Court of Appeal finds for London Metal Exchange in Elliott / nickel trade cancellation litigation

Summary

The Court of Appeal has dismissed an appeal by Elliott Associates L.P and Elliott International L.P (together "Elliott") against the decision of the Divisional Court in December 2023 to dismiss a claim for judicial review brought by Elliott and another trading entity, Jane Street Global Trading.

Elliott had sought judicial review of decisions by the London Metal Exchange ("LME") and LME Clear that led to the cancellation of nickel trades during the price spike of March 2022. That claim was rejected by the Divisional Court in November 2023 and Elliott appealed. Elliott claimed losses of net profits of $456 million as a result of the LME's cancellation decision.

In upholding the Division Court's dismissal of Elliott's claim for judicial review the Court of Appeal endorsed almost all the Divisional Court's determinations on the issues and followed much of its reasoning.

The most notable feature of the Court of Appeal judgment is the finding that Elliott's Agreed Trades (also called Contingent Agreements to Trade) did, contrary to the finding of the Divisional Court, have the status of "possessions" for the purposes of its claim under Article 1 of the first protocol to the European Convention on Human Rights ("A1P1").

Background

The background to the case and the parties' positions is set out in our previous e-alert on the Divisional Court's judgment, which can be found here.

In short, the litigation concerned events in the early hours of 8 March 2022, where there was an unprecedented spike in price of 3M nickel on the LME. At one point, the price rose to over US$100,000 per tonne, which compared with the previous day's opening price of just under US$30,000.

During this period, Elliott, an experienced commodity trader, saw the opportunity, and entered into several Contingent Agreements to Trade (binding contracts to submit trades for clearing) to sell nickel at high prices before the suspension.

At 08:15 on 8 March 2022, the LME suspended nickel trading, and at 12:05, cancelled all nickel trades entered that day before the suspension took effect. The market remained closed for over a week until 08:00 on 16 March. The aggregate value of all cancelled trades was around $12 billion.

Decision of the Court of Appeal

In finding against Elliott, the Court of Appeal observed that, while the background is complex, this was, "ultimately a straightforward case". Its findings on the seven grounds of appeal were as follows:

1. The contractual context

The LME had the power to cancel trades in exceptional circumstances of disorderly trading (LME Rules, TR 22), which were satisfied by the unprecedented price spike in nickel futures. Elliott was not a member of LME but traded on the LME as a Client of a Member. Elliott had agreed in its contract with its Member to trade subject to LME Rules.

The Court of Appeal accepted Elliott's submission to the effect that the contractual context did not "dilute" the public law duties of LME, and diverged from the Divisional Court, in terms of emphasis at least, which described the contractual context as "highly significant".

However, with reference to public law duties, the Court of Appeal upheld the Divisional Court's judgment on the determination by LME that the nickel market had become disorderly, describing the Divisional Court's conclusions on the issue as "unimpeachable".

2. Ultra vires

The Court of Appeal found that LME acted in accordance with legal and regulatory requirements; the power to cancel trades is itself a regulatory requirement, intended to protect the market in periods of exceptionally disordered trading.

It was found that the power is to be exercised only in "exceptional cases". However, the discretion of an expert decision maker (here, LME) will be a significant factor in determining what amounts to an "exceptional case".

LME acted within its powers. The absence of a policy on cancellation did not impact this conclusion.

3. Procedural fairness

With reference to the urgency of the situation on 8 March 2022 the Court of Appeal found no failure of procedural fairness arising from the fact that LME did not consult affected parties prior to making the cancellation decision.

A slight difference of emphasis is discernible in the Court of Appeal's decision making on this point; the Court of Appeal found that the discretion afforded to the LME on whether to consult is more nuanced and fact-specific than the "wide margin of discretion" the Divisional Court held to exist (see paragraphs 116 and 117 of the judgment). However, this difference of approach, while potentially relevant in a future case on similar facts, did not impact the outcome on this ground of appeal.

4. Irrationality and improper purpose

LME Clear has a regulatory obligation to collect sufficient margin to cover its exposures, and the Court of Appeal found that it was for LME Clear, as an expert body, to make an estimation of the margin needed to cover those exposures. The view taken by LME Clear in this case was held to be "entirely rational".

The argument advanced by Elliott on improper purpose was also rejected, in short order. Decisions made by LME and LME Clear were not made with a view to favouring one cohort of the market but were made in the interest of avoiding a 'death spiral' in the whole market.

5. Failure to investigate

The Court of Appeal found that LME had sufficient information to make its decision to cancel the trades. The CEO did not need to investigate the causes of disorder to make a finding that the market was disorderly. Emphasis was placed by the Court of Appeal on the urgency of the situation on 8 March 2022. Even if more investigations were required, there was not time, as the market was in crisis and LME needed to act.

6. A1P1/ Possessions

On this ground the Court of Appeal reached a different determination as to the status of Elliott's Agreed Trades (also called Contingent Agreements to Trade) finding that these were "possessions" for the purpose of A1P1.

The contractual analysis in paragraphs 158 – 169 of the Court of Appeal judgment is a helpful and clear summary of the status of Contingent Agreements to Trade.

The contractual analysis has the potential to be relevant in other cases. In summary:

• Because the clearing and matching process had not been completed at the time when the power to cancel was exercised, Elliott did not have Client Contracts but only (in the terminology of the LME Rules) Agreed Trades or Contingent Agreements to Trade.
• These were not contracts of sale pursuant to which Elliott had the right to receive the agreed price.
• They were however legally binding contracts, enforceable by arbitration, for which damages would be recoverable in the event of breach, but the only obligation which could be enforced was the Clearing Member’s obligation to submit the contracts to LME Clear for clearing and matching. That obligation had been performed and there was nothing left to enforce.
• Accordingly, Elliott did not have an existing contractual right to be paid the price at which it had agreed to sell the nickel. Its ability to obtain the price depended on LME Clear completing the clearing and matching process.
• However, this was a routine administrative process which (so long as the Contingent Agreements to Trade subsisted) LME Clear could not have refused to undertake. It had no discretion in the matter.
• If it had refused, it would have been in breach of its obligations as a CCP, which Elliott could have enforced (or could have required the Clearing Member to enforce).
• Therefore, from a practical and legal viewpoint, all parties were committed to the trades. There was nothing left to be agreed and none of the parties concerned (including LME Clear) had a right to withdraw from or to refuse to proceed with the transactions.
• In these circumstances the Court of Appeal considered that Elliott’s rights (subject always to the possibility of lawful cancellation under TR 22) had a clear economic value.
• If it had not been for the cancellation of the trades, Elliott would undoubtedly have obtained Client Contracts and, if for some reason LME Clear had refused to undertake the clearing and matching process, it would have had a legal remedy.
• It therefore had (subject to what is said in relation to ground 7 below) a legitimate expectation that it would obtain such contracts.
• Elliott therefore did have "possessions" for the purposes of A1P1.

7. A1P1/ Interference and justification

LME's cancellation did not amount to an "interference" because any legitimate expectation held by Elliott that its Agreed Trades would become Client Contracts was subject to and "heavily qualified" by the power of LME to exercise its power to cancel trades lawfully in exceptional circumstances.

Even if the LME's cancellation of trades amounted to an interference the Court of Appeal expressed, "no doubt that any interference was lawful, justified and proportionate."

Comment

In expressing that this was a "straightforward case" the Court of Appeal doubtless had a mind to the exceptional nature of the circumstances on 8 March 2022, which the Court described as a, "once in a generation event". It was these exceptional circumstances, the risk to the wider market, and the resulting urgency of the situation, which is at the heart of the Court of Appeal's decisions that the LME and LME Clear acted rationally and lawfully in making its decision to cancel the relevant nickel trades.

The Court of Appeal's reiteration of the "undiluted" nature of public law duties (placing less emphasis than the Divisional Court did on the contractual context and Elliott's agreement to trade subject to LME Rules). There is a more nuanced approach to the margin of discretion afforded to public bodies, and the finding of the Court of Appeal that an Agreed Trade can amount to a "possession" for the purposes of A1P1 is important and has the potential to be relevant in future disputes and litigation.

On the question of what is a disorderly market: as the Court of Appeal was so clear in its findings on the exceptional nature of the market conditions on 8 March 2022 ("if the extreme and unprecedented market movements experienced on 8 March leading to the risk of multiple defaults did not amount to a disorderly market, it is difficult to see what would") the question did not receive close scrutiny in the Court of Appeal's judgment.

However, in endorsing the Divisional Court's analysis of the LME's approach to the question (determining the relevant passages of the lower Court's judgment "unimpeachable"), and in the absence of any singular, prescribed definition, it appears that expert decision makers, such as Recognised Investment Exchanges, will be afforded discretion to make determinations of this nature, and such determinations will be treated favourably by the Courts, if a rational approach to the question is taken.

On the power of an Exchange to cancel trades, the Court of Appeal was clear that "the power to cancel only arises if the circumstances are exceptional". However, the Court did not accept Elliott's submissions that the power was otherwise constrained: "there is no further constraint within TR 22 itself, or in the legislation from which it is derived, beyond that the power to cancel arises in exceptional cases.".

Given the extreme ("once in a generation") factual circumstances of this case, few lessons can be drawn as to where the line for "exceptional" might be drawn in the future.

The full judgment can be found here: Elliott Associates LP & Anor, R. (On the Application Of) v The London Metal Exchange & Anor [2024] EWCA Civ 1168