An “indefeasible right of use” in capacity – a pauper dressed up as a princess?

Emerging new technologies and Government initiatives such as the Ultra Fast Broadband and Rural Broadband initiatives in New Zealand have brought fibre optic cables into sharper focus in recent times.

Telecommunication network operators and ISPs who do not own their own cable network but wish to provide services to their customers using fibre optic cables have several options to procure the rights they need. The simplest of these is to obtain rights to use the amount of bandwidth required as “lit” (or activated) capacity on a third party’s fibre optic cable network. In this way, the purchaser of capacity does not have to “light” the fibre using its own equipment and instead can start transmitting voice and data communications via the fibre on day one.        

Often, parties looking to procure such rights to capacity on a fibre optic cable network insist on purchasing the capacity pursuant to an “indefeasible right of use” (IRU). Under an IRU, the purchaser of capacity has an exclusive right to use a specified amount of capacity or bandwidth on the cable system for an agreed period of time. Payment is usually made upfront, with some on-going operational and maintenance fees payable over the life of the contract.

The insistence on the use of an IRU to purchase capacity is, at least in part, based on the view that, unlike a services contract, a capacity IRU conveys a property right on the purchaser that cannot be set aside in the event of insolvency of the supplier. Unfortunately, the instances where an IRU has been held to convey a property right are limited to very specific circumstances and purchasers should be careful not to place too much reliance on this idea when entering into a capacity IRU.  

The use of IRUs is not limited to the purchase of capacity. IRUs can also be granted in respect of specific fibres within a cable. A “dark fibre” IRU, for example, gives the purchaser an exclusive right to use identifiable strands of un-activated or “dark” fibre within the cable (e.g. the glass strands numbered 3 and 4 in a cable that contains, for example, 3 fibre pairs). The purchaser would then need to attach its own equipment at each end of the fibre to activate or “light” the fibres before it could start transmitting communications over those fibres.

While there are circumstances in which a dark fibre IRU has been found to be a property interest, these circumstances can be easily distinguished from the sale and purchase of capacity. One of the key factors affecting the determination of whether an IRU conveys a property right is whether or not there is a precisely identifiable asset to which the IRU relates. For example, in the case of a dark fibre IRU, the purchaser’s rights of use are in respect of fibres numbered 3 and 4 (using the example above) – a precisely identifiable asset. Even then, the dark fibre IRU would need to have a variety of other characteristics before a determination as to whether it conveys a property right can be made. This includes, among other things, a grant of rights for the useful life of the cable system that cannot be revoked even in the event of breach by the purchaser (although a claim for damages could still be made). In the case of a capacity IRU therefore, where it is the supply of capacity rather than a precisely identifiable asset to which the IRU relates, it is much harder to argue that a property interest is conveyed.  

In effect, a capacity IRU is simply a set of contractual rights and obligations. To understand what the purchaser’s rights are (say, for example, in the event of insolvency of the supplier), you will need to look to the terms contained in the IRU agreement. As with all contracts, purchasers of capacity will need to ensure that the IRU agreement contains the rights and protections they require to address their concerns. If there are concerns about the solvency of a supplier, purchasers could negotiate payments over the life of the agreement rather than paying upfront to protect their position. In this way, purchasers of capacity who enter into a capacity IRU can minimise the chance of surprises if issues do arise.

For advice in relation to IRUs or the sale and purchase of capacity, please contact Anchali.

‍

Social media image credit: Quino Al

Footnote

[1]WorldCom, Inc. and MCI WorldCom Network Services,Inc. v PPL Prism, LLC (United States Bankruptcy Court, Southern District of NewYork, 2006).

[2]Ibid.