The Contract Is King

Some welcome commercial certainty

Parties who agree the basis on which they contract are bound by their agreement, the Court of Appeal has found. Put so simply, it hardly sounds like a surprising decision. Contracts are meant to be legally binding after all. However, until the judgment on 1 November 2010 in Springwell Navigation Corporation v. JP Morgan Chase Bank and others1 the ability of parties to agree whether they had given or received advice, and whether they had made or relied on a representation before they made their contract, was in doubt.

Conflicting cases resolved

Springwell resolves a clash between competing Court of Appeal authorities. Lowe v. Lombank2 suggested that an agreement about the basis of the contract that both sides knew was untrue was not a contractual promise at all. In contrast, the more recent case of Peekay Intermark Ltd v. Australia and New Zealand Banking Group Ltd3 held that, where parties had agreed to contract on a particular basis, they could not say afterwards that the reality had been different. This has become known as "contractual estoppel". In Springwell the Court of Appeal has consigned Lowe v. Lombank to a line of consumer case law that has minimal relevance to business disputes. Contractual estoppel is here to stay. This is welcome news not only for banks involved in complex derivative transactions, but also for the wider commercial world.

In addition, the court has clarified how to distinguish clauses that define the basis on which a party is willing to contract from clauses that exclude liability for negligence or misrepresentation. Exclusion clauses only work to the extent that they are "reasonable" under the Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977.

The court's thinking

There have been a string of first instance decisions since Peekay that have followed it. Earlier this year, the Titan Steel Wheels4 case looked at duties to advise, while Raiffeisen Zentralbank v. RBS5 considered liability for representations. None of the cases has followed Lowe v. Lombank. But Springwell was the first time that the Court of Appeal had to decide which of its previous decisions was right. Lord Justice Aikens gave the judgment of the court. Before his promotion to the Court of Appeal, as Aikens J, he had been one of the first judges to follow Peekay6.

Springwell claimed its bankers, the Chase Manhattan group (now JP MorganChase), had misrepresented the nature of various investments that...