Where public law and commercial contracts collide: R (Elliott Associates) v London Metal Exchange

The Court of Appeal has dismissed a claim brought by commodity traders (“Elliott”) challenging a decision taken by the London Metal Exchange (“LME”) and its clearing house, LME Clear, to cancel overnight trades of nickel futures worth US $12 billion on 8 March 2022.^[1] Upholding the decision of the Administrative Court,^[2] the Court of Appeal held that the cancellation was lawful, given the “real risk of … a ‘death spiral’ in the international metals market”.^[3]

The judgment contains important guidance on the approach courts should adopt to the intensity of review in cases at the cross-section between public law and commercial relationships. It also provides welcome domestic clarification on the economic interests protected by the right to peaceful enjoyment of possessions under Article 1 Protocol 1, ECHR^[4] (“A1P1”).

Background

When the London commodity markets closed on Monday 7 March 2022, the price of nickel contracts for delivery in three months (“3M nickel”) was approximately US $48,000 per tonne. By the next morning, it had more than doubled to a peak just shy of $102,000.

In the early hours of 8 March 2022, Elliott had agreed various 3M nickel trades which they alleged would have made them a profit in excess of US $450 million.^[5] Like all who traded on the LME, Elliott’s trades were governed by the LME Rules and Regulations (the “LME Rules”).  

As the LME’s central counterparty (“CCP”), LME Clear has regulatory duties to collect margin, calculating the amount needed on a “near to real-time basis”.^[6] On the morning of 8 March, LME Clear calculated that an additional US $19.75 billion in margin was needed if the overnight trades stood. By the LME’s calculations, this would place at least nine LME members in default or at serious risk of default,^[7] something that the LME said would lead to “market instability and upward pressure on prices”.^[8]

The LME therefore cancelled all 3M nickel trades made after midnight on 8 March until the suspension of trading at 08:15. It considered that the market had become disorderly and there was no rational connection between nickel prices and relevant macroeconomic or geopolitical factors.^[9] 

The “contractual context” 

Though private entities, the LME and LME Clear perform regulatory functions as a regulated exchange and regulated clearing house, respectively. They are amenable to judicial review and obliged under s.6 of the Human Rights Act 1998 to act in a way compatible with the ECHR.^[10] Elliott challenged the decision on several grounds, including Wednesbury irrationality, procedural unfairness, and breach of A1P1. 

In dismissing the claims at first instance, the Administrative Court relied on the “contractual context” or, in other words, the fact that the power to cancel could only be used on Elliott’s trades because Elliott had contracted on terms which included the LME Rules.^[11] The Administrative Court drew a distinction between scenarios where individuals made the “conscious decision” to submit to the exercise of public law power via contract, and the typical judicial review case where persons come to be subjected to public law power “by mere happenstance”.^[12] It stressed the general presumption that those who entered contracts did so with a “full understanding” of its terms, and that Elliott was “well-resourced”, “experienced” and “knowledgeable”, with access to internal and external lawyers.^[13]

On appeal, Elliott submitted that the Administrative Court had impermissibly “diluted” its public law protection, by applying a lower intensity of review.^[14] The Court of Appeal agreed that the context did not justify weaker public law review and reaffirmed that the mere fact of a private person agreeing to be subject to the exercise of a power such as the LME’s right to cancel trades does not mean that it agreed to that power being exercised otherwise than in accordance with the ordinary protections provided by public law.^[15] It also took the unusual step of observing that the context surrounding the cancellation was “much less significant” than certain passages of the Administrative Court’s judgment had suggested.^[16] While the Administrative Court expressly stated that the context would “affect both the intensity and scope of review”,^[17] the Court of Appeal held that the LME’s decision could be – and, in the end, was – upheld by applying conventional public law reasoning. 

This is an important clarification. Reasoning with reliance on the “contractual context” could have had wide-reaching ramifications for private entities across a range of regulated sectors who consent to the application of public law powers through contract or licensing conditions. It is not difficult to see how the Administrative Court’s comments might apply to disputes between regulators or quasi-regulators and private bodies not only in trading contexts, but also in relation to private investment in utilities, media, and telecommunications. The Court of Appeal’s decision nonetheless needs to be read alongside other authorities addressing this specific issue, including a recent High Court decision which emphasised the “contextual shape” of judicial review,^[18] and the long line of judgments discussing the appropriate intensity of judicial review in various commercial contexts.^[19] 

Dismissing the public law claims 

The Court of Appeal rejected each of Elliott’s grounds. By way of illustrative example:  

• The LME declined to allow the 8 March trades to stand on the basis of margin calculated by reference to the prices at closing on 7 March. Elliott argued that this was irrational. The Court of Appeal dismissed this, noting that to do so would have placed LME Clear in breach of its regulatory obligations under UK financial regulations because it would have left LME Clear “potentially significantly under collateralised”.^[20]
• The Court of Appeal rejected Elliott’s submission that the cancellation was done pursuant to improper purposes, noting that the decision was made for the markets as a whole.^[21] A disorderly market would have led to further price increases, and cancellation was inevitable to avoid a loss of confidence in commodity markets beyond just nickel futures.
• On procedural unfairness, the Court of Appeal disagreed with the Administrative Court’s reasoning that the LME defendants had a “wide margin of discretion” on whether consultation was needed.^[22] It accepted that this was for a court to decide but stated that the serious urgency and demand for an immediate decision meant that consultation would have been impractical.^[23]

Article 1 Protocol 1 of the ECHR

The Court of Appeal rejected the Administrative Court’s finding that Elliott did not hold ‘possessions’ for the purposes of A1P1. 

Elliott had an agreement by which the particulars of the relevant transactions were submitted to the LME to become a contract of sale in accordance with the LME Rules.^[24]

Citing the European Court of Human Rights’ case law on economic interests protected by A1P1,^[25] the Court of Appeal said that A1P1’s protection is not limited to “the ownership of tangible property” and that “certain other rights and interests constituting assets may also be regarded as ‘property’”.^[26]

The Court of Appeal found that from a practical perspective – which is what A1P1 required – all parties had agreed to the sales of the 3M nickel in Elliott’s cancelled trades.^[27] The relevant agreement thus had “clear economic value”, and Elliott did hold property for the purposes of A1P1.^[28]

On the facts, Elliott’s claim still failed as the cancellation was not an infringement of its possession rights. Elliott’s rights were effectively subject to the built-in qualification of the LME’s power to cancel. Even so, the judgment still provides useful domestic confirmation that A1P1 is flexible enough to apply to a range of disputes involving sophisticated financial transactions, specifically where trades flow through a CCP. 

_{[1]    R (Elliott Associates) v London Metal Exchange [2024] EWCA Civ 1168 (the “Court of Appeal Judgment”).}

_{[2]    [2023] EWHC 2969 (Admin) (the “Administrative Court Judgment”). See the Administrative Court’s judgment here.}

_{[3]    §174, Court of Appeal Judgment.}

_{[4]    The European Convention on Human Rights.} 

_{[5]    §4, Court of Appeal Judgment.}

_{[6]    Articles 40 and 41, UK EMIR.} 

_{[7]    §55, Court of Appeal Judgment.}

_{[8]    §63, Court of Appeal Judgment.}

_{[9]    §54, Court of Appeal Judgment.}

_{[10]   §14, Court of Appeal Judgment.}

_{[11]   §133, Administrative Court Judgment.} 

_{[12]   §135, Administrative Court Judgment.}

_{[13]   §136, Administrative Court Judgment.}

_{[14]   §76, Court of Appeal Judgment.}

_{[15]   §79, Court of Appeal Judgment.}

_{[16]   §80, Court of Appeal Judgment.}

_{[17]   §171, Administrative Court Judgment.} 

_{[18]   See R (Care North East Northumberland) v Northumberland County Council [2024] EWHC 1370.}

_{[19]   See, for example: T-Mobile (UK) Ltd v Office of Communications [2008] EWCA Civ 1373; [2009] 1 W.L.R. 1565 at §29; R. (on the application of Star China Media Ltd) v Office of Communications [2023] EWCA Civ 843 at §§38-39; and Société Coopérative de Production SeaFrance SA v The Competition and Markets Authority [2015] UKSC 75 at §31.}

_{[20]   §128, Court of Appeal Judgment.}

_{[21]   §132, Court of Appeal Judgment.}

_{[22]   §136, Administrative Court Judgment.}

_{[23]   §199, Court of Appeal Judgment. The court placed reliance on Bank Mellat v HM Treasury (No. 2) [2013] UKSC 14, at §§178 – 179.} 

_{[24]   For a detailed explanation, see §§20 – 22, Court of Appeal Judgment.}

_{[25]   Depalle v France (2012) 54 EHRR 17, §63.}

_{[26]   Ceni v Italy (App No. 25376/06 of 4th February 2021), §38.}

_{[27]   §132, Court of Appeal Judgment.}

_{[28]   §160, Court of Appeal Judgment.}