Telkom still confident in R5 billion claim

Telkom this week launched a High Court action to overturn the decision of an arbitrator which could cost it up to R1.3 billion, two-thirds of its net profit for the last financial year.

Despite losing the first part of its battle against American software company Telcordia, Telkom is still confident its own claim of $495 758 714.80, or around R4.9 billion, has a better chance of success.

However, even if Telkom`s court action is successful it faces at least two more years of uncertainty until the dispute is resolved.

"The parties will revert to square one and we will have to appoint another arbitrator," says Telkom`s legal department group executive Mandla Ngcobo. He expects the current High Court action to only be concluded around the middle of next year, with a further two years of arbitration to follow that. Either party could still also revert to the courts at any point.

The dispute between the companies stem from the iCare/FlowThru project, a multibillion-rand software system Telkom commissioned in 1999. Telcordia was the primary contractor, responsible for overall project management as well as the FlowThru part or back-end of the system.

The entire project was to deliver what Telkom describes as "a fully integrated end-to-end customer activation and assurance system" and was at the time punted as an important part of the company`s drive to better service.

However, when the first phase of the software was delivered in June 2000, Telkom was not impressed, saying it identified 800 instances of missing functionality. According to Ngcobo, an agreement was struck: Telkom would pay only 60% of the money due to Telcordia (around $97 million), with the rest to be paid when the next phase was delivered in December and proven to have fixed the problems.

Telkom contends that the agreement required a prior demonstration that, to its satisfaction, it was getting what it paid for. It says the software failed that test, and the contract was terminated.

However, by that time the project had developed some quirks of its own, and that lies at the heart of the dispute. Telkom says the software was measured against a "statement of compliance" contained in the contract and failed. Telcordia says the true measure was a "feature specification description" developed by technical teams, and passed.

The matter was taken to arbitration, which has now been partially completed, but Telkom says the process was flawed and stops just short of accusing the arbitrator of incompetence.

"There were irregularities in the arbitration and a breach of duties by the arbitrator," says Ngcobo.

In a finding released in late September, the arbitrator dismissed Telkom`s claim for damages and found that Telcordia had been hard done by. Further hearings would determine the amount Telkom owed the software maker.

But Ngcobo says the arbitrator ruled on matters in which Telkom was not heard, exceeded his powers, and made unfair or incorrect findings.

On these grounds the company is now asking the High Court to set aside the ruling, rendering the entire process up to now void.

If it succeeds, a new arbitrator will be appointed and the hearings will start from scratch, albeit with a considerably more careful arbitrator.

But if the court does not find irregularities in the process to date, it will face an annoyed arbitrator who will consider the damages it should pay. Although the Telcordia claim is for $130 million, the award may be considerably smaller.

Meanwhile, Telkom, once burnt, is completing the project with an in-house team. Since January, a team of 400 operational support systems staff has been delivering segments of the whole and it expects the aims of the original project to be achieved during 2005. A large part of the Telkom counter-claim is made up of the damages it says the delay has caused.

If nothing else, the experience has taught it circumspection, the company says.

"We now handle contract negotiations differently and our procurement department interfaces with the lawyers," says Ngcobo. It has also developed the habit of demanding performance guarantees and pays close attention to the arbitration clauses in contracts.

However, these measures will not help it to avoid the contingent liability it will have to disclose as it lists early next year, at an amount analysts say is sure to make nervous telecommunications investors all the more wary.

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