Учебный год 22-23 / The Public Law-Private Law Divide

the suggested implied term might itself be seen by the courts as a fetter on the government’s discretion. This is because the additional payment or compensation might deter the authority from exercising its other powers, even where it would be in the public interest to do so. The court could not imply a term to which the parties could not validly agree. Of course, the force of this argument varies according to the circumstances. This might produce a regime in which contractors who claimed a small amount of extra money or compensation would receive it, whereas those who sought a considerable amount would not. Where the court could not imply a suitable remedial term, the government would be able to claim that the contract was void as a fetter. Perhaps this offers a welcome degree of flexibility to the government, but it is hard to justify from the contractor’s perspective.

Again, therefore, it seems necessary to advocate statutory reform, even though governments are unlikely to promote legislation which would restrict their own freedom of action. Any such legislation would need to have two elements. First, it would need to empower the courts to vary the terms of a government contract in order to preserve its financial balance (rather like the French doctrine of fait du prince) where that balance was upset by the government’s exercise of other powers. At this stage, both parties could be permitted to argue that continuation of the contract, even on revised terms, was not practicable.72 For example, the government might not be able to afford a long-term commitment to the new contract price, or the contractor might not be able to hire enough staff to meet the government’s changed demands. If either party satisfied the court on this point, attention would then turn to the second element of the legislation. This would enable the court to terminate the contract but with compensation for the contractor. This could be achieved by similar provisions to those set out in ss. 6 and 7 of the Local Government (Contracts) Act 1997, discussed above.73 If a party persisted with a claim that the contract could not be continued, but failed to convince the court, that party would have the option of terminating the contract in accordance with any applicable clauses, or breaching and facing the consequences. This does of course mean that the government would have more leverage over the contractor than the contractor would have over the government. This is because there is little practical difference between being ordered to compensate the contractor on a courtsanctioned termination, and being ordered to compensate the contractor on breach. But the public and political consequences might be very different in the two cases.

Although such legislation does not seem likely at present, one high-profile dispute involving substantial disruption to public services might be sufficient to

72 The French doctrine of imprévision (which applies where there is a change in circumstances beyond the control of both parties) compels the contractor to perform under the revised terms unless force majeure can be invoked (see Brown and Bell, supra n. 70, at 208-10). Although this model offers the best means of safeguarding public services, it might seem very daunting to contractors, making them reluctant to bid for government contracts.

73 Note that while s. 5(3) of the Act also empowers the court to continue the contract, it does not provide a complete solution to the present problem because it does not permit the court to vary the contract’s terms.

generate pressure for reform from private firms and even the public. In the meantime, as argued above, the courts can and should scrutinise claims that particular contracts fetter the government’s discretion. Such scrutiny should at least ensure that the unsatisfactory ultra vires solution is brought into play only where a genuine public interest is at stake.

IV. – CONCLUSION – THE PUBLIC/PRIVATE DIVIDE RE-EMPHASISED?

English law does not cope well with the wider public interests which might be at stake in government contracting. The law does not provide a satisfactory regime for ensuring that government contracts have a democratic mandate. Central government (in the shape of the Crown) and ministers (as corporations) can place contracts without seeking any statutory authority at all. And where public bodies do need statutory authority, this is policed through the doctrine of ultra vires which fails to strike a proper balance between the various interests at stake. It prioritises the wider public interest in legality over the contractor’s interests and the public interest in uninterrupted service delivery. The government should be required to have some statutory authority for all its contracts, but the courts should have a discretion (as they do in the local government context) to permit an ultra vires contract to continue, or to impose suitable discharge terms, in order to protect these other interests.

Similarly, English law does not properly address the problem of government powers which may conflict with the terms of a government contract. The law appears to allow the government a considerable degree of freedom to escape contracts in order to exercise these conflicting powers. But in practice, the courts have shown some willingness to scrutinise the government’s claims to be acting in the public interest before allowing it to override a contract. This more rigorous approach is to be welcomed, but it should be accompanied by more clearly reasoned judgments. Once the court has decided that the government should be allowed to exercise conflicting powers, the contract is at present declared void. This fails to compensate the contractor or to ensure, where appropriate, that public services continue to be provided without interruption. A more sophisticated regime of specialised remedies should be created by legislation.

Taken together, these arguments form a partial case for a more developed set of public law doctrines to regulate government contracts. These doctrines would address some of the wider public interests raised by government contracts, whilst taking account of the public interest in the delivery of services under the contract, and the contractor’s interest in performing the contract and securing its expected profits. But the case for a law of public contracts is, of course, highly controversial. The most significant objection is one which besets public law as a whole: the difficulty of determining its scope of application.74 Would a law of

74 On which see, generally, J. W. F. Allison (1996), A Continental Distinction in the Common Law: a Historical and Comparative Perspective on English Public Law; D. Oliver (1999), Common Values and the Public-Private Divide.

public contracts apply to all government contracts, or just to a select group? How would the ‘government’ be defined for these purposes? Would there be a large volume of ‘boundary-mapping’ litigation, analogous to that which followed the assertion in O’Reilly v Mackman75of the distinctiveness of public law procedure? These objections are not, in fact, unanswerable, but space precludes consideration of them in the present chapter. All that can be said is that if the concerns about government contracts raised here are valid, and the proposed solutions desirable, it may be worth tolerating some problems of scope in order to secure the benefits greater public law regulation would bring.

The importance of the issues raised here should not be underestimated. Government contracts in the UK are now a central mode of public service provision. Under the Private Finance Initiative and other types of Public/Private Partnership, private firms are being given a core role – through contract – in the management of schools, health care services, public transport and so on. A tighter legal regime cannot address many of the political objections to contractualisation. But the law could do much more to ensure that contracts are not simply an area of unaccountable discretionary power for the government. Paradoxically, this may involve re-creating the public/private divide at the theoretical level even as it blurs in practice.

75 1983 2 AC 237.

3

COMPETITION LAW AND

THE PUBLIC / PRIVATE DIVIDE

Karen Yeung*

I. – INTRODUCTION

One of the primary concerns of public law, and judicial review in particular, is to safeguard the individual against the arbitrary exercise of power by public bodies. Although courts have been willing to extend the reach of judicial review to “intermediate” bodies exercising governmental or regulatory functions1, commercial profit-making enterprises are generally regarded as private and thus not amenable to judicial review2. Private enterprises are, however, becoming increasingly powerful, particularly in light of the removal of national trade barriers, the rapid pace of technological innovation and the globalisation of markets. Many commercial enterprises operate on an international scale and wield considerable economic power (often referred to in as multi-national enterprises (MNEs) or trans-national corporations (TNCs)). In a modern global environment, it is sometimes suggested that the greatest threats to individual liberty arise not from the exercise of state power, but from the rising power of private enterprise.

The inapplicability of judicial review to private enterprise does not, however, mean that the power of commercial enterprise is unregulated3. In particular, competition law provides an important means by which the state imposes limits

* St Anne’s College, Oxford. I am indebted to Bronwen Morgan for her helpful comments on earlier drafts of this paper.

1R v Panel on Take-overs and Mergers ex parte Datafin plc [1987] 1 QB 146. J Mclean, “Intermediate Associations and the State”, in M Taggart (ed.), The Province of Administrative Law, Hart Publishing, Oxford, 1997.

2A generous interpretation of “public authority” is, however, provided under the Human Rights Act 1998, s 6. In presenting the Bill to Parliament, it was stated that a public authority included, “to the extent that they are exercising public functions, companies responsible for areas of activity that were

previously within the public sector, such as the privatised utilities”: Rights Brought Home: The Human Rights Bill, Cm 3782, Oct. 1997, 8.

3 In the late 18th century, the common law developed the doctrine of common callings which enabled it to control prices by monopolists. P. Craig, “Constitutions, Property and Regulation”, (1991) Public Law 532.

on the extent to which commercial actors are free to exercise their market power. It is generally accepted that the purpose of modern competition law is to facilitate competitive markets in order to promote economic efficiency, thereby promoting consumer welfare. Because firms have incentives to abuse or exploit their market power for their own advantage, “abuse” being defined in terms of inefficient commercial activity, the aim of modern competition law is to safeguard the market process against such abuses. So conceived, competition law may thus be regarded as an accountability mechanism – a means by which private actors can be called to account to the public for the way in which they exercise their market power4.

Although any form of state regulation of business activity involves the use of public power to regulate private power (such as environmental regulation, product safety regulation and the like) what is unique about competition law is that it is directly concerned with the regulation of private power in and of itself. In other words, the accretion of private power is itself thought to be a threat to the welfare of the community. By this I mean that certain restrictive practices are treated as benign if carried out by firms lacking significant market power, yet the same practices may be thought of as “abusive” and hence illegitimate if carried out by firms with significant market power5. Although the way in which the “abuse” of private power has been understood by competition law has changed over time, the rationale for controlling private power underlying competition law has consistently focused on the threat to community welfare posed by the restrictive commercial activities of powerful private enterprises.

The primary aim of this paper is to examine how developments in competition law and policy may implicate the public/private divide. To this end, I consider two significant shifts in the development of competition law. First, I examine a shift in the justification for competition law, from its original concern with the potential threat to individual liberty and freedom posed by powerful private enterprise to a concern for economic efficiency. Secondly, I examine a shift in the scope of competition law, which was originally concerned only with the exercise of private economic power but which has in more recent years expanded so that the exercise of state power has also been subsumed within its grasp. In considering the implications of these two developments for the public/private divide my aim is merely to raise a number of difficult and important questions, rather than make any attempt to resolve them. I will suggest that, taken together, these developments serve not only to illustrate the vagueness and ambiguity that plagues the public/private divide but may also point towards its increasing redundancy.

The structure of this paper proceeds as follows. First, I will briefly explain the economic theory which is generally accepted as providing the foundation for modern competition law, emphasising the central role played by the concept of efficiency in assessing whether private power is harmful to community welfare. This modern conception stands in stark contrast to the original conception of competition law, in which private economic power was perceived as a potential

4See section V C below.

5R. Whish, Competition Law, 4th ed. Butterworths, London, 2001, chapter 5.

threat to individual freedom rather than primarily as a threat to the efficient functioning of markets. Secondly, I will briefly examine the attractions of efficiency and the economic theory upon which it rests as the foundational justification for competition law, and suggest that the strength of their appeal may not be as extensive as its advocates may have us believe. Yet the limitations of economic theory and its focus on the pursuit of efficiency have not prevented them from becoming the foundation for modern competition law, exemplified in sweeping reforms to UK competition law, which are then discussed in greater detail by way of illustration. Thirdly, I consider the expanding scope of competition law, demonstrating that it has grown beyond its original focus on private economic power to encompass the exercise of state power, at least in so far as the exercise of the latter may have an impact on the competitive functioning of markets. Finally, I will consider the implications of these two developments for the public/private divide before providing a brief conlusion.

II. – COMPETITION LAW: PAST AND PRESENT

Competition law provides one means by which public power is used to constrain the exercise of private power. In its modern guise, the justification for constraining private power through competition law rests on economic theory. But this conception is rather different from the ideas upon which competition law was originally conceived. In this section, I will briefly explain the modern “efficiency” based conception of competition law and compare it with the historical origins of competition law in both the USA and Germany, demonstrating that the theoretical justification for competition law has not been static.

A. – MODERN COMPETITION LAW:

COMPETITION, MARKET POWER AND EFFICIENCY

The purpose of modern competition law is generally claimed to be the promotion of economic efficiency by facilitating competitive markets. Given that society’s resources are limited, it is in the community’s interest to produce and allocate those resources efficiently. When this occurs, all economic resources are allocated between different goods and services in precisely the quantities consumers wish (their desires being expressed by the price they are prepared to pay on the market) and produced at the lowest possible cost6. According to microeconomic theory, competition is required in order to ensure that markets operate efficiently7. In competitive markets, producers compete with each other

6 Economic efficiency can be divided into allocative and productive efficiency. Allocative efficiency refers the allocation of resources between different goods and services in precisely the quantities consumers wish. Productive efficiency means that goods and services are produced at the lowest possible cost: see F Scherer and D Ross, Industrial Market Structure and Economic Performance 3rd ed. Houghton Mifflin, Boston, 1990, 19-29; 661-667; R Whish, Competition Law, 4th ed. Butterworths, London, 2001, chapter 1.

7 Efficiency can be defined more precisely in terms of partial equilibrium welfare economics, that is the maximisation of the sum of the discounted present value of consumer and producer surpluses.

in order to satisfy the demands of consumers: each producer striving for custom, thereby constantly seeking to produce better goods and services (as indicated by consumer’s tastes and preferences) at the lowest possible cost. Under conditions of competition, if a producer is to survive, it must be responsive to the demands of its customers, suppliers and the policies of its rivals. The antithesis of a competitive market is a market with only one producer, a monopolist. A monopolist can dictate its own terms of supply. It does not face the threat of being ‘outperformed’ by its rivals, and is thus free to reduce its volume of production to levels below that demanded by consumers in order to bump up the price of its produce, thereby maximising its profit8. The result is inefficiency: the quantity of production is lower than would be the case under conditions of perfect competition.9 Consumers are thus deprived of goods and services which they would be willing to pay for at the competitive price, generating what is known as the “deadweight loss” of monopoly10. In addition, the monopolist is not constrained by the threat of competition, and faces little incentive to drive down its costs to the lowest level, nor does it have strong incentives to innovate in order to attract and retain custom. The result is a misallocation of resources, wasteful expenditure and hence a loss to society at large.

Competition is therefore considered essential to the pursuit of economic efficiency11. The antithesis of competition is market power. A firm possesses market power when it is free to act independently of its competitors, customers, and suppliers12. A firm with market power is thus able to “give less and charge more”13, exploiting the conditions of the market to maximise its own profit, which has the overall effect of harming the general welfare of society. Because

This definition encompasses the trade-off between static and dynamic efficiency: current and welfare losses may be acceptable, if the market structure or conduct which gives rise to the losses will also generate efficiencies in the long run, so long as the prospective benefits are not too delayed in realisation and the social discount rate is not too high: see DA Hay and DJ Morris, Industrial Economics and Organization, Oxford University Press, Oxford, 1991, chapters 16-17.

8F Scherer and D Ross, Industrial Market Structure and Economic Performance, 3rd ed. Houghton Mifflin, Boston, 1990, 15-17, 21-29.

9Perfect competition requires four conditions: a) a very large number of buyers and sellers on the market; b) all products are homogeneous; c) consumers have perfect information about market

conditions; and d) there are no ‘barriers to entry or exit’ which might prevent the emergence of new competition or hinder firms from leaving the industry. Under the conditions of perfect competition, the price at which a good or service is sold never rises above the marginal cost of production: F Scherer and D Ross, Industrial Market Structure and Economic Performance, 3rd ed. Houghton Mifflin, Boston, 1990, 24-49; R Cooter and T Ulen, Law and Economics, 2nd ed. Addison-Wesley Educational Publishers Inc USA, 1997, 29-30.

10F Scherer and D Ross, Industrial Market Structure and Economic Performance, 3rd ed. Houghton Mifflin, Boston, 1990, 15-17; 21-29; R Cooter and T Ulen, Law and Economics, 2nd ed. Addison-Wesley Educational Publishers Inc USA, 1997, 30-31.

11Although competition has traditionally be understood in terms of price competition, non-price competition can also occur in various guises. Firms may compete on the number of brands they put on the market, in product quality, after-sales service, marketing and so forth. Over time, firms may

compete in physical investment or in research and development.

12Hoffman La-Roche v EC Commission [1979] ECR 461, para 38.

13Re Queensland Co-operative Milling Association Ltd, Defiance Holdings Ltd [1976] ATPR 40-012

citing Attorney General for the USA, Report of the National Committee to Study the Antitrust Laws, (1955) at 320.

firms can generate higher profits if they possess significant market power, rational profit-maximising firms can be expected to pursue strategies which enable them to enhance their market power. Economists have identified three strategies which firms may pursue in order to enhance their market power: collude with competitors, merge with competitors or deter competitors from entering the market (or induce existing competitors to leave the market). Modern competition law seeks to block these three routes to market power, in order to safeguard the competitive process and thereby promote economic efficiency14.

14 M Williams, “The Effectiveness of Competition Policy in the United Kingdom”, (1993) 9 Oxford Review of Economic Policy 94. Although competition is generally conducive to the pursuit of economic efficiency, there are some situations (known in economic parlance as “market failure”) in which this may not be the case: F Bator, “The Anatomy of Market Failure”, (1958) Quarterly Journal of Economics. First, there are some industries which require considerable capital investment in order produce the desired goods or services yet the strength of demand for those goods or services may be small in relation to the costs of production. It may even be that industry can only operate efficiently by a single supplier, which is known in economics as a natural monopoly, and are particularly common in relation to network industries: Sharkey, the Theory of Natural Monopoly, 1982, Cambridge University Press, at 2; T Prosser, Law and the Regulators, Clarendon Press, Oxford, 1997, and CD Foster, Privatization, Public Ownership and the Regulation of Natural Monopoly, Blackwell, Oxford, 1992. Even if an industry is not a natural monopoly, the reduction in costs of production achieved through economies of scale and scope arising from fewer firms supplying a large proportion of the product may outweigh the corresponding loss to consumers arising from pricing at levels above the competitive price: F Scherer and D Ross, Industrial Market Structure and Economic Performance, 3rd ed. Houghton Mifflin, Boston, 1990; Secondly, in competitive markets rational profit-motivated firms will strive to reduce their costs of production to the lowest possible level. However, this fails to account for external costs (or “externalities”) which may be generated from the production process but which are not reflected in the prices which the supplier charges for products: A Ogus, Regulation – Legal Form and Economic Theory, Oxford University Press, Oxford, 1994, at 35-36. For example, a factory may pollute the surrounding environment, thereby imposing costs on residents. In the absence of legal restrictions, a rational firm will not take these external costs into account in pursuing its production strategy, and hence the overall impact of its production on social welfare may not be efficient. Thirdly, firms in competitive markets may engage in excessive non-price competition, such as multiple branding, after-sales service and marketing (including advertising), the provision of which may exceed the level demanded by consumers, because their preferences are not accurately reflected in the price mechanism, excessive services are produced, leading to inefficiency. Fourthly, some goods can be characterised as “public goods”. A public good is a commodity, the benefit of which is shared by the public as a whole, or by some group of it. Thus, consumption by one person does not leave less for others to consume. The supplier may find it either too costly or simply impossible to exclude consumption by “free riders”, ie those who consume the good without paying for it. A national defence system is a frequently cited example of a public good. The market method of allocation cannot be relied upon to determine the desired quantity of supply of a public good, because willingness to pay does not provide a measure of demand and fails to provide incentives for suppliers to produce the public good: A Ogus, Regulation – Legal Form and Economic Theory, Oxford University Press, Oxford, 1994, at 30-32. Thus, given that there are some circumstances in which the promotion of competition may not lead to economically efficient outcomes, the design and application of competition law and policy should be capable of accommodating them if it is to be effective in promoting economic efficiency.

B. – THE HISTORICAL ORIGINS OF COMPETITION LAW:

THE PROTECTION OF LIBERTY

Although modern theory of competition law is concerned primarily (if not exclusively) with the pursuit of economic efficiency, this was not the basis upon which competition regulation was originally conceived. Modern competition law largely originated from United States antitrust law, beginning with the Sherman Act 1890, which emerged from the industrial revolution15. At that time, there was considerable popular dissatisfaction in the US with the expanding railroad companies which formed cartels, established in the form of trusts. Using these trusts, stocks held in competing companies were transferred to trustees who then managed and co-ordinated the affairs of the industry. These trusts were thus able to exploit their market power to drive many small businesses out of the market while charging prices disproportionate to the value of their services. The Sherman Act was introduced in this context, making it illegal to enter into contracts in restraint of trade or to monopolise, or attempt to monopolise, a market. The Act was not particularly effective in overcoming populist concerns, largely due to the US Supreme Court’s relatively narrow interpretation of its provisions. The 1912 Presidential election was fought mainly on the antitrust issue, with Woodrow Wilson promising the “New Freedom” through antitrust reform so as to give the “little man” the chance to succeed and assuring greater certainty for business16. The Clayton Act 1914 was then enacted, which made particular restrictive trade practices (such as price discrimination and some mergers) unlawful. The Federal Trade Commission was established in the same year, an administrative agency with the statutory responsibility for investigating competition problems, to regulate business and to provide guidance on competition policy. The protectionist era of the 1930s saw the enactment of the Robinson-Patman Act 1936, which reinforced the view that smaller business needed protection to prevent its bigger rivals from using their buying power to secure superior trading terms. Concerns about the perceived undue power of big business continued into the early 1940s following World War II, in light of the wave of vigorous merger activity, and the merger provisions of the Clayton Act were strengthened as a result.

A central theme pervading the early decades of US antitrust was freedom of economic opportunity, and a particular concern for the protection of small business from the superior economic power of large enterprise. It was not until the late 1940s that the influence of economic analysis began to predominate, and the conceptual basis of antitrust law shifted from political concerns relating to the power of large enterprise and the vulnerability of small business and individual consumers to the discipline of economic analysis and the pursuit of competition in order to secure economic efficiency. In particular, the influence of the so-called “Chicago School” of economics began to take hold in the 1970s,

15EM Fox, “The New American Competition Policy – From Anti-Trust to Pro-Efficiency”, (1981) 2

European Competition Law Review 439, 440.

16Ibid.