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I list them in the order in which they will be addressed below. RLC |
The first was that BT had a contractual right to vary its charges, subject to Ofcoms determination if the dispute resolution procedure was operated. RLC |
The second was that the introduction of innovative charging structures was itself a mode of competing, and that interference with it would restrict competition. RLC |
The third was that price control is an intrusive form of control which elsewhere in the 2003 Act can only be introduced by SMP condition (para. 442). RLC |
It was therefore inappropriate for Ofcom to use its dispute resolution powers as a way of controlling the charges of a CP like BT which did not have significant market power in a relevant market. Ratio |
Summarising their view of these points, the CAT said: 396. Ratio |
The crucial question is what is a regulator to do in the context of such uncertainty? Essentially, the regulator has two choices: (1) To prevent change unless it can be demonstrated that the change is beneficial- in which case it may well be said that the dead hand of regulation is constraining behaviour which may actu... |
We stress that our conclusion regarding Principle 2(i) was that the welfare assessment was inconclusive, not that consumers would be harmed. Ratio |
(2) Alternatively, to allow change despite the uncertainty, even though there is a risk that the change may result in a disbenefit to consumers, recognising that an undue fetter on commercial freedom is itself a disbenefit to consumers. Ratio |
It followed that, if Principles 1 and 3 were satisfied (as they were), Ofcom could reject a proposed change in a CPs termination charges only if the welfare test distinctly showed that they would adversely affect consumer welfare. Ratio |
The CAT reached substantially the same conclusions about the welfare test as Ofcom did, namely that it was inconclusive. Ratio |
They expressed their conclusion as follows at paragraph 379: Fundamentally, the welfare analysis is inconclusive, due to a lack of empirical evidence. Ratio |
Even with the assistance of the simplifying assumptions that we have described, a reliable assessment of elasticity of demand is not possible. Ratio |
Whilst it is possible to conclude that prices for 080, 0845 and 0870 calls will, on balance, fall, it cannot be said how far they will fall, nor what volumes of calls there will be at any given price. Ratio |
Equally, the extent of the Mobile Tariff Package Effect is essentially unknown. Ratio |
An inconclusive welfare test could not in the CATs view be enough. Ratio |
The CATs conclusion on this point is conveniently summarised at paragraphs 447-448 of their judgment: 447. Ratio |
If, therefore, the test to be applied is whether the NCCNs can be shown to provide benefits to consumers, then that test is not met. Ratio |
However, we do not consider this to be the correct test in the circumstances of the present case, because it places undue importance on Ofcom's policy preference, at the expense of the two other relevant factors that we have identified as forming a part of Principle 2 (namely Principle 2(ii) [the risk of a distortion t... |
448 Ratio |
We consider that whilst Ofcom's welfare analysis could override these other factors, it should only do so where it can clearly and distinctly be demonstrated that the introduction of the NCCNs would act as material disbenefit to consumers. Ratio |
In short, given the presence of the two other factors that we have identified, it is not enough for the welfare analysis to be simply inconclusive. Ratio |
The welfare analysis must demonstrate, and demonstrate clearly, that the interests of consumers will be disadvantaged. Ratio |
The decision of the Court of Appeal RLC |
Appeal lies from the CAT to the Court of Appeal on a point of law only. RLC |
The Court of Appeal (Lloyd, Etherton and Elias L.JJ) overruled the CAT and restored the decision of Ofcom. RLC |
The leading judgment was given by Lloyd LJ, with whom both the other members of the Court agreed. RLC |
In summary, Lloyd LJ rejected the CATs starting point. RLC |
In the first place, he held that the tribunal had been wrong to treat BT as having a prima facie right to change its charges, which needed to be displaced. RLC |
It had no more than a right to do so subject to the determination of Ofcom if the counterparty objected. RLC |
Secondly, he held that they had been wrong to attach weight to their view that a restraint on BTs freedom to set its own charges would itself distort competition. RLC |
Thirdly, he held that the CAT had been wrong to attach weight to the fact that BT, not having significant market power in a relevant market, was not subject to ex ante control of its prices on competition grounds. RLC |
Having disposed of the three considerations that led the CAT to put the burden of justifying their objection to the new charges on the mobile network operators, Lloyd LJ held that it was for BT to justify its charges as being fair and reasonable. RLC |
This, he thought, required them to establish positively that consumers would benefit by them, something which the inconclusive outcome of the welfare test made it impossible for them to do. RLC |
The function of Ofcom in resolving disputes Ratio |
Lloyd LJ attached considerable importance to the nature of the function which Ofcom is performing when it resolves disputes about charges under an interconnection agreement. Ratio |
He considered (para 63) that dispute resolution is a form of regulation in its own right, to be applied in accordance with its own terms. Ratio |
In his view, the terms of the Interconnection Agreement were of little if any relevance because their effect was that any new charges introduced by BT were liable to be overridden by Ofcom in the exercise of its regulatory powers. Ratio |
This led him to regard interconnection charges as an essentially regulatory construct. Ratio |
Much of the rest of his analysis follows from these premises. Ratio |
Because Ofcoms determination of the dispute was a regulatory function, Lloyd LJ considered that the balancing of the various factors relevant to Principle 2 was a value judgment for it. Ratio |
Since it was not shown to have erred in principle, its decision should be restored. Ratio |
The dispute resolution functions of Ofcom have often been described as regulatory, notably by the CAT in T-Mobile (UK) Ltd v Office of Communications [2008] CAT 12. Ratio |
It is unquestionably true that the dispute resolution functions of national regulatory authorities are part of the regulatory scheme, and that in exercising those functions the regulator is required by Article 20.3 of the Framework Directive to promote the overarching objectives set out in Article 8, just as it is requ... |
But the description of dispute resolution as a form of regulation in its own right is apt to mislead without some analysis of what is meant by it. Ratio |
As a national regulatory authority charged with the resolution of disputes, Ofcom has both regulatory and adjudicatory powers. STA |
Article 20.1 of the Framework Directive requires national regulatory authorities to have power to resolve disputes between CPs in connection with obligations arising under this Directive or the Specific Directives between undertakings. STA |
Article 5.4 of the Access Directive requires national regulatory authorities to have a power of intervention in a dispute about access and interconnection in accordance with (inter alia) the procedures in Article 20 of the Framework Directive, in order to secure the policy objectives of Article 8 of the Framework Direc... |
The combined effect of these provisions is that the dispute resolution function extends to disputes of different kinds. STA |
A dispute may arise (i) under the existing interconnection terms, or (ii) because the parties have been unable to agree terms and one of them wants the regulator to impose them, or (iii) because there are binding terms but they do not satisfy (or no longer satisfy) Article 5.3 of the Access Directive or the policy obje... |
In case (i) it may perform an adjudicatory or a regulatory role or a combination of the two. STA |
The existence side by side of both adjudicatory and regulatory functions follows from the scheme of the Directives, but is particularly clearly spelled out in section 190 of the Communications Act, which I have already quoted. STA |
The section distinguishes between Ofcoms powers in the course of dispute resolution to declare the rights and obligations of the parties (section 190(2)(a)), to fix the terms of transactions between the parties (section 190(2)(b)) and to impose an obligation to enter into a transaction on terms fixed by Ofcom (section ... |
The first of these powers is plainly adjudicatory. STA |
The second and third are regulatory. STA |
As I have pointed out above, the scheme of the Directives depends critically on the agreed interconnection terms. Ratio |
This is a feature of the scheme which is fundamental to its essentially permissive character. Ratio |
It reflects the consistent emphasis in the Directives on respecting freely negotiated interconnection terms in a competitive market: see in particular Recital (5) of the Access Directive. Ratio |
In the ordinary case, the interconnection terms will have been negotiated between the parties, within the constraints imposed by law, namely that the result must be consistent with the objectives in Article 8 of the Framework Agreement. Ratio |
If, however, they were imposed or modified by Ofcom under Article 5.1, the effect is the same, namely to create a contract or something that will be treated as legally equivalent to a contract. Ratio |
When Ofcom is resolving a dispute about a proposed variation of charges under an existing agreement, it is performing a mixture of adjudicatory and regulatory functions. Ratio |
The terms of the interconnection agreement are the necessary starting point for this process. Ratio |
If there is no contractual right to vary the charges, it is difficult to see how Ofcom can approve a variation unless it is necessary to achieve end-to-end connectivity (for example to enable operators to recover their efficient costs) or to achieve the Article 8 objectives. Ratio |
If there is a contractual right to a variation, but the proposed variation is not consistent with the Article 8 objectives, Ofcom may reject the variation. Ratio |
It may also modify any terms which created an entitlement inconsistent with the Article 8 objectives. Ratio |
If there is a contractual right to a variation which is consistent with the Article 8 objectives, Ofcoms function when the right is challenged is to give effect to it. Ratio |
The contractual effect of the interconnection terms will of course depend on their proper law, and in some respects this may vary from one member state to another. Ratio |
But as far as the Article 8 objectives are concerned, there will be commonality between every member state because all of them have the same obligation to ensure that interconnection agreements are framed and applied in a manner consistent with those objectives, and the same obligation to require their national regulat... |
Clause 12 of the Interconnection Agreement Ratio |
Clauses 12.1 and 12.2 of BTs Standard Interconnect Agreement confer a power on BT unilaterally to fix or vary its charges. Ratio |
Although the mobile network operators did argue in the CAT that their unilateral character was a reason why they should not be given weight, neither they nor Ofcom argued in the CAT that clause 12 should be modified. Ratio |
The manner in which English law ensures that contractual effect is given to the Article 8 objectives is by treating BTs discretion under Clause 12 as limited. PRE |
As a general rule, the scope of a contractual discretion will depend on the nature of the discretion and the construction of the language conferring it. PRE |
But it is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously: Abu Dhabi National Tanker Company Ltd v Product Star Shipping Ltd (No 2) [1993] 1 Lloyds Rep 397, 404 (Leggatt LJ); Gan Insurance Company L... |
This will normally mean that it must be exercised consistently with its contractual purpose: Ludgate Insurance Company Ltd v Citibank NA [1998] Lloyds Rep (I&R) 221, para 35 (Brooke LJ); Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459 (Lord Steyn), 461 (Lord Cooke of Thorndon). PRE |
Interconnection agreements are made in a regulated environment. PRE |
The regulatory scheme may change, quite possibly after interconnection terms have been agreed (as it did in this case). Ratio |
But the intention of the parties must be to comply with the scheme as it stands from time to time so far as the contract permits. Ratio |
That intention necessarily informs the scope and operation of any contractual discretions. Ratio |
In my opinion, it is entirely clear that the discretion conferred by clause 12 of the Standard Interconnect Agreement is limited by reference to the purposes set out in Article 8 of the Framework Directive. Ratio |
It follows that contractually BT was entitled to set its own charges, but only within limits which are fixed by those objectives. Ratio |
By virtue of clause 12.5, BTs power to set its own charges within those limits is subject to any order, direction, determination or consent of Ofcom. Ratio |
But this does not mean that Ofcom can do what it likes. Ratio |
It is bound to start from the parties contractual rights and may override them only if that is required by the Article 8 objectives. Ratio |
However, under Clause 12 of the Interconnection Agreement, this is a conflict which cannot arise, because BT has no contractual right to require a price variation which is not consistent with the Article 8 objectives. Ratio |
In this case, therefore, Ofcoms function was to determine whether BTs proposed charges exceeded the limits of its contractual discretion. Ratio |
That depends on whether they were in fact consistent with the Article 8 objectives. Ratio |
This is where the three principles applied by Ofcom, including the welfare test and the competition test, come in. Ratio |
Clause 13 of the Interconnection Agreement Ratio |
At this point, it is necessary to make a short excursion into Clause 13 of the Interconnection Agreement. Ratio |
Whereas Clause 12 is concerned with charges for BT services, Clause 13 deals with charges payable by BT to the Operator for Operator services. Ratio |
It provides by Clause 13.1 that the charges are to be those specified from time to time in the Carrier Price List. Ratio |
The remainder of Clause 13 is concerned with variations to the Operators charges in the Carrier Price List proposed by the Operator. Ratio |
But it works in a different way from the corresponding provisions of Clause 12 relating to variations proposed by BT. Ratio |
In particular, there is no direct equivalent of Clause 12.2. Ratio |
The Operator has no unilateral right to introduce a variation. Ratio |
He must request one. Ratio |
If the request is rejected by BT and the parties fail to agree upon a modified version of the proposed variation, the issue is referred to Ofcom. Ratio |
Under Clause 13, the variation is not treated as provisionally valid pending a determination. Ratio |
The Court of Appeal attached importance to these differences because it considered that the way in which Ofcom determined a dispute about pricing must be the same whether the issue arose under Clause 12 or Clause 13. Ratio |
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