IRUS AND FIBER OPTIC CABLES :An Overview and Examination of Associated Risks

BY FERNANDO MARGARIT, URIEL A. MENDIETA, BRITTANY E. BUHLER AND MICHAEL J. SANCHEZ

FERNANDO MARGARIT

MICHAEL J. SANCHEZ

BRITTANY E. BUHLER

URIEL A. MENDIETA

 

 

 

 

 

 

As digital infrastructure rapidly expands to meet the surging demand for bandwidth, the telecommunications industry increasingly relies on Indefeasible Rights of Use (IRUs). These critical instruments grant exclusive, long-term rights to use specific assets, such as fiber cables, closely mirroring actual ownership without the transfer of legal title.

Despite their prevalence, IRUs can be complex and often misinterpreted. For telecom participants, it's crucial to distinguish between true ownership and the rights an IRU confers. While the IRU holder enjoys near-ownership benefits like usage and control, the legal title remains with the grantor, who, despite retaining ownership, must forego traditional rights over the asset for the term of the IRU.

A pivotal aspect of IRUs is their resilience in bankruptcy situations. Ideally, an IRU should withstand the bankruptcy of the grantor, maintaining the grantee's rights. This protection differentiates IRUs from other contractual rights, which can be nullified if the grantor enters bankruptcy and rejects the contract.

To fortify an IRU against bankruptcy challenges, it's best to require upfront performance by both parties. For instance, the grantee would pay the IRU price in full immediately, while the grantor simultaneously confers the IRU. Additionally, operation and maintenance (O&M) services are typically secured via separate contracts to prevent the IRU from being classified as executory, hence susceptible to rejection in bankruptcy proceedings.

Recent court decisions, particularly the WorldCom case, have provided guidance on structuring IRUs to ensure enforceability. Key drafting considerations include clearly identifying the asset, defining a fixed term, ensuring exclusivity and irrevocability, and demanding upfront, full payment for the IRU.

Drafting IRU Agreements: A Delicate Balance

To ensure an IRU's solidity, several factors must be considered during the drafting process:

  • Asset Identification: The asset under IRU must be clearly identifiable within the agreement.
  • Fixed Term: The IRU should be established over a set period to avoid ambiguities.
  • Exclusivity: Ensure that the IRU grants an exclusive interest to one grantee, preventing multiple parties from claiming rights over the same asset.
  • Full Upfront Payment: The IRU's purchase price should be paid in full upfront to solidify the grantee's commitment and rights.
  • Irrevocability: The IRU must be irrevocable, signaling that the grantee's rights cannot be undone or terminated at the grantor's discretion.

Conclusion:

For telecom industry stakeholders, comprehending and correctly implementing IRUs are essential to safeguarding their investments and maintaining uninterrupted use of critical infrastructure. With proper structuring and understanding of IRUs, parties can mitigate risks and secure their telecommunications assets against uncertain future legal challenges.

To read the complete article, check out Issue 135 of the Sub Tel Forum Magazine here