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Russian lesson

31 Dec 08

The case of a multi-million-pound portfolio that collapsed sounds a warning for anyone hoping to blame their investment house if they are badly hit in the financial crisis

by Jonathan Brogden and James Brice

Many investors will be sitting on losses that they will find difficult to trade out of. Some may only just be realising the extent of their exposure through investments in complex derivative products. Others may be staring down a black hole with open-ended liabilities.

Investors may naturally look to apportion blame and the most obvious direction to look is to the person who sold them the investment.

A recent decision will mean that investors operating within the jurisdiction of the English courts need to think carefully before launching an offensive and while the facts in a recent case, Springwell, relate to a historic financial crisis, the principles decided will apply to investors caught up this time round.

The facts

Springwell Navigation Corporation brought a claim against various companies within the JP Morgan Chase group after the value of its investment portfolio held with the bank collapsed in 1998.

Springwell was the investment vehicle for the Polemis group, a family-run Greek shipping business. The Polemis family had a relationship with the bank (previously Chase Manhattan) going back to the 1950s. Springwell was run by two Polemis brothers. From 1990, Adamandios Polemis alone was responsible for the investment decisions. His main point of contact with Chase was a salesman, Justin Atkinson, whom he had known since 1987.

Between 1990 and 1998, Springwell’s investment portfolio became heavily concentrated in emerging markets securities. By August 1998, it was valued at more than $700m (£470m). The portfolio was particularly exposed to GKOs, a form of Russian bond, and GKO-linked notes, the value of which depended on the performance of GKOs.

In August 1998 a financial crisis hit the Russian market. The Russian state defaulted on payments due on GKOs, other derivative investments plummeted in value and the value of Springwell’s portfolio collapsed.

Springwell brought a number of claims against Chase in the High Court, alleging that Chase owed it a duty of care in law to provide investment advice in relation to the investments in its investment portfolio. The existence of such a duty would mean that Chase would, in essence, be liable for its carelessness concerning the investment advice it provided.

Springwell argued that the portfolio as at 17 August 1998 was one which no reasonable advisor could have advised it to have held. It alleged that this duty of care arose both in contract law and in common law as negligence.

Springwell also alleged that Chase owed a fiduciary duty and that had breached this duty by failing to act in the best interests of Springwell and by taking advantage of Adamandios Polemis’s lack of investment knowledge and expertise. Further, Springwell alleged that Chase was liable for misrepresentation as it had misled Springwell as to the characteristics of the Russian investments.

Chase denied these claims, relying on contractual documentation with Springwell to demonstrate that it did not owe a duty of care to Springwell. In particular, Chase relied on express contractual disclaimers which contained, in terms, an acknowledgment that Springwell had not relied on investment advice from Chase, and that Chase was not liable for any losses caused by investment decisions taken by Springwell.

The judgment

Giving judgment for Chase, Mrs Justice Gloster held that Chase did not owe contractual or common law obligations to Springwell to advise it as to appropriate investments or the structure of its portfolio. The judge pointed to a number of factors which had influenced her decision. She found that:

• Mr Polemis was considered a sophisticated, “commercially astute” and vastly experienced investor who was “well able to understand and assess the concept of the correlation of risk and reward”.

• Mr Polemis was found to have significant knowledge about emerging markets and financial products.

• No written advisory agreement existed.

• The disclaimers were considered to be standard form disclaimers which were not unusual or onerous and were typical of contractual documentation between investment banks and clients.

The judge relied on guidance from English case law that the existence of contractual provisions such as the disclaimers prevented a general duty of care to advise from arising.

Mrs Justice Gloster further held that there was no fiduciary relationship between Chase and Springwell, commenting that a duty did not simply arise because Mr Polemis placed significant trust in the company’s salesman Mr Atkinson.

The misrepresentation claim failed on the basis that, like the other claims, it was based on the existence of an advisory relationship which was the judge held did not exist.

The judge recognised that over a number of years, Mr Atkinson had provided Mr Polemis with advice on the Russian market, and on particular financial instruments, but held that this was within the ambit of his role of salesman and did not give rise to a duty of care.

The judge crucially found, as a matter of fact, that Mr Polemis had shown scant regard for the contracts which Mr Atkinson asked him to sign regularly, and in any case often ignored his advice; the evidence showing him “to be a man who determined for himself what he wanted to do”.

The fact that Springwell’s investment portfolio was so heavily leveraged in Russian bonds was, so far as the judge was concerned, due to the decisions of Mr Polemis and his pursuit of profit.


Although this is a first instance judgment of the English courts which could well go to the Court of Appeal and ultimately to the House of Lords, the message for investors appears clear: do not come to this court claiming blind reliance on the banks.

The position would, of course, be different for a bank that can be shown to have acted in an advisory capacity. Where an investor can claim reliance on a bank’s advice, a duty of care may well arise. But where, as with Springwell, the bank can rely on express contractual disclaimers, investors need to consider carefully any allegations of reliance.

Further, investors will need to consider carefully their position as to their level of knowledge and experience in financial markets. Sophisticated investors, as Springwell was found to be, will be unlikely to get much sympathy with the English courts.

The decision in Springwell will come as a blow to many investors covered by the English courts who are looking for someone to blame for losses from the credit squeeze.

Whereas in the recent past they could have traded out of trouble, liquidity and availability of credible investment opportunities may now militate against this possibility. Investors will need to be very sure of their position before they embark on litigation in England and pre-action litigation due diligence will be an essential element of their pre-claim activities.

Springwell is a stark reminder, transferable to any jurisdiction, that the performance of key witnesses is crucial for the success of any fact driven case. Early identification of witnesses and their potential credibility should feature heavily in the pre-action due diligence process. n

Jonathan Brogden is a partner and James Brice is an assistant solicitor in Davies Arnold Cooper’s dispute resolution group.

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