R (on the application of United Company Rusal Plc) v London Metal Exchange
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice McCombe,Lady Justice Gloster |
| Judgment Date | 08 October 2014 |
| Neutral Citation | [2014] EWCA Civ 1271 |
| Docket Number | Case No: C1/2014/1404 |
| Court | Court of Appeal (Civil Division) |
| Date | 08 October 2014 |
[2014] EWCA Civ 1271
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Mr Justice Phillips
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice McCombe
and
Lady Justice Gloster
Case No: C1/2014/1404
Mr Michael Beloff QC and Mr Simon Pritchard (instructed by Latham and Watkins London LLP) for the Appellant
Miss Monica Carss-Frisk QC, Mr James Segan and Miss Naina Patel (instructed by Macfarlanes LLP) for the Respondent
Hearing dates: 29–30 July 2014
The respondent to this appeal ("Rusal") produces various metals which are traded through the appellant, The London Metal Exchange ("the LME"). The LME also approves the warehouses where the metals traded through it are held. The LME has proposed a new rule directed at solving a problem ("the queuing problem") which started to occur at the start of the world recession in 2008, namely long delays in obtaining metals stored at warehouses. The LME decided that it would consult market participants on the one way which it supported for mitigating this problem, namely the adoption of a rule. The new rule would provide that the amount of metal which a warehouse, having a queue of more than 100 days, could accept (or "load in") would be linked to the amount which it had delivered (or "loaded out"): for short, the "LILO" rule. To this end it issued a consultation notice ("the CN") to all members, warehouse companies and London agents on 1 July 2013 inviting submissions within a three month period expiring on 30 September 2013.
The CN contained a detailed explanation of the LILO rule. It also explained that the LME had previously considered and rejected a number of options but it did not set out any of those options. These had included an option for rent caps (that is, reductions) or rent bans (that is, rent "holidays") where delays exceeded a certain point ("the rent ban option"). The LME considered that this option carried unacceptably high legal risk on competition law grounds. On 7 November 2013, the LME announced that, following consideration of the responses to the consultation, the new LILO rule would take effect on 1 April 2014. In fact that did not happen due to the commencement of these proceedings.
On 23 December 2013 Rusal began proceedings for judicial review against the LME. Rusal's case is that: (i) the CN should have set out an explanation for rejecting the rent ban option ("rent ban information"); (ii) the LME should have conducted a fresh competition law review before engaging in consultation and deciding to adopt the LILO option, investigations into this option with approved warehouse operators in September 2013, and (iii) the LME's decision was vitiated by bias since it is financed by a stock levy made by it on warehouse charges and thus had an interest in maintaining the amount of the rent charged by warehouse operators ("warehouse rent").
The case was heard by Phillips J who, in his judgment dated 27 March 2014, held that this consultation was unfair principally for two reasons: (1) it was procedurally unfair because it did not explain the principal option that had been rejected, namely the rent ban option, and (2) there had been inadequate investigation of the rent ban option prior to the consultation.
Background to the consultation in this case
The judge's judgment contains a careful and full explanation of the LME's business and also trading in base metals. It also explains that the Financial Conduct Authority ("FCA") has recognised the LME as an investment exchange for the purposes of the Financial Services and Markets Act 2000. The LME is therefore regulated by the FCA. I need not repeat most of what the judge set out by way of the background. The parties to this appeal did not claim that it was inaccurate in any material respect.
The judge explains why the queues mattered. There is a free market in base metals as well as a market in the LME. The LME price is used to help "discover" the free market price. The LME price is always at a discount to the free market price because of (a) the need to pay warehouse charges (so that the metal is, in the jargon of the market, "free on truck") and (b) the inconvenience of having to obtain delivery from the warehouse. But, as queues have lengthened (thus creating an element of uncertainty in the warehouse rent to be paid by the holder of an LME warrant seeking to obtain physical delivery of the metal to which the warrant relates), it has become increasingly difficult to discover the free market price. There is a divergence of view between, on the one hand, producers and warehouse operators with warehouses where there are queues, who benefit from the queues, and, on the other hand, consumers who might have to pay higher prices and warehouse operators with warehouses without queues who face competition because producers prefer warehouses with long queues.
The background is also important in showing how the LME came to decide on the LILO option.
In 2010, the LME commissioned Europe Economics ("EE") to advise whether the requirements in the LME warehouse contract for rates of physical delivery-out were satisfactory. In their report dated 12 May 2011 ('the EE Report'), EE advised on five main policy options that the LME might consider to address the problem, the first four (or primary solution) seeking to impose controls on stocks or load-out rates for delivery out of physical stock. The fifth option was to ban or cap rent for metal in a long queue. The LME only published a summary of this report which did not reveal the nature of the fifth option.
EE had in fact done a report in 2007 which the LME had published and which stated that competition law prevented the LME from intervening in order to set the "free on truck" charge. This was a reference to matters analogous to banning or capping warehouse rents.
The LME adopted a modified version of the primary solution proposed in the (2010) EE Report by increasing minimum load-out rates with effect from 1 April 2012, but this was not effective to reduce queues.
The LME had considered the rent ban option but had been advised by internal and external counsel in 2000, 2005, 2007 and 2012 (and having sought the views of the European Commission in 2000 and 2007) that the rent ban option was vulnerable to challenge on competition grounds. There was a reference to the competition concerns in the context of the queuing problem in the May 2013 edition of Metal Bulletin, reporting a public statement by Mr Diarmuid O'Hegarty, the Deputy Chief Executive and former General Counsel of the LME, and in a Media Presentation accompanying but not referred to in the CN.
In late 2012, Hong Kong Exchanges and Clearing Limited ("HKEx") agreed to acquire the LME, the acquisition being completed on 6 December 2012.
Mr Matthew Chamberlain, who had been advising HKEx on the acquisition, had already joined the LME as its Head of Strategy and Implementation in October 2012. Mr Chamberlain undertook a further review of the queuing problem in early 2013. He advised that there were 5 categories of options available but none of those categories related to the rent ban option. He presented his review to the board of the LME in April 2013. It contained a section entitled "Universe of Potential Solutions", listing nine potential responses to queues, but not referring to the possibility of the rent ban option. The board decided in principle to consult on the LILO option. In June 2013 the board confirmed this decision but maintained the queue threshold at 100 days, rather than reducing it to 30 days suggested by Mr Chamberlain.
Events following the inception of consultation and the responses to the consultation
Thirty-three written responses were received of which 10 proposed a rent ban as well as or instead of the LILO option.
It is inevitable that Rusal should be concerned with the potential losses to producers that might result from implementation of the LILO option. It was possible that implementation would lead to an increase of metal on the free market and to a fall in the price which would be contrary to the interests of producers. In September 2013, Rusal filed a written response opposing the LILO option but not proposing the rent ban option. As the judge explains, Rusal opposed the proposed change stating "… the argument underlying the …. proposed rule change has not been clearly stated nor supported with Exchange data. Instead, the intent… to accelerate the transfer into the market of an additional two million tonnes of aluminium, accumulated and stored since the financial crisis, is an unprecedented intervention and one that Rusal strongly objects to". Rusal suggested alternative measures designed to improve transparency in the price setting process rather than reducing queues: it did not mention the rent ban option.
There is no clarity over the issue whether Rusal were aware that the rent ban option was vulnerable to competition challenge. Mr Andryushin, Chief Operating Officer of Rusal Marketing GmbH, merely states in his evidence that Rusal did not know whether there were any viable alternatives to LILO or the reasons why all solutions, including LILO, had previously been rejected by the LME. He does not go so far as to say that he did not know that the options risked challenge by the competition authorities. Nor does he say that Rusal was unaware of the...
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