LME consultation process considered by Court of Appeal

LME consultation process considered by Court of Appeal

Following the Court of Appeal’s decision in Rusal v LME, John Cooper, head of the public law and regulation team at Wragge Lawrence Graham & Co LLP, advises that future claimants will find little support in this case for potential challenges to the choice of subject matter in consultations.

Original news

R (on the application of United Company Rusal Plc) v London Metal Exchange [2014] EWCA Civ 1271, [2014] All ER (D) 104 (Oct)

The defendant, the London Metal Exchange (LME), decided, following a consultation process, to implement a new rule (the LILO rule) and excluded the possibility of a rent ban option. The claimant, United Company Rusal Plc (Rusal), sought judicial review. The judge held that, among other things, as the rent ban was the next best option, consultees had to know the reasons why it had been rejected in order properly to understand the LILO rule. The Court of Appeal, Civil Division, in allowing the defendant’s appeal, held that, among other things, the defendant had correctly disclosed the true reasons for the LILO rule and it had had no obligation to put forward a proposal which it was not willing to promote.

What is unusual about this case?

As the Court of Appeal recognised, this is a comparatively unusual example of a commercial body being subject to judicial review. The case should serve as a useful reminder that public law applies to all bodies exercising public functions, as the LME does in regulating its market, even where they are otherwise commercial entities with no statutory underpinning.

Why did Rusal raise a judicial review?

Rusal is a producer of various metals. The LME is the world’s premier market through which those metals are traded. The LME also regulates the warehouses in which metals traded through it are held.

After the start of the global recession in 2008, there was a fall in final demand for metals, but at the same time investors were acquiring them as a hedge against their exposure to financial markets. In combination, this meant that greater volumes of metals were being stockpiled in warehouses regulated by the LME. This was good news for the warehouse operators, but bad for final purchasers who were subject to increasing delays in accessing their stocks due to the logistical difficulties of obtaining access at highly-stocked warehouses.

In order to protect purchasers, and therefore its own market, the LME consulted on a proposal designed to reduce the amount of metal stored at warehouses and so bring down the delays in access. The leading proposal was that any warehouse would be prevented from accepting new stock except to the extent that it was releasing existing stock. This was the only option consulted upon. An alternative option of restricting rents by the warehouses experiencing long delays was considered to raise competition law concerns and was not put out to consultation.

Rusal’s commercial interest, as a producer, was in preventing substantial releases of existing stock onto the free market, since this would increase available supply and tend to depress the world price for metals. It challenged the lawfulness of the LME’s consultation, on the basis that, by consulting on only one option, the LME had not met the standard of fairness required of it in public law. The LME needed, Rusal claimed, at least also to have consulted on the rent restriction option.

The Court of Appeal considered the complaint to be ‘unreal’. In its view, Rusal did not support the rent restriction option and was not in fact misled by any failure to consult on it—it was using this ground of complaint in service of its wider commercial interests.

In March, the High Court decided that the LME’s consultation had been unfair—why did the Court of Appeal overturn this decision?

There is a substantial body of case law dealing with challenges to consultations. It establishes no general principle that all available options must be consulted on. On the contrary, it is clear that, before consulting, a public body may narrow the range of options on which it chooses to consult, including by consulting on a single preferred option.

While there are some important cases in which a consultation has been held to be unfair for excluding certain options—notably R (on the application of Madden) v Bury Metropolitan Borough Council [2002] EWHC 1882 (Admin), [2002] All ER (D) 65 (Aug) and R (on the application of Medway Council) v Secretary of State for Transport [2002] EWHC 2516 (Admin), [2002] All ER (D) 385 (Nov)—the judgments in those cases turned on their specific circumstances. The Court of Appeal held that those cases were clearly distinguishable from the circumstances of Rusal’s complaint. The first instance judge, who had thought those cases more analogous to this one, was wrong and his judgment ‘extended the principles [of fairness in public law] beyond the limits to which they can properly be stretched’.

In truth, this seems an overly harsh view of the High Court decision. The first instance judge recognised that the authorities allowed public bodies considerable discretion as to the options on which they consult, that this included in most circumstances the right to consult on a single option, and that the cases in which this was held to be unfair were ‘exceptional’. All of this was essentially in line with the Court of Appeal’s judgment. However, as the Court of Appeal rightly reminded us, applying the public law duty of fairness is always an ‘intensely case-sensitive’ exercise. The first instance judge thought that the facts of Rusal’s case made it exceptional—the Court of Appeal disagreed.

In short, therefore, the Court of Appeal overturned the High Court decision not because of any significant difference in legal analysis from the first instance judge, but because it did not think that the facts of this case justified treating it as falling within the very limited category of cases in which the courts should intervene to control the choice by a public body of the options on which it consulted. In doing so, it appears to have been influenced by its lack of sympathy with Rusal’s aims, and a concern that treating this case as exceptional would open that restricted category to too many other cases in the future.

Why is the judgment significant?

De Smith’s Judicial Review (7th edn, 7-054) says that the duty of fairness requires of public bodies that ‘there should be consultation on every viable option’. Practitioners might therefore be forgiven for advising their public sector clients to that effect. However, both the High Court judge and the Court of Appeal explicitly considered this an incorrect statement of the law, and reasserted the actual position—‘there is in general no obligation on a public body to consult on options it has discarded’.

While there will be exceptions to this general rule, where in all the circumstances the duty of fairness will require a public body to consult on options that it is not actively pursuing, they are in a very small category of exceptional cases which the courts will not allow to be expanded.

What was the relevance of competition law to the case?

The reason the LME dismissed the rent restriction option before it had even consulted on it was that it had been advised that it would be difficult to give effect to that option without falling foul of competition law. As far as the LME was concerned, this made it a non-viable option, rendering it entirely unsuitable for consultation even if the law had been as it was stated in De Smith.

In one of the more striking aspects of the High Court judgment, the first instance judge, when concluding that the option should have been consulted upon, suggested that this meant that the question whether it was in breach of competition law should also have been part of that consultation. This strongly implied, and the Court of Appeal took it to say, that the competition law advice received by the LME would have had to be disclosed for the purposes of ensuring a fair consultation on the issue.

Unsurprisingly, the Court of Appeal was unimpressed with the idea that the duty of fairness required the LME to disclose its legally privileged advice on competition law compliance. This is surely correct. The notion that a public body might be required both to disclose and seek the views of consultees on legal advice received by it was perhaps the most surprising aspect of the first instance decision, and certainly had the potential to cause significant difficulties for public bodies, even assuming it was confined to ‘exceptional’ cases.

The Court of Appeal has clearly rejected that idea. However, it should be noted that it did so in the belief that consultees were already aware from general knowledge of the market that there was a competition law concern with rent restriction, and could have made submissions on it if they wished. This holds out the small prospect that the outcome may be different in a case involving a less specialist and well-informed consultee group.

What lessons can be learned from this case?

The Court of Appeal has reviewed the authorities on consultation and provided a very clear restatement of the duty of fairness as it applies to a choice of options for consultation. Most public bodies will be pleased that this leaves them with a large measure of discretion in what they consult upon. Future claimants will find little support in this case for potential challenges to the choice of subject matter in consultations.

The law as stated by the Court of Appeal is broadly consistent with what remains the general position in common law, that there is no duty on public bodies to consult except where one is imposed by statute or generated by the promises or conduct of the body itself. Since there is no general duty to consult, it follows that it would be surprising if, once a consultation took place, there was a duty regulating the required subject-matter of the consultation.

However, while the general position is clear, there remains room for exceptions. Aside from making clear that the courts will be reluctant to consider any new cases exceptional, the Court of Appeal judgment does little to clarify the circumstances in which a case may properly be said to fall within that category. Since all cases in this area remain highly fact-sensitive, there will always be room for argument in individual cases that the circumstances are such as to bring it within this restricted category.

Is this the end of the road?

Almost certainly. This is an area of the law which has been considered by the Court of Appeal on a number of occasions, and this case turns on its particular facts. The law as stated by the Court of Appeal is generally clear, fully reviews the previous authorities, and leaves room for genuinely exceptional cases to be treated differently in future. The case is unlikely to be of any interest to the Supreme Court, even if Rusal were minded to take it there.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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