The English Court of Appeal dismissed an appeal of the High Court’s judgment in favour of the London Metal Exchange (LME) and LME Clear, the central counterparty of the LME, in respect of the LME’s decision to cancel trades in three month nickel futures (3M Nickel) in response to the nickel crisis in early March 2022.
The Court of Appeal’s judgment upholds the High Court’s conclusion that the cancellation was lawful and in doing so, the Court of Appeal comments on regulatory decision making in times of crisis, which is relevant for UK recognised investment exchanges, central counterparties, and those trading on these exchanges.
The High Court dismissed the judicial review challenge
As explained in our previous blog on the High Court’s decision, the price of 3M Nickel rose by an unprecedented 69% on 7 March 2022 and over 100% in the early morning of 8 March 2022. This led the LME to suspend trading at 8:15 on 8 March 2022 because it viewed the market as no longer ‘orderly’. The LME subsequently published the cancellation at 12:15 on 8 March 2022.
Elliott Associates and Jane Street were adversely affected by the cancellation and brought judicial review proceedings against LME and LME Clear. They argued that the LME and LME Clear acted unlawfully in implementing the cancellation and, as such, that their right to peaceful enjoyment of their possessions under the European Convention on Human Rights (the ECHR) had been breached. They sought damages on this basis. The High Court dismissed the claim in November 2023, finding that the LME had acted lawfully and not breached the claimants’ ECHR rights.
Grounds of appeal
The grounds of appeal included that:
- the High Court had wrongly attached significance to the contractual context governing trades on the LME and, in doing so, had diluted the applicable public law principles;
- the LME did not have the power to cancel the trades because that power is only to be used in cases of malfunctions of trading venue mechanisms;
- the LME’s decision to cancel trades was procedurally unfair, irrational and served an improper purpose;
- the LME improperly failed to investigate the cause of the price movement in 3M Nickel or the market disorder more generally; and
- Elliott’s trades were “possessions ” capable of protection under the ECHR and that those rights had been interfered with unlawfully by the cancellation.
Key findings by the Court of Appeal
The Court of Appeal rejected most of these arguments. In doing so, it clarified the law applicable to recognised investment exchanges’ powers when acting in the face of similar market turbulence.
Although the appeal failed, the Court of Appeal’s findings on some important points differed to those of the High Court. In summary, the Court of Appeal found that:
- the ‘contractual context’ could not be used to dilute public law principles. The power to cancel trades arose under contracts entered into with informed consent but this does not change the requirement on a public body to exercise that power lawfully. Despite the High Court’s reference to the ‘contractual context’ as “highly significant”, the reasoning of the High Court did not turn on an assessment of the contractual context;
- the High Court was wrong to describe the LME as having a “wide margin of discretion” to decide “whether, whom and how to consult” those who may have been affected by the cancellation. The Court held that it can review a decision-maker’s judgement of what fairness requires in the circumstances, but this will differ significantly according to the context of the decision. Here, the urgent circumstances would not have allowed more consultation than was offered by the LME in the terms of the LME notice announcing the suspension of trading; and
- contrary to the finding of the High Court, Elliott’s contingent trades were “possessions”, even though they were not cleared because, from a “practical and legal” viewpoint, all parties were committed to the trades. Absent the cancellation, Elliott would have had its trades cleared or would have had a legal remedy against LME Clear for failing to clear the trades. This gave rise to a “legitimate expectation” that Elliott would obtain the cleared contracts in future. However, the Court of Appeal found that the rights Elliott had were always qualified by the risk of the lawful exercise of the LME’s power to cancel the trades such that these rights had not been infringed by the cancellation. And any interference with these rights was viewed by the Court of Appeal as lawful, justified and proportionate in the circumstances.
Comment
The Court of Appeal moved away from the High Court’s reference to the ‘contractual context’ as a highly significant factor in assessing the LME’s decision making. Instead, the Court of Appeal focused on the LME’s compliance with fundamental principles of public law decision making and how those applied in the context of a “once in a generation” market event. The ‘contractual context’ was relevant insofar as it informed the assessment of the contractual rights attaching to the trades, and the expectations that the claimants should have had that the trades they were completing were always subject to the risk of a lawful cancellation by the LME.
The Court of Appeal’s reasoning was driven by what it described as the “unprecedented, urgent and potentially catastrophic ” circumstances surrounding the cancellation. The Court ultimately found that the LME was left with “effectively no choice ” but to cancel the trades, which was a power it was legally required to have in the event of such exceptional circumstances. When the LME and LME Clear’s decisions are assessed in the context in which they occurred, they were rational and lawful decisions taken under intense pressure.
This case highlights the obstacles claimants will face when challenging a decision of a specialist decision-maker, particularly one acting in urgent and unprecedented circumstances, through judicial review or based on the Human Rights Act. It is also a reminder for recognised investment exchanges that, whilst the Courts appreciate the challenges of responding to market crises, decision-making in such circumstances will be judged against undiluted principles of public law.
