By Rodrigo Zepeda, CEO, Storm-7 Consulting Limited

[Part IV of a four part blog series]

It has been widely published in the media that the United States (US) fund manager ‘Elliott Management’ has commenced a judicial review claim against London Metal Exchange (LME) in the English High Court via its affiliates, Elliott Associates LP (EALP) and Elliott International LP (EILP). Full details of the legal case have yet to be publicly disclosed. Whilst many media outlets have provided brief factual details about the case, no media outlet has provided any type of substantive legal analysis of the case itself.

Consequently, this series of blogs seeks to provide a snapshot of such a substantive analysis of the case that has not been provided in any other media outlet to date. This final part of the blog will analyse the fourth pleaded ground of judicial review, namely the application of English law jurisprudence on ‘A1P1’ cases (Article 1 (A1) of the First Protocol (P1) of the European Convention on Human Rights (ECHR) contained in the Human Rights Act 1998 (c.42) (HRA)), as well as analysis of the potential long-term impact on trust and confidence of participants and investors in the LME nickel market.

ANALYSIS OF JUDICIAL REVIEW CLAIM (continued)

Judicial Review Ground 4: Human Rights

There are at least three key rights that EALP/EILP may plead within the context of the current judicial review claim, namely:

(1) a breach of a right to fair proceedings (Article 6);

(2) a breach of a right to non-discrimination (Article 14); and

(3) a breach of a right to property (A1P1).

Article 6 (fair proceedings)

Article 6 protects the rights of the claimants where LME, acting as a public authority, made a decision that impacted their civil rights or obligations. Section 6 of the HRA sets out a legal obligation for public authorities to act compatibly with ECHR rights (as set out in Schedule 1 HRA). In theory in such a case, for example if the claimants suffered harm to their rights, LME should have ensured there were procedural protections in place to allow such parties to have an opportunity to make submissions prior to the making of any interim/final order (R (Wright) v Secretary of State for Health [2009] 1 AC 739; Bank Micallef v Malta (17056/06) [2009] ECHR 1571; Bank Mellat (Appellant) v Her Majesty’s Treasury (Respondent) No.2) [2013] UKSC 39).

If the Court finds that LME was acting as a public authority when making its decision to cancel the claimants’ nickel contracts, and that this decision impacted upon their civil rights or obligations, then Article 6 which protected the claimants’ rights to a fair and public trial or hearing would have been activated. The claimants could prove that their Article 6 rights were breached, by showing that LME did not provide them with any opportunity to make representations regarding such rights or obligations.

In such a situation, the claimants could bolster their case by seeking to show/prove that LME acted in such a way that it did not even acknowledge the civil rights or obligations of the claimants in the first place, e.g., LME acted in such a way that it believed that it was a private commercial entity, and not an entity making a decision governed by public law principles. Relevant questions the claimants might ask, include:

Did LME recognise that it was acting as a public authority making a decision that impacted upon the civil rights or obligations of the claimants?

Did LME put in place any procedural protections for the claimants?

Were any of the parties whose rights were affected (market participants) allowed to make representations within a reasonable time prior to the making of LME’s decision?     

Were any of the parties allowed to make a proper and full opportunity to challenge any factual and legal conclusions on which LME’s interference with their rights was based?

Article 14 (non-discrimination)

Article 14 (prohibition of discrimination) states that the enjoyment of human rights and freedoms must be secured without discrimination on any ground, including for example, national or social origin or property (Gerards 2013) When taking a decision affecting human rights, LME was therefore required not to discriminate on any ground listed in the HRA unless the discrimination could be justified on objective and reasonable grounds (O’Connell 2009, p. 2). This means LME was required not to discriminate between nickel market participants because of their national or social origin (e.g., LME treated Chinese firms more favourably compared to US firms), or because of property owned (e.g., in-the-money hedging contracts were signficantly discriminated against compared to out-of-the-money speculative short contracts). 

To make a successful judicial review application, the claimants would be required to show/prove that LME’s decision clearly discriminated against its established property rights in some way. A starting point might be to identify and map out the nickel contract positions of all market participants that existed at the time of suspension of the LME nickel markets, i.e., 08.15 am London time on 8 March 2022 (Point A). The claimants would then be required to show/prove that the decision to cancel all executed nickel contracts from 00.00 am (Point B) to 8.15 am London time, resulted in either direct or indirect discrimination against the claimants’ human rights.

Given the sophisticated nature of LME operations, it is more likely that if any discrimination did in fact arise, it was indirect in nature (indirect discrimination). For the sake of argument, let us say that indirect discrimination arose because of undisclosed conflicts of interest or undisclosed pressures from any, or all of, Hong Kong Exchanges and Clearing Ltd. (HKEX); Tsingshan Holding Group Co. Ltd’ (Tsingshan); or the Chinese Government. So, what could have happened is either:

(1) LME sought to adopt a neutral measure which in actuality resulted in a disproportionately prejudicial effect on a particular group of market participants (that included the claimants with nickel contracts significantly in-the-money) with no discriminatory intent (Position 1) (JD and A v United Kingdom (32949/17; 34614/17, European Court of Human Rights; D.H. and Others v The Czech Republic (57325/00) (2008) 47 EHRR 3); OR

(2) LME chose one measure (Point B) over another measure (Point A) which resulted in a disproportionate effect on a group of market participants (that included the claimants with nickel contracts significantly in-the-money) with discriminatory intent (e.g., discriminatory intent was very carefully hidden through unofficial or undocumented meetings, telephone calls, or communications, or occurred because of compartmentalised decision-making or operational flaws) (Position 2).

In short, what the claimants would be seeking to prove would be that the LME’s decision resulted in a disproportionately prejudicial effect on their property rights (nickel contracts significantly in-the-money), and either such discrimination could not be objectively justified (Position 1), or there is sufficient direct or circumstantial evidence that can be discovered (e.g., conflicts of interest, only Tsingshan seemed to hugely benefit from the choice of Point B) to prove that LME’s decision-making was influenced by some form, or forms, of discriminatory intent (Position 2).

A1P1 (right to property)

Article 1 of Protocol 1 of the ECHR protects the property rights of both natural and legal persons, so it includes the property rights of EALP and EILP. A1P1 states inter alia that every legal person is entitled to peaceful enjoyment of its possessions, and that such legal persons shall not be deprived of their possessions except in the public interest, and subject to conditions provided for by law, and by general principles of international law. This creates a qualified right to peaceful enjoyment of possessions under English law (R (Aviva Insurance Limited) v Secretary of State for Work and Pensions [2020] EWHC 3118).

In this respect, the meaning of possessions is not limited to physical goods but also extends to property rights (Marckx v Belgium (1979) 2 EHRR 330; Gasus Dosier-und Fordertechnik GmbH v The Netherlands (1995) 20 EHRR 403). In practice, this could cover the situation faced by the claimants, e.g., business goodwill in the form of concluded contracts (Breyer (and others) v Department for Energy and Climate Change [2015] EWCA Civ 408), or a right of action in tort (Matthews v Ministry of Defence [2002] EWCA Civ 773).

In summary, in an A1P1 claim, the claimants would be required to show/prove that LME’s decision infringed the claimants’ A1P1 rights according to the following test limbs:

(1) interference with possessions;

(2) legitimate aim;

(3) rational connection to aim;

(4) no more than is necessary;

(5) fair balance between interests;

Bank Mellat v HM Treasury (No. 2) [2012] QB 101; de Freitas v Permanent Secretary of Ministry of Agriculture [1999] 1 AC 69; Huang v Secretary of State for the Home Department [2007] 2 AC 167; Aviva Insurance Ltd & Anor, R (On the Application Of) v The Secretary of State for Work and Pensions [2020] EWHC 3118, paras. 111-138.

First, the claimants would have to show/prove that LME’s decision represented an interference with its possessions, namely the claimants had accrued legal rights in property (i.e., the nickel contracts) which held an ascertainable financial value. Second, the claimants would have to identify the aim behind the decision to cancel the nickel contracts, and whether this aim was legitimate. In practice, this would likely be to ensure orderly market conduct.

Third, the claimants would need to prove the actual decision made by the LME was not rationally connected to this aim, based on all the available evidence. The claimants might seek to refute any rational connection proposed by LME, by seeking to show potential conflicts of interest, and consideration of non-orderly market conduct related factors. Fourth, the claimants would need to disprove that the decision taken by the LME did no more than was necessary to achieve the legitimate aim.

For example, if the claimants can show/prove that the LME’s intervention at Point A was easily sufficient to maintain and ensure orderly market conduct, LME’s decision to cancel contracts all the way back to Point B would, on the face of it, potentially be regarded as going beyond that which was necessary to maintain orderly market conduct. Fifth, the final test limb would be an analysis of whether the LME decision struck a fair balance between the interests of the relevant community of stakeholders affected (e.g., all relevant LME nickel market participants), and the rights of the claimants.

The claimants might seek to show/prove that the retrospective effect of the cancellation of the nickel contracts, resulted in a clear and unfair balance between the respective interests identified. For instance, Point B may have benefitted only a few market participants such as Tsingshan with very large negative market positions, because it limited significant additional financial losses on speculative (short) positions compared to Point A. These are all complex issues that are generally dependent on the particular context of the claim in question.

The point made here, is that in order to objectively analyse the merits of the claimants’ claims under all four grounds for judicial review, legal counsel would have had to undertake a very extensive and lengthy analysis of all relevant judicial review cases and A1P1 human rights jurisprudence. Not only that, but they would also have had to calculate and analyse in depth, the market positions of all relevant LME nickel market participants at Point B and Point A, and all points in between (at regular intervals such as going back every hour).

This would have provided them with a scenario analysis of the overall net position of market participants at Point B, Point A, and each scheduled interval between. By overlaying market volatility and risk analyses on top of these, legal counsel would be able to trace back what effect market volatility and risk had on the net position of market participants. This would provide them with an analysis of what effect the cancellation of nickel contracts would have on all market positions overall at each point in time from Point A to Point B. It is submitted that without undertaking this type of highly extensive legal and financial analysis, it would be foolish to state that the judicial review claims made by EALP and EILP were without merit.

The judicial review claim was filed on 1 June 2022 and served on LME on 2 June 2022. However, it was just THREE business days later on Tuesday 7 June 2022 that LME stated that the claims were without merit. What I am saying, is that it would seem to be the case that whoever advised LME to state that these claims were without merit, had NOT undertaken this type of extensive legal and financial analysis that was required to justify such a conclusion, at the time this statement was made.

ANALYSIS OF POTENTIAL LONG-TERM IMPACT ON THE LME NICKEL MARKET

The LME nickel market has continued to be plagued by a series of problems, such as continuing operational and systems errors, disruption events, implementation of strict pricing movement limits, and fairly thin trading (Chan 2022). Market trust and confidence are absolutely crucial underlying requirements for any modern functioning exchange – fundamentally an exchange is made up of its members and those firms and individuals that trade through members. The real question, therefore, is whether the current materialised loss of market trust and confidence in the LME nickel market is temporary or permanent.

For some, cancellation of close to $4 billion in transactions, and the attendant risk that this may occur again in the future, may place their nickel trading operations in too precarious a position going forwards. This is especially true if they are seeking to implement long-term commodity hedges that necessitate strict counterparty certainty. For others, the judicial review case may showcase the size and extent to which Tsingshan’s accrued losses were mitigated through the cancellation of existing nickel contracts of other market participants.

They may then be in a position to personally assess whether they believe that the LME’s decision was objectively fair based on all available evidence at the time. It should be noted that the pending judicial review case is likely to be very aggressively and extensively contested. This will more than likely mean that all relevant facts, whether supportive or detrimental to the positions of parties will be disclosed, which may provide market participants with more information with which to base their future operational decisions. At the same time, it should also be noted that the heavy criticisms drawn from investors and traders regarding LME’s cancelation of executed trades have already been widely noted (Chan 2022).

Added to this, the Manged Funds Association has already accused the LME of a conflict of interest during the nickel market turmoil, and further, that the LME failed to perform its regulatory functions in a way which exacerbated market disorder (Baxter-Derrington 2022; Reuters 2022; Stafford 2022). Finally, the UK’s regulators, the Financial Conduct Authority and the Prudential Regulation Authority have announced that they too will be opening up external reviews into the cancellation of nickel contracts by LME (Farchy 2022; Sukhraj 2022). Consequently, the potential long-term impact on trust and confidence of participants and investors in the LME nickel market is still very much up in the air at present. Much will depend on the positive or negative outcomes of the judicial review case and the regulatory investigations in the UK.