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	England and Wales High Court (Administrative Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> United Company Rusal Plc, R (On the Application Of) v The London Metal Exchange [2014] EWHC 890 (Admin) (27 March 2014) URL: http://www.bailii.org/ew/cases/EWHC/Admin/2014/890.html Cite as: [2014] EWHC 890 (Admin)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		27/03/2014

Mr Justice Phillips:

1. On 1 July 2013 the Defendant ("the LME") issued a consultation notice inviting comments from participants in the international metals market on a change the LME proposed to make to the rules for LME approved warehouses. 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 ("the Proposal").
2. The consultation period ended on 30 September 2013. On 7 November 2013 the LME announced its decision to implement a new rule for its warehouses with effect from 1 April 2014 in the terms proposed in the consultation notice, save that the threshold for the application of the linkage formula would be 50 days rather than the proposed 100 days ("the Rule").
3. In these proceedings the Claimant ("Rusal"), a leading global producer of aluminium and alumina, seeks to challenge the LME's consultation process and its subsequent decision. It is not in dispute that the LME is subject to the principles of public law and amenable to judicial review.
4. Rusal contends (and the LME does not dispute) that the implementation of the Rule will result in an immediate, if short-term, fall in the global open market (or "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. In that context, Rusal's grounds of challenge are:

(1) that the consultation process was procedurally unfair, principally because the LME consultation notice did not identify (let alone explain the reason for discounting) the main alternative option for reducing warehouse queues, namely, banning warehouses from charging rent for the period metal is held in a queue (or otherwise capping the amount of rent so charged), an alternative which Rusal asserts would cause significantly less damage to metal producers.

(2) that the LME's decision to implement the Rule was made without adequate consideration of or inquiry into relevant matters, including the effect the Rule would have on the all-in price of metal and the consequent effect on metal producers, the LME having made a deliberate decision not to consider that factor.

(3) that the decision was a breach of Rusal's human rights, being a disproportionate interference with Rusal's right to peaceful enjoyment of its possessions (namely, its goodwill or economic interests) or was otherwise discriminatory as between metal producers and warehouse operators.

5. On 7 January 2014 Carr J. directed that the Claimant's application for permission to bring judicial review proceedings, and the substantive hearing if permission is granted, be listed together for a "rolled up" hearing. The case was argued before me on that basis.

The factual background

6. Although certain aspects were only clarified during the course of the hearing in supplementary witness statements from officers of the LME, the background to and progress of the consultation and the LME's decision are not now disputed in any significant respect and are summarised below.

The LME

7. The LME, established in 1877, is the world's premier base metals market. It operates futures and options markets in eleven industrial base metals. For eight of those metals, including aluminium, the daily LME official prices have become the accepted reference prices for the world trade in those metals.
8. The LME is a Recognised Investment Exchange ("RIE") within the meaning of section 285 of the Financial Services & Markets Act 2000 ("FSMA"). As an RIE, the LME has a responsibility to uphold standards on its exchange in accordance with the FSMA Recognition Requirements Regulations 2001, including (pursuant to paragraph 4(2) of Schedule 1 to the Regulations) ensuring that it has (i) rules and procedures to provide for fair and orderly trading and (ii) satisfactory arrangements for securing the timely discharge of the rights and liabilities of the parties to transactions effected on the exchange.
9. The LME provides three main functions: (a) a price-discovery mechanism for the metals traded; (b) a price-hedging mechanism for producers and consumers of metals traded; and (c) a source of last resort for the physical delivery of those metals.
10. The LME is an on-exchange forwards market. This means that LME contracts are based on physical settlement by the transfer of ownership of metals stored in LME approved warehouses. Although only a very small proportion of LME trades actually result in physical settlement, the possibility of physical delivery (out of one of more than 700 LME approved warehouses worldwide) results in price convergence between the LME price and the price of physical metal, so that the LME price is truly reflective of supply and demand.
11. Consignments of metal enter the LME system on delivery to an LME approved warehouse, at which point the warehouse issues a bearer document, known as a warrant, for each lot of LME-approved metals. The size of a lot is defined per metal, and in the case of aluminium, is 25 tonnes. LME warrants are used as the means of delivering metal under LME contracts.
12. LME-warranted metal can only be stored in LME approved warehouses. Warehouse companies must meet strict criteria before they are approved by the LME. Once approved, a warehouse company enters a warehousing agreement with the LME on standard terms and individual warehouse buildings are licensed by the LME. There are currently more than 700 LME approved warehouses across 36 locations in 15 countries. The total metal delivered in and out of these warehouses exceeded 8.7 million tonnes in 2013.
13. The LME price, which is used as the global benchmark for physical contracts, is a price for metal traded 'in-warehouse'. This entails that the additional costs associated with making delivery of "free metal" outside the constraints of the LME system are not reflected in the LME price, with the result that the physical market price for aluminium will be higher than the LME price. The physical market price of aluminium, known as the "all in" price, is therefore made up of the LME price plus a premium.

The emergence of problems with warehouse queues

14. The international financial crisis of 2008 led to a sharp fall in industrial demand for metal, particularly from the motor car industry in the United States, and resulted in a huge surplus of aluminium. Stocks of that metal accumulated in various warehouses, particularly in Rotterdam, Baltimore and Detroit. This was exacerbated by increased investment in commodities, being held as a hedge against exposure to financial products, leading to yet further increases in stocks of aluminium held at LME approved warehouses.
15. These factors resulted in substantial queues developing at certain warehouses so that a warrant-holder who presents a warrant for cancellation (in exchange for delivery of the lot of metal to which the warrant related) will have to wait for weeks or even months for the metal to be loaded out. The problem is exacerbated by the fact that a seller of metal on the LME is entitled to (and usually will) settle the trade by delivering to the buyer the "worst warrant" held by the seller in respect of the relevant metal, that is to say, the warrant representing metal at the back of the queue.
16. It is recognised that the growth of long queues, seen particularly in five major LME approved warehouses, has several damaging effects on the LME system. First, by denying owners reasonable access to their metal, queues undermine the role of the LME as a market of last resort. Second, the cost of paying rent to the warehouses in respect of the period during which the metal is held in a queue causes the LME price to be discounted even further from the all-in price, resulting in an increased divergence between the LME price and the all-in price of metal, thus damaging the role of the LME in discovering the true market price of metal. Third, the delay in physical settlement of LME trades gives rise to regulatory issues. Those factors, taken individually and in combination, risk damaging the LME's reputation.

The Europe Economics report

17. In 2010, following numerous complaints about the length of queues at LME warehouses, the LME commissioned Europe Economics to prepare an independent assessment of whether the requirements in the LME warehouse contract for rates of physical delivery-out were satisfactory. Europe Economics carried out research between September 2010 and February 2011 and produced a report for the LME dated 12 May 2011 ('the EE Report').
18. The EE Report set out in detail the damaging effect of long queues on price discovery. It explained that the representativeness of the LME price is dependent on arbitrage (or the possibility of arbitrage) with the physical market, ensuring that the LME price and physical prices will converge. Unduly lengthy queues for the delivery of metal increase the cost of arbitrage in three ways: (a) rent must be paid during the time in which the metal is in the queue; (b) the length of the queue is uncertain and (c) the inconvenience of being obliged to wait for delivery gives rise to other costs such as the difficulty of arranging delivery for a date further into the future.
19. In other words, the EE Report explained, because of the impediments to arbitrage caused by queues, the value of warranted metal in LME warehouses concerned is lower than it would otherwise be in relation to the value of metal physically delivered. The result is an increase in physical premiums, which now contain a component attributable to warehouse queues. This may be damaging to the price discovery process because (a) the reduction in value due to queues is not related to features of the physical metal market, but is a function of warrant cancellations and LME loading-out requirements; and (b) fluctuations in the LME price will be related to unpredictable changes in the length of queues as well as changes in physical supply and demand.
20. The EE Report addressed five main policy options that the LME might consider to address the problem, the first four seeking to impose controls on stocks or load-out rates. The fifth option was to 'invite warehouses to offer rent rebates' for metal held up in long queues. Although referred to as "inviting rebates", the proposal was in fact to ban or cap rent for metal in a long queue.
21. The EE Report recorded that this option was suggested by some stakeholders on the basis that it would help to remove the warehouse companies' incentives not to deliver metal promptly while, at the same time, compensating the owners of metal for the inconvenience of the delay. Europe Economics noted that, while there was no great demand for such rebates, some stakeholders expressed interest in them and they could, in principle, help to address the problems.
22. After discussing the option, Europe Economics recorded the argument that the LME was, under existing legislation, prevented from interfering in pricing and that, even if legislation did not prevent the LME from requiring rent rebates, their universal and enforceable imposition would require a change in the warehousing agreements. Such a change would have to occur by agreement with warehouses, rather than by imposition, and would require extensive negotiation, the conclusion of which would not be guaranteed to be successful. The EE Report concluded that, while rent rebates would in principle address the issue of queues, it was not clear that they were enforceable. Significant discussion would be needed to establish the scope of this policy option to be successfully introduced.
23. The EE Report was not published in full, but the LME did publish the Recommendations section, together with an Executive Summary. The principal recommendation was that loading-out requirements be implemented applying higher delivery out requirements to warehouses with stocks above 300,000 tonnes and that these requirements should be reviewed formally at intervals of six months. Should persistent and lengthy queues continue, the level of stocks at which higher loading-out requirements apply should be progressively lowered.
24. As for rent rebates, the Executive Summary stated that they "could address some aspects of the problem, though they are subject to some significant feasibility issues which could hamper their effectiveness". The Recommendations section proposed that "rent rebates be discussed, bearing in mind that their effectiveness is contingent on their application to warehouses with long and persistent queues".

The LME's implementation of the EE Report Recommendations and its effect

25. The LME duly adopted the primary solution proposed in the EE Report by increasing minimum load-out rates with effect from 1 April 2012, although the increased minimum load-out rate was lower than that suggested.
26. As further recommended, the LME continued to review the queues at warehouses following the implementation of the increased load out-rate. The issue was discussed at an Aluminium Committee meeting on 11 June 2012 (attended by a representative of Rusal). Following that meeting, email correspondence (to which Rusal was again a party) expressed the view that "the adjustments in minimum load-out rate in April have proven to be insufficient to resolve the issue. The queues are now even longer and the warehouses continue to increase their incentive offer, adding further up pressure to local premia in the over supplied global market…".
27. In June 2012 the LME's Executive Committee produced a report entitled "LME Warehouse Analysis - Description and Appraisal of the Proposals". The report set out various proposals for solving the issue of warehouse queues, but did not include banning/capping rent in its list of nine proposals. The LME explained in its Skeleton Argument that the option of banning/capping rents was not listed because (as confirmed in the second statement of Diarmuid O'Hegarty, the Deputy Chief Executive and former General Counsel of the LME) that option had been considered and consistently discounted as a viable option by the LME in the light of advice obtained from internal and external counsel in 2000, 2005, 2007 and 2012 and having sought the views of the European Commission in 2000 and 2007.
28. The Executive Committee Report concluded that the only current realistic option was to "change load-out rates to a policy of the larger of current policy levels OR a monthly total equal to the monthly delivered in tonnage (basis size warehouse)".
29. Concerns as to effect of queues continued to be expressed, including a report in the Financial Times on 13 September 2012 that Rusal saw a problem in the fact that the LME did not reflect the real market and was warning of the risk of other exchanges launching competing aluminium contracts.
30. On 21 December 2012 the Chief Executive of the LME, Martin Abbott, stated in a letter to Rusal that the LME believed that the existing measures to reduce queues went "as far as it's reasonable to address the effect on the aluminium market of long aluminium queues in some locations. Such queues are the result of broader macro-economic forces at play in the aluminium industry. The LME has said on many occasions that the proper role of the LME is to reflect the effect of those macro-economic forces and not to try to distort them".
31. In the later half of 2012 Hong Kong Exchanges and Clearing Limited ("HKEx") agreed to acquire the LME, the acquisition completing on 6 December 2012, following which HKEx's Chief Executive, Mr Charles Li, joined the Board of the LME. Matthew Chamberlain, who had been advising HKEx on the acquisition, had already joined the LME as its Head of Strategy and Implementation in October 2012.
32. It seems that the LME's view as to whether it should consider further intervention to deal with warehouse queues evolved following (and perhaps because of) HKEx's acquisition. By early 2013 it had been agreed between Mr Li and Mr Abbott that Mr Chamberlain should undertake a fresh review of the options available.

Mr Chamberlain's review in early 2013

33. On January 2013 Mr Chamberlain produced a memorandum entitled "LME Warehousing-Perimeters of a Post-Completion Review", setting out certain "key principles", the third of which was as follows:

"The review should take an "ab inito" view of the various suggestions which have been made by users to both HKEx and the LME. Although many of these have been considered and rejected in the context of both the LME's internal work and the Europe Economics Report, it would be important to present a clear view of why these potential solutions are not desirable or feasible."

34. The memorandum noted that the LME had broad powers over the warehouses under the terms of the warehouse agreement, but also noted that one of the constraints on any proposed approach was UK and EU competition law, stating "any solution which envisaged limiting warehouse incentives or capping metal deposited into any particular warehouse would likely be illegal under competition law."
35. Mr Chamberlain set out five categories into which the options he considered to be available to the LME could be placed, none of which related to the banning/capping of rents. The last category he listed was "Linkage between load-in and load-out." In his first witness statement Mr Chamberlain explained that the suggestion of linking loading-in and loading-out had been made by Mr Li. This is further apparent from the following:

(a) an email from Mr Chamberlain to LME's Management dated 28 March 2013 in which he stated "I am working here on the basis that we are presenting only two options, namely (i) status quo and (ii) the Charles solution. I haven't heard that there's any other approach in which we feel sufficiently strongly that we wish to table it – but pls say if you disagree on this."

(b) a further email dated 7 April 2013, circulating drafts of the materials for the Board, Mr Chamberlain stated as follows: "Just to remind everyone, the idea is to provide (i) an overview of the current situation, (ii) an analysis of Charles' proposed solution, (iii) a comparison between that solution and the status quo."

36. The results of Mr Chamberlain's review were presented to the LME's Board on 24 April 2013 (the evening before the April meeting of the Board) with the aid of a slide deck entitled "LME Warehousing – Situation Review and Potential Solution". The introduction noted that key dangers to the LME of continued queues and no further solutions were reputational and the risk of increased regulatory scrutiny. While it was recognised that the LME might be unable to implement changes that meaningfully impact the economics or the substance of the issue, the Board was asked to approve further consulting the market on a specific proposal; "the linked load-in and load-out" solution.
37. The review contained a section entitled "Universe of Potential Solutions", listing nine potential responses to queues, but not referring to the possibility of banning/ capping rents. The slides addressed the linked load-in and load-out solution in detail. The final slide, which charted the path forward, indicated that, if the Board decided to consult the market, the only two outcomes would be implementing a new rule introducing the linkage of load-in and load-out or withdrawing any proposal and continuing to monitor the situation thereafter.

The April 2013 Board meeting

38. At the April 2013 board meeting the Board decided in principle to consult on the linked load-in and load-out solution.
39. According to both the Chairman of the Board, Sir Brian Bender, and Mr Chamberlain, the Board considered whether it would be valid to take into consideration the fact that a solution would have negative consequences for metal producers such as Rusal by decreasing the all-in price of metal. On the basis that the LME's regulatory duty was to maintain an orderly market and not to achieve a certain price for the benefit of any particular part of the market, the Board concluded that it should not give any significant weight to any such negative consequences.

The Board meeting of June 2013

40. Mr Chamberlain made a further presentation to the Board at its meeting on 14 June 2013 in which he recommended consulting the market on the implementation of the linked load-in load-out solution, save that the target queue length should be 30 days rather than 100. Mr Chamberlain is recorded as having outlined the possible options available to the Board as being "to implement the Proposal; to implement the Proposal with modifications as a result of the consultation; or not to implement the Proposal".
41. The Board agreed to commence the consultation, but with the market being asked to comment on a target queue length of 100 calendar days and not the 30 days suggested by Mr Chamberlain.

The Consultation Notice of 1 July 2013

42. On 1 July 2013 the LME published the Consultation Notice in respect of the Proposal.
43. The Notice referred to Mr Chamberlain's internal review and the EE Report, but did not attach either document and, in particular, did not refer to the EE Report's conclusion that, while rent rebates would in principle address the issues of queues, it was not clear that they are enforceable. Indeed, the Notice did not discuss any of the alternative proposals for dealing with queues. The Notice stated as follows:

"In reviewing warehouse arrangements, the LME has previously considered a complete list of alternative policy options for delivery out rates, but it was not deemed appropriate to implement any option [other than increasing load-out rates] following feedback from the market. However, in light of the persistence of the situation due to continuing macro economic factors, and the negative impact on market participants, the LME has decided to revisit the most workable of these options, and open a consultation process with the industry as a whole."

44. The Notice further stated:

"In the interests of stimulating an informed debate and encouraging responses from all interested parties, the LME sets out in this Notice its preferred proposal (the "Linked Load-In/Load-Out proposal") for changes to the LME policy in relation to load-out rates, and seeks to lay out the potential positive and negative impacts of such a change. For the avoidance of doubt, the Board of the LME, while noting stated user opinions, has not yet formed a conclusive view on whether any action would be in the best interests of the market, and invites broad feedback on this topic. However, to the extent that action is taken, and following extensive review work, the LME believes that a proposal broadly consistent with that specified in this Notice would best balance the competing demands of LME members, the metals industry and warehouse operators."

45. There then followed a detailed explanation of the Proposal. The Notice concluded that, following the consultation period, the Board might decide to (i) enact the requirements set out in the paper (ii) enact modified versions of such requirements or different requirements, or (iii) not enact any new requirements. Mr Chamberlain, in his second statement served on the first day of the hearing, explained that the Board decided to add the words "or different requirements" to the draft paper presented at its 14 June 2013 meeting.

Responses to the consultation

46. There were 33 written responses to the consultation and over 70 meetings took place with market participants. At least ten of the 33 written responses recommended pursuing the alternative option of banning or capping rents on queued metals. None of those responses addressed the legal obstacles to that solution which had been identified in the EE Report and upon which the LME had previously received advice.
47. Rusal responded in writing on 19 September 2013. Rusal opposed the proposed change stating "… the argument underlying the …. proposed rule change has not been clearly stated nor supported with Exchange data. Instead, the intent… to accelerate the transfer into the market of an additional two million tonnes of aluminium, accumulated and stored since the financial crisis, is an unprecedented intervention and one that Rusal strongly objects to". Rusal suggested alternative measures designed to improve transparency in the price setting process rather than reducing queues: it did not mention the alternative of banning/capping rents.

The LME's consideration of banning/capping rent for metal in queues

48. The late evidence served by the LME referred to legal advice having been sought in 2013-2014 in relation to the competition law risks for the LME in banning/capping rent. In the course of argument Mr Beloff QC, leading counsel for the LME, confirmed that a further legal review of the competition law issues relating to controlling queues, in particular the issue of banning or capping rents, had commenced during the consultation period, prompted by the not insignificant number of responses received suggesting the banning or capping of rents as an alternative means of reducing queues.
49. On 24 September 2013 the LME consulted its Warehousing Committee regarding the possibility of banning rents in queues. Perhaps not surprisingly, given that the Committee comprised mostly but not entirely representatives of the warehousing companies (including those with long queues at their warehouses), the members of the Committee were not in favour of that solution.

The Board meeting of October 2013

50. On 25 October 2013 Mr Chamberlain made a presentation to the Board using slides entitled "LME Warehousing – Consultation Process Summary."
51. The presentation recorded that there had been significant opposition to the Proposal from producers of aluminium who were "clearly concerned as to the impact on all-in price available for their output". The presentation also contained a section on rents, stating:

"Many respondents have suggested that charges need to be capped (or incentives limited) as a primary policy initiative. Additionally, to the extent that Rule causes warehouses to increase rents, caps may also be required as a secondary response.

However, legal obstacles to any such power still significant.

Key Questions for the Board

- is the Board happy for the Executive to continue investigating the LME's powers in this regard? "

- does the Board however agree that action needs to be taken in advance of the above being known?

52. The Presentation also included a slide entitled "Limit rents in queues – Most commonly-proposed alternative approach", recording that the limitation of rent in queues was cited by many respondents as a more effective approach, but that "Legality unclear at this point, given interference in existing contracts implicitly entered-into by metals owners and warehouses." The key questions for the Board were: "Is the Board happy not to implement this approach at the current time?" and "Does the Board task the Executive with investigating the feasibility of this approach as a future policy option?"
53. The presentation also recorded that there had been significant market focus on queues being reduced to acceptable lengths and recommended that the threshold be reduced from 100 to 50 days.
54. Subject to minor qualifications, the Board accepted the recommendations in Mr Chamberlain's presentation and, subject to any comments from the Financial Conduct Authority, authorised the implementation of the Rule.

The decision notice and the consultation report

55. On 7 November 2013 the LME issued a notice setting out its decision to implement the Rule, accompanied by a report on the consultation.
56. The report recognised that the effect of reducing queues, whilst leading to a rise in the LME price in the long term, was likely to lead in the short term to a reduction in the all-in price of metals, with consequent impact for both producers and stock holders. It was recognised that this effect could be further compounded by the discharge of metals from warehouses causing the market to anticipate a "wall of supply", thus further reducing prices and compounding short term cash flow issues for producers. However the report stated that it was not the role of the LME to achieve a given price for any market participant, and so this could not be a guiding consideration.
57. In addition to considering the Proposal, the report also considered alternatives suggested by respondents. It recorded that a number of respondents had raised banning rent in queues, stating that "of all the proposed alternative routes, the concept of banning queues does appear to be one of the most rational and deliverable" and referring to the option as "the only practical suggested alternative to the Proposal." The report went on to record that this approach has historically been considered by the LME and rejected for various practical reasons, including that it would be a retro-active measure as, if it was to be effective, it would have to apply to metal which was loaded-in under the old rules and that the rule might be open to manipulation by warrant holders seeking to obtain free storage.
58. However, the report did not discount the option of banning or capping rents, but instead recommended that the LME "commit to fully investigate the feasibility of banning the charging of rent in queues. To the extent that it could be practically implemented, reserved as a policy option for the Board to deploy if required."
59. The report stated (apparently mistakenly) that competition law advice had last been obtained in 2005, but (correctly) recorded that a further review was now in progress, stating:

"As explained above, the LME's position has been that an attempt to regulate rents or FOTs [Free on Truck – charges levied by warehouses for delivery] may be problematic under European Competition Law. However, in the light of the prevailing market conditions, regulatory developments and the potential impact of regulatory and political pressure, it seems appropriate to review the scope of the LME's ability to regulate rents and/or FOTs. The legal analysis of this topic is underway. However, the review is unlikely to be completed until 2014. Accordingly it is not advisable to delay the results of the Consultation pending completion of the review."

60. The report concluded by recording the Board's resolution to introduce the Rule, but also recording that it was proposed to review the scope of the LME's powers under competition law to identify and define a set of further policy options for the Board, including the possibility of banning rent in queues.

Ground 1: Procedural Unfairness

61. In R v North and East Devon Health Authority, ex parte Coughlan [2001] QB 213 Lord Woolf MR, giving the judgment of the Court of Appeal, summarised the requirements for a lawful consultation as follows:

"To be proper, a consultation must be undertaken at a time when the proposals are still at a formative stage; it must include sufficient reasons for particular proposals to allow those consulted to give intelligent consideration and an intelligent response; adequate time must be given for this purpose; and the product of consultation must be conscientiously taken into account when the ultimate decision is taken."

62. In R (Medway Council) Secretary of State for Transport [2002] EWHC2516 (Admin) Maurice Kay J rejected the suggestion that the four requirements set out in Coughlan superseded the previously well-recognised general principle that fairness was a requirement of a lawful consultation process, pointing out that fairness is an aspect of what is "proper" – the word used in Coughlan. Maurice Kay J concluded that it is "axiomatic that consultation, whether it is a matter of obligation or undertaken voluntarily, requires fairness".
63. Rusal contends that the LME's consultation was procedurally unfair in the following six respects:

(a) in failing to identify and provide information in relation to alternative options and the reasons why they had been discounted by the LME;

(b) in failing to disclose "key documents" referred to in the Consultation Notice: the EE Report and Mr Chamberlain's review;

(c) in failing to carry out a cost benefit analysis in respect of the Proposal;

(d) in consulting only the Warehousing Committee during the consultation period in relation to the option of banning/capping of rents;

(e) because the LME had a direct financial interest in rents (by reason of the 1.1% stock levy payable by the approved warehouses under their agreement with the LME which it did not disclose), giving rise to an appearance of bias:

(f) in failing to re-consult before implementing the Rule given the change of threshold from the 100 days referred to in the Proposal to one of 50 days.

(a) The LME's approach to alternative options

64. Rusal contends that the failure of the LME to refer to and explain the reason for discounting viable alternatives to the Proposal in the Consultation Notice demonstrates both (i) that the consultation was not undertaken at a formative stage, the LME having closed its mind to any alternative option, and (ii) the LME did not give sufficient reasons to permit intelligent consideration and intelligent responses to the consultation. Rusal also contends that the Consultation Notice was misleading in that it suggested that other options had been rejected "following feedback from the market", whereas certain of the options, including that of banning/capping rents, had apparently been discounted on the basis of advice as to competition law.
65. The LME responds that it was not obliged to consult on every option, but was entitled to consult on its preferred option, being entirely open minded (as confirmed by Sir Brian Bender in his witness statement) as to whether to implement the Proposal, a modification of the Proposal or different requirements, or do nothing at all. The LME further contends that it was not obliged to refer to an option which it had consistently rejected on advice. But, in any event, consultees were able to, and did, provide responses which encompassed alternative options, including banning/capping rents.
66. It is indeed well established that a public body is not obliged to consult on every possible option, but is entitled to put forward its preferred option as a proposal for consideration. In Nichol v Gateshead Metropolitan Borough Council (1988) 87 LGR 435 CA a local authority's scheme for the re-organisation of secondary education in its area was challenged on the basis that the authority had consulted on its proposal and did not outline other options which had been rejected, save by reference to earlier reports of its Education Committee which had considered those options. The first instance Judge had quashed the scheme. In overturning that decision, O'Connor LJ said:

"… the Judge is in effect saying that the formative stage of these proposals was passed as soon as the Council selected a preferred option… this is in effect requiring a referendum; that is not what consultation means. Bearing in mind …the desirability of proposals of some specificity … I do not think it right to try to lay down any rules as to when proposals may be said to have passed the formative stage. I am, however, sure that consultation after the formulating and the deciding upon specific proposals to put out for consideration is plainly while the proposals which are to go to the Secretary of State are still at a formative stage. "

and Sir George Waller stated:

"In the present case it would not be helpful to put before parents all the original possibilities because the authority might then have to decide which of a variety of options, each with support, to accept. When does the formative stage end? In my opinion it ends when the details of the plan have been decided and no alterations can be made."

67. In R (Kidderminster and District Community Health Council) v Worcestershire Health Council [1999] EWCA Civ 1525 a health authority had narrowed down seven options for re-organising its emergency medicine and surgery services to a single preferred option before consulting on that option. The Court of Appeal rejected a challenge to the consultation, Simon Brown LJ stating:

"If, as is clearly established (and is, in any event, only plainly common sense) an authority can go out to consultation upon its preferred option, per O'Connor LJ [in Nicol], or with regard to "a course it would seek to adopt if after consultation it had decided that that is the proper course to adopt" ….. then it seems to me plain that it can choose not to consult upon the less preferred options. It does not, in other words, have to consult on all possible options merely because at some point they were developed, crystallised, canvassed and considered. "

Auld LJ added:

"Here the authority, in its February 1998 consultation paper, indicated that, having considered no less than seven options, it had selected one of them as its preferred option as a proposal for consultation. Having reached the stage of retaining just one proposal under consideration, albeit in a formative state, the authority was entitled to proceed to consultation, as it did, within the terms of regulation 18(1). That provision did not require it to give focus to proposals which it no longer had under consideration. In any event, the process of consultation did not and designedly could not, preclude outright opposition to the one proposed, which opposition might prompt the authority to re-consider it and/or any of its discarded six options and/or to consider any new ones."

68. In the Medway case (above), Maurice Kay J. also recognised that it was permissible for the Secretary of State for Transport to narrow the range of options within which he would consult and eventually decide so that, when consulting on the policy to be adopted by the Government for additional airport capacity in the South East, the Minister was, all things being equal, entitled to exclude the option of expansion at Gatwick. However, Maurice Kay J. went on to consider whether, in circumstances where the option of expansion at Gatwick was likely to re-emerge in future planning enquiries, if only as a preferred alternative solution, it was nevertheless unfair to exclude that option from the consideration, holding that:

"The question really becomes this: knowing that the Claimants will probably and legitimately wish to advocate Gatwick as an alternative solution at a later stage in the decision-making process, is it procedurally unfair of the Secretary of State to operate the consultation process in such a way that the Claimants lose their only real opportunity to present their case on Gatwick without their being in place a Government policy which, realistically, will present them with an insurmountable hurdle? In my judgment, when one considers the decision-making process as a whole, the answer is that to operate the consultation process in that way is indeed procedurally unfair."

69. In R (Montpeliers and Trevors Association) v. City of Westminster [2005] EWHC 16 (Admin), the City had installed barriers preventing the use of two London squares by through traffic, but objections were made by a neighbouring authority and others in the area. The City commenced a public consultation on various options, but excluded the option of retaining the barriers, the option favoured by residents of the squares. Munby J held that the City had not consulted properly because "an option which on any view was of central significance .. had already been excluded from further consideration". He further held, referring to the approach in Medway, that the process was unfair:

"Fairness in my judgment required that there should be a process of consultation in which those being consulted could express their views on all the various options. That never took place. It is no good … saying, even if it is the case, that proponents of the retention of the barriers expressed views supportive of that contention in the course .. of the exercise."

70. In Tinn v SST [2006] EWHC 193 (Admin), Bean J. pointed out that the fairness challenge in Medway succeeded on a narrow basis and also emphasised that in Montpelier Munby J. had castigated the City for having treated the court and the claimants "in a cavalier and almost contemptuous fashion". At [32] he pointed out that "in public law context is everything", before expressing the view that:

"The requirement to consult while the proposals are at formative stage cannot mean that there must be a first round of consultation on whether to reduce the options consulted upon to one, and then a second round of consultation on that one. "

71. In R (Vale of Glamorgan Council) v Lord Chancellor [2001] EWHC 1532 (Admin), the Divisional Court re-emphasised the approach apparent from the Court of Appeal decision in Nichol and Kidderminster, pointing out that [24]:

"… there is no general principle that a Minister entering into consultation must consult on all the possible alternative ways in which a specific objective might arguably be capable of being achieved. It would make the process of consultation inordinately complex and time consuming if that was so."

Elias LJ, giving the judgment of the court, expressed the view at [25] that Medway was an exceptional case, as was R (Madden) v. Bury MDC [2002] EWHC (Admin) 1882. In Madden the local authority had consulted over the proposed closure of two care homes. Richards J. held that the consultation was unfair because "a proper understanding of the true reasons for the proposed closure would require at the least a comparison with the other home that the council proposed to retain …". The case was regarded as exceptional by the Divisional Court because some reference to alternative closures was necessary in order to provide a proper explanation of the reasons for the proposed closure.

72. Miss Carss-Frisk argued that the effect of the authorities referred to above is that, whilst a decision maker issuing a consultation is entitled to have a preferred option, there should be consultation on every viable option. She refers to the statement to that effect in section 9 of Chapter 7 of De Smith's Judicial Review 7^th Ed., which cites Medway and Montpelier in support of the proposition.
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.
74. 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. The reasons I have come to this view are as follows:

(a) The consultation arose because the implementation of the prime recommendation in the EE Report (contained in the published Recommendations section) had not resolved the problem of queues. Requiring rent rebates was the only other option identified in the Recommendations as capable, in principle, of addressing queues. Indeed, the EE Report had recommended that the option be "discussed". Given its status as (apparently) the next obvious option referred to in the very report referred to in the second paragraph of the Consultation Notice, some explanation of the option, the result of the recommended discussions and the reason why the option had been discounted was necessary for a proper understanding of the LME's thinking in relation to the Proposal, just as reference to the alternative closure option was necessary in Madden.

(b) Given previous references to the option, it was inevitable that responses to the consultation would propose or otherwise address banning/capping rents, but would be doing so in ignorance of (and possibly misled by the Consultation Notice as to) the very specific and technical reason why that option had been rejected. The fact that 10 responses proposed or supported the idea, but did not address possible contractual or competition law concerns, highlights the inherent unfairness of the process. It is certainly the case that the 10 responses were made without the information necessary to permit intelligent consideration and response. The procedure adopted by the LME also entailed that others who might have supported rent rebates, or contributed to the debate on legality, may have been unaware of the option and the issues which it engaged.

(c) The unfairness of the above is further illustrated and increased by the fact that the LME recognised during the consultation period that further discussion and legal review of the option of banning/capping rents was necessary (and, indeed, was commenced during the consultation period). It is unclear, and no explanation was provided by the LME, as to why such discussions and review had not commenced earlier or the consultation postponed pending their completion. In my view it was patently unfair to continue with the consultation without informing the market that it was simultaneously discussing and reviewing other options which had not even been referred to in the Consultation Notice.

(d) Given that the LME recognised that the Proposal would likely result in losses being suffered by metal producers, but decided to discount that as a factor, fairness demanded that they should have the opportunity to consider and comment on an alternative that might cause them less damage. Whilst the LME may regard banning/capping rent as a possible further step to reduce queues in the future, metal producers will by then have suffered the full losses caused by the introduction of the Rule: by failing to include banning/capping rents in the consultation, the LME has deprived the metal producers of any opportunity to reduce those losses. The situation is therefore analogous to that in Medway.

75. I have reached the above conclusion that the LME consultation was procedurally unfair notwithstanding a number of further arguments advanced on its behalf by Mr Beloff as follows.
76. First, it is said that LME was justified in not referring to the option of banning/capping rents because, given the significant risk of regulatory action in respect of which no comfort could be obtained, it was simply not and never could be a viable option. However, given that the LME has not disclosed any advice it has received in the past and is now engaged on what must be (given the time taken) an extensive review of the competition law issues with a view to considering the option in future, it is in my judgment simply not open to the LME to take that stance.
77. Second, the LME relies on the fact that, although the competition law issues arising in relation to capping/banning rents were not referred to in the Consultation Notice, they had been referred to in an earlier report from Europe Economics which had been published in full in 2007, were identified in the May 2013 edition of Metal Bulletin Weekly and also in a Media Presentation accompanying but not referred to in the Consultation Notice. However, the fairness of a consultation can only be judged on the basis of the consultation documents themselves. An otherwise unfair process cannot be rendered fair on the basis of speculation as to whether (some) consultees may have considered other information.
78. Third, Mr Beloff points to the fact that under the relevant FSMA Recognition Requirements, the LME is required to satisfy the Financial Conduct Authority ("the FCA") as to its procedures for consulting users in relation to any proposed change in its rules, the FCA having regard to whether the LME publicises a formal consultation paper which includes clearly expressed reasons for the proposed changes and an appropriately detailed assessment of the likely costs and benefits. Mr Beloff relies on the fact that the regulatory requirement is to consult on a proposed change to rules (and not alternatives which are not proposed) and also on the fact that on 7 November 2013 the FCA issued a statement expressing its view that the Rule was consistent with the LME's regulatory obligations. However, neither the regulatory context nor regulatory approval seems to me to affect the court's task of assessing the fairness of the consultation. Further, it may well be that other options would also have met with FCA approval.
79. Fourth, Mr Beloff emphasises that the test is not whether the consultation accorded with best practice, but "whether the process was so unfair as to be unlawful": R (JL & AT Baird) v. Environment Agency [2011] EWHC 99 per Sullivan J at [51]. For the reasons set out above, I am of the view that the consultation in this case was indeed so unfair as to be unlawful.

(b) Non-disclosure of "key" documents

80. Rusal contends that, in failing to disclose the full EE Report and Mr Chamberlain's review (each of which referred to legal issues arising from the banning or capping of rents), the LME failed to provide sufficient information to enable an intelligent consideration and response to the consultation.
81. As I have found above that the consultation was unfair in failing to refer to the option of banning/capping rents and to explain the issues arising in that regard, the failure to disclose documents which considered those matters was at most an aspect of that unfairness, but does not otherwise add to the debate. The decision not to disclose the documents in question would not, in my judgment, have in itself rendered the consultation unlawful if the LME had been entitled to consult solely on the Proposal.

(c) Lack of risk or cost-benefit analysis

82. Rusal contends that, although the LME recognised in paragraph 15 of the Consultation Notice that the Proposal required "careful consideration and risk analysis", it did not provide any detailed analysis of the significant impact the Proposal would likely have on the market, limiting itself to a broad warning of the possible risk of creating an artificial supply and demand dynamic in LME markets. Rusal's case is that the absence of detailed analysis entailed that consultees could not give the Proposal intelligent consideration.
83. The parties adduced conflicting opinions from experts in consultation processes (whose evidence was not otherwise relied upon at the hearing before me) as to whether the "market impact" was a proper subject of the cost-benefit analysis to be expected of a body such as the LME issuing a consultation. In my view, opinions as to what might be expected in general are of little assistance in assessing the fairness of the particular consultation. In my judgment, given the range of interests, the substantial number of variables and the complexity of any assessment of the likely effect on prices and market dynamics, the LME could not fairly have been expected to provide a detailed analysis of the market impact of the Proposal. It is reasonably to have been expected that affected parties would assess the likely impact on their specific interests in the market.

(d) Consulting only the Warehouse Committee on banning/capping rents

84. As indicated above, the fact that the LME had discussions as to banning/capping rent with representatives of the warehouse companies during the consultation period was, in my judgment, an aspect of the unfairness of excluding that option from consideration in the consultation.

(e) Apparent Bias of the LME

85. Rusal acknowledged that the conflict of interest upon which it relies is inherent in the structure of the LME and its warehousing arrangements. Rusal further recognised the doctrine of "necessity", as explained in section 6 of chapter 10 of De Smith (above), extends to situations where "the administrative structure makes it inevitable that there is an appearance of bias", so that the decision-maker is not disqualified.
86. Rusal contends, however, that the LME could and should have taken steps to address the appearance of bias, for instance, by setting up an independent advisory committee or other independent structure.
87. However, the ultimate decision to accept or reject any independent recommendation would have to be taken by the LME itself (through its Board) and could not properly be delegated, entailing that any appearance of bias could not be displaced, precisely because it is inherent in the administrative structure of the LME. In my judgment the doctrine of necessity applied in this case and, given the necessity for the LME to act where it appeared to have a conflict, there was no obligation to adopt some half-way measure to mitigate the appearance of bias.
88. But in any event the LME's stock levy, although only referred to in a footnote in the consultation report, is an integral part of the LME's structure, well known throughout the marketplace and is certainly known to Rusal. In those circumstances Rusal cannot sit back and then raise the issue of bias after the event, but must be taken to have waived its objection: see De Smith (above) paragraph 10-061.

(f) Failure to consult on the reduction in the threshold

89. Rusal contends that the reduction in the threshold at which the Rule would apply from 100 days to 50 days was a significant change, which will have the effect of further reducing premiums and releasing yet more metal onto the market. Rusal further complains (i) that the LME was plainly aware of the possibility of reducing the threshold (Mr Chamberlain having proposed 30 days initially) but acted unfairly in not specifically disclosing that possibility in the Consultation Notice and (ii) that the reduction was justified on the basis of the concerns as to the needs of physical users needing access to their metal, a significant change of rationale.
90. Rusal's argument is that, even if the consultation was (contrary to my finding above) otherwise fair and lawful, the LME should not have implemented the Rule adopting the lower threshold without conducting a further consultation on that change.
91. In R (Smith) v. East Kent Hospital NHS Trust [202] EWHC 2640 (Admin), the question arose as to whether a health authority was under an obligation to re-consult when it had made changes to its proposed plan for re-organisation. Silber J held:

"The concept of fairness should determine whether there is a need to re-consult if the decision-maker wishes to accept a fresh proposal but the courts should not be too liberal in the use of its power of judicial review to compel further consultation on any change. In determining whether there should be further re-consultation, a proper balance has to be struck between the strong obligation to consult on the part of the health authority and the need for decisions to be taken which affect the Health Service. This means that there should only be re-consultation if there is a fundamental difference between the proposals consulted on and those which the consulting party subsequently wishes to adopt."

92. Whilst the change from 100 to 50 days might have a significant quantitative effect, it does not, in my judgment, entail that there is a fundamental difference between the Proposal and the Rule. The change is one of degree to just one factor in an otherwise unchanged scheme. The concept and mechanism of the solution are otherwise completely unaltered.

Ground 2: Failure to conduct a sufficient enquiry/failure to consider relevant matters

93. Rusal makes four complaints under this heading.

(a) Failure to consider alternative options

94. The LME's acceptance during the course of the hearing that it had commenced a fresh competition law review during the consultation period, prompted at least in part by the number of responses which supported banning/capping rents, is in my judgment tantamount to an admission that it had failed to make sufficient inquiry and had failed to consider relevant matters prior to commencing the consultation. If those responses required further inquiry, it is difficult to see why such inquiry was not also required by the EE Report and Mr Chamberlain's memorandum, nor why such inquiry was not undertaken and completed prior to any consultation. I consider that on this basis also, which is closely linked to the procedural fairness arguments above, the consultation process was unlawful.

(b) Failure to consider the effect of the Proposal on the all-in price

95. Rusal objects to the LME's express decision not to take into account the depressing effect the Proposal would likely have on the all-in price of metal, to the disadvantage of metal producers such as Rusal. It is asserted that the LME's obligation to maintain an orderly market does not exclude and may in fact require that consideration be given to the effect of "major market intervention" specifically designed to affect prices.
96. In my judgment, however, the LME's approach to dealing with queues cannot be criticised in this respect. In dealing with a recognised problem in the market, it was reasonable and indeed essential to approach the issue uninfluenced by the competing interests of buyers and sellers in the effect on price, unless such effect would be such as to damage the market. Given Rusal's own evidence as to the massive fluctuations which have been seen in the price of aluminium in recent years, the relatively minor and short term effect the Proposal is likely to have on prices does not appear to be of great significance. It would be improper for the LME to take into account which category of its users would win and which would lose in any such price effect.
97. Rusal point to the fact that the LME, in paragraph 6.5.2.1.1 of the consultation report, did take into account the likely adverse effect of a price-drop on metal producers in explaining why it rejected the option of further increasing load-out rates. However, it is clear that the LME regarded this option as giving rise to a risk of such substantial price reductions that there would be long-term damage to the market as smelters went out of business, resulting in a reduction in supply and a longer term increase in prices.

(c) Failure to consider profits made by warehouse owners

98. Rusal contends that the LME Board could not properly and fairly take into account (as it was invited to do by Mr Chamberlain) the effect that banning/capping rents would have on affected warehouses without first considering the profits the warehouses had already made from such rents, a step it did not take.
99. However, in my judgment the more important question for the LME was whether the option would jeopardise the LME's system by causing warehouses to withdraw from the LME network. The fairness or otherwise of profits being made by the warehouses was not a matter the LME should or could have considered, any more than it should or could have considered the effect of options on the profits of other market participants.

(d) Failure to analyse the effect of reducing the threshold

100. Rusal complains that the threshold of 100 days, itself described by the LME in the consultation report as "arbitrary in nature", was reduced without any assessment or analysis of the effect of so doing.
101. However, the length of the threshold was considered on several occasions by the Board and arrived at on the basis of various factors, including responses to the consultation as to what delays were regarded as acceptable. In my judgment the LME was entitled to take a broad approach to selecting a threshold, not least because the threshold could be varied once its effect was seen in practice.

Ground 3: Human rights

102. In the course of oral argument Miss Carss-Frisk accepted that Rusal cannot succeed on its contentions based on the Human Rights Act unless it also succeeds on one of the first two grounds, the matters relied upon as constituting disproportionate interference with Rusal's possessions or discrimination being the very matters raised in grounds 1 and 2.
103. 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.

Conclusion

104. In summary, I have found the LME's consultation to have been unfair and unlawful on the first two grounds advanced by Rusal. Although it has not been necessary for me to decide matters raised by the third ground, that ground is plainly arguable. I therefore grant permission to Rusal to bring proceedings for judicial review on all three grounds, allow the substantive application on grounds 1 and 2 and quash the LME's decision to implement the Rule.