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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