- The
Claimant (TM) was at all material times a partnership licensed to run telecommunication
systems in the UK and to use the radio spectrum over which mobile telecommunications
services are provided. It was formerly known as One 2 One. In August 1999, TM,
under its previous name, was the subject of a proposed sale, by its then owners,
to Deutsche Telekom. That sale was concluded after execution of agreements made
between TM and the First and Second Defendants which are both companies in the
Virgin Group and to which I shall collectively refer as ‘Virgin’ in this judgment.
The Third Defendant (VM) is a joint venture company owned by TM and Virgin and
operated by them pursuant to a Subscription and Shareholders Agreement dated 9th
August 1999 (the JVA). VM’s business is the retail sale of mobile telecommunications
services. It operates as a "virtual network" by purchasing the use of
TM’s telecommunications systems under a Telecommunications Supply Agreement between
TM and VM also dated 9th August 1999 (the TSA).
- The
major dispute between the parties arises out of a letter of the 30th
September 2002 sent by TM to VM, which, the former asserts, constitutes an event
of termination or gives rise to an event of termination under the JVA. The letter
purported to propose a "Customer Contribution" (CC) less than the "Minimum
Customer Contribution" (Minimum CC) to which the TSA referred. In order to
determine this and other disputes between the parties, six issues must be addressed.
- The
first issue is the construction and effect of a letter of agreement of 12th
September 2000, which varied the terms of the TSA. The question is whether under
the terms of that letter TM could propose a CC less than the Minimum CC.
- The
second issue relates to the allegation by VM that, if it is wrong on the point
of construction, there is an estoppel by conduct, representation or convention
as to TM’s entitlement to exercise the right under the JVA to make such a proposal.
Alternatively it is said that TM is estopped from relying upon the letter of 30th
September 2002 as constituting or giving rise to an Event of No Fault Termination
under the JVA.
- The
third issue relates to the allegation by TM that, if it is wrong on the point
of construction, the effect of a letter of 30th May 2002 is to reverse
the effect of the letter of agreement of 12th September 2000.
- The
fourth issue, which proceeds on the basis that TM was entitled to propose a CC
less than the Minimum CC, relates to the contents of TM’s letter of 30th
September 2002 and whether the calculation of the CC to which it refers is a valid
and proper calculation in accordance with the TSA.
- The
fifth issue, which is related to the fourth issue and also gives rise to monetary
claims by VM under the TSA, concerns the question of dormant customers of VM who
have, over a given period, failed to make use of some or all of the telecommunications
services.
- The
sixth issue relates to a fax sent by Peter Gram on 1st October 2002,
following receipt of the 30th September 2002 letter and whether or
not this constitutes a notice of an "Event of No Fault Termination"
under the terms of the JVA.
The
Agreements
- The
JVA was an agreement concluded by Virgin, TM and VM, although the vast majority
of the obligations set out were owed between Virgin and TM. Under the terms of
the JVA, it was agreed that Virgin and TM would own VM on a 50/50 basis and each
should appoint three directors to VM’s board. These directors were at the time
of the events in question in 2000, Mr. Dormandy, Mr. McCallum and Sir Richard
Branson as appointees of Virgin and Mr. Shearer, Mr. Harris Jones and Ms. Chain
as appointees of TM. A number of matters, called "Reserved Matters"
required approval by unanimous resolution of all the Directors. The most important
of these for the purposes of this litigation was that required by Clause 4.5(f),
namely "the approval of or any change to the Business or to the then current
Business Plan." In the event of all the voting members of the Board failing
to agree unanimously upon any Reserved Matter, there was a procedure for resolution
by reference to the Chairman of Virgin and the Managing Director of TM or their
respective nominees. If that reference failed to resolve the matter then the termination
provisions of Clause 16.1 were to apply.
- By
Clause 7 of the JVA, VM was to procure that, within three months after execution
of the agreement, and thereafter annually in each financial year, a Business Plan
was to be produced to the Board for review and approval.
- Clause
4.7 of the JVA provided that Virgin and TM would procure that any director appointed
by them should, to the extent that it was not inconsistent with his duties as
a director, so act and vote in relation to the affairs of VM as to ensure that
VM complied with the terms of the JVA, "including, without limitation, the
Business Plan". The "Business Plan" was defined in the JVA as "the
annual budget and operating plan of the Company (VM) from time to time approved
or changed by the Board in accordance with Clauses 7 and 4.5" of the JVA.
- The
terms of Clause 16.1 and 16.2 of the JVA are central to the main dispute between
the parties. Clause 16 provided as follows, so far as relevant: -
"16.1
No Fault Termination
(a)
It shall be an "Event of No Fault Termination" if: ……
(ix)
for the period 1 April 2002 to 30 June 2002 or on any subsequent review date,
the Customer Contribution proposed by [TM] is less than the Minimum Customer Contribution
for the relevant period.
(b)
If an event of No Fault Termination occurs, the Company shall notify [Virgin]
and [TM] in writing and either [Virgin] or [TM] may make an offer to buy all (but
not some only) of the other party’s Shares. If neither party wishes to purchase
the shares of the other and no offer has been made within 60 days of the notification
by the Company of the Event of No Fault Termination, unless [Virgin] and [TM]
agree otherwise, the parties shall use all reasonable endeavours to sell all the
Shares in the Company to a third party for the highest achievable price.
…
(k)
If [Virgin] purchase the shares of [TM] pursuant to clause 16.1(b) [TM] shall
be obliged to sell and the Company shall be obliged to purchase Airtime Services
in accordance with the Telecommunication Supply Agreement for supply to customers
of the Company existing at the date of the Event of No Fault Termination for a
period of (i) three years or (ii) the length of time such customers remain customers
of the Company, whichever period is the shorter…"
[Detailed
provisions for offers and counter offers to acquire the shares of the other shareholder
were set out in clause 16.1.(c)-(j), whilst clause 16.1(l) provided for the position
where TM purchased Virgin’s shares in VM.]
16.2 Event of Default. It shall be an "Event of Default"
if:-
(h) [TM] proposes a Customer Contribution for the period 31 January 2000 to 31
March or on any review date between 1 April 2000 and 31 March 2002 which is less
than the Minimum Customer Contribution for the relevant period;
16.3
Consequences of Event of Default. If any Event of Default is committed
by or occurs in respect of either [Virgin] or [TM] (a "Defaulting Party")
then the other (the "Non-Defaulting Party") shall be entitled to serve
a notice on the Defaulting Party (a "Compulsory Sale Notice") (provided
that on the date of any such notice the relevant Event of Default is continuing)
requiring that the Defaulting Party’s Shares are offered for sale to the Non Defaulting
Party in the manner set out in Clause 16.4.
16.4
Compulsory Sale. Following the service of a Compulsory Sale Notice, the
Defaulting Party will be obliged to sell all of its Shares to the Non Defaulting
Party at a price equal to 50% of the value of physical assets of the Company (excluding
any value attributable to brand rights, goodwill, customer database or other IPR)
less the Company’s liabilities or £1 if greater, the assets and liabilities of
the Company to be determined by the Company’s auditors on the same basis as the
last audited accounts."
- There
was thus a difference between the share sale provisions which applied to an Event
of Default and those which applied to an Event of No Fault Termination in respect
of the parties who could purchase the shares of the other and in the valuation
to be put upon the shares to be purchased. If an Event of Default occurred, only
the non-defaulting party could purchase and could do so at a figure which reflected
the physical assets of VM without any reference to brand rights or goodwill. Since
VM was a virtual network operator, it had few physical assets and its real value
was tied up in its brand name and goodwill. By contrast, if an Event of No Fault
Termination occurred, it was open to each of the shareholders to outbid the other
in an auction where the price would reflect the true worth of the company, including
its intellectual property and goodwill.
- Under
the TSA, TM agreed to supply VM upon request with "Airtime Services"
constituting mobile radio telecommunication services and other services of a similar
kind, in return for payment from VM who were to purchase these services exclusively
from TM. By the terms of clause 5.1, VM was to pay to TM a Capacity Utilisation
Fee (CUF) for each minute (or part thereof) of outbound usage by their Customers
except in the case of On Net calls, in which case VM was to pay TM twice the CUF
for each minute or part thereof. The CUF, as at the date of the TSA, was set out
in Appendix A but could be varied as provided in the formula set out in that appendix.
- Under
Clause 5.7, TM was to issue invoices in respect of the CUF "less the relevant
Marketing Support Contribution (as defined in and in accordance with Appendix
F)." By Clause 6.1 and 5.7, VM was also liable to pay the actual cost of
interconnection charges incurred by TM in relation to outbound or inbound calls
made or received by customers to or from a third party network, although in practice
this actually meant interconnection charges on outbound calls only.
- Clause
5.10 read as follows:-
"The
parties agree that from the date when the Company begins to pay the Capacity Utilisation
Fee pursuant to Clause 5.1 until 31 January 2000 inclusive [TM] shall
pay to the Company a Marketing Support Contribution as defined in and in accordance
with Appendix F. For the period from 1 February 2000 to 31 March 2000 inclusive,
and thereafter on a quarterly basis, [TM] shall pay to the Company a Marketing
Support Contribution which shall be recalculated on the day before the first day
of each such period (the "review date") by [TM] in accordance with Appendix
F unless and until the parties agree alternative bonus arrangements. If the Customer
Contribution (as defined in Appendix F) calculated by TM for the period from 1
February to 31 March inclusive or on any review date between 1 April 2000 and
31 March 2002 inclusive is less than the Minimum Customer Contribution (as defined
in Appendix F) for the relevant period, there shall (unless the parties otherwise
agree) be deemed to be an Event of Default by [TM] for the purposes of Clause
16.2 of the JVA. Thereafter, if the Customer Contribution calculated by [TM] on
any review date is less than the Minimum Customer Contribution for the relevant
period, there shall (unless the parties otherwise agree) be deemed to be an Event
of No Fault Termination for the purposes of Clause 16.1 of the JVA. For the avoidance
of doubt, if the parties agree alternative bonus arrangements, the provisions
of Appendix F shall cease to apply."
- Appendix
F read as follows:-
"1.
In this Appendix F, the following terms and expressions shall have the following
meanings:
"Customer
Contribution" means the amount payable by [TM] to the Company per Customer
per month as determined in paragraphs 2 and 3 below;
"D"
means (1.09 p/12-1);
"Initial
period" means the period from launch to 31 January 2000;
"Marketing
Support Contribution" means the Customer Contribution for the month concerned
multiplied by the Monthly Customer Base;
"Minimum
Customer Contribution" means (the Customer Contribution for the Previous
Period x (1+ Relevant RPI) x (1-D)) and, for the avoidance of doubt, the Minimum
Customer Contribution shall be calculated as shown in example 2 below:
"Monthly
Customer Base" means the average of the number of Customers connected
to the Network at the beginning of the calendar month concerned and the number
of Customers connected to the Network at the end of the calendar month concerned;
"P"
means the number of months in the Previous Period;
"Previous
Period" means the period since the last review date or, if there hasn’t
been a review date, the period since the launch date;
"Relevant
RPI" means the RPI for the Previous Period.
2.
For the Initial Period the Customer Contribution shall be £4.56.
3.
The Customer Contribution shall be reviewed on 31 January 2000, 31 March 2000
and thereafter every three months. On each such review date [TM] shall inform
the Company of the Customer Contribution for the following period. [TM] shall
base the calculation on the Company’s performance over the previous period starting
from the last review date. [TM] undertakes that the Customer Contribution for
the period 31 January 2000 to 31 March 2000 and for each subsequent period shall
not, unless the parties agree alternative bonus arrangements, be less than the
Minimum Customer Contribution. For the avoidance of doubt, once the parties agree
alternative bonus arrangements the provisions of this Appendix F shall cease to
apply.
4.
The Marketing Support Contribution shall be calculated by [TM] on a monthly basis
and set against the Charges otherwise due to [TM] under this agreement for that
month. The Charges less the Marketing Support Contribution shall be invoiced by
[TM] and payable by the Company in accordance with Clause 5 of this Agreement."
- It
was common ground that the underlying basic philosophy of the JVA and TSA (as
expressed in Heads of Agreement in February 1999) was that services should be
supplied essentially at cost to VM and that the two joint venturers, Virgin and
TM should make profits by distribution from VM, rather than in their dealings
with it. It was also common ground that, in the same way that VM was required
to pay TM a CUF in respect of outbound calls by VM’s customers, and to reimburse
TM for costs incurred as a result of using third party networks, the original
intention was that VM was to receive from TM a figure equivalent to the revenue
generated from third party network operators, when calls originating from their
networks were connected to VM customers. TM and its then owners feared, however,
that the pass-through of inbound revenue from TM to VM might attract the attention
of the OFTEL regulators, who were concerned at the level of interconnection charges
between mobile networks and that this might jeopardise the proposed sale of TM.
A payment mechanism was therefore provided which was intended to bear a relationship
to inbound revenue, but which could not be expressly tied to it in such a way
as to excite the attention of OFTEL. Thus it was that Appendix F came into existence
with the concept of a "Marketing Support Contribution" (MSC) made up
by multiplying the " Customer Contribution" (CC) by the "Monthly
Customer Base". The wording used in relation to calculation of the CC was
vague. There are many different ways in which "performance over the previous
period starting from the last review date" in theory might be assessed but,
to the extent that it is in issue, I find that the parties knew that the calculation
of MSC was intended as a proxy for inbound revenue and the performance in question
was that which related to the generation of that inbound revenue. There was a
common understanding and agreement to that effect at the time the JVA and TSA
were concluded. In order to safeguard the position of VM from the deficiencies
of the wording, a Minimum CC was provided, linked to the CC for the previous period,
and the figure of £4.56 appeared in Clause 5.10 and Appendix F of the TSA as the
initial figure which was based by TM on their estimate of future inbound revenue
less the allocated cost of the use of the TM network (the CUF).
- This
figure was to apply for the initial period from the date of the launch of the
Virgin Mobile Network (11th November 1999) to 31st January
2000, for the purpose of assessing the MSC. Although Clause 5.10 and paragraph
3 of Appendix F of the TSA provided for a review of CC and calculation of MSC
on 31st January 2000, 31st March 2000 and 30th
June 2000, in practice, there was no calculation based on VM’s ‘performance’ on
any of those dates. Instead, the figure of £4.56 was used as the CC for the purpose
of assessing the MSC. There was no discussion during that period of any calculation
based upon VM’s performance over the previous period starting from the last review
date, nor of any Minimum CC, assessed by reference to the CC in the previous period,
changes in the retail price index and the 9% figure referred to in the definition
of "D" in Appendix F. (In broad terms, it was common ground that the
effect of applying the mechanism set out for assessing the Minimum CC over the
relevant period of time, when the retail price index moved reasonably steadily,
was that the Minimum CC generally amounted to a figure diminishing at the rate
of 7% pa. From time to time the parties referred simply to a 7% reduction as a
shorthand for this mechanism). No calculation of this kind featured in the early
part of the year 2000 however and the figure of £4.56 was used without any discussion
or objection.
- From
at least the middle of the year 2000 onwards, if not earlier, it became apparent
that substantial increased funding was needed by VM in order to expand its customer
base. Neither of the shareholders was willing to fund this and it therefore became
necessary to seek external funding in the shape of a bank loan. In due course,
£115 million was made available by a number of banks, led by JP Morgan, in the
form of a term loan of £100 million over a five-year period and a revolving credit
of £15 million. Leaving aside matters of detail for the moment and the history
leading up to the loan which was made on 26th September 2000, it is
sufficient at this stage to say that, in the absence of tangible assets to serve
as security for the loan, attention was focused upon VM’s revenue stream, both
by those at VM, those at Virgin, those at TM and the banks who were to lend the
money.
- Over
the period since the launch, a number of different issues had also risen under
the TSA, which required resolution, as between VM and TM. The question of MSC
was one of these issues, regardless of the bank loans. In the result, following
a series of discussions and negotiations, a letter of agreement dated 12th
September was signed on behalf of VM and TM. The relevant terms of the letter,
which was sent by VM to TM and countersigned on behalf of the latter, were as
follows:-
"Following
recent correspondence and discussions that we, … (VM) have had with [TM] over
the course of the last few months we are writing in order to reach final closure
on a number of outstanding issues.
…………………
Marketing
Support Contribution
5. [TM]
and (VM) hereby agree that the Customer Contribution (as defined in Appendix F
of the Telecommunication Supply Agreement dated 9 August 1999 (the TSA) made between
[TM] and VM) shall be equal to £4.56 for the period commencing on the date on
which [TM] countersigns this letter and ending on 31 March 2001. The parties hereto
agree that notwithstanding the provisions of Clause 5.10 and Appendix F of the
TSA, from 1 April 2001 the Marketing Support Contribution and the Customer Contribution
shall be calculated in accordance with and using the formula set out in the TSA.
For the purposes of Clause 5.10 of the TSA, the date on which [TM] countersigns
this letter shall be deemed to be a review date. In addition for the purposes
of the calculation using the formula in the TSA at the next review on 31 March
2001 the "Previous Period" shall be three months."
The
letter was acknowledged and signed in agreement with its terms by TM shortly after
receipt.
The
proper Construction of the JVA and the TSA
- Under
cl 5.10 of the TSA, TM "shall pay" VM an MSC as defined in and in accordance
with Appendix F of the TSA. That was obligatory. Equally, in the language of the
clause, TM "shall pay" to VM in the period 1 Feb –31 March 2000 inclusive,
and thereafter on a quarterly basis, an MSC "which shall", on the review
date, "be recalculated in accordance with Appendix F", in the absence
of agreed alternative bonus arrangements. This was mandatory also.
- Appendix
F defined the MSC as the CC for the month concerned multiplied by the monthly
customer base. Paragraph 2 of the Appendix provided that the CC would be £4.56
for the initial period from 11.11.99- 31.1.00, whilst paragraph 3 provided that
"the CC shall be reviewed" quarterly from 31.1.00 onwards. Paragraph
3 of Appendix F continued by providing that on each review date, TM " shall
inform" VM of the CC for the following period and "shall base"
the calculation on VM’s performance over the previous period starting from the
last review date. All of this language is obligatory and creates no discretion
in TM as to whether to review, recalculate or inform.
- The
Appendix however also includes an undertaking by TM that the CC for any period
after 31 Jan 2000 "shall not" [absent alternative agreement] be less
than the Minimum CC, which is to be calculated by reference to the CC for the
previous period, factoring in changes in the RPI index and a 9% pa reduction.
This calculation is set out in the Appendix by reference to symbols for some of
the constituent parts, such as "D" and "P".
- It
might be thought that there is a conflict between the terms of Appendix F and
cl 5.10 of the TSA because under the former, TM undertook that the CC should not
be less than the Minimum CC but cl 5.10 provided for the situation where the CC
(as defined in Appendix F) was less than the Minimum CC (as defined in Appendix
F). Cl 5.10 provided that where this occurred prior to 31st March 2002,
it was to be deemed an Event of Default by TM for the purposes of cl 16.2 of the
JVA and where it occurred after that date, it was deemed to be an Event of No
Fault Termination for the purposes of Cl 16.1 of the JVA, unless the parties otherwise
agreed, in either case. This is however explicable by reference to the terms and
purposes of the JVA and the TSA and the termination provisions of both. The TSA
continues whilst the JVA is in force and thereafter as provided in the JVA, as
can be seen from clause 15 of the TSA. The terms of the TSA essentially relate
to the supply of airtime services by TM to VM and the payments to be made. Thus
the parties agree that (absent other agreement) TM can never pay less than the
Minimum CC, but TM can put forward a CC which is lower, which then has the deemed
effect specified, so far as the JVA is concerned.
- As
a matter of strict language, under the terms of Cl 16.1(a)(ix) and 16.2(h) of
the JVA, where TM "proposes" a CC or a CC is "proposed" by
TM, this in itself, without more, constitutes an Event of Default or an Event
of No Fault Termination, as the case may be, but the use of the word "propose"
or "proposed" suggest that this is open for acceptance by Virgin, whilst
the terms of cl 5.10 of the TSA provide that, for the purposes of the TSA, it
is not a deemed event of that nature, if TM and VM so agree.
- It
must therefore be open to TM and Virgin, who control VM between them, to mutually
agree to treat the proposed CC, even if below the Minimum CC, as the CC for the
period in question and to continue as if no event of termination of the JVA had
occurred. They would then procure VM’s agreement to it. Further, in the case of
an Event of Default, the option to treat the JVA as continuing must lie with the
non-defaulting party (being Virgin in the context of a proposed CC). In the case
of an Event of No Fault Termination, however, because there is, ex hypothesi,
no question of fault or breach, both Virgin and TM have to agree if the calculation
of the CC and the notification of it is not of itself to amount to such an event.
It is not enough for Virgin to accept the calculation in order for the joint venture
to continue, (notwithstanding the use of the word "proposed"), since
the fact that the proposed CC is less than the Minimum CC is in itself the event
of termination with the prescribed effect, so that, if this is not to be the position,
both parties would have to agree otherwise. This is commercial sense since VM
will be affected by this and because VM is a 50/50 company, both Virgin’s and
TM’s interests are affected by any acceptance of a lower CC.
- Although
the CC is defined in paragraph 1 as the amount payable per month as determined
in paragraphs 2 and 3, it is not enough for TM to inform VM of a Minimum CC alone.
If the CC is more than the Minimum CC then VM is entitled to be paid that figure.
If it is less, then various consequences follow as set out in clause 5.10 of the
TSA and clause 16 of the JVA. Both therefore fall to be calculated and information
given to VM, in order that VM, Virgin and TM can assess the position with regard
to the termination provisions.
- In
this context therefore, the calculation and the notification by TM of the CC after
31 March 2002 (where it could amount to an Event of No Fault termination) assumes
great importance, since it lies in the hands of TM and has such a critical effect
on the Joint Venture. If the parties do not agree to work with the CC lower than
the Minimum CC and to the continuance of the JVA, despite the happening of the
Event of No Fault Termination, the JVA will terminate. It cannot then be enough,
as TM initially argued, for such a vital calculation to be done solely in good
faith. It must also, at the very least, be a calculation, which is properly based
on performance in the sense understood by the parties, namely bearing a relationship
to the generation of inbound income for TM in the period since the last review
date and also be a reasonable assessment of that. By the end of the trial this
was accepted by TM. The calculation must be reasonable in the context of the understanding
of the parties that it was a substitute for VM receiving a "pass through"
of TM’s inbound earnings deriving from communications to VM’s customers. It would
be commercially absurd for the calculation to rest in TM’s discretion alone, without
any governing element of reasonableness. At the time of contracting, the parties
and any officious bystander, if asked the question whether such a calculation
had to be a reasonable one, would unhesitatingly answer in the affirmative and
there is, in my judgment an implied term to that effect, as a result. Moreover
such an implication is necessary in order to give the provision business efficacy.
The calculation is therefore open to objective analysis to ascertain if it complies
with that standard.
Construction
of the Letter of 12th September 2000
- Both
parties agreed that the factual matrix of the letter of 12th September
was important in construing it, but there was some disagreement as to what the
relevant matrix was. Whilst it is obviously important to construe the letter in
its business context, in my judgment, the ordinary meaning to be accorded to its
language, as a matter of analysis of its self contained terms, leads to exactly
the same conclusion as that which is derived from consideration of the factual
matrix.
- Even
without regard to the factual matrix, the construction of paragraph 5 of the letter
of the 12th September 2000 is, in my judgment, clear. The paragraph
can be broken down into its four constituent sentences but each sentence must
be read as a constituent part of the whole.
- It
was common ground between the parties that the first sentence clearly set out
the CC as £4.56 for the period up to the 31st March 2001, in circumstances
where the only prior express agreement was that the figure of £4.56 would run
until 31st January 2000. It is worth noting that it fixed the CC, not
the Minimum CC at this level which points to the aim of the paragraph as a whole.
The first sentence provided that the figure of £4.56 should apply from the date
of counter signature of the letter agreement until the 31st March 2001.
The prior use of the figure £4.56 for the period between 31st January
2000 and the date of countersignature was not touched on in the wording of the
letter. There was no suggestion, and has never been any suggestion, that any other
figure should apply over that interim period, but this sentence fixed the contribution
for the period up to 30th September 2000, up to 31st December
2000 and up to 31st March 2001 at that level.
- The
second sentence was the sentence, which gave rise to the major issue between the
parties. It is plain that, by reason of the use of the word "notwithstanding",
some change is to be effected to the application of the provisions of clause 5.10
and Appendix F of the TSA to the MSC and CC, as from 1st April 2001.
Equally, it is clear that the calculation of those two elements is to be related
to a "formula" set out in the TSA. Despite the ingenuity of the arguments
put forward by TM, the use of the word "formula" in the second sentence
tallies with the use of the word "formula" in the fourth sentence and,
in the context in which they appear, those words in the fourth sentence can only
refer to the formula for calculating the Minimum CC, as set out in Appendix F.
The ordinary and natural meaning of the word "formula" in a context
such as this is that of a mathematical calculation or procedure for arriving at
a figure, and the only relevant calculation or procedure, to which this could
refer, is that for ascertaining the Minimum CC. If the parties had expressly referred
to the "formula for calculating the Minimum CC" the point would not
arise, but this is the obvious reference. I will shortly revert in more detail
to the arguments for and against this.
- The
third sentence deemed the date of counter signature of the letter by TM to be
a "review date." It specified the date of the agreement as a "review
date" because of the reference to "the last review date" in the
definition of "previous period" in paragraph 1 of appendix F and because
there had been no prior reviews at the end of January, March or June 2000. Nor
would there be at September 30th or December 31st 2000.
The sentence made it clear that a fresh start was to be made in calculations from
the date of counter signature of the letter, notwithstanding the use of £4.56
between March and September. The suggestion that the purpose of this sentence
was to fix a prior review date for "performance" calculations flies
in the face of the first, second and fourth sentences.
- The
fourth sentence, which qualifies the third sentence by using the words "in
addition", then provided that the next review date was to be 31st
March 2001 (thus tying in with the first sentence and ruling out reviews on 30th
September and 31st December 2000). It also provided that the relevant
"previous period" was to be three months rather than the whole period
since countersignature of the letter, for the purpose of using the figure "P"
in calculating the figure "D" in paragraph 1 of Appendix F, i.e. 3 months
only. This is only necessary in the context of assessing the "Minimum CC".
It is therefore plain, in my judgment, that the "formula" referred to
in the fourth sentence, in this context, can therefore only refer to the formula
for calculating the "Minimum CC", because of this reference to the "previous
period".
- When
regard is had to the use of the word "formula" in the fourth sentence
and its use in the second sentence of paragraph 5 of the letter, the question
arises as to whether there is any other provision to which it could refer. TM
had two suggestions for this. The first was that it referred to the complete terms
of clause 5.10 and appendix F which, it was said, gave rise to a mechanism for
using either the CC or the Minimum CC in assessing MSC. The second suggestion
was that the word "formula" was apt to describe the calculation based
upon VM’s performance over the previous period starting from the last review date,
when assessing the CC. Neither of these alternatives is realistic. When the parties
used the word "formula" in paragraph 5 of the letter, in both the second
and the fourth sentence, the obvious reference was to the formula set out in appendix
F for calculating the Minimum CC by using the CC for the previous period, and
factoring in the relevant retail price index movement, the 9% figure and the number
of months in the previous period. Neither a performance based calculation, nor
a comparison of a performance-based calculation with the Minimum CC can aptly
be described as the application of a formula. In the second sentence, moreover,
it is not just the MSC, which is to be calculated "in accordance with and
using the formula", but the CC also. Even if the multiplication of the CC
by the Customer Base could be described as a formula for ascertaining the MSC,
the only formula to which reference can be made both for ascertaining the CC,
and the MSC to be derived therefrom, is the Minimum CC formula in Appendix F.
- The
other use of the word "formula" in the TSA is to be found in the definition
of "Capacity Utilisation Fee". This is defined as meaning "the
charge per minute (or part thereof to the nearest second) payable by [VM] to [TM]"
in consideration of the provision of telecommunication services "as calculated
in accordance with the formula set out in part 1 of appendix A". Part 1 of
appendix A provides, in the form of a table, for CUF to be calculated on the basis
of the number of minutes of circuit switched use on the network per calendar month,
with diminishing amounts payable per minute for increased quantities of circuit
switched use and for different figures which depend upon whether or not the traffic
profile ratio is achieved. In relation to these figures, if the annual increase
in the retail price index exceeds 2.5% in any year, TM has the right to increase
the CUF by the actual percentage increase in the retail price index minus 2.5%.
An example was then given in Appendix A in the shape of what would commonly be
called a mathematical formula. Appendix A therefore listed both a table with variables
and a formula to apply to it with reference to the retail price index. TM therefore
gained no assistance from the use of the term "formula" in this context,
in seeking to say that the word "formula" in the 12th September
letter meant anything other than the obvious mathematical formula for assessing
the Minimum CC in appendix F.
- It
was also argued by TM that the words "notwithstanding the provisions of clauses
5.10 and appendix F of the TSA" were included in order to make it clear that
what was being agreed did not constitute "alternative bonus arrangements"
as referred to in both clause 5.10 and appendix F. Although the letter agreement
of 30th May 2002 included such a reference, it was common ground that
the inclusion of this provision in the TSA relating to a potential future agreement
between the parties on "alternative bonus arrangements" was there in
case the parties found a better way of compensating VM in respect of inbound revenues
than the "Marketing Support Contribution", whether because of any change
in the regulatory regime or otherwise. Thus, paragraph 3 of appendix F states
that, once the parties agree alternative bonus arrangements, the provisions of
appendix F cease to apply. What was envisaged by "alternative bonus arrangements"
was a different regime entirely, which this was not.
- It
would therefore be an odd cross-reference, if the intention was to reinstate the
full terms of Appendix F after agreeing a particular figure for 6 months as was
TM’s intention. Alternative bonus arrangements do not sit with the application
of Appendix F and there would seem no need to rule out that possibility when making
what amounted to amendments to that Appendix. By contrast the wording of the second
sentence is apt to alter the provisions of clause 5.10 and Appendix F by directing
that a CC calculation be carried out in accordance with the Minimum CC mathematical
formula set out in that Appendix. The reference in the second sentence to Clause
5.10 is needed because that provides for the calculation of MSC, whilst Appendix
F provides for the calculation of CC and Minimum CC, which go to make up a constituent
element of MSC. On TM’s construction there would be no need for any reference
to MSC at all.
- The
effect of TM’s argument as to the meaning of the second sentence is to make the
whole sentence redundant. TM’s argument was that its effect was to restore the
provisions of Clause 5.10 and Appendix F in their entirety so that, from 31st
March 2001 onwards, the original contractual regime of CC and Minimum CC applied
with all the Clause 5.10 consequences if the CC put forward was less than the
Minimum CC. This construction would make the crucial second sentence entirely
otiose.
- It
is in my judgment self evident that, when the parties used the words "formula
set out in the TSA" or "formula in the TSA" that what they had
in mind was the formula for the Minimum CC, since this is the obvious natural
reference and there is in reality nothing else which lends itself to being described,
or can appropriately be described, as a formula. Moreover, given this meaning,
each of the sentences in paragraph 5 of the letter fit together as a coherent
whole and result in the CC from 1st April 2001 onwards being assessed
by taking the formula for Minimum CC and applying it to the CC of £4.56 operating
in the "previous period" of three months from 1st January
to 31st March 2001. The effect is thus to replace the uncertain CC
calculation based on VM’s "performance" and to make future CCs calculable
solely by reference to the CC for the "previous period" (beginning with
£4.56 in March 2001) and the application of the only relevant formula that exists
in the TSA, namely the formula for assessing Minimum CC.
- This
conclusion on construction is reinforced when regard is had to the commercial
background, business common sense, the matrix of the transaction and the way in
which any objective observer in the position of the parties at the time with their
knowledge would have approached the matter.
- My
attention was inevitably drawn by both parties to the terms of Lord Hoffman’s
speech in Investors Compensation Scheme Ltd v West Bromwich Building Society
[1998] 1 WLR 896 at 912-3 and to decisions commenting on and applying it.
Regard is to be had to "The ascertainment of the meaning which the document
would convey to a reasonable person having all the background knowledge which
would reasonably have been available to the parties in the situation in which
they were at the time of the contract" as well as to the language of
the contract simpliciter. The genesis, the objective aim, object and commercial
purpose of the transaction and its factual matrix are important as older authorities
show. The meaning of the document is what the parties using those words, against
the relevant background would have understood those words to mean (see also Mannai
Investments Co Ltd v Eagle Star Life Assurance Ltd [1997] AC 749). Both parties
also prayed in aid the canon of construction that contracts should be construed
so far as possible in such a way as to be consistent with business commonsense.
What is also clear, and undisputed by the parties, is that evidence of negotiations
of a formal contract is inadmissible as an aid to construction as is evidence
of the subjective intent of either of the parties and the subsequent performance
of the contract in question. TM invited me to have regard to four particular elements
in the factual matrix. The first was the existence and terms of the JVA and TSA.
The second was the known commercial function of the MSC (namely that it was a
proxy for inbound revenue). The third was the funding gap revealed in the business
projections for VM and the fourth was the proposal for obtaining funding from
banks led by JP Morgan with the VM Business Plan produced for that purpose. VM
and Virgin did not disagree with this but stressed the fourth element and the
need for the banks to be satisfied about the security of the MSC as a revenue
stream and the need to underpin the Business Plan’s figures for MSC with an enforceable
agreement.
- I
find the following facts in relation to the background against which the Letter
of Agreement dated September 12th 2000 was signed by Mr. Dormandy of
VM and Ms. Chain, the General Counsel and Company Secretary of TM. In this context,
I heard evidence from Messrs. McCallum, Alexander, Gow, Blackburn and Thomas of
Virgin or VM. The only relevant witness from TM for these purposes was Mr Meadows.
TM did not call evidence from Mr. Jones, Mr. Shearer or Ms. Chain, their representative
directors on the board of VM, nor from Mr. Schuller or Mr. Ostacchini, their representatives
on the VM funding team.
- At
the time of the execution of the letter there were a number of disputes, apart
from MSC between VM and TM which the parties wished to resolve, of which the most
important was a claim by VM of approximately £2.85 million as compensation for
the deficient provision of services by TM. VM also wanted to renegotiate the fee
charged for utilisation of the network (CUF) but TM were not prepared to countenance
this.
- So
far as MSC was concerned, both parties were aware that the figure for the average
minutes of inbound use of VM’s customers was well below that which had been anticipated
at the outset when VM and TM had agreed to a figure of £4.56 as the CC rate, which
had assumed about 67 minutes per month. TM had complained at this shortfall.
- It
was clear from the outset that MSC was a proxy for inbound interconnection revenue
and that any "performance" based calculation for CC would therefore
focus on that element of VM’s performance, namely the extent to which inbound
revenue had been obtained by TM as a consequence of VMs activities. The parties
were also aware that any calculation on the performance basis would currently
give rise to a lower figure than the Minimum CC figure, unless the customer base
expanded considerably. Whilst VM had been very successful in increasing the customer
base, it was insufficient to make up for a 50% shortfall in customer inbound usage
on a per minute basis, as compared with the original projection upon which £4.56
was based.
- The
provisions of Appendix F for calculating MSC were always intended to be temporary
and to be replaced by "alternative bonus arrangements" as and when such
could be agreed, should the regulatory regime change or the parties be able to
reach agreement on a different basis.
- As
at September 2000, although both parties knew that the inbound interconnection
revenue had fallen short of the figure of £4.56 per user, both also knew that
there was a potential for inbound revenue to exceed the MSC calculated on the
basis of the Minimum CC formula in Appendix F.
- Unknown
to VM, TM had privately carried out calculations which showed (on certain assumptions)
an expectation that in 2000, 2001 or 2002 this would be the case. If regard is
had to the business plans discussed in August and approved in early September
2000, prior to the 12th September letter, TM calculated in August that
the projected inbound revenue, on a gross basis, was expected to exceed the MSC
(reducing in accordance with the defendants’ construction of the 12th
September letter) on certain assumptions, in 2000 or from the third quarter of
2001 onwards. TM would then make profits from VM in 2001 or 2002. Mr. Meadows
of TM accepted that some such calculations were effected by TM in August and September
2000 but, he said, doing such calculations on a gross basis leaving out network
costs, was inapposite. In reality however network costs were payable by VM on
a basis which was said to give rise to no profit to TM and were paid as a separate
combined figure for inbound and outward use by VM, in the shape of CUF, so that
comparison on a gross basis, which was effected at various times was an appropriate
exercise. As an email from Mr. Rosen to Mr. Meadows of 10th August
shows, the assumptions made in the calculations were seen at the time to be reasonable
and did not take account of inbound text revenue which was due to come on stream
in November 2000.
- Contrary
to Mr. Meadows’ evidence, I find that the calculations done in various documents
of which he was either the co-author with Mr. Schuller (TM’s Treasurer) and Mr.
Akinlola, who was an accountant and the point man responsible at TM for daily
operating contact with VM, or were found on Mr. Meadows’ file or that of other
senior personnel at TM, reflected TM’s view that inbound revenue was, at the time,
considered to be likely to exceed MSC in a time scale of the order set out in
those calculations, on assumptions which were optimistic but not then unrealistic.
In deciding whether to reach agreement as to a revised MSC, a comparison of recalculated
MSC (in accordance with the defendants’ construction) with projected inbound revenue,
on a gross basis, was an obvious and sensible calculation to effect and was done
at various stages in August. There was a considerable potential upside for TM
in agreeing to fixed rates of MSC based on the £4.56 figure, if VM’s business
went well.
- At
the time of making the Agreement set out in the letter of September 12th, VM was
seeking bank funding of £115 million. In order to effect that funding, which was
unsecured because VM, as a virtual network operator, had no physical assets to
speak of, it was necessary to persuade the banks that VM could repay the borrowings
over the 5-year period of the projected loan. For this purpose, the banks needed
assurance of the Joint Venturers’ support of the joint venture (into which they
had already sunk £30 million pounds in equity and £50 million pounds in loans
which were to be subordinated to the bank lending) and of VM’s ability to meet
repayments out of income. For this purpose a business plan had to be produced
for the banks’ benefit, quite apart from VM’s own internal planning. A Funding
Team was assembled which included Mr. Gow, Mr. Thomas and Mr. Blackburn from VM
and Mr. Schuller and Ms. Chain from TM. Ms. Chain was the VM sponsoring director.
Mr. Meadows of TM was not part of the team but had some involvement in providing
information to the bank on behalf of TM. A draft business plan was shown to J
P Morgan, the lead bank on 28 June 2000 showing the CC at a figure approximating
to the Minimum CC as it stood at the time, without any decline.
- The
immediate sequence of events leading up to the bank lending and the 12th
September letter begins with a shareholding briefing of 26th July 2000
for Virgin and TM. In this briefing various shareholder issues were raised which
required resolution before financing could be finalised with J P Morgan and the
other banks. Whilst this document referred to "key underpinning assumptions
affecting the pay back period" and to the need to resolve issues on CUF,
no reference was made to any need to renegotiate the MSC nor any of the provisions
of the JVA relating to termination. In an e-mail of 31st July, J P
Morgan questioned VM about their business plan model and, amongst a number of
headline items including market development and costs, expressed interest in the
economics of the TSA "including an overview of VM’s current "loyalty
bonus" (a synonym for MSC) versus network costs".
- On
the 3rd August 2000, Mr. Gow made a presentation to TM at a meeting
attended by Ms. Chain, Liliana Solomon, (Chief Financial Officer of TM) Mr. Shearer
and Mr. Meadows of TM. Mr. Alexander and Mr. Pryce were present also for VM. The
slides of the PowerPoint presentation reveal what was put forward. VM set out
its objectives, including the need to clarify network costs/utilisation fees and
inbound revenue/MSC as well as the need for increasing the "earned level
of MSC", by which was meant the need to generate increasing inbound revenue,
as compared with MSC. Of crucial importance, however, is the slide, which deals
with inbound revenue/MSC. This refers expressly to the absence of reviews by TM
of the CC thus far and draws attention to the effect that the "contract formula"
would have had if applied to the figure £4.56 between January 31st
2000 and the date of the presentation. By the "contract formula" it
is clear that reference was being made to the formula for assessing Minimum CC
in Appendix F of the TSA, as Mr Meadows accepted. If applied, the £4.56 rate would
have become £4.18 as at the date of the meeting, giving rise to an additional
peak-funding requirement of £4.5 million in late 2001/early 2002. The proposals
put forward at the meeting included the proposition that MSC should be frozen
at current levels for renegotiation at 31st March 2001, by which all
those present understood that the CC should be so frozen (to be multiplied by
the customer base in order to arrive at MSC). This would drive bank-funding negotiations.
Because the funding gap could be met by freezing the CC until 31st
March 2001 and reducing the CC thereafter in accordance with the Minimum CC formula,
as he explained to the meeting, it was implicit, Mr. Gow said in evidence, that
the declining formula would have to set in at that point, although no explicit
proposal was made to this effect.
- Following
that meeting the Funding Team worked on models of business plans. On 7th
August 2000 the banks’ due diligence exercise began in respect of the proposed
loan facility, giving rise to continual discussions between the Funding Team and
the Banks as to the Business Plan and as to the ability of VM to repay the proposed
loans. During the course of these exercises there was then discussion in the Funding
Team about the need for clarity in the MSC revenue stream, in order to satisfy
the banks of the ability of VM to repay the anticipated loan. The banks asked
questions about the MSC and its rationale and its future projection as it constituted
about one third of VM’s income. The Funding Team worked in discussion with the
banks to produce a business plan which was adequate for this funding, assessing
that a CC of £4.56 up until 31st March 2001 and reducing thereafter
in accordance with the Minimum CC formula was what was necessary to satisfy the
banks. A contract wording that referred simply to a performance based calculation,
without any defined criteria for assessment was one of which any bank would be
wary, particularly if this income stream represented a considerable part of the
assets upon which the banks were reliant for repayment of any loan made. From
at least the 3rd August version onwards, the business plan included MSC based
on £4.56 as the CC until 31st March 2001 followed by application of
the Minimum CC mathematical formula for decline thereafter. Mr. Thomas of VM liased
with Messrs. Schuller, Ostacchini and Ward of TM in the preparation of the plan
in the various versions from Version 7.2 onwards. Questions raised by the banks
were discussed in the Funding Team, specifically with Mr. Schuller and also with
Mr Shearer of TM in the course of the 2 weeks prior to the 16th August
Board Meeting in order to satisfy the banks’ concerns.
- A
meeting took place on 9th August between some or all of Mr. Gow, Mr.
Pryce, Mr. Alexander, Mr. Cowlishaw, and Katy Liles of VM in relation to tasks
to be done in order to obtain bank funding. One of the tasks set for Mr. Pryce
in a minute of the meeting was for him to get a "letter of rate/waiver till
March 2001" from TM, in relation to the MSC, and then "agreement to
renegotiate". I am satisfied that this is an abbreviated minute of the action
that it was agreed he should take because, in a matter of hours, he e-mailed Mr.
Meadows seeking to "capture agreement on two key points relevant to questions
raised by the banks". That E-mail asked Mr. Meadows to confirm (inter alia)
"the agreement that the network loyalty bonus shall remain at the current
level of £4.56 until March 2001 at which time we shall renegotiate or revert to
the formula in the contract". Two hours earlier, Mr. Thomas had e-mailed
Mr. Schuller and Mr. Ostacchni of TM pointing out that the latest version of the
business plan (7.3) contained references to "network loyalty bonus decreasing
at contract rate from March 01". Both of these references were to the mathematical
formula for the Minimum CC in Appendix F as Mr. Meadows accepted. Mr. Meadows
responded to the email by saying that no agreement had been reached at the meeting
on August 3rd and that TM had undertaken to respond as soon as possible
to Mr. Pryce’s request. TM then carried out an internal calculation of the kind
referred to in paragraph 40 of this judgment.
- The
matter then came before the VM Board on 16 August 2000, in circumstances where
the Funding Team, with its mixture of representatives had produced a business
plan (7.4), which modelled the £4.56 CC to 31st March 2001 and declined
from that time at the Minimum CC contract formula rates thereafter. The form of
this plan had been agreed in detail with the banks and with Mr Schuller and Mr
Shearer before the meeting. The Plan was presented to the Board of VM by Mr. Thomas
of VM and Mr. Schuller of TM for its approval so that it could be used as the
basis for negotiation with the banks on the funding facility. Present at the meeting
were Mr. Shearer, Mr. Jones and Mr. Meadows of TM. Mr. Gow pointed out to the
Board that this Business Plan had been discussed with the banks and incorporated
an MSC calculated by reference to a CC fixed at £4.56 until 31st March
2001 and declining thereafter at 7% pa. The slides in the PowerPoint presentation
of the Business Plan were clear in referring to the MSC declining by 7% per annum
after March 2000 (which all agreed was a mistype for March 2001), this being shorthand
for MSC declining in accordance with the Appendix F method for calculation of
the Minimum CC. Mr. McCallum’s note confirms this. Mr. Gow made plain at the meeting
that there was a projected funding gap of £4.5million at the time of VM’s peak
funding requirement which could be bridged by freezing the CC at £4.56 until March
2001. It was not only the fact of freezing it to that date, but the fact that
this figure represented the starting point for the application of the declining
formula which enabled the gap to be filled in late 2001. The freezing had a knock
on effect for future contributions as all present recognised from the terms of
the presentation and the Business Plan.
- The
Minutes of the Meeting recalled that a number of issues were left outstanding
at the end of it, including VM’s compensation claim, the MSC and the CUF. The
Minutes stated that these matters were to be resolved separately by August 18th.
Mr. Alexander’s evidence, which I accept, was that, at that meeting, there was
general consensus about the MSC, which was not really contentious as the Funding
Team, partly composed of TM personnel, had agreed that this was appropriate. CUF
and compensation were bigger issues. Whether there was "agreement in principle"
or merely expressed "consensus" is unimportant for present purposes.
Mr. Gow, in cross-examination, said that the assumptions of the business plan
were accepted with one or two provisos, including the proviso that final agreement
on the MSC was still needed.
- I
find that the clear understanding of all at the Meeting was that this element
of the Business Plan was required in order to facilitate the obtaining of bank
funding. Mr. Meadows, who was the only TM witness called who had any direct involvement
with these matters and present at that meeting, in cross examination agreed that
TM was being asked in the exchange of 9th August to agree to CC at
£4.56 up to 31st March 2001 and declining thereafter in accordance
with the Minimum CC formula and that the Business Plan reflected that, as if it
had been agreed. It is clear from the Minutes that there was no binding agreement
on the part of TM at that meeting and that there was a link between this and the
issue of CUF and compensation which both parties wished to resolve also. TM had
not agreed and expressly reserved its position, whatever agreement in principle
there had been to the need for MSC to be agreed in accordance with the Business
Plan, which itself remained unapproved at the meeting because of the need to remodel
the average revenue per user. A revised business plan was, in accordance with
the Minutes, to be circulated for approval following the meeting as soon as practicable.
- No
formal response from TM was forthcoming by Friday 18th August and on
Monday 21st, following discussions at VM Mr. Gow faxed Mr. Meadows
a letter so that he could brief Mr. Shearer for a meeting that Mr. Shearer was
due to have with the banks the next day. This meeting was part of the banks’ scrutiny
of VM’s capacity to repay the loan. That faxed letter referred to a number of
items which remained outstanding, some of which were "crucial to the funding
decision" to be taken by the banks. The first item in the list was expressed
as "MSC stays at £4.56 until March 01, then declines per contract formula".
Mr. Meadows refused to accept in cross-examination that this was a reference to
the Minimum CC formula, but it is plain, in the light of every prior reference
to the "formula" and "contract formula" that this was the
case and that he so understood it at the time. The last item on the list was "Sign-off
of business plan (requires prior resolution of items above)". This Mr. Meadows
understood and accepted. The Business Plan could not be finalised without the
agreement of TM to the preceding items in the letter, including the MSC proposal.
There is no doubt that the reference to the" contract formula" was a
reference to the MSC of £4.56 and declining on the basis of the Minimum CC calculations
set out in Appendix F, as displayed in the Business Plan which had been considered
at the August 16th Board Meeting. On a number of copies of this faxed
letter, emanating from TM’s files, including the file of Mr Meadows, which incorporated
that of Mr. Shearer, these two items had a tick placed by them, by someone at
TM. One copy with Mr. Meadow’s manuscript on it contained such a tick. The faxed
letter concluded by saying "J P Morgan need a stable business plan as soon
as possible in order to commit to underwriting and pre-funding" and that
it was necessary for agreement to be reached on outstanding issues before Tuesday
night, the 22nd August.
- Mr.
Meadows was involved in drafting a TM internal presentation dated 21st
August 2000 relating to MSC. This he presented to Mr. Shearer in the form of a
PowerPoint display. A comparison was effected between MSC paid and inbound interconnection
revenue between November 1999 (the launch date of VM) and 31st July
2000, showing the former exceeded the latter by £700,000. The Presentation went
on to refer to the original contribution of MSC being applied in a "formula"
that would be the basis of calculating the MSC at each subsequent review point.
It set out the impact for VM of a freeze in the contribution to 31st
March 2001, namely a benefit of £888,610, in that period, with a consequent benefit
thereafter because of the higher base for the calculation at the start of each
subsequent review period. Mr Meadows accepted that this was a reference to the
Minimum CC formula and its effect. A further slide in the Presentation referred
to VM foregoing any benefit in increased inbound revenue by adhering to "the
formula in the contract". The Presentation concluded by recommending the
freeze to 31st March 2001 and adjustment of the MSC by reference to
the terms of the contract, which in this context referred to adjustments in accordance
with the Minimum CC formula. More internal TM calculations of the kind referred
to in paragraph 40 of this judgment are dated 21st and 23rd
August 2000.
- Also
on 21st August, VM had received advice from their solicitors, Freshfields,
on the effect of Clause 5.10 of the TSA, the question of performance-based calculations
and the impact of Clause 5.10 on events of termination under Clause 16 of the
JSA. Although none of this was known to TM, the question of the calculation of
CC by reference to performance and both the issue of termination on events of
default and the issue of no fault termination were thus in the mind of Messrs.
Blackburn and Gow.
- I
did not have the benefit of any evidence from Mr. Shearer, Mr. Schuller or any
of the TM appointed directors except Mr. Meadows. Mr. Alexander gave evidence
of a 20-minute telephone conversation with Mr Shearer, which took place on the
afternoon of 21st August at about 3 pm. The object of this telephone
conversation was ostensibly to brief Mr. Shearer for his meeting with the banks
but Mr. Alexander used it to seek to obtain agreement from TM on the outstanding
issues referred to in the letter of 21st August, including the compensation
claim, the CUF and MSC. It is to be inferred that Mr. Shearer had the letter of
21st August in front of him when conducting the telephone call and
that the tick to the MSC item represents his agreement or that of some senior
individual who had discussed the matter with him. In discussing the outstanding
issue to which the letter referred, Mr. Shearer said that VM would not be paid
anything like £2.5 million for the compensation claim and that VM would at best
receive something substantially less than that. He said that what was important
to the business plan and to the banks, out of all the issues, was the MSC and
that it was the only revenue stream VM had which it could "securitize".
He said that TM had given VM the MSC because it was important to ensure the funding.
His approach was that, as TM had given that away, they were not prepared to give
much ground on the other issues. Mr. Alexander remarked that VM were giving away
the potential upside of a CC if inbound revenue should increase, in seeking to
get agreement on other issues, but Mr. Shearer responded by saying that fixing
the MSC rate was important in order to ensure the funding, and the other matters
did not require resolution in order to obtain that funding. He refused to give
way on other issues, harking back to the benefits of having the certainty of the
MSC payments set out in the business plan.
- On
22 August Mr. Alexander spoke to Mr. Meadows about recording the terms of what
had been agreed with Mr Shearer the day before. On the same day, Mr. Shearer agreed
the compensation claim with Mr McCallum of VM at a figure of £473,943 and settled
other smaller disputes. In consequence Mr. Blackburn liased with Freshfields on
the drafting of a letter of agreement, whilst he drafted a covering letter. Both
were the subject of internal discussion at VM. Insofar it is of any relevance,
I find that VM’s subjective intentions were to obtain agreement on a fixed CC
at the rate of £4.56 until 31st March 2001 and for the rate to decline
from then in accordance with the Minimum CC formula in Appendix F. This is revealed
in Mr. Blackburn’s instructions to Freshfields and represents his intention, that
of Mr Gow and that of Mr Alexander. Moreover, that intention was well known and
understood by TM, in the persons of Mr. Jones, Mr. Meadows, Mr. Schuller and Mr.
Shearer as a result of the exchanges to which I have referred and the contents
of the business plan discussed at the meeting of 16th August. There
were exchanges between VM and Freshfields about the way in which the Minimum CC
formula worked and its impact on a draft letter of agreement.
- That
draft letter of agreement was sent by Mr. Alexander to Mr. Shearer on 24 August.
The terms of that draft, insofar as it related to the MSC, remained unchanged
in the final signed letter dated 12th September. The covering letter,
as all VM witnesses agreed, did not fully reflect the legal letter in two respects.
First it referred to the MSC as being "at least £4.56" until the period
ending 31 March 2001 and secondly it referred to that date as the date when the
next review would occur "per TSA" rather than specifying that the review
would be in accordance with the formula for the Minimum CC in the TSA. However
this could not have resulted in any misunderstanding on the part of the recipients
in the light of all prior discussions where the review of the £4.56 figure was
always recognised to be the review in accordance with the mathematical formula
for the Minimum CC in Appendix F.
- This
covering letter enclosed the draft letter of agreement as the "Proposed Agreement"
summarizing its terms though not fully nor entirely accurately. The Covering Letter
expressed the need for agreement so that "the last remaining key assumptions
in the Business Plan" [Version 7.5 as redrafted in accordance with the discussion
at the 16 August Board meeting when version 7.4 had been considered] "will
be supported by a documented agreement", so that VM and the Joint Venturers
"will be in a position to formally agree the business plan" and so that
" VM finance team will be in a position to finalise a £115 million loan facility
with JP Morgan to meet the funding requirements of the business".
- The
Business Plan, in its amended form (Version 7.5) was approved at a Board Meeting
on 7th September 2000. This contained the figures for CC over the duration
of the loan in accordance with VM’s construction of the 12th September
Letter of Agreement.
- Insofar
as it is of any relevance I find that, as at 5th September 2000, TM
was considering internally, at the highest level, the termination provisions of
the JVA, including in particular the deadlock provisions, which gave rise to no-fault
termination. What was envisaged was the need for a comprehensive review of the
Contract to fully understand the potential exit strategies of each partner. Ms.
Chain and Mr Harris Jones exchanged e-mails on the subject with Mr. Shearer and
Liliana Solomon. What flowed from this does not appear from the documents before
the Court. The 12th September Letter Agreement was in due course signed
by Ms Chain for TM shortly after receipt.
- Given
this background, and the issues between the parties as to what is and is not admissible
or relevant as a legitimate aid to construction of the Letter of Agreement dated
12 September, I find the following to be the relevant factual matrix:-
- The
Letter of Agreement was a compromise of a number of disputed matters between the
parties, as is indeed clear from the terms of the Letter itself.
- Agreement
to the provision of the MSC took place in a context where it had originally been
intended to be a proxy for inbound revenue and there was some reason to believe
that inbound revenue could exceed the MSC calculated in accordance with the Minimum
CC formula in the future, although that had never been the case in the past, as
both parties knew.
- There
was a perceived need for agreement on an MSC which would bridge a projected peak
funding gap of £4.5m in late 2001 and early 2002.
- The
funding gap of £4.5million would not be met by a freeze to March 2001 alone. It
was necessary for the MSC figure thereafter to reach at least the sum arrived
at by an application of the MSC formula in the period up to and including the
peak funding period in late 2001- early 2002.
- TM,
Virgin and VM all considered that the need to obtain bank funding of the order
of £115million was essential for VM’s continuing business growth.
- In
order to obtain bank funding, there was a need to satisfy the banks of the incoming
revenue stream, including MSC, from which repayment of the loan would have to
be made.
- The
Business Plan was a key element in persuading the Banks to provide the funding.
- VM
and TM perceived a need to reach agreement on the basis upon which MSC would be
payable in the future which was certain and which was in line with a Business
Plan which would satisfy the banks and persuade them to lend £115 million.
- Although
a performance based calculation would, according to the parties mutual understanding,
be based on the generation of inbound traffic, the TSA had no definition of performance
and there was therefore doubt as to the parties rights and their enforceability.
- The
business plan agreed between them as a business plan for VM to put forward to
the Bank proceeded on the basis of figures representing £4.56 as the CC until
31st March 2001 and then declining in accordance with the formula provided
in Appendix F for the Minimum CC.
- The
word "formula" had a clear and recognised meaning for both of the parties
as a result of their previous exchanges. All those involved in discussions and
negotiation leading to the signing of 12th September letter understood
that the word "formula" or the words "contract formula" uniformly
referred to the mathematical method for calculating the Minimum CC set out in
Appendix F to the TSA. Mr Meadows admitted in evidence that it was his understanding
that it was to this formula that the letter referred. No one at the time who had
any dealings with the matter could have had any different understanding.
- The
factual matrix therefore entirely supports VM’s construction of the 12th
September Letter. The word "formula" had a clear meaning in the parties’
understanding. The need for TM and VM to agree the CC at a defined rate which,
it was anticipated, would meet the projected funding gap and would satisfy the
banks’ desire for a more secure revenue stream from which repayment could be made,
provide a mutually understood business rationale for the Letter of Agreement and
the application of the Minimum CC formula to the calculation of MSC for the duration
of the loan. That was the genesis of the transaction.
The
Effect of the Letter of Agreement of 12th September on the Letter of
30th September 2002
- The
effect of the Letter of Agreement of 12th September 2000 is therefore
that the parties have agreed that there is no room for any future assessment of
CC on the basis of performance at all. Unless and until the parties agree "alternative
bonus arrangements" or the agreement is superseded by some other agreement,
the CC commences with a figure of £4.56 for the period of 1st January
2001 to 31st March 2001 and then, as long any upward movement in the
retail price index amounts to less than 9%, it declines from that figure in accordance
with the Minimum CC formula. In those circumstances, no CC could ever be assessed
which was less than the Minimum CC for the relevant period and there is no possibility
of any deemed event of no fault termination on that basis, whether for the purposes
of clause 5.10 of the TSA or for the purposes of clause 16.1 of the JVA. This
is simply an event, which can never occur.
- In
this way, a revenue stream within known confines was secured to VM which was the
undoubted aim of all those concerned on the board at VM, those at Virgin and TM
who were involved and the banks who were lending money, who required confidence
as to the ability of VM to repay the loans out of the earnings they received.
- There
was no need for any amendment to the JVA clause 16-termination provisions. They
remained extant in the absence of any agreement to vary the terms of the JVA between
Virgin and TM. All that happened was that one of the potential events of termination
ceased to be a possibility.
- The
result is that any assessment made by TM on the 30th September 2002
of a CC based on "performance" is ineffective as a matter of contract
and any proposal of a CC, which was less than that calculated by application of
the Minimum CC formula is contractually a nullity. It could not constitute, carry
with it, or give rise to, an event which set in chain a bidding process under
clause 16.1 of the JVA. The letter of 30th September 2002 which purported
to set out a performance based calculation of CC was therefore misconceived and
of no legal effect.
Estoppel
by Conduct, Representation or Convention
- Whilst
subjective understanding is not relevant to construction, the position is that
the parties did share the same understanding of the meaning of the provisions
in the Letter of Agreement and expressed that understanding to one another in
the course of the exchanges to which I have referred. Their mutual subjective
intention was to fix the CC in accordance with the Minimum CC figure £4.56 till
31st March 2001, declining thereafter in accordance with the Minimum
CC formula, thus ruling out the possibility of a performance based CC as proxy
for inbound revenue. The fact that a draft letter to different effect was not
sent by TM on 24th August and the existence of the internal calculations
at TM, when added to Mr. Meadows’ admissions of his understanding of the word
"formula" wherever it appeared, including the 12th September
Letter of Agreement (with the notable exception of the 21st August
letter where I did not accept his evidence) make TM’s understanding plain, whilst
the evidence of the VM witnesses was clear on the point. Each party was willing
to take the risk that the formula based calculation might either exceed or fall
short of a CC, calculated on the basis of "performance", by reference
to actual inbound revenue. Although no express reference was made in their discussions
to the abrogation of performance-based calculation or the termination provisions
which depended on them, because their focus was on agreeing the MSC in accordance
with the Minimum CC formula starting from £4.56, the consequence of that agreement
was to eliminate those elements.
- If
wrong on the point of construction, it is VM’s case that TM was estopped by conduct,
convention or representation from proposing a CC less than the Minimum CC or of
informing VM of a CC based upon performance, rather than upon the Minimum CC as
impacted by the reducing arithmetical formula. As I have decided the point of
construction in VM’s favour, I do not need to decide this issue but, as the points
were argued and given my findings on the shared mutual intention of the parties
I proceed to do so nonetheless.
- First
VM contended that, if it was wrong on construction, then because TM was in breach
of contract in failing to notify VM, on each review date between 31st
March 2001 and 31st March 2002, of a performance based CC calculation,
TM was taking advantage of its own breach in notifying such a calculation thereafter
with very different consequences. If notified prior to 31st March 2002,
it would constitute an event of default on the part of TM which could, as I have
found, be waived by VM and Virgin but could lead to termination of the JVA with
the consequence that Virgin would be able to purchase TM’s shares in VM at a favourable
price. As I have found that TM could only put forward a CC calculated in accordance
with the formula, starting from £4.56 at 31st March 2001, this issue
does not arise. In any event, it seems to me that TM would not be relying on its
own breach to set up its right to make a proposal of a CC lower than the Minimum
CC, but that this merely gave the opportunity to it to do so. If VM wished to
pursue a claim on this basis it would have to sue for breach and allege and prove
damage as a result. It would of course be Virgin, not VM which was deprived of
the chance to purchase TM’s shares at a discount.
- The
other estoppel claims were based in essence on two forms of conduct by TM. The
first was TM’s actual calculation and notification of CC both before the 12th
September 2000 and afterwards until October 2002 on the basis of £4.56 and the
arithmetical formula. The second was TM’s conduct in encouraging VM to conclude
the Facility Agreement with the banks, by giving its approval to the VM business
plan 7.5 and to the conclusion of the Facility Agreement on that basis.
- In
relation to the calculations of CC, the position before the 12th September
2000 Letter of Agreement, from 31st March 2000 until that date, was
that £4.56 was applied without reference to the reducing formula. The 12th
September Letter of Agreement was intended to govern the position from that point
onward by, as was common ground, imposing a freeze at £4.56 until 31st
March 2001. The calculation and notification on every review date thereafter of
CC in accordance with what I have held to be the proper construction of the 12th
September Letter of Agreement, without any other calculation, is said to constitute
a clear representation as to the meaning of the agreement reached. In circumstances
where, under the original unamended TSA, TM was bound to inform VM of a performance
based CC, as I have held to be the case, it would then be a breach not to do so.
Nonetheless, this could not be said to be a clear unequivocal representation that
there was only one method of calculation open to TM. It might well be that TM
was in breach of the TSA in failing to make the appropriate calculation and notification
as it did prior to the 12th September Letter. The conduct was akin
to that which preceded the 12th September letter agreement, which was
not a clear representation as to any lack of entitlement to effect a performance
calculation under the TSA. It likewise was not unequivocal, unless the form of
notification in itself amounted to an unequivocal representation that there was
only one method of calculation available.
- The
first such letter of 11th April 2002 referred to the Letter of Agreement:
"In
accordance with the terms laid out in the jointly signed letter dated the 12th
of September 2000, I would like to formally notify you of [TM’s] intention to
reduce the Marketing Support Contribution from the current level of £4.56 per
customer month to £4.48.
This
is in accordance with the formula laid out in Appendix F of the Telecommunication
Supply Agreement [TSA] and will be effective from the 1st April 2001.
For the avoidance of doubt, the MSC at the end of April will be at the effective
rate of £4.48.
Going
forward, the MSC will be reviewed in accordance with the TSA on a three monthly
basis".
- Other
letters followed a not dissimilar form although some stated that "in accordance
with the terms defined in Appendix F of the TSA, …the CC will be …". It is
not possible to spell out of these letters a representation that there was only
one method of calculation available for assessing MSC, although the letters show
unequivocally that the Minimum CC formula method was in each case applied. The
conduct was not consistent only with the conventional meaning of the Letter of
Agreement for which VM contended. Nor does the 30th May 2002 letter
advance VM’s argument on this front.
- Virgin
and TM representatives on the VM funding team and on VM’s board of directors participated
fully in the production and approval of business plan 7.5 for scrutiny by the
banks from whom the loan facility was sought. The terms of the JVA required the
Board representatives unanimously to approve any business plan and for TM and
Virgin to procure that their appointed directors ensured, so far as consistent
with their duties as directors, that VM complied with any such business plan.
TM, through its representatives on the Funding Team, its directors on the VM Board
and through Mr. Meadows, knew that the Business Plan worked on the basis of the
Minimum CC mathematical formula starting at £4.56 in March 2001 and reducing thereafter
and that it was necessary for TM and VM to agree to the MSC calculation set out
in that Plan, as VM’s letter of 21st August and letter of 24th
August covering the draft Letter of Agreement made plain and Mr. Meadows accepted
in evidence. An agreement between TM and VM underpinning the MSC in the Business
Plan was recognised as necessary to create sufficient bank confidence in VM’s
ability to repay the loan, in order to obtain the funding required. TM’s personnel
agreed to the inclusion of it in the Business Plan on the footing that it would
be secure for the duration of the loan, since otherwise it would carry little
weight with the banks.
- Prior
to the formal agreement, the mutual intentions of TM and VM had been expressed
to one another, as I have already found. Each knew full well what they intended
to agree. The Letter of Agreement with its reference to calculation in accordance
with a formula had a conventional meaning, because the parties always used the
word "formula" to mean the Minimum CC formula.
- TM
agreed that the Business Plan be put forward to the banks on the basis of the
figures in the plan for MSC, projected over the lifetime of the facility, and
allowed VM to put forward the Information Memorandum to the banks which stated
in terms that the average revenue per user generated from MSC had "been agreed
with TM at £4.56 in 2000 and declining at 7% per annum thereafter". The document
showed the figures for 2000-2005 on this basis. In the passages dealing with termination,
no reference appears to the possibility of an event of default or a no fault termination
on the basis of a proposal of a CC lower than the Minimum CC, whilst other provisions
giving rise to such termination (such as deadlock) are described. There was no
reference to the only possible extant provision which allowed TM unilaterally
to trigger an event of no default termination, namely the CC proposal. Its absence
is significant. Had TM and VM considered that it still existed, it is inevitable
that it would have to be mentioned in the Memorandum. Moreover, TM approved the
conclusion of the facility agreement with the banks which obliged VM to use its
best endeavours to implement the Business Plan, provided for an event of default
to occur under the Facility Agreement if there was an event of default or event
of no-fault termination under the JVA which, if it occurred, would accelerate
the obligation to repay the whole loan. Whilst it is said on TM’s behalf that
no-one appears to have addressed the termination provisions as such, the terms
of the Information Memorandum show that the provisions were well in mind and all
involved with the Bank funding, including Mr. Schuller who was heavily involved,
were plainly proceeding in that context on the basis that the MSC would be calculated
on the Minimum CC formula, throughout the duration of the loan. The Information
Memorandum was the subject of the usual warranties in the Facility Agreement by
VM.
- Whilst
there was no evidence from the banks that the loan facility would not have been
given without the "securitization" of the MSC as a revenue stream to
VM, there was evidence from VM’s personnel, which I accept, that if TM personnel
had expressed any different understanding, VM would have precipitated a discussion
about calculation of the CC in order to obtain clarity as to incoming revenue
because it had to be able to produce a Business Plan acceptable to the banks when
seeking funding. I find that VM could not have committed itself to the Facility
Agreement in the form that it took without further discussion with TM and clarification
of the income stream due to it from MSC over the ensuing 5 years, if all representatives
of TM on the funding team and the Board had not shared and expressed the same
understanding as to the only way in which CC could thereafter be calculated.
- TM
not only agreed, through its representatives on the VM Board, to the Bank facility
proceeding on the basis of a revenue stream in accordance with the revised Minimum
CC and its mathematical formula, but thereafter produced calculations every quarter
based upon this for payment by TM to VM. There was never any suggestion of any
other possible calculation which, had there been an alternative right to calculate
on a performance basis, it would have been mandatory for them to produce. As referred
to later in this judgment, disputes arose in 2001-2 as to the precise figures
for the "formula" calculation, without any intimation of any other available
way of calculating MSC at all. Although this conduct was not in itself unequivocal
for the reasons given earlier, it reinforced the unequivocal nature of the representations
made in relation to the basis upon which bank funding was to be sought, namely
the underpinning of the MSC in the Business Plan for the duration of the loan.
TM encouraged VM to obtain and, through its own representatives, participated
in the obtaining of a loan from the banks on the basis of a secure revenue stream
for 5 years, namely the formula calculation, with no scope for an alternative
lesser figure or an earlier cut off because of a calculation of a lower figure.
- On
the happening of an event of no fault termination, if Virgin purchased TM’s shares,
there was a right in VM to use the Airtime Services, but only for VM’s existing
customers for 3 years. The loan period expired in September 2005 with balloon
repayments, whereas, not only could the run off period expire before that, if
TM were able to invoke the no fault termination provisions for a CC proposal after
31 March 2002, but the projected MSC would be falsified long before then, since
VM’ s income would drop rapidly, once the termination was effective, by reason
of ordinary "churn" and the drop out rate of existing customers looking
for a more permanent network. The Business Plan would have had to take this into
account, although how it would have dealt with this termination risk is in doubt,
but if there was considered to be a realistic prospect of a lower CC being paid
than the formula required, at any stage during the duration of the loan, this
would surely have had to feature in the Business Plan and the Information Memorandum
in some way. It did not because the parties proceeded on the basis that it was
not a possibility. Moreover, if TM’s internal calculations (of the kind referred
to earlier in paragraph 40) are taken into account, at the time of approving the
Business Plan, TM envisaged a realistic possibility that a performance based calculation
might exceed the MSC figures in it. As Mr. Blackburn said in evidence, the Business
Plan would have been different one way or another, if there had not been a mutual
understanding to the effect for which VM contended.
- Whilst
therefore it can be said that there was no unequivocal representation as to the
lack of entitlement to propose a performance based calculation of CC, on the basis
of the post September 2000 calculations of MSC alone, I have already found that
it was from mid August onwards, the common intention and assumption of those involved
in the negotiation of the 12th September Letter of Agreement that the
CC could only be calculated in accordance with the Minimum CC mathematical formula
from the starting point of £4.56. That common assumption was acted upon by both
TM and VM when TM encouraged VM to conclude, and participated in VM’s conclusion
of, the bank Facility Agreement on 26th September 2000 on the basis
of the secure 5 year MSC revenue stream. It was further acted upon by both TM
and VM when calculating, notifying and paying the MSC on the basis of the Minimum
CC formula and in not raising any point as to alternative calculation of the CC.
In the circumstances outlined, it would plainly be unconscionable and unjust for
TM to resile from the common assumption in circumstances where TM had previously
failed to make any performance based calculation prior to September 2002, which
would, on this hypothesis (where the construction is different from that which
I have held and the question of estoppel arises), have been a breach of the unamended
TSA. It would have led to an entirely different situation prior to 31 March 2002.
The loan facility agreement might not have been concluded. A different agreement
might have been made in relation to MSC. Alternatively, if a notification had
been given prior to 31st March 2002, Virgin would have had the option
of waiving their right to terminate and enabling itself and VM to obtain better
terms or terminating the JVA on terms which were much more favourable to Virgin
and VM when it was TM in default.
- Whether
the analysis is that of estoppel by representation, equitable estoppel or estoppel
by convention may not matter but, in my judgment the case on equitable estoppel
or estoppel by convention is unanswerable, in accordance with the principles set
out by Bingham L J (as he then was) in the Vistafjord [1988] 2LLR 343 at
p349-352. The agreed convention was as to the method of calculating MSC under
the September 12th Letter of Agreement. TM and VM each acted on that
conventional basis in dealing with the banks and each other in relation to the
bank funding and VM relied on TM’s acts in that regard in entering into the Facility
Agreement. There was conduct and there were exchanges "crossing the line".
TM and VM established an expressed conventional basis for the effect of September
12th agreement and did regulate their dealings accordingly. It would
clearly be unjust to allow TM to depart from that now.
- Internal
documentation at TM shows that TM was well aware at all times up to October 2002
that any performance calculation which was based on actual past inbound revenue
would have given rise to a lower figure than the Minimum CC formula figure and
that any notification of this prior to 31st March 2002 would amount
to an event of default on TM’s part with disadvantageous consequences in permitting
Virgin to purchase TM’s shares at a low value. TM was also aware that notification
after 31st March 2002 would constitute an event of no fault termination, which
would set in train the auction process for sale and purchase by either party at
full value. In the absence of any evidence from any of the relevant personnel
involved in the decision to notify VM of a calculation of £1.71 at the end of
September 2002, and in the light of the internal documents disclosed and the telephone
call from Mr. Jones to Mr. Alexander on 17th September 2002, to which
I refer later in this judgment, the inference is clear that TM made a calculated
decision to seek to use the termination provision of the JVA after 31 March 2002
in an attempt to secure commercial advantages to itself at the expense of VM and
Virgin.
The
Letter of Agreement of 30th May 2002
- As
mentioned earlier in this judgment, for every quarter from 31st March
2001 onwards, TM produced a calculation of MSC in accordance with what I have
held to be the proper construction of the 12th September letter agreement.
Those letters normally took a standard form in which TM expressed its intention
to reduce the MSC from its current level in accordance with the formula laid out
in Appendix F of the TSA.
- On
the 30th October 2001 Mr. Akinlola of TM wrote to VM setting out details
of the calculation for the previous quarter as well as the calculation for the
September to December quarter, because an issue had arisen as to the method of
calculation of the element described as "D" in the formula. Two queries
then arose, as set out in an e-mail from VM dated 2nd November 2001.
The first related to the figures used for assessing the RPI adjustment which should
have been those based on the figures at the beginning and end of the previous
quarter and not upon the annual RPI figure at the start of that quarter. The second
issue related to the degree of precision of the calculations of the reducing CC.
- On
the 3rd and 5th December 2001 there was an exchange of e-mails
between VM and TM. VM asked whether TM would write and confirm that it was agreed
that TM should employ calculations to the fourth decimal place for the second,
third and fourth quarters of the 2001 financial year and for the future. Mr. Akinlola
e-mailed his agreement.
- By
a letter of agreement of 9th January 2002, signed by both parties,
VM and TM agreed to a resolution of the issues for the second, third and fourth
quarters of the year 2001. The letter read, so far as relevant: -
"I
would like to record our final agreement of revised amounts for the Marketing
Support Contribution applicable to quarters 2,3 and 4 of 2001………
The
reason for the revision is twofold. Firstly "D" used in the formula
to calculate the Minimum Customer Contribution in Appendix F of the TSA has been
incorrectly calculated for those quarters…..Secondly the RPI for those quarters
has also been incorrectly calculated …
The
effect of these adjustments on the Customer Contribution can be seen in the table
below….
Both
[TM] and VM have agreed that in calculating the Customer Contribution and the
Minimum Customer Contribution in accordance with the TSA, figures will be rounded
to four decimal places…
For
quarters 2 & 3 and October 2001 VM will invoice [TM] for the net difference
resulting from the adjustment…The invoices for November and December of quarter
4 will be based on the rate of £4.3280"
- In
February 2002, as appears from the correspondence, it emerged that this agreement
had been based on the application of the "all items RPI" not the "RPI
all items excluding mortgage, interest and tax charges as computed by the Office
of National Statistics", which was the RPI Index to which Clause 1 of the
TSA referred. TM was not however prepared to reopen the 2001 calculations of MSC
but agreed to employ the contractual RPI for 2002. The letter agreement of 30th
May 2002 signed by TM on that day and by VM on the 11th June 2002 provided
as follows, so far as relevant:
"…we
are writing to you in order to reach and record final closure on these issues:
Marketing
Support Contribution ("MSC")
1.
T-Mobile agrees that the Customer Contribution (as defined in Appendix F of the
Telecommunication Supply Agreement dated 9 August 1999 ("TSA")) shall
be £4.2713 for the first quarter of 2002. T-Mobile agrees that Virgin Mobile’s
invoices for MSC at this agreed rate in respect of the first quarter of 2002 will
fall due for payment by T-Mobile as follows: …..
2.
Virgin Mobile and T-Mobile ….. agree that:
(a)
MSC payments for 2001 will be based on the "Correct Customer Contribution"
figures referred to in our letter of 9 January 2002, which have been paid in full
except in respect of customers who have not made an outbound call or sent a text
message for 365 days or more as referred to in paragraph 4 below, and
(b)
MSC payments for the first quarter of 2002 will be based on a Customer Contribution
of £4.2713 as referred to in paragraph 1 of this letter and will be otherwise
calculated in accordance with the TSA.
For
the avoidance of doubt, to the extent that the arrangements agreed in this letter
represent "alternative bonus arrangements" for the period to the end
of the first quarter of 2002 for the purpose of paragraph 3 of Appendix F of the
TSA, those alternative bonus arrangements shall come to an end at the end of the
first quarter of 2002 and the provisions of Appendix F of the TSA shall again
apply thereafter.
3.
For the avoidance of doubt, Virgin Mobile will take no further steps to re-open
the calculation of the "Customer Contribution" in respect of the year
2001 and the first quarter of 2002.
4.
From now on in calculating the Customer Contribution and MSC figures in accordance
with the TSA, figures will be rounded to the nearest fourth decimal place, unless
otherwise agreed between Virgin Mobile and T-Mobile in writing. "
- TM
originally sought to argue that the references in that letter to calculations
to be done "in accordance with the TSA" or to "the provisions of
Appendix F of the TSA" had the effect of restoring the force of the original
TSA, even if it had been amended by the 12th September letter agreement.
TM said that it had the effect of reapplying the provisions of the TSA in its
unamended form from the end of the first quarter of 2002. Alternatively it was
said that the letter showed that the parties were not, as from the date of signature,
conducting themselves on the basis of an assumption that the provisions of the
TSA relating to performance based CCs were no longer applicable.
- In
the context of the dispute, which had arisen between the parties, these arguments
are unsustainable. When the letter is read as a whole it is clear that it is the
Minimum CC mathematical formula, which is the very subject of the agreement. There
is no reference to anything at all outside it and the purpose of the agreement
was to clarify and resolve issues which had arisen in the application of the formula
itself. The words to which TM refers have no wider application and do not in any
way derogate from the terms of the 12 September Letter of Agreement. The reference
to calculations "in accordance with the TSA" or to the application of
"the provisions of Appendix F of the TSA" were plainly intended to refer
to those provisions as amended by the 12th September Letter of Agreement
and could not have been construed or understood otherwise by the parties, with
the knowledge that they had or what had previously occurred.
- Ultimately
TM employed this Agreement as no more than a vehicle for arguing that expressions
such as "the formula" or "Appendix F of the TSA" were not
used as terms of art by the parties in their Letters of Agreement and that they
regarded Appendix F as remaining in force, save insofar as temporary derogations
were agreed. This does not assist TM in its arguments relating to the 12th
September Letter however, because the reference in that to the formula in Appendix
F of the TSA can only be, as I have held, to the Minimum CC formula. The context
of that agreement also showed clearly the meaning of "formula" whilst
the context of the May 2002 Letter shows clearly that it is that formula which
is being addressed. Appendix F remains in force, save insofar as varied by the
12th September Letter of Agreement. It had to do so in order that the
MSC could be calculated based on the modified way of calculating the CC.
TM’s
Calculation of 30th September 2002
- I
have already found that there was no basis in the TSA, as amended by the 12th
September letter agreement, for TM to notify any performance based calculation
to VM. I need not therefore deal with each and every point argued in relation
to the contents of the letter and the calculation of £1.71 to which it referred.
I do however find that the letter and calculation were not effected in accordance
with the terms of the original TSA prior to amendment, in any event, as was conceded
by TM in its closing submissions.
- On
the 17th September 2002 Mr. Harris Jones of TM telephoned Mr. Alexander
of VM. The latter’s attendance note and his evidence of this call showed that
Mr Jones informed him of a proposal that TM had made to Virgin for termination
of the joint venture. He went on to say that, absent Virgin’s agreement to that
proposal, on 30th September 2002 TM would unilaterally alter the CC
to £1.71, which would trigger an Event of No Fault Termination.
- The
letter of 30th September 2002 was addressed to VM and to the Virgin
defendants. It was delivered by hand to Virgin Management Ltd, a central services
company for the Virgin Group of companies in London. There were three envelopes
addressed to VM and the two Virgin defendant companies containing identical letters
in the following form: -
"Consistent
with our rights and obligations under the above agreements [the TSA and JVA] we
are writing to inform you that we propose that the Customer Contribution for the
next period (1 October 2002 to 31 December 2002) shall be £1.71".
- No
details were given of the way in which the sum of £1.71 had been calculated, but
in response to a request for such information, TM’s solicitors stated that the
figure was calculated by reference to VM’s performance in terms of its generation
of inbound interconnect revenue. This was said to equate to inbound interconnect
revenue per person per month, calculated on the basis of average usage of 24.8
minutes (x £0.1071= £2.65) with a deduction of CUF (24.8 minutes x £0.038 = £0.94).
- As
an attachment to Further Information given in the course of these proceedings,
TM gave details of the calculation of £1.71 figure. The calculation was said to
be TM’s good faith attempt to estimate the most appropriate figure for CC for
the period October 1st to December 31st 2002, using pre-October
data and projections for the October to December period.
- The
calculation was made in the middle of September 2002 and not on any relevant review
date nor within a reasonable time thereafter.
- The
inbound interconnect volume customer base was assessed by reference to actual
data from 1st January to 31st August 2002 inclusive and
projections for the period from 1st September 2002 to 31 September
2002 inclusive, not on the inbound revenue in the previous period, starting with
the last review date.
- The
average inbound pence per minute figure was not only based upon actual figures
for the period 1st January 2002 to 31 August 2002 inclusive, but the
rate was then amended to reflect a 3% voluntary reduction that TM at that time
intended to apply in respect of the period from 1st November 2002 to
31st December 2002.
- The
figure of 24.8 minutes as the total volume of inbound interconnect minutes used
per customer reflected a calculation based on the actual average per customer
minutes for the period January to August 2002 in TM’s management accounts. That
was used as the basis of TM’s forecast of the likely volume of inbound interconnect
minutes for the period 1st October to 31st December 2002.
- The
figures used for the calculation, in respect of interconnect agreements with other
network operators, were the receipts for voice calls. No figure was included for
any income from text messages (SMS).
- The
figure for customer numbers included all those who were considered dormant, whether
for a period of 365 days or more, as at 31st August 2002. That figure
was then adjusted for the purpose of calculating CC on the basis of monthly forecasts
of additional customers and disconnects in the period October to December 2002,
based upon actual data for the period January to August 2002.
- A
series of criticisms of this figure were made by VM to which I shall come in a
moment. In consequence, TM then produced a further calculation, which purported
to take account of all these criticisms, and resulted in a figure of £3.8794.
This figure was included in its Replies in the pleadings in this action served
on 25th October 2002. TM maintains that both of these calculations
were good faith calculations in accordance with the terms of the TSA and that
it is entitled to produce a second calculation to meet any criticisms advanced
in respect of the first calculation, which is, it contends, a reasonable figure
which complies with the contractual criteria.
- I
have already held that, under clause 5.10 and Appendix F of the TSA, TM was obliged
to make a calculation of CC based on VM’s performance over the previous period
starting from the last review date. Because of the serious consequences of this
in relation to termination, I have also held that it is not enough for such a
calculation to be done solely as a "good faith" calculation. TM submits
that its obligation to "base the calculation on VM’s performance" involving
an obligation to calculate this as a proxy for inbound revenue, means that the
calculation should be of a sum intended to reflect the net economic benefit to
TM in respect of calls and messages received on the TM network by VM’s customers
from other networks. It is then said that this should be a calculation based on
inbound interconnect revenues less costs incurred by TM in delivering calls to
VM’s handsets. In my judgment, at the very least, an objective standard of reasonableness
must be applied to this calculation with reference to the TSA and the remuneration
payable to both parties under its terms.
- Before
considering any details of the two calculations, it is necessary to determine
whether or not TM can "inform" VM of alternative customer contributions.
Given the purpose of Appendix F and clause 5.10, it is clear, in my judgment,
that there cannot be alternative calculations put to VM by TM as the performance
based CC under the unamended TSA, because it is the comparison between the CC
and the Minimum CC which determines what is payable. TM could notify a CC calculation
and then withdraw it and replace it with another, but at any one time there must
only be one CC in existence so that the parties know where they stand in considering
the contractual validity of it and the impact upon Minimum CC, MSC and any question
of termination. In this case therefore the second calculation would be ineffective
under the TSA (as unamended) unless and until TM withdrew the first calculation,
which they have not done, save, by inference on 25th February 2003,
when serving their closing submissions.
- There
are a number of unanswerable criticisms in relation to the first calculation of
£1.71, as TM recognises.
-
The first of these is the prematurity of the calculation, since it was effected
at a time when the figures for the prior period were not available. The calculation
was made in mid September when figures for the June- September quarter could not
be utilised.
- The
second is the use of figures which related to periods other than the prior period.
The calculation was not based upon the "performance" of VM for the previous
period of 1st July to 30th September 2002, which was the
period expressly referred to in Appendix F paragraph 3. Neither the customer base,
the inbound pence per minute nor the inbound interconnect minutes were based on
that period, but on different periods.
- The
third is the omission of any text revenue at all. There is no possible basis,
on any view of inbound interconnection revenue, to exclude text revenue and to
work solely on the basis of voice calls. This is however what TM did.
- These
defects in themselves render the calculation non contractual.
- The
customer base, quite apart from the period of assessment over which it was taken,
included all dormant customers, whether dormant in excess of 180 days or 365 days,
whereas TM had been maintaining for the better part of 2 years that MSC was not
payable in respect of customers inactive for over 365 days and contended that,
as from May 2002, it was not payable in respect of those inactive for over 180
days. The use of an extended customer base has the effect of reducing the CC.
If this CC was to be applied to the reduced Customer Base which TM was only prepared
to take into account, the effect would be to reduce the sum payable on an entirely
inconsistent and irrational basis.
- TM
also applied reduced interconnect rates of 10.6 pence for November and December
2002 on the basis of an intention to reduce rates for those months and took a
figure of 10.9 pence for September when the average of the preceding three months
would have been 11 pence.
- In
arriving at the figure of £1.71, a deduction was made in respect of what was referred
to as the "relevant CUF rate" in respect of inbound services. Under
the TSA, the CUF actually paid by VM in respect of outbound services is expressed
to be the consideration paid for the "Basic Services". The Basic Services
include those telecommunications services listed in Appendix G which included
voice messages inbound and outbound as well as receipt of text messages. There
is therefore no basis for deducting CUF from inbound revenue since VM is already
paying CUF in respect of that element of service in any event. It is nothing to
the point that clause 5.1 of the TSA provides for VM to pay CUF for each minute
of outbound usage since that clause itself refers to this as consideration for
the supply of the Basic Services. Nor is it relevant that CUF was based on projected
fully allocated costs on all traffic, inbound and outbound, on net and off net.
Although the sum derived was to stand as the conventional estimate of actual cost
for use of the network, the notional figure was already charged and paid for in
payment for the Basic Services.
- There
is plainly also an argument about the need to include "on-net revenue"
in any performance based calculation. It appears that on-net inbound minutes were
included by TM in calculating the initial £4.56 Minimum CC and there is no doubt
that TM obtains revenue when its customers telephone VM’s customers. It charges
its customers as if there was an interconnection agreement between TM and VM and
a charge payable for such interconnection, in circumstances where there is none.
Yet what TM charges its customers is irrelevant in the context of the TSA in just
the same way as what VM charges its customers for calls to TM’s customers is irrelevant,
where it likewise charges its customers as if an interconnection charge had to
be paid to TM when none is payable. There are no actual charges received by TM
as would be the position where a call is received from a third party network,
where an interconnection charge would be payable by that other network under an
interconnection agreement. Nonetheless, there is an element of inequity in this
respect. Although the parties had agreed that there would be no interconnection
agreement between the two of them on calls in either direction, the inequity arises
because the greater VM’s market share, the more on-net calls there will be and
the greater the revenue to TM from inbound and outbound calls. Yet VM’s "performance"
based revenue would decline if limited to take account of actual inbound off net
revenue. The greater its market share, achieved by attracting customers from other
networks, the less the inbound revenue from interconnection agreements but the
greater the revenue to TM for on-net business. This area is not one which is capable
of a ready answer and I refrain from making any decision in relation to it.
- I
am not much persuaded by any of the other criticisms advanced by VM but those
I have referred to are enough to show that the basis of the £1.71 calculation
was flawed. In my judgment, it was not only flawed, it was deliberately skewed
to achieve the lowest possible result. I find that TM in the person of Mr. Harris
Jones, Mr. Shearer, Miss Chain, Mr. Schuller and Mr. Meadows must have been, and
were, aware of the mutual intention underlying the 12th September letter
agreement. Yet TM put forward a figure of £1.71 as the CC. The evidence of Mr.
Grindal, who was responsible for effecting the £1.71 calculation, was that he
was instructed by Mr. Chrisp and Mr. Meadows to perform this calculation without
including text messaging, to deduct CUF and to apply a no dormancy rule. He never
discussed his calculation with Mr. Akinlola who was otherwise responsible for
the interface with VM and the calculation of the CC. He was told what elements
to take into account and followed his instructions. He understood that what he
had to do was to perform a calculation which reflected what would occur in the
fourth quarter of 2002 and therefore did not do the calculations based on the
performance of VM over the previous 3 month period, which had not then ended.
He did not have the figures for September 2002, when carrying out the calculation
in the middle of that month. In his e-mail explaining how he arrived at the figures
he did, dated 4th October 2002, appears the following:-
"We
needed to propose a customer contribution to VM on 30/9/02 as per 16(1)(a)(ix)
of the JVA and hence used what information we had at the time. The resultant calculation
appears as £1.71 above."
- Mr.
Grindal said in evidence that this reflected his understanding of why the £1.71
was calculated, namely in the context of the Clause 16 termination provisions,
but said that this was a matter of speculation on his part as to why Mr. Meadows
had asked him to do it. It is plain, in my judgment, that this figure was deliberately
produced at as low a figure as possible in order to put forward a no fault termination
case. It was not a justifiable figure on any basis.
The
"Dormancy" Issue.
- In
order to calculate the MSC in accordance with the 12 September letter of agreement,
it is necessary to assess the CC and then multiply it by the "Monthly Customer
Base" in accordance with Appendix F. The Monthly Customer Base is defined
as "the average of the number of Customers connected to the network at the
beginning of the calendar month concerned and the number of Customers connected
to the network at the end of the calendar month concerned." VM and TM disagree
as to those who fall within the definition of "Customers connected to the
network". TM says that this does not include those who have been inactive
for 365 days in the sense of not using the network for ingoing or outbound calls
or text messages for such a period. VM by contrast initially argued that a customer
is a customer so long as he or she remains connected to the network. VM contends
that TM was at all times aware of VM’s marketing pitch to potential customers
of service for life and access to the network for life on payment of an initial
charge and the purchase of a telephone or SIM card. Thus a customer became a customer
for life and could not be disconnected.
- The
TSA in clause 1, the definitions clause, defines "Customer" as "any
person to whom the company (VM) or any of its authorised agents or distributors
sells or whom the company or any of its authorised agents or distributors permits
to use the Airtime Services (including the company itself and other members of
the group)."
- TM
argues that this connotes some element of current usage because of the use of
the present tense in the words "sells…or permits to use" and draws attention
to the phrase in parenthesis as showing that permission to use is intended as
a reference to those to whom services are provided gratuitously. This, it is accepted,
would include all promotional free air time given to those connected to the network.
The phraseology does not however, in my judgment, assist TM in its arguments.
VM "sells" airtime to 90% of its customers on a prepay basis, which
they then utilise subsequently. Only 10% pay by direct debit arrangement. The
former do not buy the airtime services when they make calls. Buying a voucher
or buying air time in advance entitles the purchaser to make use of the amount
of air time bought at the prescribed rates. Once the voucher or airtime is bought
in advance of use, no further selling occurs until the next occasion when a voucher/airtime
is bought. Thus the word "sells" does not create a relevant temporal
limitation, since all those who have prepaid then have "permission to use"
the air time facilities for the length of the calls for which they have paid.
The phrase "permits to use" then does no more than refer to VM’s permission
for utilisation of the services, not the extent to which a person avails themselves
of that permission nor their actual utilisation.
- Further
clause 2.4 of the TSA provides that VM may resell or provide the Airtime Services
to its customers. The selling or provision of such services is an entitlement
which VM has, of which it makes use both when it sells vouchers or air time and
when the customer makes use of those services. The customer does not have to take
advantage of what he has bought at once. A prepay customer pays for that provision
and for his ability to use his phone and those services, whether he actually makes
calls or not.
- Just
over one year after the launch of VM in November 1999, the issue arose as to customers
who had been inactive for 365 days. TM supplied VM with the data upon which VM
based its invoices for MSC. TM did not however include data for customers who
had made no outbound calls in the prior 365 days and so a dispute arose in December
2000. VM sought such data and because Customs and Excise raised a question about
the invoicing arrangements, it was then agreed between VM and TM that there would
be separate invoicing for such customers where "dormancy" was in dispute.
TM refused to pay on any such invoices as they were submitted from then onwards.
- By
clause 2.1 of the TSA, TM is obliged to supply VM upon request with Airtime Services
and by clause 2.3 it is obliged to provide VM with the means to connect or disconnect
customers to the network to enable VM to provide its customers with the Airtime
Services. TM has express rights to suspend the provision of Airtime Services in
the circumstances specified in clause 14 of the TSA, none of which has occurred.
One such circumstance arises where TM is obliged to comply with any statute, order,
instruction or request of the government or other competent administrative or
regulatory authority.
- Apart
from TM’s purported direction as to disconnection by VM of some of its customers,
to which I refer hereafter, there appears no contractual basis for any limitation
on customers based on the actual usage of the network by those customers. TM gave
no direction to VM requiring disconnection after 365 days inactivity by a customer
and both the definitional sections of the TSA and the key obligations for the
provision of Airtime Services militate against a construction, which requires
a certain usage to be made of the network by customers, in order that they should
be considered as such. VM was, on the face of the TSA entitled to decide whom
it would permit to use the Airtime Services that TM was obliged to provide to
VM for its customers use.
- There
is some absurdity and perversity about maintaining an unreal customer base for
the purpose of MSC payments, as TM stressed. The elements which fall for consideration
in relation to an assessment of the 180 day rule which TM sought to impose, and
to which reference is made later in this judgment, have to be borne in mind here.
Where the terms of a contract are construed to give rise to an unreasonable commercial
result, that construction must be viewed with suspicion and where the objective
intention is clear, the words may have to give way to a construction which accords
with, and does not flout, commercial or business commonsense. Where is the business
sense in payments being made in respect of those who have not used their phones
for over a year, when it is reasonably clear that the vast majority will have
moved to other networks, lost their phones or bought new phones? Are they all
to remain on the list of customers on the off chance that some of them may return
to VM at some indefinite point in the future? The problem arises however in identifying
those who have given up using the phone, as opposed to those who wish to retain
the ability to use what they have paid for, however limited their actual usage.
If a customer could be shown to have abandoned his or her right to be connected,
then he or she would no longer be a customer, in any ordinary sense of the word.
A notifying customer who takes his number with him when migrating to another network
falls into this category. There may also come a point where the abandonment of
such a right to use the services already paid for can be inferred but, as appears
hereafter, that cannot be inferred at 365 days for all customers and there may
be some difficulty in identifying those for whom it is true. Some other factor
beyond non-usage for outbound calls is needed to establish such abandonment.
- It
is worth noting that at no point did TM give a direction about disconnection of
365 day dormant customers. It merely argued that 365 day dormant customers did
not qualify for MSC payments. In the absence of a direction or any evidence of
abandonment by any VM phone user of his right to be connected and to use the Airtime
Services, VM was not only entitled to maintain the connection of such a customer,
but to treat him as a customer to whom it had sold such services, to whom it provided
such services and who was permitted to use those services.
- VM’s
own internal Customer Definition Document of November 2000 has a section headed
"Customer Definitions" which defines customers as "the number of
customers who have a continuing connection with the network and who have made
or received a call within 365 days". This document’s express aim was to set
forth a definition of a customer for the purpose of establishing a reporting basis
to OFTEL. In fact, TM has to furnish such a report as the holder of the telecommunications
licence, but VM supplies the information on its customers to TM for it to do so.
In the same document, there is a reference to "disconnections" which
includes those who are described as "long term inactive subscribers who have
not made an outbound or received an inbound call in 365 days". VM’s evidence
was that such people, although described as "disconnections" and excluded
from the definitions of "customers" for reporting purposes and assessment
of average revenue per user, were not actually disconnected.
- VM
accepted in its closing submissions that there had to be some limit on those who
could be classified as customers whilst remaining connected to the network. VM
itself disconnects a number of customers, including non payers, those whose phone
is lost or stolen, those who have died, those who have notified it of migration
to another network with the allocated telephone number, those who have returned
phones under the customer dissatisfaction policy and those who have asked to be
disconnected. VM, in its closing submissions stated that it was prepared to treat
as non customers for MSC purposes those customers who were truly dormant for 365
days and who could be regarded as having abandoned their rights to use the network,
but said that the following could not be put into that category, which I accept:
- Those
customers who received inbound calls. VM said that these were identifiable by
TM but I was told otherwise by TM’s Counsel. Without evidence, I am unable to
decide whether that is so or not.
- Those
customers who have topped up their prepay accounts within that 365 day period
or have a credit balance in their account (of more than a de minimis amount).
- Those
who have made payment for a value added service within that period.
- Those
who in future make a data interaction using their phone (to the extent that this
does not involve making an outbound call in any event).
- Those
who reactivate after the 365 day period by subsequently making or receiving a
call, thus showing that the lapse of time could not be seen as an abandonment
of their rights to use the services.
- Those
who register details or a change of details.
Otherwise,
VM accepted that those who were truly dormant, inbound and outbound over 365 days,
could properly be treated as having abandoned their rights to use the VM network.
- In
my judgment therefore a simple 365 dormancy rule is not justifiable but equally
VM is not entitled to claim MSC in respect of those subscribers who have given
up their rights.
- By
a letter dated 4 July 2001, TM notified VM that with effect from the 1st
May 2002 VM were required to disconnect any customer who had not been responsible
for a chargeable event within the preceding 180 days. TM stated that it intended
to enforce this by disconnecting any customer not disconnected by VM in accordance
with this rule. A "chargeable event" was defined, so far as relevant
for VM’s purposes, as "an outbound call being made or an SMS (text message)
being sent which directly results in a specific call charge becoming payable."
TM informed VM it was introducing this new disconnection rule pursuant to clause
9 of the TSA and that this was being imposed on all its wholesale partners also.
As wholesale partners worked on an entirely different basis, whereby they paid
monthly connection charges in advance, the impact on them was entirely different
to that on VM.
- Clause
9 of the TSA provides as follows:-
"CONNECTIONS
"9.1
Where [TM] provides [VM] with the means to connect or disconnect any SIM Cards
from the Network or to otherwise administer the accounts or records of customers,
[VM ]shall at all times comply with such procedures and directions as [TM] may
specify in writing from time to time.
9.2
[TM] expressly reserves the right at any time to reasonably vary any procedures
and/or directions specified by [TM] pursuant to clause 9.1 by giving (except in
the case of emergencies or otherwise agreed by [VM]) not less than one month’s
notice in writing to [VM].
9.3
[VM] shall be entitled to request and if so requested, [TM] shall provide connection
to the Network of a SIM card at any time in accordance with the procedures specified
by [TM] pursuant to clause 9.1 whereupon [VM] shall forthwith be liable for and
shall make payment to [TM] of all relevant charges…applicable to such SIM Cards
in accordance with thid Agreement."
- VM’s
case is that clause 9.1 of the TSA does not entitle TM to make unilateral changes
to the operation of the TSA, particularly the MSC, since all variations to the
TSA have to be agreed in writing in accordance with clause 20. Furthermore it
is said that in the circumstances, which obtained then and now, the direction
given in July 2001 on disconnection was not reasonable, as required by clause
9.2 and by necessary implication, clause 9.1.
- VM
say that clause 9.1 is only intended to allow TM to give directions to VM as to
administrative matters in relation to connection and disconnection. Clause 9.1
refers to the provision of means of disconnection and the means to "otherwise"
administer the accounts or records of customers. The clause is headed "Connections"
however and also refers to "directions" and not merely to "procedures"
in that context. Such a "direction" would not appear to be limited to
the means or mechanisms for carrying out connections or disconnections, which
are covered by the word "procedures". The word "direction"
is wider than that and the clause gives a liberty to TM to make directions as
to connection or disconnection limited only by the criterion of reasonableness.
Any variation in directions must be reasonable under clause 9.2 to be effective
and self evidently any original direction under clause 9.1 must also satisfy that
requirement, unless there is an agreement between the parties. A new direction
does not amount to a variation of the TSA for the purposes of clause 19, because
it is a liberty given within the framework of the TSA for unilateral directions
to be given by TM. The rights given to VM by clauses 2.1, 2.3 and 9.3 are subject
to TM’s power to give directions and vary such directions subject always to the
reasonableness of that which is directed.
- VM
contends that the direction given was not reasonable primarily because:-
- It
cut across VM’s marketing strategy of access to the network for life on payment
of an initial charge.
- Customers
who made no outbound calls but received inbound calls would be disconnected, even
though they generated inbound revenue.
- The
costs associated with maintaining "dormant" customers create no justification
for disconnection, since most of the costs are "sunk" costs amortised
in respect of the equipment required for the provision of the services, rather
than incremental costs resulting from the maintenance of extra facilities for
these inactive customers.
- There
is no regulatory pressure and no practical pressure on network numbers because
there are currently 300 million mobile numbers (with 47 million in use) and 500
million unallocated mobile numbers available to potential customers. OFTEL is
not concerned to ensure recycling of dormant numbers.
- These
arguments need to be considered in a broader context. In considering the reasonableness
of the direction, regard must be had to the nature of the issue in dispute which
is impacted by it, as well as the effect on VM’s customers and the joint venture
as a whole. The argument originally arose in the context of assessment of the
MSC payable by TM to VM which, it was accepted by those witnesses with knowledge
of the original negotiations of the TSA and JVA, was intended to be a proxy for
inbound interconnection revenue. VM make the point that to disconnect on the ground
of lack of outbound calls takes no account of the possibility of inbound calls
being made to such persons with the concomitant generation of revenue to TM. No
data showing the inbound calls to such people was available. TM makes the counter
argument that there is an obvious, but not precise, correlation between outbound
and inbound usage. TM contends that common sense and experience show that most
people who do not use their phone for 180 days for outbound calls will not receive
inbound calls either, nor will they make outbound calls thereafter because they
are likely to have given up using the VM phone for one of a variety of reasons
such as expense, death, loss of the phone, theft of the phone or more usually
because of movement to another network or upgrading of the phone or SIM card.
There was a dispute between the parties as to whether information on inbound usage
by supposedly dormant customers could be retrieved from TM’s records, upon which
no evidence was adduced.
- A
large variety of factors fall to be taken into account in assessing the objective
reasonableness of the direction, bearing in mind the impact on TM and VM of the
direction or absence of it in the context of the joint venture. The evidence adduced
showed the following:-
- The
reporting figures for customers used by VM and other network operators do bear
some relationship to actuality and to the perception of the network operators
of those who are actually making use of their facilities. Although customer numbers
were once thought to be a yardstick for judging the success of a network, and
there was therefore a tendency to err on the high side in customer counts, the
emphasis has more recently moved to average revenue per user when assessing success,
which has in turn led to a tendency to give lower figures for the customer base.
The four UK network operators did not and do not necessarily disconnect those
who they no longer report to OFTEL as being within their customer base.
- In
October 2001 an OFTEL report based on reporting by the four mobile networks showed
that two of the four had a stated disconnection policy for those customers inactive
outbound and (essentially) inactive inbound over a period of 3 months whilst one
network had such a policy in respect of those who had not made outbound calls
in 3 months. VM’s own research in December 2001, referred to 2 networks with a
disconnection policy for lack of outbound use for 180 days and one network with
such a policy for lack of inbound and outbound use over the same period of 180
days. TM, having had a stated policy of disconnecting those with no inbound or
outbound activity for 365 days, which is reflected in the OFTEL report, introduced
its new 180 day policy to take effect from 1st May 2002. Prior to the
October OFTEL report, information available from earlier years shows little uniformity
of practice, whether at the date of launch of VM or otherwise.
- It
is not clear if or how these policies were operated by the networks. TM did not
in fact automatically disconnect customers after 180 days inactivity, even after
the effective date of its new rule.
- The
contract terms of the network operators entitled them to disconnect in accordance
with their stated policies. Apart from TM, it is unclear whether other operators
have taken advantage of their entitlement to disconnect in accordance with their
terms and conditions.
- OFTEL
regulations provide that a customer who obtains a telephone number is entitled
to keep that number and to take it with him to another network operator, should
he wish to transfer his custom. To do so, contact has to be made with the existing
network to effect the transfer. Few customers changing allegiance in fact do this.
Most simply transfer their custom without any notification of any kind.
- There
is no regulatory pressure on mobile networks to regulate numbers and there are
large numbers of spare and unallocated numbers in the UK as VM contends. Neither
OFTEL nor the government has required any network operator to operate a dormancy
rule or disconnect anyone.
- There
is an element of cost to TM in maintaining facilities for truly inactive customers.
An internal assessment by TM of operating and capital expense arrived at a figure
of £1.10 per annum per customer for operating expense across the whole breadth
of TM’s customers, but Mr Meadows accepted in cross examination that there were
no ongoing out of pocket costs in the sense of incremental expense for VM’s inactive
customers – merely a loss of opportunity to use these resources elsewhere. I find
that this is of little significance in the medium term, given the spare capacity
of the facilities.
- It
is clear that from surveys and research effected by VM that if no outbound call
is made by a person for 365 days, the prospect of that person using the facilities
to make any outbound call thereafter is small. About 5% of such people then made
a call in the succeeding year, though as many as 25% to 35% might still consider
themselves to be "customers" of VM.
- Equally,
on VM’s research, where there has been no outbound use for 180 days, less than
20% of such people then make an outbound call in the year thereafter, although
some 37% might regard themselves as VMs customers.
- There
is no information on inbound usage in respect of such inactive customers, whether
on the 180 day or 365-day period, but any witness who was asked, accepted that
there was an inexact correlation between inbound and outbound usage.
- There
are some users however whose usage is predominately inbound or who keep a phone
charged for use in emergencies but have not actually made use of the phone, whilst
expecting to be able to do so.
- At
launch, VM had advertised its service as one where, after the initial purchase
of a phone or SIM card and initial connection fee, there was "service for
life", "access for life", "connection for life" and non-expiring
vouchers. I find that TM was well aware of this marketing strategy at VMs launch.
Although that had been a distinctive feature of VM’s marketing approach at that
time, non-expiring vouchers are now issued by all the network operators and, in
the analysis which VM carried out of the impact of introducing a 180 day disconnection
rule, it was noted that access for life/connection for life had not been a major
feature of marketing since the launch.
- Other
networks have a stated disconnection policy, which is not per se inconsistent
with a policy of non-expiring vouchers. If someone is disconnected, they can be
reconnected, although not always with the same phone number. If actually disconnected,
a new SIM card would have to be sent. In practice, if VM disconnected someone,
a call could be put through to VM’s Call Centre and after appropriate checks,
a free SIM card could be sent in the post, should VM wish to do so.
- The
change in the number of customers who use a network is referred to as "churn".
The usual experience of other networks is of a churn rate of the order of 25%
to 35% per annum. That of VM is somewhat less, about 17%.
- The
effect of churn is that, over a period of a few years, if there is no disconnection
policy, there remains in a list of "customers" a large number of people
who are making no actual use of the facilities at all and have no intention of
making such use. Because of the absence of information on inbound calls, the number
of totally inactive customers cannot be assessed, but whilst there will be some
customers who keep a mobile phone for use in emergency or for inbound calls only,
these will be few in number. VM’s research revealed that about 20% of those customers
who had been inactive on an outgoing basis for more than 30 days had in fact bought
a new VM phone or SIM card, so that, if not removed from the customer base on
the basis of inactivity, such a person would appear in it twice.
- By
August 2002 VM was billing TM for £900,000 per month in respect of dormant customers
who had not used their phone for 365 days. That was about 10% of the sums billed
for active customers. On any sensible view, the inbound revenue generated by those
individuals would be insignificant as compared with the MSC claimed in respect
of them at the rate per customer of £4.56 per month, reducing as per the Minimum
CC formula. On a monthly basis, with interconnection revenues from other networks
accruing at about eleven pence per call, there is no realistic prospect of a commensurate
number of calls to a person who has not made a call over that period of time.
At most, a few customers might receive an occasional call. Most will receive no
calls at all.
- There
would of course be no need for any actual disconnection by VM, if it was only
the MSC which was to be based on customers who did not fall foul of the 180 rule
but, by reason of the terms of the TSA to which I have referred, in order to reduce
the MSC payable, TM gave a direction for disconnection. If the parties were to
agree on a policy for assessment of MSC (a notional disconnection), there would
be no practical difficulties for the dormant customer who had kept a phone for
emergency and then wished to use it or for a person who sought "reconnection",
having thought he had lost access. The form of TM’s direction required actual
disconnection however and not merely notional disconnection for the purpose of
assessing MSC.
- VM
was entitled, on 30 days notice, to change its Terms and Conditions with its own
customers. Because of TM’s letter of the 14th July 2001, effective
1st May 2002, in order to preserve its own position in case it was
wrong in its contentions, VM itself introduced a new rule. In March 2002, VM changed
its terms and conditions on 30 days notice to its customers, as it was entitled
to do, thereby entitling VM to terminate its customers if there was no outbound
use for 180 days, whilst saying that it had no plans to implement the policy.
VM reserved the right to charge for reconnection. VM has not made use of its entitlement
to disconnect.
- There
is no evidence that any complaint has been raised by any VM customer in respect
of this change, although, of course, no actual disconnection has taken place as
a result of it. Because of the Terms and Conditions, however such a customer would
have no valid ground of complaint, notwithstanding the original advertising campaign,
particularly if VM arranged for reconnection and access to the facilities without
charge to the re-energised customer.
- The
rule was introduced by TM on 9 months’ notice with the object of eliminating persons
who would be very unlikely to use the airtime services.
- A
failure to introduce a rule of this kind would have the effect of MSC becoming
payable for an ever increasing number of inactive customers over time, which would
speedily assume a disproportionate part of the customer base in respect of which
VM was to receive payment. The financial consequences of this would also be disproportionate
when compared with the effect of cutting off a small minority of individuals who
might wish to reactivate their phones .
- There
are means of ameliorating the effect of such a disconnection rule which TM suggested
to VM and which TM was willing to adopt. There would be no need for an immediate
and irrevocable disconnection upon expiry of 180 days of inactivity. Instead the
customer number could be suspended for a further period of, for example, 90 days
and only deleted at the end of that period in the absence of usage, with the possibility
of reconnection thereafter free of charge if the customer contacted VM’s call
centre.
- Any
disconnection rule based on lapse of use, operates tardily in respect of those
who have moved on to another network, since in practice, the absence of usage
over the relevant period (here 180 days) means that MSC has been payable over
that period, when, if migration to another network had been notified, it would
have ceased to be payable at once. This will also be true of others who have made
a deliberate decision to abandon their use of the phone, but have not notified
VM.
- These
factors have to be weighed to assess whether the direction was reasonable. In
my judgment it would be unjust and unreasonable on any objective basis for TM
to have to pay VM, as a proxy for inbound revenue, MSC in respect of customers
who have been inactive in inbound and outbound use of the phone for 180 days,
since the lack of use in such a period is clearly indicative of future absence
of use. If there is a record of some inbound use however, it cannot be reasonable
for disconnection to take place, however limited the inbound use in the 180 day
period, just because there is no outbound use in that period.
- A
problem arises however because of the absence of information on inbound use for
customers who have no outbound usage in such a period. There is no data before
me to establish the relationship between inbound and outbound usage, but all agree
that there is a correlation for most customers. This means that for most, where
there is no outbound usage, there is no realistic prospect of any significant
inbound revenue in respect of them. Some customers are likely however to have
bought phones from VM, based on the advertising and promotional material, which
stressed "service for life" and thereafter payment only for usage. They
may retain a phone for receipt of calls only or for emergency usage, whether of
the 999 variety (which it was suggested to me would always be operative on any
mobile phone, although this was not agreed) or for domestic emergencies.
- If
the information on inbound usage is retrievable, I cannot see that it can be reasonable
to direct disconnection for those who have made inbound usage of the phone within
the 180 day period. If it is not retrievable, then I take the view that, in the
absence of available inbound data showing any usage and the general recognition
of correlation, albeit imprecise, between inbound and outbound usage, the fact
of the lack of outbound usage for 180 days is, in itself, enormously significant.
To base the disconnection rule on outgoing use only, is less satisfactory than
basing it on inbound and outbound inactivity, but the rule cannot be characterised
as an unreasonable one in circumstances where information on inbound calls is
not retrievable. The consequence of having to pay MSC in respect all 180 day dormant
customers, when the vast majority will receive no inbound calls and the balance
very few such calls, is out of proportion to the harm caused by disconnection,
which can be reversed on application by the customer.
- It
is no answer to this to point to the acceptance by VM of 365 day dormancy as disqualifying
VM from MSC payments, save in the circumstances outlined above. In the absence
of information about inbound calls and messages, a large number of inactive customers
would be kept on the books for a year. Moreover, the operation of the rule works
in arrears, as pointed out earlier and the numbers of customers involved in the
calculation of MSC in the interim 6 months makes it reasonable for TM to seek
some restriction at an earlier date than 365 days.
- In
the absence of inbound information, the alternative to imposition of disconnection
on the lack of outgoing usage over 180 days is the maintenance of a large customer
base, which pays no regard to the 17% per annum churn rate in a growing market
share, the minimal use made of inbound facilities by those who are inactive on
an outbound basis over the 180 day period and the unlikelihood of any further
use inbound or outbound by any such customer at the expiry of any such period.
The mobile phone market is a fast moving market and not many people will keep
the same phone for years on the basis of a marketing campaign which took place
some years ago. VM’s own research suggests that less than 20% of such inactive
customers would wish to reactivate their connection to the network, but such reconnection
is achievable by contacting VM and, when such reconnection occurs, such customers
can appropriately be included in the customer base.
- When
the matter is looked at from the perspective of the MSC and in the round, in my
judgment, there would be nothing unreasonable about the imposition of a 180 day
rule for lack of use on an inbound and outbound basis. Nor, if it is not possible
to retrieve inbound information is there anything unreasonable in the 180 day
rule based on lack of outbound use. The impact on VM’s customers and upon its
brand name and image, in the fast moving mobile phone market, is likely to be
insubstantial as compared with the impact on VM and TM in relation to calculation
of the MSC.
- I
appreciate that this decision may give rise to a dispute as to the retrievability
of such information, with arguments as to its practical retrievability, if in
theory it could be collated, but in the absence of evidence on this point I can
take the matter no further.
The
Notice of an "Event of No Fault Termination"
- Under
the terms of 16(1)(b) of the JVA, VM was to notify the Virgin Defendants and TM
in writing if an Event of No Fault Termination occurred. This it was bound to
do, but as I have found, there was no such event as the TM 30th September
2002 proposal of CC was non contractual. The giving of such a valid notice however
would be the trigger for Virgin or TM to make an offer to buy all of the other
party’s shares. The question arises as to whether VM did in fact notify Virgin
and TM of such an event. I have already referred to the terms of the letter of
30 September 2002 which was delivered on behalf of TM to Mr. Gram who was the
company secretary of Virgin Management Limited and the Second Virgin Defendant.
Mr. Gram also faxed a copy of the letter to Mr. Alexander and showed copies to
two of the directors of VM who had offices near to Mr. Gram’s office. As set out
in his unchallenged witness statement, Mr. Gram did not have any understanding
of the significance of a proposal of CC.
- He
described in his witness statement a telephone conversation with Miss Chain, the
in-house counsel of TM who was a VM director. The letter he had received had been
addressed to Diana Legge and he telephoned Miss Chain to find out why that was.
Miss Legg was his predecessor as company secretary of the Virgin Second Defendant,
who was named in clause 27 of the JVA, which provided for notices under the JVA
to be sent to the Second Virgin Defendant (in respect of both Virgin Defendants)
for her attention. Ms Chain knew that she had left. Miss Chain said on the telephone
that the letters were addressed to Miss Legg because the JVA required that. She
said something to the effect that Mr Gram was required to write to the shareholders
under the JVA about the letter. He understood her to be pointing out something
that he should do, as a matter of professional courtesy. He looked at the notice
provision in the JVA, could see no requirement for any acknowledgement of any
notice but then sent an acknowledgement of receipt of the letter on 1st
October 2002. He did this by fax enclosing a copy of the letter sent to him by
TM, saying the following:-
"There
follows for your information a copy of a letter delivered by hand yesterday…on
behalf of TM…proposing a revised customer contribution for the period from the
1 October 2002 to 31 December 2002.
By
way of this fax, I acknowledge receipt of the letter."
This
letter and the enclosed TM letter of proposal was also faxed by Mr Gram to Ian
Cuming of Abacus, which is a corporate Secretarial Company used by the Second
Virgin Defendant. Neither Mr. Gram nor Abacus had any standing so far as concerned
the First Virgin Defendant.
- On
no sensible view could this letter be regarded as a notification by VM to TM of
an event of no fault termination. It was, as the letter says, merely an acknowledgement
of a letter received from TM. There was no formality about it. It made no reference
to an event of no fault termination and gave no notice of it.
- To
constitute a notice to Virgin under clause 16.1(b) of the JVA, the terms of clause
27 of the JVA had to be met, which required him to send it in writing to Virgin
at the Campden Hill address where he himself was. This he did not do.
- So
far as the Virgin shareholders were concerned, Mr. Gram assumed if anything needed
to go to them, it would be passed on by Abacus, the professional corporate secretarial
company, with whom he shared Company Secretary responsibilities. In passing on
any documents to Abacus for the Virgin companies, once again Mr. Gram was not
purporting to give notice on behalf of VM to them of an event of no fault termination.
He enclosed a copy of the proposal letter from TM addressed to the Virgin Defendants
and VM, but he did not himself issue any notice on behalf of VM.
- Mr.
Gram had no idea that an Event of No Fault Termination had even allegedly occurred
and he merely passed on correspondence which he had received from TM and acknowledged
receipt to TM. There had been no consideration of the matter by the VM Board nor
any authorisation to him as VM company secretary to give any such notice to Virgin
or TM. He did not purport to do so and neither Virgin nor TM could have thought
that he was doing so on receipt of the fax or copy TM letter.
- In
these circumstances, there never was any notification under Clause 16.1 (b) of
the JSA and the auction mechanism was not triggered, even if an event of no fault
termination had occurred.
- Moreover
none of the necessary formalities were observed in relation to the alternative
calculation put forward in TM’s Replies in this Action, so that, for this reason
also, there was no valid notification of the revised figure of £3.88.
Conclusion
- For
all the above reasons TM is not entitled to any of the declarations sought by
it. VM is, entitled to contrary declarations and to an order for payment of sums
of money in respect of MSC on the principles set out in this judgment, the amount
of which will have to be ascertained. I will hear argument on the form of orders
to be made, if they cannot be agreed.