Bank not liable for representations made to sophisticated investor
Springwell Navigation Corp v JP Morgan Chase Bank and others.
The Court of Appeal has affirmed the decision of Gloster J absolving JP Morgan Chase Bank (the “Bank”) of liability for, amongst other things, alleged negligent misstatement and misrepresentation. This is consistent with other recent decisions which have emphasised that sophisticated investors must take responsibility for their own decisions, that entire agreement clauses will exclude liability for any (non-fraudulent) misrepresentations, and that it is extremely difficult to establish that those selling complex investments owe duties of care to sophisticated investors to spell out the levels of risk involved.
The claimant (a well-known investment bank) originally sought a court declaration of no liability against the defendant’s claims that it had been negligent in matters of investment advice and had made misrepresentations. Gloster J found for the Bank at first instance.
Springwell appealed on two aspects of Gloster J’s judgment:
•It claimed that the Bank had made specific misrepresentations during telephone conversations as to the nature of Russian “GKO” bonds which induced it to invest in the GKO derivatives (known as GKO Linked Notes) by these misrepresentations and that as a result it suffered a loss when the notes defaulted as a consequence of actions of the Russian Central Bank.
•It claimed that the Bank had failed in its duty to Springwell to obtain some value from the forward currency contracts attached to the GKO Loan Notes in the period after the default.
The first aspect of Springwell’s appeal is of interest because it sheds light on the circumstances in which the courts are prepared to find that a duty of care was owed and reliance was placed for the purposes of establishing a misrepresentation claim. It indicates that where sophisticated investors are involved, the threshold for establishing a duty of care on the part of the person providing advice and for establishing reliance on the part of the recipient of such advice is higher, particularly where the recommendations come from a salesman and there are contractual provisions intended to protect the position of the salesman’s employer.
Springwell argued that the Bank had been engaged to give, and owed a duty of care to give, careful investment advice to Springwell in accordance with its investment objectives as a conservative investor. It claimed that the recipient at Springwell of the investment advice was an unsophisticated investor, who had little comprehension of basic concepts of risks and rewards. Springwell therefore claimed that it was absolutely reliant on the advice it received from its contact at the Bank in all respects. Springwell alleged that the Bank gave negligent recommendations and incorrect advice, as well as failing to give proper warnings about the level of risk and liquidity attached to the notes.
Unsurprisingly, the Bank argued that it did not have an advisory role with regard to Springwell’s investments and that Springwell was in fact an aggressive investor which sought the highest possible yields and chose emerging market securities in the belief this would maximise its returns. Further, the Bank argued that the recipient of the Bank’s advice at Springwell was in fact a highly sophisticated investor who was at ease with emerging markets and happy to take big risks in order to obtain high yields on investments. In any event, the Bank denied that any misrepresentations had been made, or that Springwell had relied upon the advice or representations made or that such advice had caused Springwell to enter into the investments that it had.
It was noted that the owners of Springwell knew that their contact at the Bank, with whom they had had many telephone conversations during the sale and purchase of the notes, was a salesman working on the trading floor who made recommendations about the merits of various products and as to whether Springwell should buy, sell or hold any particular investments. The Court of Appeal agreed with Gloster J’s finding that the reasonable person operating in the financial market in which Springwell engaged would not have assumed that the salesman’s statements were actionable or that his expressions of opinion were to be treated as anything more than “trader’s opinions from the trading floor” based upon the Bank’s research and the salesman’s own view of the markets and the economic and political situation.
Crucially, it was also recognised that Springwell’s owners retained control over all decision-making and as to whether to initiate trades on Springwell’s behalf. In addition, they were aware of the risk of sovereign default by Russia. In fact, the recipient of the Bank’s advice at Springwell was held to be knowledgeable about emerging markets and familiar with the jargon used in relation to them by the salesman at the Bank; although his knowledge was not as extensive as that of the salesman, he was never out of his depth. In these circumstances, it was held that it was highly unlikely that Springwell had relied on what the salesman had said, and that the way in which the salesman advised and sold emerging market securities to Springwell might give rise to a “low level duty of care on the part of the salesman not to make any negligent misstatements, or even to use reasonable care not to recommend highly risky investments without pointing out that it was such”, but that was “miles away” from the much broader scope of duty of care said by Springwell to be owed by the Bank as an “investment advisor” to Springwell, which was rejected entirely.
The contractual provisions binding Springwell and the Bank played a key part in this decision. The Bank was able to show that Springwell was bound in its dealings with the Bank by various contractual documents including the terms of the GKO Linked Notes themselves, which Springwell had repeatedly and on a routine basis confirmed and represented that it had read, understood and accepted. The notes specifically stated that “…in addition the Holder has not relied on, and acknowledges that neither CMSCI nor CMIL [being entities of the Bank] has made any representation or warranty with respect to the purchase of this note.” It was clear that the Bank was only prepared to allow Springwell direct access to the emerging markets trading desk on the express basis that, in accordance with the signed contractual documentation, Springwell was precluded from bringing a claim in misrepresentation and that the Bank entities were not assuming any responsibility for statements made.
It was held that in the circumstances, such provisions operated as the Bank intended. The Court held that there could be no duty of care owed by the Bank to Springwell. Further, the provisions operated (via contractual estoppel) so as to prevent:
•Springwell from relying on any actionable misrepresentation that the Bank may have made or
•Any Bank entity being liable in damages for any such representation.
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