T. Mobile(UK) (A Partnership) v Bluebottle Investments SA & Ors

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 9^th 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 9^th August 1999 (the TSA).

The major dispute between the parties arises out of a letter of the 30^th 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 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…”

Event of Default. It shall be an “Event of Default” if:-

[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;

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.

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 31January 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 (11^th November 1999) to 31^st 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 31^st January 2000, 31^st March 2000 and 30^th 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 26^th 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 12^th 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.

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 31^st 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.

Both parties agreed that the factual matrix of the letter of 12^th 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 12^th 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.

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 12^th 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 30^th 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 31^st 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 1^st 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 1^st January to 31^st 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 12^th 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 12^th 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 12^th 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 10^th 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 12^th September letter begins with a shareholding briefing of 26^th 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 31^st 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 3^rd 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 31^st 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 31^st 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 31^st 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 7^th 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 31^st 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 31^st 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 16^th August Board Meeting in order to satisfy the banks’ concerns.

A meeting took place on 9^th 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 3^rd 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 31^st 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 31^st 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 18^th. 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 9^th August to agree to CC at £4.56 up to 31^st 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 18^th August and on Monday 21^st, 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 16^th 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 22^nd August.

Mr. Meadows was involved in drafting a TM internal presentation dated 21^st 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 31^st 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 31^st 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 31^st 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 21^st and 23^rd August 2000.

Also on 21^st 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 21^st 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 21^st August, including the compensation claim, the CUF and MSC. It is to be inferred that Mr. Shearer had the letter of 21^st 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 31^st 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 16^th 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 12^th 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 7^th September 2000. This contained the figures for CC over the duration of the loan in accordance with VM’s construction of the 12^th September Letter of Agreement.

Insofar as it is of any relevance I find that, as at 5^th 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 12^th 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 factual matrix therefore entirely supports VM’s construction of the 12^th 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 12^th 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 1^st January 2001 to 31^st 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 30^th 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 30^th September 2002 which purported to set out a performance based calculation of CC was therefore misconceived and of no legal effect.

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 31^st 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 24^th 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 12^th September Letter of Agreement (with the notable exception of the 21^st 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 31^st March 2001 and 31^st 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 31^st 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 31^st 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 12^th 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 12^th September 2000 Letter of Agreement, from 31^st March 2000 until that date, was that £4.56 was applied without reference to the reducing formula. The 12^th 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 31^st 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 12^th 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 12^th September Letter. The conduct was akin to that which preceded the 12^th 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 11^th April 2002 referred to the Letter of Agreement:

“In accordance with the terms laid out in the jointly signed letter dated the 12^th 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 1^st 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 30^th 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 21^st August and letter of 24^th 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 12^th 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 26^th 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 31^st 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 12^th 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 12^th 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 31^st 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 17^th 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.

As mentioned earlier in this judgment, for every quarter from 31^st March 2001 onwards, TM produced a calculation of MSC in accordance with what I have held to be the proper construction of the 12^th 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 30^th 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 2^nd 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 3^rd and 5^th 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 9^th 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 30^th May 2002 signed by TM on that day and by VM on the 11^th 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 12^th 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 12^th 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 12^th 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 12^th 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.

I have already found that there was no basis in the TSA, as amended by the 12^th 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 17^th 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 30^th September 2002 TM would unilaterally alter the CC to £1.71, which would trigger an Event of No Fault Termination.

The letter of 30^th 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 1^st to December 31^st 2002, using pre-October data and projections for the October to December period.

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 25^th 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 25^th 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 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 12^th 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 4^th 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.

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:

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 1^st 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:-

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:-

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.

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 30^th 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 1^st 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.

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.