December 2009

17 Dec 2009

IRU (Indefeasible Rights of Use)

For well over a decade the telco industry has traded in a unique construct called an Indefeasible Right of Use (or IRU).

An IRU is the contractual grant of rights in a telecommunications facility - usually fibre optic networks (both subsea and terrestrial), and usually in respect of specific fibres or capacity in a network. Fibre optic networks (particularly subsea) require a significant investment to build and operate. IRUs are therefore usually sold for large up-front payments with ongoing operational and maintenance (O&M) fees. Where there is a single or limited number of alternative networks (often the case with subsea cables), the purchaser will also have built its business case and customer base on the basis of continued access and use of the relevant network at a certain cost.

These two commercial issues make the solvency of the IRU provider and continuity of the IRU a critical issue for any purchaser - if the provider goes into liquidation, will the purchaser still be able to enjoy the rights under its IRU, or can the IRU be disclaimed as an onerous contract, leaving the purchaser with no IRU and no remedy?

Shorter term capacity IRUs with monthly or other periodic payments are also becoming common - but do these really qualify as IRUs, or are they really just capacity leases, or the provision of a service? What rights and protections can a purchaser of these capacity IRUs rely on?

This article explores some of the issues and features of IRUs, and a United States case that examined the enforceability of an IRU.

Different Types of IRUs

IRUs are common in relation to dark fibre networks. Dark fibre networks involve the installation of many strands of fibre in a cable. Individual, identifiable pairs of fibre strands in the cable, between two demarcation points along a specific route, are then sold to purchasers (usually telecommunications carriers and high-volume users). These are specific physical assets, and the concept of conveying property rights in that asset is relatively simple to construct.

Advances in technology have meant that two strands of fibre optic cable (a fibre pair) are now capable of being divided into multiple wavelengths (referred to as 'colours' or lambdas) using Dense Wavelength Division Multiplexing (DWDM), with each wavelength able to carry hundreds of data and voice circuits. Rather than selling dark fibre, vendors sell capacity in lit fibre (fibre that has been activated). Often that capacity is sold by reference to the demarcation points at which it is accessible, rather than specifying the actual route over which the capacity will be carried. The "asset" which is the subject of these lit fibre IRUs (also known as capacity IRUs or wavelength IRUs) is much less tangible, and the concept of conveying property rights in that asset is much more difficult to construct.

What Makes an IRU?

A true IRU is a property right (as opposed to a contract to provide services, or a lease for a term) that cannot be defeated or set aside upon the liquidation of the provider.

Some capacity is sold using the label of 'IRU', but when the legal terms and conditions are examined, the purchaser is in fact only receiving rights that are akin to a lease of capacity or the provision of capacity as a service.

There is no legal foundation (statutory or case law) for IRUs. IRUs have not been legally tested or confirmed in New Zealand or Australia, and only minimally elsewhere. 

US Case:  WorldCom, Inc. v. PPLPrism, LLC

The United States case WorldCom Inc. and MCI WorldCom Network Services, Inc. v. PPLPrism, LLC, from the US Bankruptcy Court for the Southern District of New York, examines the issue of the enforceability of IRUs.

WorldCom had entered into an IRU agreement with Cambrian Communications LLC for six fibres, with payment of an up-front fee. Cambrian filed for bankruptcy and under an asset-purchase agreement, sold these fibres and other assets to PPLPrism, LLC. The asset-purchase agreement included an obligation on Cambrian to attempt to reject the IRU as an executory contract under Bankruptcy Code § 365 (similar to the disclaiming of an onerous contract under section 269 of the Companies Act 1993 in New Zealand), and seek compensation from WorldCom in exchange for assuming the IRU and then assigning it to PPLPrism. WorldCom claimed that PPLPrism should allow WorldCom to continue to access and use the IRU fibres without additional charge. PPLPrism claimed it had no obligation to do so.

The US Bankruptcy Court for the Southern District of New York held that WorldCom had a property interest (rather than a mere contractual interest) that was enforceable against PPLPrism, including the right to access the relevant fibres for the purpose of enjoyment of the IRU. The court did not rule generally on the legal nature of IRUs, but analysed the exact nature of the rights WorldCom held, and accepted WorldCom's argument that the language and operation of the IRU indicated a property interest. A key factor in the Court's decision appears to be the fact that the rights were for a specific asset, with the fibres precisely identified, and the exclusive right to use that asset for a definite duration and a price that was effectively a sale price (because the agreement provided a right for WorldCom to acquire the asset for $10 at the end of the term).

Another critical aspect of the case was the practical ability of WorldCom to enjoy the asset. The separate maintenance agreement WorldCom had entered into with Cambrian had been rejected. Ownership of the asset without the right to access it would be meaningless. The original IRU agreement however specifically gave WorldCom a right to perform maintenance at Cambrian's expense if Cambrian failed to do so. On that basis PPLPrism did not have a right to exclude WorldCom from access to the fibres because Cambrian never had that right itself.

Conclusion

IRUs have evolved and continue to evolve in the context of a rapidly changing and innovative industry. They are a commercial reality, but whether a particular IRU is enforceable despite the liquidation of the vendor will depend on many factors and the circumstances of the particular case. The WorldCom, Inc. v. PPLPrism, LLC decision, and commentary on that case, identify several features that go towards establishing an IRU. The clear message from the WorldCom, Inc. v. PPLPrism, LLC case is that the exact nature of the rights granted is critical.  IRU agreements are constantly evolving and therefore require careful review and drafting.

Author

Michael Sage

Partner - Corporate & Commercial

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