JP Morgan Chase Bank & Ors v Springwell Navigation Corporation & Ors

A structured financial note must be construed according to its commercial purpose and express terms. Where it passes through the economic returns and risks of underlying assets and transactions, the issuer is not subject to an unqualified obligation to pay principal and interest despite default by those assets or counterparties. An issuer retaining the underlying position must nevertheless exercise the contractually required degree of care to maximise recoveries for the holder. Liability under a lower contractual standard of care requires proof of the stipulated gross negligence or wilful misconduct. A representation inducing entry into new agreements may operate as a collateral agreement or estoppel, and cannot necessarily be withdrawn by notice while those agreements subsist.

Following an earlier judgment concerning pre-default claims, Springwell pursued post-default claims arising from eleven GKO-linked notes held as collateral for its financing with Chase. It claimed payment of the notes’ principal and interest, an account of recoveries from underlying Russian securities and forward contracts, damages for alleged gross negligence or wilful misconduct in dealing with those transactions, and reimbursement of custody fees charged under a nominee arrangement.

The central issues were the construction and effect of the notes after the Russian default, the scope of Chase’s contractual duty of care, the consequences of its dealings with the underlying assets and forwards, and whether a representation that custody fees would not be charged bound Chase.

1. Payment Claim. The notes were pass-through instruments. Sections 3 and 5 had operative effect and allocated to the holder the economic returns and risks of the designated assets and transactions. Section 4 supplied supplementary and optional modes of performance in specified governmental circumstances; it was not an exhaustive code governing every circumstance in which the issuer could avoid paying principal and interest. Chase was therefore entitled to rely on section 5(c) when the GKOs and forwards failed, and the GKO-related payments discharged the issuer’s obligations.
2. A Sovereign Event and a Convertibility Event had occurred. The Moratorium and subsequent S-Account restrictions restricted rouble-dollar exchange and prevented or impeded performance of the forwards. Section 4(d) operated automatically upon the defined impediments; no formal election or notification was required. The relevant assets and proceeds were held to the order of the holder through the security and nominee arrangements. Springwell’s estoppel argument failed for want of detrimental reliance and loss.
3. Account Claim. Chase was required to account for the recoveries from the Sberbank forwards, including the conceded shortfall and interest. The tax deduction was justified because CMBI had paid profits tax and section 2(h) left the tax treatment to CMSCI’s discretion. The evidence established that the CMBI forwards had not performed, so no further account was ordered.
4. Damages Claim. Under section 3(c), Chase’s primary obligation was to exercise appropriate care, subject to the stipulated standard, to maximise recoveries for the ultimate holder. The duty was not fiduciary and did not require Chase to treat the transactions as its own proprietary dealings. The non-CMBI risk forwards had no independent economic value because their performance depended on the local forwards. Chase’s conduct during the Moratorium, its force majeure notice and termination of the CMBI forwards, and its failure to fund S-Accounts did not amount to wilful misconduct or gross negligence. The VTB claim likewise failed.
5. Custody Fees Claim. The relationship manager had actual or ostensible authority to assure Springwell that custody fees would not be charged. Springwell relied on that assurance in entering the 1999 agreements. It operated as a collateral agreement and/or estoppel, not merely a revocable promise to forbear. Chase was liable to reimburse $445,472.13 plus interest.