[Blogmeister’s Note: This is the second in a series of posts by Bob Butler on the Fine Art of Telecom Transactions. In the first installment, he cautioned about the needs to plan early and to understand the structure ad interrelationships of the deal documents. In this and upcoming installments, he moves on to factors to watch out for in the drafting process.]
Tip No. 3 – Understand and Accommodate the Impact of Regulation
Telecommunications services are still regulated in various ways at the federal, state and local level in the U.S., and to even greater extents in many foreign jurisdictions. The good news is that such regulation will rarely give a vendor an excuse not to meet your reasonable requests for service or specific contract terms. The bad news? Governmental regulation may still in some respects limit your vendor’s flexibility in providing the service; it can also increase costs (for both the vendor and, more importantly, you) through taxes and specialized levies such as universal service fund payments.
What makes matters more difficult is the fact that the regulatory landscape is shifting in various, not necessarily predictable, ways. Contrary to what we’ve generally seen in the past two decades, the recent trend is to increase regulation for some previously regulated service, and to start to regulate previously unregulated offerings such as Internet and other IP services. These changes, which are occurring both in the U.S. and in other countries, can undermine the enforceability of previously negotiated terms, and they can complicate negotiations that are still underway.
To avoid the potential pitfalls created by the uncertainties of regulation, it’s important to conduct due diligence so that you understand the effect that both existing and potential regulation could have on your deal. And an essential added safeguard is an effective material adverse change (MAC) clause to permit you to make appropriate adjustments should regulatory changes, whether or not anticipated, adversely affect your interests after you’ve signed the deal.
Tip No. 4 – Be Sure to Get Specific and Enforceable Service Commitments
In my first installment I pointed out that a telecom transaction consists of a number of separate and distinct agreements. One of those is usually a “Service Level Agreement” (SLA) that sets out the performance characteristics of the services you’re purchasing. More often than not, the telecom vendor will propose (not surprisingly) vendor-friendly SLA language that speaks in terms of aspirational objectives, not contractually enforceable commitments. This language needs to be changed to establish performance guarantees on which the customer can rely; and, of course, failure to meet those guarantees should expose a carrier to substantial liabilities. Such potential liability serves as an inducement to the vendor to make good on its promised level of service.
Unfortunately, carriers routinely offer only very modest credits as a customer’s exclusive remedy for SLA failures. That means that the customer should, as part of the negotiation process, shoot for a considerable increase in the credits which the vendor will have to provide for service shortfalls. It’s also useful to include as part of the deal a termination right for chronic failures: if the vendor proves unable to provide the customer the promised level of service, the customer would then have the contractual right to walk away from the deal without penalty.
One more consideration about SLAs: As I mentioned in my last installment, it’s very important to understand how the various components of a telecom deal relate to one another. For example, the master service agreement (MSA) may include a general disclaimer of warranties provision. That’s routine and not objectionable. But since SLAs could arguably be viewed as warranties, such a general disclaimer could (also arguably) be seen as effectively nullifying the SLAs. One way to avoid that is to expressly except the SLAs from your contract’s general disclaimer of warranties language. However it’s done, the goal is to make sure that specific terms (such as particular levels of service to be delivered) which you successfully negotiate don’t get overridden by operation of some general provision in some other component of the overall deal.