LME’s cancellation of nickel trades was not unlawful
Elliott and Jane Street made a judicial review claim against the LME as a public authority, arguing that its decision was irrational (i.e. Wednesbury1 unreasonable), and should be quashed. They also sought damages, on the basis that the LME’s decision resulted in unlawful interference with their possessions (i.e. their interest in nickel trades that would have generated significant profits) contrary to Article 1, Protocol 1 of the European Convention on Human Rights (enforceable in England under the Human Rights Act 1998). Both claims were unsuccessful.
This was a relatively unusual context for judicial review Human Rights Act claims, and the decision illustrates the fundamental difficulties for claimants who may have lost out as a result of the decisions of public authorities – including market and exchange authorities.
In early March 2022, nickel prices on the LME rose dramatically, culminating in an unprecedented price spike overnight on 7/8 March 2022. At 08.15, the LME suspended nickel trading.
The LME had the power to do this under its Rules and Regulations. It did so to further its objective of maintaining an orderly market, which it is obliged to do as a matter of public law as a Recognised Investment Exchange (RIE).2
At 12.05 on the same day, the LME published a notice cancelling all nickel trades entered into on or after 0.00 (UK time) on 8 March 2022 up until the time of the suspension. The aggregate value of the cancelled trades was approximately US$12bn. In making the cancellation, the LME used the power under Rule 22 of its Trading Rules, which states that “where the Exchange considers it appropriate, the Exchange may cancel, vary or correct any Agreed Trade or Contract”.
The LME further determined to demand margin calls based on the closing price on 7 March, rather than the most recent price of nickel.
The LME argued that all of those actions were taken to fulfil its obligation to maintain an orderly market. Notably, the LME stated that it believed that if margin calls were made on Tuesday 8 March based on the most recent price of nickel then at least five Members were expected to default and four other Members would be at risk of default, and possibly more.
Elliott alleged that the cancellation caused them to lose net profits of around US$456m. Jane Street alleged that the cancellation caused it to lose net profits of around US$15m.
The claimants sought judicial review of the cancellation decision (but did not challenge the suspension). It was common ground that the LME and LME Clear Limited, the clearing house for trading on the LME, undertake regulatory functions and that their decisions are therefore amenable to judicial review.
Per rule 54.1(2) of the Civil Procedure Rules, a claim for judicial review is a claim to review the lawfulness of a decision, action or failure to act in relation to a public function. A judicial review may be based on any combination of illegality (or error of law), irrationality (also known as unreasonableness), procedural impropriety (also known as unfairness) or breach of legitimate expectation.
The claimants alleged that the Cancellation decision was unlawful for a number of reasons. They sought to apply grounds of illegality, irrationality and procedural impropriety, submitting that:
- the Cancellation decision was ultra vires;
- the LME acted in a way that was procedurally unfair;
- the LME erred in its approach to “disorderliness” in the market;
- the LME acted irrationally in its approach to the cancellation decision; and
- the LME Special Committee and/or Board Risk Committee should have been consulted.
The judicial review claim was dismissed in its entirety. The judgment is detailed and complex, but much of the difficulty with the claims can be seen in the Court’s examination of the approach to the meaning of an “orderly market”.
The judges, Swift J and Bright J, noted that there is no fixed or established meaning of an “orderly market” or related terms.
The claimants had put forward expert evidence from a former Head of Market Operations at the LME, who had described what, in his experience, he believed would (or at least should) be the criteria for assessment of an orderly market. That evidence supported the claimants’ case, which argued that the movements in nickel price were explicable by the short positions of some traders. The claimants alleged that the LME had failed to look into this possibility, and had the LME done so it would have found that the market was not disorderly as there was a good explanation for the price volatility.
The judges did not accept this evidence on how to determine whether a market was disorderly, saying “it was not apparent to us that [the claimants’ expert] in fact has any experience of assessing whether a market is or is not orderly”. They also noted the failure of the expert to explain why he took a different view from that of the International Organization of Securities Commissions (IOSCO), the international body of securities regulators, saying this was “particularly striking”.
The court did not entirely adopt the LME’s approach to disorderliness either, likening it to a “you know it when you see it” argument with which the courts are not entirely comfortable.
Instead, the judges found that, given there is no definition of “orderly” or “orderliness” in the LME rules or relevant legislation, “there may be a number of different definitions or tests that a reasonable RIE could adopt. These include, but may not be limited to, the IOSCO guidance and the NASDAQ definition.”
The court found that the basis on which the LME in fact made its assessment, in the evidence of its CEO, Matthew Chamberlain, was consistent with the IOSCO guidance and the NASDAQ definition and was therefore reasonable and hence legally permissible.
This decision reflects that the margin of discretion afforded to a decision maker in such circumstances makes it very challenging for a claimant to succeed in judicially reviewing the exercise of such a discretion. To show that the decision maker has behaved unreasonably requires a claimant to demonstrate that the defendant’s decision was so unreasonable that no reasonable decision maker would have come to it. That is a very high bar to meet in any case. Here, where the facts were relatively unusual, there was no legislative definition to rely on, and there were good reasons that the decision was one which should be left to the public authority as expert, the claimants’ burden was especially onerous.
The judges noted the importance of caution from the court when asked to review highly technical decisions. They stressed that the court needs to “permit sensible latitude to decision-makers with specialist knowledge insofar as the decisions reviewed either rested on or were informed by” specialist knowledge of the kind which they found the LME decision-makers possessed.
The urgency of the situation was also relevant. The judges noted that “decisions about the suspension and cancellation of trades, and about margin calls, are of their nature likely to be made in urgent situations” and that “this must be borne in mind when interpreting the legislation and the LME Rules.”
An interesting feature of the decision is the emphasis the judges placed on the claimants’ voluntary acceptance of the LME’s Rules and Regulations. The judges found it significant that the claimants could have chosen to trade elsewhere or not at all. Instead, they had accepted contractually that the LME had the power to cancel trades. The judges said that the Claimants were “well-resourced entities with both internal and external lawyers at their disposal” and that they were “experienced and knowledgeable traders who are familiar with the operation of RIEs and CCPs” and hence that they understood the situation that they were signing up to when opting to trade on the LME.
The Human Rights Act claims
As the Court had dismissed the judicial review claim, it was not possible for the cancellation decision to have constituted unlawful interference with the claimants’ possessions. Nevertheless, the Court briefly addressed the arguments that had been made on the Human Rights Act claims.
The Court found that Elliott’s trades were not “possessions” within the meaning of A1P1. This was because the trades were not fully cleared and so were not concluded contracts. Elliott’s A1P1 claims would therefore fail.
By contrast, Jane Street’s trades were “possessions” because they were concluded contracts, and it is settled law that a concluded commercial contract having present economic value is a possession for the purposes of A1P1. However, Jane Street’s voluntary acceptance of the LME’s Rules and Regulations that allowed it to cancel the trades would have been an obstacle to its A1P1 claim succeeding (and this same obstacle would have impeded Elliott, had its trades been “possessions”.)
Judicially reviewing the exercise of a broad discretion is an uphill task. The courts are hesitant to interfere with the decisions of expert decision-makers and will not substitute in their own views where the course of action taken is found to be one of a range of reasonable options that were available to the decision-maker.
In theory, A1P1 claims may be used by commercial parties seeking redress for losses sustained as a result of unlawful decisions of public authorities. However, in this case the interaction between private and public law made such a claim challenging to sustain.
Parties in any doubt as to the meaning of the powers of public authorities with whom they do business should seek legal advice.
2 A Recognised Investment Exchange is an investment exchange recognised by the Financial Conduct Authority as meeting the requirements of The Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001 (the Recognition Regulations).