The Queen (on the application of United Company Rusal Plc) v The London Metal Exchange
| Jurisdiction | England & Wales |
| Judge | Mr Justice Phillips |
| Judgment Date | 27 March 2014 |
| Neutral Citation | [2014] EWHC 890 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 27 March 2014 |
| Docket Number | Case No: CO/17678/2013 |
[2014] EWHC 890 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Phillips
Case No: CO/17678/2013
Monica Carss-Frisk QC and James Segan (instructed by Macfarlanes LLP) for the Claimant
Michael J Beloff QC and Simon Pritchard (instructed by Latham & Watkins LLP) for the Defendant
Hearing dates: 26 th and 27 th February 2014
On 1 July 2013 the Defendant ("the LME") issued a consultation notice inviting comments from participants in the international metals market on a change the LME proposed to make to the rules for LME approved warehouses. The proposal was that, where a warehouse had a wait-time (or "queue") for delivery of metal in excess of 100 days, the amount of metal which the warehouse could load-in would be linked to (and limited by) the amount which it loaded out. The formula governing the linkage was designed to reduce the queue at the affected warehouse by one day for every two business days the new rule applied ("the Proposal").
The consultation period ended on 30 September 2013. On 7 November 2013 the LME announced its decision to implement a new rule for its warehouses with effect from 1 April 2014 in the terms proposed in the consultation notice, save that the threshold for the application of the linkage formula would be 50 days rather than the proposed 100 days ("the Rule").
In these proceedings the Claimant ("Rusal"), a leading global producer of aluminium and alumina, seeks to challenge the LME's consultation process and its subsequent decision. It is not in dispute that the LME is subject to the principles of public law and amenable to judicial review.
Rusal contends (and the LME does not dispute) that the implementation of the Rule will result in an immediate, if short-term, fall in the global open market (or "all-in") price of aluminium, potentially causing hardship to metal producers such as Rusal, with the potential for longer term damage through the closure of smelters. In that context, Rusal's grounds of challenge are:
(1) that the consultation process was procedurally unfair, principally because the LME consultation notice did not identify (let alone explain the reason for discounting) the main alternative option for reducing warehouse queues, namely, banning warehouses from charging rent for the period metal is held in a queue (or otherwise capping the amount of rent so charged), an alternative which Rusal asserts would cause significantly less damage to metal producers.
(2) that the LME's decision to implement the Rule was made without adequate consideration of or inquiry into relevant matters, including the effect the Rule would have on the all-in price of metal and the consequent effect on metal producers, the LME having made a deliberate decision not to consider that factor.
(3) that the decision was a breach of Rusal's human rights, being a disproportionate interference with Rusal's right to peaceful enjoyment of its possessions (namely, its goodwill or economic interests) or was otherwise discriminatory as between metal producers and warehouse operators.
On 7 January 2014 Carr J. directed that the Claimant's application for permission to bring judicial review proceedings, and the substantive hearing if permission is granted, be listed together for a "rolled up" hearing. The case was argued before me on that basis.
The factual background
Although certain aspects were only clarified during the course of the hearing in supplementary witness statements from officers of the LME, the background to and progress of the consultation and the LME's decision are not now disputed in any significant respect and are summarised below.
The LME
The LME, established in 1877, is the world's premier base metals market. It operates futures and options markets in eleven industrial base metals. For eight of those metals, including aluminium, the daily LME official prices have become the accepted reference prices for the world trade in those metals.
The LME is a Recognised Investment Exchange ("RIE") within the meaning of section 285 of the Financial Services & Markets Act 2000 (" FSMA"). As an RIE, the LME has a responsibility to uphold standards on its exchange in accordance with the FSMA Recognition Requirements Regulations 2001, including (pursuant to paragraph 4(2) of Schedule 1 to the Regulations) ensuring that it has (i) rules and procedures to provide for fair and orderly trading and (ii) satisfactory arrangements for securing the timely discharge of the rights and liabilities of the parties to transactions effected on the exchange.
The LME provides three main functions: (a) a price-discovery mechanism for the metals traded; (b) a price-hedging mechanism for producers and consumers of metals traded; and (c) a source of last resort for the physical delivery of those metals.
The LME is an on-exchange forwards market. This means that LME contracts are based on physical settlement by the transfer of ownership of metals stored in LME approved warehouses. Although only a very small proportion of LME trades actually result in physical settlement, the possibility of physical delivery (out of one of more than 700 LME approved warehouses worldwide) results in price convergence between the LME price and the price of physical metal, so that the LME price is truly reflective of supply and demand.
Consignments of metal enter the LME system on delivery to an LME approved warehouse, at which point the warehouse issues a bearer document, known as a warrant, for each lot of LME-approved metals. The size of a lot is defined per metal, and in the case of aluminium, is 25 tonnes. LME warrants are used as the means of delivering metal under LME contracts.
LME-warranted metal can only be stored in LME approved warehouses. Warehouse companies must meet strict criteria before they are approved by the LME. Once approved, a warehouse company enters a warehousing agreement with the LME on standard terms and individual warehouse buildings are licensed by the LME. There are currently more than 700 LME approved warehouses across 36 locations in 15 countries. The total metal delivered in and out of these warehouses exceeded 8.7 million tonnes in 2013.
The LME price, which is used as the global benchmark for physical contracts, is a price for metal traded 'in-warehouse'. This entails that the additional costs associated with making delivery of "free metal" outside the constraints of the LME system are not reflected in the LME price, with the result that the physical market price for aluminium will be higher than the LME price. The physical market price of aluminium, known as the "all in" price, is therefore made up of the LME price plus a premium.
The emergence of problems with warehouse queues
The international financial crisis of 2008 led to a sharp fall in industrial demand for metal, particularly from the motor car industry in the United States, and resulted in a huge surplus of aluminium. Stocks of that metal accumulated in various warehouses, particularly in Rotterdam, Baltimore and Detroit. This was exacerbated by increased investment in commodities, being held as a hedge against exposure to financial products, leading to yet further increases in stocks of aluminium held at LME approved warehouses.
These factors resulted in substantial queues developing at certain warehouses so that a warrant-holder who presents a warrant for cancellation (in exchange for delivery of the lot of metal to which the warrant related) will have to wait for weeks or even months for the metal to be loaded out. The problem is exacerbated by the fact that a seller of metal on the LME is entitled to (and usually will) settle the trade by delivering to the buyer the "worst warrant" held by the seller in respect of the relevant metal, that is to say, the warrant representing metal at the back of the queue.
It is recognised that the growth of long queues, seen particularly in five major LME approved warehouses, has several damaging effects on the LME system. First, by denying owners reasonable access to their metal, queues undermine the role of the LME as a market of last resort. Second, the cost of paying rent to the warehouses in respect of the period during which the metal is held in a queue causes the LME price to be discounted even further from the all-in price, resulting in an increased divergence between the LME price and the all-in price of metal, thus damaging the role of the LME in discovering the true market price of metal. Third, the delay in physical settlement of LME trades gives rise to regulatory issues. Those factors, taken individually and in combination, risk damaging the LME's reputation.
The Europe Economics report
In 2010, following numerous complaints about the length of queues at LME warehouses, the LME commissioned Europe Economics to prepare an independent assessment of whether the requirements in the LME warehouse contract for rates of physical delivery-out were satisfactory. Europe Economics carried out research between September 2010 and February 2011 and produced a report for the LME dated 12 May 2011 ('the EE Report').
The EE Report set out in detail the damaging effect of long queues on price discovery. It explained that the representativeness of the LME price is dependent on arbitrage (or the possibility of arbitrage) with the physical market, ensuring that the LME ...
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