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In R (Elliott Associates, Elliott International and Jane Street Global Trading) v The London Metal Exchange and LME Clear [2023] EWHC 2969 (Admin), the Divisional Court has dismissed judicial review proceedings and a damages claim under the Human Rights Act 1998 ("HRA") brought by traders Elliot Associates and Jane Street against the London Metal Exchange ("LME") and its clearing house counter-party, LME Clear. It held that LME had not acted unlawfully in its decision to suspend and cancel nickel trades, emphasising the latitude afforded to specialist decision makers such as recognised investment exchanges ("RIEs").

Key Points

  • The court must permit sensible latitude to decision-makers with specialist knowledge insofar as the decisions reviewed either rest on or are informed by such knowledge
  • The court considered the private law contractual context to be significant, emphasising that the claimants subjected themselves to the decision making of the defendants through their informed consent in contracting on the LME's rules
  • Urgency is relevant when considering what investigations should have been made and the margin of discretion to be afforded to specialist decision makers
  • A proprietary interest recognised in law or asset is needed for a possession to be protected under the HRA so as to enable a damages claim

Background

The claimants sought judicial review of the decision of the defendants, LME and LME Clear, to cancel US$12 billion worth of three-month nickel future trades amidst disorderly trading conditions on 8 March 2022.

The claimants were bound by LME's trading rules as clients of LME members trading on the platform, notably Trading Rule 22.1 ("TR 22"): "where the Exchange considers it appropriate, the Exchange may cancel, vary or correct any Agreed Trade or Contract." The court noted that the trading rules had an unusual status in this judicial review since they are not themselves part of a legislative regime, but the legislative regime imposes statutory obligations on LME to ensure the market complies with various requirements. That means the rules must contain the necessary powers and obligations to allow LME to give effect to the legislative regime. Therefore, although the rules operate in the field of private law, rather than public law, they should be interpreted against the regulatory context in which they operate.

The court also considered the contractual context to be significant. Unlike most judicial reviews which involve decisions made under powers granted by the legislature, over which the persons affected have no direct control, these claimants had agreed to contract, by entering trades, on LME rules. They were therefore subject to TR 22 through their deliberate consent and, given that they were well-resourced entities with lawyers at their disposal, they must be taken to have understood their rights and obligations under those contracts.

The claimants sought to quash the cancellation decision on the basis that LME had acted ultra vires, for an improper purpose, and in a procedurally unfair and irrational manner in executing the cancellation decision. The claimants also sought substantial damages under the HRA for a breach of their right to "peaceful enjoyment of their possessions" under Article 1, Protocol 1 ("A1P1").

Judgment

The Divisional Court dismissed the claims in their entirety, finding that LME acted lawfully in its cancellation decision and there had been no breach of the claimants' rights under A1P1.

Ultra Vires

The claimants' argument that LME lacked the power to cancel the trades focussed on the interpretation of TR 22 in the light of other rules and legislative materials. As a matter of interpretation, the court did not agree that TR 22 was required to be read in this way.

Improper Purpose

The claimants further contended that LME had exercised its power to cancel for an improper purpose, arguing that LME's functions did not extend to protecting market participants from the consequences of bad trading decisions or to averting perceived systemic risk; particularly where the effect would be to protect some market participants at the expense of others. However, the court construed this as no more than an argument that (a) irrelevant matters were considered when the decision was taken; and (b) no proper regard was had to other options available to LME. The argument also failed.

Procedural unfairness

The claimants alleged that as persons who would be directly affected they should have been consulted. However, there was no express requirement to consult under LME rules. It was for the defendants to decide whether, whom and how to consult, and they were entitled to a wide margin of discretion. LME's evidence suggested that consultation would not have provided any useful information since they already appreciated that there would be winners and losers as a result of the decision. In these circumstances, especially with the urgent context, there was no duty to consult the claimants. In any event even if there had been consultation it was very unlikely that it would have made any difference.

Irrationality

The defendants explained that part of the reason for cancelling trades was that allowing them to stand risked leaving LME Clear under-collateralised with the possibility of multiple LME members defaulting, causing a systemic disturbance to the market. The claimants alleged that this was irrational, in that the defendants could have considered alternative options that would not have resulted in these outcomes. The claimants also complained that the defendants had failed to take reasonable steps to inform themselves by not investigating the underlying causes of the price movements, under the Tameside duty of sufficient inquiry. The court rejected these grounds, noting that irrationality is a significant hurdle in any judicial review but even more so with the contextual features present here. In any event the court considered that LME "was right to take a conservative approach" in its cancellation decision.

Latitude Afforded to Specialist Decision-Makers

The court emphasised the importance of the context in which the LME was operating, noting that the defendants have specialist knowledge, experience and expertise in relation to complex and technical economic issues, arising in a niche area of commercial activity, that are beyond the knowledge, experience and expertise of the court. This being so, the court should be cautious when reviewing any decisions on grounds such as rationality or any Tameside -type failure to make proper inquiry, ask the correct question, or properly assess relevant considerations. The court's approach to review must permit sensible latitude to decision-makers with specialist knowledge insofar as the decisions reviewed either rested on or were informed by such knowledge.

In this situation, although what constitutes an orderly market is not explicitly fixed, the court considered that an experienced exchange should be capable of distinguishing between an orderly market and a disorderly one without needing evidence from others. There were various tests or definitions that would have been reasonable to adopt, of which LME picked one and it was therefore legally permissible even if other reasonable RIEs might have preferred a different definition.

Claims under HRA

In relation to the claim under the HRA, there was an important distinction between the claimants for the purposes of considering whether there was a relevant "possession" to be protected. Jane Street had concluded contracts that constituted possessions for the purposes of A1P1. However the Elliott Associates trades were not fully cleared. Although Elliott contended that there was nothing further to be agreed and all that was outstanding was administrative checks and processing, the court emphasised the clear distinction between a contract that exists and one which does not yet exist. Elliott had only Contingent Agreements to Trade, but not any proprietary interest recognised in law or asset. No possession was therefore found on the part of Elliott Associates.

Jane Street's claim under A1P1 was also rejected, despite having possessions capable of engaging the right. The court reiterated the contractual context of the case, opining that Jane Street's informed and willing consent to TR 22 meant it could not object on the basis that TR 22 was not justified in the public interest or proportionate. This consent was subject to the implicit limitation that LME would exercise its powers lawfully, rather than unlawfully and irrationally. If, therefore, the court had found in favour of the claimants on the judicial review grounds, Jane Street would have had a claim under A1P1. However, in circumstances where the judicial review grounds were dismissed, the court did not see how a claim for damages under A1P1 could run. The court took pains to emphasise that this was because of the unusual features of this case, in particular the contractual context, arising as it did in a commercial field in which these claimants were well-resourced and knowledgeable, and where the defendants are specialist decision-makers whose exchange the claimants chose to use.

Comment

This case is an interesting example of the interaction between private law arrangements and judicial review and highlights that the Administrative Court is willing to tailor its approach based on the commercial and contractual context. Specialist decision makers are generally given broad discretion in any event, but where a party has consensually submitted to an exercise of power this case demonstrates the difficulties in subsequently seeking to challenge a use of that power within its explicit confines.

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Andrew Lidbetter

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Nusrat Zar

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Jasveer Randhawa

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Andrew Lidbetter photo

Andrew Lidbetter

Partner, London

Andrew Lidbetter
Nusrat Zar photo

Nusrat Zar

Partner, London

Nusrat Zar
Jasveer Randhawa photo

Jasveer Randhawa

Professional Support Consultant, London

Jasveer Randhawa
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