On one reading the recent decision of the Commercial Court in JPMorgan Chase Bank v Springwell Navigation (2006) should have given comfort to providers of financial services facing potential litigation.
The 287-page judgment approaches the myriad of claims brought against the bank by its client in considerable detail. However, it is possible to draw out a number of conclusions about the current state of the law in this area. The first part of this article sets out the most important of these.
The duties of a trader
Many of the complaints made against the bank depended on the claim that it had a general advisory relationship with its client. The background finding was that, as a matter of fact, the trader had expressed opinions to the client.
However, the judge held that the fact that advice was, in fact, given and accepted did not give rise to a general advisory duty of the type owed by a fully fledged investment adviser. The contractual terms were relevant in the court’s conclusion that the bank was not giving investment advice and had assumed no duty of care as an investment adviser.
It was found in Springwell not only that the client did not read the contractual terms but that the bank knew that the client had not read them. Did this prevent the bank from relying upon any terms that might restrict its liability? The clear answer given in this case was that it did not. The position would have been different had the bank sought to mislead its client as to what the terms were. However, this was not the case here and the bank was therefore able to rely on the relevant terms.
Another attempt by the client to avoid the effect of the contractual terms put in place by the bank relied on an argument that they were not reasonable and so fell foul of the Unfair Contract Terms Act 1977 (UCTA) and/or the Misrepresentation Act 1967.
In dealing with this argument, the judge referred to it as a “last-ditch argument”, observing that the legislation is, in practice, of very limited application in the case of commercial contracts between commercial counterparties. The terms were market standard and the judge did not consider them to be intrinsically unfair. Many of the clauses said to be unfair were not even exclusion clauses at all but merely defined the scope of the relationship, and so the reasonableness test would not apply. However, even those that were truly exclusion clauses were found to be reasonable.
In a similar vein, the client argued that unusual and onerous contractual terms had to be drawn very clearly to the client’s attention. Unsurprisingly, given the judge’s approach to the question of reasonableness, this argument was also unsuccessful. Further, the judge went on to observe that the principle in question could only have very limited application to signed contracts between commercial parties operating in commercial markets and might not apply to signed contracts at all. In any event, the judge did not consider the clauses to be particularly onerous or unusual.
The claimant argued that there can never be an agreement in a contract that the parties are conducting their dealings on the basis that a past event had not occurred or that a particular fact was the case, although both parties know that in reality the facts were inconsistent with that position. To do so would be to rewrite history and no estoppel would arise because of the absence of reliance. However, the judge adopted a robust approach in rejecting such a broadly framed principle and found that there could nevertheless be a contractual estoppel.
There is, however, another perspective on Springwell. Not only is the case (unsurprisingly) dependent on its own elaborate fact pattern, but there are also broader grounds for caution in applying the case.
One striking fact about the Springwell decision is the extent to which the fact that the client was sophisticated was relevant in the court’s assessment of each of the questions with which it was faced. For example, in addressing reasonableness, the fact that the parties were of equal bargaining strength and the terms were market standard were considered relevant. Had the client not been considered sophisticated, a different conclusion might well have been reached.
A further underlying area of uncertainty arises from the question of what “sophisticated” means. It is perfectly possible for a client to be sophisticated in some of its financial dealings but nevertheless to be entirely ignorant in relation to a particular type of complex financial instrument. This point was not as fully explored in the case as it might have been – probably as a result of the rather extreme position adopted by the client in emphasising its financial naivety, which the judge simply did not believe.
The Springwell decision arose from facts that occurred prior to the Financial Services and Markets Act 2000. Were the same facts to occur in the new regulatory environment, there is no doubt that the bank’s approach in dealing with its client would have been different. The current regulatory framework would also have had an impact on how the court addressed the question of the bank’s duties.
Damien Byrne Hill is a partner in the litigation and arbitration group at Herbert Smith