Winnetka Trading Corp v (Julius Baer International Ltd & Anor

A bank must clarify a client’s instruction where its meaning is unclear. The bank’s failure to do so may breach its contractual and tortious duties, even where the client would probably have given the same instruction if asked.

The scope of any duty to warn or advise depends primarily on the contract and the parties’ relationship. Regulatory rules may inform the standard of care, but do not automatically create a duty to warn a sophisticated client that an express transaction involves counterparty risk. A term requiring risk-management systems is implied only where necessary to make the contract work.

Winnetka claimed damages from Julius Baer International Ltd and Bank Julius Baer & Co Ltd in respect of two payments made to acquire shares in Inyx Inc. It alleged that the defendants should have arranged delivery-versus-payment settlement, or warned that payment free of delivery exposed it to counterparty risk.

The first instruction was ambiguous. The second clearly required payments to specified recipients, followed by attempts to obtain shares through DTC, although delivery-versus-payment was impossible because the recipients of the money were not the transferors of the shares. The central issues were the construction and performance of the instructions, the existence of a duty to warn, and causation.

1. The first instruction to “sort out” the attached request to transfer $650,000 was unclear. Julius Baer should have clarified it. That failure was a breach of contract and negligence, although the court found that clarification would probably have produced the same instruction to make the payment free of delivery. The breach therefore caused no loss.

2. The second instruction was unambiguous. It concerned a transaction already agreed with the persons identified by the claimant and required payment to the specified accounts, followed by arrangements to receive the shares. It was not an instruction to execute a new transaction or to arrange delivery-versus-payment settlement. Such settlement was in any event impossible because the recipients of the funds and the transferors of the shares were different. Julius Baer complied with the instruction.

3. The contractual relationship was the starting point for any duty to warn. Neither mandate imposed a duty to warn concerning investments selected by the client. The implied duty to exercise reasonable skill and care did not require Julius Baer to tell the claimant that an express instruction was inadvisable or risky. The regulatory framework did not create such a duty on these facts.

4. The scope of a financial adviser’s duty is fact-sensitive and may develop with the relationship. Here, however, the client appeared sophisticated, originated the transaction itself, relied on personal contacts, and did not ask for advice about the investment, DTC, or counterparty protection. There was consequently no breach of any duty to warn.

5. Even if a warning had been required, the claimant would probably have proceeded. It expected a very substantial short-term profit and had already accepted significant risks in relying on the anticipated management buy-out and on the individuals arranging the transaction. The claims against both defendants were dismissed.

First-instance judgment in the High Court (Chancery Division). The claims against both defendants were dismissed.