Court of Appeal clarifies equal public law protection in contractual context and concept of possessions under A1P1

In R (Elliott Associates and Elliott International) v The London Metal Exchange and LME Clear [2024] EWCA Civ 1168 the Court of Appeal dismissed an appeal concerning the cancellation of nickel trades, despite disagreeing with the judgment below on a number of key issues of wider application.

Key Points

• A contractual context does not justify diluting public law principles – those who agree to contract with public authorities do not agree to power being exercised other than in accordance with the ordinary protections of public law.
• It is for the court to determine whether a fair procedure has been followed, rather than giving a wide margin of discretion to public authorities on this issue.
• A practical and effective approach to Convention rights may mean that a "possession" capable of protection under A1P1 exists even where there is no concluded contract of sale.

Background

There was an unusual rise in the price of nickel in March 2022. The London Metal Exchange ("LME") concluded that the market had become disorderly, and exercised a power under one of its trading regulations (TR22) to cancel all nickel trades entered into on the day in question.

The judicial review challenge to this and related decisions by LME and its clearing house counter-party LME Clear failed before the Divisional Court on multiple domestic public law and human rights grounds (see our previous blog). The appellants sought to overturn that decision, while the other unsuccessful claimant in the Divisional Court, Jane Street, did not appeal.

Judgment

Relevance of contractual context

The Divisional Court had placed some emphasis on the contractual context that surrounded the trades and the decisions made by LME and LME Clear, highlighting that the claimants subjected themselves to the decision making of the defendants through their informed consent in contracting on the LME's rules. This was challenged by Elliott on appeal, with Elliott arguing that the Divisional Court had thereby diluted the protection afforded by public law principles, taking what the appellant characterised as a "public law light" approach.

On appeal, the court clarified that the contractual context did not justify a less rigorous approach, and that ordinary public law principles should be applied. Although Elliott had agreed to contract on specific terms, that did not mean it agreed to power being exercised otherwise than in accordance with ordinary public law protections. The Court of Appeal ultimately agreed with the respondents however that the contractual context had not in fact played a very significant role in the Divisional Court's reasoning when looking at each individual ground and why it failed, even if some of the wording in the Divisional Court's judgment suggested otherwise.

Procedural Fairness

The appellants argued they should have had the opportunity to make representations before the cancellation, in light of the unprecedented nature of the decision and considerable cost implications, running to hundreds of millions of dollars for Elliott.

The court took the opportunity to distinguish two situations that are frequently considered together, namely (i) a duty to consult on a proposed decision affecting the public at large, often aimed at participation in decision making; and (ii) the requirement to adopt a fair procedure before making a decision that extinguishes the legally protected interests of a defined cohort. This case fell into the second category. The court accepted that arguments about the impracticality of seeking representations in such situations need to be examined closely. However, in the particularly unusual and highly urgent facts of this case, the court accepted that seeking representations would not have been practical. The court considered the limited measures that the LME had taken to provide at least some warning to the market and route for questions and concerns, and found that in the circumstances those were relevant and there was no procedural unfairness.

The Court of Appeal disagreed with the Divisional Court which had stated that it was for the LME to decide whether, whom and how to consult with a wide margin of discretion – in fact Males LJ (giving the leading judgment) confirmed that it is for the court to determine whether a fair procedure has been followed.

Human Rights

The court considered whether the cancellation of trades was an unlawful interference with the right to protection of property under Article 1 of the First Protocol ECHR ("A1P1"). In the Divisional Court Elliott (unlike Jane Street) was found not to have possessions engaging the protection of A1P1, because the relevant trades had not fully cleared, meaning a contract of sale did not exist even though all that was left were administrative checks and processing.

The Court of Appeal overruled the Divisional Court on this point, finding that Elliott had a legitimate expectation that amounted to a possession capable of protection under A1P1. This was not a legitimate expectation in the sense of domestic administrative law, but one based on the A1P1 Strasbourg caselaw. Males LJ surveyed the authorities and concluded that the critical questions when considering whether a legitimate expectation qualifies as a possession for the purposes of A1P1 are whether the expectation has a sufficient basis in domestic law and an identifiable (even if not necessarily measurable) economic value. Although the contracts held by Elliott at the time of cancellation were not contracts of sale, only routine administrative steps fell to be carried out, and if the clearing house had declined to carry out those steps, Elliott could have enforced its obligations. Elliott did therefore have rights with a clear economic value and, bearing in mind the principle that the Convention should operate practically and effectively, this was found to be a legitimate expectation engaging A1P1. 

The Court of Appeal held however that there was no interference with the property right, with the consequence that the A1P1 claim failed as it had at first instance. On this point the contractual context did take on significance, as Elliott's rights and expectations were always subject to the possibility of TR22 being lawfully exercised and qualified in that way. Given the court found no domestic unlawfulness in the use of the power, Males LJ concluded that there was in practice no real scope for an A1P1 claim. In any event, even if there had been an interference the court considered it would have been lawful, justified and proportionate.

Irrationality and ultra vires

The irrationality ground also failed on appeal, as did a related challenge alleging improper purpose by arguing that the TR22 power had been used to protect one cohort of the market (LME Members or the LME itself) from the risk of default, or to prevent 'knock-on effects' in other metals markets or the wider global financial system at the expense of those who had concluded lawful trades. The court considered that the power had been used rationally and in the interests of the market as a whole.

Similarly, an ultra vires challenge focusing on the interpretation of TR22 failed, as the court did not accept that the TR22 power, which was a regulatory requirement, was tightly constrained in the way the appellants suggested. Further the court clarified that there was no requirement to have a published policy setting out when that power could be exercised.

Comment

The Court of Appeal cautioned against introducing lower standards of judicial review scrutiny, and therefore public law protection, in a contractual context. This is a helpful clarification considering comments in other cases suggesting a "light touch" approach should be deployed in commercial contexts. However, the factual background clearly influenced the outcome in this case, at both first instance and on appeal. The Court of Appeal's judgment recognised the urgency and severity of the circumstances that the decision-makers were dealing with on the day in question, described as "unprecedented, urgent and potentially catastrophic". This, combined with the technical nature of the issues and the expertise of the respondents, meant that the court approached the issues with a degree of practical realism, as well as respect for the discretion of the decision-makers.

It is also interesting to see the Court of Appeal disagreeing with the court below in concluding that Elliott held possessions capable of being protected by A1P1, and emphasising the need to take a practical view on this issue. It remains to be seen how this influences A1P1 caselaw going forward.