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QUEEN V LONDON METAL EXCHANGE LIMITED ALBATROS WAREHOUSING BV [2000] EWHC Admin 314 (30th March, 2000)
IN THE HGH COURT OF JUSTICE CASE NO: CO/2470/98
QUEENS BENCH DIVISION
CROWN OFFICE LIST
THE COUNTY COURT, AT SWANSEA
Thursday 30 March 2000
Before:
THE HO MR JUSTICE RICHARDS
THE QUEEN
V
THE LONDON METAL EXCHANGE LIMITED RESPONDENTS
ALBATROS WAREHOUSING BV CLAIMANT
_____________________________
(TRANSCRIPT OF THE HANDED DOWN JUDGMENT OF
SMITH BERNAL REPORTING LIMITED, 180 FLEET STREET
LONDON EC4A 2HD
TEL NO: 0171 421 4040, FAX NO: 0171 831 8838
OFFICIAL SHORTHAND WRITERS TO THE COURT)
_____________________________
COUNSEL: CLAIMANT: Miss P Baxendale QC and Mr J strachan instructed by Pitmans
(sols)
RESPONDENT : The Hon Mr M Beloff QC and Miss D Rose instructed by Linklaters
(Sols)
_____________________________
Judgment
As Approved by the Court
Crown Copyright ©
MR JUSTICE RICHARDS:
1. Albatros Warehousing BV ("Albatros") operates a warehousing business and is
listed as such with the London Metal Exchange Limited ("the LME"). On 9 June
1998 the Appeal Committee of the LME imposed sanctions, including a fine of
£200,000, on Albatros for two breaches of certain of the LME's rules. By
these proceedings Albatros seeks to quash that decision. The main grounds
advanced are that (1) the decision of the Appeal Committee was vitiated by
bias, (2) the Appeal Committee erred by adducing new evidence of fact during
the hearing, (3) in imposing the sanctions the Appeal Committee failed to have
regard to material considerations, and (4) the sanctions imposed were grossly
disproportionate and thereby Wednesbury unreasonable. The application
raises a threshold question whether the decision of the Appeal Committee is
amenable to judicial review.
Legal framework
2. The LME, a company limited by guarantee, is a "recognised investment
exchange" within the meaning of the Financial Services Act 1986. As a
recognised investment exchange, it is "an exempted person as respects anything
done in its capacity as such which constitutes investment business" (s.36(1))
and is thereby entitled to carry on investment business which would otherwise
be prohibited by s.3. "Investment business" is defined by s.1(1) and Schedule
1 to the Act. It is common ground that Albatros's warehousing business does
not itself count as investment business.
3. A body's status as a recognised investment exchange depends upon the making
of a recognition order by the Secretary of State, who may make an order if it
appears to him that the requirements of Schedule 4 are satisfied (s.37(4)) and
who may revoke an order if it appears that any such requirement is not
satisfied or that the exchange has failed to comply with any of the obligations
to which it is subject under the Act (s.37(7)). The material provisions of
Schedule 4 are these:
"Safeguards for investors
2.(1) The rules and practices of the exchange must ensure that business
conducted by means of its facilities is conducted in an orderly manner and so
as to afford proper protection to investors.
(2) The exchange must -
(a) limit dealings on the exchange to investments in which there is a proper
market; and
(b) where relevant, require issuers of investments dealt in on the exchange to
comply with such obligations as will, so far as possible, afford to persons
dealing in the investments proper information for determining their current
value.
....
Investigation of complaints
4. The exchange must have effective arrangements for the investigation of
complaints in respect of business transacted by means of its facilities.
Promotion and maintenance of standards
5. The exchange must be able and willing to promote and maintain high standards
of integrity and fair dealing in the carrying on of investment business ....
Supplementary
6.(1) The provisions of this Schedule relate to an exchange only so far as it
provides facilities for the carrying on of investment business; and nothing in
this Schedule shall be construed as requiring an exchange to limit dealings on
the exchange to dealings in investments.
...."
4. The LME has published Rules and Regulations which govern the conduct of LME
members (who are contractually bound by them) and are aimed inter alia at
meeting the requirements of Schedule 4. Warehouse operating companies are not
members of the LME and are not governed by those Rules and Regulations, but are
subject to similar contractual arrangements with the LME. Whether those
arrangements also serve to meet the requirements of Schedule 4 is one of the
issues to be considered in relation to the amenability of the decision to
judicial review. The importance of the arrangements derives from the fact that
trading on the LME is based on warrants, which are documents of title to a
particular lot of metal, meeting particular specifications as to quality and
description and stored in a particular warehouse. Only approved (listed)
warehouses are entitled to issue such warrants; and for that purpose they must
comply with detailed requirements, including the carrying out of checks to
ensure that the metal is of the requisite quality.
5. The current contract between the LME and Albatros, dated 16 January 1996,
provides for the listing of Albatros, which "agrees to be bound by the
conditions, procedures and notes as laid down for Warehouse Companies as
amended by the LME from time to time ...". Schedule C contains relevant
conditions and procedural notes. Conditions as to the issue of LME warrants
are contained in Clause D of Schedule C. They provide inter alia that
Warehouse Companies must pay particular attention to the LME Special Contract
Rules for Metals prevailing from time to time and must refuse to issue warrants
if for any reason the metal or supporting documentation does not conform to the
relevant Special Contract Rules.
6. Provisions governing disciplinary action are contained in Clauses I to N of
Schedule C. They include:
"I. Enforcement of Conditions
a) Allegations of misconduct or bringing into disrepute the LME or violations
of the conditions laid down for Warehouse Companies shall be investigated by a
Warehouse Disciplinary Committee consisting of Board Directors of the LME or
other persons nominated by or under the authority of the Chief Executive of the
LME.
....
J. Sanctions
The sanctions which may be imposed by a Warehouse Disciplinary Committee shall
include one or more of the following: -
a) the issue of a warning or reprimand;
b) the imposition of a fine;
c) the withdrawal either temporarily or permanently of listed Warehouse Company
status;
d) such other penalty as the Warehouse Disciplinary Committee shall think
fit.
....
M. Appeal
a) Any person and/or Warehouse Company who is found by a Warehouse Disciplinary
Committee / LME Warehousing Committee to have committed an act of misconduct or
violated the conditions and is dissatisfied with the Warehouse Disciplinary
Committee's / LME Warehousing Committee's findings or decisions may, within
seven days of receiving notice thereof, appeal in writing to the Board of
Directors against the same and may make such written representations and supply
such written information as he may consider relevant. Implementation of any
decision appealed against shall be suspended pending the determination of the
appeal.
b) A Director of the LME or other persons may not participate in consideration
of the appeal if they have participated in the finding or the decision of the
Warehouse Disciplinary Committee / LME Warehousing Committee against which the
appeal is made, or if they have any financial interest in the matter either
personally or through any company with which they may be connected.
c) The Board of Directors shall as soon as reasonably practicable after
receiving notice of the appeal confirm or amend the Warehouse Disciplinary
Committee's / LME Warehousing Committee's finding or decision and shall notify
the appellant in writing accordingly. The Board of Directors may make such
arrangements as they think fit to consider any such appeal.
d) The appellant may appear before the Board of Directors and make such
representations in support of his appeal as he may think fit, provided that no
new evidence of fact may be adduced unless the Board of Directors are satisfied
that there is good reason why such evidence was not adduced in the proceedings
before the Warehouse Disciplinary Committee / LME Warehousing Committee.
e) Notice of any appeal to the Board of Directors and of their decision shall
be posted to the Exchange.
The decision of the Board of Directors on such an appeal shall be final."
Factual background
7. Albatros became an LME listed warehouse in 1992. It has been in breach of
the LME conditions on three previous occasions. In 1993 it was admonished for
issuing warrants for metals stored in a warehouse and compound which had not
been approved by the LME. In 1996 it was reprimanded for failing to maintain
accurate records, failing properly to issue warrants and submitting incorrect
stock returns on a number of occasions. The breaches were considered
sufficiently serious to justify the imposition of a financial fine, but there
had been a 6 week suspension of the right to issue warrants and the committee
took the view that the consequent loss of business was a sufficient financial
sanction. The third occasion was in 1997, when it was severely reprimanded for
late payment of its stock levy. An order to pay the costs of the investigation
in the sum of £4,000 was suspended on condition that there were no
material breaches of the contract for 12 months from 3 November 1997.
8. The breaches that give rise to the present proceedings took place in May and
August 1997, when Albatros issued warrants in respect of two shipments of tin
which did not meet LME's standards. It subsequently transpired that in breach
of LME requirements the tin was contaminated with impurities, including
unacceptable levels of arsenic, contained brands which were not on the approved
list, was not accompanied by a certificate of analysis within the quality
specification, comprised tin from more than one country and was made up of
mixed brands. The breaches came to light when a customer rejected the warranted
tin on its delivery from Albatros's warehouse.
9. Albatros has accepted that it was thereby in breach. It says that it should
have carried out its own independent checks before placing the tin on warrant
and that it mistakenly relied on the representations of the shipper to the
effect that the tin was of the requisite quality. It describes this as an
error of judgment, not a deliberate flouting of the rules. As soon as Albatros
became aware of the problem, it notified the LME. In consequence the LME
cancelled warrants amounting to approximately 15% of total LME stocks of tin,
resulting in a short-term shortage in supply. This caused a significant
disturbance in the market and exacerbated a backwardation in the price of tin
(i.e. where the price for immediate delivery exceeds the future price).
Thereafter Albatros took steps to compensate traders who had suffered loss as a
result of the breaches and to keep the LME informed of the position.
10. In January 1998 a Warehouse Disciplinary Committee was appointed to
investigate the matter. The statement of charges included eight charges (with
sub-charges) relating to specific breaches of the rules and one charge that by
its actions Albatros had brought the LME into disrepute. The LME Executive
sent the committee a written submission on the statement of charges. The
hearing before the committee, which was attended by Albatros without legal
representation, took place on 23 March 1998. Albatros pleaded guilty to six
charges or sub-charges relating to specific breaches, namely 1.1 (breach of
clause 1 of the Special Contract Rules for Tin, in that the warranted tin did
not conform to the contract specification), 1.2 (breach of the same clause, in
that the warranted tin was not of approved brands), 2.1 (breach of the Special
Rules Governing the Placing of Tin on Warrant, in that tin put on warrant was
not accompanied by a certificate of analysis within the quality specification),
2.2 (breach of the same rules, in that each warrant was not made up of the
production of one country), 2.3 (breach of the same rules, in that each warrant
did not consist of one brand) and 5 (breach of the same rules and/or
misrepresentation of the tin underlying the warrants, in that the warrants
stated that tin was a particular brand which it was not).
11. In its decision, also dated 23 March, the committee found Albatros guilty
on the charges to which it had pleaded guilty, made no findings on the other
charges relating to specific breaches, but held that Albatros had brought the
LME into disrepute. It stated that the offences were very serious breaches of
contract in respect of two shipments, that it had closely considered delisting
Albatros, but that bearing in mind the pleas of guilty it had decided not to
delist but to impose a fine of £250,000.
12. On 6 April Albatros lodged an appeal against the sanction imposed, but not
against the findings of guilt. The LME Executive submitted a response on 22
April. The composition of the Appeal Committee was the subject of exchanges
between the LME and Albatros, to which it will be necessary to make further
reference. The hearing before the Appeal Committee took place on 1 May. On 8
June (as recorded in a letter of 9 June) the Appeal Committee decided to impose
the following sanctions: (1) a fine of £200,000, (2) a requirement that
Albatros commission a management consultancy audit to ensure that its
management and control systems were sufficiently robust to deliver LME
standards and requirements in the future, (3) payment of costs in the sum of
£1,650, and (4) activation of the suspended order for payment of costs in
the sum of £4,000 in respect of the previous disciplinary investigation.
The fourth sanction was subsequently withdrawn, having been imposed in error
(since the new breaches took place before the date of the previous
suspended costs order). The second has been complied with and is no longer a
live issue. The matters still in dispute are (1) and (3) - the fine and the
order for costs.
13. On 11 June the LME issued a public notice setting out the Appeal
Committee's findings. In a press statement the Chief Executive commented:
"This announcement clearly demonstrates the Exchange's commitment to ensuring
that warehousing companies approved by the LME meet the standards of
performance expected by the LME's users and required by the LME itself."
14. Written reasons for the Appeal Committee's decision were given at a much
later date, after the commencement of the judicial review proceedings. That
delay and the document's reference to the subsequent withdrawal of the fourth
sanction prompted the expression of doubts by Miss Baxendale QC for Albatros as
to whether the document contains the actual contemporaneous reasons for the
Appeal Committee's decision. On the basis of the information provided at the
hearing by Mr Beloff QC for the LME, I am satisfied that it does.
15. The written reasons set out the background to the appeal and then summarise
the deliberations on which the decision was based. Under the heading "the
offences" the reasons stress the impact of the breaches and why such conduct
was considered to have brought the LME into disrepute. The Appeal Committee
considered that it was appropriate to demonstrate to the market that such
"gross errors" by a warehouse were regarded extremely seriously and to take
action such as to encourage all warehouses to have scrupulous regard to the
validity of warrants issued. The reasons then examine "factors which could
mitigate the gravity of the offences". The Appeal Committee concluded inter
alia that Albatros's failure in so many respects, in relation to two separate
shipments, made clear that it had not operated adequate systems and/or that its
staff were not appropriately trained. Further, evidence showed that the
failure was not a mere oversight. Account was taken of Albatros's pleas of
guilty to some of the charges, but this was not considered to be a strong
mitigating factor (they were late pleas and did not extend to the disrepute
charge). Consideration was given to Albatros's contention that the gravity of
the offence had been mitigated by the steps taken to reduce the impact on third
parties and that they had been commended by the LME's Chief Executive for such
action. Those points give rise to specific issues considered later in this
judgment. The reasons next examine "circumstances which could render a fine of
£250,000 unduly harsh", including contentions advanced by Albatros as to
its capacity to pay the fine, the fact that it had already committed
approximately £170,000 through settlement negotiations and related
actions, and the extent to which Albatros had been subject to previous
disciplinary action.
16. The last part of the written reasons records the Appeal Committee's
findings. The committee considered that the financial penalty of £250,000
imposed by the Warehouse Disciplinary Committee was in general circumstances
appropriate given the seriousness of the offences. It judged the penalty to be
commensurate with previous penalties imposed by the LME for far less serious
offences. That aspect of its reasoning is another matter to which it will be
necessary to return. In the light of the information provided about Albatros's
financial position, however, the Appeal Committee had decided to reduce the
fine to £200,000, which was considered to be well within the ability of
the company to pay. The committee was also extremely concerned about the
ability of Albatros to deliver LME standards in the future, and it was for that
reason that it decided to require Albatros to commission a management audit by
an appropriate consultant. Finally the committee dealt with the question of
costs and the activation of the suspended penalty. It determined that a Notice
should be issued announcing its findings and the sanctions imposed. All the
decisions were expressed to be unanimous.
Is the decision amenable to review?
17. Mr Beloff submits that the application to this Court fails at the first
hurdle on the ground that the decision of the Appeal Committee is not amenable
to judicial review. Although the LME might be amenable to judicial review in
relation to its regulation of investment business, it is not so amenable in
relation to the regulation of warehousing operations. Mr Beloff points to the
following factors as supporting that conclusion: (1) The LME is a private
body, a company limited by guarantee. (2) The mode of regulation of warehousing
is by contract, not e.g. by rules made under statutory authority. (3)
Warehousing is not itself an intrinsically necessary or universal feature of
investment exchanges. (4) The provision or regulation of warehousing is not
required by the 1986 Act or other statutory provision. (5) The requirements of
Schedule 4 to the 1986 Act are applicable only in so far as the exchange
provides facilities for the carrying on of investment business, which does not
include warehousing: see paragraph 6(1), which was added by the Companies Act
1989 so as to clarify the limited scope of Schedule 4. Thus the Secretary of
State could not withdraw recognition if the LME did not regulate warehousing.
(6) LME warrants are documents of title primarily and directly relevant to the
sale of the commodities, not to investment business. (7) The LME provides, in
addition to investment business, other important functions such as global
reference prices and quality standards for metal. It is in respect of those
non-investment functions that the regulation of approved warehouses is
important.
18. The only factor telling in the opposite direction, he submits, is that the
integrity of the warrants bears indirectly on investment business, to the
extent that a proper market in e.g. futures and options depends ultimately on
confidence in the warrants. That, however, is insufficient to bring the
regulation of warehousing within the scope of judicial review.
19. Mr Beloff stresses that the jurisdictional point is taken not as a means of
avoiding the grounds of challenge in the present case, all of which are
resisted in any event on their merits, but because an analysis in terms of
private rather than public law might involve differences in substantive law and
remedies capable of affecting the outcome in other cases.
20. Miss Baxendale, on the other hand, lays stress on the fundamental
importance of warrants for the purpose of the LME's functions in respect of
investment business as well as its other functions. Warehousing may not be
intrinsically necessary for investment exchanges, but it is necessary for the
LME. The reliability of warrants issued by warehouses is crucial. The
regulation of warehouses and of the issue of warrants by them is therefore an
integral part of the LME regulatory regime, as is recognised in the LME's own
documents and affidavits. Without such regulation the LME would be unable to
comply with the requirements of Schedule 4 to the 1986 Act. Thus the
regulation of warehousing is part of the structure relevant to the regulation
of investment business even though warehousing itself is not investment
business and warrants are not themselves financial instruments dealt with on
the exchange. Without such regulation by the LME there would be regulation by
government. Nothing turns on the status of the LME as a private body or on the
fact that regulation is achieved through contract. Such features have not
precluded judicial review of other regulatory bodies and would not preclude
judicial review of the LME in respect of regulatory functions that are accepted
to fall within the scope of the 1986 Act. Accordingly there is no reason why
they should preclude judicial review in respect of the regulation of
warehousing. Such regulation is the exercise of a public function in respect
of which the LME is amenable to review. That is reinforced by the fact that
the LME is the world's largest market for trading in metals (though Miss
Baxendale backed away from a contention that it has monopoly power).
21. The passages in the LME's own documents on which Miss Baxendale relies
include these from the written reasons for the Appeal Committee's decision:
"World-wide acceptance of the LME's market system depended on all users of the
market having full confidence that any warrant gave good title to metal meeting
the contract specification. Any event which undermined that confidence was
damaging to the LME and an episode which publicly demonstrated unreliability of
warrants on a large scale was seriously damaging. It was also crucial to
confidence in the market that statistics of metal stocks in LME approved
warehouses were reliable as market users took trading decisions based on those
stock figures" (para 8).
"The Appeal Committee judged the penalty to be commensurate with previous
penalties imposed by the LME for far less serious offences .... Regulatory
fines by all regulatory bodies had been increasing in recent years, overseen by
the Financial Services Authority, in an effort to raise the level of
compliance, investor protection and the integrity of the Recognised Investment
Exchanges such as the LME" (para 18).
"The LME had a legal responsibility under Schedule IV to the Financial Services
Act 1986 to provide fair and proper markets in addition to its moral
responsibility to all users of its markets" (para 20).
22. Similarly, in an affidavit sworn by Mr Christopher Farrow, Chairman of the
Appeal Committee, in support of an application for the removal of a stay that
had been imposed at the time of the grant of leave to apply for judicial
review, he states:
"The LME has a legal responsibility to ensure fair and proper markets, the
reliability of warehousing is an integral part of that and the audit
requirement was imposed on Albatros in accordance with this duty" (para 15).
"In these circumstances the Appeal Committee felt that in the light of the
LME's responsibilities for the overall integrity of the market it was necessary
to take steps to minimise the possibility that further breaches might occur"
(para 17)
In a later affidavit Mr Farrow states:
"The integrity of LME warrants is fundamental to the operation of the LME's
metal markets" (para 6).
23. Despite those competing submissions, I do not think that the broad
principles are in dispute. The essential question is whether, in exercising
disciplinary powers over listed warehouses, the LME is performing a public
function. The fact that the powers are exercised pursuant to a contractual
relationship between the LME and the warehouse is a factor telling against the
performance of a public function but is far from decisive of the question. It
is necessary to make a broader assessment based on all the circumstances of the
case and in particular on the extent to which the powers can be said to be
woven into a system of governmental control.
24. It is, I think, sufficient to refer to three authorities. First, in R
v. Panel on Takeovers and Mergers, ex parte Datafin Plc [1987] 1 QB 815,
Lloyd LJ expressed the matter in this way:
"... Of course the source of the power will often, perhaps usually, be
decisive. If the source of the power is a statute, or subordinate legislation
under a statute, then clearly the body in question will be subject to judicial
review. If, at the other end of the scale, the source of power is contractual,
as in the case of a private arbitration, then clearly the arbitrator is not
subject to judicial review ....
But in between these extremes there is an area in which it is helpful to look
not just at the source of the power but at the nature of the power. If the
body in question is exercising public law functions, or if the exercise of its
functions have public law consequences, then that may ... be sufficient to
bring the body within the reach of judicial review. It may be said that to
refer to 'public law' in this context is to beg the question. But I do not
think it does. The essential distinction, which runs through all the cases to
which we [were] referred, is between a domestic or private tribunal on the one
hand and a body of persons who are under some public duty on the other ...."
(847A-D).
25. In R v. Disciplinary Committee of the Jockey Club, ex parte Aga Khan
[1993] 1 WLR 909, Sir Thomas Bingham observed that the effect of the decision
in Datafin was "to extend judicial review to a body whose birth and
constitution owed nothing to any exercise of governmental power but which had
been woven into the fabric of public regulation in the field of take-overs and
mergers" (921c). By contrast, he held (at pages 923-924) that judicial review
did not lie against the Jockey Club which, although regulating a significant
national activity and exercising powers which affected the public and were
exercised in the interests of the public, was not a public body and had not
been woven into any system of governmental control of horseracing. Hoffmann LJ
(at pages 931-933) also stressed the need for the relevant power to be
"governmental in nature", observing that in Datafin there was "a
privatisation of government itself" and that bodies such as the Advertising
Standards Authority and IMRO had been held to be amenable to review as "private
bodies established by the industry but integrated into a system of statutory
regulation". He accepted that a body such as IMRO which exercised governmental
powers was not any the less amenable to public law because it had contractual
relations with its members. But the Jockey Club was not exercising
governmental powers. Control over its exercise of power had to be found in
that case in the law of contract, which provided entirely adequate remedies.
26. The need for care in determining whether the particular functions
are public or private is exemplified by R v. Lloyd's of London, ex parte
Briggs [1993] 1 Lloyd's Rep 176, in which it was held that judicial review
did not lie to challenge a decision by Lloyd's agents to serve notice of a cash
call on a number of Names. Leggatt LJ stated (at page 185):
"The fact is that even if the Corporation of Lloyd's does perform public
functions, for example, for the protection of policy holders, the rights relied
on in these proceedings relate exclusively to the contract governing the
relationship between Names and their members' agents and, in some instances,
their managing agents. We do not consider that that involves public law
....
Lloyd's is not a public body which regulates the insurance market. As
[counsel] remarked, the Department of Trade and Industry does that. Lloyd's
operates within one section of the market. Its powers are derived from a
private Act which does not extend to any person in the insurance business other
than those who wish to operate in the section of the market governed by Lloyd's
and who, in order to do so, commit themselves by entering into the uniform
contract prescribed by Lloyd's. In our judgment, neither the evidence nor the
submissions in this case suggest that there is a public law element about the
relationship between Lloyd's and the Names as places it within the public
domain and so renders it susceptible to judicial review".
27. In the present case the first step in the analysis, as it seems to me, must
be the position of the LME within the system of investor protection established
by the Financial Services Act 1986. The Act provides for such protection in
the case of investment exchanges not by laying down a comprehensive set of
rules to be policed by a public body, but by laying down general criteria that
must be met by an exchange in order to qualify for recognition and thereby for
the right to carry on investment business. It thereby leaves the function of
detailed regulation to the exchange. When engaged in the process of regulation
necessary to meet the requirements of the 1986 Act, in particular those of
Schedule 4, the LME is in my judgment performing a function that can properly
be said to be woven into a system of governmental control of investment
business or integrated into a system of statutory regulation. In respect of
the performance of such a function it is amenable to judicial review despite
the fact that it has a contractual relationship with those whom it regulates.
It is in a position similar to that of Lautro, which in R v. Lautro, ex
parte Ross [1993] QB 17 was conceded by Mr Beloff to be a body whose
decisions were susceptible to judicial review. It is true that Lautro was
recognised as a self-regulating organisation under the provisions of the 1986
Act dealing with authorised persons, whereas the LME is recognised as an
investment exchange under the provisions dealing with exempted persons, but
that difference does not appear to me to be capable of producing a different
result as regards amenability to review.
28. The next question is whether the regulation of warehouses, at least as
regards the issue of warrants, is sufficiently connected with that public
function to bring it within the scope of judicial review, or whether it relates
only to the LME's other functions and is directed only at the protection of the
commercial interests of the LME. As to that, it is true that the 1986 Act does
not regulate directly the physical trade in metal, warehousing or the issue of
warrants, none of which counts as investment business. But the provisions of
Schedule 4 are in my view capable of biting indirectly on non-investment
business if and to the extent that the regulation of non-investment business is
necessary in order to meet the requirements laid down in respect of the conduct
of investment business. On the evidence before the court there is no escaping
the fundamental importance of warrants for all aspects of the LME's operations.
I accept Miss Baxendale's submission that the reliability of warrants is
crucial to the proper conduct of investment business as well as for the LME's
other functions. That is how the matter is seen by the LME itself, as is
apparent from the extracts I have quoted from the written reasons of the Appeal
Committee and the evidence filed on behalf of the LME in these proceedings.
Whether the LME would be in breach of the requirements of Schedule 4 if it
failed properly to regulate the issue of warrants is of course a matter of law
on which the views of Directors of the LME are not determinative. In my
judgment, however, it would be. Such regulation is necessary for the provision
of the requisite safeguards to investors and the promotion and maintenance of
the standards laid down by Schedule 4.
29. I therefore hold that in exercising its disciplinary powers over Albatros
in relation to breaches of the rules as to the issue of warrants, the Appeal
Committee was performing a public function in respect of which its decision is
amenable to judicial review. On that basis I proceed to consider the
substantive grounds of challenge to the decision.
Bias
30. Albatros's first substantive ground of challenge is that the decision was
vitiated by bias. The following matters are relied on:
(1) One of the members of the Appeal Committee was Mr David King, the Chief
Executive of the LME. Mr King had been involved at the investigation stage and
had spoken to Albatros about its conduct (see (2) below). He then authorised
the commencement of the disciplinary proceedings and appointed the members of
the Warehouse Disciplinary Committee.
(2) Mr King was a witness of fact on one issue before the Appeal Committee. It
arose out of a statement in Albatros's notice of appeal that in a telephone
conversation with Mr Meeuwisse, Albatros's Chief Executive, Mr King had
"commended the way in which we had acted" in relation to the compensation of
third parties affected by Albatros's breaches. The response by the LME
Executive stated: "Whilst Mr King does not recall giving any such general
commendation the Executive submits that Mr King should be expected to have
commended any suggestion that the dispute between Albatros and the Warrant
holders be resolved." To the extent indicated in that passage it is clear that
Mr King had spoken to the Executive about this factual issue, though he had no
other input to and was not in any true sense a party to the Executive's
submissions. In the event the Appeal Committee had before it a transcript of
the telephone conversation between Mr King and Mr Meeuwisse and was able to
form its own judgment on the factual issue. Its written reasons deal with the
matter as follows: "A transcript of the recorded telephone message clearly
showed that the Chief Executive of the LME had not commended the way in which
Albatros had acted." Nonetheless it is submitted by Miss Baxendale that as
soon as Mr King was called upon to give evidence in relation to the issue
raised by Albatros he should have stood down from the Appeal Committee.
(3) During the hearing before the Appeal Committee, Mr King asked one of the
LME staff, a Mr Hall, about his experience and how this case compared with
others. Mr Hall replied that this was the worst case he had ever seen.
Albatros's solicitor then objected, suggesting that new evidence was being
introduced. The Chairman of the Committee, Mr Farrow, did not want to get
embroiled in a debate about the admissibility of the question and therefore
asked Mr King to withdraw it, which he did. It is clear from the evidence that
there had been no pre-arrangement between Mr King and Mr Hall about the
question and answer and that the matter ended with the withdrawal of the
question. Nevertheless the exchange is relied on as giving rise to an
impression of bias.
(4) On the announcement of the Appeal Committee's decision, it was Mr King who
issued the press statement to the effect that the announcement demonstrated the
LME's commitment to ensuring that warehousing companies met the required
standards.
(5) Mr King had a direct pecuniary interest in the outcome of the appeal by
virtue of his role as Chief Executive of the LME, since any money levied by way
of a fine would be paid to the LME. Similarly the other member of the Appeal
Committee had such an interest by virtue of their status as Directors of the
LME.
(6) A number of general points are made about the composition of the Appeal
Committee by one-off appointment from a limited pool of the Board of Directors,
the inherent links between the Directors and the LME Executive (the prosecuting
authority) and the inherent common causes shared by the Board of Directors and
the LME Executive.
31. It is common ground that the relevant legal principles as to bias are set
out in the extremely helpful judgment of the Court of Appeal in Locabail
(UK) Ltd v. Bayfield Properties Ltd [2000] 1 All ER 65. Miss Baxendale
relies first on automatic disqualification: see Locabail at page 70
paras 4 et seq. She submits that Mr King and the Board of Directors were
subject to automatic disqualification by virtue of (5) above, i.e. their
pecuniary interest in the outcome of the appeal. Further, she submits that Mr
King was subject to automatic disqualification by virtue of his involvement as
prosecutor, as shown by (1) to (3) above. In relation to that she relies on
the extension of the rule of automatic disqualification identified in R v.
Bow Street Metropolitan Stipendiary Magistrate, ex parte Pinochet Ugarte
(No.2) [1999] 2 WLR 272, as summarised in Locabail at pages 71-73
paras 11-14. Finally Miss Baxendale relies on the general principle that a
decision should be set aside if on examination of all the relevant
circumstances the court concludes that there was a real danger (in the sense of
a real possibility) of bias: see Locabail at page 73 para 16 et seq.
In support of that she relies on the overall effect of (1) to (6) above. She
also cites R v. Gaisford [1892] QB 381, where a justice was held to be
disqualified from adjudicating on a summons for failure to comply with a
resolution that the justice himself had moved; R v. Barnsley Metropolitan
Borough Council, ex parte Hook [1976] 1 WLR 1052, where it was held that
the presence of the prosecutor (namely the market manager, who had also given
evidence) throughout the deliberations of the relevant committee vitiated the
committee's decision; and Hannam v. Bradford Corporation [1970] 1 WLR
937, where it was held that school governors who had dismissed a teacher should
not have sat on a council sub-committee inquiring into whether the dismissal
should be prohibited.
32. Miss Baxendale does not seek to advance any independent submissions as to
the effect of the European Convention on Human Rights (and Mr Beloff had
signalled clearly and with good reason that any such submissions would be
resisted). She does, however, rely on what is said in Locabail at page
74 para 17 as to the general similarity of outcome of the tests under the
English common law and the Convention, and she cites Piersack v. Belgium
(1982) 5 EHHR 169 as showing the outcome to be expected in the present case.
In Piersack the impartiality of a trial court was held to be "capable of
appearing open to doubt", so as to give rise to a violation of Article 6(1), in
circumstances where the court was presided over by a judge who had previously
been a senior official in the public prosecutor's department at the time when
it decided to prosecute the applicant (and who, it seems, was not only entitled
to revise the submissions of, and give advice to, the officials in charge of
the file, but also played a certain part in the proceedings).
33. Mr Beloff submits, and I accept, that the issue as to bias has to be
examined within the framework of what Albatros expressly agreed by way of the
rules and as regards the specific composition of the Appeal Committee. Clause
I of Schedule C to the contract by which Albatros agreed to be bound provides
in terms that the members of the Warehouse Disciplinary Committee are to be
nominated by or under the authority of the Chief Executive of the LME, i.e. Mr
King. It seems to me that the Chief Executive's role in authorising the
commencement of disciplinary proceedings is implicit in that contractual
provision. Albatros likewise agreed to Clause M, which provides that the
Appeal Committee is to consist prima facie of the Board of Directors, subject
however to the exclusion of those who have participated in the finding or
decision of the Warehouse Disciplinary Committee and those with a financial
interest in the matter. It is plainly not envisaged that the possibility of
the imposition of a fine, one of the sanctions set out in Clause J, is to count
as a financial interest for this purpose and thereby result in the exclusion of
the entire Board of Directors.
34. In practice, as Mr Beloff again points out, Albatros was given a full
opportunity to object to the membership of the Appeal Committee. By fax dated
31 March to the LME's Mr MacKay, Albatros identified a number of Directors who
should not participate in the appeal decision. Mr MacKay's response dated 1
April took issue with one of those listed by Albatros but identified additional
Directors who should be ruled out on the ground of a financial interest. After
further exchanges Albatros wrote on 6 April that "we have agreed that the
following Board members only will be involved with the Appeal, due to conflicts
of interest etc.". The agreed list included Mr King (an ex-officio member of
the Board) and the others who eventually sat on the Appeal Committee. A
question subsequently arose as to whether Mr King would sit, but that was only
because of the need to maintain an odd number. If Mr Farrow sat, as in the
event he did, then it was made clear that Mr King would also sit.
35. Against that background there is plainly no substance to what I would term
the institutional features relied on by Miss Baxendale as giving rise to bias.
That includes the role of Mr King in authorising the commencement of the
disciplinary proceedings and appointing the Warehouse Disciplinary Committee,
the inclusion of Mr King and other Directors of the LME on the Appeal Committee
despite the fact that any fine would be payable to the LME, and the general
points about the composition of the Appeal Committee and the links and common
causes existing between the Directors and the Executive. These are all matters
to which Albatros had given its clear and unequivocal agreement under the terms
of its contract with the LME. Even if otherwise there might be some basis of
objection on grounds of bias, Albatros had waived its right to object. The
case would meet the conditions for waiver summarised in Locabail at page
73 para 15 and page 78 para 26. I would add, however, that none of those
institutional features would in my view constitute bias in any event. The
rules make proper provision for the disqualification of any Director with a
financial interest in the matter. As to the fact that any fine would be
payable to the LME, there is no evidence that the Directors would stand to gain
individually from this and the suggested link seems to me to be too remote to
give rise to a disqualifying interest. If there is any relevant interest at
all, it is so small as to come within the de minimis exception recognised in
Locabail at page 71 para 10.
36. In relation to Mr King the objection concerning his authorisation of
proceedings forms part of a wider objection that he was the prosecutor in the
case. In my view, however, it would be wrong to regard him as having any
substantive role as prosecutor. His role in relation to the commencement of
the proceedings, as in relation to his appointment of the original committee,
was an essentially administrative one. It was the solicitor, Mr MacKay, who
acted as prosecutor in the case. He decided that there was a case to answer
and recommended to Mr King that a committee be appointed. He drafted the list
of charges, the Executive's written submissions and all other "prosecution"
documents, with no significant input or comment from Mr King. Thus it was that
Albatros took specific (though unsuccessful) objection to Mr MacKay's presence
at the appeal hearing, on the ground that he had been the person responsible
for presenting the case on behalf of the LME at the previous stage.
Accordingly I do not consider that Mr King's role can be equated with that of
the justice who moved the motion in Gaisford, the market manager who was
the prosecutor in Hook, the governors in Hannam or indeed the
former member of the public prosecutor's department in Piersack. Mr
King did not have the kind of interest that would bring him within the scope of
the extended rule as to automatic disqualification applied in Pinochet
Ugarte (No.2). Nor was his role in relation to the prosecution such as to
create a real danger of bias if he participated in the appeal decision. If I
were wrong about any of those matters, I would hold that by its clear and
unequivocal agreement to Mr King's membership of the Appeal Committee, Albatros
had waived any objection on the ground of his involvement as prosecutor.
Albatros knew or (through its agreement to the rules) must be taken to have
known of the functions of a Chief Executive in relation to the bringing of the
prosecution.
37. That leaves a number of specific objections based on Mr King's conduct in
the course of the proceedings. First there is the matter of his telephone
conversation with Mr Meeuwisse in which he was said to have commended the way
in which Albatros had acted as regards compensating third parties. As to that,
the point was at best of marginal significance. In the event, however, its
resolution did not depend in any way on Mr King's recollection, since the
Appeal Committee had before it, and based itself on, the actual transcript of
the telephone conversation. I reject the contention that Mr King should have
stood down as soon as the issue was raised and that his continued participation
thereafter vitiated the decision.
38. Then there is the question that Mr King put to Mr Hall. It was in my view
a proper question. It was not stage-managed as has been suggested on behalf of
Albatros: there was no pre-arrangement between Mr King and Mr Hall. Moreover
the question was withdrawn as soon as objection was taken to it. Although
Albatros's solicitor formed an adverse impression of the incident, on the
evidence before the court the circumstances were not capable of creating or
contributing to any real danger of bias.
39. Finally, I see no valid basis of objection to the press release. It was
entirely proper for the Chief Executive to issue a press release in such
circumstances. His doing so flowed from his position as Chief Executive and
did not compromise, and was not compromised by, his membership of the Appeal
Committee. There is nothing in the terms of the press release that might
reasonably be taken to suggest some lack of impartiality by Mr King. What is
said is a fair reflection of the reasons why the Appeal Committee considered
that such a large fine was appropriate.
40. I do not think it necessary to deal specifically with the Convention. I
have mentioned the one authority relied on as in some way illuminating the
position. But the Convention either produces the same result as the common law
or, if it produces a different result, cannot assist Albatros in the present
case. The application of Article 6 to disciplinary proceedings when the Human
Rights Act 1998 comes into force may well give rise to additional
considerations in a case such as the present because of the need for a tribunal
to be independent as well as impartial, thereby taking one beyond
questions of bias. That, however, is not something for decision now.
41. For the reasons I have given, I reject Albatros's submission that the
decision of the Appeal Tribunal was vitiated by bias.
Fresh evidence
42. The submissions made under this head are based primarily on the fact that
the Appeal Committee, in deciding the appropriate sanction, had regard to two
previous disciplinary decisions without giving Albatros notice of the point or
giving it any proper opportunity to deal with it. A secondary matter on which
reliance is placed is the questioning of Mr Hall by Mr King in the course of
the hearing; but for reasons already given in the context of bias, nothing
turned on that questioning and I do not think it necessary to deal further with
it.
43. The Appeal Committee's written reasons state:
"The Appeal Committee judged the penalty to be commensurate with previous
penalties imposed by the LME for far less serious offences. A £100,000
fine had been imposed on a warehouse for the far less serious offence of
placing aluminium on warrant in compounds and there had been a recent
£90,000 fine imposed on an LME Member firm for the mis-reporting of large
positions."
44. Miss Baxendale submits that reliance on those two previous decisions
amounted to a breach of paragraph (d) of Clause M of Schedule C, which provides
that the appellant may make such representations as he thinks fit "provided
that no new evidence of fact may be adduced" without good reason why it was not
adduced in the proceedings before the Warehouse Disciplinary Committee. I
reject that submission. The provision in question is clearly aimed at the
appellant and the previous decisions are not "new evidence of fact".
45. The further submission made is that it was procedurally unfair to rely on
the previous decisions without giving Albatros notice or an opportunity to
comment. Had Albatros been given such an opportunity, it would have pointed
out that the first of the decisions related to two separate (though obviously
related) companies and that 75% of the fine of £100,000 was suspended on
condition that they did not materially breach the conditions of the contracts
between them and the LME for a period of 12 months.
46. I do not consider it inherently unfair for a body such as the LME, when
considering the appropriate sanction for breach of its rules, to take into
account its own published disciplinary decisions without giving a party to
disciplinary proceedings notice and a specific opportunity to comment on them.
Such decisions amount to published precedents the potential relevance of which
is obvious. Those who are subject to disciplinary proceedings know or ought to
know of their existence and are free to make such reference to them as they
wish in the course of their own submissions. That is not to say that fairness
would never require the giving of an opportunity to comment. The individual
circumstances of the present case, however, do not require it. The analogy
with court proceedings was explored in the course of argument. In my judgment
it is not generally incumbent on a sentencing court (or a court hearing an
appeal against sentence) to give a party notice of reported decisions which the
court is minded to take into account when determining the appropriate sentence,
though there may be circumstances where it would be right to draw attention to
a particular authority before relying on it. To the extent that the analogy is
helpful, it tells against Albatros.
47. Moreover there is no reason to believe that the Appeal Committee was
unaware of the fact that, in one of the cases referred to, 75% of the fine of
£100,000 was suspended; nor, therefore, is there any reason to believe
that representations on behalf of Albatros as to the nature of the sanction in
that case might have affected the Appeal Committee's judgment about the
appropriate sanction in the case of Albatros. What is given in the written
reasons does not purport to be a complete statement of what the Appeal
Committee considered in relation to that earlier case. It is obviously only a
summary.
48. I do not accept an additional submission by Mr Beloff that the precedents
did not form the basis of the decision, which was taken on independent grounds,
but were put forward as justifying a decision already taken on those other
grounds. On a fair reading of the written reasons the previous decisions are
relied on as a strand in the overall reasoning by which the decision is
reached. But in view of the conclusion that I have already reached as to the
absence of unfairness in the approach taken by the Appeal Committee, nothing
turns on this point. I reject Albatros's case under the head of fresh
evidence.
Failure to have regard to material considerations
49. The first matter raised under this head is the submission that the Appeal
Committee failed to have proper regard to previous fines imposed by it on other
warehouses or traders, so as to create consistency and fairness in its approach
to regulation and breaches of conditions. The submission rests in part on the
suggestion that the Appeal Committee misdirected itself as to the true nature
of the previous fine of £100,000 to which I have referred in considering
the issue of fresh evidence. To a substantial extent I have dealt with the
point in that context, observing in particular that what appears in the written
reasons is simply a summary of the previous decision rather than a full
exposition of it. Although the submission is elaborated in the present
context, I think it sufficient to record that in my judgment there was no
misdirection in any of the respects alleged and there was no failure to take
the circumstances of the previous case into consideration.
50. The other aspect of the submission as to previous fines is that Albatros
has adduced, for the purposes of the present proceedings, details of fines in a
number of other cases (post-dating as well as pre-dating the decision under
challenge) and contends that the Appeal Committee failed to have regard to them
or to carry out a proper exercise of comparison between the circumstances of
those other cases and of the present case. I have been referred to some of the
details of the previous cases in order to show their potential relevance to the
level of fine for Albatros. In my view there was no obligation on the Appeal
Committee to take into account the details of the previous cases on which
Albatros chooses now to rely. It was certainly entitled to look at previous
cases and to take them into account in the way that it did - the point
considered under the head of fresh evidence. But it was not required to do so
or to go further than it did. If Albatros wished to put forward previous cases
in support of its contention that the level of fine imposed by the Warehouse
Disciplinary Committee was too high, it was free to do so; and the Appeal
Committee would then have been bound to take them into account. The very fact
that Albatros did not adopt that course may tell one something about the
significance or otherwise of the cases in question. Leaving that aside,
however, I am satisfied that any failure by the Appeal Committee to take into
account previous cases on which Albatros had placed no reliance in support of
its appeal was incapable of vitiating the decision reached.
51. A separate submission is that the Appeal Committee failed to take any
proper account of Albatros's willingness to compensate traders affected by the
breaches. The argument advanced by Albatros in support of its appeal had been
that, although Albatros was legally protected under the FENEX conditions, it
chose not to avail itself of that protection but to act in the interests of LME
brokers by compensating the majority of those affected. The submissions of the
LME Executive had cast substantial doubt on the strength of that point as a
mitigating factor, whilst also observing that any exclusion of liability under
the FENEX conditions did not affect Albatros's responsibility to the LME for
breach of the conditions contained in its contract with the LME. The written
reasons for the Appeal Committee's decision deal with the matter in this
way:
"Albatros also claimed that they were not bound by the conditions of the LME
Warehouse Contract in so far as they imposed obligations which were in conflict
with the limits of responsibility contained in the FENEX, the Dutch forwarding
Conditions which operate in the Port of Rotterdam. The Appeal Committee did
not accept this claim. Albatros had signed the Warehouse Contract with the LME
without qualification and its obligations under the Contract relating to
disciplinary matters were not reduced by the FENEX terms of business."
52. That is a clear misunderstanding of the argument put forward by Albatros,
as Mr Beloff has conceded. It is submitted by Miss Baxendale that the Appeal
Committee thereby failed to have regard to a material consideration and
expressed the matter in a way which was liable adversely to affect its
consideration of Albatros's position.
53. I do not think that this admitted error was sufficient to vitiate the
Appeal Committee's decision. Looking at the written reasons as a whole, I am
satisfied that the Appeal Committee did take into account Albatros's claim to
have compensated the majority of those affected and that its misunderstanding
of the argument that such compensation went beyond Albatros's legal obligations
was not a material factor in the overall decision as to the level of fine.
Grossly disproportionate sanction
54. The final ground advanced by Albatros is that the sanction imposed, in
particular a fine of £200,000 and costs, was grossly disproportionate to
the offences. It was unprecedented and far in excess of any fines imposed in
other cases. As to the power of the court to interfere in such a case,
reliance is placed on R v. Admiralty Board of the Defence Council, ex parte
Coupland (Division Court, 18 July 1995, unreported), which applied R v.
St Alban's Crown Court, ex parte Cinnamond [1981] QB 480. Those cases show
that the underlying principle is, or is equivalent to, that of
Wednesbury unreasonableness. Miss Baxendale did not seek to put her
submissions on any basis other than that the fine in this case was so
disproportionate as to be Wednesbury unreasonable.
55. She submitted that the sanction was grossly disproportionate in the light
of (1) the nature of the offences themselves, (2) the fact that they arose from
mistakes and there was no dishonesty or deliberate breach by Albatros, (3) the
level of fines and other sanctions imposed in the past in respect of similar or
other breaches by LME warehouses, (4) the fact that the mistakes, once they
came to light, were quickly and readily admitted by Albatros, (5) Albatros's
pleas of guilty to all relevant charges except that of bringing the LME into
disrepute, (6) the steps taken by Albatros to mitigate the effects of its
mistake and to offer to compensate traders who had suffered loss, (7) the
financial loss suffered by Albatros as a result of taking such steps, (8) the
low level of profits which Albatros derived from its position as an LME listed
warehouse and the severe effects such a large fine would have on it, (9) the
consequences of the imposition of the fine coupled with the costs of the
management consultancy audit in terms of Albatros's continuing viability as an
LME warehouse, and (10) the costs of the management consultancy audit
itself.
56. The factual basis for those points is developed in Albatros's evidence,
especially the affidavit of Mr Meeuwisse. The points are also considered in the
LME's evidence, in particular in the form of a commentary in Mr Farrow's second
affidavit. I have considered the relevant material but do not propose to set
out further details.
57. In my judgment the Appeal Committee was entitled to take a very serious
view of Albatros's conduct in this case. The committee was exercising an
important regulatory function, as is reflected in my finding that its decision
is amenable to judicial review. It was an expert body which was well placed to
assess the needs of the market, the impact of a breach of the rules and what
was required in order to deter future breaches and secure confidence in the
market. The court does not have the same expertise in such matters. I have
already referred to the reasons why the committee took a particularly serious
view of Albatros's conduct and decided that a severe sanction was appropriate.
They are reasons of substance and were given careful consideration. The
committee had regard to the various points of mitigation advanced by Albatros
and even reduced the fine by £50,000 because of Albatros's financial
position. The previous cases relied on by Albatros were all very different
factually and were less serious than the present case.
58. In light of those considerations I have come to the clear view that there
is no basis for intervention by the court in relation to the level of fine
imposed in this case. It cannot be said that it was a grossly disproportionate
sanction or that the decision to impose it was Wednesbury
unreasonable.
Conclusion
59. Although I hold that the decision of the Appeal Committee is amenable to
judicial review, Albatros has failed to persuade me that the decision was
unlawful in any of the respects put forward. The application for judicial
review is therefore dismissed.
Ruling on orders consequential upon the judgment (this ruling does not
form part of the judgment itself but follows on for convenience)
1. I have handed down the judgment while out on Circuit. By consent of the
parties, consequential orders have been the subject of written submissions so
as to make it unnecessary for the parties to attend at court. I am grateful to
counsel for their submissions and for their typographical corrections to the
draft judgment.
2. The application for judicial review is dismissed.
3. The applicant is to pay three-quarters of the respondent's costs, to be
subject to detailed assessment if not agreed. The order reflects the fact
that, although the applicant was ultimately unsuccessful, it did win on the
threshold issue of amenability to review, which required substantial
preparation and took up a substantial amount of time in court. That is a
matter properly taken into account as part of the overall circumstances in the
exercise of the court's discretion as to costs under CPR Rule 44.3. I do not
consider that the debate over the written reasons ought to affect the costs
order. Nor do I consider that the applicant's conduct of the proceedings was
such as to justify requiring it to pay the whole of the respondent's costs
despite the fact that it won on the amenability issue. In particular, the costs
of setting aside the stay (in respect of which the applicant's conduct was
indeed open to criticism) were awarded to the respondent in any event and it is
not appropriate to impose a further penalty for the applicant's conduct.
4. Permission to appeal refused. In my view an appeal does not have a
realistic prospect of success on any of the issues in respect of which I have
decided against the applicant. The case does not raise points of principle of
such importance that they ought to be considered by the Court of Appeal even in
the absence of a realistic prospect of success. The financial hardship faced
by the applicant is not a good or sufficient reason for granting permission to
appeal.
© 2000 Crown Copyright
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