An In-House Perspective on Telecoms Arbitrations

Too often it is assumed that arbitration is the almost automatic answer and ideal way to solve a dispute in an international business context – telecoms or not – and is chosen without too much thought given to its efficiency – it is assumed to be better, swifter than the judiciary.

Arbitration has certainly a lot of positive sides – first and foremost, in a dispute between an investor and a country or government, under the protection of an investment treaty. Applied to the world of telecommunications, this is the case of a dispute over the telecoms operator’s right to operate, for example when all or part of a telecoms licence has been cancelled or unilaterally modified by a government authority through a judiciary process or a change of laws, or where the legitimate expectations of the investor under the licence have been thwarted by governmental action (such as issuing an unreasonably high amount of other licences, or granting the right to state organisations managing a closed telecoms network, to offer a telecoms service to the public). Such a dispute will, in the absence of an available treaty protection and except in the very rare case where the licensing regime provides for a settlement through arbitration, go to the judiciary or administrative authorities of that country – and often to no avail.

If the cancellation or changes mentioned above are, which is often the case, paramount to expropriation or unfair or discriminatory treatment, and if an international treaty is in place to protect the investment, arbitration as instituted under that treaty, is the operator’s best (and often only) way to benefit from an independent forum to defend its rights, assuming a negotiated political solution in unachievable (owing to the weight of telecoms operators in the respective national economies, these questions very quickly become political). It is therefore essential that any major investment is placed, to the extent possible, under the protection of such a treaty by choosing the right vehicle, and that due care is taken of the case where the agreement includes an arbitration clause that is additional to (and may be uselessly or harmfully additional to) the investment treaty’s arbitration process.

In a contract between private parties – business companies – the choice is less obvious. An agreement to arbitrate will be preferred for a couple of reasons, whereof two – rapidity and confidentiality – play in many cases a rather minor part and are counterbalanced by disadvantages such as the arbitration’s high costs or the more complicated enforcement processes. The question of costs, for major disputes between major players, plays a subordinate role. The enforcement difficulties may be real but in many cases are made easier by international agreements – and it would generally (with some exceptions such as judicial enforcement inside the European Union), not be significantly less difficult, costly or uncertain to enforce and execute a foreign jurisdictional decision than an arbitration award.

But there is one reason difficult to trade off, namely the lack of trust by one or all of the parties to a contract in the judiciary system of a certain country, that would, under applicable procedural laws or international treaties, be competent to solve the dispute – an important factor in a telecoms dispute because the telecoms infrastructure, equipment, service, etc., is strongly anchored in the territory of that country. Typically, one party does not want, be it for good reasons or prejudice, the courts of the other party to decide on the matter at stake. Arbitration is then the straightforward avenue.

Sometimes arbitration is chosen because it offers a comfortable common ground between two parties to an agreement. A major business company will always strive to impose upon its contractual partner the courts of its home country, under some, regrettably sometimes true, impression that these courts will favour it, which in turn will calm the partner’s ardour to litigate. The most it will agree to is probably arbitration, be it for good reasons or out of prejudice against the other party’s jurisdictions, or just because it is a matter of relative economic strength.

But arbitration as an ideal way to solve a dispute is a debatable idea, specifically in the telecommunications sector. It may be that an arbitration tribunal, while competent, will not be able to deliver the valid and enforceable decision the claimant expects – even in the case of a stable legislative environment reasonably ensuring exequatur and enforcement possibilities.

Arbitrators are bound by the mandate granted to them in the agreement to arbitrate, and if that mandate does not extend to certain core issues at stake, which are alien to the contract and therefore the agreement to arbitrate, they will nonetheless still be required to render an award. Typically, the interference of regulatory or competition or other government authorities will create such issues, and the telecoms industry is a highly regulated industry and that regulation is usually of public policy and imperative. The award may therefore be inefficient, and it may be annulled – for breach of the arbitrators mandate or for conflict with public order, or denied exequatur or impossible to enforce against the losing party.

Obviously in the world of telecommunications, there are many disputes situated outside of the telecoms regulatory context – where traditional reasons to choose arbitration will be good enough - but any proper telecoms dispute resolution process is likely to experience such an interference.

Let us briefly describe, in the broadest terms, the nature of the telecommunications regulatory environment, which will show the extent of possible avenues for arbitration to solve a telecoms dispute.

Telecoms operators operate under a specific approval regime and framework given by the government authorities, which at a minimum comprises three elements:

• Telecoms operators are authorised by the government to perform, for their customers, a service that is often perceived as a (at least partially) ‘public’ service – or a service that no citizen or company is free to refuse because of its essential character in our modern economy and society. This approval regime is embodied in the telecoms licence.
• The operators’ rights and obligations to operate such a service are defined and restricted by specific terms and conditions regulating, inter alia, their interactions with the government, for example, in matters of safety or cooperation with the police or the judiciary, or other operators – in the French-speaking community generally called cahier des charges.
• The operators use limited and listed resources, the electromagnetic waves required to carry the telecoms signal or spectrum. The spectrum’s property, management and control lies with the government (and the government will itself derive its rights from an international order under international treaties). Spectrum is national or international public domain. The operator’s right to use the spectrum is embodied in a spectrum schedule detailing the frequencies granted to the operator, and this schedule is usually independent of the licence.

• This corpus of documents forms the ‘agreement’ (in an administrative law context, this qualification may often not be fully accurate) between the state and its telecoms operator and is subject to public law. The government may agree to an arbitration clause in some of the documents but that is rarely the case.

In addition to the basic regulatory telecoms framework, the industry is also impacted by other elements – probably more so than most other economic activities – alien to the contract itself.

The telecoms industry is a heavily concentrated industry. Spectrum is a finite and scarce resource (and only a part of it is available for a commercial telecoms service). Its scarcity becomes an ever more pressing issue as communications develop exponentially in quantity (number of communications) and quality (mass of data each communication carries). Because of the history of the industry, which in almost every country experienced a long period of public monopoly, the number of operators in a certain country is limited (generally there are three or four generalist operators, plus a certain number of specialised or local service providers). The entry ticket to the telecoms market is high and, commercially, the subscriber base does not allow for an unlimited number of players competing on the market, because a too ferocious competition will impair each player’s ability to make the investments required for the continuity and development of the service. In most cases, the major operators will belong to big international groups. The telecoms equipment and software providers able to provide the core (hard- and soft-) ware necessary to run a nationwide telecoms service are also only a handful. Hence, the competition authorities of most countries, at least where a sophisticated competition legal framework exists, are particularly vigilant when it comes to the telecoms industry.

Telecoms operators deal, by the very nature of their activity, with personal or sensitive date of their customers – which raises sometimes contradictory issues of personal data and public safety (risk of terrorism) under the watchful eye of governments or their data protection authorities.

This already long list of government or para-governmental interferences has been increased by a new topic – international sanctions. Much of telecoms technology or equipment have a dual military and civil use, and carry the technical possibility to intrude into other networks or databases. To fend off such risks, governments have the right and the capacity to restrain the parties from certain actions they should normally carry out in the course of the performance of their commercial duties. Of course, telecoms operators or providers are reluctant to engage in actions or omissions that would trigger the risk of breaking an international sanctions regime. An operator in a given country will, as a principle, prefer to breach existing agreements rather than risk the ire of the government that has granted the right to commercially exist. Because almost all major international operators and suppliers belong to multinationals, there is a strong likelihood that said operator is a subsidiary of an international group, and its controlling shareholder may prefer that the company, even if it is not directly at risk of sanctions, breaches an agreement, rather than being subject to sanctions of the government that has authority over the parent or a sister entity.

All this creates a blurred and complicated picture of the laws possibly applicable to a telecoms contract, and it is not infrequent that at the moment a dispute arises in the course of such a contract, a party’s legal department discovers that the company falls under certain foreign legislation, or certain competition restrictions, or that the dispute’s core question actually hinges on a decision by a regulatory authority that will hinder the arbitration tribunal’s ability to solve the dispute properly.

To make the matter more savoury for the in-house counsel, these situations are not always foreseeable at the time when the contract was entered into, and may be based on contradictory principles (free enterprise versus regulation, confidentiality versus safety).

In this context, international arbitration is not automatically the straightforward way to solve a dispute. There are dozens of possibilities of interference by regulation, competition, etc., into any major telecoms contract, by an authority or person alien to it, and therefore dozens of possibilities to frustrate the progress of an arbitration process, impair or annihilate its result or the enforcement thereof.

The limits of arbitration in the context of telecoms disputes

The mandate given in a contract to settle a dispute generated under that contract through arbitration may not encompass the right to solve the question at the heart of the dispute. While the tribunal is the judge of its own competence, and, once constituted, is supposed to do what it is asked to do – solve the dispute – it may intrinsically lack the competence to do exactly that. Indeed, while deciding the case based on the contract that includes the mandate to arbitrate, the tribunal may fail to include a point of public policy or administrative law that is quintessential to the dispute.

Certainly, there are many cases where the tribunal will be able to insert by reference into its mandate the laws or regulations applicable to such a contract – after all, it is bound to settle the dispute under a certain applicable law. But there are certain things that will fall outside the competence of a tribunal:

• deciding on a challenge to a regulation, be it telecom, data protection or other, or on the validity of a decision by a regulator, which requires an operator to act in breach of certain provisions of its contract with another party: only the judiciary of a country may rule on the legality of such a regulation or decision even if such a regulation or decision is contrary to international public policy); and
• deciding on the competitive position of an operator. Is it dominant or not? Or on a technical facility, is it essential or not? These qualifications may trigger more or less unforeseen and substantial consequences on the performance of existing contracts – such as changing an interconnection rate, requiring or denying a network access, etc., but only a competition authority or a court of the jurisdictional order (or, in certain cases, a telecoms regulator) can decide whether such qualifications apply.

The possibilities where a dispute over an alleged breach of contract that may be the consequence of a regulatory decision are many:

A dispute can arise over who is to blame in a merger or acquisition, which has failed for lack of governmental approval of the transfer of spectrum or licence, and the aggrieved party considers that the party responsible for obtaining these approvals has not made enough efforts to ensure such approval. The tribunal may examine the efforts made by the obligee but it has no authority to decide whether this refusal was legal or legitimate.

A dispute can also concern an interconnection agreement between two operators that has been implicitly changed – or made impossible to perform – by a change in the competitive position of one of the parties, for instance, if one of the operators starts or ceases to hold a dominant position in the market, where such a position, as is often the case, implies differentiated interconnection rates to the detriment of the dominant operator, thus implying a change of the interconnection agreement’s contractual terms. The tribunal has no mandate to decide whether that operator is or is not dominant. (The same reasoning can easily apply to a facilities or infrastructure share or access agreement or to data exchange agreements.)

Similarly, an interconnection agreement may refer to certain rules between operators that, over time, have been changed by the regulator, where such change is considered – or later ruled to be – illegal or is being reversed: again, the mandate of the tribunal to settle a dispute between the two contracting parties does not extend to check the legality or constitutionality of such regulation.

The examples above are taken from real life; they ended up with arbitration proceedings being stopped before an award was rendered, or awards being annulled or unenforceable. They relate to matters where there is a reasonably stable legislation or jurisprudence in most countries. In more novel areas, such as the dispute-happy field of data transfer or data protection (or international sanctions) it is more difficult to foresee the outcome of a similar conflict, but one can expect it to run along similar lines and at times into similar difficulties.

Hence, the costly process of arbitration can be useless because of annulment, refusal of exequatur or impossibility to enforce because of issues over which neither the parties nor the tribunal have control.

What should the in-house or general counsel do?

At this point, the question to be asked by for the in-house or general counsel of a company, pragmatically, is which avenue to choose – arbitration or not – before entering into an arbitration agreement or before launching a claim.

Of course, our general counsel often has at least the comfort of not being asked to choose, because a predecessor has inserted an arbitration clause into an agreement generating a dispute that it is hardly arbitrable. The clause, clumsy as it may be (and it may not have been that clumsy when it was drafted years ago) is there, and in the case of a dispute, there is no choice but to arbitrate, or drop the case – something that for reasons of principle, few major international players will easily agree to.

But fundamentally, the question remains: is arbitration the right avenue?

I do not think there is any single definitive answer to that question. In many cases, arbitration will be the least bad avenue. Starting with arbitration will at least have the advantage to get to an (even unenforceable) award, thus showing that the claimant is not willing to be pushed around. For major companies, it is often more important to start and lose a case than let an alleged breach be unanswered. And, after all, what are the other solutions?

Going to the courts of the country where the issue arises? Why not, if these courts can be trusted? But wasn’t the recourse by arbitration motivated exactly by the distrust of these courts by one of the parties? However, one can imagine that two parties to a dispute, none of them a national of the country where the dispute materialises (for example, the place of performance of the contract), would prefer to go to the local courts if it is highly likely that the solution to the dispute lies in the answer to a regulatory or competition question, rather than to arbitration. One would need to carefully assess the pros and cons of the judiciary avenue – which is clearly riskier (before the local courts, which customarily are more sensitive to arguments based on local laws and regulations than an international arbitral tribunal, the claim would face more risks of being dismissed at an initial stage, taking away the benefit of having an award to lean upon in a negotiated settlement) but may bring more certainty and efficiency.

Choosing the courts of a ‘neutral’ country? This solution will hardly bring any additional comfort; the neutral court is, of course, unlikely to have more authority to settle a foreign competition or administrative dispute than an arbitration tribunal, and the enforcement processes may well be as difficult as for an arbitral award.

It cannot be stressed enough, for both parties when entering into an arbitration agreement, and for the claimant before starting an arbitration process, that the merits of an actual or potential claim are assessed holistically, not only on the basis of the contract itself but also of the applicable regulation, competitive standing of the parties, the existence or not of specific security, privacy or sanctions restrictions, etc. Specifically, the question of how far the arbitration tribunal’s mandate will extend to these issues needs to be discussed extensively, as well as the extent to which the defendant may oppose exequatur or ask for annulment of the award based on these questions.

Litigation funding firms will analyse the merits of the claim and the financial standing of the other party thoroughly. The legal departments of telecoms operators should perform the same assessment and routinely include, in the due diligence, the regulatory, competition and international sanctions matters. It is necessary to get the most complete picture of the chances and difficulties of any arbitral proceedings. That does not necessarily mean that arbitration should be discarded or no claim started. But a minima, it will allow the claimant to be better prepared – the claimant can thus explore the possibilities of a negotiated settlement in light of his or her regulatory findings, or redirect the matter towards another procedural possibility before or concomitantly starting the arbitration process (such as challenging the relevant regulatory authorities to clarify the applicable regime to certain aspects of the dispute, or launching or threatening to launch a request to a competition authority).

And for the defendant?

The defendant who has agreed to an arbitration clause cannot not attend the arbitration process, even if it is only to challenge the tribunal’s competence (which, of course, is for the tribunal to decide). But numerous possibilities to challenge the tribunal’s competence or otherwise frustrate the progress of the arbitration proceedings or their enforceability now arise.

Financially, the defendant may refuse to pay any part of the costs of the arbitration process, leaving the claimant with the full financial burden of the arbitral proceedings while knowing that whatever the award, if detrimental, it will try to get it annulled or have its exequatur refused, be it for incompetence of the tribunal to decide the matter or because the award would arguably conflict with public policy in the form of a compulsory regulatory provision or decision by the relevant government.

This is a risk that the claimant, of course, should be aware of: ending up with no practical result after paying the full amount of the arbitration process. As a result – again, a real life example – the claimant had a beautiful award in its victorious hands, an award carefully drafted by the tribunal to remain within its mandate but that was then annulled for reasons of conflict between the award and public policy. The claimant was left with costs often exceeding €1 million for a procedure that has proved to be useless. Not an expense any general counsel wants to see in his or her annual budget.

A couple of ‘dos and don’ts’

• In a contract with a government entity, always check the applicable treaty or equivalent legal protection. If required, choose an astutely located investment vehicle to benefit from such a treaty. Include a clause in the agreement that ensures stability of the legislation that was applied to the investment at the time of the investment. Make sure the agreement does not include an arbitration clause that may run counter the processes under that treaty, or waives any protection granted by that treaty. Avoid arbitration under the local arbitration law with a seat in the relevant country.
• If a dispute erupts with a country, that could lead to an arbitration procedure, get a clear picture of the political situation between the countries involved first.
• Do not start or get drawn into any proceedings that could trigger a waiver of the investment’s protection under the available treaties or your right to arbitration.
• In a contract between two private entities:
  • Check whether rather than arbitration, the matter could be decided by a court in your or a neutral country and the chances such a decision can be upheld and, if needed, exquatured. Get your company to buy into the arbitration agreement at the highest level as per applicable corporate law – there are countries that require that a decision to solve a dispute out of the normal procedural rules of that country, such as by arbitration, is vetted by the company’s board of directors or even general meeting. If arbitration is the right answer, look into the detail of the mandate given to the arbitration tribunal. Don’t trust the contract in dispute alone, check the surroundings – regulatory, competition etc environment – first and extensively, to ensure arbitration can bring you an enforceable solution, and consider clearing these regulatory aspects first. Choose your forum and seat well. Avoid seats where procedural laws can excessively complicate the process. If a case erupts, know in detail your position’s strengths and weaknesses – the defendant will at any rate increase your weaknesses. Do not go to arbitration on weak grounds – rather not formulate a claim that is weak or easily challenged from the start than having to drop it during the proceedings.

The points above are at best some very basic and general advice. There is no ‘one size fits all’ here: do a complete due diligence on your claims, their regulatory or legal environment, your position in the dispute and the defendant’s strategic, legal and financial standing. Do not trust your law firm, whatever outstanding quality it may have, to be able to do that for your company.

Notes