As the Credit Crunch continues to bite and following the collapse of banking and investment stocks a large number of investors are looking at recouping their losses from professional advisers.
The case of J P Morgan v. Springwell ([2008] EWHC 1186 (Comm)) is a clear warning for all such investors to seek good professional advice and exercise caution when pursuing such litigation.
Fact and Background
This case was one which arose following the financial crisis in Asia and between 1997/1998. Springwell Navigation Corporation (Springwell) had been established as an investment vehicle which had made significant investments in bonds issued by Russia. These bonds were therefore a substantial element of the Springwell investment portfolio such that when defaulted upon payment of the bonds as a result of its financial crisis Springwell suffered extremely large losses.
J P Morgan Chase had been involved in the sale of many of these bonds to Springwell and as a result Springwell claimed US $280 million from J P Morgan Chase. The figure was calculated as being the difference between what the portfolio was worth and what it should have been worth had the bonds been paid out. Springwell sought to make a further recovery for the loss of return of the shipping assets which it had been intended to purchase with the profits from the investment portfolio.
Claim
The case itself is an extremely complex one covering four separate pleaded causes of action against J P Morgan Chase. Those claims were for breach of contract, for negligence, for breach of fiduciary duty and for miss-representation. Springwell was in fact unsuccessful in each and every claim.
The Court held that J P Morgan Chase did not owe a duty of care either in contract or in tort to Springwell. The suggestion had been that Chase owed Springwell a duty “to advise Springwell as to appropriate investments and to use reasonable care and skill in so doing”. Further this was one of the rare claims that was advanced where pure economic loss was claimed to be recoverable in tort.
The Trial Judge held crucially that the terms of the contract between Springwell and J P Morgan Chase showed that “the parties specifically contracted upon the basis of a trading and banking relationship which negated any possibility of a general or specific advisory duty coming into existence. As a result J P Morgan Chase was essentially held to be, as they had pleaded, merely a salesman and not an adviser. The relationship between J P Morgan as a salesman and Springwell did not give rise to any duty of care in contract or tort. The mere fact that the salesman was giving any advice or making recommendation did not place a duty of care upon the salesman.
Finally and perhaps most critically the relationship between a private bank and an investor does not establish a duty of care either in contract or tort upon the bank.
Conclusion
This case makes clear the fact that it will often be difficult to prove a duty of care is owed by those selling investments to their purchasers. However even in the event that there had been a duty of care owed it will be difficult to prove that was causative of loss given that as the Judge held in this case Springwell’s investment manager “knew and determined for himself the direction of the portfolio”. Further, although not relied upon in this matter, the Judge was clear that the contractual disclaimers applied by J P Morgan Chase and commonly seen in contracts of this nature, would have been effective if necessary to disclaim liability. The individual disclaimers themselves not being unreasonable under the Unfair Contract Terms Act 1977.
This case is clear warning signal to all potential litigant investors to exercise caution. In the absence of clear evidence of a duty of care specifically being undertaken in the course of advising regarding an investment, given the often sophisticated and considered approach of investors, it will be difficult to found a case to recover losses on investment.
Accordingly whilst the credit crisis has long been predicted to produce a tidal wave of litigation, proper advice must be sought at the outset if claims which are in fact fruitless are not to be pursued. To sue a financial adviser for negligence or breach of contract where a loss has been suffered is not a decision to be taken lightly, as what the man in the street may think negligent, the Courts may not.
For more information on investor litigation and advisor's liability, please contact Daniel Jennings.
