Carrier Contracts: A Minefield of Avoidable Risk

Posted: 08/1999

Carrier Contracts: A Minefield of Avoidable Risk
By Neil S. Ende

Carrier agreements are intended to set forth the terms and conditions under which
resellers purchase the essential commodity of their business: telecommunications services.
Sadly, however, it is a rare instance when the reseller has read or truly understands the
essential terms and conditions of its agreements. Even more troubling is the fact that few
resellers use their agreements to facilitate their business interests and to protect
themselves against undue risk. As a result, rather than being a roadmap to success and a
shield against risk, carrier agreements often become minefields through which resellers
unwittingly wander until the inevitable misstep is made and damage is done.

While it never is possible to eliminate all risk, it is possible to disarm many of the
land mines found in carrier agreements and to identify and map the remaining land mines so
they can be avoided where possible. With knowledge and care, it also is possible to
anticipate where explosions are most likely to occur and to limit the injury to a
reseller’s business.

Contract land mines take many forms and are found in all types of telecom agreements.
The following is a list of contract land mines where particular caution is required.

Filed Rate Doctrine

Many telecommunications agreements contain an innocent-looking term stating that the
agreement is subject to the carrier’s tariff. As explained in PHONE+ article, "Unholy Contract: The Legacy and Abuse of the Filed Rate
Doctrine" (May 1999), since carriers generally are obligated to provide service
pursuant to their tariffs, inconsistent contract terms generally are null and void. Thus,
even the most carefully considered and negotiated contract terms are meaningless in the
face of inconsistent tariff provisions. Specific legal strategies are required to ensure
that the terms of carrier agreements are and remain legally binding on both parties. Put
simply, if a reseller fails to properly implement these strategies in its carrier
contract, it is at the mercy of its carrier and its ever-changing tariffs.

Take or Pay/Minimum Usage Requirements

These terms generally require a reseller to pay for a predefined number of service
units regardless of whether it actually uses those units. Needless to say, these terms are
dangerous in any circumstance, as they can require the reseller to pay for service it has
not taken and from which it is not deriving revenue. Extreme caution should be exercised
before agreeing to such terms. If, however, it is necessary to agree to a take or
pay/minimum usage term to obtain an attractive service arrangement or rate, it is critical
that the agreement properly addresses a number of issues, including the following:

Quality/Availability of Service. As amazing as it may sound, agreements
containing take or pay/minimum usage requirements almost never have corresponding terms
obligating the carrier to ensure the ongoing quality and availability of its services.
Indeed, quite the contrary, most carrier contracts with take or pay/minimum usage clauses
specifically limit or exclude any warranty regarding the quality or availability of
carrier services. This means that the purchasing reseller can remain liable for the full
take or pay/minimum usage obligation even when the reason that it is unable to purchase
the required volume is because the services are of poor quality and/or are insufficient to
handle the required purchase volume. Appropriate protective language is required to ensure
that take or pay/minimum usage requirements do not apply when the failure to take the
minimum amount is the carrier’s fault or is due to reasons beyond the reseller’s control.

Rate Protection. The issue a reseller usually negotiates most carefully is
rates. However, in negotiating rates, it is critical to do so in the context of any take
or pay/minimum usage requirements. Most carrier agreements provide the reseller little if
any protection against rate increases. Carriers often can increase rates on as short as a
week’s notice. And there often is no limit on the amount or frequency of rate increases.
This creates the troubling possibility that a carrier could, either innocently or
otherwise, increase a rate to the point that the reseller no longer is able to meet its
minimum commitment. Nonethe-less, absent appropriate protective language, the reseller
remains liable to pay the charges associated with the full minimum commitment (at the
higher rates). Keep in mind that this same take-or-pay problem can arise even if the
carrier does not raise its rate. Indeed, today’s attractive rate quickly can become
unmarketable in tomorrow’s competitive market. But, of course, the reseller’s purchase
commitment remains. Thus, it is critical that a reseller carefully consider rate issues in
the context of take or pay/minimum usage requirements and that adequate protections be
built into agreements (such as most-favored nations clauses, rate caps and termination
clauses) to ensure that the reseller is not required to pay for services that it cannot
resell or does not use.

Unclear or Inappropriate Payment Terms

Disputes over terms of payment most often result from poor contract draftsmanship
and/or inadequate consideration of relevant issues. At a minimum, carrier contracts should
clearly address the following issues: (1) How frequently invoices are rendered; (2) The
time period each invoice covers and the form(s) the invoices are in (paper, tape, CD-ROM,
bulletin board, etc.), including any charges applicable to any of these forms; (3) The
manner of delivery (fax, overnight, etc.); (4) The content of the bill and supporting data
(call detail records [CDRs], etc.); (5) The so-called "grace period" before
payment is overdue; and (6) The right to and manner of dispute. The last two issues are
discussed briefly below.

The "Grace Period." This is the period in which payment is due before
any applicable interest, penalty or termination rights apply. In addition to assuring that
this term is clearly drafted and provides an adequate time period (normally 30 days), it
also is critical that the start date for the grace period be well- defined. Most carrier
agreements tie the grace period to a number of days following the invoice date. The
problem with this arrangement is that the "invoice date" often is an arbitrary
date generated by the carrier’s billing system that bears little or no relationship to the
date the bill is actually delivered to the reseller.

Indeed, it is not uncommon for the invoice to arrive weeks after the "invoice
date" and at or near the end of the grace period. To address this concern, we
strongly urge the grace period and payment date be tied to the date the bill is received
by the reseller (which can be established by a fax or overnight delivery record).

Disputes. Most carrier agreements severely limit dispute rights (the time to
lodge a dispute) and/or require full payment at the time the dispute is lodged. These
terms are very dangerous, particularly in combination. To protect a reseller, dispute
provisions should, at a minimum, contain the following terms: (1) An adequate period to
lodge the dispute in writing (at least 90 days following receipt of complete billing
records in a standard electronic format); (2) No loss of dispute rights when the carrier
has committed fraud or withheld data necessary to uncover the billing error; (3) No
obligation to pay disputed amounts (escrow arrangements may be acceptable); (4) Carriers
must respond in writing within 90 days of a dispute; (5) No right to terminate for
nonpayment of disputed amounts; and (6) Near-term arbitration/litigation of all disputes.
In addition, resellers should have procedures and staff in place to address disputes as
they arise, to document them properly and to issue dispute notices as required by the
carrier agreement.

Aggressive/Punitive/ Open-Ended Deposit Requirements

Many carrier agreements contain very aggressive and open-ended deposit requirements.
These requirements often give the carrier enormous discretion on the circumstances in
which deposits can be required, the amount of required deposits and the notice it must
give. As a result, these provisions are very dangerous, even if used in good faith, and
especially when used by carriers as a lever to impose other punitive terms on resellers.
Careful drafting is necessary here to identify the circumstances under which deposits can
be required, the amount of such deposits (such as a multiple of one to three months’
bills) and the advance notice required.

Aggressive Limitations of Liability

All carrier agreements contain very comprehensive provisions limiting the carrier’s
liability for most damages, including lost profits. While these terms often are difficult
to negotiate, several issues should be considered.

First, a reseller needs to evaluate the quality of the carrier and the reliability of
its services carefully before agreeing to any limitation of liability. In making this
evaluation, it is important to understand that courts generally will enforce limitation of
liability terms to the letter of the agreement.

Second, if a reseller enters into an agreement containing an aggressive limitation of
liability provision, it needs to do so with the understanding that it is likely forgoing
most, if not all, rights to damages in the event of a service failure. At the same time,
it is critical that reseller agreements with its customers take these limitations into
account. For example, a reseller should not leave itself exposed to liability to its
customers caused by the carrier’s failure to provide promised services where the reseller
cannot recover from that carrier.

Finally, if possible, try to have the carrier’s gross negligence and willful misconduct
excepted from the limitation of liability. Most carrier tariffs already contain this
exception, so it should be possible to negotiate the same exception into carrier
agreements. This exception will help protect a reseller against the most egregious
misconduct.

Fraud Liability

Fraud exposure is a major concern for carriers and resellers alike, expressly because
the potential loss can be so large. To the extent that carrier agreements address the
issue, it’s not surprising that full liability is normally assigned to the reseller. The
concern here not only is the open-ended nature of this exposure, but also the fact that
the reseller often is completely blind to fraud and cannot take measures to limit or
prevent its exposure. Thus, fraud terms need to be considered carefully and appropriate
language included.

Again at a minimum, the agreement should specify the following: (1) The carrier
represents that it has systems in place to detect and prevent fraud; (2) The carrier will
use those systems for the reseller’s traffic; (3) The reseller is not liable for fraud
before it is notified of the fraud; (4) The reseller can instruct the carrier to shut down
service to any line or service evidencing fraud; and (5) The reseller is not liable for
fraud on any line or service after termination is requested.

Nondisclosure/Noncircumvent Terms

Few, if any, carrier agreements provide adequate protection to the reseller for its
customer information. This is particularly critical with 1+ resellers, although it also is
an important issue for debit card providers, particularly with respect to their
distribution networks.

Resporg Issues

In cases which 800 access is at issue, the reseller should either retain all
responsible organization (resporg) rights or assign them to a third-party resporg. When
this is impossible, the agreement must clearly specify resporg rights upon termination by
either party. When the reseller is the terminating party, the agreement should specify the
immediate resporg of all 800 numbers and the transfer of all databases containing customer
information.

Neil S. Ende is founder and partner of Technology Law Group LLC, a Washington-based
communications law firm. He can be reached by phone at +1 202 895 1707 and by e-mail at Nende@tlgdc.com