The In-House Lawyer

In the prevailing economic climate, banks and financial institutions are likely to face an increasing number of claims. These can be a useful opportunity for banks to reconsider and review their existing documentation and risk management policies.

The ongoing litigation in JP Morgan Chase Bank & ors v Springwell Navigation Corp continues to give helpful guidance to the banking industry and is considered below from two particular angles:

1. creating appropriate protective documentation; and
2. handling problems and disputes that arise.

Background

The first stage of the litigation involved the High Court holding that Springwell, the investment vehicle of a wealthy Greek family, could not succeed in claims against JP Morgan for losses suffered in connection with $700m of investments in exotic (complex) financial instruments ( JP Morgan Chase Bank & ors v Springwell Navigation Corporation [2008] 1186 (Comm)). The most recent stage involved the High Court awarding JP Morgan a significant proportion of its costs on an indemnity basis ( JP Morgan Chase Bank & ors v Springwell Navigation Corp [2008] 2848 (Comm)).

costs decision

By an indemnity costs award a party is awarded all, or nearly all, of the costs it has incurred in the case. The more common 'standard' basis involves an award of costs only on a proportionate basis (usually 60-70% of the costs incurred). In this case, in which JP Morgan's costs amounted to approximately £27m (including interest), the decision to award costs on an indemnity basis meant that Springwell had to pay around £4m more than it would otherwise have done.

The court has discretion to award costs and must have regard to all the circumstances of the case, including:

• the conduct of all the parties;
• whether a party has succeeded on part of their case even if they have not been wholly successful; and
• any payment into court or admissible offer to settle made by a party that is not an offer to which costs consequences under Part 36 of the Civil Procedure Rules (CPR) apply.

The court will take into account the conduct of the parties before and during proceedings. In Springwell the High Court considered that the conduct of the claimant in a number of areas justified a partial award of indemnity costs in favour of JP Morgan.

THE RIGHT DOCUMENTS?

Both of the Springwell decisions give guidance and useful reminders about the documents that banks should endeavour to create and retain. There are several points that are of particular significance:

• Courts will usually look at all documents and evidence available to them in deciding the legal relationship banks have with their clients and other parties, particularly where there is any lack of clarity in the contractual documentation. Every document is potentially important.
• Documents showing the scope of the bank’s legal duty of care (both the scope of the duty and the standard of care owed) are of key importance. Ideally, it will be clear from the documents what the bank is responsible for and what it is not.
• Exclusion clauses and limits of liability do matter. Courts are prepared to uphold properly drafted exclusion clauses and disclaimers, particularly between sophisticated commercial parties, where they are sufficiently clear. It is worth spending time drafting these clauses properly, having regard to any applicable legislation (this issue itself could be the subject of a separate article).
• Document creation and retention policies should be kept under review. The core documents such as client agreement, prospectus or offering memorandum are of fundamental importance, but are not the end of the matter. The increased willingness of courts to look at all the surrounding evidence, rather than just the key contracts, means that documents such as notes of events, e-mails, day books, personnel records, or telephone recordings can be determinative.
• The Springwell decisions provide a reminder that the courts will expect parties to outline differences between written and oral evidence in proceedings. This highlights the reality that relationships between parties change and evolve and any significant changes should be documented clearly when they occur.

Overall, the lesson is clear. It is worth spending time to get the bank’s documentation right, both at the time of the initial contract or offering and as relationships continue. Courts are prepared to look at all relevant documents and view them in context. If the documents are clear, the courts will be loath to allow sophisticated clients to re-invent their relationships or walk away from their own financial or investment decisions.

Springwell demonstrates that the attitude of the court can vary significantly depending on the type of client or institution that is in dispute with a bank. Documents should be drafted and created with this in mind where possible. A ‘one-size-fits-all’ approach, while helpful up to a point, may not provide the desired protection in the fullness of time.

HANDLING PROBLEMS AND DISPUTES

The costs decision in Springwell, in particular, provides guidance about the handling of potential disputes and those that develop into litigation. None of these points are necessarily new, but they are important to remember, particularly as the courts are increasingly prepared to scrutinise how parties handle disputes when making decisions on costs. The courts are likely to increase their level of scrutiny further, as the media continues to take interest in what are sometimes perceived to be unnecessarily lengthy and expensive trials.

Some of the background to this issue is worth remembering. The Woolf Reforms, introduced in April 1999, were designed to force parties to adopt a more constructive and proportionate approach to litigation. This has happened, but perceptions remain that this approach has not been embraced in the largest disputes (eg BCCI, Equitable Life). Arbitration, while having its advocates, has not been perceived to be as good or better an option than the courts. The banking profession itself, particularly in the Commercial Court, is trying to develop ways of handling large and complex disputes more efficiently and cost-effectively. Finally (and perhaps most importantly), the current economic backdrop, combined with increased judicial and media scrutiny, is likely to lead to more flexible and pragmatic handling and resolution of large disputes.

Some lessons can be gleaned from Springwell for handling potential disputes before a dispute reaches the courts:

• Devote necessary and appropriate internal and external resources early. This enables timely and better strategic decisions to be made. It also tends to reduce the likelihood of nasty surprises.
• Develop a press or media strategy from the outset, both internally and externally. While it may not be called upon in all cases, this is a step that should be considered when a dispute first arises. Parties are becoming increasingly adept at using the media in their disputes.
• Identify and obtain the desired involvement from senior management in the potential dispute. Doing this at an early stage can produce significant advantages in terms of early resolution.
• Investigate the position early and form provisional views on all issues that arise to the furthest extent and as early as possible. While sounding somewhat trite, this can make an enormous difference in setting the strategy for resolving a matter, whether through litigation or otherwise.
• Develop a strategy for engaging the other party or parties. Clearly it will be necessary to comply with such protocols and legal or regulatory requirements as they arise, but a strategy should be developed beyond this. For example, a strategy of proactive engagement at the pre-action stage can pay significant dividends no matter at what stage the dispute is resolved.
• Whether potential claimant or defendant, consider the merits of making an early offer under CPR Part 36. This can have probable costs consequences in due course and can create a tactical advantage. Springwell’s refusal of a $15m offer was one of the factors that led to it being penalised on costs. The offer was considered by the High Court to have been ‘a sensible approach… which, in retrospect, Springwell would have been wise to accept’.

Some lessons also worth noting arise in relation to the handling of litigation:

• Courts are increasingly less likely to look favourably on wide-ranging, sometimes called ‘kitchen sink’ litigation. They will expect all parties to adopt realistic, focused, proportionate and restrained positions. JP Morgan had to defend, at significant cost, allegations that were found to have been totally without substance. The High Court warned that claimants pursuing claims on a ‘wide and extravagant canvas’ run the risk of an indemnity costs award.
• Particular care should always be taken before making allegations involving a lack of good faith, such as dishonesty, impropriety and deceit. Claims of this nature have a high standard of proof and courts will expect allegations of this nature to be properly pleaded and supported by credible evidence.
• Parties are likely to obtain dividends in litigation by seeking to narrow the scope of the dispute, whether by streamlining their own position or persuading or requiring the other parties to retract some of their less tenable positions.
• Although not directly an issue in Springwell, each reported decision in that case provides the reminder that banks should always endeavour to make the governing law and dispute resolution provisions clear in contracts. The current list of cases proceeding through the London and New York courts involving collateralised debt obligations and other commercial paper highlights this point.

CONCLUSION

The Springwell litigation rumbles on and continues to provide useful reminders and lessons to the banking sector. Like most cases of this nature, the lessons tend to be more general than specific, but they are no less valid for it. The next stage should be awaited with interest.

By Chris Warren-Smith, partner and co-chair of the global litigation practice, and Ian Pegram, professional support lawyer in the disputes practice, Fulbright & Jaworski International LLP. E-mail: cwarren-smith@fulbright.com; ipegram@fulbright.com.