Typical provisions of submarine cables installation contracts / by Blas de Lezo
Twenty first century is the era of high technologies where increasing dataflow requires speedy communications and transfer of information over large distances in a limited period of time. All communications facilities including high-speed internet, calls, and emails are nowadays carried by modern fiber-optic telecommunications cables laid on the bottom of the oceans. Apart from technical and engineering challenges arising in connection with cable installation, maintaining and reparation there are also legal aspects of interest to be mentioned. Summarizing cable industry experience, this article is devoted to legal regime of submarine cables under typical cable installation contracts.
Laying of submarine cables is a challenging task requiring men force, remotely operated vehicles, cable vessels, divers and other subjects involved. In order to settle all issues, cable industry has elaborated its own standard provisions of contracts concerning installation, transportation, reparation and other numerous services relating to submarine cables. Thus, in contracts concerning submarine cables activities the following provisions are typically included.
Normally cable contracts involve several companies considered as one party of the contract (consortium of purchasers) and several companies on the other side of the contract (consortium of contractors), forming joint venture for the purposes of arranging construction of submarine cable. In some contracts parties are single purchaser and a single contractor, but multiple companies representing one party is more typical situation for cable industry. In case of several contractors, responsibilities, as well as the level of liability for breach of contract, shall be specified in detail for every participant.
In the majority of cases cable laying contracts are signed with the condition of further maintenance of the whole cable system which means that the same contractor remains to support operation of cable after its installation. Apart from cable installation itself, the contractor shall also arrange for the construction of terminal station/s and other surrounding facilities, and contracts normally specify relevant details of such station/s and date when they must be ready for exploitation. Parties specify life term of the cable – how many years cable system will be in force under normal use and service conditions. Average submarine cable life term is 25 years but may vary due to developing technologies, length of cable, location and surrounding environmental conditions.
As far as cable installation projects are expensive, typical contracts contain pre-performance provision under which purchaser shall pay the down payment within some days agreed by the parties after the date of signature of the contract. Contractor in its turn shall provide the purchaser with Performance Bond. After these actions parties’ obligations under the contract come into force. Following the first payment all subsequent payments are also subject to parties’ agreement. Normally billing schedule foresees billing of installments of the contract price at fixed calendar dates or upon the achievement of predetermined milestones in the performance of works (corresponding to major parts of the work). In case of several companies acting as a purchaser, there is one of them who typically acts as the central billing party and all the invoices are addressed to him.
Some contracts have a “coming-into-force” clause, providing that the contract does not come into force until some later date and upon the advent of some circumstances. However, this provision has serious disadvantage as the status of contract and parties’ rights and obligations are unclear between the date of signing and the coming-into force date. Basically, the contract, though signed, is not a contract and has a kind of ‘pending’ status. That is why some companies agree on the following: contract comes into force upon signing, but some or all of parties’ obligations do not become effective until one or more conditions have been satisfied.
All submarine cable installation projects start with the conduction of a detailed survey of cable route including land-based and marine areas. For reaching these purposes parties agree cable type and length, cable ship to be engaged in these works and expected days for installation. However, only approximate period for installation can be agreed in the time of signing the contract as far as this period can be prolonged due to both technical and administrative delays. Among these delays could be re-routing of cable with the purposes of avoiding areas of environmental sensitivity, removal of out-of-service cable, payments of fees to local authorities etc. The same applies to sum of money devoted to route survey. It may vary significantly and in order to prevent disputes parties sometimes agree maximum additional payment allowable because of route variations. Another option that purchaser could choose is to perform route survey under a separate contract preceding cable installation contract.
Parties agree Plan of Work which may be changed only upon purchaser’s prior written consent. Milestones of work are subject to provisional Acceptance Certificates and the whole completed work is accepted under the Certificate of Final Acceptance clearly specifying the completion of all works. Stages of work and detailed technical description are designed in the form of several annexes carefully specifying each milestone.
All permits, authorizations and licenses as well as payment of taxes during the cable laying process are normally at contractor’s account. He is responsible for obtaining all consents from governments of the coastal states for performing cable installation activities and shall pay all related fees under current domestic laws. However, purchaser shall assist contractor with getting all necessary permissions if they can be obtained only by his actions and upon his name. Contractor is also responsible for transferring all the equipment to the place of works and for paying compensation to any nonparty if it’s required in order to finish the installation work. Such situation, for instance, may arise when submarine cable laying process affects fishing industry and relevant compensation to be paid to fishermen in order to compensate them for suspending their activity in the area. Purchaser in his turn shall provide contractor with all information and necessary documentation for all actions specified above and finally will compensate him for all sums spent on such actions upon corresponding invoices.
In order to prevent possible deviations and delays in the course of work, purchaser normally has right to access and inspect land-based stages of works so long as it doesn’t impede their performance. The same applies to maritime stages of work. However, purchaser’s personnel is under vessel’s master command and shall follow all his instructions in accordance with safety requirements.
Since installation works are completed, parties normally agree test specifications and schedule when these tests shall be taken. It is difficult to fully define test specifications at the time of signing the contract, therefore, parties sometimes agree during contract negotiations that final schedule of tests and test periods will be specified later allowing the purchaser to review and agree them as they become available. Parties may also agree on providing cable laying reports submitted by the contractor on a regular basis, informing purchaser about the course of work.
Upon the completion of all works, right to cable system passes to the purchaser at the date of final acceptance certificate or with the final installment of contract price. Before the transfer of title purchaser is normally obliged not to place submarine cable system (or any part thereof) in service without contractor’ prior consent due to safety requirements. With the transfer of cable system as material infrastructure, software to the system also goes to the purchaser. He is granted with nonexclusive, nontransferable, royalty-free license for it, including the right to make a reasonable number of copies for back-up purposes.
During the warranty period contractor is responsible for all necessary repairs, technical support and supplying with parts of cable system on his own costs and in a reasonable period of time. He also bears all costs in connection with operation of cable ship responsible for repairs. Generally all post-laying services are particularly described in the Technical Specification agreed by the parties. Along with that, it’s quite difficult to distinguish breaks occurring in the warranty period and beyond it. Therefore parties sometimes agree patterns of failure listing all the breaks based on cable industry experience. However, the contractor will not be liable for any cable damages if they are caused by negligence, failure to follow instructions or improper repairs on purchaser’s side.
Parties shall indemnify each other from claims concerning personal liability, death or property damage raised from fulfilment of obligations under the contract. Contractor shall also indemnify purchaser against all losses and liabilities for environmental damage directly caused by him during performance of the contract. It is an inherent condition of every cable installation contract that contractor shall follow all environmental requirements necessary for laying cable. Apart from it, contractor shall collect or recycle equipment left on the seabed after cable installation in accordance with applicable laws. Requirements of different states on this matter may vary significantly depending on domestic jurisdictions. Local laws usually oblige to collect and recycle such equipment but prescribe different mechanisms and rules for it. Some contracts (if they permit subcontractors relations) provide with the requirement to subcontractor to have an ISO 14001 Environment Management System Certification as a guarantee for its safe services. In any case, whether works are performed by contractor or its subcontractors – purchaser has right to carry out an environmental audit.
Parties often limit their liability under submarine cables laying contracts. In any case, whether based on breach of the contract, statutory warranties and conditions or otherwise, parties agree that purchaser´s and contractor´s liability will not exceed certain percentage of the contract price. However, if purchaser doesn´t pay sums agreed in the contract within certain amount of days (agreed by the parties), the contractor in addition to other remedies may suspend performance of works under the contract. Moreover, contractor may at anytime terminate the contract if purchaser committed any material breach of the contract, filed a voluntary petition under bankruptcy, insolvency or other similar liquidation procedure and in other cases specified in the contract. However, contractors rarely terminate contracts on such grounds, but rather enter into negotiations in order to solve the issue. In case of several companies acting on the side of purchaser, other companies have remedies to stabilize the situation convincing defaulting purchaser to take necessary steps. If the contract decided to be terminated, parties shall deliver Notice of Termination to each other specifying why contract is terminated and date upon which the other party shall stop performing its obligations under the contract.
Special place is given in these types of contracts to force majeure provisions. It is difficult to specify such circumstances especially in maritime industry. For instance, it is not always clear what to be counted as inclement weather conditions (or unworkable weather) under which the contractor can´t perform works. Sometimes parties define unworkable weather as weather conditions that are worse than would reasonably be anticipated on the basis of the meteorological records for the preceding several years, usually ten-year period. The other way how parties define them is taking into account different capabilities of vessels according to their type and size and by specifying type of work for which they are to be used. Third option is to rely on the judgment of vessel´s master, subject to some reasonable standards to make decisions regarding the safety of the vessel and all persons and property on board. When force majeure circumstances occur, each party shall promptly notify the other party and exercise all reasonable efforts to continue to perform its duties not affected by force majeure circumstances.
Normally submarine cables installation contracts include possibility to subcontract works but it is subject to written consent by the purchaser. The contractor anyway remains responsible for such subcontractors and is liable for their actions before the purchaser. Purchaser in its turn may assign its rights to its affiliates or to any financial institution providing financing to purchaser in connection with the contract. Contractor in this case shall be reimbursed for any additional costs of such assignment.
To sum up, submarine cable installation and maintenance contracts are, on the one hand, similar to other construction contracts, but on the other hand, have peculiarities characterizing especially this industry. All the provisions described above and the present analysis are based on English common law, a highly developed body of law in commercial and financial matters, often chosen by parties in cable contracts. Following this statement, parties, therefore, normally agree to send all disputes arising from such contracts to arbitration held in the English language in London, in accordance with the Rules of Arbitration of the International Chamber of Commerce. However, if parties choose other jurisdiction to rule their contract, the provisions mentioned above are subject to serious drafting changes.