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Background
The London Metal Exchange (“LME”) is the main centre worldwide for the trading of industrial metals, including nickel, and is a “recognised investment exchange” for the purpose of the Financial Services and Markets Act 2000 (“FSMA”). LME Clear Limited (“LME Clear”) provides clearing and settlement services for LME users, thereby facilitating the transactions, and is a “recognised central counterparty” for the purposes of FSMA. Trades concluded by LME and LME Clear included nickel futures trades.
In March 2022, the price of nickel and nickel futures rose significantly, brought about by the Russian invasion of Ukraine and subsequent sanctions. In particular, on 8 March 2022, the price of nickel due for delivery in three months’ time rose to a peak of over 100% more than the price at close of trading the previous day. This followed an already significant price rise on 7 March 2022, said in a report commissioned by LME to be “nearly five times greater than the next biggest move in nickel in the past twenty years”.
As a recognised investment exchange, LME has regulatory functions and trading on the LME is governed by the LME Rules and Regulations (“LME Rules”), which include Trading Regulations (“TRs”). Those trading on the LME must be members (or must trade indirectly through members) and submit to their trades being regulated by the LME, in accordance with the LME Rules. As acknowledged in the LME Rules and as set out in the relevant regulations applicable to LME1, one of the key objectives is to maintain a “fair and orderly market”. In particular, at TR3:
"1.3 The Exchange may, at its absolute discretion and acting reasonably suspend trading on one or more of the Execution Venues for such period it considers necessary in the interests of maintaining a fair and orderly market. Trading will be resumed as soon as reasonably practicable following any such suspension of an Execution Venue.
…
1.5 The Exchange may establish such arrangements as it considers appropriate to prevent disorderly trading and breaches of capacity limits including, without limitation, procedures to establish the maximum price fluctuations on the market for each Metal Contract, which may as a consequence lead to the restriction or suspension of business."
Also, of key relevance is TR22:
"22.1 Notwithstanding, and without prejudice to, the general power set out at Trading Regulation 1.3, the Exchange may temporarily halt or constrain trading in accordance with the relevant procedures established by Notice if there is a significant price movement during a short period in a financial instrument on the Exchange or a related trading venue (as such term is defined in Article 4(1)(24) of the MiFID II Directive). Where the Exchange considers it appropriate, the Exchange may cancel, vary or correct any Agreed Trade or Contract."
LME suspended nickel trading at 08:15 on 8 March 2022 (the “Suspension”) on the basis that the market had become “disorderly” and, at 12:05, published a notice cancelling nickel trades entered into on 8 March 2022 prior to the Suspension (with a value of approximately US$12 billion) (the “Cancellation”).
The Claimants, two investment funds and an international trading firm, traded indirectly on the LME’s nickel futures market during the affected period and alleged multi-million dollar losses as a result of the Cancellation.
The Claim
The Claimants sought to challenge the decisions of LME and/or LME Clear in relation to the Cancellation by way of judicial review on the basis that they were unlawful. They also sought damages for lost profits (totalling approximately US$471 million) on the basis that their Convention rights under the Human Rights Act 1998 (“HRA”) had been breached2. (It is worth noting here that it was accepted by the parties that the decisions in question were amenable to judicial review and that LME and LME Clear are “public authorities” for the purpose of the HRA.)
The Claimants challenged the Cancellation decision, arguing that LME and/or LME Clear had acted unlawfully:
1. They argued that the Cancellation was ultra vires (or, in other words, beyond the powers of various rules LME/LME Clear had to follow (including TR22.1)) and had been taken for an improper purpose: to protect Members from default (LME would have had to make £multi-billion margin calls to cover its estimated liabilities).
2. LME and/or LME Clear had acted in a way which was procedurally unfair as they failed to give the Claimants an opportunity to make representations and/or engaged in a one-sided consultation, by receiving information from those at risk of default, but not from parties at risk of detriment as a result of Cancellation.
3. LME and/or LME Clear took an unlawful approach to disorderliness in terms of the factors taken into account.
4. LME and/or LME Clear acted irrationally in their approach to alternative options to cancellation and that the Cancellation was irrational.
5. Appropriate committees should have been consulted.
LME and LME Clear challenged the Claimants on all points and took the position that the Cancellation decision would have still been made in any event. The Claimants also added a challenge at a late stage to a related decision to reject an alternative option.
The decision
The High Court rejected the Claimants’ claims in their entirety. In doing so, the court noted several important contextual points:
1. No definition. There is no fixed or established meaning of “orderly” or “orderliness” in any of the relevant rules or provisions, in which case there could be a number of different definitions or tests which could reasonably be adopted. The court stated that a recognised investment exchange such as the LME, and those selected to make decisions on its behalf, “is, or should be, capable of distinguishing between an orderly market and a disorderly one without needing evidence from others, let alone the assistance of an expert”.
2. Expertise. LME and LME Clear are specialist decision-makers, in a complex, technical area: “The LME and LME Clear 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 this Court.”
3. Urgency. Urgency is relevant to ultra vires arguments, given that decisions are being made in pressurised, urgent situations. Relevant individuals would have been in a better situation to assess urgency than the court.
4. Contract terms. The Claimants had made a conscious decision to enter into each trade, contracting on LME Rules (including TR22). They were well-resourced and experienced parties.
The court did not accept the Claimants’ ultra vires arguments and rejected their interpretations of the relevant rules. Nor was there procedural unfairness. As noted above, decisions were made in an urgent context and neither Claimant had a direct relationship with LME or LME Clear, which would have impacted the ability to identify and consult with the Claimant entities. Consultation was not expressly required, nor would it have revealed effects which had not already been understood.
In terms of the analysis of relevant considerations and appropriate level of scrutiny by the court, following a review of key authorities, the importance of context in decision making was highlighted: “It affects both the intensity and the scope of review – notably, what considerations should the decision-maker have regard to, what should he not have regard to, and what steps should he take to obtain information in relation to them.” Again, the fact that LME and LME Clear are “specialist decision-makers, operating in a complex, technical area” was highly relevant to the court’s review of the decisions.
In respect of the assessment of orderliness, LME is to be allowed a margin of discretion in respect of its approach to matters to be considered and the weight attributed to them, and the way in which the assessment was carried out was legitimate. These factors must be seen in light of the urgent context.
On considering the Claimants’ arguments as to irrationality, the court concluded, “It is possible that other approaches might also have been rational, but the approach actually followed was not irrational.” Further, it was found that there was no basis for the suggestion that LME’s Special Committee or LME Clear’s Board Risk Committee should have been consulted (although the court found that in fact LME’s Special Committee had been consulted, albeit not in a meeting).
As part of its consideration of the above points, the court concluded that there had been no improper purpose to the decisions taken.
The Claimants’ claims for damages were rejected. In respect of one of the Claimants, it was found that there was no interference with its possessions (concluded contracts) – its rights were subject to the LME Rules, which had been willingly agreed to and had been adhered to. In respect of the other Claimants, given the contractual structure, the court found that they did not in fact have possessions in the form of concluded contracts at the time of the decisions and there was therefore no interference as a result.
Comment
This decision demonstrates the court’s reluctance to interfere with decisions taken by sophisticated parties exercising technical judgement in urgent circumstances, in an area in which they have expertise. As summarised in the decision: “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.” Whether or not any of the Claimants in this case will appeal, or whether the court will maintain this approach in future challenges of a similar nature, will remain to be seen.
Expertise
Our team has extensive experience advising on natural resources disputes across jurisdictions, including disputes involving metals futures trading. Please contact Fraser Mitchell, Partner in our Dispute Resolution team for a discussion.
1Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges, Clearing Houses and Central Securities Depositories) Regulations 2001 (SI 2001/995)
2Specifically, Article 1: right to the peaceful enjoyment of possessions.