Mis-selling claims:Court of Appeal guidance

Investors who have suffered loss through declining asset values are likely to investigate whether their contractual counterparty (such as a bank or other financial institution) owed a duty of care to advise them as to the suitability of investments, and/or made actionable misrepresentations or misstatements. Given the extent of recent investor losses, it is likely that this will be a fertile area of litigation for some time to come.

This article focuses on the Court of Appeal decision in Springwell Navigation Corporation v JP Morgan Chase Bank & ors [2010], which was handed down on 1 November 2010. Not only does it contain important guidance on the likely approach of the court when dealing with claims by disappointed investors, but it also considers the meaning and effect of non-reliance clauses that are so often included in the boilerplate terms of commercial sale and purchase or investment agreements. Springwell, therefore, will have important consequences for anyone seeking to bring a claim in respect of statements made before the contract has been concluded.

At the end of this article several issues are drawn out, from Springwell and elsewhere, that disappointed investors will need to consider in the future before bringing claims against banks or other financial institutions.


Adamandios Polemis (AP) and his brother, Spiros, ran a very successful shipping business from London and Piraeus. Springwell was an investment vehicle through which the brothers invested excess liquidity. During the 1990s, AP built up a close relationship with a salesman on JP Morgan Chase’s emerging markets desk, Justin Atkinson (JA), to whom he had been introduced in the late 1980s. By the mid to late 1990s, JA and AP were speaking nearly every day, discussing investments, and AP bought a significant number of the investments that JA proposed.

By 1998, AP had, on behalf of Springwell, built up a massive portfolio, with Chase, of investments in debt instruments, purchased in the main from JA:

  • The total portfolio was about $700m, divided between Russian and Latin American bonds.
  • The Russian part of the portfolio included long term eurobonds, restructured USSR debt and ‘GKO-linked notes’, which passed through the risks and rewards of short-term, rouble-denominated Russian treasury bills.
  • The portfolio was quite heavily leveraged: around 50-60% under repurchase agreements.

In August 1998 the Russian government announced a devaluation of the rouble and a restructuring of its sovereign debt. As a result, the value of Russian investments collapsed, triggering massive losses in Springwell’s portfolio.

contractual context: Relevant Provisions

Springwell signed a large number of documents containing representations and statements as to the terms of its relationship and dealings with Chase. These included:

  1. trading confirmations;
  2. dealings in developing countries securities letters;
  3. Global Master Repurchase Agreements;
  4. GKO – linked note documentation.

These documents contained numerous representations and disclaimers (together the ‘relevant provisions’) to the effect that Springwell was a sophisticated investor, understood the risks of its investments and was not relying on Chase for advice, as well as stating Springwell’s classification as a ‘non-private’ customer for the purposes of the Securities and Futures Authority (SFA) rules then in force.

claim and first instance decision

Springwell’s claims at first instance, included the following investment claims:

  1. a general advisory claim alleging a very broad advisory duty of care in contract and tort; and
  2. specific claims in negligent misstatement and misrepresentation, focusing on particular comments made by JA to AP about certain investments.

Gloster J dismissed Springwell’s claims. Importantly, the judge held that the contractual documentation between the parties delineated the nature of their relationship and established that Springwell’s trading with Chase was not intended to, and did not give rise to, investment advisory obligations. The judge also held that the contractual documentation precluded any actionable representation being made at all, whether of fact or opinion, because Springwell and Chase had contracted on the basis that Chase was not assuming any responsibility for statements of fact or opinion that were made.


Springwell pursued a narrower case before the Court of Appeal. It did not appeal against the finding that Chase did not owe it a contractual and/or tortious duty of care to provide it with general investment advice. Instead it alleged that Chase provided it with inaccurate and misleading information about GKO-linked notes (which formed part of its Russian portfolio). In particular, Springwell argued that JA had described the GKO-linked notes as:

  1. conservative;
  2. liquid; and
  3. without currency risk.

According to Springwell, these representations were inaccurate, and gave rise to a claim in misrepresentation and negligent misstatement.

Court of Appeal’s decision

Aikens LJ gave the only reasoned judgment, with which Rix LJ and Rimer LJ agreed. Aikens LJ rejected the appeal for several reasons, but his most interesting findings relate to the question of whether actionable misrepresentations were made, and the meaning and effect of the relevant provisions.

Were any actionable misrepresentations made?

AP would not have understood JA to be representing that the GKO-linked notes were conservative, liquid or without currency risk. While the transcripts of recorded telephone conversations and the witness evidence showed that JA had used these words, the statements had to be taken in the context of investments in emerging markets and were not to be ‘lifted like a fish out of water’. AP was a sophisticated investor who was well aware that there were significant risks involved in making this type of investment.

Even if the alleged representations were made, they were not actionable. The representations were of opinion, not fact. Statements of opinion do not give rise to misrepresentation claims unless they carry with them an implied statement of fact that the maker has reasonable grounds for holding the opinion. The Court of Appeal refused to overturn Gloster J’s finding of fact that no such statement of reasonable grounds could be implied in Springwell. The question of whether such a term could be implied depended on the context in which the communication was made and the parties’ respective positions, knowledge and experience. AP was a sophisticated investor and Chase had sent him a risk disclosure statement setting out the risks. Against that background, there was nothing in the relationship between AP and Chase that could lead to a statement of reasonable grounds being implied.

Relevant provisions

The issue for the Court of Appeal was whether Springwell was bound by the statements of non-reliance contained in the relevant provisions, such as:

‘[Springwell] has not relied and acknowledges that [Chase] has [not] made any representation or warranty with respect to the advisability of purchasing this [GKO-linked note].’

Relying on the Court of Appeal judgment in Lowe v Lombank [1960], Springwell argued that the statements of non-reliance in the relevant provisions could only operate, if at all, as an estoppel by representation. In other words, Springwell could be estopped by the representation of non-reliance from relying on any representations that Chase had, in fact, made, but only if Chase could establish that:

  1. Springwell had made representations to Chase that Springwell did not rely on Chase and accepted that Chase had made no representation or warranty as to the suitability of buying the GKO-linked notes;
  2. Springwell intended that Chase should rely on these representations as true;
  3. Chase had, in fact, relied on Springwell’s representations; and
  4. Chase did not believe that AP relied on JA’s advice when making decisions to invest in GKO-linked notes.

At first instance, Gloster J held that Chase had failed to prove that it did not believe that AP relied on JA’s advice in coming to his decisions on GKO-linked notes. Springwell submitted that this meant Chase could not rely on the relevant provisions by virtue of an estoppel by representation.

Chase, on the other hand, relied on another Court of Appeal decision, Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006]. Chase argued that the statements of non-reliance operated as a contractual estoppel (as opposed to an estoppel by representation) and that it did not matter whether or not Chase believed that AP had not relied on advice given by JA.

Aikens LJ preferred to follow Peekay. Starting from first principles, he took the view that parties should be free to contract on whatever terms they see fit. This included agreeing to assume a certain state of affairs to be the case at the time the contract is concluded, or has been so in the past, even if that is not the case, so that the contract is made on the basis that the present or past facts are as stated and agreed by the parties. In other words, parties should be free to enter into a contract on the basis that white is black, if that is what they want to do. He held that Lowe was not, as Springwell argued, authority to the contrary. Lowe was, according to Aikens LJ, decided on the basis of s8(3) of the Hire Purchase Act 1938 and not on the much wider basis argued for by Springwell. The correct approach was that taken in Peekay; namely that parties can agree that a state of affairs will be the basis of their contractual dealings with one another, even if they know that is not is the case. This approach accorded with principle and had been applied in several subsequent cases.

Springwell argued that the contractual provisions on which Chase sought to rely were unreasonable exclusion clauses within the meaning of s3 of the Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977, and, therefore, were not enforceable. Aikens LJ disagreed. The provisions (or at least some of them) were not exclusion clauses at all, but merely clauses that delineated the nature of the services provided to Springwell. To the extent that they were exclusion clauses, they were reasonable, given the fact that AP was experienced in emerging market investments and aware of the risks involved.

Future mis-selling claims

It has been predicted in various quarters that the credit crunch would lead to an avalanche of mis-selling claims by disappointed investors. Although such a crash has not yet materialised, there tends to be a time lag between losses being suffered and claims being made. Indeed, the principal events underlying the dispute in Springwell took place in 1997 and 1998. Looking ahead, below are some of the key issues that parties will need to consider when bringing or defending such claims:

  1. The contractual framework will be the starting point for ascertaining the rights and obligations that exist between the parties, and so all of the contractual documentation must be obtained and analysed in detail.
  2. A well-drafted non-reliance clause may mean that a party is contractually estopped from contending that actionable representations were made by another party to the contract.
  3. In Bankers Trust International plc v PT Dharmala Sakti Sejahtera [1996] at 575-76, Mance J concluded that the existence and scope of an advisory duty of care in tort was ultimately a pragmatic question, and that ‘the analysis of the relationship is in the circumstances one of some delicacy’. This approach has been followed and endorsed in several subsequent cases, including Springwell, where Gloster J said that the focus of any enquiry should be on the exchanges between the parties.
  4. As a result, any claim for losses arising out of failed investments is likely to be expensive. In Springwell, for example, an enormous quantity of factual and expert evidence was considered by the judge during a six-month trial; AP was cross-examined for 12 days and JA for ten days; there were hundreds of telephone transcripts; four expert disciplines; and thousands of pages of submissions.
  5. In general terms, the court will be reluctant to find that banks and other financial institutions have a duty to provide financial advice to their clients, unless the client in question has asked for that service and is prepared to pay for it.
  6. 6) It will be more difficult for sophisticated investors in commercial transactions to make successful claims against banks or other financial institutions from which they purchased investments. The court is likely to start from the proposition that sophisticated investors know and understand the risks that they are taking.
  7. 7) Parties should also consider the relevant regulatory background. This will be relevant to whether or not a duty of care exists. There may be scope for incorporating regulatory codes of conduct into the agreement by reference. In Larussa-Chigi v CS First Boston Ltd [1998], Thomas J held that the London Code of Conduct had been incorporated because the client agreement stated that transactions would be ‘governed by’ the Code.
  8. 8) A regulatory breach may give rise to a self-standing claim for damages under s150 of the Financial Services and Markets Act (FSMA) 2000, which provides that:

‘(1) A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.’

  1. 9) Establishing a claim under s150 of FSMA 2000 will avoid the need to show that a duty of care exists. However, an action under s150 of FSMA 2000 can only be brought by a ‘private person’. Broadly, if a loss has been suffered by an entity (as opposed to an individual) in the course of carrying on a business, it will not qualify as a private person. Under s150(3) of FSMA 2000, the Financial Services Authority (FSA) can prescribe breaches of certain rules as actionable by anyone, regardless of whether or not they are a private person, but the exceptions so prescribed are fairly limited in scope.
  2. 10) Causation will play an important part in the overall analysis of any claim. In particular, consideration must be given to whether the claimant would have behaved differently if the correct advice had been given.
  3. 11) Finally, any loss suffered by a claimant must be quantified. This is likely to involve detailed expert evidence comparing the non-compliant portfolio against a hypothetically compliant portfolio. It may be the case that the claimant has not, in fact, suffered a loss, or, at least has suffered a smaller loss than first believed.

By Barry Donnelly, partner and head of banking and finance litigation, and Jonathan Pratt, professional support lawyer in the litigation and dispute resolution department, Macfarlanes LLP.

E-mail: barry.donnelly@macfarlanes.com;jonathan.pratt@macfarlanes.com.