Consulting on a single option - R (United Company Rusal Plc) v The London Metal Exchange

02 April 2014

In Rusal the Administrative Court was asked to find that a decision by the London Metal Exchange to consult on a single preferred option was unfair. The challenge was one of the few that has succeeded on this basis.

Background

The London Metal Exchange (the LME) is the world's premier base metals market. It operates futures and options markets in eleven industrial base metals, including aluminium. Under the Financial Services and 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, as well as securing the timely discharge of the rights and liabilities of parties to transactions effected on the exchange.

The LME wished to address the problem of increased wait-times (or queues) for delivery of aluminium from the approved warehouses in which it was stored. These queues resulted from a fall in demand after the 2008 crash which, together with people using metals to hedge against exposure to financial products, led to increased accumulation of aluminium stocks. 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. They also had an impact on the pricing of aluminium on its exchange as against the price obtainable on the open market.

The LME went out to consultation on the single proposal that, where a warehouse had a wait-time 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 Preferred Option). 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 consultation did not include details of other options that had been considered and rejected by the LME, including the main alternative option - banning warehouses from charging rent for the period metal is held in a queue (or otherwise capping the amount of rent so charged) and requiring rebates of such rent (the Rebate Option). This option had been rejected initially because the LME had considered it unenforceable due to contractual or competition law issues.

The claimant, a leading global producer of aluminium and alumina, sought to challenge the LME's consultation process and its eventual decision to adopt a variant of the proposal it had outlined during the consultation. The LME did not dispute that it was a public authority and hence amenable to judicial review.

The challenge

The primary challenge brought against the LME was that its consultation process was procedurally unfair, principally because it did not identify - or explain the reason for discounting - the Rebate Option as the main alternative for reducing warehouse queues.

Phillips J agreed that 'in the particular (and perhaps exceptional) context in which it arose', fairness demanded that the consultation should encompass the Rebate Option. This was because -

  1. The Rebate Option was the only alternative identified in the recommendations put to the LME by its consultants as capable, in principle, of addressing queues. Given its status as the next obvious option, some explanation of the Rebate Option and the reason why it had been discounted was necessary for a proper understanding of the LME's thinking in relation to the Preferred Option.
  2. Given references to the Rebate Option in previous documents, it was inevitable that responses to the consultation would propose or otherwise address banning or capping rents, but would be doing so in ignorance of the very specific and technical reason why that option had been rejected. The fact that ten responses to the consultation proposed or supported the Rebate Option, but did not address possible enforcement concerns, highlighted the inherent unfairness of the process as those 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 the Rebate Option, 'or contributed to the debate on its legality', may have been unaware of the option and the issues which it engaged.
  3. The unfairness was further illustrated and increased by the fact that the LME recognised during the consultation period that further discussion and legal review of the Rebate Option was necessary and commenced that further consideration during the consultation period. 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 been referred to in the consultation.
  4. The LME recognised that its Preferred Option would likely result in losses being suffered by metal producers, but decided to discount that as a factor. Fairness demanded that metal producers should have the opportunity to consider and comment on the Rebate Option as an alternative that might cause them less damage. While the LME may regard the Rebate Option as a possible further step to reduce queues in the future, metal producers would by then have suffered the full losses caused by the implementation of the Preferred Option. By failing to include the Rebate Option in the consultation, the LME had deprived metal producers of any opportunity to reduce those losses.

Commentary

The decision in Rusal is interesting as it joins the short list of exceptional cases in which the court has been prepared to find that a public body was unable to discharge its obligations in public law by simply consulting on its preferred option.

One of the requirements of a lawful consultation is that it must be undertaken at a formative stage. Previous claimants have sought to argue that this formative stage has passed once a preferred option has been identified and that consultation on such a preferred option takes place at too late a stage to be meaningful.

The courts have not agreed with this analysis and there is a substantial body of case law from the Court of Appeal and Divisional Court to the effect that a public body is not required to consult on every option which it has considered and rejected. Rather it may narrow the range of options on which it consults, including consulting on a single preferred option. Phillips J was clear in Rusal that this continues to be the default position.

However, there is an overriding requirement that any consultation process must be fair and the courts have been prepared to find that in some (albeit rare) circumstances, fairness requires a consultation to canvas alternative options in addition to a preferred option.

Consultation forms an important part of many decision-making processes. Challenges to consultation processes are relatively common and, if successful, can lead to considerable delays for defendant authorities while the consultation is re-run in a lawful manner.

Drawing on the comments made by the judge in Rusal we therefore recommend that public bodies consider the following questions before going out to consult on a single preferred option and seek further advice where necessary -

  1. Is the preferred option the only option under consideration? If other options are still being investigated, particularly if they are viable and obvious alternatives to the preferred option, these other options should be included in the consultation.
  2. Are any alternative options likely to re-emerge at a later stage of the decision-making process and, if so, is the present consultation the only opportunity for stakeholders to advocate those alternative options on the basis of a level playing field? It may be, for example, that alternative options may be considered again at a later stage during which there will be less opportunity for stakeholder involvement. Alternatively, by the time of such further consideration, the preferred option may have become so entrenched as to be hard to overturn. In either event, the consultation would be the only time at which stakeholders could advocate an alternative option on a level playing field and, if this is the case, they should be given the opportunity to do so.
  3. Is discussion of any options that have been discounted necessary to fully understand the reasoning behind the adoption of the preferred option? For a consultation to be lawful consultees must be provided with sufficient information to allow them to intelligently respond to the option put forward. If consultees can best understand why a certain option is preferred through an explanation as to why other options have been discounted then that explanation should be provided.
  4. Will the adoption of the preferred option lead to losses being incurred by stakeholders whereas another viable option will not? If so, then consultees should be given the opportunity to comment on those alternative options. Likewise, if the adoption of a preferred option would place stakeholders in a more disadvantageous position than a viable alternative, the appropriateness of consultation on such an alternative will increase in proportion to the degree of disadvantage likely to be suffered.

Although it remains the position that a public body may consult on a single preferred option we hope that consideration of the above questions will assist public bodies in identifying those rare instances in which a court may consider such a course unfair and thus reduce the costs and delays that can result from a successful challenge.


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.