Here are some guidelines that salespeople and lawyers should follow when negotiating Capacity Indefeasible Rights of Use (IRU) agreements:
1. An IRU model does not transfer ownership of the underlying assets.
It is one of many legal forms for commercializing capacity. A Capacity IRU agreement grants the right to use a specific amount of capacity over a long-term period, typically 10–20 years, without transferring ownership of the underlying asset, that is, the submarine cable.
Therefore, make sure to define the term Capacity and use it extensively in the contract to differentiate it from other similar services in the wholesale telecom market, such as spectrum, wavelength, or even dark fiber. It is sometimes better to be repetitive in an agreement than argue afterwards that the negotiated and agreed Capacity IRU with extremes A-Z was only a point-to-point dedicated bandwidth, and not something else.
The term IRU stands for Indefeasible Right of Use and refers to the exclusive, unrestricted, and indefeasible right to use the bandwidth of a determined capacity service of a fiber cable. Accordingly, the capacity supplier will be committed to providing the capacity services associated with the IRU contract, possibly without making any reference to a specific cable infrastructure.
This last aspect is also relevant when considering bankruptcy1, and it is advisable to include additional terms in the agreement to clarify that there is no sale of assets or transfer of title. Hence, it is recommended to explicitly state that the sale of the Capacity IRU does not transfer any form of title or ownership in any real or personal property, including, but not limited to, the supplier network.
This is also important for those who are outside the wholesale market, such as local tax authorities or antitrust watchdogs, that may request a copy of these agreements to calculate the market share of international connectivity of a specific cable owner. For such purposes, the submarine cable owner landing in that country should carefully analyze the contract beforehand, in accordance with applicable local laws that may impose dominant operator obligations.
A similar approach should be considered to avoid potential restrictive criteria from national telecom regulators. Before signing a multijurisdictional capacity IRU agreement, lawyers should carefully examine the appropriate local terms used for capacity IRU operations in those markets to avoid any legal burdens commonly restricted to the mobile/retail business, such as price control mechanisms, obligations to publish the service offer, or standard network interconnection agreements.
2. Service Level Agreements (SLAs)are a critical part of a Capacity IRU agreement.
During its life cycle, any cable submarine system is expected to experience a service outage.
For such cases, the sole remedy provision in a SLA is an important clause that specifies the customer's options for receiving compensation or terminating the contract if the service provider does not meet the agreed-upon service levels.
While it is essential to customize SLAs to meet customers' needs and expectations, it is also important to remember that the supplier of capacity IRU service is merely a provider and not a partner of its customers. Financial entities may receive numerous claims when their clients experience interruptions in wire transfers or other banking operations due to disruptions caused by force majeure events in submarine cables. However, these inherent business risks should not be passed on to the carrier.
Other alternatives to SLA credits are typically requested by the financial industry as IRU capacity customers, such as redundancy or emergency plans, specific termination rights or harsher monetary penalties. To limit its risk exposure, the carrier should know where to draw a red line.
Even with the best possible capacity IRU contract and its SLA, it is not always possible to prevent a carrier's salesperson from sending a letter to their customers using phrases such as "valued partner" or making promises about future partnerships in pre-sales presentations. When dealing with compensatory damages claims against a carrier, the courts generally consider the context and the local usage or custom of trade. Therefore, it is advisable to include a contractual provision stating that the executed agreement constitutes the entire understanding and agreement between the parties and supersedes all previous written or oral representations.
3. Make sure you are prepared to use every clause of the agreement.
Boilerplate clauses are standardized language in a contract that usually appears at the end of a commercial agreement (Severability, Headings/Construction, etc.). They do not contain commercial terms and are rarely negotiated.
However, the importance of these provisions should not be underestimated. Some of them are extensively negotiated to allocate the risk of potential liabilities or damage to the undersea infrastructure (Force Majeure, Indemnification, Liability caps, Representations, Warranties), or to provide a stronger legal position in case of future litigation. (Governing law/Jurisdiction).
Every lawyer negotiating a capacity IRU agreement should carefully understand these approximately 20–40 provisions and know how to apply them in the changing scenario of the wholesale industry.
Consequently, there is an imperative need for a "less desk, more deck" approach to legal education.
Any in-house counsel or external advisor involved in a negotiation should have visited a cable station and/or cable maintenance ship and attended at least one cable-aware activity. This will provide them with first-hand knowledge of weak areas in their own cable company, as well as how engineers tackle day-to-day difficulties with sea and inland infrastructure owned by both their company and third parties.
This pedagogical symbiosis between engineers and lawyers is essential to effectively bridge the gap between the two fields and add value to a company's negotiation of each capacity IRU contractual provision. It is important to know how to use these provisions appropriately and effectively, assessing each business risk as either remote or plausible with a "think-do" attitude.
For instance, explicitly excluding "cable cuts" as a force majeure event in long-term agreements proposed by customer legal counsel could potentially create problems in the future. While a submarine cable may not sustain damage due to fishing activities at the time of the capacity IRU agreement's execution, because the cable was not laid in a hot spot for fishing activities, the location of fishing hot spots may change over the 15-year IRU term, which could affect the risk of cable cuts and the applicability of force majeure provisions.
Gaining first-hand knowledge of the fishing industry, maritime traffic, naval authorities, and other seabed users would provide a clear perspective on red lines that should not be negotiated. This would enable proposing pragmatic legal solutions and being prepared to understand how each contractual clause should be used in case of emergencies. For example:
changes in landing permits and the national legal framework that may impact the regulatory compliance provisions.
how a maintenance or upgrade activity is communicated to the affected customers in accordance with the SLAs, and what happens when the procedure is not followed.
contractual terms regarding debt collection of unpaid customer invoices, and how to use them when pursuing the assets in several countries where customer affiliates have assets.
Andrés Fígoli the Director of Fígoli Consulting, where he provides legal and regulatory advice on all aspects of subsea cable work. His expertise includes contract drafting and negotiations under both civil and common law systems. Additionally, he has extensive experience as an international commercial dispute resolution lawyer. Mr. Fígoli graduated in 2002 from the Law School of the University of the Republic (Uruguay), holds a Master of Laws (LLM) from Northwestern University, and has worked on submarine cable cases for almost 21 years in a major wholesale telecommunication company. He also served as Director and Member of the Executive Committee of the International Cable Protection Committee (2015-2023).
This article was first published in SubTel Forum Magazine #130 – May 2023.