JP Morgan Chase Bank v Springwell Navigation Company & Ors - Case Summary
07 January 2009
Gloster J’s lengthy judgment in Springwell will be of interest to all trustees investing funds. The key issues were:
- the degree to which JP Morgan Chase (Chase) might be liable for losses suffered by a sophisticated investor (Springwell); and
- whether the bank had a duty to act as an investment advisor to its client, irrespective of any contractual agreement governing their relationship.
Springwell, which had a long-standing relationship with Chase, brought claims against various members of the Chase group, arising from losses made on investments in “emerging markets” instruments which Chase had sold or issued. By 1998, Springwell had a portfolio with a face value of some $700 million invested in market debt in Latin America and Russia, in particular in “GKO-linked” notes, which were debt securities issued by the Russian Federation. However, the GKO notes defaulted, and Springwell began proceedings in New York for the losses it suffered. The proceedings were halted on jurisdictional grounds, and Chase applied in England for a declaration of non-liability. Springwell counter-claimed alleging, among other things, breach of contract, breach of fiduciary duty and negligent misstatement.
General advisory claims
Springwell alleged there was an advisory relationship between it and Chase, but that the particular were investments made and the portfolio as a whole were such that no reasonable advisor could have advised Springwell to hold them. Although there were a number of disclaimers in the contracts between Chase and Springwell, Springwell alleged that these dated only from 1992, whereas the advisory relationship had begun by 1987. This duty to advise was accentuated as Springwell’s investments became more heavily concentrated in Russia. Springwell sought to support its allegation that Chase owed a duty of care on the basis that, as Chase admitted, Chase knew that Springwell’s representative often did not read the documents that Chase gave him. Springwell further alleged that, however the relationship might have started, it evolved over time to become an advisory one.
Gloster J rejected these allegations. In doing so, she drew attention to Springwell’s sophistication as an investor, the surprising lack of evidence documenting any advisory obligation (given the scale and complexity of the investments), the fact that although Springwell valued Chase’s advice it ultimately made its own decisions, and the existence of the disclaimers. As to the latter, Gloster J accepted that they did not apply to all of the investments, but held that they were an indication of the overall nature of the relationship between Springwell and Chase. In any event, the investments Springwell made did not obviously fall outside the range and nature of those suggested by its underlying investment objectives, so there was no legally relevant reliance: Springwell would have made those investments irrespective of what Chase said.
In assessing the claim for breach of duty of care, Gloster J repeated recent judicial comments to the effect that there was no over-arching principle against which the existence of a duty could be tested – the judgment remained “pragmatic”.
Claims for misrepresentation
Springwell also alleged that, even if Chase had no duty to give advice, Chase had misled it as to the nature of the investments – specifically, that Chase had led it to believe that the notes were “conservative” cash-equivalents. On this basis, Springwell claimed that the various disclaimers did not apply. Springwell also argued that, whatever the disclaimers might say, Chase had actually acted as an advisor and was therefore prevented, by its own conduct, from relying on the disclaimers. However, Gloster J found that there was no real distinction between the claims falling under this heading and the general advisory claims – they both derived from the assertion that there was a duty of care.
In one sense, the decisions in Springwell are not surprising. The existence of a duty of care in this context will always be fact-specific, and the Courts have been reluctant in recent years to find such duties where they have not been established by previous case law, or to infer such duties where the evidence is thin. Equally, the question of whether an investor did actually rely on advice will always be fact-specific. From a trustee’s or investor’s point of view, the case may also confirm a suspicion that the Courts are very careful not to hold investment managers or advisors liable unless there is a clear contractual obligation or, at the least, where the parties’ conduct shows de facto that such a relevant advisory relationship exists.
Perhaps more surprising is that such a long-lasting relationship, involving such large sums, could have developed without any clear and definitive documentation about the nature and scope of that relationship and the parties’ rights and obligations, and that the Court was not prepared to infer that an advisory relationship had developed which created a duty of care.
For trustees the message is clear: the degree to which you are looking to product salesmen, brokers etc to give advice, and the degree to which you are relying on that advice, should be established at the outset of the relationship. If the relationship changes, those changes and the new obligations involved should also be clearly agreed and recorded. Further, the more sophisticated a trustee is as an investor, the greater the need for such documentation: Springwell’s ability to show reliance was adversely affected by the fact that it was highly experienced in investing in emerging markets.
Separately, Gloster J held that Chase’s non-reliance clauses were reasonable in the circumstances. It is possible that she would have been more reluctant to find this if there had not been equality of bargaining power between the parties, and it may be that smaller and less sophisticated trustees or investors would be more successful in challenging such clauses in other circumstances. On a further practical point, Gloster J drew attention to the wide-ranging nature of the duties which Springwell alleged; this may have been a tactical mistake, in that it seemed to be clear from the evidence that some degree of advice had been given. Again, a more restrictively framed claim might have been met more sympathetically.
Finally, this was a lengthy case provoking a very lengthy judgment and a great deal of commentary. However, it remains to be seen how significant it is. One remarkable feature that emerges is how reluctant Springwell was to take advice which did not correspond with its own pre-conceived objectives. If Springwell had been able to show that it had been amenable to the advice it was given, and hence show some degree of reliance, the outcome might have been quite different.