Dear Legal Line,

Several months ago I met a guy at a bar during
a reseller convention who professed to have constructed a Hybrid
VoIP network ready to pass traffic termination in Colombia and Ecuador.
We met because he was looking for a U.S. client to commercialize
this network thru a prepaid calling card. The network was supposedly
interconnected in both countries with the PTTs with all the necessary
equipment ready to interconnect there. It seemed to be a good “white
line” route ready to go so I followed through with it. This
guy later passed me a network design map thru email showing all
the specs and listing competitive pricing. We signed a US based
carrier services agreement after that and I began structuring a
specialty card for on-net and off-net services with both Colombia
and Ecuador in mind at the rates he gave me. At the time I asked
him for copies of his interconnect contracts but I was honestly
more focused on finalizing the international services structuring,
distribution and printing of the cards to follow thru.

Two weeks ago he called me and told me that rates
needed to be adjusted because the PTT had a price change with him.
Before I looked at the contract, we got into it and the whole thing
ended with both of us screaming breach of contract. We later cooled
off and I carefully read the contract. It says that the rates in
the Exhibit were “subject to” his agreement with the
PTTs. We talked again and generally agreed to adjust the pricing
and our contract. I am now reviewing the whole thing again and realize
that my profitability has been reduced. I can still make it profitable
if I go forward at the adjusted price but it will be tough. My question
is about keeping that price. Is there any way to verify the price
he is getting from the PTTs if I get the PTT contracts? Having a
copy was a condition of me going forward with the adjusted agreement.
The whole thing still makes me feel as if I am getting played. If
it is real, my profit is fair. If not, I will lose more than just
the printing and deposits I have given this guy so far. How can
I check this guy out or at least any PTT agreements he passes me
as the ones he has in these countries? If I pull out now I lose
money, but maybe it will be less than if I stay with him after actually
distributing on a first-use basis. How do I know difference here?

- When Contracts Fail

Dear Failed Contracts,

The reality of this situation may not be as pessimistic
as you think. Having some experience in both studying law and working
in Latin America, including Ecuador, I think that there are a few
more questions in this transaction that you should parlay to this
guy before picking up your marbles and licking your wounds. Before
giving them, however, I think you need a context in which to evaluate
their importance. Let’s begin with Colombia. If you are dealing
with “white line” termination there, four companies
are critical: Telecom Colombia; Orbitel also know in the US as Cinco
Telecom; Empresas Telefonica de Bogotá (ETB) and Empresas
Publicas de Medellin (EPM). In the case of ETB and EPM both are
local providers (the equivalent of Bellsouth in the US before getting
long distance service approval) and usually they use Telecom Colombia,
Orbitel, or an international carrier for long distance long haul.
These two are generally good for specific termination to remote
cities, but not general use. In the case of Orbitel, or its US subsidiary
Cinco Telecom, there is no interconnect agreement — they do
work via carrier service agreements that usually involve no equipment,
since they are already in the US. In the case of Telecom Colombia,
or ColTelecom its US subsidiary, there may be an interconnect agreement
of sorts. This is because Telecom Colombia is a market dominant
PTT and is quasi governmental to boot. This means that if there
is an agreement, a long approval process is usually involved. Most
that hold this type of agreement are direct resellers for Telecom
Colombia. Likewise, most of these contracts can be identified by
approval authorizations by the Ministry of Telecommunications in
Colombia, as they must be approved much like interconnection agreements
are by the state utility commissions here in the US — docket
number and final approval are marked on each. Another distinct feature
of these contracts is an International Chamber of Commerce (ICC
Paris) arbitration clause that requires at least 50K to arbitrate
any contract dispute should it arise. While these are good indicators,
this is not a guarantee that the contract in hand is not a fake.
Proof, as true for any major transaction in telecom, is in the due
diligence. The problem is that most US telecom attorneys are stupefied
when presented with foreign law due diligence. This is why a Colombia
attorney, here in the US and experienced in telecom, would be necessary
to truly confirm what you may have in hand. I, like many other professionals
in this practice of law, maintain such attorneys on staff or on
call — so getting one is not impossible for a telecom attorney.
This documentation would then need to be crosschecked with the Ministry
of Telecommunications to verify approval. In general this agency
is very open and friendly, should you have a good rapport, speak
Spanish and are a telecom attorney. They are very forthright about
what has or has not been approved.

The problem you may have is from a business/regulatory
perspective, rather than a contract verification issue. Unlike the
US, Colombia is not entirely open to telecommunications competition.
Aside from the PTTs mentioned here, there is no licensed class of
resellers like those that exist in the US under the IXC license.
A Colombian reseller either has a contract with the PTTs, or, is
not legally reselling. The next closest license holder to that of
a US reseller in Colombia is the Value Aggregator Class which is
primarily an Internet Provider. Often they refer to themselves as
Hybrid VoIP carriers — so this may be the key clue. The truth
is that if they offer telephony termination over a certain percentage,
they could lose their license as a Value Aggregator as they are
not approved for such service in Colombia. This is not far fetched
from reality as Colombia just recently de-criminalized a public
law that made it a crime punishable by imprisonment and forfeiture
of property (equipment) if a communications provider was terminating
telephony traffic through a by-pass of the PTTs. So if your guy
in this deal is not a true contractual reseller, this whole guise
of interconnection may be a ruse awaiting your future discovery
that he is just a Value Aggregator — and not really in position
to complete this deal for a “white line” route.

Now let’s talk about Ecuador. Like Colombia,
the Ecuadorian Telecommunications market is not entirely open to
competition. In Ecuador there are four companies critical to authorized
termination: Pacifitel SA, Andinatel SA, Linkotel SA, and ETAPA
which are the primary providers of termination. Both Linkotel and
ETAPA have regional limitations for local access (again, like Bellsouth
in the US before getting long distance service approval). Pacifitel
and Andinatel both offer countrywide termination with variances
in pricing based upon which of the two is using the others network.
The unique feature that Ecuador does offer, in contrast to Colombia,
is actual interconnection with the PTT. Pacifitel, for example,
will allow US common carriers with 214 Authority to interconnect
with them if all equipment is supplied and maintained by that carrier.
However, this contract is not a private one — all interconnection
agreements with the PTT must first be approved by The Secretariat
of Telecommunications and CONATEL. These two regulatory agencies
act much like a combination of the FCC and state commissions here
in the US, leaving any final approved interconnection contract with
docket numbers and a final authorization which are also usually
published by CONATEL afterward. Should your guy have an interconnection
agreement with Pacifitel or Andinatel there will be plenty of documentation.

One issue to also keep in mind is the possibility
that this guy has a private termination contract with a local loop
provider in Ecuador, instead of the PTT. If he does, he can terminate,
but only to a specific city in Ecuador. Should you forward calls
to other cities beyond the loop provider’s license then he
would have to utilize the PTTs network and price increases would
be involved. Leaky operators tend to use this tactic. Like Colombia,
there have been a lot of leaky operations in Ecuador due to remote
termination points, high prices by the PTTs, and corruption. While
the Ecuadorian PTTs and the regulatory agencies are beginning to
combat these providers, leaky networks still actively operate in
Ecuador.

Now back to your original questions. In this
deal, you are negotiating for “white line” or clean
routes terminating in Ecuador and/or Colombia. This is a very specific
type of service. Many major carriers here in the US do not even
use such a service with their Latin American network grooms. Having,
or not having, a “white line” route with this network
is the most critical issue, in my view, for determining whether
to go forward with the contract or not. On the Colombia route, demand
that he show you either a reseller agreement and interconnect documentation
with Telecom Colombia, a carrier agreement with Cinco Telecom or
Orbitel, or an agreement with a local access provider. If he can’t
or won’t, then start limiting your losses because it sounds
like he’s leaky. Thereafter, go back to your contract and
see if there is a “Representations or Warranty” clause
where he warrants to have a good service or network. If it does
you may have a basis to sue him in court here in the US. If he produces
a reseller agreement or documentation thereof, consult attorneys
that have a Colombian telecom attorney to verify what you have in
hand.

On the Ecuadorian route, demand that he show
an interconnection agreement and reference an approval number in
CONATEL. If he can’t or won’t, then start limiting your
losses because, again, he’s leaky. In all fairness, you may
want to ask him if he has a private agreement with a local loop
provider, or is a local loop provider. If this is the case, he has
termination, but not “white line” countrywide termination
and that was not the apparent terms you agreed upon. Again, go back
to your contract and look for warranties as your first step in claiming
damages. Should you decide to go forward in the end, then realize
what kind of termination you have in hand, and realize that prices
may increase or the operation may not be able to have the ASRs first
expected, like always, consult a telecom attorney experienced in
these issues. He can properly advise you about any nuance that your
situation may have, or what kind of damages you may be entitled
to through a lawsuit.

GOOD LUCK AND SUCCESS IN THE INDUSTRY