Springwell Navigation Corporation v JP Morgan Chase Bank & Ors

In 1996 the Russian Federation, having recently embraced capitalist methods of state debt finance, came to the international capital markets to help fund its state spending. Between 1996 and mid-1998, investment in Russian sovereign debt and associated derivatives was popular with many professional investors who were keen to take advantage of high yields on instruments based on “emerging market” states, of which Russia was one. But the Russian economy had severe structural problems and the state deficit ballooned in 1998. On 13 July 1998 the IMF announced a “rescue” package of aid for Russia totalling US$ 22.6 billion. Despite this package, on 17 August 1998 the Russian government and Russian Central Bank suddenly declared a 90 day moratorium on foreign debt repayments and a suspension of all trading on Russian Federation issued bonds. These restrictions applied to short-term (3, 6 or 12 months), non-interest-bearing (“zero coupon”) bonds, denominated in roubles, quoted at a discount to face value, and issued by the Ministry of Finance of the Russian Federation. These bonds were known in the markets as "GKOs". That is an acronym for their full Russian name, which is, transliterated, “Gosudarstvenniye Kratkosrochniye Beskuponniye Obligatsio”.

The appellant company, (“Springwell”) was the “treasury” company for a group of shipping companies owned and controlled by the Polemis family. Springwell was beneficially owned by Adamandios Polemis (“AP”), his brother Spiros Polemis (“SP”) and their mother, who was the widow of the founder of the current group, the late Mr Leonidas Polemis. Springwell, as the treasury company of the group, had, since 1996, invested heavily and profitably in emerging market securities, including a derivative of Russian GKOs. Derivatives of GKOs were issued by banks such as Chase Manhattan Bank, as the first respondent was formerly known. The derivatives were known as “GKO Linked Notes”, which I shall call “GKO LNs”. This will describe both the derivative generally and the instruments which are the subject of this litigation. In the case of the Chase derivatives, the GKO LNs were issued by Chase Manhattan Securities (C.I.) Limited (“CMSCI”), as the third Respondent was formerly known. The GKO LNs were always traded in US dollars. Because the underlying GKOs were traded in roubles, to avoid the possibility of a currency loss on the GKO LNs at redemption if the rouble/US dollar exchange rate had deteriorated by the time the underlying GKO matured, the GKO LNs contained, as part of their structure, a forward currency contract for the conversion of the GKO rouble proceeds into US dollars at the redemption date of the GKO LNs.

Between April 1996 and July 1998, Springwell made 42 separate purchases of GKO LNs. The sellers of the GKO LNs to Springwell were Chase Investment Bank Limited (“CIBL”) and then Chase Manhattan International Limited (“CMIL”), as the fourth and second Respondents were formerly known. The last purchase was made over a week after the IMF “rescue package” was announced. At the time of the moratorium on 17 August 1998, Springwell still had eleven GKO LNs in its portfolio. Their cost had been US$ 87,837,270. Those eleven GKO LNs were due to mature on dates between mid–September 1998 and January 1999. They constituted about one-third of Springwell’s Russian and Russian related investments. The eleven GKO LNs’ nominal maturity value, or “redemption amount” was US$95,259,716. The result of the Russian moratorium declared on 17 August 1998 and subsequent Directives of the Russian Central Bank was that the underlying GKOs did not perform and so Springwell’s outstanding GKO LNs defaulted. They were ultimately restructured. At the same time, the value of the rouble against the US dollar fell from 6.2 roubles to the dollar before the 17 August announcement to 22.77 roubles to the dollar by 28 January 1999. Some Russian banks became bankrupt. Many western banks, including Chase, lost large sums as a result of this débâcle.

The current proceedings (Footnote: ¹) arise as a result of this Russian financial crisis in the summer and autumn of 1998. The present appeal from orders of Gloster J dated 27 May 2008 and 25 July 2008 concerns only a part of the original claims made by Springwell against various entities in what was then the Chase Manhattan Bank and is now JP Morgan Chase Bank. I will call these entities collectively “Chase”. In the trial before Gloster J, Springwell claimed over US$ 700 million in damages, alleging that Chase had breached various contractual, tortious and fiduciary duties in advising on the nature and contents of Springwell’s investment portfolio as a whole, which included not only Russian securities but also those of other “emerging market” countries. Those claims were collectively known as the “Pre-Default claims”. Another of the many allegations was that Chase failed to take action after the Russian August 1998 default to recover some of the value of the forward currency contracts which were part of the GKO LNs. That claim was one of four claims known at the trial as the “Post-Default claims”.

The trial before Gloster J lasted 68 days. It took place between April and October 2007. Gloster J produced two judgments, dated respectively 27 May and 25 July 1998. The first judgment dealt with all Springwell’s claims other than the Post–Default claims. It covers 742 paragraphs over 266 pages. The second judgment, dealing with the four categories of Post-Default Claim, runs to 261 paragraphs over 84 pages. (Footnote: ²) Both judgments are admirably clear and deal (with only very small exceptions) comprehensively with the facts, the expert evidence and the law. The judge dismissed all but one of Springwell’s claims, which was a minor custody fees claim.

Springwell sought permission to appeal on all the main aspects of the judgments on which it had lost, but the judge refused permission. At an oral hearing before Thomas and Aikens LJJ on 16 June 2009, Springwell sought permission to appeal on two aspects only of the two judgments of Gloster J. The first of these concerned claims that Chase, through its employee Mr Justin Atkinson (“JA”) had made specific misrepresentations as to the nature of the GKO LNs in the course of telephone conversations with AP, in particular between March 1997 and July 1998. Springwell asserted that it was induced to invest in GKO LNs by these misrepresentations, thereby incurring loss in respect of the 11 GKO LNs it held when the Russian moratorium was announced on 17 August 1998 and which subsequently defaulted. At the trial and on appeal this claim was called the “Misrepresentation Claim”, although that term embraces claims both under section 2 of the Misrepresentation Act 1967 and for alleged negligent misstatement by JA to AP.

The second specific aspect on which permission to appeal was sought concerned the claim that Chase failed in its duty to Springwell to obtain some value from the forward currency contracts attached to the GKO LNs in the period after the Russian default. That was the most important of the four Post–Default claims that had been advanced at the trial.

Thomas and Aikens LJJ gave permission to appeal those two aspects, although upon terms. The appeal itself was heard over 7 days between 14 and 22 June 2010. We heard oral submissions from Mr Michael Brindle QC and Mr Andrew Baker QC (who dealt with the Post-Default claim appeal) on behalf of Springwell, and Mr Mark Hapgood QC and Mr Adrian Beltrami QC (who responded on the Post – Default claim appeal) on behalf of Chase. There were 15 Appeal Bundles, plus a Core Bundle, together with 7 bundles of authorities. Springwell’s “Skeleton” arguments ran to over 100 pages, excluding appendices. Chase’s “Skeleton” arguments ran to 180 pages, excluding appendices. Luckily all the documents, including transcripts of the appeal hearing, were available on a CD, prepared by the parties.

Judgment was reserved.

The Polemis group of companies comprised one–ship companies, a management company called Polembros Shipping Limited, a company that handled freights, hire and disbursements (Wintersea Maritime Corporation) and, from March 1986, Springwell Navigation Corporation, which was incorporated in Liberia. From 1986/7 the Polemis shipping group was generating profits which were not needed immediately for use in the business. The funds therefore needed to be invested elsewhere and Springwell was incorporated specifically so that it could be the investment vehicle of the Polemis group. Springwell had no employees. From 1990 until 1998 the management of Springwell, including the decisions about its investments, were largely those of AP alone. After the Russian default, SP took over the principal management of Springwell and its claim against Chase. (Footnote: ³)

When Leonidas Polemis had been running the Polemis family shipping business in the 1950s, he opened a bank account for the business with Chase. The Polemis group maintained a relationship with Chase from that time onwards. Springwell held its bank account with the London branch of the Chase Manhattan Bank (“CMB”) from 1986 to 1998. From 1990 to 1998 the account was maintained in a unit within CMB known as the Private Bank. CMB is now known as JP Morgan Chase Bank, the first respondent to the appeal. CMB was responsible for providing the financial arrangements, including loans, to enable Springwell to purchase securities such as the GKO LNs on a leveraged/margin basis.

Chase Investment Bank Limited (“CIBL”) was the investment bank in the Chase group until 1997. CIBL is now known as JP Morgan PLC, the fourth respondent to the appeal. CIBL was the seller of investments to Springwell. In 1997, following the merger of Chase and Chemical Bank, CIBL was replaced in the investment bank role by Chase Manhattan International Limited (“CMIL”). It too sold investments to Springwell. That bank is now known as JP Morgan Europe Limited which is the second respondent to the appeal.

CMSCI was incorporated under the laws of Jersey. As already noted, it was the Jersey issuer of the GKO LNs which are the subject of this appeal. CMSCI is now known as JP Morgan Securities (CI) Limited, which is the third respondent to the appeal.

Chase Manhattan Bank International (“CMBI”) was incorporated under the laws of Russia. CMBI was Chase’s Russian subsidiary. It was the counter-party to so-called “S Account Forwards” (Footnote: ⁴) which were forward US$/rouble currency hedge contracts which were part of the GKO LNs issued by CMSCI. These forward currency contracts are the subject of the Post-Default claims appeal. No claim was made by Springwell against CMBI and it is therefore not a party to the present appeal.

JA was employed by CIBL. He was introduced to AP in 1987. In 1990 JA joined what subsequently became the Chase International Fixed Income group (“the IFI group”) within CIBL and then, subsequently, CMIL. JA specialised in sales of emerging market securities and instruments which he sold to Chase’s non-private (ie. non-consumer) clients, such as Springwell. All the sales/purchases of the GKO LNs which are the subject of the appeal were made during telephone conversations between JA and AP. Those telephone conversations were regular and often long. From May 1997 they were tape- recorded and all the tapes of telephone conversations between JA and AP covering the relevant period, which totalled nearly 1000, were disclosed by Chase as part of pre-trial discovery. (Footnote: ⁵)

The judge found (Footnote: ⁶) that the Polemis brothers knew that from 1990 JA was only selling and giving advice (in the sense described below) on emerging market paper. Moreover, they knew that JA was a salesman who worked on the trading floor. (Footnote: ⁷) The judge found that JA marketed emerging market instruments to AP on the basis that JA made personal recommendations about the merits of the various products he was offering and on whether Springwell should buy, sell or hold any particular investments. Gloster J also found that, in so doing, JA was giving investment advice, although this was “no more than the recommendations of a trader to a buyer as to what was available, on what terms and perhaps also as to the respective merits of the products on offer, given the requirements of the particular client”. (Footnote: ⁸) However, AP retained control over all decision making and all decisions on whether to initiate trades on Springwell’s behalf. (Footnote: ⁹)

The judge expressed the tentative view that the way JA advised and sold emerging market securities to Springwell might give rise to what she described as a “low level duty of care …on the part of the salesman not to make any negligent misstatements, or even to use reasonable care not to recommend highly risky investments without pointing out that it was such…”. (Footnote: ¹⁰) But that was “miles away” from the much broader scope of duty of care said by Springwell to be owed to it by Chase as an “investment advisor” to Springwell. Gloster J rejected that case entirely.

The Pre-Default claims. The principal claim advanced by Springwell at the trial was that Chase had been engaged to give general investment advice to Springwell since its incorporation and assumption of the “treasury company” role for the Polemis group in 1986. Springwell alleged that Chase, through CMB and CMIL, owed a duty of care in contract and tort to give Springwell careful investment advice in accordance with Springwell’s investment objectives. Springwell contended that its investment objectives were those of a conservative investor whose aims were principally the preservation of capital and the maintenance of liquidity in its portfolio. Springwell asserted that AP, who was the recipient of the investment advice of Chase (largely through JA), was an unsophisticated investor who had little comprehension of basic concepts of risks and rewards, so that Springwell was absolutely reliant on the advice it received from JA in all respects. Springwell alleged that Chase, largely through JA, gave negligent recommendations and incorrect advice and also failed to give proper advice or proper risk warnings about investments recommended.

Allied to these claims in contract and tort was a claim for breach of fiduciary duty, although that was made in connection with only certain investments. A claim that JA had positively recommended certain investments from late 1997 to July 1998 knowing that they were unsuitable for Springwell (given its alleged investment objectives) was abandoned just before the trial.

In addition to the principal claim, which was called the “General Advisory Claim” at the trial and in the first judgment, there were further claims for damages based on more specific allegations of negligent misrepresentation. These claims were made under section 2(1) of the Misrepresentation Act 1967 (Footnote: ¹¹) and also on the principles of Hedley Byrne & Co v Heller & Partners Ltd. (Footnote: ¹²)These two types of “Misrepresentation Claims” related not only to the GKO LNs but other Russian securities and instruments. At the trial Springwell relied on 149 extracts from transcripts of telephone conversations between JA and AP as the basis for these claims. (Footnote: ¹³) Springwell also relied on those extracts for the General Advisory Claim.

Before Gloster J, Springwell had argued that there were three broad categories of misrepresentation by JA which had been relied on by Springwell in purchasing the GKO LNs. The first category covered somewhat inchoate representations that the investments proposed by JA (including the GKO LNs) were “appropriate” for Springwell, could reasonably be expected to result in profit and were not subject to significant risks of default. The second category comprised general misrepresentations about Russia and the state of its economy; in particular, misrepresentations that there would be no default on Russia’s debt obligations and/or no devaluation of its currency. The judge found that none of the representations in either of these two categories were made and there is no appeal from that conclusion.

The third category referred particularly to the GKO LNs. (Footnote: ¹⁴) Three particular alleged misrepresentations were identified at the trial. The first was that the GKO LNs were a “conservative” investment; alternatively that JA represented to AP that there were reasonable grounds to believe that they were a “conservative” investment. That is the principal alleged misrepresentation relied on in the appeal.

The second alleged misrepresentation was that the GKO LNs had a high degree of “liquidity”, akin to the liquidity associated with time deposits of cash or equivalent money market instruments. The implication was that the GKO LNs were as liquid as cash.

The third alleged misrepresentation (which Mr Brindle did not advance on appeal as a separate misrepresentation) was that investment in the GKO LNs involved no “currency risk”. It was said that it was effectively represented that there was no risk that Russian counterparties to the forward currency contracts which were part of the GKO LNs would default on them as a result of any large scale devaluation of the rouble against the US dollar, as did effectively occur in August 1998.

The Post-Default claims. Before the judge there were four categories of Post-Default claim. Three are no long relevant. (Footnote: ¹⁵) The relevant Post – Default claim concerns the forward currency contract that was a part of each of the GKO LNs. As already noted, the GKO LNs were derivative instruments created by Chase and they were US dollar denominated. The obligor of the GKO LNs was CMSCI. Each GKO LN matured on a specified maturity date and on that date CMSCI was obliged to pay the principal value of the Note and the stipulated interest, in US dollars. (Footnote: ¹⁶) The GKO LNs were stated to “pass through” to the “Holder” the risks and returns of investing in the underlying GKOs, which were called “Designated GKO Assets”. CMSCI never actually owned any GKOs; instead it had contractual rights to GKOs under participation agreements with others. (Footnote: ¹⁷) The obligation of CMSCI was to pay to the Holder of the GKO LN upon its maturity the proceeds of those contractual rights to GKOs, but converted from roubles into dollars. (Footnote: ¹⁸)

To avoid or reduce the currency risk of a devaluation of the rouble against the US dollar during the currency of the GKO LN and the underlying GKO, the GKO LNs also contained, as part of the deal, a forward currency contract. Thus the value of the GKOs on maturity (in roubles) would be converted into US dollars at an agreed rate and the US dollar denominated GKO LNs would then be redeemed by the issuer, CMSCI, in dollars at that agreed rate. These forward currency contracts were arranged between CMIL (as agent for CMSCI, the issuer of the GKO LNs) and either CMBI or another, non-Chase, Russian bank. In cases where the forward currency contract was between CMIL and CMBI, CMBI might be the principal or it might be a “pass through” party, where the ultimate counterparty was another, non-Chase Russian bank. (Footnote: ¹⁹) Russian laws and regulations required that these forward currency contracts had to be operated through a specifically designated account, called an “S-Account”. CMIL maintained an “S-Account” with CMBI.

The forward currency contracts between CMIL and CMBI were contracted on the terms of a Master Agreement between them dated 7 April 1997 (“the Forwards Master Agreement” or “FMA”). (Footnote: ²⁰) The relevant terms of this FMA are set out in Appendix 2 to this judgment. They are: the definition clauses, clauses 8.4.2, 10, 20 and 22. By clause 26 the FMA was to be governed by English law. It should be noted that, by clause 8.4.2, if CMBI was acting in a “pass-through” capacity and the ultimate counterparty was another Russian bank, then CMBI had no liability to CMIL on forwards unless there had been due performance by the Russian counterparty; and CMBI bore no responsibility (towards CMIL) for performance by the Russian counterparty.

The forward currency contract was intended to be performed on the date the individual GKO LN matured. In principle, therefore, CMBI (or the other Russian counterparty) had to pay US dollars to CMIL, (on behalf of CMSCI, the issuer and obligor of the GKO LNs), in return for the rouble value of the underlying GKO at the rouble/dollar rate agreed when the forward was struck. The conversion of GKO rouble proceeds into foreign currency upon the maturity of the GKO had, by Russian law, to be performed via an “S Account”, which had to be with a Russian bank. During the period of the 90 day moratorium from 17 August 1998, Russian banks, including CMBI, were prohibited from performing forward currency contracts with non-Russian counterparties, such as CMIL, ie. currency contracts which provided for settlement more than two days ahead. The maturity dates of all the eleven GKO LNs were more than two days ahead when purchased, so that the forwards associated with all eleven GKO LNs were therefore caught by this prohibition. After 12 November 1998, Russian legislation made it effectively impossible to place new roubles into an existing S-Account. (Footnote: ²¹)

By letter dated 24 November 1998 addressed to CMBI, CMIL declared force majeure in respect of its existing obligations under S Account forwards with CMBI. The events that had occurred weresaid (and held by the judge) to be within the terms of clause 22 of the FMA, which is the force majeure clause. CMIL said that the prohibition on Russian banks from purchasing foreign currency from non-residents (such as CMIL) in order to fund provision of roubles in an S account affected CMIL’s ability to perform its obligations on forward contracts with CMBI. Therefore, the letter stated, the performance by CMIL of forward contracts with CMBI would be delayed pursuant to clause 22 of the FMA.

On 23 March 1999 the Russian authorities confirmed the continuation of the prohibition on funding S accounts. (Footnote: ²²) By letter dated 23 March 1999, CMBI terminated the outstanding forwards.

Meanwhile Chase had set up two committees in January 1999 to oversee the rapidly changing situation in Russia. (Footnote: ²³) These committees became involved in negotiations to settle outstanding forward currency contracts with other Russian banks and also the claims of Chase customers who had purchased GKO LNs which had CMBI forward hedges. On 4 February 1999, Chase obtained a good settlement on outstanding currency forwards that CMIL had with the Russian bank called VTB (Footnote: ²⁴) and some, but much poorer, settlements with other Russian banks. In most cases Chase obtained nothing. Chase also offered to buy back from its customers their GKO LNs which had CMBI currency forward contracts. (Footnote: ²⁵) Springwell rejected these offers in January and June 1999.

Springwell’s Post-Default claim concerning the forward currency contracts was against CMSCI only, as the issuer of the GKO LNs to Springwell. Its case was that on the 9 forward currency contracts between CMIL and CMBI (whether CMBI acted as principal counterparty in the currency forward contracts or as “pass through” party) that were outstanding as at 17 August 1998, CMSCI/CMIL were “in the money”, ie. in credit for value, to the extent of US$ 49 million. Springwell argued that this was because, in principle, CMBI remained obliged to pay to CMIL the US dollars due on maturity of those forwards. Springwell next argued that, by Section 3(c) of the Terms and Conditions of the GKO LNs, CMSCI was under a duty to Springwell, as “Holder” of the GKO LNs, to exercise a duty of care with respect to the forward currency transactions. Springwell argued that this meant that CMSCI had a duty to try and obtain value for the outstanding currency forwards that it had (through CMIL) with CMBI in respect of all of Springwell’s 9 outstanding GKO LNs where there was a currency forward involving CMBI, whether as the direct counterparty or where the currency forward “passed through” CMBI to another Russian bank counterparty.

Springwell accepted that it could only recover under the terms of Section 3(c) of the GKO LN conditions, if it could show that it had suffered loss as a result of Chase’s “wilful misconduct” or “gross negligence” in relation to “any Transaction”. It was common ground at the trial and before us that the forward currency contracts were within the term “any Transaction” within Section 3(c). Springwell contended that CMSCI was guilty of “wilful misconduct” or “gross negligence” in failing to extract value from the “transactions” constituted by these 9 outstanding forwards. Effectively, Springwell alleged that the Chase group, acting for CMSCI/CMIL, decided voluntarily to release CMBI from its obligations to CMIL/CMSCI under the direct forward currency contracts; purporting to do so in the “wider interests” of the Chase group. It also alleged that the Chase group did not do enough in relation to forward contracts where CMBI was the “pass–through” party. Springwell argued that these decisions made by Chase in relation to the forwards were to the detriment of GKO LN holders such as Springwell. Springwell’s case was that if CMIL/CMSCI had acted properly, in particular by having arms-length negotiations with CMBI, then they would have recovered all or at least some of the value of all the 9 currency forwards. (Footnote: ²⁶)

Defences on the Pre-Default claims. On the “General Advisory claim”, Chase had argued before the judge first, that it did not have an advisory role with regard to Springwell’s investments. Secondly, it argued that Springwell’s investment objectives were those of an aggressive investor which sought the highest possible yields and believed those could be found in emerging market securities. Moreover, Chase argued that AP himself became a highly sophisticated investor who was at ease with emerging markets and happy to take big risks in order to obtain high yields on investments. Thirdly, Chase denied that any of the general or specific representations about investments generally or specific investments such as GKO LNs had been made by JA to AP as alleged. Fourthly, in any event, Chase argued that AP had not relied on advice or representations made by JA. Fifthly, Chase submitted it could not be shown that the advice or representations of JA (or other Chase employees) were the cause of Springwell’s decision to purchase any particular investment, so that Springwell could not prove that the cause of its alleged losses were the advice (or lack of it) given by Chase or any representations made by Chase through JA.

Lastly, and importantly for the purposes of this appeal, Chase relied on certain provisions in various contractual documents which it said were contractually binding between Springwell and relevant Chase entities. These were collectively referred to at the trial, in the judgments below and on the appeal as “the Relevant Provisions”. I will use the same term in this judgment. Chase’s case was that the terms of the Relevant Provisions operated so that it was agreed between all parties that the relationship between Springwell and Chase was non-advisory and there could be no duty of care owed by Chase to Springwell. Further, Chase argued that the terms of the Relevant Provisions operated so as to preclude Springwell from relying on any actionable representation that Chase might have made or from any Chase entity being liable in damages for any such representation. Therefore, the overall effect of the Relevant Provisions, on Chase’s case, was to prevent or exclude any liability in relation to all the Pre-Default claims. I will mention them all here as part of the background to the appeal, but later in the judgment I will only refer in detail to those that are relevant to the appeal concerning the GKO LN claims.

There are three principal groups of relevant documents. First, there are two letters, both sent from CMB to Springwell, one in 1993 and the other on 17 September 1997, which were called the “DDCS Letters”. (Footnote: ²⁷) These confirmed Springwell’s regulatory classification as a “Non-Private Customer” for the purposes of the rules of the Securities and Futures Authority Limited (“SFA”), in respect of dealings by Springwell for the latter’s own account in “various debt and equity securities of public and private issuers located in developing countries (“Instruments”)”. The DDCS Letters also set out the terms on which Chase was prepared to deal with Springwell in respect of such Instruments. The DDCS Letters were signed by way of acceptance by Springwell. Chase relies in particular on the terms of paragraphs 4 and 6 of the Letters. The relevant terms of the 1997 Letter (Footnote: ²⁸) are set out in Appendix 1 to this judgment.

Secondly, Chase relied on the Master Forward Agreement (“MFA”) (Footnote: ²⁹) and the Global Master Repurchase Agreement (“GMRA”) (Footnote: ³⁰). They were both standard form contracts which set out the terms upon which Chase made finance available to Springwell to enable it to purchase investments. The MFA was signed by Springwell in 1992. It was replaced by the GMRA in September 1997. (Footnote: ³¹) The relevant clauses, also reproduced in Appendix 1 to this judgment, are 1, 2, 9 and 25.

The third group of documents are the GKO LNs themselves and associated documents. (Footnote: ³²) Each GKO LN was represented by a physical Note containing terms and conditions. Chase also provided Springwell with term sheets, confirmation sheets and risk disclosure sheets for each purchase. The confirmation sheets were called “confirms” and that term is used in the judgments below. The judge made findings of fact on the process by which the GKO LN documentation was produced and the specific manner in which Springwell dealt with its GKO LN trades. (Footnote: ³³) None of those findings of fact are challenged except one, (Footnote: ³⁴) although the judge’s construction of the GKO LN documentation is very much in issue. The relevant terms of the GKO LNs, (Footnote: ³⁵) the GKO LN Terms and Conditions, (Footnote: ³⁶) the Risk Disclosure sheet, (Footnote: ³⁷) and the Confirmations or “confirms” (Footnote: ³⁸) are set out in Appendix 1 to this judgment.

Defences on the Post-Default Claim. Chase argued before the judge that its actions during the moratorium and after it ended on 14 November 1998 were not a breach of its duty under Section 3(c) of the GKO LN terms. First, it argued that the currency forwards were “deliverable” in the sense that CMIL had to provide roubles in return for the US dollars that CMBI (or other Russian bank counterparty) had to pay upon maturity of the underlying GKO and the currency forward contract. Secondly, Chase argued that the forward currency contracts became incapable of performance during both the moratorium and after (as a result of the Russian Central Bank’s Directives on S-Accounts), so that, thirdly, CMIL was entitled to declare force majeure on 24 November 1998. Fourthly, Chase argued that nothing that it did could be described as either “wilful default” or “gross negligence” so that there could be no recovery under the terms of Section 3(c) of the GKO LN Terms and Conditions.

The judge dealt first with the General Advisory Claim. None of her conclusions of primary fact on the General Advisory Claim are challenged on appeal, except for one. The judge’s conclusions on the construction and effect of the Relevant Provisions are, however, very much in issue.

On the relationship between AP and JA, the judge held that AP was a sophisticated investor who was knowledgeable about emerging markets and was familiar with the jargon used in relation to them by JA as a salesman. Although AP’s knowledge was not as extensive as that of JA, he was never out of his depth. In relation to the conversations between AP and JA, the judge concluded that AP was always in charge of them. (Footnote: ³⁹) They showed that AP took his own independent decisions, sometimes ignoring completely what JA said. (Footnote: ⁴⁰) Overall, he was not a reliable witness. (Footnote: ⁴¹)

Secondly, with regard to JA, the judge concluded that he was honest as both witness and salesman. He was articulate and approached his job with a high degree of professionalism. (Footnote: ⁴²)

Next, Gloster J concluded that Springwell’s case that it had conservative investment objectives and that it had a conservative attitude to risk were “constructs of fantasy which bore no relation to reality”. (Footnote: ⁴³) On the contrary, the judge found that by the 1990s Springwell was an extremely aggressive investor, comfortable in emerging markets and sought very high returns from the purchase of fixed income instruments in those markets and was prepared to assume significant risk in order to do so. (Footnote: ⁴⁴)

In relation to GKO LNs in particular , the judge found that those were within the investment objectives of Springwell and that all the material risks were disclosed to Springwell and known to AP. (Footnote: ⁴⁵) The judge also found that AP was at all times aware of the risk of sovereign default by Russia and that he frequently discussed this with JA. The judge found that the risk of sovereign default on local currency Russian government securities such as GKOs was seen as low. Moreover, the judge found that AP was at all times aware of the risks of devaluation of the Russian rouble. This was seen as very low in 1997 and as rather higher in 1998; but there was “no preponderance of view”. It was therefore reasonable to take the view, which JA held, that this would not occur. The judge also found that AP was able to and did take his own view on the likelihood of this occurrence. (Footnote: ⁴⁶)

It is worth quoting here in full the judge’s findings on Springwell and AP’s attitude to the purchase of GKO LNs:

“AP was an enthusiastic purchaser of GKO-Linked Notes, which produced high yields on short-term assets and which provided Springwell with the benefit of cash flow and liquidity. They were a standard product available in the market, which were purchased in large quantities by many other emerging markets investors. As the underlying GKOs were sovereign local currency debt, the risk of default was small, and they also had the benefit of good quality local currency hedges. They easily fitted within Springwell's portfolio. There was a vast amount of evidence, expert and otherwise, relating to the alleged unsuitability of the GKO-Linked Notes for Springwell's portfolio, the risks attached to the Notes, whether AP was warned about these, and whether Chase, through its own proprietary trading book ("the prop book"), became aware of the increasing likelihood of default on the underlying GKOs. Having reviewed this evidence, I reject Springwell's contention that the evidence relating to the prop book trading and the other evidence established that Springwell should never have been advised to invest in GKO-Linked Notes, alternatively should not have been advised to invest in the Notes to anything like the extent it was; alternatively should certainly have been advised in July and/or early August 1998 (at the latest) to reduce as much as it could, and eliminate, if possible, its exposure to the GKO market”. (Footnote: ⁴⁷)

Gloster J reviewed each stage in the history of the relationship between Chase and Springwell and concluded first, that at all times Chase had no general advisory duty of any sort regarding Springwell’s investment portfolio. Secondly, the judge held that any such duty was precluded by the Relevant Provisions. I will attempt to summarise the judge’s conclusions on the correct construction and effect of the Relevant Provisions in the context of her findings on the Misrepresentation Claims below. Thirdly, the judge concluded that even if any such a duty of care had been owed, Chase was not in breach of it. Fourthly, Springwell’s case on the General Advisory Claim failed on causation. Lastly, any claim would have been substantially reduced because of Springwell’s contributory negligence.

In her first judgment, Gloster J dealt with the Misrepresentation Claims, including those concerning the GKO LNs, after the General Advisory Claims and the Breach of Fiduciary Duty Claims had been dismissed. The part of her first judgment which deals with the Misrepresentation Claim covers paragraphs 655 to 723. In my view that part of the judgment is clearly intended to be read subject to the findings the judge had made in relation to the General Advisory Claims.

In relation to the Misrepresentation Claims, the judge concluded that the “short answer to the specific misrepresentation claims, whether made under common law or pursuant to the 1967 Act, is that they are precluded by the Relevant Provisions in the DDCS Letters, the MFA (insofar as relevant), the GMRA and, in relation to claims made in respect of the GKO-Linked Notes, those in the GKO-Linked Notes documentation”. (Footnote: ⁴⁸)Having made that general conclusion, the judge then dealt with the provisions of particular documents.

Gloster J concluded that the terms of the DDCS Letters precluded any representation, whether of fact or opinion, being made at all by CMB, CIBL or CMIL. (Footnote: ⁴⁹) Furthermore, the judge found, also at [1/670]:

“My analysis of the Relevant Provisions in the DDCS Letters is that they precluded any representation being made at all, whether of fact or of opinion, by CMB, CIBL or CMIL. The terms of the Relevant Provisions in the Letters make it absolutely clear:

i)

that neither CMB nor CIBL/CMIL (or any associated company) were taking any responsibility for the "fairness, accuracy or completeness" of any information, written or oral regarding "any instrument or investment opportunity";

ii)

that neither CMB nor CIBL/CMIL would not have "taken any independent steps to verify" that information written or oral;

iii)

that "no representation or warranty express or implied" was made by CMB, CIBL/CMIL or their officers (in this context, JA) in relation to such information written or oral; and

iv)

conversely, that by signing the letters, Springwell "By placing an order" with CMB, CIBL/CMIL, expressly represented that it was a "sophisticated investor" and that it had "independently, without reliance on CMB, CIBL/CMIL or any associated person, made a decision to acquire the instrument having examined such information relating to the instrument and the issuer thereof as you deem relevant and appropriate." (My emphasis).”

The judge also concluded that Chase was entitled to rely on the representations and warranties made by Springwell under clauses 9, 24 and 25 of the GMRA. (Footnote: ⁵⁰)

The judge further held that Springwell was bound in its dealings with CMSCI, CMB and CMIL by the terms of the GKO LNs themselves, “which Springwell had repeatedly and on a routine basis, by the GKO-Linked Note confirms, represented that it had read, understood and accepted”. (Footnote: ⁵¹)The judge concluded that the effect of Section 6(c) of the GKO LN terms (Footnote: ⁵²) taken with the terms of the DDCS Letters was a “strong pointer” against it being reasonable for Springwell to rely on any statements made subsequent to the purchase of a particular GKO LN as being actionable representations inducing Springwell to retain the Notes. (Footnote: ⁵³)

The judge made two overall conclusions on the effect of the Relevant Provisions in relation to the Misrepresentation Claims. First, that the reasonable person operating in the financial market in which Springwell engaged would not have assumed that JA’s statements were actionable or that his expressions of opinion were to be treated as anything more than “trader’s opinions from the trading floor, based upon Chase research and [JA’s] own view of the markets and the economic and political situation”. (Footnote: ⁵⁴)Secondly, whether determining if there was any actionable misrepresentation at all or whether Springwell was entitled to rely on any representation that was made, all the Chase entities concerned “…were respectively only prepared to allow Springwell direct access to the emerging markets trading desk and to JA on the express basis that, in accordance with the signed contractual documentation, Springwell was contractually precluded from bringing a claim in misrepresentation and that Chase entities were not assuming any responsibility for statements that were made”. That therefore precluded Springwell from bringing any Misrepresentation Claims either under the 1967 Act or for negligent misstatement at common law. (Footnote: ⁵⁵)

Having made those conclusions, Gloster J went on to consider whether the alleged specific misrepresentations were made, were actionable, were false, and were relied on; or whether they were negligently made or the maker had reasonable grounds to believe and did believe that the representations made were true. The judge’s findings were universally against the case advanced by Springwell.

The judge concluded (Footnote: ⁵⁶) that it was “highly likely” that most of the statements of JA forensically relied on by Springwell would not qualify as actionable misrepresentations in any event, even without the presence of the Relevant Provisions. Instead they were properly to be characterised as expressions of opinion without any representation by the maker (JA) that he had reasonable grounds for his view. But the judge emphasised that she did not need to decide the point in the light of her conclusion on the effect of the Relevant Provisions on the Misrepresentation Claims.

Nonetheless, the judge went on to make more specific findings about the various misrepresentations alleged by Springwell. She concluded that the statements of JA concerning the Russian economy were not false or made negligently, even if they turned out to be wrong or over-optimistic and he had reasonable grounds for expressing the views that he did. (Footnote: ⁵⁷)

The judge then considered the four specific alleged representations concerning the GKO LNs. (Footnote: ⁵⁸) In relation to the first (no currency risk), the judge concluded that JA’s statements amounted to no more than saying that if the forward currency hedges were paid by the counterparty (CMBI or other Russian bank), then there was no currency risk, but JA was not promising that they would be paid. The judge found that AP “…clearly appreciated” that there was a counterparty risk in the event of devaluation of the rouble and that there could not be absolute protection through the use of a forward currency contract in such an event. (Footnote: ⁵⁹)

Gloster J dealt with the second and third alleged representations (viz. GKO LNs were straightforward liquid investments or investments with a high degree of liquidity) together. The judge concluded that, taken in context, JA was not representing, either expressly or impliedly, that the GKO LNs “…had all the risk and liquidity characteristics of a time deposit or money market instrument with Chase or other similar banking institution let alone those of a US or UK treasury bond”. (Footnote: ⁶⁰) The judge emphasised that JA and AP were operating in an emerging market, as opposed to an investment grade environment. The descriptions given by JA to AP were short-hand and had to be seen in the context of the trading relationship with AP as it developed over the years. (Footnote: ⁶¹)

The judge also found, (Footnote: ⁶²) “…in this context…” that:

“…given AP’s knowledge as to the type of instruments in which he was dealing, I find it to have been highly unlikely that AP would have placed any reliance on JA’s use of terminology to convince himself that such shorthand, informal terms were somehow conveying that Springwell was investing in investments that were equivalent to investment grade assets”.

On the appeal, Springwell challenged this finding of fact on reliance. In the alternative it argued for a narrow interpretation as to the scope of the finding.

Lastly, the judge held (Footnote: ⁶³) that, upon a proper analysis of what JA actually said, there was no statement by him in absolute terms that the GKO LNs were “conservative and secure investments”. The judge accepted that JA considered and expressed the view that the GKO LNs were attractive investments for Springwell, given their yield and their short-term nature, even when balanced against the risk. But JA did not describe them as “straightforward” and he had discussed the risks with AP, who “… knew that the Notes carried particular risks”. The judge accepted that, within Chase, JA had described the GKO LNs as “conservative” to Stewart Gager, (Footnote: ⁶⁴) but “…that was in the context of a discussion about concentration limits where JA was trying to explain to [Stewart Gager] why Springwell had such a large concentration in Russia”. The fact that Springwell had various Chase hedges was also a factor why JA regarded Springwell’s position as conservative. (Footnote: ⁶⁵)

When Gloster J gave her judgment on permission to appeal (Footnote: ⁶⁶), she said that she “…may have wrongly overlooked the fact that JA indeed told AP on occasions that GKO LNs were conservative in the transcripts of the telephone calls”. This statement was strongly relied on by Mr Brindle in the appeal and I shall have to consider the transcripts to which Mr Brindle referred us at the hearing.

I have already noted the background to the Post-Default claims; in particular the moratorium on performance of term foreign exchange contracts of 17 August 1998 and then the introduction of legislation prohibiting the purchase of foreign currency from non-residents in exchange for roubles to be deposited in existing S accounts from 12 November 1998, which remained effective after the moratorium expired and was continued after March 1999. Gloster J held that, under the terms of the GKO LNs (in particular Sections 3(a) and (c)), CMSCI’s obligation (to be exercised through CMIL) was to take the “appropriate care”, ie. the standard duty of care as modified by the wording of Section 3(c) and elsewhere in the GKO LN terms, to maximise recoveries under the relevant “Transaction” (ie. the forward currency contracts) for the ultimate Holder of the relevant GKO LN. This meant that CMSCI/CMIL were not entitled to take steps (or not to take steps) which might be in the interests of the Chase group, but to the detriment of the Holder of the GKO LN. (Footnote: ⁶⁷)

The judge analysed the terms of the forward currency contracts that were made between CMIL and CMBI under the FMA conditions. It is easiest to quote her findings: (Footnote: ⁶⁸)

“In relation to all eleven Failed Notes, the first hedge comprised a forward foreign exchange transaction, conducted through the S-Account, between CMIL on the one hand, acting on behalf of CMSCI, and CMBI or, on two occasions, VTB, on the other hand. These were defined in the Notes as a "Designated Forward Transaction"; each was a dollar/rouble forward contract under which CMBI (or VTB) agreed to sell CMIL sufficient dollars to redeem the Note in return for the transfer to CMBI (or VTB) of the amount of roubles payable under the referenced GKOs. The nine forward contracts between CMIL and CMBI were referred to as "the CMBI Forwards". These were all S-Account Forward Contracts which I find as a fact were "deliverable" in the sense that they required the delivery of the roubles in the S Account for conversion into dollars”.

The finding that the S account forward contracts were deliverable in the sense described by the judge is an important finding that is attacked by Springwell on the appeal.

The judge held that, during the period of the moratorium (ie. until 14 November 1998), Chase was reasonable in its view that nothing could practically be done and that it was necessary to wait until the moratorium had expired because, (a) the forwards could not be performed, and (b) there was great uncertainty about what would happen after the moratorium ended. (Footnote: ⁶⁹)

Gloster J decided that, on the true construction of the FMA, the position of CMIL (which, it will be recalled, entered into forwards with CMBI or other Russian counterparties on behalf of CMSCI), was as follows:

“…the reality of CMIL’s position, thereafter, post-Moratorium, was that it simply was not in a position to deliver roubles so as to obtain the benefit of its forwards with CMBI. That remained the position thereafter”. (Footnote: ⁷⁰)

Gloster J also held that everyone knew that the forwards could not, in fact, be performed and that all the Russian banks (apart from CMBI) proceeded on the basis that the forwards could not be performed. (Footnote: ⁷¹) The judge held that the consequence of the fact that CMIL could not perform its obligations under the CMBI forwards to deliver roubles into the S-Account was that there was “very little that could have formed the subject of any negotiation …” (Footnote: ⁷²) to obtain any value on the forward currency contracts.

The judge rejected Springwell’s argument that Chase’s decision not to set up separate negotiating teams for CMSCI/CMIL and CMBI to deal with the issue of the outstanding forwards was a breach of CMSCI’s “appropriate duty” to Springwell. (Footnote: ⁷³) Even if there had been a duty to set up separate negotiating teams and they had negotiated, the result would have been no different, because everyone knew that the forwards could not be performed and, unlike other Russian banks (such as VTB), CMBI had no relationship or other reason to curry favour with CMIL (which had acted as CMSCI’s agent). “Thus in reality there was little prospect that CMBI would have agreed to pay any sum at all to CMIL in settlement of unperformable forwards”. (Footnote: ⁷⁴)

The judge rejected all allegations of wilful misconduct by Chase. This conclusion applied both to the decision not to set up two negotiating teams (CMSCI/CMIL and CMBI), (Footnote: ⁷⁵) the declaration of force majeure (Footnote: ⁷⁶) and the service of the termination notice by CMBI in March 1999. (Footnote: ⁷⁷)

In any case, Gloster J found as a fact that there was a force majeure event within the meaning of paragraph 22.1 of the MFA terms which bound CMIL/CMBI . The failure of the Russian authorities to redeem the GKOs, the implementation of the moratorium and the post-moratorium “S Account Amendments” (as the Central Bank Directive was called) were all circumstances which affected the Moscow Interbank Exchange (“MICEX”), the Central Bank of Russia (“CBR”) and the Moscow currency markets generally. As a result CMIL was prevented or delayed from performing its obligations under the forward currency contracts, which was to furnish roubles. As the forwards were deliverable contracts, CMBI was therefore equally prevented or delayed from performing its own obligations for the same reasons. (Footnote: ⁷⁸)

Gloster J also found that it was correct for CMIL (as opposed to CMBI) to serve the force majeure notice, because the circumstances affected CMIL’s obligation to provide the roubles in the S Account so as to enable the forward to be performed. In the absence of a force majeure notice, CMIL was in breach of contract. The notice was given so as to excuse such a breach for the continuation of the force majeure event. (Footnote: ⁷⁹) In any case, the judge found, the fact of sending a force majeure notice was not causative of any loss, because even if one had not been sent by either CMIL or CMBI, CMIL could not perform its part of the forward transaction (by providing the roubles), so that ultimately CMBI would have been entitled to treat the forwards with CMIL as discharged for non-performance by CMIL. So the force majeure notice made no difference. (Footnote: ⁸⁰)

The judge further found that, in the circumstances, it was entirely reasonable for CMBI to have served its notice of termination of the forwards in March 1999. By that time it was confirmed that the S Account Amendments were to continue, so that roubles could not be paid into the account. The judge held that because forwards are “time critical contracts”, it was “wholly commercially appropriate” for CMBI to close off these contracts which could not be performed. (Footnote: ⁸¹)

Finally, on this aspect, Gloster J rejected the submission that CMIL should have funded the S Account with its own roubles. The judge held that there was no obligation under the GKO LN terms for CMIL to do so; nor did anyone else in the market adopt such a course. For good measure, the judge rejected the suggestion that Chase should have suggested to Springwell that it should have provided its own money to fund the S Account with roubles. There was no obligation on CMSCI to do so and there was no evidence that Springwell had funds available to do this in any event. (Footnote: ⁸²)

With regard to the six S Account forwards that were hedged with local Russian banks (Footnote: ⁸³) through CMBI, the judge concluded that the damages claim was “hopeless”. There was no complaint against Chase in relation to its conduct in trying to enforce the local forward currency contracts. Gloster J recorded that it was not suggested that Chase could, or should, have obtained any more money than it in fact did from any of Sberbank, Inkombank or Imperial Bank. (Footnote: ⁸⁴)

The judge gave her reasons for the conclusion that this part of the Post-Default claim was “hopeless” as follows (in summary): (a) Section 3(a)(v) of the GKO LN terms stipulated that CMBI’s performance of the S Account forwards was dependent on that of the local bank forward; (b) the local bank forwards were sold as such and had a higher yield; (c) the Terms and Conditions sheet and the Risk Disclosure sheet confirmed and emphasized these local bank risks; (d) the two forwards were interdependent, so that the noteholder was only entitled to what the local bank paid. (Footnote: ⁸⁵)

Springwell’s arguments. Springwell’s appeal is confined to three specific misrepresentations about the GKO LNs which it claims that JA made to AP during telephone conversations between March 1997 and July 1998. The three representations relied on are that the GKO LNs were (i) “conservative”; (ii) liquid; and (iii) without currency risk. Mr Brindle stated that the third was not argued as an independent misrepresentation, but an “adjunct” to the first two. Mr Brindle noted that the judge expressly stated that she did not need to conclude whether the representations alleged were actionable or not, because she had based her conclusion on the Misrepresentation Claim on the Relevant Provisions. (Footnote: ⁸⁶) Mr Brindle invited us, nonetheless, to review the judge’s conclusions on the nature of the representations as stated by Gloster J at paragraphs 706-711 of the first judgment.

Springwell’s case remains that these specific representations give rise to causes of action against CMSCI, under section 2 of the Misrepresentation Act 1967, and against CMIL, under the principles established by the Hedley Byrne case. As to the first of these causes of action, Mr Brindle submitted that even if the representations of JA to AP were opinions, rather than statements of fact, then, in the circumstances in which they were made, they carried with them an implied representation by JA to AP that there were reasonable grounds for the opinions stated. (Footnote: ⁸⁷)

On the second, Mr Brindle submitted there can be a duty not to state a negligent opinion about present or future events. (Footnote: ⁸⁸) Mr Brindle also relied on the fact that the GKO LN sales by Chase to Springwell were subject to the Bank of England’s “London Code of Conduct”, (Footnote: ⁸⁹) in which paragraph 24 of the section “General Standards” stipulates that:

“When entering into or arranging individual deals, dealers and brokers must ensure that at all times great care is taken not to misrepresent in any way the nature of the transaction”.

Mr Brindle submitted that this provision reinforces the common law duty not to misrepresent any fact or opinion. He submitted that it also suggests that if JA did give an opinion on the nature of the GKO LNs then he was duty bound to ensure he had reasonable beliefs for that opinion. Mr Brindle submitted that the judge was therefore correct to make the tentative conclusion (Footnote: ⁹⁰) that there may well be a “low level duty of care” on the part of JA, as a salesman, not to make any negligent misstatement and also to use reasonable care not to recommend any highly risky investment without pointing out it was such. (Footnote: ⁹¹) He submitted that this “low level duty of care” applied to the three specific representations relied on by Springwell.

Mr Brindle submitted that the evidence demonstrated that, contrary to the judge’s (obiter) conclusion, the three representations relied on were clearly made and were false, or could not have been made on the basis of knowledge or investigations which justified JA in making the statements of opinion he did. He pointed out that the judge did not make specific findings on reliance or causation in the context of the Misrepresentation Claims. He submitted that there was sufficient evidence to conclude that AP relied on the representations alleged to purchase and retain the GKO LNs which subsequently defaulted.

In the course of the hearing we asked Mr Brindle to identify the particular findings of primary fact of the judge which he was inviting us to review and reverse in relation to the Pre-Default appeal. He identified three. First, the finding in paragraph 710 that it was highly unlikely that AP would have placed any reliance on JA’s use of terminology to convince himself that such short hand terms as “short dated CDs”, (Footnote: ⁹²)“short dated stuff”, “cash management stuff”, and “money market stuff” conveyed that Springwell was investing in investments that were equivalent to investment grade assets. Secondly, the finding in paragraph 711 that JA only described the GKO LNs as “conservative” in Chase internal conversations and not to AP. Thirdly, if paragraph 233 (i)-(iv) were to be read as findings that Finbarr Sheehan (FS) (Footnote: ⁹³) explained or that AP read and was aware of the effect of the Relevant Provisions in the 1993 DDCS Letter, they were challenged.

Mr Brindle attacked the judge’s conclusions on the effect of the Relevant Provisions. First, he submitted that the judge was wrong to use the whole basket of Relevant Provisions to hold, on a general basis, that Springwell was precluded from bringing any claims based on alleged representations. Secondly, he submitted that the judge was wrong to hold that either CMSCI (against whom the Misrepresentation Act claim is made) or CMIL (against whom the negligent misstatement claim is made) could rely on the terms of the GMRA. Those terms applied only to the repurchase contract under the financing arrangements between CMB and Springwell. Thirdly, the DDCS Letter terms are not relevant because the GKO LNs were not within the definition of the transactions to which the letters applied, viz. “debt and equity securities of public and private sector issuers located in developing countries”. Mr Brindle emphasised that the issuer of the GKO LNs, CMSCI, was located in Jersey, in the Channel Islands, not Russia. Fourthly, Mr Brindle argued that only CMIL could rely on the terms of the DDCS Letters, but not CMSCI, which was not a party to them. Although he accepted that CMIL could rely on the terms of the DDCS Letters in principle, he submitted that clauses 4 and 6 did not prevent CMSCI being liable for misrepresentations or CMIL from being liable for negligent misstatements. Mr Brindle relied in this regard on the argument based on Lowe v Lombank (Footnote: ⁹⁴)to which I refer below in relation to the terms of the GKO LNs.

Fifthly, although Springwell now accepted that both CMSCI and CMIL could rely on the terms of the GKO LNs and associated documents, Mr Brindle submitted that they did not assist them for two main reasons. The first is that the only clause of any real help to CMSCI or CMIL is Section 6(c), the last sentence of which states that “the Holder” of the GKO LN has “…not relied on, and acknowledges that neither CMSCI or CMIL has made, any representation or warranty in respect of the purchase of this note”. But, Mr Brindle submitted, the “Holder” was at all times CMB, not Springwell, because of the way the financing arrangements were structured.

The second argument raised in relation to the same provision is that the use of the word “acknowledges” in clause 6(c) means that it acts only as a representation by the “Holder”. Mr Brindle submitted that “acknowledges” there means the same as “represents”. He submitted that, on the authority of Lowe v Lombank a representation about a statement as to past facts, known by both parties to be untrue, cannot be the foundation of a contractual obligation as to what a party to the contract could or could not rely on in the future. (This has been called in subsequent cases “a contractual estoppel”). Therefore, if in fact AP (on behalf of Springwell) had relied on representations by JA (on behalf of CMIL and CMSCI) and both knew that to be the case, then an “acknowledgement” in the GKO LN terms that Springwell had not relied on such representations could not give rise to a contractual promise that Springwell would not do so. Mr Brindle accepted that if AP had stated, unequivocally, that he and Springwell did not rely on anything said by JA when deciding whether or not to buy GKO LNs, that could give rise to an estoppel by representation, but he argued that there had been no finding by the judge to that effect.

Mr Brindle submitted that insofar as the Court of Appeal in Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd (Footnote: ⁹⁵) (“Peekay”) may be inconsistent with Lowe v Lombank, by concluding that parties can agree that a certain existing state of affairs should form the basis of a transaction, thereby creating a “contractual estoppel”, that decision is per incuriam, because Lowe v Lombank and succeeding cases (Footnote: ⁹⁶) were not apparently cited to the court in Peekay. (Footnote: ⁹⁷) Indeed, Mr Brindle ultimately argued that there was no proper juridical basis for a doctrine of “contractual estoppel”. The only proper analysis, in appropriate cases, was that there was an estoppel by convention, which could only be relied on if a court is satisfied that it would be unjust for a party to resile from the agreed “conventional facts” and that would have to have been established on the facts. (Footnote: ⁹⁸) In the present case, even if there was a “convention” between JA and AP that AP would not rely on representations that both knew that JA had made about the nature of GKO LNs, it would not be unconscionable to permit Springwell to resile from that convention and there was no finding of the judge to the contrary.

Lastly, on the Relevant Provisions generally, Mr Brindle attacked the judge’s conclusions (Footnote: ⁹⁹) that “most of the contractual documentation” fell outside the ambit of section 3 of the Misrepresentation Act 1967 (Footnote: ¹⁰⁰) and thus section 11(1) of the Unfair Contract Terms Act 1977 (“UCTA”). (Footnote: ¹⁰¹) It is fair to say that the judge did not specifically identify which contractual documentation did or did not fall within section 3 of the 1967 Act. However, Gloster J did conclude that even if some of the terms did fall within section 3, they were all reasonable and it was reasonable for Chase to include the terms in the contractual documentation. (Footnote: ¹⁰²) Mr Brindle submitted that section 3 of the 1967 Act applied to the specific representations made by JA to AP and that Chase could not demonstrate that the Relevant Provisions are reasonable terms and so cannot rely on them.

On the question of whether there was reliance by Springwell on the specific misrepresentations alleged, Mr Brindle submitted that this court should make findings, even though the judge did not do so in relation to the Misrepresentation Claims. He accepted that the tests are slightly different, depending on whether the claim is made under section 2 of the 1967 Act or for damages for negligent misstatement. In the former case, he submitted, the question is whether the representee has been induced to enter the contract. He submitted that inducement can be established even if the contract might have been entered into without the misrepresentation alleged, provided that the misrepresentation “materially contributed” to the claimant’s actions. (Footnote: ¹⁰³) In the case of negligent misstatement, Mr Brindle argued that the test is whether the misrepresentation was a “real and substantial part of what induced the representee to enter into the transaction”. (Footnote: ¹⁰⁴) Mr Brindle submitted that both tests were readily satisfied on the facts of this case.

Lastly, on the issue of causation of loss, Mr Brindle again submitted that this court could and should make findings even though the judge did not. If this court concluded that the representee would not have entered into the relevant transactions without the representations, then, in respect of claims under the 1967 Act, the loss will be that flowing from entering into the relevant transactions. Although the test in the case of negligent misstatement is rather different, he submitted that in practical terms it would not matter on the facts.

Chase’s arguments. Mr Hapgood submitted that the question of what JA said to AP about the GKO LNs and what AP understood by JA’s statements had to be evaluated against the background that AP had been involved in emerging market investments for years and that, by 1997, AP was an experienced investor and buyer of GKO LNs. He submitted that, properly understood, JA did not represent GKO LNs as being “conservative” in any absolute sense, but only by comparison with other possible investments in Russia, which was not a “conservative” investment market at all. JA’s statements that the GKO LNs were “liquid” were accurate, because Chase could buy back the GKO LN itself, or it could sell the underlying GKO in the market and the forward could either be left or put into the market again. There was never a problem with liquidity. There was no “currency risk”, because the forwards converted that risk into a counterparty risk, of which AP was fully aware; they discussed the creditworthiness of banks who were the potential or actual counterparties to the forwards.

Even if Springwell could establish that the statements of JA were actionable misrepresentations, Springwell must fail on the issue of reliance, because there is no evidence that AP relied on these particular three representations when deciding whether or not to buy GKO LNs, as opposed to all the 149 representations relied on at the trial. In this regard, Mr Hapgood pointed out that the representations now relied on were not pleaded originally (although others were), but only pleaded after disclosure of the transcripts of the telephone conversations.

On the Relevant Provisions, Mr Hapgood made the following general submissions. First he submitted that CMSCI could rely upon the terms of the DDCS letters, because CMIL acted as the agent of CMSCI in contracting with Springwell in relation to the sale of the GKO LNs. As principal, CMSCI could rely on the terms agreed between its agent and Springwell. Secondly, Mr Hapgood submitted that the distinction drawn by Mr Brindle between an agreement to treat past events as if something else had happened, which to the parties’ knowledge is not true, and an agreement to treat a current state of affairs as the case for the basis of a contract, even if known not to be true, is a false one. Thirdly, he distinguished Lowe v Lombank as turning on the terms of the hire purchase legislation which was the background to the case. Fourthly, Mr Hapgood submitted that Peekay was correctly decided and confirmed the principle of “contractual estoppel” and was binding on this court. Fifthly, the element of “unconscionability” that is needed before a party can rely on an estoppel by convention is not needed in the case of a contractual estoppel.

On the particular provisions, Mr Hapgood accepted, first, that neither CMIL nor CMSCI were party to the GMRA clauses. Secondly, he submitted that the DDCS letters do apply to GKO LNs although they were issued by CMSCI, which was incorporated in Jersey. Thirdly, Mr Hapgood submitted that CMSCI can rely upon clause 6 of the DDCS letter terms to defeat any liability based on misrepresentation, on the assumption that Springwell can rely on any representations at all. He accepted that the provision was subject to the requirement of “reasonableness” under the UCTA, but relied on the judge’s findings of fact that the terms were reasonable. Fourthly, Mr Hapgood submitted that Springwell was bound by the terms of the GKO LNs and the confirmation notes because Springwell had signed the confirmations as “customer”. The terms were agreed conditions on which the purchases of GKO LNs were carried out.

The Principal Issues on the Pre-Default Misrepresentation Appeal. The principal issues that arise on the “pre-default” appeal seem to me to be the following:

Springwell’s arguments. Mr Baker accepted the judge’s conclusion (Footnote: ¹⁰⁵) that CMSCI had to exercise the “appropriate care” to maximise the recoveries from the “Transactions” which term included the forward currency contracts between CMSCI/CMIL and CMBI. (Footnote: ¹⁰⁶) He accepted that the “appropriate care” was the same degree of care which CMSCI would exercise in relation to the administration of similar transactions on its own account, in accordance with the wording of Section 3(c) of the GKO LNs. Mr Baker submitted that the best way to judge whether Chase acted with “appropriate care” in relation to the CMIL/CMSCI – CMBI forwards was to test how Chase acted in relation to forward currency contracts it had with other Russian banks where CMBI was not involved at all.

Mr Baker also accepted that CMSCI could not be liable to Springwell under the terms of Section 3(c) of the GKO LN terms unless Springwell demonstrated that Chase had been grossly negligent in taking or refraining from taking any action with respect to the transactions regarding the forward currency contracts. He stated that Springwell’s case on appeal would concentrate on the “gross negligence” of Chase, in particular CMSCI, although the case based on “wilful misconduct” was not abandoned.

Mr Baker submitted that Gloster J had failed to concentrate on the right issues and had failed to take into account much of the evidence on which Springwell relied when reaching her decision on the facts on the Post-Default claims. Mr Baker said that the key lay in the provisions of the FMA (Footnote: ¹⁰⁷) between CMIL and CMBI, which set out the terms on which the forwards were made and to be performed and which was governed by English law. The judge failed to deal with matters which Springwell relied on to show that there was a substantial debate which should have taken place between CMIL and CMBI on the liability of CMBI on the forwards, if CMIL and CMBI had negotiated at arms-length. Moreover, CMIL acted contrary to its own economic interests and those of holders of GKO LNs (such as Springwell) in declaring force majeure under clause 22 of the FMA on 24 November 1998. There was no evidence on why CMIL declared force majeure; Mr Heath’s (Footnote: ¹⁰⁸) evidence was that he simply advised on the decision; but he did not take it. Moreover, there was no evidence that CMBI itself ever considered declaring force majeure or that CMBI would have sought to terminate the Chase Forwards for no return without CMIL’s declaration. The judge disregarded, or wrongly regarded as not significant, evidence which showed that the declaration of force majeure and CMBI’s subsequent termination of the forwards on 23 March 1998 were done solely to give CMBI grounds for not making any payment.

Springwell therefore challenges seven primary findings of fact of the judge. These findings of the judge are: (i) that CMIL did not align itself with CMBI or act in the wider “Chase” interest in relation to the Chase forwards; (Footnote: ¹⁰⁹) (ii) that there was no evidence that CMSCI/CMIL knew it was in breach of its obligations under the GKO LNs to take appropriate care in relation to the forward transactions; (Footnote: ¹¹⁰) (iii) that Chase’s offer to buy back GKO LNs Nos 4, 10 and 11 replicated (and were seen by Chase as replicating) the negotiated settlements which had been achieved with some other Russian banks; (Footnote: ¹¹¹) (iv) that there was only a remote possibility that any sum could have been extracted through negotiations between CMSCI and CMBI and that the sum offered by Chase to buy back GKO LNs Nos 4,10 and 11 was better than the result which could have been obtained by the negotiation route; (Footnote: ¹¹²) (v) that the Chase forwards could not have been performed and that force majeure could have been validly declared; (Footnote: ¹¹³) (vi) the decision to send the notice of termination was a collective decision taken by Chase as a whole through the working committee (set up in early 1999); (Footnote: ¹¹⁴) (vii) that the termination of the Chase forwards by CMBI was not intended to be an aggressive or significant step as regards Chase’s relationship with its clients, including Springwell. (Footnote: ¹¹⁵)

Therefore, Mr Baker submitted, it was incumbent upon Chase to demonstrate why CMBI would not have paid either the full value of the forwards (about US$ 49 million) less credit for some small payments made during the proceedings or a substantial settlement value. There was no evidence from CMBI about what it would have done had CMIL made serious efforts to recover value in the forwards from it in negotiations. At the lowest, CMBI would have been prepared to settle at a notional spot rate of 11 roubles to the US dollar, so that the damages (before credit for sums paid) would be US$ 32,409,617.

Chase’s arguments. Mr Beltrami submitted that the conclusions of the judge were based on findings of fact which cannot be impugned so that the appeal must fail. He identified six “bedrock” findings of fact: (i) the forwards could not be performed during the moratorium period lasting until 14 November 1998; (Footnote: ¹¹⁶) (ii) the S-account forwards were “deliverable” forwards of roubles into the S-Account for conversion by the delivery of US dollars in exchange; (Footnote: ¹¹⁷) (iii) Directive No 407-U of 10 November 1998 changed the S-Account regime and prohibited the purchase (by Russian banks) of foreign currency from non-residents in exchange for roubles to be deposited in S-accounts, (Footnote: ¹¹⁸) which meant that CMIL could not deliver roubles and so the forwards were unperformable in accordance with the FMA terms; (iv) everyone knew the forwards were unperformable and the other Russian banks proceeded on that basis; (Footnote: ¹¹⁹) (v) unlike other Russian banks, CMBI had no “relationship” reason to curry favour with CMIL; (Footnote: ¹²⁰) (vi) Chase made two offers of settlement of forwards to clients, including Springwell, which replicated in economic terms (as seen by Chase) the negotiated settlements with some of the other Russian banks. That was better than any result which would have been achieved by any attempted separate negotiations between CMIL (on behalf of CMSCI) and CMBI. (Footnote: ¹²¹)

Mr Beltrami submitted that if (as Chase contended) Springwell could not successfully challenge those findings of fact, then the judge’s conclusions on both “gross negligence” and “wilful default” were incapable of being challenged. The actions of Chase had to be judged by reference to the fact that the forwards were a part of the GKO LNs; the forwards were not free-standing.

In my view the issues which arise on the Post-Default appeal are as follows:

I will consider each of the three representations that it is said that JA made to AP in the order of importance given them by Mr Brindle in his submissions. First, then, I examine the alleged representation that the GKO LNs were “conservative”; secondly, that they were “liquid” and, lastly, that they were “without currency risk”.

The “conservative” representation: the evidence relied on by Springwell on appeal. Mr Brindle relied on two specific telephone conversations. First, that of 19 November 1997. (Footnote: ¹²²) That is a conversation about how GKO LNs are going to perform in the next few weeks. Chase’s proprietary sales desk thought that the “rates” on them (ie. the yield) would go down, but AP said he thought that they would not. There was a discussion about what yield could be obtained on “Chase hedged paper” with a very short maturity of about nine weeks. In this context JA said: “It’s possible I may be able to come with the most conservative thing in the world with a 13 per cent coupon on it…now that would be something”. However, AP then stated that he did not wish to buy “Chase backed” GKO LNs (ie. those where the currency forward is with CMBI), but asked JA to buy him GKO LNs hedged with a Russian bank where the yield would be 19 per cent.

Next Mr Brindle relies on a telephone conversation on 8 July 1998, (Footnote: ¹²³) that is just over two weeks before the IMF “rescue package” was announced. AP asked JA if he thought that GKO LNs were the most conservative thing with Russia and JA said “yes”, but he immediately went on to say that there was a lot of “bearish” sentiment around and that Russia had 30 billion dollars of debt that would mature between then and the end of 1998 and “they don’t have the money”.

Mr Brindle next relies on answers given by JA in cross-examination. (Footnote: ¹²⁴) JA accepted that he used the language “conservative Russian stuff” and “short dated CDs” about GKO LNs when talking to AP about them. However, JA went on to explain as follows:

“…of all the different Russian alternatives available I would had did [sic] categorise them in my mind and make the same suggestion to clients of mine that they were conservative at the time”.

He described the GKO LNs as “…very conservative – almost, you know, not to be mixed in or confused with, you know, the bigger and more traded assets that they had in their Russian portfolio at the time…”. (Footnote: ¹²⁵) Moreover, he explained that he used the term “CD” (Footnote: ¹²⁶) more as an administrative term because the GKO LNs were so short in maturity.

In his witness statement (Footnote: ¹²⁷) JA stated that in the context of Russian investments, he regarded GKO LNs as “one of the more conservative instruments”. He said that the risks were those of Russia defaulting on the underlying GKOs which were payable in the local currency, which would have been unprecedented, and the rouble not being capable of being converted into US dollars. JA said that he thought that was unlikely if the currency forward was with a “suitable institution”. This, he said, explained his view that GKO LNs were “attractive emerging market investments because they were conservative and high yielding”.

Mr Brindle also relies on a transcript of a telephone conversation between JA, Finbarr Sheehan and Gary Glick, of the Chase Private Bank in New York, (Footnote: ¹²⁸) on 29 April 1997, (Footnote: ¹²⁹) that is before the telephone conversations between JA and AP were routinely recorded. JA was explaining, for Gary Glick’s benefit, the risks involved with GKO LNs in the context of credit facilities being advanced to clients. JA said that the risk on those assets “is as good as any of our clients hold. Because at the end of the day you got to think about what the risks on these, the risks on these assets are very clear, the risk on these assets are sovereign default…or a Chase default”. JA pointed out that there had never been a local currency default anywhere in the world so that “whatever happens the Russians will pay their roubles”. The other possible default mentioned was that Chase would not honour the “forward FX”. Then JA said:

“So the point is I don’t want you, I wanted you to be – it’s important Gary that you are comfortable with these as a CD, because of course the attraction in this kind of market is very clear, and that is that people are defensive because the financial markets are pretty volatile at the moment. So people are generally looking to keep relatively short, you know one year and shorter….And there is nothing to compare which is anything like as good as these things”.

Finbarr Sheehan agreed. (Footnote: ¹³⁰)

Mr Brindle submitted that it was noteworthy that AP was not challenged on his witness statement in which he said that JA had said to him that GKO LNs were “conservative”, but only on the use of the phrase “time deposits”. But AP made it clear that the term “CD”, “GKO” and “notes” were all used interchangeably and he knew that all the terms referred to GKO LNs. (Footnote: ¹³¹)

The “liquid” representation: the evidence relied on by Springwell on appeal. Mr Brindle relied on statements by JA to AP in telephone conversations on 14 May 1997, (Footnote: ¹³²) 23 March 1998 (Footnote: ¹³³) and 31 March 1998. (Footnote: ¹³⁴) In the first, JA said, talking of the nature of GKO LNs, that “… the underlying asset is a big tradable asset so you can always sell the things you know”. In the second AP stated, in the context of a conversation about GKO LNs, that he is never interested in buying something illiquid and JA said “I know, nor am I”. In the third JA said that there is “…great liquidity in GKOs”. However this last statement was made in the context of Chase saying that it would not leverage money market securities (ie. short-dated securities) of clients such as Springwell, an attitude which JA described as “…nonsense”. Mr Brindle also relied on the fact that JA admitted in cross-examination that he had described GKO LNs as “CDs” or “money market instruments” or instruments of “cash management” from the start. (Footnote: ¹³⁵) In his witness statement, AP had said that JA had described GKO LNs as liquid investments. (Footnote: ¹³⁶)

Mr Brindle submitted that the judge failed to deal with Springwell’s primary case on the “liquidity” representation, which was that JA represented to AP that the GKO LNs were liquid investments. He complained that the judge concentrated only on Springwell’s secondary argument that JA represented that they were investments with a high degree of liquidity akin to that associated with time deposits or money market instruments.

The “Currency Risk” representation: the evidence relied on by Springwell on the appeal. As already noted, Mr Brindle did not pursue the allegation that this was a separate representation. Mr Brindle acknowledged that the currency forwards did hedge the currency risks. But he submitted that the implication of JA saying that there was no currency risk (Footnote: ¹³⁷) was that there would never be any risk that counterparties to the forward currency contracts might default. In this regard Mr Brindle relied on a passage in JA’s cross-examination in which he accepted that he had talked to AP about the impact a devaluation might have on some of the “hedge providers in the GKO”. Gloster J asked JA whether the devaluation of the rouble would have an effect on the credit risk of the FX forwards. JA said:

“On the provider of the forward….that is where the pressure would be felt. But I have said that in that situation I believed that Chase would certainly honour its obligations and obviously there is a scale of risk associated with which banks you have….the way I saw it and the way that other people who knew Springwell’s portfolio saw it was that he didn’t have or had marginal currency exposure in the form of some of his FX forwards…”. (Footnote: ¹³⁸)

Can Springwell impugn the judge’s findings on the representations made? I am quite satisfied that they cannot. First, I deal with the “conservative” representation, which Mr Brindle relied on most heavily. I accept that JA used that word both within Chase and to AP to describe GKO LNs, but the word cannot be lifted like a fish out of water. The judge has found, and Springwell accepts, that AP was a sophisticated investor, who knew about “emerging markets”, who knew the jargon and who knew that the very high returns from investment in fixed income instruments in those markets, including Russia, carried significant risk. (Footnote: ¹³⁹)The judge expressly found that the material risks (sovereign default, currency default and counterparty default), were all disclosed and known to AP. (Footnote: ¹⁴⁰)

Having heard and weighed all the evidence, the judge found that upon a proper analysis of what JA actually said, there was no statement in absolute terms that the GKO LNs were “conservative and secure investments”. (Footnote: ¹⁴¹)I accept that JA did give evidence that he used phrases in conversations with AP which described the GKO LNs as “conservative”. But that has to be seen in its context. Even if the judge did overlook evidence about these direct statements, having considered all the evidence to which Mr Brindle has referred us, I am satisfied that the conclusion of the judge was right. The judge could have expanded her reasoning in [1/711] to reiterate her earlier conclusions that it was clear from the evidence that when JA said the GKO LNs were “conservative” he was doing so in the terms of the relevant market, ie. that they were fixed income derivatives based on local currency instruments issued by Russia, an emerging market, which carried the attendant risks that AP knew all about, as the judge had found. The judge might also have added specifically in that context that it was clear on the evidence that JA used the term “conservative” in the sense that the GKOs themselves were local currency issues on which there had been few if any sovereign defaults historically. Moreover, the GKO LNs were short term in nature, thereby lessening the risks. Thirdly, the GKO LNs themselves had, as part of their terms, the currency forward, which provided protection against rouble devaluation, although a counterparty risk remained. Those are all points of which, on the judge’s findings, AP was well aware at all times.

For similar reasons, whether or not the judge actually concluded that JA did not represent that the GKO LNs were “liquid” or “liquid investments” in absolute terms, I am quite satisfied that he did not do so. Once again, the statements of JA that are relied upon have to be seen in their context, viz. that the GKO LNs were short-term and that the risks of sovereign default on the local currency underlying GKOs were seen as low. The judge found that AP knew the GKO LNs were not “in an investment grade environment” (Footnote: ¹⁴²) and so could not be regarded as “liquid” in the same way as US or UK Treasury bonds. The judge was correct, in my view, in concluding that AP well understood that JA’s use of shorthand such as “CDs”, “short dated CDs”, “cash management” and “money market stuff” were not intended and did not convey to Springwell that it was buying instruments that were equivalent to investment grade assets and so of an equivalent liquidity. (Footnote: ¹⁴³) I therefore reject Mr Brindle’s submission that the judge’s finding in [1/710] could not be made on the basis of the evidence before her.

As for the alleged representation about “currency risk”, it seems to me that Springwell has no case on this at all. There was no actual currency risk unless a counterparty defaulted on the forward currency contracts. It is not asserted that JA made any representation that counterparties, whether it be CMBI or any other Russian bank, would never default. The judge found that AP knew the currency devaluation risks and the Russian bank default risk involved. Any statements by JA about “currency risks” must be construed in the light of that understanding between JA and AP. The judge’s conclusions, as set out at [1/706] are, in my view, unassailable.

Having concluded the judge was correct to find that the representations alleged were not made, the Pre-Default claim appeal must be bound to fail. However, I have also concluded that the judge was quite correct to conclude, on all the evidence, that the “representations” by JA would not amount to actionable representations in any event. The judge found, at [1/676] that AP:

“well appreciated the context in which JA was offering his views and opinions was as a salesman…[and] that AP did not understand JA to be providing an in-depth expert analysis of the economic or political situation in Russia, or the considered views of an investment advisor…AP appreciated at the time that JA was exchanging views with him about often uncertain future events (such as, for example, possible devaluation of the rouble or the likelihood of Russia defaulting on its GKO obligations”.

The judge therefore concluded (Footnote: ¹⁴⁴) that it was “highly likely” that the statements of JA would not qualify as actionable misrepresentations, but would “…rather be characterised on a proper analysis as nothing more than expressions of opinion without any representation as to the maker (JA) having objectively reasonable grounds for his views: see Bisset v Wilkinson (Footnote: ¹⁴⁵)”.

In my view the judge was correct to characterise JA’s statements about the qualities of the GKO LNs as opinions. It was JA’s view on the nature of the GKO LNs as “conservative” – in the sense discussed above – that was given to AP. Similarly, it was his view as to their “liquidity” or whether they had any “currency risk” or “counterparty risk”. It was a view which necessarily embraced the position at the time the statements were made and for the time in which it was anticipated Springwell would hold the GKO LNs in the future, which was usually until their maturity, which would be within the next year. Looked at in terms of the quality of the GKO LNs at the time the statement was made or as to their quality in the future until maturity, JA was not stating facts, he was making a judgment about them by comparison with other possible investments, in similar or other markets and conditions.

Therefore, because the Misrepresentation Act 1967 is concerned with representations of fact, not opinion, in respect of the Misrepresentation Act claim against CMSCI, (as issuer of the GKO LNs), Mr Brindle had to argue before the judge that each time JA gave an opinion on the nature of the GKO LNs, it carried with it an implied statement of fact by JA that he had reasonable grounds for holding that opinion. (Footnote: ¹⁴⁶) Even if Mr Brindle had succeeded on his appeal in establishing that the unqualified and precise representations as alleged by Springwell were in fact made, he has to overcome the finding of fact by the judge that there was no implied representation by JA that he had objectively reasonable grounds for the opinions he expressed.

Mr Brindle attempted to do so by relying on observations of Mance J in Bankers Trust International plc v PT Dharmala Sakti Sejahtera (Footnote: ¹⁴⁷)about how statements of opinion could give rise to an actionable representation for the purposes of the Misrepresentation Act 1967. He particularly relied on the remarks of Mance J that:

“The meaning and effect of words never falls to be viewed in a vacuum. It is shaped by the context of their communication, including the parties’ respective positions, knowledge and experience. A description or commendation which may obviously be irrelevant or may even serve as a warning to one recipient, because of its generality, superficiality or laudatory nature, or because of the recipient’s own knowledge and experience, may constitute a material representation if made to another less informed or sophisticated receiver….whether there was any and if so what particular representation must thus depend an objective assessment of the likely effect of the proposal or presentation on the recipient. In making such an assessment, it is necessary to consider the recipient’s characteristics and knowledge as they appeared, or ought to have appeared, to the maker of the proposal or representation”.

Mr Brindle’s difficulty, which to my mind is fatal to his case under the Misrepresentation Act, is that the judge has made specific findings of fact as to the characteristics and knowledge of AP as they would have appeared to JA and the likely effect of the representations of JA (such as they were) on AP. Thus the judge accepted that JA correctly understood the investment objectives of Springwell as being for high yielding emerging market instruments and so Springwell (through AP) accepted a preparedness to buy riskier investments. (Footnote: ¹⁴⁸) AP was well aware of the risks of potential Russian volatility, sovereign default, devaluation of the rouble and the risky nature of the investments being made. (Footnote: ¹⁴⁹) The relevant risks are all set out very clearly in the Risk Disclosure document which accompanied each set of Terms and Conditions, which I reproduce in Appendix 1 to this judgment. I accept that there was a relationship between the parties, but that by itself is not enough to create, as a matter of law, an implied representation by Chase (through JA) that there was a reasonable basis for the opinions JA gave. Mr Brindle was unable to point to anything which could undermine the judge’s conclusion as to the nature of the relationship between JA and AP and AP’s understanding of the statements that JA made to him.

Therefore the appeal concerning the claim under section 2 of the Misrepresentation Act must fail on this ground as well.

As for the claim against CMIL (as employer of JA) based on alleged negligent misstatement, I would be prepared to accept as correct the judge’s tentative conclusion that there would be a “low level” duty of care on the part of a salesman (such as JA) not to make any negligent misstatements; and to use reasonable care not to recommend a highly risky investment without pointing out that it was such. (Footnote: ¹⁵⁰) Mr Brindle did not argue on the appeal for any “higher” duty of care.

On that footing, there is no basis for any claim against Chase for what JA stated. Given the findings of fact of the judge concerning the statements made by JA, he did not make any misstatements about the “conservative” nature of the GKO LNs. Nor did he do so about their “liquidity” or the question of “currency risk” or “counterparty risk”. The statements of the expert witnesses on which Mr Brindle relied are, in my view, beside the point, because they do not put the statements about “conservative” investments, “liquid” investments or investments without “currency risk” or “counterparty risk” into their proper context in the way the judge found and I have attempted to explain. As Mance J stated in Bankers Trust International PLC v PT Dharmala Sakti Sejahtera, (Footnote: ¹⁵¹) the question of whether one contracting party owes the other a duty of care and if so what duty requires a consideration of all the circumstances. Given the judge’s conclusion that there was no general duty of care on Chase to give advice and given the judge’s findings on the nature of the statements made by JA and what AP knew and understood about GKO LNs and Russia, there simply were no actionable misstatements at all, let alone negligent ones.

I would add, for completeness, that the provisions of paragraph 24 of the General Conditions of the London Code of Conduct (1995 and 1998) do not affect my conclusion. On the findings of the judge which are not challenged, Chase fulfilled its obligations.

Therefore the appeal on the claim based on negligent misstatement must fail on this ground also.

I deal with these because we had full argument on them and there is one point of general importance which arises. However, in the light of my conclusions so far, I will not explore all the issues raised by the parties at the hearing.

The most important Relevant Provisions are contained in the GKO LN documentation and the two DDCS Letters. I will set out first the issues that arise on the GKO LN documentation. Mr Brindle accepted in argument before us that the judge was right to conclude, at [1/673], that Springwell was bound by the terms of the GKO LNs in its dealings with CMSCI, CMB and CMIL. In other words, Mr Brindle accepted that both CMSCI and CMIL can rely on the terms of the Notes and associated GKO LN documentation insofar as they may affect the Misrepresentation Act claim (against CMSCI) and the negligent misstatement claim (against CMIL).

The issues that arise on the construction of the GKO LN documentation are: first, whether the word “Holder” in Section 6(c) of the GKO LN “Terms and Conditions” refers to Springwell and so means that Springwell makes various acknowledgements about risks, representations and warranties, or whether “Holder” refers to CMB, which actually held the Notes as security for advances made to Springwell to purchase the GKO LNs. Assuming “Holder” means Springwell or that Springwell is in some other way bound by the terms of Section 6(c), the second issue is whether the wording of Sections 5(e), 5(f) and 6(c) means that Springwell is contractually precluded, as against CMSCI and CMIL, from being able to rely on any representation or warranty made by either of them with respect to the advisability of purchasing the particular GKO LN for which the Note was issued: this was dubbed the “Lowe v Lombank” issue. The third issue is whether, in order to be able to rely on a “contractual estoppel”, it is necessary for the party wishing to assert its right to do so to establish that it would be “unconscionable” for the other party now to rely on representations made by the first party that it had contracted not to rely upon, by analogy with the requirement in a case of estoppel by convention. (Footnote: ¹⁵²) The fourth issue is whether the GKO LN terms and conditions are caught by section 3 of the Misrepresentation Act 1967 and, if so, whether they are “unreasonable” within the terms of the UCTA regime.

As for the DDCS letters, Mr Brindle submitted that their terms can only be relied on by CMIL, not CMSCI; Mr Hapgood argued to the contrary. As I understood it, Mr Brindle accepted (Footnote: ¹⁵³) in oral argument that, on the authority of Peekay, the terms of the DDCS letters can give rise to a “contractual estoppel” so as to prevent one party to a contract from being able to use representations made by the other party to the contract as the basis for a claim for rescission or damages under the Misrepresentation Act or as the basis for a claim in damages for negligent misstatement. (Footnote: ¹⁵⁴) The issues which arise on the DDCS letters are, therefore, first, whether they apply to the GKO LNs at all; Mr Brindle’s argument being that GKO LNs are not within the definition of “debt and equity securities of public and private sector issues located in developing countries”. The second issue is whether CSMCI can rely on their terms in relation to GKO LNs. Because Mr Brindle does not take the Lowe v Lombank point in relation to the DDCS letter terms, the only question that arises on the effect of the terms of those letters (if applicable to GKO LNs) is whether the judge’s overall conclusion at [1/674-5] is correct. I will deal with that when considering the effect of the GKO LN terms in the context of the Lowe v Lombank point. The fourth issue in relation to the DDCS letters is the same as the third issue set out above concerning the GKO LN terms, viz. the “unconscionability” issue. I will consider that issue for both the GKO LNs and the DDCS letters togther. The fifth issue is the same as the fourth issue with respect to the GKO LN terms, viz. the issues arising under the Misrepresentation Act and UCTA. I will also deal with those two together.

Lastly, I will, if necessary, have to consider whether CMSCI or CMIL can rely on the terms of the GMRA.

Sub-Issue (a): The GKO LN Note terms: to whom does the term “Holder” apply? In order to discuss this, it is necessary to summarise the judge’s findings on how each GKO LN purchase was effected. (Footnote: ¹⁵⁵) For each trade a terms and conditions sheet with a Risks Disclosure statement attached, a GKO Linked Note, a two page trading “confirm” and a “repo confirm” (if the trade was being financed by CMB) were produced. The trading confirm had the terms and conditions sheet (including Risks Disclosure statement) attached to it and that bundle was sent by fax. The repo confirm was sent separately by fax. The repo confirm stated that the GKO LN “has been issued by CMSCI to Springwell (the “Customer”) on…” a stated date, which was the settlement date, usually 4 or 5 days after the trade date. The confirm recorded the obligation of “the Holder” to pay the “Consideration Amount” and that upon receipt of that payment, CMSCI would fax a copy of the GKO LN to “the Holder” for signature.

However, despite the repo wording quoted above, Gloster J found that inaccurately stated the position because each of the GKO LNs was bought by Springwell via finance provided by CMB. Thus the judge found that “…each of the [GKO LNs] was leveraged, [so] “the Holder” was CMB and it was thus CMB who was to pay the Consideration Amount”. (Footnote: ¹⁵⁶) The confirm also recorded that, because of the financing, the non-transfer/non-assign provisions of the GKO LN terms were to be waived “…because the Note was to be sold by Springwell to CMB, and subsequently resold to Springwell”. The confirm further noted that it was agreed “in furtherance of the foregoing” that the Note was to be issued to CMB. The judge held that Springwell “…acquired the contractual entitlement to the issue of the Note to itself at the trade date, was on-selling the Note to CMB under the financing arrangements”. The judge records that Mr Brindle “…made something of this…” but in her view it was irrelevant to Springwell’s awareness of the provisions of the GKO LN documentation.

The judge also held (Footnote: ¹⁵⁷) that once CMB had paid the “Consideration Amount” on the settlement date, CMSCI issued the GKO LN (already signed by CMSCI) to CMB. The Note would then be signed by CMB , which was defined as “the Holder” in the Note and the signed copy would be returned to CMSCI.

The judge concluded (Footnote: ¹⁵⁸) that copies of the GKO LNs, the confirms, the Terms and Conditions sheets and the Risk Disclosure sheets were faxed, probably directly to Springwell at Piraeus or its London office. In many cases the GKO LNs were signed by Springwell and returned to Chase. AP admitted he signed at least two Terms and Conditions Sheets and Risk Disclosure sheets in the name of another director of Springwell, Mr Baxivanos.

Mr Brindle submitted that because “the Holder” is defined in the GKO LN to mean CMB, therefore Section 6(c) was not an acknowledgement by Springwell, nor did Section 6(c) say anything about what representations had been made to Springwell or what Springwell had or had not relied on. Thus, the wording of Section 6(c) could not give rise to any estoppel (whether contractual or otherwise) which prevented Springwell, as opposed to “the Holder” viz. CMB, from asserting that it, Springwell, had relied on advice as to the advisability of purchasing the GKO LNs or on representations or that it, Springwell, had such advice given to it.

It is clear from the terms of the GKO LN itself that CMB is defined as the “Holder”. Although, on the face of those terms, it is therefore CMB that makes the “acknowledgements” set out in Section 6(c) of the GKO LN Terms and Conditions, it would be artificial and uncommercial if that were to be the true construction of the effect of Section 6(c). It is plain in the context of the transaction for the sale of the GKO LNs when taken as a whole, that it is the entity that is to have the ultimate benefit of the purchase, not the financier of the purchase, who must be making the acknowledgements.

The confirms each state that a GKO LN as identified in the confirm has been issued by CMSCI to Springwell as “the Customer”. The confirm expressly indicates the mechanism to be used in respect of the sale and purchase of a GKO LN that has been financed by CMB: the Note will be sold to CMB and then there will be a subsequent transfer of the Note when the Customer’s obligations in connection with the financing have been satisfied in full. It is in order that this can be done that the confirm states the provisions of the Note rendering it non-transferable and non-negotiable will be waived. The confirm also provides that the Customer represents and warrants that it has read the Note and the terms of the Note, of which a summary is attached.

The judge found as a fact that those confirms were signed on behalf of Springwell and returned to Chase. There is no appeal from that finding. Therefore Springwell was bound by the Terms and Conditions of the GKO LNs, including Section 6(c). Given the understanding that Springwell would have the benefit of the Notes and that it was bound by the Terms and Conditions, I think that “Holder” in Section 6(c) has to be construed so as to include Springwell as the “customer”. In my view this construction is confirmed if the terms of Section 5 are examined. That Section deals with “Other Risks Assumed by Holder”. It is obvious that “the Holder” there is referring to the Customer, not a Chase entity that is the purchaser of the GKO LNs under a financing arrangement. In particular, it would not make sense for the terms of Section 5(e) and 5(f) to be directed at another Chase entity. This view is also confirmed, I think, by the terms of Section 6(a); it would not make sense to limit “the Holder” to CMB in the context of the representations and warranties that “the Holder” gives under that provision. It is, in my view, plainly a Customer such as Springwell that is to be treated as giving those representations and warranties as to its power to execute the Note and that it constitutes a valid and binding operation and so forth. It could hardly have been intended that only CMB, as “the Holder”, would represent and warrant that it “has the knowledge and experience in financial and business matters as to be capable of evaluating the merits and the risks of this Note and it has determined that purchasing this Note is appropriate in the light of the Holder’s business strategies and objectives”.

This is one of those cases where a literal construction of the wording of the Terms and Conditions of the GKO LN, in respect of the definition of “the Holder” taken out of its context, makes commercial and practical nonsense. Therefore the court must look for a more sensible construction. The answer is, as Chase submitted, that it embraces “the Customer” as defined in the confirms, that is Springwell. Therefore Springwell is bound by the terms of Sections 5 and 6 of the Terms and Conditions as “the Holder”.

Sub-Issue (b): The GKO LN Terms and Conditions: the effect of Sections 6(c) and 5(e): the “Lowe v Lombank” issue. This issue only arises if, contrary to my conclusions above, CMSCI, through JA, had made actionable representations about the nature of the GKO LNs and I make that assumption for the purpose of considering this point. As already noted, the argument of Springwell is that the statement in the last sentence of Section 6(c), viz. that “the Holder has not relied and acknowledges that neither CMSCI nor CMIL has made any representation or warranty with respect to the advisability of purchasing this note” cannot be used by CMSCI to prevent Springwell advancing its Misrepresentation Act claim against CMSCI. Mr Brindle submitted that the last sentence can only operate as a representation by Springwell that neither CMSCI nor CMIL has made any representations or warranties on the advisability of purchasing the GKO LN concerned. He accepts that if CMSCI (or CMIL) could establish, on the facts, that Springwell had made a representation to CMSCI that it (Springwell) accepted that CMSCI had made no representation or warranty as to the suitability of buying the GKO LN and it was also shown that it was intended by Springwell that CMSCI should rely on that representation as true and it (CMSCI) had in fact done so, and that Chase did not believe that AP relied on JA’s advice when making decisions to invest in GKO LNs, then Springwell could be estopped by that representation from relying on any representations that CMSCI had, in fact, made. Mr Brindle relied on the finding of fact of the judge (Footnote: ¹⁵⁹) that Chase had not proved that it did not believe that AP relied on JA’s advice in coming to his decisions on GKO LNs to submit that Chase could not therefore rely on Section 6(c) by virtue of an estoppel by representation.

Mr Brindle submitted that the decision of Lowe v Lombank (Footnote: ¹⁶⁰) applies to Section 6(c). Therefore, a statement in a contract that one party (A) acknowledges certain past facts, (viz. that CMSCI had made no representations), known by both parties to be false (because, on this assumption, CMSCI had made representations) cannot be converted into a contractual obligation upon (A) that he will do or will not do acts in the future on the footing of that acknowledgement.

Before I examine Lowe v Lombank and subsequent cases on this issue, I will try and analyse the matter from principle. If A and B enter into a contract then, unless there is some principle of law or statute to the contrary, they are entitled to agree what they like. Unless Lowe v Lombank is authority to the contrary, there is no legal principle that states that parties cannot agree to assume that a certain state of affairs is 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 upon the basis that the present or past facts are as stated and agreed by the parties. It is, after all, common in marine insurance contracts for an assured to “warrant” that a certain state of affairs has existed in the past and is still existing at the time the insurance contract is concluded or will continue, eg. that the nationality of a ship was and is British; or that a ship was and is “in Class” with her Classification Society. The shipowner may know that those things are not the case; the insurer may have his suspicions that they are not the case. The parties agree that for the purposes of the insurance contract, the facts as “warranted” by the assured are as he has stated them to be. A “conclusive evidence” clause in a sale contract, viz. that a report on eg. the amount or condition of a commodity sold under a contract between A and B shall be “conclusive evidence” of the matters stated in the report is to the same effect. The parties are agreeing that the statements in the report shall be the case for the purposes of the contract of sale and the parties cannot go behind that agreement.

So, in principle and always depending on the precise construction of the contractual wording, I would say that A and B can agree that A has made no pre-contract representations to B about the quality or nature of a financial instrument that A is selling to B. Should it make any difference that both A and B know at and before making the contract, that A did, in fact, make representations, so that the statement that A had not is contrary to what each side knows is the case? Apart from the remarks of Diplock J in Lowe v Lombank, Mr Brindle did not show us any case that might support the proposition that parties cannot agree that X is the case even if both know that is not so. I am unaware of any legal principle to that effect. The only possible exception might be if the particular agreement between A and B on the certain state of affairs concerned contradicts some other specific or more general rule of English public policy. (Footnote: ¹⁶¹) Like Moore-Bick LJ in Peekay (Footnote: ¹⁶²) I see commercial utility in such clauses being enforceable, so that parties know precisely the basis on which they are entering into their contractual relationship.

What, therefore, does Lowe v Lombank Ltd actually decide? The claimant was a widow aged 65. She agreed to buy a car on hire-purchase terms for £223. She was loaned £158 from the defendant hire purchase company. The claimant and the defendant entered into a hire-purchase agreement, which consisted of a printed form. Clause 8 of the agreement said that the only warranties (as to the fitness of the car and its merchantability) should be those implied under the Hire Purchase Acts 1938 and 1954. (Footnote: ¹⁶³) Clause 9 (ii) of the agreement provided that the hirer acknowledged that she “had examined the goods and that there were no defects in the goods which examination ought to have revealed and that they were of merchantable quality”. It also provided, in the last sentence:

“The hirer further acknowledges and agrees that he has not made known to the [hire purchase company] expressly or by implication the particular purpose for which the goods are required and that the goods are reasonably fit for the purpose for which they are in fact required”.

When the claimant signed the contract she did not read it, nor, most importantly, were its terms explained to her. Also, she had not seen the car. The salesman assured her it was “perfect” or nearly so. The car was brought around to her the same day but not left with her because it was said to need some “adjustment”. When the car was delivered to her at a later date, she signed a delivery receipt which contained a statement that she acknowledged that she had read the agreement and that she had examined the goods and that they were in good working order and condition. The car was, in fact, not roadworthy. The claimant claimed damages for breach of the condition of fitness for purpose implied into the contract by section 8(2) of the 1938 Act. The hire-purchase company pleaded in its defence that the conditions implied by section 8(1) and (2) of the 1938 Act were subject to the exclusion of warranties set out in clause 9(ii) of the hire-purchase agreement.

The County Court judge found that the contract between the claimant and the hire-purchase company contained the implied condition that the car would be fit for the purpose for which it was required, namely transport, having found as a fact that the claimant impliedly let the hire-purchase company know the purpose for which she required the car. He also found that no terms of the hire-purchase agreement excluding or modifying the implied terms imported by the 1938 Act were brought to the attention of the claimant. But the judge also found that the claimant was estopped by virtue of the delivery receipt which she had signed from relying upon the defects that did in fact exist in the car as constituting a breach of that implied condition as to fitness for purpose. It should be noted that there is no finding of fact that the claimant knew or even suspected that the car was not fit for the purpose for which it was needed at the time of the contract. The claimant appealed.

The reserved judgment of the Court of Appeal (Footnote: ¹⁶⁴) was given by Diplock J. The court first of all agreed with the County Court judge that the claimant had “plainly” made known to the hire-purchase company the purpose for which she required the car, viz. “driving about”. (Footnote: ¹⁶⁵) Secondly, the Court noted that the terms of clause 8 of the hire-purchase agreement did not exclude the conditions as to merchantability and fitness for purpose implied by sections 8(1) and (2) of the 1938 Act. But even if they had attempted to do so, they would be ineffective by virtue of section 8(3) of the 1938 Act because the effect of clause 8 was never brought to the attention of the claimant. (Footnote: ¹⁶⁶)

The Court of Appeal next considered the effect of clause 9(ii) of the hire-purchase contract terms. Diplock J repeated the finding that the clause was never brought to the attention of the claimant nor was its effect made clear to her. He noted that the first part of clause 9(ii) is expressed to be an acknowledgement, “that is to say a representation” by the claimant that she had not made known by implication that the car was required for a particular purpose and “also as an agreement that she had not made that purpose known to the defendants”. (Footnote: ¹⁶⁷) Diplock J stated that “insofar as it was a representation it could only operate as an estoppel preventing the [appellant] from asserting the contrary…”. But, Diplock J noted, counsel for the appellant did not rely on that argument “…no doubt for the very good reason that there was no evidence….that the defendants believed in the truth of the representation [that the claimant had not made known the purpose for which the car was required]”.

Diplock J then deals with the last sentence of clause 9(ii) of the hire-purchase agreement, viz. that “…the goods are reasonably fit for the purpose for which they are in fact required”. He said:

“To call it an agreement as well as an acknowledgement by the [claimant]cannot convert a statement as to past facts, known by both parties to be untrue, into a contractual obligation, which is essentially a promise by the promisor to the promisee that acts will be done in the future or that facts exist at the date of the promise or will exist in the future. To say that the hirer “agrees” that he has not done something in the past means no more than that the hirer, at the request of the owner, represents that he has not done that thing in the past. If intended by the hirer to be acted upon by the person to whom the representation is made, believed to be true by such person and acted upon by such person to his detriment, it can give rise to an estoppel: it cannot give rise to any positive contractual obligations. Although contained in the same document as the contract, it is not a contractual promise”.

Those remarks appear to be directed more to the statement in the sentence in clause 9(ii) that the hirer has “…not made known to the owners expressly or by implication the particular purpose for which the goods are required…”, rather then the remainder of the sentence in that clause. As I read the second half of page 204 and the first paragraph of page 205 of the report, Diplock J held that because of the finding of fact that the claimant had made known the purpose for which she required the car and because the hire-purchase company did not bring clause 9(ii) of the hire-purchase contract or its effect to the attention of the claimant, the effect of section 8(3) of the 1938 Act was to strike down that clause of the hire-purchase contract. Therefore the implied condition as to fitness for purpose remained a term of the contract and, as it was broken, the claimant was entitled to damages. (Footnote: ¹⁶⁸) With respect to Christopher Clarke J’s detailed analysis of Lowe v Lombank and associated authorities (including the decision of Gloster J in this case) in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland PLC, (Footnote: ¹⁶⁹) I disagree with his view that the Court of Appeal did not decide Lowe v Lombank on the basis of section 8(3) of the 1938 Act. I think that is precisely what it did. As Diplock J said, (Footnote: ¹⁷⁰) clause 9(ii) of the hire-purchase agreement was an attempt to evade sections (8)(2) and (3) of the Act.

Lastly, Diplock J dealt with the effect of the terms of the delivery receipt which the claimant signed when the car was ultimately delivered to her. This document was not part of the contract terms. Therefore, he held, the statement in it that the claimant had examined the car and acknowledged that it was in good order and condition could only operate as a representation by her to the hire-purchase company that she had examined the car and did indeed find it in good order and condition. So she could only be estopped from alleging the contrary. But, Diplock J said, the alleged estoppel failed to satisfy any of the ingredients of an estoppel by representation, ie. that the representation was clear and unambiguous, that the claimant meant it to be acted upon by the hire-purchase company, or that the defendants believed it to be true and were induced to act upon it as a result. (Footnote: ¹⁷¹)

The remarks of Diplock J that I have quoted above were not, in my view, necessary for either part of the decision in the case. The only way clause 9(ii) could possibly negate the effect of section 8(3) of the 1938 Act would be if it operated as an estoppel by representation or estoppel by contract to the effect that the fact and effect of the terms of clause (ii) had been made known to the claimant. But the clause itself does not say that is the case. Counsel for the hire-purchase company therefore did not, indeed could not, argue that clause 9(ii) of the hire-purchase agreement prevented the claimant from saying that the terms of that clause had not been brought to her attention. Therefore, given the finding of fact that the clause and its effect were not made known to the claimant, it had to be caught by section 8(3) of the 1938 Act. So the remarks of Diplock J that I have quoted above on the efficacy of the last sentence of clause 9(ii) appear to have been made on the assumption of a point that was not being argued by counsel for the hire-purchase company, Mr TG Roche QC.

In Grimstead (EA) & Sons Ltd v McGarrigan, (Footnote: ¹⁷²) Chadwick LJ stated that an acknowledgement of “non-reliance” by parties to a contract was capable of operating as an evidential estoppel if the legal requirements of an estoppel were fulfilled. In that case he held they were not. (Footnote: ¹⁷³) He also pointed out the commercial utility of enforcing such estoppels when the parties to a contract were of equal bargaining power. (Footnote: ¹⁷⁴) Chadwick LJ also gave the leading judgment in Watford Electronics Ltd v Sanderson CFL Ltd. (Footnote: ¹⁷⁵) He referred to his analysis in Grimstead and to Lowe v Lombank. (Footnote: ¹⁷⁶)However, in neither case did Chadwick LJ make any analysis of the remarks of Diplock J quoted above.

Accordingly, and in agreement with Gloster J, (Footnote: ¹⁷⁷) I have concluded that the remarks of Diplock J in Lowe v Lombank quoted above are not binding authority for the far-reaching proposition that there can never be an agreement in a contract that the parties are conducting their dealings on the basis that a past event had not occurred or that a particular fact was the case, even if it was not the case and both the parties knew it was not. However, with respect to Gloster J, I do not agree that Diplock J was considering whether or not the agreement between the claimant and the hire-purchase company was a “sham” of the kind he subsequently discussed in Snook v London & West Riding Investments. (Footnote: ¹⁷⁸)

In contrast to Lowe v Lombank, there is a series of cases which support the proposition 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 it is not the case. First there is the decision of the Court of Appeal in Burrough’s Adding Machines Limited v Aspinall. (Footnote: ¹⁷⁹)The case concerned a dispute about whether the salesman was entitled to commission on the sale of adding machines to banks. The company had, wrongly but without deceit, prepared its accounts of the sales of the machines on the basis that sales to banks were excluded. The salesman knew that sales of adding machines had been made to banks, but did not dispute the accounts at the time they were sent to him. He only raised the issue when he left the company’s service some years later. The court (Footnote: ¹⁸⁰) held that a term in the contract between the company and its salesman that all statements of account sent by the company to him “shall be deemed to be accepted by the salesman as correct” unless he gave written notice that they were not within 30 days of receiving the account, bound both parties. Therefore the salesman was bound by the agreed statement of facts even if they were not accurate.

Next is the decision of Ferris J in Colchester Borough Council v Smith. (Footnote: ¹⁸¹)Mr Tillson had farmed various bits of land owned by the council for some years from about 1960 until 1983. In 1983 he and the council entered into an agreement in one clause of which Mr Tillson purported to acknowledge that his possession of the land had been as a bare licensee or as tenant at will; and he agreed that he had obtained no interest in the land by adverse possession. Subsequently the council tried to recover possession of the land. One issue before the court was the effect of the clause in the 1983 agreement, if, before that time, Mr Tillson had indeed obtained title to the land by virtue of adverse possession. The council argued that the effect of the clause was to create a “contractual estoppel”, preventing Mr Tillson from asserting that he was entitled to an interest in the land by virtue of any adverse possession established before the 1983 agreement was concluded.

Ferris J accepted that argument. He referred to and adopted (Footnote: ¹⁸²) a statement in Spencer Bower and Turner, Estoppel by Representation, (Footnote: ¹⁸³)which said:

“A convention of the parties, which binds them to adhere to an assumed state of facts, may amount to an express contract in which case each party contracts with the other to be estopped. Burrough’s Adding Machine Ltd v Aspinall (1925) 41 TLR 276 CA is an example”.

The passage in Spencer Bower continued by noting that the present chapter was concerned with “estoppel by convention” rather than estoppel by contract. It then made the further comment:

“But it has been of interest to notice, by way of introduction to the subject, that there may be an estoppel whereby parties are precluded, as a matter of contract, by virtue of operative words, and not those of a mere recital, from setting up a version of the facts different from that which they have agreed to assume; and this result may be likened to statutory estoppel”.

Ferris J therefore held (Footnote: ¹⁸⁴) that Mr Tillson was bound by the terms of the clause in the 1983 agreement as the basis on which he could remain on the land. It should be noted that Ferris J did not state that the council had to prove, before it could succeed on “contractual estoppel”, that it would be “unconscionable” for Mr Tillson to go back on what he had agreed. (Footnote: ¹⁸⁵)

The Court of Appeal (Footnote: ¹⁸⁶) viewed the 1983 agreement as a bona fide compromise of a dispute as to Mr Tillson’s interest in the land. Dillon LJ said that it was a matter of indifference whether this was labelled “estoppel by contract” or “estoppel by convention”. (Footnote: ¹⁸⁷)Lowe v Lombank was not cited in either court.

Thirdly, there is the decision of the Court of Appeal in Peekay (Footnote: ¹⁸⁸)itself. That case also involved GKO LNs, which had been issued by the Australia and New Zealand Banking Group Limited (“ANZ”). Peekay Intermark Limited (“Peekay”) claimed damages under section 2(1) of the Misrepresentation Act 1967, claiming that it had bought GKO LNs as a result of misrepresentations as to the nature of the GKO LNs by a regional manager of ANZ. The deputy judge found that the nature of the GKO LNs had been misrepresented to Mr Pawani, buying on behalf of Peekay. That finding was maintained in the Court of Appeal, but it reversed the deputy judge’s further finding that Mr Pawani was induced to buy the GKO LNs on the basis of the misrepresentation.

In the Court of Appeal ANZ raised, apparently for the first time, an argument that Peekay was estopped, by its signature of a Risk Disclosure Statement, from alleging that it had been induced to enter into the contract by the misrepresentations by ANZ’s regional manager. Mr Pawani had signed ANZ’s “final terms and conditions” or “FTCs” to which the Risk Disclosure Statement was attached. Mr Pawani had returned the documents to ANZ, thereby confirming that he had read and understood their terms. The Risk Disclosure Statement was five pages long and expressly warned the investor to take independent advice before purchasing an emerging market instrument. It further advised the investor to satisfy himself that he understood the risks involved, the nature of the transaction and the risk of loss that was possible.

The final page of the FTCs contained an “Important Notice”, part of which read:

“Before considering entering into this transaction you must make your own independent assessment as to whether it is appropriate for you based upon your own judgment and upon advice from such advisors as you consider necessary. ANZ Bank is not acting as your financial advisor or in a fiduciary capacity in relation to this transaction. It is an express term that you may enter into with ANZ Bank that you are not relying on any communication (written or oral) made by ANZ Bank as constituting either investment advice or a recommendation to enter into this transaction…”.

The Court of Appeal permitted ANZ to argue that Peekay was estopped by contract from asserting that it had been induced to enter into the purchase of the GKO LNs by misrepresentations of ANZ’s regional manager. However, it refused permission to raise an argument based on estoppel by representation because that would raise new issues of fact. (Footnote: ¹⁸⁹)

The leading judgment was given by Moore-Bick LJ. He said that, as a matter of principle, parties could agree that a certain state of affairs should form the basis of their transaction, whether it be the case or not and that agreement gave rise to an estoppel. He cited the Colchester case as an example. (Footnote: ¹⁹⁰) Moore-Bick LJ then continued:

“57.

It is common to include in certain kinds of contracts an express acknowledgment by each of the parties that they have not been induced to enter the contract by any representations other than those contained in the contract itself. The effectiveness of a clause of that kind may be challenged on the grounds that the contract as a whole, including the clause in question, can be avoided if in fact one or other party was induced to enter into it by misrepresentation. However, I can see no reason in principle why it should not be possible for parties to an agreement to give up any right to assert that they were induced to enter into it by misrepresentation, provided that they make their intention clear, or why a clause of that kind, if properly drafted, should not give rise to a contractual estoppel of the kind recognised in Colchester Borough Council v Smith. However, that particular question does not arise in this case. A clause of that kind may (depending on its terms) also be capable of giving rise to an estoppel by representation if the necessary elements can be established: see E.A. Grimstead & Son Ltd v McGarrigan (C.A.) (unreported, 27^th October 1999)…”

At [60], Moore-Bick LJ held that Mr Pawani’s signature and return of the FTCs and Risk Disclosure Statement meant that there was a contract between Peekay and ANZ on terms that Peekay was aware of the nature of the investment and was satisfied that it was suitable for its needs. As it was not asserted that ANZ had misrepresented the nature of the FTCs or Risk Disclosure Statement, Peekay was bound by their terms. It was therefore “not open to Peekay to say that it did not understand the nature of the transaction described in the FTCs…”. Consequently it could not say that it was induced to enter into the contract as a result of representations previously made by ANZ’s regional manager.

Chadwick LJ agreed with the judgment of Moore-Bick LJ. He held (Footnote: ¹⁹¹) that the investor’s statement that it had read and understood the Risk Disclosure Statement operated as a contractual estoppel to prevent Peekay from asserting that it had not done so. Therefore Peekay must be taken to have accepted that ANZ would have assumed that Peekay fully understood the nature of the transaction into which it was entering. “…Given that, Peekay could not be heard to say that Mr Pawani had assumed that the FTCs which he had signed on its behalf did not need to be read and understood”.

Lowe v Lombank was not cited to the Court of Appeal in Peekay. Although Moore-Bick LJ refers to the Grimstead case and Chadwick LJ had been party to both the Grimstead and Watford Electronics decisions, I am prepared to accept that neither Moore-Bick nor Chadwick LJJ would have had in mind in Peekay the particular remarks of Diplock J in Lowe v Lombank on which Mr Brindle now relies. Mr Brindle therefore submitted that the general statements of Moore-Bick LJ in Peekay I have set out above are contrary to binding authority of the Court of Appeal in Lowe v Lombank and so Peekay was wrongly decided per incuriam. At the least, Moore-Bick LJ’s statements are, he submitted, obiter which should not be followed.

I cannot accept either submission. In my view the statements of Moore-Bick LJ are consistent with principle and authority. For the reasons that I have already set out, the statements of Diplock J in Lowe v Lombank which I have quoted were not necessary for the decision in that case and are not binding in the present context. (Footnote: ¹⁹²) Those statements are, in my view, inconsistent with the Burrough’s Adding Machine decision. That decision was referred to (via Spencer Bower) and relied on in the later decision of Ferris J in the Colchester case to which Moore-Bick J referred in Peekay. I respectfully regard the principles stated in Peekay as good law. That case has now been followed in a large number of first instance cases which need not be analysed in any detail. (Footnote: ¹⁹³)

How are the principles confirmed by the Peekay decision to be applied in this case? I will deal first with the terms of the GKO LNs. Mr Brindle relied on the fact that Section 6(c) refers only to the Holder acknowledging, which he said equalled “representing” that it understands the risks and potential consequences of purchasing the GKO LNs and that the Holder acknowledges that neither CMSCI nor CMIL “…has made any representation or warranty with respect to the advisability of purchasing this Note”. He submitted that, even accepting the principles set out in Peekay, the language of this clause does not help Chase, because an acknowledgement or a representation by Springwell is not the same as an agreement: therefore on the proper construction of this clause, it cannot create a contractual estoppel. I disagree. The correct analysis must be the same as that in Peekay. Springwell signed the terms and conditions more than once. In law it is to be taken as having read and understood them. Therefore the terms are part of the contract for the sale of the GKO LNs and Springwell is bound by them. Springwell and Chase contract for the purchase of the GKO LNs on the basis that Springwell is bound contractually to its statement, or acknowledgement, that no representation or warranty has been made by Chase. Moreover, Springwell must be bound by the terms of Section 5(e), which means that it accepts that CMSCI has not made any representations or warranties of the kind set out there.

Accordingly, subject to any argument based on section 3 of the Misrepresentation Act 1967 and UCTA, I agree with the judge that the effect of Section 6(c) and 5(e) and (f) of the GKO LN Terms and Conditions is twofold. (Footnote: ¹⁹⁴) First and foremost, they mean that Springwell is contractually estopped from contending that there were any actionable representations made by Chase on which Springwell could base its current claims either under the Misrepresentation Act or for negligent misstatement. Secondly, they point strongly against any statements of JA from being actionable, either as misrepresentations under the 1967 Act or as negligent misstatements.

Sub-Issue (c): The construction of the terms of the DDCS letters. The issue of the type of instruments to which the DDCS letters applied will be considered below, in the next sub-issue. But as for the effect of the terms of the DDCS letters, clause 4 must mean that Springwell is contractually bound by the representations that it states it is giving to Chase, viz. that it is a sophisticated investor, that it is familiar with and able to evaluate the merits and risks associated with the instruments with which the DDCS letter is concerned and is able to assume the risk of loss associated with such instruments. The effect of clause 6 is that Springwell accepts that no express or implied representations are or will be made by CMIL concerning any written or oral information regarding any instrument or investment opportunity covered by the terms of the DDCS letters.

Subject to arguments on section 3 of the Misrepresentation Act and UCTA, I would therefore go somewhat further than the judge did at [1/674] and say that by virtue of the DDCS letters Springwell had agreed with Chase that statements by JA were to be treated as his expressions of opinion, based on Chase research and JA’s own view of the markets and the economic and political association in Russia. Springwell had agreed that statements by JA in the numerous telephone calls with AP were not to be susceptible to scrutiny with a view to seeing if they constituted potential actionable misrepresentations.

Sub-Issue (d): do the DDCS Letters apply to the purchase of the GKO LNs at all? As already noted, Mr Brindle submitted that the definition of “Instruments” to which the DDCS letter terms apply does not cover GKO LNs. The first sentence of the letters describes these “Instruments” as “…various debt and equity securities of public and private sector issuers located in developing countries (“Instruments”)”. Because CMSCI, the issuer of the GKO LNs, was located in the Channel Islands, it was not located in a “developing country”. Gloster J held that the GKO LNs were instruments in which “…the economic benefits and risk of the investment were tied to the emerging markets”. (Footnote: ¹⁹⁵)The judge went on to hold that the DDCS terms applied to the GKO LNs because they applied to situations in which Springwell was “…dealing for your own account in” the types of instruments identified. “Dealing …in…” meant, on the judge’s construction, the whole process of investing and participating in an emerging country where the underlying instrument issued by the borrower is issued in that emerging country. (Footnote: ¹⁹⁶) Mr Brindle submitted that this is to stretch the words of the first paragraph of the DDCS letter too far.

I cannot accept this submission. The wording of the first paragraph of the DDCS letters must be set in their context. The GKO LNs were based on the underlying GKOs which were issued by the Ministry of Finance of the Russian Federation, which was an emerging market. As Gloster J put it, the GKO LNs were “pass-through” instruments in which the benefit (or otherwise) of the GKOs were passed onto the buyer of GKO LNs. Everyone accepted that the GKO LNs were “emerging market investments”. Therefore, Springwell was “dealing in” GKOs, albeit at one remove. Any reading which divorced the GKO LNs from the underlying GKOs and which did not regard the GKO LNs as investments in “emerging market” instruments is artificial and lacks commercial common sense.

Sub-Issue (e): can CMSCI rely on the terms of the DDCS letters? CMIL was the seller of the GKO LNs to Springwell. Springwell claims against CMIL as the employer of JA who is alleged to have made the negligent misrepresentations. Springwell claims against CMSCI in respect of the claim under section 2 of the Misrepresentation Act. But the maker of the alleged misrepresentations was the same person, JA. So Springwell must allege that CMIL through JA was acting as the agent of CMSCI and CMSCI, as CMIL’s principal, is liable for misrepresentations made on its behalf by CMIL/JA. If the case is put on that basis (and I can see no other way of putting it), then CMSCI, as principal, must be entitled to rely on contractual defences that are available to its agent, CMIL, through whom the alleged misrepresentations were made. Therefore, I would conclude that CMSCI can rely on the terms of the DDCS letters so as to create a contractual estoppel against Springwell with regard to the alleged misrepresentations by JA.

Sub-Issue (f): Does Chase have to establish that it would be “unconscionable” for Springwell to resile from the contractual estoppel before it can rely on either Sections 5(e), 5(f) and 6(c) of the GKO LN Terms and Conditions or clauses 4 and 6 of the DDCS letters? I have, effectively, rejected Mr Brindle’s argument that there is no juristic concept of “contractual estoppel” which is distinct from the doctrine of “estoppel by convention”. To my mind, once it is accepted that there is a separate doctrine of “contractual estoppel” then there is no room for a requirement that the party which wishes to rely on that estoppel must demonstrate that it would be unconscionable for the other party to resile from the conventional state of affairs that the parties have assumed. The reason why that is a requirement in the case of “estoppel by convention” is precisely because there is no contract between the parties. Therefore some other mechanism has to come into play to make the non-contractual “convention” enforceable.

Mr Brindle relied on the statement of Peter Gibson J in Hamel-Smith v Pycroft and Jetsave (Footnote: ¹⁹⁷) that the ability to rely on an estoppel by convention is governed by “considerations of justice and equity”. Therefore, before an estoppel by convention can be enforced it is necessary to demonstrate that it would be unjust or unconscionable for one of the parties (against whom it is sought to enforce the convention) to resile from it. That statement was part of a long passage of Peter Gibson J’s judgment that was approved by the Court of Appeal in The “Vistafjord.” But, in my view, it is irrelevant to the doctrine of “contractual estoppel” for the reasons that I have given.

Sub-Issue (g): Are the terms of the GKO LN Terms and Conditions and the terms of the DDCS letters caught by section 3 of the Misrepresentation Act 1967 and so subject to the regime of the UCTA? Gloster J described Springwell’s argument that the Relevant Provisions were ineffective because they fell within section 3 of the Misrepresentation Act and fell foul of the UCTA regime as “last ditch”. (Footnote: ¹⁹⁸) The judge accepted that the last sentence of paragraph four (I think this must mean the penultimate sentence) and the last main clause in the last sentence of paragraph 6 of the DDCS letters were “genuine exclusion clauses”. However, the judge held that “the bulk of the terms…were not exclusion clauses but merely clauses which defined the nature of the services which Chase was rendering to Springwell and which confirmed the basis on which the parties were transacting business”. (Footnote: ¹⁹⁹)However, Mr Brindle correctly pointed out that the judge did not identify precisely which provisions did fall within section 3 or fell foul of the UCTA regime.

As Christopher Clarke J put it at [272] of Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland PLC, (Footnote: ²⁰⁰)there are two relevant questions. The first is whether the Relevant Provisions, in this case the GKO LN documentation and the DDCS, exclude or restrict any liability to which Chase is subject by reason of any misrepresentation made by it or any remedy available to Springwell by reason of such misrepresentation. The second is, assuming that they do, whether or not Chase has established that the particular provisions satisfy the requirement of reasonableness. But section 3 does not affect the prior question of whether, given the terms of the Relevant Provisions overall, an investor in Springwell’s position would have understood Chase to be making representations at all or, indeed, what those might be. Therefore the first question to consider is whether the clauses said to offend section 3 of the 1967 Act and the UCTA regime are ones which relate to whether any alleged misrepresentation was made at all, or whether it purports to exclude liability for a misrepresentation which has been made. (Footnote: ²⁰¹)

The DDCS Letters paragraphs 4 and 6: I agree with Gloster J that the penultimate sentence of paragraph 4 and the last part of the single sentence that makes up paragraph 6 of the DDCS letters are exemption clauses. They fall within the ambit of section 3 of the 1967 Act. As for the remainder of the terms of paragraph 4 of the DDCS letters, other than the penultimate and last sentence, in my view they are terms on which Chase is agreeing to contract with Springwell and they therefore fall outside the scope of section 3. The statement in the middle of the very long sentence that makes up clause 6 is more difficult to classify. This states: “…no representation or warranty, express or implied, is or will be made by either CMB or CMIL or CMp, their representative officers, servants or agents or those of their associated companies in or in relation to such documents or information….”. However, as Christopher Clarke J trenchantly put the point in the Riaffiesen case, (Footnote: ²⁰²) “…to tell the man in the street that the car you are selling him is perfect and then agree that the basis of your contract is that no representations have been made or relied on, may be nothing more than an attempt retrospectively to alter the character and effect of what has gone before and in substance be an attempt to exclude or restrict liability”. I would therefore be inclined to regard that part of clause 6 of the DCSS letters as falling within section 3 and therefore subject to the UCTA regime.

The GKO LN terms Section 6(c): In relation to the key part of Section 6(c) of the GKO LN terms, viz. “…the Holder has not relied on and acknowledges that neither CMSCI nor CMIL has made any representations or warranty with respect to the advisability of purchasing this Note”, I think that the same reasoning applies. If, contrary to my conclusion, Chase had made representations to Springwell, then this clause is an attempt retrospectively to alter the character and effect of what has gone on before and so is in substance an attempt to exclude or restrict liability.

“Reasonableness”. The next question is whether these terms that fall within section 3 of the 1967 Act are reasonable terms. Gloster J found that the terms were reasonable. (Footnote: ²⁰³) That is a finding of fact. Mr Brindle challenged it first by reference to JA’s cross-examination on how he explained the risks of GKO LNs to AP. (Footnote: ²⁰⁴) He submitted that it was unreasonable to explain the risks and then to discount them and then subsequently to rely on clauses that assert that no representation has been made at all. I cannot accept this submission. It takes the evidence out of context and it fails to take account of the fact that AP was a sophisticated investor in emerging market investments who was conscious of the risks of this type of investment. Mr Brindle next relied on the terms of the London Code of Conduct. That is not persuasive; JA did explain the risks to AP, as the judge found. Thirdly, Mr Brindle challenged Gloster J’s finding of fact (Footnote: ²⁰⁵) that AP read and was aware of the effect of the Relevant Provisions of the 1993 DDCS letter. But Mr Brindle has advanced no plausible basis on which the judge’s findings can be challenged. They are based on the evidence of the witnesses, particularly AP.

Therefore, I agree with Gloster J that the identified clauses in the DCSS and GKO LNs are clauses on which Chase can rely to exclude or restrict liability for any misrepresentations given by Chase and they are reasonable. Chase must therefore be entitled to rely on them both to exempt Chase from liability for claims under section 2 of the Misrepresentation Act and for claims based on negligent misstatement.

Sub-issue (h): Given the conclusions so far, what is the effect of the Relevant Provisions?

From my analysis it must follow that I agree with Gloster J’s conclusions on the effect of the DDCS letters stated at [1/670] and set out above at paragraph 49. I also agree with her conclusions about the effect of the DDCS letters and GKO LNs at [1/673] to [1/674]. Therefore, first, Springwell is contractually estopped from asserting that any actionable misrepresentations were made at all by JA; secondly, Springwell is precluded from claiming reliance on any of the alleged misrepresentations and, thirdly, Springwell has contractually agreed that CMSCI and CMIL were not assuming any responsibility for any statements that were made by JA. Therefore, fourthly, Springwell is precluded from bringing any claim, whether against CMSCI under section 2 of the Misrepresentation Act or against CMIL for negligent misstatement by virtue of the Relevant Provisions. For good measure, lastly, the effect of the penultimate sentence of paragraph 4 of the DDCS Letter must be that Chase is exempted from any liability in any event. Springwell did not mount any argument, in relation to the Pre-Default Appeal, that either CMIL or CMSCI had been guilty of “gross negligence” or “wilful default”.

The terms of the GMRA: As I have concluded that both CMCSI and CMIL can rely on both the DDCS letters and the GKO LN terms and conditions, I think it is not necessary to consider the extent to which they might also be able to rely on the terms of the GMRA. I will not therefore deal with those.

We heard submissions from both sides on what a claimant had to prove in order to establish that the misrepresentation which was the basis of the claim for damages played a “real and substantial” part in inducing the claimant to enter into the contract in question. In the light of my conclusions so far, I think there is no point in considering further this interesting and difficult question.

Nor is it necessary to deal with causation of loss. I would only point out that the judge found three important facts which, to my mind, would have made Springwell’s case on causation very difficult. First, Gloster J found that the investment in GKO LNs was within the long-held investment objectives of Springwell as she found them to be, viz. investment in high-yielding, short term emerging market instruments which provided Springwell with the benefit of cash flow and liquidity. (Footnote: ²⁰⁶) Secondly, the judge accepted the expert evidence of Ms McLeod-Wilson, Chase’s expert on emerging market debt investments, that, given its investment objectives, Springwell would not have acquired any different portfolio apart from the one that it did in fact acquire even if other advice had been tendered. (Footnote: ²⁰⁷) Thirdly, the judge concluded that even if JA had said more than he had about risks involved or even if AP had been given further risk warnings, it would not have made AP change his investment profile. (Footnote: ²⁰⁸) Those are findings of fact which cannot reasonably be challenged and Mr Brindle did not really attempt to do so.

I would dismiss this appeal for the reasons given above. In summary: first, I reject Springwell’s submissions on what representations were made by JA. Secondly, I reject the argument that there were actionable misrepresentations. Lastly, I conclude that CMIL and CMSCI can rely on the Relevant Provisions in the DDCS letters and the GKO LNs and they preclude any successful claim being made against CMSCI under section 2 of the Misrepresentation Act or against CMIL for negligent misstatement and they exempt both Chase companies from liability in any event.

Introduction: It will be recalled that the overall question on the Post-Default appeal, which is against CMSCI alone, is whether, within the meaning of Section 3(c) of the terms of the GKO LNs, CMSCI was guilty of “gross negligence” or “wilful default” with respect to actions it took, or failed to take, in relation to nine of the eleven outstanding forward currency contracts (as at 17 August 1998) that had been concluded between CMIL and CMBI as part of each GKO LN purchase. Springwell’s contention is that CMIL was at all times acting as the agent of CMSCI and that CMSCI is therefore responsible for the actions or failures of CMIL in relation to the currency forwards contracts. Springwell asserts that CMIL was “grossly negligent” or guilty of “wilful default” in failing to make efforts to procure performance of the nine currency forward contracts. Gloster J dismissed this claim. None of the disclaimers or exclusions relied on by Chase in relation to the Pre-Default claim are relevant to the Post-Default claim. There is no dispute that CMSCI was under the duty imposed by Section 3(c) of the terms of the GKO LNs.

I approach the issues on the Post-Default appeal on the basis, first, that Chase’s obligation to Springwell under Section 3(c) of the GKO LN terms was to maximise recoveries under the relevant “Transaction” (in this case the nine outstanding forward currency contracts) for the benefit of Springwell as the ultimate “Holder”. Secondly, this means that Chase was not free, in the administration of these transactions, to disregard this primary function and to decide, for Chase’s own separate economic benefit, not to attempt to do things which a reasonable person, acting on his own, would have done. (Footnote: ²⁰⁹) Therefore, I agree with Gloster J’s conclusion that “…CMSCI (acting by CMIL) would not be justified, by example, voluntarily to release CMBI from its obligations under a Designated Forward Transaction simply for the purpose of reducing CMSCI’s payment obligations under the Notes or of reducing CMBI’s financial obligations and in the “wider interests” of the Chase group”. (Footnote: ²¹⁰)

Thirdly, if Chase was obliged, in relation to these “Transactions” to use that degree of care that it would use if acting on its own account, then it has to be shown by Springwell that any actions or failures by CMIL, for which CMSCI is responsible as its principal were, at the least, negligent. Like Gloster J, in the context of the present case I regard the debate about what precisely is meant by “gross negligence” as a “somewhat sterile and semantic one”. (Footnote: ²¹¹) Before the judge it was common ground that “wilful misconduct” involved a knowingly wrongful action or failure to act or some act or failure to act that was done with “reckless carelessness”, that is not caring what the results of that carelessness might be. (Footnote: ²¹²) The parties adopted the same position on the appeal. Therefore, if “gross negligence” is not established, there is no hope of proving “wilful misconduct”.

The judge concluded that the forward currency contracts between CMBI and CMIL that were part of the structure of the nine relevant GKO LNs were “deliverable”, in the sense that those forward currency contracts required the delivery of roubles to CMIL’s S-Account with CMBI before CMBI had an obligation to exchange those roubles into US dollars for delivery to CMIL. That is primarily a conclusion of law, based upon the correct construction of the terms of the FMA of 7 April 1997 between CMIL and CMBI, although it is obviously founded on the facts and legal framework of the structure that was set up at the time the FMA was agreed. The obvious relevance of the judge’s conclusion is that if the forward currency contracts were “deliverable” in the sense used by the judge, but in fact there were no roubles in CMIL’s S-Accounts at any stage when the 9 outstanding CMBI forward currency contracts matured after 17 August 1998, then, subject to one further argument raised by Mr Baker for Springwell, there could be no argument that CMBI had an obligation to pay US dollars to CMIL on the forward currency contracts as they matured.

Mr Baker submitted that the judge was wrong to reach the conclusion that the forward currency contracts were “deliverable”. At the least, he submitted, the judge should have concluded that CMIL could have mounted a good argument to CMBI that, in the circumstances prevailing, the forward currency contracts were no longer “deliverable”, but CMBI still had an obligation to pay US dollars to CMIL under the terms of the currency forward contracts upon maturity. Mr Baker argued that CMIL’s failure to make those arguments, for which its principal CMSCI was responsible, amounted to “gross negligence” or “wilful default” for the purposes of Section 3(c) of the GKO LN terms.

Clause 10.4.1 of the FMA terms states that the conclusion of a “Forward Foreign Exchange Transaction” as defined (Footnote: ²¹³) shall “irrevocably instruct [CMBI] to deduct the Forward Rouble Amount from [CMIL’s] Rouble Account on the Forward Exchange Date”. The term “Forward Exchange Date” is defined as being, in respect of a “Forward Exchange Transaction”, the “Business Day” specified in the Forward Transaction Confirmation “… on which [CMIL] delivers Roubles to [CMBI] and [CMBI] delivers [US dollars] to [CMIL]”. Clause 10.6 of the FMA states that, subject to clauses 8.4 (performance by Russian Central Bank and performance by any other counterparty to the forward currency contract) (Footnote: ²¹⁴), clause 10.3 (acceptance of terms) and clause 10.4, “…CMBI shall promptly pay into [CMIL’s] Relevant Currency account (at the Forward Exchange Rate) the Relevant Currency equivalent of the Forward Rouble Amount, less any deductions…”.

The effect of those provisions is clear. Before CMBI had any obligation to pay US dollars into CMIL’s “Relevant Currency account”, CMIL had to have roubles in its Rouble Account, which clearly means an S-Account established pursuant to the “Rouble Account Agreement” also dated 7 April 1997 between CMIL and CMBI. (Footnote: ²¹⁵)

Therefore, on the wording of the FMA the judge was correct to conclude that the currency forward contracts required that CMIL deliver roubles to its S-Account before CMBI had an obligation, on the “Forward Exchange Date” to deliver US dollars to CMIL. I realise, of course, that Clause 10.9 provides for means by which CMBI can ensure that sufficient roubles will stand to the credit of CMIL in its S-Account as at the Forward Exchange Date, so that those roubles can then be used for the rouble/US dollar exchange. But that seems to me only to confirm the conclusion that provision of roubles in the S-Account by CMIL was a pre-condition to CMBI being contractually obliged to place US dollars in CMIL’s S-Account in exchange.

Although the FMA is governed by English law, when the judge made her conclusion in [2/9] that the currency forward contracts were “deliverable”, she refers to the report of Chase’s Russian law expert and the experts’ Joint Memorandum in support of this conclusion. It is fair to say that the experts distinguish between “deliverable” and “non-deliverable” “S-Account forwards” in their Joint Memorandum, but I think this adds nothing to the conclusion on the construction of the terms of the FMA. Mr Beltrami informed us that there was much evidence from Chase witnesses that the forward currency contracts were “deliverable” and that was not an issue at the trial. It still strikes me that this is a question of construction of the FMA and that there is no doubt that, on its terms, the forward currency contracts were “deliverable” contracts in the way the judge found them to be and as I have explained above.

Mr Baker showed us an example of the SWIFT confirmations that passed between CMIL and CMBI in relation to the currency forward contracts. (Footnote: ²¹⁶) He said that its terms were consistent with an argument that the delivery of roubles by CMIL into its S-Account with CMBI was not required before CMBI’s obligation to pay US dollars on the maturity date of the forward currency contract arose, or, alternatively, that such an obligation on CMIL could be waived by CMBI. I do not see how the SWIFT confirmations can affect the proper construction of the FMA terms unless it is said that there was a variation of the FMA by virtue of the terms of the SWIFT confirmation, or the SWIFT confirmation itself amounted to a waiver or gave rise to an estoppel. Mr Baker also argued that, as a matter of fact, CMBI had not insisted on delivery of roubles before paying CMIL US dollars upon maturity of the currency forward contracts, thus (at least arguably) giving rise to some kind of waiver of the FMA terms or some estoppel working in CMIL’s favour. There are no findings on this topic by the judge. In my view the material that Mr Baker showed us in the course of argument does not support the submission that the judge erred in failing to make the findings Mr Baker needs.

The Russian law experts agreed that, under Russian law, roubles could only be deposited into S-Accounts through currency exchange transactions or the redemption or sale of permitted state securities, including GKOs. (Footnote: ²¹⁷) Gloster J found that, after the moratorium, trading in GKOs was suspended and there was no market in them and they had no legal or commercially practicable objective market value. (Footnote: ²¹⁸) Therefore roubles could not have been deposited in the S-Account by redemption of the underlying GKOs. The judge effectively found (Footnote: ²¹⁹) that there were no other means by which CMSCI/CMIL could have funded its S-Account. The judge also held that there was no obligation on Chase, under the GKO LNs, to place its own funds at risk to ensure that a forward currency transaction was performed. (Footnote: ²²⁰)

Mr Baker submitted that, despite these findings, CMIL could have triggered the obligation of CMBI to pay the US dollars on maturity of the forward currency contracts by funding its S-Account with roubles through a spot currency transaction on the date that the currency forward matured. He pointed out that spot currency transactions were not outlawed during the time of the moratorium (Footnote: ²²¹) and that clause 10.9 of the FMA provided that if other means of funding CMIL’s S-Account with roubles failed, CMIL “…shall be obliged to enter into a Spot Currency Transaction…” with CMBI, whereby, presumably, CMBI would sell roubles to CMIL spot, in exchange for US dollars and the roubles would then be credited to CMIL’s S-Account. In fact, CMIL and CMBI did not enter into any Spot Currency Transactions during the period of the moratorium and CMBI did not at the time press CMIL to do so. (Footnote: ²²²) The judge found that there could be no criticism of Chase’s conduct during the time of the moratorium. (Footnote: ²²³) There is no appeal from that conclusion. It must follow, therefore, that any decision by CMIL during the time of the moratorium not to attempt to undertake a spot currency transaction with CMBI so as to have roubles in CMIL’s S-Account cannot be treated as a breach of duty by CSMCI under Section 3(c) of the GKO LN terms. Moreover, on any basis, any failure by Chase to put its own funds at risk in order to trigger the operation of the forward currency contracts could not amount to “gross negligence”, let alone “wilful misconduct”.

From 12 November 1999, when the CBR Directive No 407-U became effective, resident banks were prohibited from purchasing foreign currency from non-residents (such as CMIL) in exchange for roubles to be deposited in the non-resident’s S-Account. Moreover, spot currency transactions for the purpose of funding an S-Account were also banned. (Footnote: ²²⁴) On the face of it, therefore, I cannot see any basis on which CMIL could have argued that CMBI remained obliged to deliver US dollars upon maturity of the forward currency contracts.

But Mr Baker had a further argument on this issue. He submitted that the effect of CMBI’s failure to insist that CMIL fund the S-Account with roubles as at the Forward Exchange Date (whether under clause 10.9 of the FMA or otherwise) was, at least arguably, a waiver by CMBI of the requirement that CMIL fund the S-Account with roubles before it (CMBI) became obliged to provide CMIL with the equivalent US dollar amount on the Forward Exchange Date. He submitted that CMIL should have put that argument forward to CMBI in an attempt to persuade CMBI to negotiate and pay to CMIL some value on the outstanding currency forwards, whether they were directly with CMBI or where they were “pass through” contracts with CMBI.

I regard that argument as hopeless. The material that Mr Baker showed us does not suggest that Chase might have thought of this argument at the time. (Footnote: ²²⁵) I therefore reject the criticism that the judge should have made a finding on the topic. I am very doubtful whether, in the very uncertain factual circumstances that existed during the Moratorium, any failure by CMBI to insist that CMIL must enter into a Spot Currency Transaction pursuant to clause 10.9 could have amounted to a waiver of the pre-condition (that there be roubles in the S-Account) to CMBI’s obligation to pay US dollars under a currency forward contract. The failure to insist would, in the uncertain circumstances existing, have been an equivocal, rather than an unequivocal action. Then, once the Central Bank of Russia prohibited spot currency transactions to fund an S-Account with roubles, no question of an argument based on waiver could arise. I am not sure whether this is one of the “various other arguments” with which the judge felt she did not even need to deal: see [2/244]. But I regard the argument as so weak that it would be impossible to characterise any failure by CMSCI to pursue it, via CMIL, as negligence of any kind.

The upshot of this analysis is that I agree with the judge’s conclusion that the forward currency contracts were deliverable and there was no plausible argument that CMIL could have raised with CMBI that they were not. It follows that because CMIL was never in a position to put roubles into the S-Account, it had no basis on which it could have argued with CMBI that it was obliged to perform the outstanding forward currency contracts. I therefore reject the submission that the judge erred in making the findings of fact that she did at [2/224].

The position with regard to the “pass-through” forward currency contracts was even weaker for CMIL. Clause 8.4.2 of the FMA is clear that CMBI’s obligation to deliver US dollars to CMIL under a Currency Transaction is conditional upon the performance by any other counterparty. Therefore the argument of Springwell has to be that CMIL ought to have pressed CMBI to press its Russian bank counterparties to pay US dollars to CMBI to enable it to perform its obligations to CMIL (assuming that the “deliverable” issue was otherwise overcome). This proposition just has to be stated to see that any failure by CMIL to push CMBI cannot be characterised as “gross negligence” or “wilful default” under Section 3(c) of the GKO LNs. The judge accurately described this claim as “hopeless”. (Footnote: ²²⁶)

If my analysis on the “deliverable” nature of the forward currency contracts is correct, then CMIL was under an obligation to CMBI to ensure that its S-Account had in it the roubles needed to be exchanged to enable CMBI to fulfil its obligation to pay (at the agreed exchange rate) the US dollar sum payable on the relevant “Business Day” under the relevant Forward Exchange Transaction. CMIL could not supply the roubles via the maturity of the underlying GKO, because of the decision of the Russian authorities not to redeem them. The moratorium and the post-moratorium “S-Account Amendment” meant that Russian banks, including CMBI, were prohibited from purchasing foreign currency from non-residents such as CMIL. Therefore there was no means by which CMIL could purchase roubles to fund its S-Account which had no roubles in it.

Therefore, it seems to me that there was a force majeure event within the terms of clause 22.1.2 of the FMA which prevented or delayed CMIL from performing its obligation to provide roubles in its S-Account. The events were “circumstances affecting the [MICEX] (Footnote: ²²⁷)…the Central Bank of Moscow currency markets generally…” which were beyond CMIL’s control. At the least, as the judge found, (Footnote: ²²⁸) CMIL’s decision to send a force majeure notice to CMBI on 24 November 1998 was a reasonable one. In my view it cannot possibly be characterised as negligent for the purposes of Section 3(c) of the GKO LN terms. I agree with Gloster J’s further conclusion that if CMIL had not sent a force majeure notice, it ran the risk (at the least) that its failure to have roubles in the S-Account at maturity of each of the forward currency contracts would be treated as a breach of contract by CMBI entitling it to terminate each of the contracts under the provisions of clause 20.1.1 of the FMA. Again, assuming that CMBI was acting on its own behalf, it would be obviously in its own interests to do just that. At least by giving a force majeure notice, CMIL kept the position open for a period of 15 days, under clause 22.3.

Therefore, I agree with the judge’s conclusion that there was no “gross negligence” let alone “wilful default” in CMIL giving the force majeure notice on 24 November 1998.

As I understood Mr Baker’s arguments, two points are made by Springwell. The first is that Chase should have set up separate negotiating teams, one in CMIL and one in CMBI, to deal with the issue of the forward currency contracts, rather than the two Chase group committees that were set up in December 1998 to deal with the Russian situation. (Footnote: ²²⁹) Gloster J found that, “in certain respects” some members of these committees “did not necessarily appreciate the niceties of the separate obligations owed by CMSCI/CMIL to Holders of GKO Notes to maximise recoveries and were keen, in the interests of the Chase Group, commercially to align CMSCI/CMIL with CMBI”. But she concluded that there was no breach of CMSCI’s duty of care under Section 3(c) of the GKO LN terms. (Footnote: ²³⁰)

I fail to follow Springwell’s argument on this issue. It was the Chase group, not CMIL, that set up the two committees which were to oversee the Chase group Russian interests. Quite how CMSCI itself is to be regarded as in breach of its duty to Springwell under the GKO LN terms simply by virtue of the committees being set up by Chase as a group escapes me. It might be said that CMSCI should have argued with Chase headquarters that it (CMSCI) had a duty to ultimate Holders, such as Springwell, to maximise recoveries under the forward currency contracts, so that, in respect of those contracts, there should be arms-length negotiations between CMIL and CMBI to see if there could be any recovery; so that CMSCI’s failure to make this argument to the Chase group as a whole amounted to a breach of duty under Section 3(c).

But if CMSCI had raised that argument within the Chase group, the unanswerable point would have been made that, because CMIL could not perform its obligations under the forward currency contracts, CMBI itself had no obligations under those contracts and any arms-length negotiations between CMIL and CMBI would be pointless. So, as the judge found, (Footnote: ²³¹) even if the failure to set up two committees did constitute a breach of Section 3(c) by CMSCI, it is impossible to hold that this caused loss to Springwell. It therefore seems to me that the challenges Springwell wishes to make to the findings of the judge in [2/221-222] are, at the least, irrelevant.

Mr Baker showed us two internal Chase Memos (Footnote: ²³²) which he said demonstrated that Chase took the view in January and March 1999 that the future of Russian capital was very difficult to estimate and that there was a “debate going on” within Chase as to “the ongoing nature of the [forward currency] contracts themselves”. He submitted that this showed that Chase did not think, even up to just before the termination of the forwards on 23 March 1999 that the forward currency contracts were valueless to CMIL, so that if there had been separate teams, CMIL could have pressed CMBI to negotiate. In my view that is to read far too much into the two memos and in particular into the one sentence in the Memo of 19 March 1999.

Secondly, Mr Baker relied upon the fact that Chase was energetic in relation to obtaining recoveries on forward contracts from counterparties other than CMBI. He submitted that CMSCI’s actions or inactions should be judged by what was done by Chase in relation to those other counterparties. After all, Chase recovered large sums from VTB where it was the counterparty. I cannot see the relevance of this argument. The question is whether CMSCI, through CMIL, should have attempted to obtain any value from the forward currency contracts with CMBI. If there was none to obtain and, effectively, no argument on which value might be obtained, that is the end of it.

I was unsure whether Mr Baker intended to pursue a separate argument that CMSCI was somehow guilty of a lack of care under Section 3(c) of the GKO LN terms because of Chase’s collective decision to terminate the forward currency contracts by the notice of 23 March 1999. (Footnote: ²³³) I have concluded that CMIL was entitled to serve a force majeure notice and, indeed, sensible to do so because it prevented CMBI from asserting that CMIL was in breach of its obligations to fund its S-Account with roubles. After the S-Account Amendment, CMIL could not perform its obligations under the forward currency contracts and neither could CMBI, even assuming there was any obligation on it to provide US dollars in the absence of performance by CMIL. As the judge found, once it was confirmed in March 1999 that the Post-Moratorium S-Account Amendments were to continue, it was “…entirely reasonable and contractually appropriate for CMBI to have sent a notice of termination”. (Footnote: ²³⁴) In my view that finding is not open to challenge. Whether it was an “aggressive step” or not seems to me to be irrelevant.

It must follow from the conclusions I have already reached that the answer to this question is “No”. Accordingly, there is no need for me to deal with Springwell’s appeal on the issue of quantum of the Post-Default Appeal.

For the reasons I have given, the judge was correct to dismiss the Post-Default damages claim against CMSCI.

I would dismiss the appeals on both the Pre-Default claim and the Post-Default claim.

I must thank all counsel and solicitors for the parties for the meticulous way in which all the material for this appeal was prepared and presented to the court; I must also thank counsel for their patience during the many questions raised by the court in the course of the hearing.

I agree.

I also agree.

APPENDIX 1

1997 Dealings in Developing Country Securities Letter

(“DDCS letter”)

17 September 1997

……..

Dear Sirs,

Dealings in Developing Country Securities

We refer to our recent discussions when you informed us that you wished us to effect an introduction to the capital markets desk of our associated companies. Chase Manhattan International Limited CCMIL") and Chase Manhattan plc ("CMp"), with a view to you dealing for your own account in various debt and equity securities of public and private sector issues located in developing countries ("Instruments").

We are pleased to arrange such an introduction on the basis that the following conditions apply, both to our activity in arranging the introduction and the activity of CMIL and CMp, when dealing for you in such instruments. This letter is accordingly signed onbehalf of The Chase Manhattan Bank ("CMB"), CMIL and CMp. The conditions referred; to above are:

1.

CMB, CMIL and CMp have decided, having regard to the frequency and size of your dealings in instruments, and having regard to your understanding and experience in such activities (as far as is known to CMB, CMIL. and CMp), to categorise you as a Non-Private Customer for the purposes of the rules of The Securities and Futures Authority Limited ("SFA"), in respect of dealings in such instruments.

2.

By treating you as a Non-Private Customer, you will not gain the samedegree of protection under the rules of SFA than if you were to be treated as a Private Customer. Neither CMB, nor CMIL, nor CMp will be required to comply with the rules which are designed to protect Private Customers and as a result will not be required by the rules to give you risk disclosure statements, to ensure that any advice which is given to you is suitable to your circumstances, to give you prior disclosure of the applicable charges in relation to a transaction or to enter into a Customer Agreement conforming with SFA rules. Neither CMB nor CMIL nor CMp will be under a duty to secure best execution in respect of any transaction or accept from you an order placed on a "best execution" basis. As a result, neither CMB nor CMIL nor CMp, will be required to ascertain the best available price in the relevant market for transactions of the kind and size concerned nor effect transactions for you at such a price which is no less advantageous to you in every transaction. In having no such duty, neither CMB nor CMIL nor CMp, have any obligation to disclose any remuneration which they or any third party with whom you or they may effect the transaction might receive.

…….

4.

Neither CMB nor CMIL nor CMp are required to give you investment advice generally or in relation to specific investments, make any enquiries about, or to consider, your particular financial circumstances or investment objectives. By placing an order with CMB or CMIL, or CMp, you represent that you are a sophisticated investor, are purchasing the instrument concerned for your own account for investment purposes and not with a view to any distribution thereof, and that you have independently, without reliance on CMB or CMIL or CMp, or any associated person, made a decision to acquire the instrument having examined such information relating to the instrument and the issuer thereof as you deem relevant and appropriate. You haverepresented to CMB and CMrt, and CMp, and therefore they have assumed that, you are fully familiar with and able to evaluate the merits and risks associated with such instruments and any consequence of these instruments forming part of a portfolio of investments and are able to assume therisk of loss associated with such instruments. You should therefore consider whether an instrument is appropriate in your particular financial circumstances or in the light of your investment objectives. Neither CMB nor CMIL nor CMp are liable for any loss which you may incur arising out of any investment decision made by youin consequence ofany service contemplated inthis letter unless such loss is caused by its gross negligence or wilful misconduct. Neither CMB nor CMIL nor CMp shall be obliged to provide any dealing services to you and may within its absolute discretion decline to do so at any time.

6.

When providing you with any circular, information memorandum, investment advertisement, published recommendation or any other written or oral information regarding any instrument or investment opportunity neither CMB nor CMIL nor CMp, will have taken any independent steps to verify the document or information and no representation or warranty, expressor implied, is or will be madeby either CMB or CMIL orCMp, their representative officers, servants or agents or those of their associated companies in or in relation to such documents or information nor will CMB or CMIL or CMp or any of their associated companies be responsible or liable (save to the extent required under the applicable law, rules or regulations) for the fairness, accuracy or completeness of such documents or information.

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GLOBAL MASTER REPURCHASE AGREEMENT (“GMRA”)

“……

1.

Availability

(a)

From time to time the parties hereto may enter into transactions in which one party, acting through a Designated Office, (“Seller”) agrees to sell to the other, acting through a designated Office (“Buyer”) securities and financial Instruments (Securities”) (other than equities U.S. Treasury instruments and Net Paying Securities) against the payment of the purchase price by Buyer to Seller, with a simultaneous agreement by Buyer to sell to Seller Securities equivalent to such Securities at a date certain or on demand against the payment of the purchase price by Seller to Buyer.

(b)

Each such transaction (which may be a repurchase transaction (“Repurchase Transaction”) or a buy and sell back transaction (“BuySell Back Transaction”) shall be referred to herein as a “Transaction” and shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex 1 hereto, unless otherwise agreed in writing, if this Agreement may be applied to BuySell Back Transactions. If Transactions are to be effected under this Agreement by either party as an agent, this shall be specified in Annex 1, and the provision of Annex IV shall apply to such Agency Transactions.

2.

Definitions

(a)

“Act of Insolvency” shall occur with respect to any party hereto upon:

(i)

its making a general assignment, for the benefit of, or entering into a reorganisation arrangement, or composition with creditors; or

(ii)

its admitting in writing that it is unable to pay its debts as they become due; or

(iii)

its seeking, consenting to or acquiescing in the appointment of any trustee, administrator, receiver or liquidator or analogous officer of it or any material part if its property; or

(iv)

the presentation or filing of a petition in respect of it (other than by the counter party to this Agreement in respect of any obligation under this Agreement in any court or

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(d)

Where either party has transferred Margin Securities to the other party it may at any time before Equivalent Margin Securities are transferred to it under paragraph 4 request the other party to transfer Equivalent Margin Securities to it in exchange for the transfer to the other party of new Margin Securities having a market value at the time of transfer at least equal to that of such Equivalent Margin Securities. If the other party agrees to the request, the exchange shall be effected, subject to paragraph 6(5) by the simultaneous transfer of the Equivalent Margin Securities and new Margin Securities concerned. Where either or both of such transfers is or are effected through a settlement system in circumstances which under the rules and procedures of that settlement system give rise to a payment by or for the account of one party to or for the account of the other party, the parties shall cause such payment or payments to be made outside that settlement system, for value the same day as the payments made through that settlement system, as shall ensure that the exchange of Equivalent Margin Securities and new Margin Securities effected under this sub-paragraph does not give rise to any net payment of cash by either party to the other.

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9.

Representatives

Each party represents and warrants to the other that –

(a)

it is duly authorised to exercise and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and thereunder and has taken all necessary action to authorise such execution, delivery and performance.

(b)

it will engage in this Agreement and the Transactions contemplated hereunder (other than Agency Transactions) as principal;

(c)

the person signing this Agreement on its behalf is, and any person representing it in entering into a Transaction will be duly authorised to do so on its behalf;

(d)

it has obtained all authorisations of any governmental or regulatory body required in connection with this Agreement and the Transactions contemplated hereunder and such authorisations are in full force and effect;

(e)

the execution, delivery and performance of this Agreement and the Transactions contemplated hereunder will not violate any law, ordinance, charter, bye-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected;

(f)

it has satisfied itself and will continue to satisfy itself as to the tax implications of the Transactions contemplated hereunder.

(g)

in connection with this Agreement and each Transaction:

(i)

unless there is a written agreement with the other party to the contrary, it is not relying on any advice (whether written or oral) of the other party, other than the representations expressly set out in this Agreement;

(ii)

it has made and will make its own decisions regarding the entering into of any Transaction based upon its own judgment and upon advice from such professional advisers as it has deemed it necessary to consult;

(iii)

it understands the terms, conditions and risks of each Transaction and is willing to assume (financially and otherwise) those risks;

(h)

at the time of transfer to the other party of any Securities it will have the full and unqualified right to take such transfer and that upon such transfer of Securities the other party will receive all right, title and interest in and to those Securities free of any lien, claim, charge or encumbrance; and

(i)

the paying and collecting arrangements applied in relation to any Securities prior to their transfer from that party to the other under this Agreement will not have resulted in the payment of any income in respect of such Securities to the party transferring such Securities under deduction or withholding for or on account of UK tax.

On the date on which any Transaction is entered into pursuant hereto and on each day on which Securities, Equivalent Securities, Margin Securities or Equivalent Margin Securities are to be transferred under any Transaction, Buyer and Seller shall each be deemed to repeat all the foregoing representations. For the avoidance of doubt and notwithstanding the arrangements which Seller or Buyer may have with any third party, each party will be liable as a principal for its obligations under this Agreement and each Transaction.

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25.

Parties to Rely on Their Own Expertise

Party B represents as of the date hereof and as of the date of each Transaction that: (a) it is a sophisticated investor; (b) in the normal course of its business, it enters into transactions similar to Transactions; (c) it has had access to such information concerning Transactions and Securities as it has requested; and (d) that it is familiar with and able to evaluate the merits and risks associated with Transactions and Securities, including the risks of entering Transactions involving Securities denominated in foreign currencies, and has the financial resources to absorb the risk of any loss that may be associated with Transactions and Securities.

…..”

GKO LINKED (S ACCOUNT) NOTE

(“GKO LN”)

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TERMS AND CONDITION

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Section 3. Transactions. (a) This Note passes through to the Holder the return and risks of investing in the Designated GKO Assets and converting payments from such assets to U.S. Dollars, whether or not Chase actually owns the Designated GKO Assets or actually engages in the foreign exchange transactions. Accordingly, this Note incorporates all transactions necessary and related to investing in the Designated GKO Assets (including, but not limited to, transactions previously entered into in the event that this Note relates to Designated GKO Assets sold by Chase from its portfolio of GKOs purchased in the primary or secondary market, all transactions directly or indirectly with the Designated Dealer, MICEX or the Central Bank of Russia, and the redemption and settlement of the Designated GKO Assets) and exchanging the Rouble proceeds thereof to U.S. Dollars, which have been entered into pursuant to the Dealer Agreement or under applicable Russian laws or regulations, including S Account Rules, or under existing market practices, as such may change from time to time, which transactions shall include, but shall not be limited to, the following:

(i)

The application of Roubles from Chase’s S Account to purchase the face amount of the Designated GKO Assets in a primary auction or in the secondary market through CMBI and MICEX or from Chase’s portfolio of GKOs purchased in the primary or secondary market and payment of any applicable MICEX or dealer commissions and/or fees. The Designated GKO Assets settle using the clearing and settlement systems of the Central Bank of Russia and MICEX.

…..

(iii)

Chase entering into a forward foreign exchange transaction or transactions (together the “Designated Forward Transaction”) with CMBI pursuant to which Chase will exchange the Rouble proceeds of the Designated GKO Assets for an amount of U.S. Dollars sufficient to pay the Note Principal Amount plus Interest on the Note Maturity Date.

(iv)

To the extent that pursuant to applicable Russian laws and regulations CMBI has entered or will enter into a forward foreign exchange transaction with the Central Bank of Russia to hedge a portion of the amount of the Designated Forward Transaction at an official exchange rate set by the Central Bank of Russia, then such forward contract shall be considered a Transaction under this Note and CMBI’s performance under the Designated Forward Transaction shall be conditioned upon performance of the Central Bank of Russia.

(b)

The holder acknowledges that at any time Chase may pool the funds received from other persons under transactions similar to that described in this Note and Chase’s proprietary investments similar to that described in this Note in connection with any purchase of the Designated GKO Assets, or Designated Forward Transactions or any other Transaction. The Holder agrees that in computing any amount to be deducted from the Redemption Amount or in making any calculations with respect to Transactions hereunder Chase may pro rate such amount or calculation among the Holder and such other persons and Chase in any commercially reasonable manner. Except as provided in Section 4(b)(x) below, the Holder shall not have any interest in or right to the Designated GKO Assets or any of the other Transactions. Chase has no obligation to enter into the Transactions described in paragraph (a) above and may not own the Designated GKO Assets at the GKO Maturity Date, but this Note is intended to operate as if Chase did enter into the Transactions and did own the Designated GKO Assets at the GKO Maturity Date. For the avoidance of doubt, the economic return and the risks profile with respect to this Note, including Transactions described in paragraph (a) above, will be earned or incurred by the Holder, including, but not limited to, the risk of fees or taxes on Designated GKO Assets or other Transactions or other risks outlined in Sections 4 or 5 herein, whether or not Chase actually owns the Designated GKO Assets or actually engages in any of the other Transactions.

(c)

In entering into, or taking or refraining from taking any action with respect to, any Transaction, Chase shall be responsible for exercising only that degree of care which it exercises in relation to the administration of similar transactions for its own account, provided that Chase shall not be liable to the Holder with respect to anything Chase may do or refrain from doing with respect to this Note or any Transaction in the absence of the gross negligence or wilful misconduct of Chase. In particular, CMSCI and CMIL shall not be deemed to have acted in a fiduciary capacity with respect to any Designated GKO Assets or any other Transaction or the administration of the Transactions. Chase shall not be responsible for the actions or misconduct of any party directly or indirectly involved with any Transaction (other than the gross negligence or wilful misconduct of Chase or its affiliates), and the Holder agrees not to hold Chase liable or otherwise responsible for any loss, cost, expense, claim or liability arising therefrom. In performing its obligations hereunder, Chase will not be required to take any action or to refrain from taking any action which in Chase’s opinion is contrary to or would infringe upon any law.

…….

Section 5. Other Risks Assumed by Holder. In addition to those risks assumed by the Holder as described elsewhere in this Note, the Holder expressly acknowledges and agrees that:

……

(f)

This Note has liquidity risk and is highly structured and non-transferable and there may not exist at any time a market for this Note. Although Chase, at its discretion, may provide a re-purchase bid price for this Note if requested, Chase is under absolutely no obligation to do so and in any event, may be unwilling or unable to provide a bid due to disruptions or illiquidity in the Russian securities or foreign exchange markets, including changes in regulations, taxes or other government restrictions. In addition, any repurchase bid price for this Note would reflect all costs associated with any early termination of Transaction.

Section 6. Representations and Warranties. (a) The Holder hereby represents and warrants to CMSCI (for itself and on behalf of CMIL) that (i) it has the power to execute, deliver and perform this Note and to purchase this Note; (ii) this Note has been duly authorized, executed and delivered by it and constitutes its valid and binding obligation; (iii) the person(s) executing this Note on its behalf have been duly authorized to do so; (iv) neither entering into this Note nor the purchase or performance of this Note contravenes any law, regulation or contractual restriction applicable to it or any order or judgment of any court with appropriate jurisdiction; (v) it has the knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of this Note and it has determined that purchasing this Note is appropriate in light of the Holder’s business strategies and objectives; (vi) all authorizations of, exemptions by and filings with any governmental or other approvals or authority that are required to be obtained or made by it in connection with this Note have been obtained or made and are valid and subsisting; and (vii) if the Holder is a U.S. Person (as defined in Regulation 5 under the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”)), it is a “qualified purchaser” as defined in Section (2)(a)(51) of the U.S. Investment Company Act of 1940, as amended, and an “accredited investor” within the meaning of Section (a) of Rule 501 of the U.S. Securities Act or a “qualified institutional buyer” as defined in Rule 144A of the U.S. Securities Act.

…….

(c)

The Holder acknowledges that it understands the risks and potential consequences associated with purchasing this Note, that it has made such independent appraisal of Russia and its economy and legal and political circumstances as the Holder deems appropriate and has consulted with legal, investment, ERISA, accounting, tax and other advisers to the extent appropriate to assist it in understanding and evaluating the risks involved and the consequences of purchasing this Note, the content of S Account Rules and the effect of such rules on the Transactions, and the tax treatment of the Transactions and any investments through S Accounts; and that it has been given access to all information about Chase, the Transactions, the parties to the Transactions, this Note, Roubles and the Designated Assets that the Holder has requested for purposes of any such evaluation. In addition, the Holder has not relied on, and acknowledges that neither CMSCI nor CMIL has made, any representation or warranty with respect to the advisability of purchasing this Note.

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GKO Linked (S Account) US$ Note

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Terms and Conditions (July 15 1998)

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International Forward Contract

Deliverable S Account foreign exchange forward contract with Chase Moscow converting the maturity payment RUR proceeds of the Underlying Instruments into U.S. dollars on September 17, 1998 sufficient to pay the Redemption Amount. 100% of CMBI’s obligations under the International Forward Contract shall be lodged by CMBI entering into a forward foreign exchange contract (deliverable or non-deliverable; to be confirmed by Reuters/Swift messages with the counterparty) with Inkom Bank, a bank organized in Russia (the “Russian Bank Counterparty”) (“the Local Forward Contract”). CMBI’s performance under the International Forward Contract shall pass through the default risk of the Russian Bank Counterparty under the Local Forward Contract.

Note Repurchase

The Notes are illiquid and not actively traded in any financial market. Although Chase, at its discretion, may provide a re-purchase bid price for the Notes if requested, Chase is under no obligation to do so and in any event, may as a result of market conditions, be unable to provide a re-purchase bid price if requested. Any repurchase bid price for a Note would reflect all costs associated with early termination, including the costs associated with the S Account restrictions in convertibility of Roubles.

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FOOTNOTE SET OUT IN THE GKO-LINKED TERMS 7 CONDITIONS SHEET

“Client are advised to make an independent review and reach their own conclusion regarding the legal, credit, tax and accounting aspects of this offering relating to their particular circumstances. Neither Chase Manhattan International Limited (CMIL), nor The Chase Manhattan Bank (Chase), nor any person acting on their behalf, makes any representation or warranty, implied or express, regarding the accuracy, completeness, or currentness of the information contained herein, We or the company or person connected or associated with us may be an underwriter or distributor of, or a market maker or otherwise hold a long or short position as a principal in a security or financial instrument (or in options, futures or other derivative instrument thereon) which has been discussed herein. This summary is not an offer of, or an invitation to subscribe for, or purchase, the Notes as described herein. Actual offerings are made only in accordance with applicable laws. CMIL is regulated by the Securities and Future Authority.

CMSCI/CMBI S ACT WITH RUSSIAN BANK FWD RISK (29 MAY 1998 FORM).”

RISKS DISCLOSURE

Key Risks to Investor

•

All default, loss or other risks with respect to the transactions with respect to the Notes, including transactions relating to the purchase of the Underlying Instruments, redemption of the Underlying Instruments and exchange of the maturity proceeds of the Underlying Instruments into U.S. Dollars.

•

Default risk of the Russian Government on the Underlying Instruments.

•

Default Risk of CMBI as a counterparty to CMIL on the International Forward Contract.

•

Default risk of the Russian Bank Counterparty as counterparty to CMBI on the Local Forward Contract

•

Custody default or loss risk of (a) National Depository Center as the main Custodian for the Underlying Instruments, and (b) CMBI, as custodian for CMIL in its investment in the Underlying Instruments.

•

Risk of the ability to convert Roubles to U.S. Dollars.

•

Risk of imposition by the Russian Government of change in laws or regulations, which may affect the return on the Underlying Instruments and Forward Contracts. The Investor acknowledges that it has made such investigation of the S Account regulations as it deems necessary and that Chase has made no representatives with respect to the S Account regulations.

•

In the event that CMSL, in its sole discretion, anticipates that it shall incur after the Note Maturity Date any costs or expenses which could be deducted from the Redemption Amount, it may reduce the Redemption Amount by such amount in anticipation of such payment.

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CONFIRMATION

………

This is to confirm that a 10.00% Linked (S Account) GKO Note (“the Note) has been issued by Chase Manhattan Securities (C.I) Ltd to Springwell Navigation Corp. (the “Customer”) on July 20, 1998

…….

In connection with the financing of the purchase price of the Note from The Chase Manhattan Bank, London Branch, the provisions of the Note that render it non-transferable and non-negotiable will be waived for the purpose of selling the Note to The Chase Manhattan Bank, London Branch and the subsequent transfer to the Customer of the Note when its obligations in connection with such financing have been satisfied in full. In furtherance of the foregoing, it is agreed that the Note will be issued in the name of The Chase Manhattan Bank, London Branch.

The Customer hereby represents and warrants that it has read the Note and understands the terms of the Note.

A summary of the terms of the Note are in the attached Terms & Conditions sheet. Please confirm your acceptance of these terms by signing this confirmation and faxing it to the attention of Michael Lim at 212-383-0334.

The Chase Manhattan Bank as Agent for

Chase Manhattan Securities (C.I.) Limited

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APPENDIX 2

MASTER FORWARD AGREEMENT

MASTER AGREEMENT No. 1

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8.4.2

if agreed by the Dealer and the Investor with respect to a particular Currency Transaction, the Dealer’s obligation to deliver to the Investor pursuant to such Currency Transaction funds, other than the Minimum Compensatory Value under the relevant Compensatory Currency Transaction, is conditional upon the due performance by any counterparty (other than the Dealer) under any relevant Non-Central Bank Currency Transaction and the Dealer shall bear no liability to the Investor in respect of the non-performance by such counterparty of such obligations.

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10.

Forward Foreign Exchange Transaction

10.1

The Investor may, in response to the Dealer’s terms, notify the Dealer no later than the specified time through the Reuter’s Dealing Service that it wishes to enter into a Forward Foreign Exchange Transaction. Such notification shall include the following information:

10.1.1

Amount of Roubles the subject of the proposed Forward Foreign Exchange Transaction.

10.1.2

Type of the proposed Forward Foreign Exchange Transaction (i.e. with or without the Option);

10.1.3

Effective Date of the proposed Forward Foreign Exchange Transaction; and

10.1.4

Term of the Forward Foreign Exchange Transaction always, subject, however, to the Forward Transaction Term and Option Forward Transaction Term.

10.2

The Dealer shall inform the Investor Bank through the Reuter’s Dealing Service whether or not it is possible to proceed with the arranging of the proposed Forward Foreign Exchange Transactions and if it is so possible, indicate the maximum amount which it believes may be converted by that investor taking into account the limits specified in Clause 8.2 and the conditions imposed by the Central Bank as the Rouble value of the related Compensatory Currency Transaction pursuant to the Non-Resident GKO Regulations (such amount, the “Forward Rouble Amount”) and the Forward Exchange Rate.

10.3

On receipt of the information specified in Clause 10.2, the Investor will promptly, and in any event no later than the specified time, inform the Dealer through the Reuter’s Dealing Service whether or not the Dealer’s Terms (including, without limitation the Forward Rouble Amount and the Forward Exchange Rate) are acceptable to it and, if so, and make available to the Investor’s Rouble Account an amount of Roubles sufficient to satisfy its obligations under the relevant Forward Foreign Exchange Transaction.

10.4

The conclusion of the Forward Foreign Exchange Transaction through the Reuter’s Dealing Service (such Forward Foreign Exchange Transaction, for the avoidance of doubt, to be deemed valid and binding on the parties hereto only if the Reuter’s communication contains the full name of each party’s authorized representatives and the Investor’s registration code) shall:

10.4.1

irrevocably instruct the Dealer to deduct the Forward Rouble Amount from the Investor’s Rouble Account on the Forward Exchange Date; and

10.4.2

where the Forward Foreign Exchange Transaction provides for an Option, oblige the Investor to pay the Option Fee in immediately available funds on the New York or London Business Day, as specified by the Dealer, next following the Effective Date to the Specified Bank Account of the Dealer.

10.5

Each of the Dealer and the Investor shall promptly send to the other party a completed Forward Transaction Confirmation setting out the terms of the Forward Foreign Exchange Transaction.

10.6

Subject to Clauses 8.4 and Clauses 10.3and 10.4 the Dealer shall promptly pay into the Investor’s Relevant Currency Account in immediately available funds the Relevant Currency equivalent (at the Forward Exchange Rate) of the Forward Rouble Amount less any deductions required or permitted pursuant to this Agreement.

10.7

Where a Forward Foreign Exchange Transaction provides for an Option the Investor shall have the right to exercise such Option at any time prior to the Option Notice Deadline by giving an Option Notice to the Dealer.

10.8

Where a Forward Foreign Exchange Transaction provides for an Option the Investor shall, no later than the Option Notice Deadline, inform the Dealer whether or not it wishes to exercise the Option. In the event that the Investor fails so to inform the Dealer, the Investor shall be deemed to have exercised unconditionally its right under the Option to terminate such Forward Foreign Exchange Transaction.

10.9

If at the Forward Exchange Date the Forward Rouble Amount does not stand to the credit of the Investor’s Rouble Account, the Dealer is irrevocably authorized by the Investor (but is not obliged) to:

10.9.1

apply any or all of the Investor’s 812 Balance in satisfaction of the outstanding Forward Rouble Account; and/or

10.9.2

sell Bonds held in the Investor’s Securities Deposit Account at a commercially reasonable price and apply the proceeds in satisfaction of the outstanding Forward Rouble Amount provided that the Dealer shall notify the Investor of such sale no later than the time of such sale.

If any part of Forward Rouble Amount remains outstanding following such application or sale, the Investor shall be obliged to enter into a Spot Currency Transaction on the terms and subject to the conditions stated in Clause 9 and will indemnify the Dealer, promptly upon demand, against all losses, liabilities, costs and expenses incurred, directly or indirectly, as a result of the operation of this Clause 10.9.

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20.

Default

20.1

If:

20.1.1

the Investor fails to pay, transfer or deliver on the due date any sum of money required by this Agreement or any Instruction or Confirmation to be paid, transferred or delivered to the Dealer; or

20.1.2

the Investor is otherwise in breach of any of its obligations hereunder and such breach is not remedied within these New York Business Days after notice of such breach; or

20.1.3

an Act of Insolvency of this Investor occurs

(In each instance, a “Default”) then (i) the following provisions of this Clause 20 will apply and (ii) if the Dealer elects to terminate this Agreement (and, with respect to a Default under Clauses 20.1.1 and 20.1.3, any or all outstanding Transactions to which such Default relates) the relevant provisions of Clause 30 will also apply.

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22.

Force Majeure

22.1

If one party (the “Affected Party”) is prevented or delayed from or in performing any of its obligations under this Agreement or under any Transaction by reason of:

22.1.1

the occurrence of a natural or man-made disaster, armed conflict, act of terrorism, riot or labor disruption; or

22.1.2

circumstances affecting the Trading System and its Bond Market Servicing Organizations, the Central Bank or the New York, London or Moscow currency markets generally (including, without limitation, the failure of the issuer of Bonds to redeem such Bonds on the due date for redemption).

where in each case the relevant event or circumstance is beyond the Affected Party’s control exercising reasonable efforts to perform, then the Affected Party may notify the other party of such event or circumstance and of the obligations performance of which is thereby delayed or prevented, and the Affected Party shall thereupon be excused the performance or punctual performance, as the case may be, of such obligations for so long as the relevant event or circumstance of prevention or delay may continue.

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