Telkom loses Telcordia dispute

By Dave Glazier for Telkom
Johannesburg, 23 Nov 2006

Telkom has taken a second knock this week, as the Supreme Court of Appeal (SCA) yesterday ruled in favour of US-based IT firm Telcordia Technologies, with which Telkom has had a five-year legal war.

This ruling, expected to cost Telkom up to R1.5 billion, comes days after the Competition Commission blocked its multibillion-rand proposed acquisition of local IT company Business Connexion.

The SCA ruling relates to a contact dispute between the companies, involving Telcordia supplying a software solution to Telkom.

The South African telecommunications utility accused Telcordia of breach of contract by not keeping to the agreed-upon specifications. Telcordia responded with a counter-claim, which was upheld two years ago by the Pretoria High Court. Yesterday's SCA ruling is effectively a reversal of the High Court's decision.

Arbitration

However, SA's fixed-line incumbent, listed on the JSE and the NYSE, has emphasised that arbitration proceedings, to determine the amount of payment awarded in yesterday's judgment, are still taking place.

"The consequence of the judgment is, among other things, that the parties will return to the arbitration proceedings," says Anton Klopper, the group's executive for legal services.

"Telkom is studying the judgment and evaluating its options regarding the protection of its rights."

Heavy trading

While news of the court's ruling only emerged in the electronic media after midday yesterday, the adverse judgment caused a flurry of afternoon trading, as volumes rose to almost six million shares traded for the day.

This compares with daily averages, over the past few days, of under 1.5 million shares changing hands.

However, the closing price was not significantly affected - ending the day at R130, from the opening price of R135.

This translates to a R2.8 billion loss of market capitalisation, says a financial analyst who did not want to named. This figure worsened to R3.5 billion in early morning trading today, before recovering slightly at the time of publication.

The original value of the 2001 Telcordia claim, notes the analyst, was only $130 million. However, this was requested with 15.5% compound annual interest - meaning the claim stands, in 2006, at about $200 million or R1.5 billion. He expects the final arbitration will settle the matter at about R700 million.

History

In 1999, explains Klopper, Telkom and Telcordia concluded a contract involving the US company supplying a customer assurance and activation system to Telkom.

In 2001, Telkom terminated the contract. "We were of the view that Telcordia was in breach of contract since they did not supply the software products to the specifications as agreed," he says.

"Telcordia's attitude was that Telkom repudiated the contract by not accepting the software products. In March 2001, the dispute was taken to arbitration."

Telcordia claimed a significant amount and Telkom instituted a counter-claim. In 2002, the arbitrator gave a partial award to Telcordia. "No decision was made, at that time, in respect of the quantum of the claim."

In 2003, the Pretoria High Court reviewed and set aside the partial award. Telcordia then appealed that decision with the SCA, which overturned the High Court's decision.

"Thus we are back at arbitration where the quantum must now be argued."

Klopper says Telcordia has, in the past five years, twice attempted to enforce the arbitration award in the US, without success.

"Telkom had to defend those applications as well; we have spent a considerable amount on the defense of this claim."