Tesco's competition victory shows rules are a legal minefield

Under the Enterprise Act 2002, the Office of Fair Trading can trigger an investigation if it has reasonable grounds for suspecting that competition is not working effectively in a particular market.

The investigation is carried out by the Competition Commission. If it finds that any feature of the market has an "adverse effect on competition", it must consider whether a remedy is required and, if so, what would be appropriate.

In May 2006, the OFT instructed the commission to investigate the groceries market. In a wide-ranging report published nearly two years later, the commission found that some larger supermarkets faced limited competition in certain areas.

Its answer to this was a new "competition test" that retailers should have to satisfy before being granted planning permission to open a large store or extend a medium-sized one.

Planning permission would not be granted if there were no more than three stores within a 10-minute drive and the new retailer would sweep up more than 60% of all sales in the area.

Far from being a competition test, says Lucy Neville-Rolfe of Tesco, "this is an anti-competition test. It would add bureaucracy and delay investment and job creation".

Tesco challenged the commission's recommendation before the Competition Appeal Tribunal, a specialist court headed by a High Court judge.

It was not the appeal tribunal's job to decide whether the competition test was a good thing.

All it could do was to examine how the commission reached its conclusions - just as the High Court does when considering an application for judicial review.

Last week, the tribunal decided that the commission had failed to consider some of the risks to consumers that might result from the competition test.

A proper cost-benefit analysis might have produced different recommendations. But the tribunal stressed that it had not ruled out the possibility that a competition test could be introduced in the future, no doubt after further research into its effect on consumers.

What happens next? Neither side is declaring its hand. But we may know next Monday, when the tribunal is to hold a further hearing.

One option would be for the commission to reconsider its recommendations in the light of the tribunal's findings and rewrite its report. But Tesco is likely to argue that the flaws in the existing investigation are too deep to be papered over.

Another option would be for the commission to seek permission to appeal. That would put everything on hold until a ruling in the autumn.

If the commission could establish that the tribunal's requirements were too demanding - given that it has only two years to complete a report - its forthcoming findings on other markets would be less vulnerable to challenge.

On the other hand, the commission may not regard this as the best case to take to appeal: wiser, perhaps, to heed the tribunal's findings and do a bit more research next time.

Tesco, understandably, says it would be far better for the commission to remove the competition test from its report and submit an amended version to the OFT.

It is, after all, only a recommendation to ministers, says Tesco's lawyer, Deirdre Trapp of Freshfields Bruckhaus Deringer.

"The Government is perfectly capable of introducing whatever changes to planning policy it thinks appropriate, whether or not these are recommended by the Competition Commission," she explains.

"Common sense might suggest that enough time and energy has been spent on this particular recommendation already."