Protect Against Prepaid Service Problems

Can your agreement protect you from
prepaid scams and prepaid service problems? Unfortunately, the answer to this question is a solid “maybe.” If you find yourself involved in a true scam, chances are the company scamming you will not have the financial wherewithal to remedy your damages (this is, of course, assuming you have negotiated an agreement that allows you to recover damages). But what if you have done your homework? You are entering into a business relationship with a supplier that is well-regarded in the industry and has your desired routes or other services available, with routes or services you have diligently tested.

Is there a way to protect yourself against service-related issues - those situations where three months into the agreement, after your prepayment has been made, suddenly the routes are bad? The answer here is, “Yes, if you have diligently negotiated a fair agreement.”

The key to drafting and negotiating a “fair” agreement is to properly set forth each party’s exact expectations, rights and obligations. The biggest mistake made in contracts covering relationships that have taken a turn for the worse is that they generally are void of exactly what one or both parties expect out of the relationship.

Of course, it may seem obvious at the time of entering into the contract that one party expects to buy routes from the United States terminating in Brazil, for example, and the other party expects to be paid for those routes. What has been left out is how those routes are expected to perform. In essence, what is the quality of the service expected from those routes? You should know the current standards of route quality and what you require.

Pay particular attention to the following clauses of the agreement (the actual section headings may be different): Service Definition, Prepayment and Service Commitment, Service Expectations, Service Complaint Process, Remedies for Service Failures, Disclaimer of Warranty and Limitation of Liability.

Service Definition.

Specifically set forth what services will be provided under the agreement. For example, you are buying a VoIP service with routes originating in the United States and terminating in Vietnam. Make this as clear as possible; don’t settle for a general definition of “telecommunication services.”

Prepayment and Service Commitment.

State exactly how much of a particular service you are willing to buy. The contract must be clear as to how many days for which prepayment must be made. Be specific. Set forth the number of days and the exact price per minute, and be clear as to when a rate adjustment will be acceptable. Know exactly what commitments you are agreeing to, and what the penalties are for your failure to meet those specifically enumerated commitments. A reputable supplier also should agree to refund money under certain circumstances, such as termination of the agreement due to its failure to meet the agreed upon service expectations.

Service Expectations.

You have two main concerns with respect to your service expectations: the availability of the service and the quality of the service. Know how you want to define “available” and have that definition stated at the beginning of this section (or in a Definition Section, if the agreement has one). Set forth the minimum expectations of when the supplier network or specific services will be available. Do you expect the services to be available 99.5 percent of the time in a calendar month? If so, make sure the contract sets forth that availability requirement. With respect to service quality, make sure you have done your homework as to the standard quality that is available in the market today for the routes you are buying. Some things to consider will be the overall acceptable delay and how long of a delay in the voice packet delivery will be reasonable. What about the jitter rates? Also consider the echo rates. Specifically set forth your minimum quality expectations for the services you are purchasing. Don’t forget that it will be possible to have different quality standards for routes terminating in the United States versus routes terminating overseas. If you do have different quality standards make sure your agreement is clear as to each distinct standard.

Service Complaint Process.

Your agreement should provide a service complaint process enables you to effectively provide notice of and remedy your service problems. Make sure the window of time to make a complaint is not severely limited. In some cases, your customers may be slow to complain, and if your agreement specifies you must make a complaint within 10 days of the end of the month in which the problem services were provided, you might miss the deadline for filing a complaint. Negotiate a longer and more reasonable time for filing a service complaint - possibly 60 or 90 days.

Remedies for Service Failures.

Your agreement should indicate what you will receive for the failure to meet the service qualities. You usually will agree upon service credits. Again, be ready to spell out the type of service failure and the credit that will be provided for each failure. You may want to request the right to terminate the agreement without penalty and a refund of any unused money if the supplier fails to meet the service expectations for a specific time period, such as two or three consecutive months.

Disclaimer of Warranty.

Most agreements have a section stating the supplier makes no warranties or representations, including warranties for a specific purpose. It is paramount you make sure this section includes an exception to this disclaimer that reads: “except for any warranties and representations specifically set forth in this agreement or any attachment hereto.”

Limitation of Liability.

It is important this section does not limit the supplier’s liability for failure to meet service expectations, if such failure is within the control of the supplier. Finally, although the terms of the agreement might seem obvious to you, never assume they are covered unless those terms are specifically enumerated in the agreement. Do not hesitate to solicit help from telecom counsel.

Stacey Pompei has about 14 years of legal and business experience. She was recently senior counsel for and managed the legal department of a diversified investment company with investments primarily in the telecommunication, Internet, financial, and real property industries. Presently, she is in practice for herself and provides legal and business consulting services to startup and established companies in the telecommunication, finance and Internet industries. Pompei also is a panelist for the Expert Eye, at

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