BusinessContinuityCLB

13 November 2002

Ronald Hendrikx

Despite evidence that businesses are vulnerable when the supplier of their telecommunication services becomes unstable, many purchasers are still not building safeguards into their supply contracts other than reserving the right to terminate for insolvency or prolonged force majeure events. More can be done to prepare a business for a telecommunications failure.

Contracts for the provision of telecommunication services usually focus on the continuity (or rather: the unavailability) of those services. However, when Atlantic Telecom went into administration just over a year ago, the telecommunications market, its customers and regulators had to deal with not just those temporary interruptions that are anticipated in service level arrangements, but rather a national fibre network and a fixed wireless local access network being switched off permanently. Similarly, during the insolvency of KPNQwest earlier this year, a lack of funds threatened to close the network control centre responsible for running KPNQwest’s European network whilst the attacks on the World Trade Centre in New York destroyed the telecommunications facilities of a range of operators in one specific, business critical geographic area. These are only some of the telcos which have got tied up in some form of insolvency procedure over the last couple of years, with similar consequential disruption for their customers.

The risk of (entire) telecommunication networks becoming unavailable due to the insolvency of their operators, or as a result of terrorist activities, has prompted a number of UK regulators to make announcements. The Department of Trade and Industry (“DTI”), the Financial Services Authority (“FSA”) and, as recent as last October, the UK regulator for the telecommunications industry, OFTEL, have published their thoughts and guidelines on the issue of business continuity and network integrity.

By law….

DTI has addressed the problem of business and service continuity from the perspective of the licensing regime, looking at ways to use licence obligations to keep failing networks operating and providing services. Whatever the DTI’s powers to enforce licences, in the event of an operator becoming insolvent the DTI, like a creditor, must make representations to the appointed insolvency practitioner about protecting consumers and public policy interests. However, insolvency practitioners (who may be administrators, receivers or even liquidators) owe their primary duties to creditors of the companies over which they are appointed and, given the substantial over-supply of capacity in the UK, are entitled to conclude that they cannot afford to let the network continue to incur operating costs through honouring customer contracts, whatever the operating licence might say.

In that case, as with Atlantic, the DTI must turn to the Courts for an Order that the administrator should make further expenditure to maintain the network for the benefit of any remaining customers. The courts’ agreement is rarely likely to be won where customers are few, operating costs are disproportionately high and the operator has no or only limited funds to secure basic functions and then only for a short time. For the DTI to be able to ensure that telecommunication services are available despite the insolvency of an operator, changes in existing insolvency law would be necessary to elevate the interests of customers of telco operators above those of its other creditors. A different strategy would also require changes to the licensing regime itself[1].

In the absence of legislative or licensing changes, customers of an insolvent operator usually return to the former incumbent (BT or Kingston Communications for the Hull area) whose universal service obligations require them to meet reasonable requests for telecommunication services. Customers should realise however that, faced with a barrage of requests from customers, these universal service providers may not, even with the best intentions, be able to connect everyone before the network of an insolvent operator is switched off.

Coming prepared

Telecommunications regulation in the UK may, at present, have to bow to insolvency practice and its governing principles when dealing with an operator who has become insolvent, but nothing prevents regulatory authorities from legislating for future problems before disaster strikes. For cases where this is due to human error causing engineering failures, OFTEL has published[2] a set of criteria and guidelines on network security and integrity, clarifying the requirements of Condition 20 of the licence for public telecommunication operators.

Condition 20 of the licence refers to the licensee taking "all reasonably practicable steps to maintain to the greatest extent possible" network security and network integrity. Even though this requirement goes back to the Revised Voice Telephony Directive (RVTD, 98/10/EC), no guidance had previously been given as to its interpretation. The new guidelines should create a common understanding[3] as to what might represent appropriate measures to protect network integrity and security, compliance with which will be monitored and investigated by OFTEL.

Important as these guidelines may be to licensed operators and the way in which they run their networks, OFTEL stresses that the guidelines “should not be used to specify requirements between network operators and their customers”. Customers with particular operational requirements, for example, financial or governmental institutions should always consider the need for any further measures[4] and put adequate contractual arrangements in place.

Back to the drawing board

The FSA too puts the emphasis firmly on the responsibility of the senior management of regulated firms to be aware of the risks and issues concerning business continuity and to “have in place appropriate arrangements, having regard to the nature, scale and complexity of its business, to ensure that it can continue to function and meet its regulatory obligations in the event of an unforeseen interruption[5].

Like OFTEL, the FSA has given detailed consideration to the issue of business continuity, albeit from the customer’s perspective. Any person looking into how best to protect his or her business against the failure of a partner or supplier of telecommunication infrastructures should find useful tools in the guidelines and working papers of the FSA and OFTEL.

Implementation of a business continuity plan is assisted when existing contracts anticipate or provide a solution for catastrophic interruptions or permanent failures other than through the contract’s termination, which may prove to be a hollow remedy. When altering existing agreements or entering into new ones (instead of or in addition to these existing arrangements), the following are amongst the issues to be considered:

  • Can the supply contract be legally terminated for the insolvency of the other contracting party? If terminated, is there any mechanism for effectively transferring the other party’s rights and obligations to a replacement service provider? This would only usually be possible through a “novation” and would entail the involvement of the insolvent provider, which may of course be difficult to obtain in such circumstances;
  • Will the insolvency of the other party leave you with only contractual claims (such as for breaches of contract), which will typically be unsecured in the insolvency, or will you have acquired a stronger proprietary interest or perhaps taken security, so binding the insolvency practitioners and third parties? This is a highly relevant question in the context of the grant of “IRUs” and similar fibre usage agreements;
  • Are any special rights of access or control required in respect of any third parties (e.g. owners of carrier hotels, co-location facilities and recovery sites) without whom you cannot fully transfer responsibilities from the other party to anyone else?;
  • Is your contracting partner itself dependent on infrastructure provided by others (for capacity or fibre) and, if so, would it make sense to reserve the right to approach that third party in the event of any specified events (like the insolvency of the other contracting party)?

Conclusion

The telecommunications industry, its regulators and customers cannot ignore the risk of telecommunication facilities being interrupted on a catastrophic scale or terminated permanently. Businesses should be aware that no statutory or regulatory fall-back mechanism currently exists to protect them against such failures. It is instead up to businesses to prepare and contract for the risk of such interruptions and failures. Licensed operators will be monitored by OFTEL for their implementation of adequate measures and end-customers may face equal scrutiny by their regulatory bodies. Not being prepared may have implications for the “innocent” contracting party extending even to its own survival, possibly triggering a domino effect in the service value chain. The regulators’ position is pragmatic in terms of anticipating casualties in the market but managing the consequences as far as possible. Hence, as the FSA puts it (boldly): “our principal concern [...] is likely to be that, if they are unable to survive, firms are able to wind down in an orderly way.

For more information, please contact:

David Kerr or Sally Trebble in London;
Frédérique Dupuis-Toubol in Paris;
Marjolein Geus in The Hague;
Jan Byok in Düsseldorf;
Richard Fawcett in Hong Kong;
Johan Tyden in Stockholm; and
Catherine Erkelens in Brussels.

Footnotes

[1] The DTI has (amongst others) suggested in its consultation paper on the continuity of supply in the event of insolvency of a telecoms operator (www.dti.gov.uk/cii/regulatory/telecomms/index.shtml) that applicants for licences should be required to submit a bond or guarantee or to establish a joint liability across the industry or the appointment of an official supplier of last resort.
[2] Go to www.oftel.gov.uk/publications/ind_guidelines/esre1002.htm for OFTEL’s guidelines regarding the continuity and availability of telecommunications services, 9 October 2002;
[3] OFTEL expects these guidelines to remain appropriate under the new regulatory regime that will come into force with the implementation of the new European Universal Service Directive (2002/22/EC) which, in Article 23, imposes a similar requirement to that of article 13 of the RVTD.
[4] Please note that requirements relating to national security and emergencies form a separate –and probably overriding- framework that network operators have to comply with.
[5] See SYSC 3.2.19G of the senior management arrangements, systems and control module of the FSA Handbook.