JPMorgan Chase Bank v. Springwell Navigation Corporation, Part 1: A Banker's Duty to Advise - Part 1

Introduction

In two recent judgments of Gloster J in JPMorgan Chase Bank

v. Springwell Navigation Corporation [2008] EWHC 1186 (Com)

and [2008] EWHC 1793 (Com), the English Court has highlighted a

number of the issues and legal principles likely to be faced by

banks and other financial institutions and their counterparties in

mis-selling and trading claims emerging from the global credit

crisis. Whilst the judgments do not strictly make new law, the

judge's interpretation of existing principles in

Springwell, which may well become the subject of appeal,

merits detailed analysis.

This first part of a series of Commentaries in relation

to particular aspects of the judgments considers the judge's

conclusion in the first judgment that, irrespective of the terms of

relevant transactional and customer classification documentation,

various entities in the JPMorgan Chase group, principally the

Private Bank and the Investment Bank (together

"Chase"), did not owe contractual or

tortious duties of care to give general investment advice to its

longstanding customer, Springwell Navigation Corporation

("Springwell"), and to use reasonable

skill and care in so doing.

Subsequent Commentaries in this series will address the

exclusions, disclaimers and representations in the contractual

documentation relied upon by Chase in support of its contention

that it had no duty to give general investment advice;

Springwell's claim that Chase was liable for negligent

misstatement or misrepresentation and for breach of fiduciary duty;

the scope and relevance of the financial services regulatory

framework; and the Court's ruling as to whether certain

pass-through instruments achieved their purpose.

In deciding whether or not Chase owed contractual or tortious

duties of care to give general investment advice to Springwell, the

judge set out in great detail aspects of the dealings and

relationship between the parties spanning more than 12 years

(1986?1998). These consisted of a number of

representatives of the Private Bank liaising with Springwell in

relation to its financial investments and a bonds salesman in the

Investment Bank engaging directly with Springwell's principal

decision maker for the purposes of buying and selling financial

investments, including emerging markets debt instruments. For the

period from May 1997 to August 1998, taped telephone conversations

between the Chase salesman and Springwell's principal were

available, amounting to thousands of hours of conversation.

In essence the judge decided, based upon the facts set out in

her judgment, that whilst the Chase salesman did make

recommendations and provide advice to Springwell on a regular basis

throughout the relevant period in relation to both particular

investments and Springwell's portfolio, such recommendations

and advice did not in themselves give rise to duties of care to

give general investment advice.

It remains to be seen whether the Court of Appeal might take a

different view of the facts. Although this judgment is heavily

fact-dependent, not all of the facts are disclosed; there is very

little quotation of correspondence and oral evidence, and none

whatsoever of the taped telephone conversations. It is therefore

necessary to be careful at this stage about expressing general

propositions as to a bank's duty to advise in the context of

this particular case.

Nevertheless, the judge helpfully sets out the principal factors

that, in her judgment, served as indicators of the existence (or

otherwise) of a contractual or tortious duty of care, including the

absence of any written advisory agreement, the extent of

Springwell's financial experience or sophistication and of its

reliance upon both the bonds salesman and other Chase personnel,

and the regulatory background. When balancing these factors against

the extensive dealings between the parties in the relevant period,

the judge determined that Chase did not assume a duty to give

general investment advice and to use reasonable skill and care in

so doing.

The judge acknowledged in her first judgment that the case might

go to the Court of Appeal, and in case she were to be wrong in her

conclusions in relation to the duty to advise, the judge stated

that, nevertheless, the terms of the contractual documentation

entered into between the parties during their relationship

militated against a duty of care.

Factual Background

The Polemis family. Springwell (incorporated in

Liberia) was the investment vehicle of the Polemis family, one of

the longest-established Greek shipping families. The principals of

Springwell were the Polemis brothers, AP and SP (together "the

brothers"), with AP taking all of Springwell's important

decisions. The Polemis family's relationship with Chase spanned

50 years, and AP and SP had had dealings with Chase for over 30

years.

Foreign exchange speculation. In the early to

mid-1980s, the brothers were active traders in foreign exchange

("FX"), not just for the purposes of hedging currency

exposure connected with the shipping business, but also for profit

through speculation. During 1982, the Polemis group traded US$383

million with Chase. In 1984, Chase internally recorded a concern

about these "speculative tendencies", which had generated

a cash loss of £7.5 million in that year, which Chase

considered to be "diametrically opposite" to the

brothers' conservative investment strategy in the shipping

markets. FX speculation continued over a three-year period until

about 1985/1986, by which time it ceased.

Acquisition of Springwell. Springwell was

acquired in June 1986 in order to carry out the treasury function

for the Polemis group, holding the profits that flowed from the

shipping operations. Previously, it was the family's practice

to place their excess liquid funds on time deposits in the names of

one or other of their shipping companies. This spare liquidity was

now transferred to Springwell.

Springwell's account with the Shipping

Department. Springwell opened an account with the Shipping

Department in London in 1986. At that time, Mr Mellis

("EM") was head of the department.

Introduction to alternative investments.

Between late 1987 and March 1988, the Shipping Department suggested

an alternative investment to AP in the form of European Commercial

Paper ("ECP"), which bore a higher rate of interest than

time deposits. At some stage during this period, Chase (EM)

introduced AP to Mr Atkinson ("JA"), an employee of the

Investment Bank, who at that time was a salesman on the Chase Money

Market Desk in London, selling ECP. By March 1989, Springwell's

investments in ECP with Chase had grown to approximately US$48

million. By this time, JA had also been selling a wider range of

investments, including emerging markets debt instruments. Indeed,

by 1990, Springwell had started to invest in debt instruments in

emerging markets in Latin America.

JA specialises in selling emerging markets

debt. In July 1990, JA joined the London Debt Arbitrage

Group, which was subsequently renamed the Developing Countries'

Capital Markets Group and, later, the International Fixed Income

Group ("IFI"). This move meant that JA began to sell to

Springwell predominantly emerging markets debt, a more specialised

asset class than ECP, as the emerging markets debt market began to

expand rapidly in the 1990s.

EM and Springwell's account move to the Private

Bank. By now EM had moved from the Shipping Department to

join the Private Bank, and Springwell's account, along with

several other Greek shipping customers, was moved from the Shipping

Department to the Private Bank on or about 20 August 1990.

Investment Management Accounts

("IMAs"). From late 1990 onwards, Springwell

opened various different types of account with Chase, entered into

various different facilities with Chase and signed various

different trading agreements with Chase in respect of its banking

and investment business. These products included IMAs, being

accounts in which funds were invested in a range of assets and

managed on a discretionary basis in accordance with the broad

investment objectives specified by each customer on its application

form. There was a quarterly management fee of 0.5 percent on the

whole of the customer portfolio, and Springwell's investment

objectives were stated, in late 1990, as "balanced".

Petrobras and the introduction to leverage. In

August 1991, Springwell purchased a substantial tranche (US$40

million) of a US$250 million Eurobond issue by the Brazilian state

oil company, Petrobras, using a US$15 million loan facility from

the Private Bank, secured on the existing IMA with the Private

Bank, as well as securities held by the Investment Bank. This

Investment Grade Facility was then for a time used regularly and

increased periodically in order to leverage Springwell's

emerging markets portfolio, including Brazilian government

"C" bonds (restructured defaulted loans).

By now, Springwell's portfolio at Chase had begun to grow

exponentially, with Springwell's emerging markets investments

mainly concentrated in Mexican and Brazilian instruments but also

including Argentinean and Venezuelan instruments, during the early

days of the emerging markets debt market.

Introduction of the Margin Forward Programme.

In early 1992, Chase developed a Margin Forward Programme in

relation to emerging markets debt investments, which enabled the

purchaser to leverage against the security of the emerging markets

debt instrument which it was seeking to purchase, under the terms

of a Margin Forward Agreement ("MFA"), rather than (as

previously under the Investment Grade Facility) against the

security of other assets that were required to be of

investment-grade quality. Indeed, Springwell's use of the

Investment Grade Facility declined as its use of the Margin Forward

Programme and related facility increased.

Customer classification and related documents.

At about this time, as a result of a change in the regulatory

regime, as the Securities...

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