Transferring fibre optic comms network

05 February 2008

David Rose

euNetworks Fiber UK Limited v Abovenet Communications UK Limited [2007] EWHC 3099 – Briggs J, High Court (Chancery Division) 21.12.07

Summary

A case involving two contracts for sale of duct and lease of fibre-optic cable and a disagreement as to the route to be covered by such duct and fibre. Along with useful discussion of the elements that make up a communications network and the technical terms used to describe these elements, the case looks at questions of contractual interpretation including the incorporation of documents and the admissibility of evidence outside the body of the contract. In particular, where a clearly defined term has been used in an agreement or the subject matter of the agreement has been clearly defined, background evidence will not be admissible to contradict such definitions.

Background

Between 1999 and 2001, a company called Metromedia Fiber Network UK Limited (the seller) undertook the construction of a fibre-optic cable network under London (Metromedia later changed its name to Abovenet Communications Limited). The seller then contracted with a network operator called Global Voice Networks Limited (now euNetworks Fiber UK Limited) (the buyer) for sale of the 'ducts' (ie. the plastic piping laid underground) and lease of the fibre-optic cable that had been installed across the network. The buyer’s business was to deliver enhanced network services to customers, including increased capacity and reliability, by means of dedicated fibre-optic strands linking its customers’ premises to the network.

The dispute between the parties centred on the route of the network. By the end of 2001, the seller had constructed a network of duct covering roughly 200 kilometres but had not fully installed fibre along the entire route. A decision had been taken by the seller to concentrate on running fibre through those parts likely to carry the heaviest communications traffic and to otherwise 'fibre' only to meet the specific requirements of the buyer for bringing the network closer to certain buildings.

The seller claimed that it was not required to do more than that under the agreement and pointed to a map that it argued had been incorporated into the contracts showing a more limited network made up of the main routes. The buyer disagreed, claiming that it had in fact purchased duct and leased fibre over substantially all the London network, and pointed to a different version of the map that it also claimed had been incorporated into the contracts.

The dispute reached the High Court. Because this is the first dispute of this type in this sector to be subject to a detailed High Court judgment, we examine the facts and decision in detail.

Key facts

Description of the Communications Network: Breaking Through the Jargon

The Court first looked at the technical language used in the contracts and identified the following elements that make up a fibre-optic communications network:

  • 'fibre-optic cable' consists of a number of fibre-optic strands along which data is transmitted by light rather than by electrical impulse;

  • a 'fibre-optic cable network' consists of lengths of fibre-optic cable in ducts;

  • 'ducts' are plastic pipes laid underground, usually along the route of public highways;

  • ducts are accessible by 'chambers', which permit access for pulling cable along, for connecting ('splicing') lengths of cable together, and for maintenance and inspection;

  • the process of running fibre optic cables through ducts is called 'fibreing';

  • a fibre-optic communications network is connected to buildings by 'laterals', usually consisting of single ducts containing one or two fibre strands for an ordinary customer or more for a data centre.

The principal routes carrying the heaviest traffic were known internally by the seller's staff as the 'backbone' of the network, and were described by Mr Justice Briggs as the 'rings'. The additional (and more expensive) routes were known by the seller's staff as the 'mesh', and were described by Mr Justice Briggs as the 'distribution network'. There were no accepted standard industry definitions of the words 'network', 'backbone', 'mesh' or 'laterals'.

Call Option Agreement and The Seller's Changed Intention

The parties initially negotiated and entered into a Call Option Agreement dated 18 December 2002, which annexed a Purchase Agreement for the duct and a Private Network Agreement for lease of the fibre. Each of these was to be executed upon exercise of the Call Option. During the negotiations, the Court found that the buyer had bargained for and expected to receive duct across the entire network, excluding only laterals. Although this was also the seller's original intention, this changed during the process of negotiations as a result of rising costs of construction and the seller's revised view was that the 'distribution network' should be excluded from the route of the duct to be sold. This change of intention was not however communicated to the buyer by the time the Call Option Agreement came to be signed and it continued to provide for coverage across both the 'rings' and the 'distribution network', as set out below:

  • the Purchase Agreement included a definition of the 'Duct' which was to be 'installed underground by [the seller] along the route shown on the Route Drawing'. The definition of 'Route Drawing' referred to 'a route drawing attached at Appendix C'. Appendix C clearly referenced two maps (the 'Original Maps') by means of identification numbers and the date of preparation, and the Original Maps were physically attached in a later part of the appendices. The Original Maps showed by use of blue lines the entirety of the routes of the London network making no distinction between 'rings' and 'distribution network';

  • the Private Network Agreement was supplemented by a Product Order No.1 which also included hard copies of the Original Maps attached as an Exhibit A.

Purchase Agreement and Private Network Agreement

The Call Option was finally exercised on 31 August 2003 and the Purchase and Private Network Agreements were executed by the buyer on 28 November 2003. Between these dates, the seller sought to rectify what it saw as an ambiguity in the Call Option Agreement by producing new maps showing a distinction between the 'rings' and the 'distribution network' for the delineation of duct (the 'New Maps'). The effect of the omission of the distribution network from the New Maps was to reduce the route area from 200km to about 125km (a commercially drastic reduction in size).

The seller's intention was to incorporate these New Maps into the Purchase and Private Network Agreements. However, in the run-up to the signing of the contracts on 28 November 2003, the seller gave no indication that points remained to be negotiated and no changes had been made to the wording. Although the seller's representative had laid the New Maps out over a table at the completion meeting on 28 November, he had only briefly directed the attention of the buyer's representative to the documents, and did not indicate that the route shown was any different from that of the Original Maps. In the end, and partly as a result of the fact that there were no legally qualified persons involved in preparing the documents for signing, the parties failed to include any hard copies of either version of the maps in the executed contracts.

The description in Appendix C of the Purchase Agreement therefore remained the same as in the earlier Form of Purchase Agreement and continued to expressly reference the Original Maps by their identification number and date of preparation. The executed version of the Private Network Agreement included only a front sheet headed 'Routes and Distances' with no maps attached. Against this messy factual background the Court therefore had to decide by inference which versions of the maps were in fact incorporated and had legally binding force.

Decision

Construction of the Call Option Agreement

The seller argued that references in the Call Option Agreement to the 'backbone', including in a definition of 'London Assets' and also a marketing document attached to the contract, indicated a common understanding between the parties as to the distinction between the 'backbone' and the 'distribution network', and therefore fell within the so-called 'private dictionary principle'.

In deciding whether to accept these claims, the Court had to apply key principles for the admission (or otherwise) of evidence outside the body of the contract, for purposes of construction. The Court highlighted the following principles:

  • where the subject matter of a contract is uncertain, extrinsic evidence can be considered by the Court (Scarfe v Adams [1981] 1 All ER 843);

  • the 'private dictionary principle', whereby the Court can look to the parties' negotiations to clear up the meaning of a phrase in a contract, can in principle be used to justify citing material outside the contract. However, it could not be invoked in relation to any word, phrase, clause or term which was itself the subject of an express definition in the contract (Chartbrook Ltd v Persimmon Homes Ltd [2007] EWHC 409 (Ch)).

On the facts, and applying these principles, Mr Justice Briggs rejected the idea that the term 'backbone' had a private dictionary meaning as between the parties. It was not used consistently within the seller's organisation and its meaning was not fully understood by the buyer. Even if the term had a private dictionary meaning, it would have been inadmissible as an aid to construction since 'Duct' was a term defined by reference to the Original Maps in Appendix C of the Form of Purchase Agreement. The lease of fibre was clearly defined in Product Order No.1 to the Form of Private Network Agreement as lying along the route shown in Exhibit A which attached the same Original Maps. On its proper construction, the Call Option Agreement therefore conferred an option on the buyer to acquire duct and fibre over the entire London network including the distribution network.

Construction of the Purchase Agreement

As the seller was seeking to rely on the New Maps (with the reduced network size), the burden fell on it to prove that the New Maps were in fact incorporated into the Purchase Agreement. The seller argued that the New Maps were incorporated by reference to the 'admissible background' which consisted of the commonly understood meaning of the 'backbone' and the fact that the New Maps were shown to the buyer's representative shortly before he signed.

Mr Justice Briggs felt that there was no ambiguity as to the subject matter of the Purchase Agreement. The attempt by the seller by reference to extrinsic evidence to establish that the Purchase Agreement in fact referred to the very different subject matter identified by the New Maps was therefore contrary to the principle laid down in Scarfe v Adams. In addition, the seller had failed to meet the requirements imposed by the law where a party seeks to bind another party to unusual terms in a document alleged to form part of a contract. Applying by analogy the authorities on unusual clauses in standard forms of printed terms (as summarised in Interfoto Library Ltd v Stiletto Ltd [1989] 1 QB 433), the seller's representative should, at the very least, have explained that the Original Maps had been incorrect or ambiguous, and that the New Maps were designed to resolve those inaccuracies or ambiguities. The seller had therefore failed to prove both in fact and in law that the New Maps had been incorporated by reference.

Therefore the buyer’s arguments prevailed and the Original Maps showing the more extensive network were judged to have formed the basis of the agreement between the parties in relation to the route of the duct.

Construction of the Private Network Agreement

The fact that maps had not been physically attached meant that, when viewed in isolation, there was a complete uncertainty as to the subject matter of the Private Network Agreement. Both parties therefore legitimately (in light of Scarfe v Adams) relied on background facts in support of their arguments. The seller again relied on its argument as to the commonly understood meaning of the 'backbone' and the fact that the New Maps were displayed at the meeting on 28 November 2003. The buyer argued that the existing contractual relationship between the parties constituted by the grant and exercise of the Call Option was the central feature of the 'admissible background' to the construction of the Private Network Agreement. It claimed that the inclusion of the Original Maps as part of that existing contractual relationship was sufficient to fill any gap which might arise in Product Order No.1 to the Private Network Agreement.

Mr Justice Briggs accepted the arguments of the buyer and held that the failure by the seller to properly draw the buyer's attention to the changes to be made by the New Maps meant that the Original Maps remained incorporated by reference to the contract formed by exercise of the Call Option.

Therefore the Original Maps showing the more extensive London network were judged to have formed the basis of the agreement between the parties in relation to the route of the fibre. This was a second success for the buyer.

The author notes that the scenario which arose in this case is highly commonplace: the transfer of assets from seller to buyer where the seller's intentions change as to what is to be sold in the lead-up to contract finalisation. Several practical lessons emerge:

  1. It highlights the importance of ensuring that technical terms used in commercial contracts are appropriately defined where possible and that both parties give clear consideration to such definitions.

  2. Documents that are to be incorporated by reference should be clearly described by use of unique identifiers such as identification numbers, version numbers and dates.

  3. The case shows the risk a party can run in trying to slip in a significant change.

  4. The case also shows the challenge a purchaser faces in ensuring it gets what it bargained for, hopefully without having to go to court.

  5. Finally – and it's a cliché to say so – the case shows the need for parties to involve legal advisers. If they had been involved, they would almost certainly have picked up the gap between the seller's and buyer's understandings of the property being transferred.

Andrew White comments: A legal lesson is that the courts remain wary of the so-called private dictionary rule. It's a challenging concept to English law principles of interpretation. And even if it's accepted in principle, it can be hard to prove in practice that there existed the required shared understanding between the parties during the pre-contract phase.

(Andrew currently leads the firm's Contract Foundations Project which offers training to a range of clients and prospects, complemented in certain cases by knowhow tools extracted from The Solutions Lab® . In recent years Andrew has presented over 200 training seminars for clients, industry audiences, and Bird & Bird lawyers).