As markets became more volatile, investors became increasingly anxious about the "safety" of their investments and exposure to counterparty defaults. This first instance decision of Mr Justice Andrew Smith in Camarata Property Inc v Credit Suisse Securities (Europe) Ltd [2011] EWHC 479 examines the duty of care owed by advisers to investors in the context of complex and sophisticated products and is an interesting application of some of the principles discussed in the well known Springwell decision.

The Judge, notably, took the opportunity to consider the importance of clauses concerning limitations on liability and, although the Judge acknowledged that it is not easy to define or even describe with precision the distinction between "gross" negligence and "mere" negligence, he acknowledged that such a distinction exists as "one of degree and not kind".

The background facts
The Claimant, a company incorporated in Belize whose sole beneficiary is a member of the Ventouris family (a Greek shipping family), bought for US$12million a "5 year Autoredemption Note in USD Bearish on Eur/USD" (the "Note") which was issued by a Lehman entity (the "Issuer"). The Claimant lost all or a significant part of its investment upon a declaration by the Amsterdam District Court in 2008 that the Issuer was bankrupt.

The dispute concerned advice received by the Claimant from Credit Suisse (the "Adviser") in respect of the Note and whether such advice was negligent and in breach of the contractual obligations of the Adviser. The Claimant contended that it had not been told that the Issuer was a Lehman entity, that it was led to believe that the Note was a "safe" investment and that but for the advice would have sold the Note before Lehman failed.

What were the duties owed by the Adviser to the Claimant?
The Claimant contended that the Adviser owed it a duty in contract and in tort that any advice would be given with the skill and care with which a reasonable financial adviser would advise a client. It contended that such terms should be implied into the contract for advisory services, inter alia, in order to give it business efficacy. The Adviser alleged that its duty was "constrained and defined" by (i) the true level of sophistication of the Claimant; and (ii) the contractual terms that governed its relationship with the Claimant. These points are considered in more detail below.

In summary, the Judge agreed that the Adviser was under a duty of care in relation to how it responded to the Claimant’s questions about its investment and accepted that the Adviser had expressed an optimistic view that the Claimant’s investment was safe. However, the Judge did not accept that the Adviser gave the Claimant any more specific or firmer advice or assurance. 

  1. The sophistication of the Claimant
    The Judge considered that the important question was what impression the Claimant gave the Adviser and whether the impression was a reasonable one (Mance J in Bankers Trust International plc v PT Dharmala Sakti Sejahtera (No 2), [1996] CLC 518). The Judge concluded that, although the Claimant had no experience of structured products before it commenced its dealings with the Adviser, its subsequent conduct was such that the Adviser could reasonably suppose that the Claimant understood the risks involved in the investment, including the risk that the investment would be lost if the counterparty defaulted.

  2. Springwell: "Contractual estoppel"
    In evaluating the representations and warranties made by the Adviser in the contractual documentation, and the limitations expressed thereto, the Judge concluded that the distribution of responsibility between the Adviser and the Claimant was that the Adviser agreed to provide advice to the Claimant and that the Claimant was to satisfy itself by its own review that the investment complied with its own needs and investment objectives. Upon consideration of Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1221, the Judge concluded that the contractual provisions were properly to be regarded as defining the parties’ respective roles and ambit of responsibility with regard to the investment.

  3. Gross negligence vs. "mere" negligence
    The contract contained a clause limiting and excluding the Adviser’s liability in circumstances "other than... arising directly as a consequence of gross negligence, fraud or wilful default". The Judge noted that the question is not whether generally gross negligence is a familiar concept in English civil law, but as to the meaning of the expression in the provisions of the contractual documentation. In evaluating the exclusion clause, he concluded that the parties did not intend it to connote mere negligence. The Judge referred to previous authorities which suggested that gross negligence is intended to represent something more fundamental than failure to exercise proper skill and care and that it embraced "not only conduct undertaken with actual appreciation of the risks involved, but also serious regard of or indifference to an obvious risk" (Mance J in Red Sea Tankers Ltd v Papachristidis (The "Ardent"), [1997] 2 Lloyd’s Rep 547, 586).

Was the Adviser in breach of duty?
The Judge recognised that counterparty risk is inherent in any assessment as to whether an investment is "safe". However, the Court considered that, in the absence of any particular reason to suspect a risk of counterparty default, an adviser could not be criticised if it did not focus on it when asked for a general view about the "safety" of an investment. The Judge concluded that the Adviser’s response to the Claimant’s questions on "safety" was one that an adviser in its position could properly give consistently with exercising the reasonable care and skill expected of it.

Although it must be viewed in the context of its own facts, this case is another illustration of the potential difficulties investors face in claiming against their financial advisers in respect of financial advice given in respect of complex and sophisticated investments.

This decision may also be of interest to financial institutions in the negotiation of exclusion clauses in contractual documentation governing their appointment. Courts have previously commented on the difficulty distinguishing mere negligence and gross negligence, or of identifying what, if any, meaning the adjective "gross" should be given. Mrs Justice Gloster at first instance in Springwell concluded that ultimately a liability for gross negligence is just the other side of the coin as to "what is the duty owed" and in the Court of Appeal decision, Lord Justice Aikens agreed that the debate was "somewhat sterile and semantic".

Market standard has been divided on this matter and parties often refrain from entering into protracted negotiations on this point. The willingness of the court to distinguish between gross negligence and mere negligence in this decision may provide an opportunity for this to be considered further.