Recent decisions from the English Court confirm that investors need to be clear at the outset of a transaction as to the precise legal basis upon which they are making an investment.
If they fail to do so, then currently (absent establishing fraud) the scope for an investor to bring a claim for losses arising from an investment is likely to be limited.
The most high profile recent decision is that of J.P. Morgan Chase Bank and Others -v- Springwell Navigation Corporation in 2008. The English High Court dismissed a US $700m claim brought by Springwell Navigation Corporation ("Springwell") for losses it had suffered on its investments through J.P. Morgan Chase Bank and Others ("Chase") in Russian emerging market debt instruments. In a 282 page judgment, it was held, contrary to Springwell's claims, that Chase did not owe a duty of care, either in contract or tort, to advise Springwell on its investments; nor did it owe a fiduciary duty; and nor was it liable for misrepresentation. The court found that the arguments raised by Springwell after its investments had suffered losses ran contrary to the terms of the contractual documentation it had entered into when making the investments.
In March 2009, Springwell applied to the Court of Appeal for leave to appeal and therefore there remains the possibility that further guidance will be provided by the Court of Appeal on investors' rights and obligations if an appeal is allowed.
The Springwell decision in part builds on principles arising out of the 2006 Court of Appeal decision in Peekay Intermark Limited -v- Australia and New Zealand Banking Corporation. In that decision, it was held that by signing a risk disclosure statement, the claimant had contractually agreed that (i) it was aware of the risks of the investment and (ii) it had determined for itself that the investment was suitable for its needs. As a result, the claimant could no longer argue that it had not in fact understood the investment at the time it was made and could not bring a claim for misrepresentation contending that it had been induced to enter the investment by a misrepresentation as to the nature of the transaction.
The decisions in Springwell and Peekay are a clear policy decision by the English Court: if sophisticated parties enter into an investment contract governed by English law, the English Courts will uphold the certainty of that contractual bargain. As a result, if the contractual documents say that the investor has not relied on any pre-contractual representations; has understood the risks of the investment; and has determined whether the investment was suitable for it, the scope for the investor to turn around at a later date and argue otherwise will be limited. The decisions are also somewhat refreshing to those who have otherwise watched regulators slide away from the basic principles of law towards consumer protectionism.
The present message to investors is clear:
- If you believe that your investment counterparty is acting in a particular capacity (such as your advisor), this should be recorded in the transaction documents.
- If you are investing in reliance on any pre-contractual representations, these should also be documented.
- If the transaction documents ask you to confirm that you understand the nature and risks of the investment, you should ensure that this is the case or seek to amend the wording accordingly.
This is an important and developing area of the law and there will be many investors in the existing economic climate who will be considering whether it is possible to recover losses from third parties. The merits of each case will depend on its own facts but the present message from the English Court is that claims against third parties will need to be advanced with caution.
We would be happy to meet with you to discuss any issues you may have in relation to existing or potential investments in the light of the issues discussed above. Otherwise, we will be in touch with you again with any further key developments in this area including the potential Court of Appeal decision in Springwell.