Backing just one horse in a consultation process can be unfair

28 March 2014 by

Aluminum-Warehouse21United Company Rusal Plc (R, o.t.a of) v. London Metal Exchange Trust  [2014] EWHC 890 (Admin), Phillips J, 27 March 2014  – read 

Public law principles allow you to challenge a decision of a public authority if the consultation process preceding it was unfair. Unfairness comes in many shapes and sizes, but the commonest one alleged is that it was not carried out at the formative stage. The authority had already made up enough of its mind so the consultation process ceased to mean anything  – it was just going through the motions.

The law is equally clear that an authority does not have to consult on every conceivable option. Indeed it can just consult on its preferred option. 

But this decision shows that if it does so it has to be wary, because on the particular facts that may be unfair.

Enter our cast, challenger in the form of Rusal (proprietor one Oleg Deripaska), and the defendant, the London Metal Exchange.

The facts

The LME is the world’s premier base metals market, and it operates futures and options markets. Under the Financial Services & Markets Act 2000, the LME has a responsibility to uphold standards on its exchange, including setting rules and procedures to provide for fair and orderly trading.

Given that, it was unsurprising that the LME accepted that it was a public authority and thus subject to challenge via the public law principles of judicial review.

The LME’s consultation proposal concerned the rules for LME approved warehouses, in which aluminium was stored. 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. In the event, LME adopted the proposal though adopted a 50 day threshold, rather than the 100 day one proposed.

The queues were triggered off by a fall in demand in the 2008 crash, and the accumulation of stocks particularly in Rotterdam, Baltimore and (no surprise,there) Detroit. Stocks were also increased by people using metals to hedge against exposure to financial products. The queues denied owners reasonable access to their metal, undermined the role of the LME as a market of last resort, and involved increased rent payable to the warehouse owners. All of this led the LME aluminium price to be discounted further from the price otherwise achievable on the global open market (the “all-in” price in the jargon), damaging the role of the LME in discovering the true market price of metal.

So far, plainly a problem to be solved by LME.

The solution adopted by the LME, however, would, it was agreed, lead to an immediate, if short-term, fall in the  “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.

LME’s problem was that it only consulted on this wait-time option. It did not consult on an option to ban or cap rent for metal in a long queue, which had been canvassed in a consultants report prepared before the LME’s formal consultation process.

The LME had rejected this option at an earlier stage. It was not straightforward, involved negotiations with the warehouses involved, and had been advised against by in-house counsel after consulting the European Commission.

10 of the 33 consultation responses invited the LME to consider a rent ban/cap.

The law

Phillips J set out a short and helpful summary of the key cases on consultation options at [64]-[71]. He then drew the threads together at [73]:

However, the broad proposition that there should be consultation on every viable option is clearly unsustainable in the light of the Court of Appeal and Divisional Court authorities referred to above, which are to exactly the opposite effect. The general rule is that a decision maker is entitled to narrow the options prior to consulting on the preferred option, and need not consult on discarded options, provided the proposed course has not been decided upon and can still be altered as a result of the consultation. It seems clear that the need to deal with alternative options only arises where there are specific reasons why it would be unfair not to do so.

And then came the big “but”.

Nevertheless, in my judgment the LME’s consultation was one where, in the particular (and perhaps exceptional) context in which it arose, fairness demanded that the consultation should encompass what the LME in due course recognised to be “the most practical suggested alternative to the Proposal”, that is to say, the banning or capping of rents.

His reasoning included the following points

  • a rent rebate was the only other option identified as capable of solving the problem;
  • consultation responses had not been alerted to the possible contractual and competition law problems, and therefore could not address those problems fairly;
  • the LME was itself carrying out further discussion and legal review of the option of banning/capping rents during the consultation period, without telling consultees;
  • fairness demanded that metal producers (who would be affected by the wait-time proposal) should have the opportunity to consider and comment on an alternative that might cause them less damage.  The situation is therefore analogous to that in R (Medway Council) v. Secretary of State for Transport – Gatwick Airport ruled out of airport expansion consultation.

So unfair in these specific circumstances, even though generally speaking one can consult on just one option.

Human rights

This got dealt with briskly, and not atypically, as our courts become more insistent that the common law, not the HRA, holds the key to resolving most problems. Rusal said the decision was a breach of Rusal’s human rights, being a disproportionate interference with Rusal’s right to peaceful enjoyment of its possessions under Article 1 of the 1st Protocol (namely, its goodwill or economic interests) or was otherwise discriminatory as between metal producers and warehouse operators. But it accepted that the matters relied upon as constituting disproportionate interference with Rusal’s possessions or discrimination being the very matters raised in the successful ground of challenge.

So the judge added

In those circumstances it is not necessary or useful, even if I am wrong in my findings in relation to grounds 1 and 2 above, for me to consider the interesting but difficult question of whether causing a business a loss of future revenues is interference with “possessions” which qualify for protection under Article 1 of Protocol 1 to the ECHR.

It would indeed have been an interesting question, there being a good body of case law both domestically and in Strasbourg doubting that interests in future prospects were possessions: see, for example, a previous post on this topic in the medical professional context.

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