings on the basis that a past event had not occurred or that a particular fact was the case, even it was not the case and both parties knew that it was not. The Court of Appeal noted that there was a series of cases (Burrough's Adding Machines Limited v Aspinall (1925) 41 TLR 276 (Court of Appeal); Colchester Borough Council v Smith  Ch 448 (Ferris J)) which supported the proposition that parties could agree that a state of affairs would be the basis of their contractual dealings with one another even if they knew that that was not the case.
Accordingly, the Court of Appeal agreed with the trial judge that, subject to any arguments based on whether such a clause would exclude or restrict any liability or remedy for misrepresentation (and would be of no effect under section 3 of the Misrepresentation Act 1967 unless it satisfied the requirement of reasonableness as stated in the Unfair Contract Terms Act 1977), the effect of the contractual documentation meant that Springwell was contractually estopped from contending that there were any acts or representations made by the Bank on which Springwell could base its current claims either under the Misrepresentation Act or for negligent misstatement.
The Court of Appeal also took the opportunity to clarify that the concept of contractual estoppel was distinct from the doctrine of estoppel by convention and that there was no room within the doctrine of contractual estoppel for a requirement that the party which wished to rely on that estoppel to demonstrate that it would be unconscionable for the other party to resile from the conventional state of affairs that the parties have assumed.
The Court of Appeal then went on to consider the question of whether the clauses excluded or restricted liability for misrepresentation (per section 3 of the Misrepresentation Act 1967) and had to be assessed for reasonableness. The Court of Appeal considered the relevant questions were whether the contractual language excluded or restricted any liability to which the Bank was subject by reason of any misrepresentation made by them or excluded or restricted any remedy available to Springwell by reason of such misrepresentation. If so, were the provisions reasonable? However, before asking these questions it was necessary to consider whether section 3 of the Misrepresentation Act 1967 was relevant at all, i.e. did the clauses relate to the question of whether any alleged misrepresentation was made at all or did they purport to exclude or restrict liability for a misrepresentation which had been made? If the former, they fell outside the scope of section 3; if the latter, they fell within the scope of section 3 and were subject to the reasonableness test. In the case of a clause providing that no representation has been, is or will be made, the Court of Appeal regarded it as more difficult to classify but decided that if representations had in fact (contrary to its judgment) been made, then such a clause was an attempt retrospectively to alter the character and effect of what had gone on before. Such a clause was in substance therefore an attempt to exclude or restrict liability for misrepresentations and subject to the reasonableness test.
The Court of Appeal was satisfied in any event that the contractual provisions were reasonable, particularly bearing in mind that Springwell was a sophisticated investor in emerging market investments and was conscious of the risks of this type of investment.
While the Court of Appeal's judgment clarifies that there is a separate concept of contractual estoppel and that the courts are prepared to give effect in appropriate cases to the 'no reliance' language within market standard documentation, it is still important for financial institutions to check carefully the detailed language and drafting which they use in their transactions to minimise their exposure. During the course of the proceedings, Springwell had taken a number of points of contractual interpretation regarding the provisions on which the Bank sought to rely where the language and definitions used did not precisely mirror the reality of the transactions. While ultimately these points of construction were resolved in the Bank's favour following a commercial and common-sense reading, it does underscore the fact that in complicated transactions it is important to ensure that the terms of the provisions on which financial institutions will seek to rely should reflect the nature and detail of the underlying transaction. Any temptation simply to copy across 'non-reliance' provisions, contractual disclaimers and exclusion clauses from previous transactions without ensuring they are appropriate and tailored for the instant transaction should be resisted.