Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1221

Springwell, a Polemis family investment vehicle, lost heavily on Russian GKO-Linked Notes purchased from Chase after Russia's 1998 default. It sued Chase for misrepresentation and breach of duty. The Court of Appeal dismissed the appeal, confirming contractual estoppel through non-reliance clauses is enforceable.

Facts

Springwell Navigation Corporation, the treasury company of the Polemis shipping group beneficially owned by Adamandios Polemis (AP) and his family, made 42 purchases of GKO-Linked Notes (GKO LNs) from Chase entities between April 1996 and July 1998. These were US dollar-denominated derivative instruments issued by Chase Manhattan Securities (C.I.) Limited (CMSCI) whose returns were linked to Russian government short-term rouble bonds (GKOs), incorporating forward currency contracts (typically with Chase Manhattan Bank International (CMBI)) to hedge rouble/dollar exposure.

Following Russia’s 17 August 1998 moratorium on foreign debt and suspension of GKO trading, eleven GKO LNs held by Springwell (cost US$87.8 million) defaulted. Springwell sued Chase for over US$700 million, alleging breach of contractual, tortious and fiduciary duties. The relationship between AP and Chase salesman Justin Atkinson (JA) was evidenced by almost 1,000 recorded telephone conversations.

Gloster J, after a 68-day trial, dismissed all but a minor custody fees claim. Permission to appeal was granted on two narrow points: (1) specific misrepresentations allegedly made by JA about the GKO LNs (Pre-Default Claim); and (2) Chase’s alleged failure to obtain value from the forward currency contracts after the default (Post-Default Claim).

Issues

Pre-Default Appeal

• Whether JA made actionable representations to AP that the GKO LNs were “conservative”, “liquid”, and without “currency risk”.
• Whether such representations were actionable absent the Relevant Provisions.
• The effect of the Relevant Provisions (GKO LN terms, DDCS letters, GMRA), including whether they created a “contractual estoppel”, whether section 3 of the Misrepresentation Act 1967 and UCTA applied, and the validity of the Lowe v Lombank argument.
• Reliance and causation.

Post-Default Appeal

• Whether the S-account forward currency contracts were “deliverable”.
• Whether CMIL was entitled to give the force majeure notice of 24 November 1998.
• Whether Chase/CMIL’s actions or inactions constituted breach of Section 3(c) of the GKO LN terms.
• Whether any such conduct amounted to “gross negligence” or “wilful default”.

Arguments

Springwell

Mr Brindle QC argued JA had represented the GKO LNs as conservative, liquid and without currency risk; that these opinions implicitly represented reasonable grounds; and that a low-level duty of care was owed not to make negligent misstatements. He challenged the judge’s findings on what was said and contended the Relevant Provisions did not apply or were struck down by section 3 of the Misrepresentation Act 1967 and UCTA. He argued that Lowe v Lombank prevented contractual acknowledgements of non-reliance operating as contractual estoppels where both parties knew representations had in fact been made, and that Peekay was decided per incuriam. For the Post-Default Claim, Mr Baker QC argued the forward contracts were not (or arguably not) “deliverable” and that Chase had failed to negotiate in arms-length fashion with CMBI.

Chase

Mr Hapgood QC submitted that JA’s statements, properly construed in context, were not unqualified representations but opinions compared with other emerging market investments; that AP was a sophisticated investor who knew the risks; that the Relevant Provisions gave rise to contractual estoppels preventing any misrepresentation claim; that Peekay was correctly decided; and that the relevant clauses were reasonable under UCTA. On the Post-Default Claim, Mr Beltrami QC relied on the judge’s bedrock findings of fact that the forwards were deliverable and unperformable.

Judgment

The Court of Appeal (Rix, Rimer and Aikens LJJ, Aikens LJ giving the principal judgment) dismissed both appeals.

Pre-Default Appeal

The Court held Gloster J was correct that JA did not make the alleged representations in the absolute terms claimed. The word “conservative” was used in the context of Russian emerging market investments; shorthand terms such as “CD” or “money market stuff” did not convey equivalence to investment grade assets to a sophisticated investor like AP. JA’s statements were expressions of opinion, not statements of fact, and there was no implied representation that he had objectively reasonable grounds. Any “low-level duty of care” not to make negligent misstatements was not breached.

On the Relevant Provisions, the Court held that “Holder” in the GKO LN terms had to be construed to include Springwell as customer, notwithstanding the literal definition referring to CMB. The Court analysed Lowe v Lombank Ltd [1960] 1 WLR 196 at length, concluding that Diplock J’s remarks about acknowledgements of past facts not giving rise to contractual obligations were not binding authority preventing parties from agreeing that a particular state of affairs shall form the basis of their contract. The Court followed Burrough’s Adding Machines Ltd v Aspinall (1925), Colchester Borough Council v Smith [1991] Ch 448, and Peekay Intermark Ltd v ANZ Banking Group [2006] 2 Lloyd’s Rep 511, confirming the doctrine of “contractual estoppel”. Unconscionability is not required for contractual estoppel (unlike estoppel by convention).

Certain provisions (penultimate sentence of paragraph 4 and parts of paragraph 6 of the DDCS letter; key wording in Section 6(c) of the GKO LN) fell within section 3 of the Misrepresentation Act 1967, but the judge’s finding that they were reasonable under UCTA was upheld. CMSCI could rely on the DDCS letter terms through CMIL’s agency.

Post-Default Appeal

The Court upheld the judge’s construction of the Forwards Master Agreement that the forwards were “deliverable”, requiring CMIL to deliver roubles into the S-Account before CMBI’s obligation to deliver US dollars arose. Following the moratorium and the Central Bank’s S-Account Amendments of November 1998, CMIL could not fund its S-Account with roubles. The argument that waiver or a “non-deliverable” construction might have been advanced against CMBI was described as “hopeless”. CMIL’s 24 November 1998 force majeure notice was a reasonable response to circumstances within clause 22.1.2 of the FMA. The subsequent termination by CMBI in March 1999 was “entirely reasonable and contractually appropriate”. There was no gross negligence, let alone wilful default, under Section 3(c) of the GKO LN terms.

Implications

The decision firmly endorses the doctrine of “contractual estoppel” following Peekay, confirming that sophisticated commercial parties may bindingly agree that a particular state of affairs (including the absence of pre-contract representations or reliance) forms the basis of their contract, even where both know the agreed state of affairs does not reflect reality. Unconscionability need not be demonstrated for contractual estoppel, distinguishing it from estoppel by convention. The remarks of Diplock J in Lowe v Lombank are confined to their statutory hire purchase context and do not prevent such agreements in commercial contracts.

The judgment is of considerable significance for financial institutions dealing with sophisticated clients in emerging market or derivatives transactions. Non-reliance clauses, acknowledgements of non-advisory status, and sophisticated investor representations will, where properly drafted and reasonable under UCTA, effectively preclude misrepresentation and negligent misstatement claims. The case also confirms that a salesman’s statements of opinion about market-linked products, made to an experienced counterparty aware of the relevant risks, will not readily be characterised as actionable misrepresentations.

The decision is, however, grounded in the findings of fact that AP was a sophisticated investor fully aware of emerging market risks; its application may be more limited where the counterparty is less experienced or where the contractual documentation is less comprehensive. The decision does not disturb the possibility of a “low-level duty of care” on a salesman not to make negligent misstatements, though that duty was not breached here.

Verdict: Both the Pre-Default and Post-Default appeals were dismissed. The Court of Appeal upheld Gloster J’s orders dismissing Springwell’s claims against the Chase entities.

Source: Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1221