London Metal Exchange (LME) sued by Elliott Management - A Commentary – PART II

By Rodrigo Zepeda, CEO, Storm-7 Consulting Limited

[Part II of a four part blog series]

The United States (US) fund manager ‘Elliott Management’ is currently suing London Metal Exchange (LME) via its affiliates, Elliott Associates LP (EALP) and Elliott International LP (EILP) in the English High Court. The ‘judicial review’ claim initiated by EALP and EILP centres on the decision that was made by LME to halt trading in the nickel contracts markets on Tuesday 8 March 2022 at 8.15 am London time, and in particular the cancellation of nickel contracts that were legally executed by LME market participants on or after 00:00 and before 8.15 am London time.

The legal claim asserts inter alia that the cancellation of trades was unlawful based on public law grounds (i.e., LME acted unreasonably and irrationally), and furthermore, that it constituted a violation of each firm’s human rights under the Human Rights Act 1998 (c.42) (HRA). A spokesman for EALP commented that LME may have:

“…acted unlawfully in that it exceeded its powers when it cancelled those trades, or that it exercised the powers that it did have unreasonably and irrationally, in particular by taking into account irrelevant factors (including its own financial position) and failing to take into account relevant factors.” (Lobo 2022).

Full details of the legal claim have not yet been publicly disclosed. However, it would seem to be the case that EALP and EILP are pursuing a judicial review claim based on the standard grounds for judicial review, namely unreasonableness/irrationality and illegality (Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374).

Whilst EALP and EILP have not disclosed whether they executed any trades on 8 March 2022, under English law they cannot bring a claim for judicial review unless they have legal ‘standing’, i.e., a sufficient interest in the matter to which the application relates (R v Inland Revenue Commissioners (“IRC”), ex parte (1) National Federation of Self-Employed and (2) Small Businesses Ltd [1982] AC 617; The Good Law Project and The Runnymede Trust, R (on the application of) v The Prime Minister and Anor [2022] EWHC 298 (Admin)).

Consequently, given the size of the damages sought, namely $456 million (£363 million), it would seem to be the case that the damages represent trade losses in nickel contracts spread across both entities (i.e., both EALP and EILP), which should provide them with sufficient legal standing. It is worth identifying that the Wall Street trading firm ‘Jane Street’ is also taking legal action against LME at the same time. Consequently, from the outset it should be noted that the final outcome of this legal claim would seem to be crucial for at least the following reasons:

(1) the case should provide a very detailed legal analysis of the legal rights and obligations of both LME and its market participants vis-à-vis the LME nickel market;

(2) the outcome of the case may affect the viability of other potential actions that may be brought against LME by other market participants (e.g., AQR Capital Management);

(3) the case will likely affirm or disaffirm, whether or not LME market participants can assert their respective human rights on such markets;

(4) the case will undoubtedly impact the future confidence, trust, and depth of liquidity in LME nickel markets in the future; and

(5) the case may potentially lead to a significant outflow of market participants from the LME to market rivals such as the ‘CME Group’.

PRIVATE CONTRACTUAL CLAIM

In practice, the nickel contracts legally executed by EALP and EILP on the LME on 8 March 2022 will be governed by contract law. The likelihood is that these contracts would be governed by contractual documentation that incorporates both the LME Rules and Regulations and any relevant LME operational policies. The problem here is that this contractual framework provides LME with a great deal of operational leeway regarding market trades. For example, Rule 22 of the LME Rules and Regulations (dated 11 March 2022) set out details regarding ‘Order Cancellation and Controls’. Rule 22.1 states:

“Where the Exchange considers it appropriate, the Exchange may cancel, vary or correct any Agreed Trade or Contract.”

In addition, paragraph 4 of the LME ‘Policy on Order Cancellation and Controls’ (Version 1.0) concerns ‘Cancellation of Orders by the LME’. This states inter alia:

“The LME may be required to cancel orders in order to prevent disorderly trading conditions and breaches of capacity limits…

The LME may also cancel or revoke orders and trades/transactions in accordance with the LME’s policy on Error Trades and Erroneous Order Submission.”

From a strategic legal perspective, it is likely that Elliott Management has chosen to pursue judicial review because it may provide better chances of litigation success. This is because a private contract law claim may potentially fail owing to the range of discretion afforded to the LME via contractual terms as operational manager of the nickel markets, i.e., it would be much more difficult to prove a private law breach of contract claim.

THE JUDICIAL REVIEW CLAIM

In the United Kingdom (UK), judicial review is normally the primary judicial procedure which is available to review the decisions of public authorities and public bodies – the Courts review a challenged decision to decide if it is arguable that the decision is legally flawed (Government Legal Department (GLD) 2018, p.8). Legally speaking, the Court does not review the merits of the decision itself, but rather focuses on how the decision was made instead.

In practice, the LME is an entity that engages in commercial enterprise. However, it has been acknowledged that the LME is indeed subject to judicial review. This was confirmed in the first instance case of United Company Rusal Plc, R (On the Application Of) v The London Metal Exchange [2014] EWHC 890 (Admin) (Rusal First Instance), where Phillips J stated that the LME was a Recognised Investment Exchange within the meaning of section 285 of the Financial Services and Markets Act 2000 (c.8) (FSMA) (para. 8).

As such, the LME held a responsibility to uphold standards on its exchange in accordance with the FSMA Recognition Requirements Regulations 2001 (SI 2001 No. 995) (Rusal First Instance, para. 8). This included ensuring that the LME had:

(1) rules and procedures to provide for fair and orderly trading; and

(2) satisfactory arrangements for securing the timely discharge of the rights and liabilities of the parties to transactions effected on the exchange (Rusal First Instance, para. 8).

On appeal ([2014] EWCA Civ 1271 (Rusal Appeal)), the Court of Appeal confirmed that the case against LME involved a comparatively unusual case of ‘commercial judicial review’, namely, where judicial review is sought with respect of the decisions of a body with the public function of running a commercial market or exchange (Rusal Appeal, para. 89 per Arden LJ).

The case details of the judicial review action currently available show that EALP and EILP are claiming that:

(1) LME exercised its powers unreasonably (REASONABLENESS); AND/OR

(2) LME exercised its powers irrationally (IRRATIONALITY); AND/OR

(3) LME acted unlawfully (i.e., it exceeded its powers when it cancelled nickel trades) (ILLEGALITY); AND

(4) LME’s exercise of its powers took into account irrelevant factors (including its own financial position); AND

(5) LME’s exercise of its powers failed to take into account relevant factors; AND

(6) LME’s decision was a breach of the human rights of EALP and EILP (HUMAN RIGHTS), e.g., it was a disproportionate interference with the right to peaceful enjoyment of possessions (economic interests), or it was discriminatory as between market participants (Rusal First Instance, para. 4(3)).

Consequently, there are three main grounds pleaded, namely reasonableness, irrationality, and illegality. The additional fourth ground pleaded is that based on an interference with human rights under the HRA. The four grounds of judicial review invoked in the claim by EALP and EILP will be summarily described below. The references to consideration of irrelevant factors and relevant factors do not form a separate ground, but rather are considered within the application of each individual ground for judicial review (where relevant). These will be considered in the next part of the blog series. 

JUDICIAL REVIEW GROUND 1: REASONABLENESS

When taking the decision to cancel nickel contracts LME was required to follow a proper reasoning process to enable it to reach a reasonable conclusion, therefore, if this decision was rationally open to a reasonable decision maker possessed of all the facts, the Court would uphold such decision (GLD 2018, pp.35-36). Consequently, to prove unreasonableness EALP/EILP would have to show that LME’s decision was so outrageous in its defiance of logic that no sensible person applying his mind to the question would have arrived at the decision, or it was beyond a range of responses open to a reasonable decision maker (Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223). Such a decision would be held to be manifestly unreasonable, and therefore not legally valid, and as such, would be quashed by the Court. As can be seen, this tends to reflect a high bar to reach in terms of proving the unreasonableness of a decision made by a decision maker.

JUDICIAL REVIEW GROUND 2: IRRATIONALITY

In practice, irrationality will be defined by the Court based on the particular circumstances and context of the case in question, and a Court will be more likely to hold a decision is irrational if it involves a breach of human rights (GLD 2018, pp.10, 36). An irrational decision by LME would involve a decision that was made that was unsustainable; or one that amounted to an abuse of power; or one where LME acted in bad faith; or one where LME attached wholly disproportionate weight to a particular factor; or one where LME made a logical blunder which rendered the LME’s whole reasoning process unlawful (GLD 2018, p.36). 

These examples are not mutually exclusive, so the more areas/issues that EALP/EILP can identify, and provide evidence for, the stronger the claim for judicial review under this ground will be. For example, EALP/EILP might seek to prove that LME’s decision to cancel the nickel contracts overall was arbitrary, irrational, and disproportionate to what could rationally have been expected in order to achieve orderly market conduct on the relevant nickel markets (Bank Mellat v Her Majesty’s Treasury [2013] UKSC 39).

JUDICIAL REVIEW GROUND 3: ILLEGALITY

LME acting as a decision maker is required to correctly understand the law regulating its decision-making power and must give effect to it (Council of Civil Service Unions). In practice, illegality may involve errors of law or errors of fact; decision makers acting beyond their powers; or decision makers fettering their discretion (R v Hillingdon Borough Council, ex parte Pulhofer [1986] AC 484; R v Secretary of State for the Home Department, ex parte Fire Brigades Union [1995] 2 AC 513). Nevertheless, it is doubtful the Court would find that LME acted unlawfully because its decision to cancel the nickel contracts was beyond its powers (i.e., ultra vires) (Attorney General v Fulham Corporation [1921] 1 Ch 440).

This is because such powers may be implied from the LME’s objectives, and they are also contained with the LME’s Rule Book and official policies. It is suggested that the claimants’ best chance of successfully pleading illegality would therefore likely be by proving LME’s decision was unlawful because the decision maker exercised its discretion on the basis of irrelevant factors and did not take into account relevant factors (GLD 2018, p.38), OR, the effect of the LME’s decision was to contravene the claimants’ human rights (GLD 2018, p.37).

JUDICIAL REVIEW GROUND 4: HUMAN RIGHTS AND THE HRA

Within the current context, the fourth ground of the judicial review claim is what is now referred to as an ‘A1P1’ claim. This is because it refers to enforcement of rights pertaining to protected possessions or property under Article 1 (A1) of the First Protocol (P1) of the European Convention on Human Rights, i.e., a right to peaceful enjoyment of possessions (R (Aviva Insurance Limited) v Secretary of State for Work and Pensions [2020] EWHC 3118). Article 1 (protection of property) states:

"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law."

Legally speaking, the reference to possessions has been interpreted widely, and can refer to, for example, any rights that are connected with running a business (Crompton v Department of Transport NW [2003] EWCA Civ 64), OR business goodwill in the form of concluded contracts (Breyer (and others) v Department for Energy and Climate Change [2015] EWCA Civ 408). In order to count as a possession with attendant enforceable human rights, a contractual right must generally be tangible, assignable, transmissible, and realisable, in order to be described as an asset (Solaria v Department for Business, Energy and Industrial Strategy [2020] EWCA Civ 1625; [2019] EWHC 2188) (note, there are certain exceptions).

In its claim, EALP/EILP would first be required to prove an unlawful interference by a public body (LME) (Breyer). Once this is established, EALP/EILP would then have to prove that the nickel contracts represented existing enforceable contracts; that they were possessions; that they formed part of the goodwill of their respective businesses; and that LMP's actions interfered with the claimants' human rights to peaceful enjoyment of their possessions. On the facts, these can be justified and argued on the evidence currently available, which means that the biggest hurdle for EALP/EILP would be first proving an unlawful intereference by LME.

TO BE CONTINUED

The next third part of the blog will strategically analyse the three main grounds for judicial review, and it will provide EALP/EILP with RECOMMENDATIONS as to the best way to try to prove these grounds for judicial review vis-à-vis LME’s actions. The final fourth part of the blog will analyse the last ground for judicial review (human rights), and provide commentary and analysis on the potential long-term impact on trust and confidence of participants and investors in the LME nickel market.