British Telecommunications Plc v Telefónica O2 UK Ltd and Others

When a communications provider has a contractual discretion to vary interconnection charges, the agreement is the starting point for resolving a dispute. The discretion must be exercised consistently with the regulatory objectives governing competition and consumer welfare.

A regulator may reject a variation which conflicts with those objectives. It cannot reject a variation merely because its effect on consumer welfare is uncertain. An inconclusive welfare assessment supplies no positive reason for intervention, particularly where preventing an innovative charging structure would itself restrict competition.

BT introduced a variable scheme of termination charges for calls from mobile networks to fixed lines associated with 080, 0845 and 0870 numbers. The charges depended on the amount which the originating mobile operator charged its customer. The mobile operators disputed the changes and referred them to Ofcom.

Ofcom prohibited the changes because BT had not demonstrated that they would produce a net consumer benefit. The Competition Appeal Tribunal allowed BT's appeals, holding that an inconclusive welfare assessment was insufficient. The Court of Appeal, in [2012] EWCA Civ 1002, restored Ofcom's determinations.

The central issues were the relationship between contractual rights and Ofcom's dispute-resolution functions, and whether uncertainty about consumer welfare justified rejecting the proposed charges.

1. The appeal was allowed unanimously. Lord Sumption delivered the judgment, with which Lord Neuberger, Lord Mance, Lord Toulson and Lord Hodge agreed. The Court of Appeal had not been justified in setting aside the Competition Appeal Tribunal's analysis.

2. Ofcom's dispute-resolution jurisdiction can involve adjudicatory functions, regulatory functions, or a combination of both. Under article 20 of the Framework Directive, article 5 of the Access Directive and section 190 of the Communications Act 2003, Ofcom may declare existing rights, fix transaction terms or require parties to transact. When resolving a dispute about a proposed variation under an existing agreement, the agreement is the necessary starting point.

3. BT's contractual discretion under clause 12 to vary its charges was limited by the objectives in article 8 of the Framework Directive. Contractual discretions ordinarily must be exercised in good faith, without arbitrariness or caprice, and consistently with their contractual purpose. In this regulated setting, BT could set its charges only within the limits fixed by the article 8 objectives. Ofcom could override the contractual position only where those objectives required it.

4. Ofcom had erred by rejecting the charges merely because the welfare assessment was inconclusive. BT was entitled to vary its charges unless the changes were inconsistent with the article 8 objectives. Ofcom had found likely direct and indirect consumer benefits, while any countervailing mobile-tariff-package effect remained essentially unknown. Mere uncertainty did not establish that BT had exceeded its contractual discretion. Treating uncertainty as sufficient would impose an extreme precautionary approach inconsistent with the market-oriented and permissive scheme of the Directives.

5. The risk created by a variation may itself be adverse where the possible consequences are sufficiently grave. That qualification did not apply on the findings in this case. Ofcom also retained power to intervene if sufficiently adverse effects later materialised.

6. The Competition Appeal Tribunal was entitled to find that preventing innovative charging structures could itself distort competition. That was relevant under article 8.2(b) of the Framework Directive. Its assessment was a factual and economic judgment made on a merits rehearing, and an appeal to the Court of Appeal lay only on a point of law.

7. It was unnecessary to decide whether Ofcom could never reject a price variation by an undertaking lacking significant market power. The absence of such power did not make competition considerations irrelevant. Even on a purely regulatory analysis, intervention would have been unjustified because neither the welfare assessment nor the competition assessment supplied a positive reason to anticipate adverse effects.

1. United Kingdom Supreme Court: Allowed BT's appeal and set aside the decision of the Court of Appeal. The Competition Appeal Tribunal's determination was restored in substance.

2. Court of Appeal: In [2012] EWCA Civ 1002, allowed the mobile operators' appeal on points of law, overruled the Competition Appeal Tribunal and restored Ofcom's determinations.

3. Competition Appeal Tribunal: Allowed BT's merits appeals and overturned Ofcom's determinations. It held that an inconclusive welfare assessment did not justify preventing the revised charges.

4. Ofcom: Determined that BT could not introduce the revised charging scheme because BT had not positively demonstrated a net consumer benefit.