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    Wholesaler safety nets

    Wednesday, September 27, 2006

    Veridas Communications Pty Ltd, a wholesaler who reportedly had in excess of 30,000 customers has, according to a range of news sources, forums and blogs, collapsed. In this edition of Legal View , I describe some of the shockwaves this has caused throughout the telecommunications industry. I have first-hand knowledge of dealing with Veridas through current representation of a client in court against Veridas, and have recently been contacted by a whole assortment of ex-Veridas resellers that have clearly been affected by the collapse.

    The collapse of Veridas will have a range of consequences for litigants embroiled in court cases against the company, depending on when, if and how it proceeds into liquidation. A company will generally be placed into liquidation if it cannot satisfy its debts as and when they fall due. The liquidation process aims to satisfy outstanding debts by selling off the company's assets. A liquidator can be appointed in different ways. Sometimes companies are voluntarily placed into liquidation. In other circumstances a court can place a company into a liquidation. In fact, there are a range of potential options for companies that go under, such as the appointment of an administrator, the placement of the company into liquidation or the continued operation of the company via the injection of additional funds. A company can also be placed into receivership. At the date of writing this article, it is unclear as to how Veridas will proceed.

    In the interim, it appears to be self evident, or at least reportedly so, from the public forums, that Veridas' supplier of telecommunications services, namely Telstra Wholesale, has turned down services on Veridas' network. In addition, it is clear that the majority, if not the entirety, of Veridas' customer base, has churned away or otherwise terminated services previously supplied either directly or indirectly by Veridas.

    The commercial consequences for ex-resellers and ex-customers that this has produced have also become evident, although these have, according to what I have heard, for the most part been dealt with. Depending on the provider, this has generally occurred via the churning of customers to alternative wholesale providers, and in some cases with the customer's knowledge and in some, without it and on a seamless basis. Some providers have obtained a significant amount of new customers as a result. Others may have lost a significant number of customers. Providers have also had to deal with enraged customers who had been without their internet connection for days.

    In order for resellers to protect themselves, one solution is to enter into “backup” agreements with suppliers. That way, if one goes down, there is another that can be relied on. Call this a form of supplier redundancy.

    The terms of any reseller agreement require careful perusal by a lawyer and should not be treated lightly. Most often, a reseller agreement that is prepared by one party will often be excessively in that party's favour. However, through the process of negotiation the balance of power can be redistributed more evenly. The rights and obligations of the wholesaler and reseller need to be carefully distributed throughout the agreement and the exposure to liability capped where possible, and against the other party. The major clauses that resellers should look out for include supplier-exclusivity, and clauses dealing with customer appropriation, amongst others.

    In certain circumstances the termination of services by a wholesaler can have devastating effects, for example, the forced fire-sale of an entire customer base to an alternative wholesaler or reseller provider, or worse, the forced closure of the entire reseller business. There are ways to get around this. For telecommunications resellers, the lesson is simple; Don't put all your eggs in one basket.

    Disclaimer: This column is for general informational purposes only. It is not legal advice nor is it a substitute for legal advice. Readers should seek legal advice on their own particular circumstances. Alan Arnott is a technology & telecommunications lawyer with qualifications in computer science and law with Arnotts Lawyers Jones Bay Wharf in Sydney. For more information, please visit www.arnotts.net.au

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