When Geoffrey Blainey contemplated ‘The Tyranny of Distance’ it’s unlikely he had internet connectivity in mind. After all, back in 1966 when the phrase was first coined, cloud computing, video conferencing and global connectivity were the stuff of science fiction. Today, we take connectivity as a given but when a business loses that, or worse, suffers an outage, there can be serious commercial consequences.

There are approximately 4.2 billion internet users worldwide. Mobile internet data usage is forecast to increase, with global mobile internet penetration predicted to reach 71% by 2019.[1] In Australia, mobile internet penetration will be closer to 110%.[2] Submarine cables are a vital component of international telecommunications infrastructure. Over 99% of Australia’s international voice and data traffic is transmitted this way.

Satellites, while giving cost-effective coverage, simply can’t offer comparable capacity overall. Facebook and Microsoft recently teamed up to lay a massive internet cable across the Atlantic. Google backed a 9,000 km link (transmitting 60 terabits per second) between the US and Japan, which came online in late June. Australian telco companies are also investing in new submarine cable systems such as the Australia West Express connecting Perth, across the Indian Ocean to Djibouti in Africa. Additionally, plans have now been fast-tracked to lay a new 60-terabit cable direct from Sydney and Auckland to Los Angeles. The new cable, which will extend the life of the existing 6-terabit Southern Cross cable, is planned for late 2018. It may also serve as a means of connecting various islands within the Pacific by means of branching units..

Our reliance on submarine cables comes to the fore when they’re disrupted. Earlier this year, a major telco’s submarine cable between Australia and Japan was hit by a fault which was located at 4,652 kilometres from Guam and lay more than 2 kilometres below the ocean’s surface. Despite attempts to re-route traffic, customers reported considerable delays in internet services, highlighting Australia’s high dependency on just a handful of submarine cables. This dependency will only increase with the exponential growth in data generated by the Internet and the manifold applications that rely on it.

Laying a submarine cable is not new technology. The first trans-oceanic copper cable was laid in 1850, while the first fibre-optic cable was laid in 1988. Like then, cables now are laid by specialised vessels and crew. However, in an increasingly connected world, there are a number of commercial and international legal issues to consider when undertaking such a project. In particular, project sponsors should be mindful of the following issues:

United Nations Convention on the Law of the Sea (UNCLOS)

UNCLOS defines the jurisdiction of different member states. It sets out an extensive legal framework for laying, repairing and maintaining submarine cables outside of territorial seas. Nevertheless, as demonstrated by the current international dispute playing out in the South China Sea, the UNCLOS framework is not immune from challenge. Project sponsors will often need to be aware of political risks and develop a strategy in response.

Australia giving effect to UNCLOS and domestic regulatory environment

Australia gives effect to UNCLOS by way of the Seas and Submerged Lands Act 1973 (Cth). Further, protection zones for submarine cables in Australia’s territorial seas are provided for by the Telecommunications Act 1997 (Cth).

Project structure

The laying of submarine cables costs hundreds of millions of dollars and project sponsors and financiers will need to be comfortable with significant risks. The approach to structuring the consortium of project sponsors will play a key role in both risk management of the project and obtaining finance.

Force Majeure

Contractual non-performance will be excused if unforeseen events or conditions are materially different from the basic assumptions of the parties when contracting arises. Force majeure clauses allow for a party’s contractual obligations to be excused for the duration of these unforeseen events or conditions only. Such clauses will keep a contract on foot and contractually delay a contract from being terminated for frustration. Among other risks, political uncertainties referred to above may be managed in part by way of a carefully drafted force majeure clause.

Indefeasible rights of use (IRUs)

Owners of a cable generally sell capacity to network carriers via IRUs for a certain number of wave lengths or channels. IRUs are very long-term leases giving rights akin to ownership lasting 15 years or more. IRU fees are often paid as a lump sum after the Ready for Service date, with an operation and maintenance fee then paid for the duration of the IRU term. This can create interesting cash flow issues for project sponsors and financiers to manage, particularly as large amounts of revenue come at the outset of the project.