TELKOM STUNG BY COURT'S R1.5BN TELCORDIA RULING

Mergers, Acquisitions and Financial Results

Fixed-line operator Telkom was dealt a R1,5bn blow when the Supreme Court of Appeal (SCA) yesterday ruled against it in a long-running dispute with US computer software company Telcordia Technologies. The court's ruling ends a six-year dispute that led to Telcordia pulling out of SA.

Telkom will have to cough up up to R1,5bn at a time when its costs are rising to the extent that brokerage Merrill Lynch warned yesterday that it was "concerned" about Telkom's profit margins after expenses raced ahead of expectations. Partly as a response to concerns over rising expenses, Telkom's share price fell 3,3% yesterday on the JSE.

The Telcordia dispute began in 2000 when Telkom terminated its agreement with the company for the delivery of a "fully integrated end-to-end customer activation and assurance system". Telkom refused to pay certain money that Telcordia contended was due to it in terms of the agreement.

What makes the case even more damaging for Telkom is that it has not set aside anything as a contingent liability. Telkom CEO Papi Molotsane told Business Day last week that it had not set aside any money as it was "confident it would win" the case. Molotsane said that "if the case does go against us, then we would have to determine the amount, but we haven't provided for it".

Now that the merits of the case have been decided against Telkom, the company must go to arbitration with Telcordia to determine the amount of the payment.

Telcordia's attorneys said the company was claiming $200m-$220m. They expected the arbitration hearings to be decided "early next year". If Telcordia gets the highest amount of $220m (about R1,5bn), this would be more than 16% of Telkom's net profit for its past financial year. Telcordia's lawyer, Greg Nott, said "that in South African legal history, this would be one of the largest civil claims yet, running into the billions of rands".

In a long-winded legal process, Tecordia first got an arbitration in its favour, but Telkom appealed against this in the Pretoria High Court. The high court overturned the arbitrators' decision. Telcordia then approached the SCA.

The SCA said the high court, in setting aside the award by arbitrator Anthony Boswood, disregarded the principle of party autonomy in arbitration proceedings and failed to give due deference to an arbitral award, something the country's courts had done consistently since the early part of the 19th century.

Appeal Court Judge Louis Harms said Telcordia and Telkom had bound themselves to arbitration in terms of the Arbitration Act of 1965.

Harms said it was a fallacy to label a wrong interpretation of a contract a wrong perception or application of South African law, or an incorrect reliance on inadmissible evidence by the arbitrator as a transgression of the limits of his power

Telkom said last week it was studying the judgment and evaluating its options regarding the protection of its rights.

Anton Klopper, Telkom's group executive for legal services, said the arbitrator had made an interim award, which addressed only certain aspects of the case, which had been effectively upheld by the SCA judgment. "The remainder of the matter will be dealt with at the arbitration proceedings." Klopper said Telkom's legal team was considering other avenues.

Business Day