Telstra Corp Pty Ltd v First Netcom Pty Ltd
[1997] FCA 630
•16 JULY 1997
CATCHWORDS
INTERLOCUTORY INJUNCTION - serious question to be tried - difficulty of assessing merits of substantive claims in interlocutory proceedings - whether one party’s refusal to pay bills to the other party is based on a genuine and bona fide dispute - balance of convenience - maintenance of status quo until final determination - whether one party should be compelled to continue to supply services to another when bills remain unpaid - what measures can be taken to secure future liabilities between the parties - whether threat to substantial portion of one party’s business justifies an injunction to maintain the status quo - whether comparable damage is likely to be incurred by continued non-payment of bills rendered
TELSTRA CORPORATION PTY LTD v FIRST NETCOM PTY LTD
NG 483 of 1997
EINFELD J
SYDNEY
16 JULY 1997
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No.NG 483 of 1997
GENERAL DIVISION )
Between:TELSTRA CORPORATION LTD
Applicant
And:FIRST NETCOM PTY LTD
Respondent
MINUTE OF ORDERS
The Court orders that:
Upon the respondent by its counsel undertaking to pay to any party adversely affected by the interlocutory injunction such compensation (if any) as the Court thinks just, in such manner as the Court directs:
(a)the applicant be restrained from communicating with the respondent’s customers in the terms or to the effect of the draft letter enclosed with a letter from the applicant to the respondent dated 6 June 1997, and
(b)the applicant be restrained until further order from discontinuing the supply of tariffed services to the respondent for the reasons set out in the said letter.
The applicant’s application for security for the undertaking as to damages be adjourned until:
(a)a substantive motion and affidavit(s) have been filed
(b)the applicant has had an opportunity to explore the respondent’s offer to consider a payment regime for future services,
(c)the possibilities for mediation or arbitration have been considered, and
(d)the Court can determine a sensible regime of case management for this case including its possible compulsory reference out to arbitration.
Costs reserved.
Note:Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules.
EINFELD J
SYDNEY
16 JULY 1997
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No.NG 483 of 1997
GENERAL DIVISION )
Between:TELSTRA CORPORATION LTD
Applicant
And:FIRST NETCOM PTY LTD
Respondent
REASONS FOR JUDGMENT
| EINFELD J | SYDNEY | 16 JULY 1997 |
History of the parties’ relationship
Following upon partial deregulation of the telecommunications industry in Australia, First Netcom Pty Ltd (First Netcom) has been in business as a reseller of telecommunication services within Australia since about the end of 1994. From about July 1995 all of First Netcom’s services were obtained from Telstra Corporation Ltd (Telstra), including local, trunk and international telephone calls. In other words, First Netcom became an intermediate provider to the general community of the full range of Telstra’s telecommunication services. Since some time in 1996 First Netcom has been obtaining its trunk and overseas facilities from Optus Communications Ltd (Optus) but as Telstra is at present the only viable direct source of local call services, it has continued to obtain those calls through Telstra.
In general terms, First Netcom seeks and enters into contracts with customers -- whether individuals, governments, public agencies and entities, unincorporated associations, or corporations -- for the provision of telecommunications services. Because of arrangements made to facilitate deregulation of the telecommunications market in Australia, First Netcom is able to obtain local calls from Telstra at a somewhat lower rate or tariff than is available to the public dealing with Telstra direct. It then offers to its customers a package of services on various terms and conditions including the price of the services provided. In this way the customer is thought to benefit both by reason of a reduced cost of calls and the provision of one single account for all telecommunications uses. Of course Telstra is in the retail market itself as a full competitor with First Netcom and other resellers.
To permit Telstra to bill First Netcom for the local call services which its customers use, First Netcom provides Telstra with certain basic information concerning its customers who are then placed on what is known as the “Agreed Accounts List” (AAL). It is the parties’ intention that First Netcom’s AAL record all its customers who have been notified to Telstra and who have not subsequently ceased to be its customers.
As with all its own direct customers, Telstra’s infrastructure equipment records the use of the telecommunications services made by the customers of all resellers or service providers, and at agreed intervals furnishes a bill or account to the resellers for the services used. The resellers then send bills to their customers on the basis of the contracts entered into between them, including the agreed price for the local calls supplied through Telstra’s infrastructure facilities. The customers then pay the resellers for the services supplied.
The arrangement between First Netcom and Telstra is that Telstra issues a separate monthly bill in respect of each First Netcom customer and sends it to the nominated city office of First Netcom. Under their agreement Telstra issues these bills in what is called a “paper format”, meaning that it is in the same form as bills issued by Telstra to its own direct retail customers. It is not clear how long after Telstra renders each bill to First Netcom that the bill becomes payable.
Since early in its relationship with Telstra, First Netcom has been alleging a number of systemic and other failures by Telstra in its contractual obligations. Among the allegations have been that Telstra failed or delayed to transfer customers to First Netcom’s AAL, that there were unauthorised additions to and deletions from First Netcom’s AAL, and most importantly that Telstra failed to provide accurate and timely billings. First Netcom has also alleged that a division of Telstra known as the “Winback Team”, set up to entice customers of its competitors back to Telstra, has used confidential information to approach First Netcom’s customers and seek to persuade them to transfer their services to Telstra direct. Another allegation is that in its attempts to target First Netcom’s customers in this way, Telstra has communicated misleading and deceptive information about First Netcom, including that it is First Netcom itself which is unable to provide accurate and timely billing and other services to the customers. As a consequence of these alleged failures on the part of Telstra, First Netcom claims that it has suffered significant loss and damage including a loss of customers enticed back to Telstra by the allegedly misleading representations.
After a certain point in time in 1996 which is difficult to identify precisely, First Netcom ceased to pay all or most of the bills it was receiving from Telstra in respect of services availed of by First Netcom’s customers. Accordingly, as at 30 September 1996, Telstra was alleging that First Netcom owed $10,104,707 of which accounts to the value of a little over $9,000,000 were identified as “disputes subject to resolution”. The significance of this classification is that, according to First Netcom, Telstra has at all relevant times operated an apparently unofficial disputes procedure with its service providers under which they notify Telstra when they dispute a bill including the grounds of the dispute, and for its part Telstra does not then require payment of the disputed amounts until the disputes have been determined. First Netcom says that in accordance with this procedure it has notified Telstra of a large number of disputed bills and the reasons for each dispute by reference to certain codes or categories under Telstra’s procedure protocols. The last dispute or series of disputes filed by First Netcom with Telstra was lodged following the December 1996 accounts.
Correspondence crystallising the current dispute
There has been a raft of correspondence between the parties or their solicitors:
The immediately relevant exchange commenced on 20 May 1997 when Telstra wrote to First Netcom as follows:
FIRST NETCOM’S TRADING RELATIONSHIP WITH TELSTRA - CREDIT ASSESSMENT
Telstra has conducted a review of the creditworthiness of First Netcom Pty Limited (‘First Netcom’).
The result of that review is that Telstra believes that First Netcom is not creditworthy.
Accordingly, under clause 6.3(a)(l) of the General Conditions Applicable to Telecommunications Services, Telstra requires First Netcom to provide security to Telstra for payment of charges incurred and unpaid by First Netcom in relation to telecommunications services. Telstra requires that the security have a value of at least 75% of the charges incurred and unpaid by First Netcom. According to Telstra’s records, charges incurred and unpaid by First Netcom up to 31 March 1997 total $13,863,962.
The security must be in place by 3 June 1997.
The security may take the form of a suitable bank guarantee in favour of Telstra. A form of bank guarantee which would be acceptable to Telstra is enclosed for your consideration. Alternatively, Telstra is prepared to entertain some other form of security if First Netcom wishes to offer it, so long as it is in a form and of a value satisfactory to Telstra and can be offered, negotiated and implemented by 3 June 1997.
In order to have the security in place by 3 June 1997, you should indicate by 27 May 1997 that First Netcom is prepared to provide the security sought. In addition, by 27 May 1997, you should provide Telstra with First Netcom’s response to our proposed form of security or, alternatively, First Netcom’s proposed form of security.
On 22 May 1997 First Netcom replied to Telstra’s letter:
First Netcom denies that it is not creditworthy.
Please provide copies of all documents constituting or evidencing the review which you say Telstra has conducted and the belief you say it has formed.
First Netcom denies that there are charges incurred and unpaid by First Netcom up to 31 March 1997 of $13,863,962.00. Further, given that this alleged debt is the subject of proceedings in the Supreme Court, and that you are aware it is being contested in those proceedings, it seems to me that your separately seeking to obtain security may well be improper. First Netcom’s rights in this regard remain reserved.
In any event, to the extend (sic) that clause 6.3 of the General Conditions may constitute part of any agreement between First Netcom and Telstra (which is not admitted) it is clear from the totality of the wording of that clause that it is not intended to apply to charges which have been incurred in the past.
In view of the foregoing, there is no occasion for the provision of the security you request.
If Telstra’s (sic) proposes to take any action against First Netcom in relation to, or arising from, First Netcom’s not providing the security sought, other than by way of proceedings, I request that you provide me sufficient advance notice so as to allow First Netcom to approach the Court if it is so advised. You should also consider that the taking of any such action may well greatly aggravate the loss and damage which Telstra has already caused First Netcom.
I note in passing that the form of Letter of Credit which you provide with you letter has Pacific Star Communications Pty Limited as the “Account Party”. I assume from this you are seeking security in identical terms from that company. This seems to me yet another indication of the commonality between the two proceedings which you and your legal counsel are at such pains to deny.
This letter was replied to by Telstra on 27 May:
It is evident from your letter that First Netcom declines to provide the security required by Telstra’s letter of 20 May 1997. If that is not the case, please advise me immediately and specify what security First Netcom agrees to provide and when that security will be in place.
I respond to the principal points in your letter below.
(i) Telstra rejects the legal arguments in your letter in relation to the proper construction of Clause 6.3 of the General Conditions Applicable To Telecommunications Services (“Clause 6.3”) and the effect of the proceedings commenced against First Netcom by Telstra.
(ii) Clause 6.3 does not state that, in order to require security from First Netcom, Telstra must establish any facts regarding the credit risk arising from Telstra’s current relationship with First Netcom. In any event, First Netcom cannot decline to provide security on the ground that First Netcom would like to review Telstra’s analysis of that credit risk. I further note that your letter provides no facts that would remotely support a conclusion that such a credit risk does not exist.
(iii) I also note your statement that First Netcom does not acknowledge that Clause 6.3 forms part of the contract currently governing the relationship between Telstra and First Netcom. Please confirm whether First Netcom takes the position that it currently is not bound by Clause 6.3 and state the reasons for any such position.
In summary, Telstra continues to require security from First Netcom in accordance with my letter of 20 May 1997. Telstra reserves its rights in respect of the other statements in your letter.
First Netcom’s reply was dated 4 June:
First Netcom’s Trading Relationship with Telstra
This letter responds to your letters dated 27 May, 1997 and, to the extent it refers to the payment sought in your letter of 20 May, 1997, to your letter of 29 May, 1997.
First Netcom does not accept that Telstra has established any proper basis for requiring either the security or advanced payment sought. These matters are addressed in my letter of 26 May, 1997 and I adhere to what I said in that letter.
In respect of the specific matters you raise in the earlier of the letters referred to, I reply as follows.
(i) Noted. We must agree to disagree.
(ii) It was your letter of 20 May, 1997 that, in effect, asserted that Telstra was seeking security pursuant to clause 6.3(a)(i) because it had conducted a review of, and formed a belief as to, First Netcom’s creditworthiness. It seems to me that, irrespective of the contractual position, Telstra could not, in good faith, pursue security in this way unless it had formed, on a proper basis, a bona fides (sic) belief that circumstances existed which justified its doing so. If you were to provide the documents evidencing the review, as I have requested, it may be that I could dispel any misapprehension’s that Telstra has about First Netcom’s creditworthiness.
(iii) If Telstra seeks to rely on clause 6.3, it is for Telstra to establish that it applies.
In a second letter dated 20 May, Telstra wrote to First Netcom:
FIRST NETCOM’S TRADING RELATIONSHIP WITH TELSTRA - CREDIT ASSESSMENT
Telstra has conducted a review of the creditworthiness of First Netcom Pty Limited (“First Netcom”).
The result of that review is that Telstra believes First Netcom is not creditworthy.
Accordingly, under clause 6.3(a)(ii) of the General Conditions Applicable to Telecommunications Services, Telstra requires First Netcom to pay in advance part of the charges which it is estimated First Netcom will or may incur in relation to the provision by Telstra of telecommunications services to First Netcom. Accordingly, Telstra requires the payment of $325,000 being 50% of the charges Telstra estimates First Netcom will or may incur in June 1997 in relation to the provision by Telstra of telecommunications services to First Netcom.
The payment of $325,000 must be made to Telstra by 30 May 1997.
Telstra foreshadows that it may require similar advance payments in the future.
First Netcom’s reply was dated 26 May:
First Netcom’s Trading Relationship with Telstra
This letter refers to the second of your letters of 20 May, 1997 and to recent discussions and correspondence with Brett McCracken of ISBU concerning Telstra’s failure to provide bills.
In my letter of 22 May, 1997, responding to your first letter dated 20 May, 1997, First Netcom denied that it is not creditworthy. That denial is reiterated. Telstra has, so far as this Company is aware, no basis to assert to the contrary.
I am now forced to the unavoidable conclusion that Telstra is embarked on a calculated campaign to undermine (I should say, “further undermine”) First Netcom’s financial position. I base this on the following:
(a)your attempt to require something in excess of $10 million security in respect of Telstra’s disputed debt claim which attempt is, as I have already indicated in previous correspondence, at best, of doubtful propriety given that the claim is already the subject of litigation;
(b)Your present unjustified attempt to require advance payment of a substantial sum based on your estimate of charges First Netcom may incur (which, incidentally, appears to take no account of the ongoing errors in, and late provision of, billing information by Telstra); and
(c)Telstra’s apparently capricious failure to supply billing information in April (thus further undermining First Netcom’s capacity to recover charges from its own clients), as referred to in the conversations and correspondence with Brett McCracken, and as detailed below.
All this must be seen in the context of the egregious harm Telstra has already caused First Netcom by its persistent failure to provide accurate and timely billing since the inception of our business relationship. As had previously been indicated, the Company’s estimate of that loss and damage in January this year was approximately $37 million. Telstra’s failure to adequately address the underlying billing recovery process, notwithstanding our repeated requests and suggestions in this regard, will have already significantly exacerbated that loss. Any attempt to further require provision of security or payment in advance, or any action purportedly taken in consequence of their not being provided, will only further aggravate the situation.
I reiterate my request for advance notice of any such action if it takes any form, other than being brought by way of proceedings.
So far as the April billing is concerned, the situation is as follows. Telstra has simply failed to provide bills for in excess of 2,300 customers due for delivery in the first half of April. No alteration has been authorised or requested in respect of the billing profiles of these accounts, including in relation to billing frequency and bill production date. It appears that the best Telstra can offer is to provide the bills in about a month’s time. In other words, approximately two and a half months late. It also appears that Telstra may, unilaterally, have put back the bill generation date in respect of these customers.
Could you please, as a matter of urgency inform me:
(a)whether Telstra has altered in any way the billing profile of the accounts concerned (they are identified in the email sent by Wayne Wilson to Mr McCracken on 28 April, 1997); and
(b)when the bills concerned are to be supplied.
Without prejudice to First Netcom’s rights which may have already accrued, I put you on notice that if I do not received (sic) a satisfactory response to this inquiry, First Netcom will take such action as it is advised, which may well include approaching the court for interlocutory orders to protect its position in this regard.
Telstra replied on 29 May:
First Netcom’s Trading Relationship with Telstra - Request for Payment in Advance
I refer to your letter dated 26 May 1997, which responds to Telstra’s request for payment in advance.
Telstra rejects any suggestion that it is acting in a unjustified or improper manner in requiring First Netcom to pay in advance part of the charges which Telstra estimates First Netcom will or may incur in June 1997, as contemplated by Clause 6.3(a)(ii) of the General Conditions applicable to Telecommunications Services (“Clause 6.3”). Telstra is simply exercising its contractual right to do so.
Nothing in your letter, including your comments concerning the April billing information, provides First Netcom with any justification to refuse to make the payment sought in my letter of 20 May 1997. In those circumstances, Telstra expects First Netcom to make part payment in advance in accordance with my letter of 20 May 1997.
In respect of your statements concerning a portion of First Netcom’s April billings, as a result of an internal billing audit by Telstra, a number of First Netcom accounts, for which bills were due to be produced for the period 4 to 21 April, were “pended”. This means that while charges incurred for the accounts were recorded in Telstra’s systems, bills for the period 4 to 21 April were not produced and forwarded to First Netcom in April. All relevant charges not billed to First Netcom for the period 4 to 21 April were, however, subsequently included in the bills produced and forwarded to First Netcom in relation to those accounts in May 1997. Accordingly, first Netcom has been billed for all charges incurred in relation to the accounts in question.
In response to paragraph (a) and (b) (sic) on page 2 of your letter, I say as follows:
(a)Telstra has not altered the billing profile of the accounts concerned; and
(b)Since First Netcom has already received bills in May 1997 that incorporate the charges that were not billed during April, there appears to be no purpose served by producing additional bills for the period 4 to 21 April.
Your letter also appears to mischaracterise my letter of 20 May 1997 requiring security. My letter of 20 May speaks for itself.
Telstra does not purport to comment at this time on your unsubstantiated claim concerning losses incurred by First Netcom. Telstra reserves all its rights in respect of the matters referred to in your letter.
This letter was replied to by First Netcom on 2 June in a letter marked ‘WITHOUT PREJUDICE’:
Your explanation as to why a portion of our April billings were not received is directly at odds with the advices made by your Mr Brett McCracken, and I seriously suggest that you two sit down and get your story straight before you are cross examined on this issue in the courts.
Mr McCracken’s advice, when we confirmed non receipt of the April bills, was that there was no problem and that we had actually been billed, hence Telstra could give no particular reason why those bills had not been received. Mr McCracken advised us that for this reason, and the fact that we had not received bills, Telstra would undertake to reprint the missing April bills. We in fact specifically queried whether the bills had been placed in “review”, and were advised by Mr McCracken that this was not the case. The fact that you now contradict his statements is a matter of concern, and we are suspicious as to the motivation.
We see this use of the “bills in review” program as a further example of intimidation by Telstra, and suggest that you refer to the speech made by your CEO, Mr Frank Blount, at the recent ATUG conference, when he said (and I quote) “The senior management of Telstra does not, and will not, condone intimidation as an element of any of the company’s relationships at any time for any reason”.
We in the service provided (sic) industry would be delighted to hear that the “new Telstra” that Mr Blount refers to will herald in an area of trust in the carrier, however our experience to date with the commercial thuggery and intimidation used by Telstra in its dealings with our industry gives us little hope for improvement.
I note further in your letter you do not guarantee Telstra will not once again place bills into review “as a result of an internal audit”, and therefore cannot guarantee timely receipt of billing information by First Netcom. Perhaps you would like to provide these undertakings now.
Telstra replied, in a letter also ‘WITHOUT PREJUDICE’, on 10 June 1997:
The correct position in relation to the April billing information is as set out in my letter to you dated 29 May 1997. For your information, the “pending” of bills is not the same as placing “bills in review”. The placing of “bills in review” is a result of Telstra’s billing systems automatically identifying abnormal call charges on a bill and withholding that bill for further investigation. An account is “pended” as a result of a manual internal audit which means that bills for that account will not be produced during the period the account is “pended”. Mr McCracken was correct when he advised you the bills were not “bill in review”. There has been no contradiction between my advice to you and Mr McCracken’s advice to you in that regard.
As to the balance of your letter, I reject any suggestion that Telstra has engaged in any type of “intimidation”. Further, I have responded to the matters on which you sought clarification in my letter of 29 May 1997. No undertakings were sought in the terms which you now suggest nor would they be required or appropriate. In the circumstances, First Netcom is in no position to require guarantees concerning the provision of services to it.
10.First Netcom’s reply to this letter was dated 11 June and was also marked ‘WITHOUT PREJUDICE’:
1.Thank you for your further explanation of the so called “Pending” of bills. Perhaps you can now advise why our bills were “pended”, if indeed this was a manual exercise, why Mr McCracken was not aware of this. Mr McCracken was approached on a number of occasions and asked for an explanation as to what was happening with these bills, and his answer was that he did not know, and that the bills had been sent out, and that he would arrange for duplicate bills to be issued. Surely if this was a manual system, and the number of bills in our grouping were “pended” to the extent they were, Mr McCracken would have been aware of this as our Account Manager. If he wasn’t, would you like to comment on the organisational arrangements that allow this to happen.
2.The fact that you do not seem to believe that Telstra has been involved in a systematic intimidation of this company specifically and the service provider industry general (sic) does you no credit. There is ample evidence to show that Telstra either by direct planning or intentional acts of omission, has done what it could to ensure that the Service Provider industry was effectively “nobbled” prior to deregulation. That Telstra has done a good job at removing any level of competition is undoubted, and there is ample evidence that will be provided in the courts in due course to show what has been done.
This correspondence, as time-consuming and unrewarding in resolving a single disputed matter as it was, represents only a small portion of the party and party exchanges evidenced in the proceedings thus far. I have set it out in this selective way to illustrate in the words of the parties what the nature and substance of their disputes are. I have included the letters marked ‘without prejudice’ because as I read them they are not truly without prejudice in any relevant sense at all.
11.Inserted into this panoply of words was a letter dated 6 June 1997 in which Telstra brought these disputes to a head:
Telstra Corporation Limited - Discontinuance of Services to First Netcom Pty Ltd
This letter provides formal notice to First Netcom of Telstra’s intention to discontinue all tariffed services to First Netcom on 8 July 1997.
Telstra relies, without limitation, on clause 7.3 of Telstra’s General Conditions Applicable to Telecommunications Services as entitling it to discontinue the provision of all Tariffed Services to First Netcom on any of the grounds that payment by First Netcom of accounts for services is overdue, the provision of security by First Netcom is overdue and First Netcom has breached terms and conditions of the Tariff. Telstra relies, without limitation, on all or any of the following:
1.By letter dated 19 February 1997, Telstra demanded payment by First Netcom within 7 days of the sum of $3,639,327 being an amount payable to Telstra in relation to a number of accounts which First Netcom sought to dispute on the ground described as “invalid tariff code”. That amount has not been paid.
2.By letter dated 12 March 1997, Telstra demanded payment by First Netcom within 7 days of the sum of $1,718,633 being an amount payable to Telstra in relation to a number of accounts which First Netcom sought to dispute on the ground described as “insufficient details”. By letter dated 2 April 1997, Telstra revised that amount and demanded immediate payment by First Netcom of the sum of $1,664,845. That mount has not been paid.
3.First Netcom has failed to pay the sum of $3,168,633 in respect of accounts for services provided by Telstra from 1 October 1996 to 28 February 1997. That sum is overdue and has not been paid.
4.By letter dated 20 May 1997, Telstra sought security from First Netcom in respect of charges incurred by First Netcom and which remain unpaid, which security was to be in place by 3 June 1997. That security has not been provided.
5.By letter dated 20 May 1997, Telstra required from First Netcom, by 30 May 1997, payment in advance of part of the charges which Telstra estimates First Netcom will or may incur in June 1997, in the amount of $325,000. That amount has not been paid.
First Netcom is also notified that, too minimise any disruption in relation to the provision of services to First Netcom’s customers, Telstra intends to inform those customers, on 20 June 1997, of the intended discontinuance. A form of the proposed notice to customers is enclosed.
DRAFT
THIS LETTER CONTAINS IMPORTANT INFORMATION AFFECTING
YOUR TELEPHONE SERVICES
PLEASE READ IT CAREFULLYJune 1997
Name
Address
Contact DetailsDear [Sir/Madam]
Your telephone service from First Netcom Pty Limited
We understand that your telephone service is currently supplied to you by a service provider, First Netcom Pty Limited, which “resells” to you telecommunications services supplied to it by Telstra.
Effective from 8 July 1997
Telstra intends, from 8 July 1997, to cease to supply First Netcom Pty Limited with telecommunications services for re-sale to you.
This would mean that from 8 July 1997 your current telephone service would no longer be supplied by First Netcom Pty Limited
You choose new supplier
In that event, you would need to choose one of the general carriers (Telstra or Optus) or a new service to supply your telecommunications services from that date. You may even choose to acquire your network access and local calls from one supplier and your long distance calls from another.
For example, if you would like to choose Telstra as the supplier of some or all of the telecommunications services you currently obtain through First Netcom Pty Limited, you can proceed in one of two ways.
OPTION 1: You can complete the attached Customer Transfer Form and return it to Telstra by 4 July 1997
OPTION 2: You may simply continue to use your telephone service as you require after 8 July 1997.
In that event, you will be taken to have accepted this offer of Telstra to supply telecommunications services to you. Telstra will reflect this change in its records and allocate an appropriate pricing plan to your accounts for services rendered after that date. You can change that discount plan, if you wish.
Choosing another supplier
If on the other hand you wish to choose a carrier or service provider other than Telstra to provide some or all of your telecommunications services, you should contact the relevant organisation to determine what you are required to do to have your services supplied by that organisation. You should then contact Telstra on the number set out below and advise us of your decision by 4 July 1997.
Telstra will then effect your transfer to the other supplier.
In the meantime, Telstra intends to protect your interests by continuing your telephone service from the date of discontinuance of services via First Netcom until the transfer to your new supplier is completed. Telstra will charge you according to an appropriate pricing plan for your use of telecommunications services during that period. If you do not want your services to continue during that period, please tell us immediately by calling the number set out below.
What to do now
· Decide how you want to acquire telecommunications services from 8 July 1997 and take the steps described above.
· In the meantime, you should pay accounts received from First Netcom for services provided by it.
Telstra has established a dedicated Help Desk to respond to any questions you may have and to minimise any disruption the change in the supply of your telecommunications services may cause you. The contact number is [1800 ]
Yours sincerely
[Name]
[Title]12.Telstra’s solicitors Mallesons Stephen Jaques (Mallesons) added two further justifications for Telstra’s proposed discontinuance of services in a letter somewhat oddly described as a “Confidential communication” and dated 18 June 1997 to First Netcom’s solicitors Freehill Hollingdale & Page (Freehills):
1.First Netcom has failed to pay the sum of $663,265.36 in respect of accounts for services provided by Telstra for the month of March 1997. That sum is overdue and has not been paid.
2.First Netcom has failed to pay the sum of $313,485.93 in respect of accounts for services provided by Telstra for the month of April 1997. That sum is overdue and has not been paid.
There is no presently relevant “confidential” material in that letter such as should prevent its extraction here.
Legal proceedings between the parties
In July 1996 First Netcom commenced proceedings against Telstra in the Equity Division of the Supreme Court of New South Wales seeking an order that Telstra provide it “with sufficient billing information to enable it to bill each of [its] clients”. It also claimed damages, interest and costs. The summons was served and Telstra entered an appearance but at Telstra’s request the parties agreed not to advance those proceedings so as to enable the disputes between them to be the subject of mediation. There followed extensive without prejudice negotiations extending to quite recently but no mediation has taken place. First Netcom says that it is willing to mediate the disputes. Telstra appears to have lost or moderated its enthusiasm for mediation. I am not aware of the fate of these proceedings.
On 23 April 1997 Telstra commenced proceeding number 50090 of 1997 in the Commercial Division of the Supreme Court of New South Wales against First Netcom claiming the sum of $13,863,962 being charges allegedly incurred and unpaid up to 31 March 1997. On 18 June 1997 First Netcom filed its defence and cross claim to this claim. By this time there had already been three directions hearings in the Commercial Division, namely on 9, 16 and 21 May. Then on 19 June, when the cross claim was first sighted by the Supreme Court, it was seen that First Netcom was relying on a large range of causes of action including substantial breaches by Telstra of their contract, as well as negligence, misleading and deceptive conduct, unauthorised use of confidential information, unconscionable conduct, fraud on power, misuse of market power and what is described as discrimination under the Telecommunications Act. Damages were sought in an unparticularised sum although an affidavit of First Netcom’s solicitor earlier quantified the loss at approximately $37,000,000. Importantly for present purposes, the cross claim sought interlocutory injunctions until the determination of the proceedings or further order to restrain Telstra from discontinuing the supply of telephone services to First Netcom and from communicating with First Netcom’s customers in the terms or to the effect of the draft notice enclosed with Telstra’s letter to First Netcom of 6 June 1997.
Because of perceived jurisdictional problems for the New South Wales Supreme Court in dealing with all the issues raised by the cross claim, the case was cross vested to this Court on 19 June 1997 on which day an urgent hearing was commenced on the application for interlocutory relief. In order to enable the Court to hear and give judgment on the matter, appropriate undertakings have been given to extend the time for the sending out of the letter until judgment has been given. Of course the central issue is not the proposed letter but the intended discontinuance of Telstra’s local call services to the letter’s addressees if they remain First Netcom’s customers.
The evidence
There was a considerable quantity of evidence called on the application for interlocutory injunctions. There is no dispute that the parties reached agreement in 1995 for Telstra to supply telecommunications services to First Netcom. It is also agreed that in the intervening period Telstra has been supplying considerable quantities of telephone calls and other facilities to First Netcom’s customers even though in the last 12 months or so these services have been limited to line rental, maintenance and local calls. In fact it appears that First Netcom’s customers are incurring amounts in the order of $600,000 to $650,000 per month for these services.
For a considerable time First Netcom has been disputing almost every account so that since at least October 1996 it has paid Telstra only about $25,000 per month, or less than 4% of total billings, whilst collecting from its customers of the order of 40-50% of those sums. Since January 1997 no bills have been lodged for dispute but in general payment has not been made. First Netcom claims that it is not bound to pay on two main grounds, first, that the bills are still quite inadequate to identify actual amounts owing with sufficient accuracy and precision to be able to be checked and verified to the customer, and second, that its cross claim so far exceeds Telstra’s claim against it as to provide no requirement for payment.
As indicated by the correspondence earlier extracted, Telstra considers that it should not be required to continue to provide services to a company which owes it such a large sum of money, and which is not prepared to provide security for past or future liabilities, despite recovery from its customers of a sizeable proportion of the moneys owed. In Telstra’s opinion First Netcom is also unable and unlikely to be able to pay its future liabilities. The inference if not express suggestion by Telstra is that the real reason First Netcom is not paying is not because of the inaccuracies or inadequacies in the billing or because of the cross claim but because it does not have the funds to pay.
An internal memo from the credit manager of Telstra’s division known as the Industry Services Business Unit-Finance to the General Manager of that division dated 20 May 1997 -- the same day on which Telstra sent its two letters to First Netcom seeking security and part payment in advance -- is instructive in this regard. In this memo the view is expressed that First Netcom possesses neither “the skills, expertise, financial backing, operational processes or performance record in respect of payments to be classified as an acceptable risk in either the short or the long-term”. The memo identifies amongst other things that First Netcom is undercapitalised and that it has failed to participate “in a positive proactive manner to develop sustainable long-term financial and operational processes”. The memo claims that Telstra’s analysis is supported by independent external creditworthiness assessments conducted by Price Waterhouse in October 1996 which are said to have assessed First Netcom as “a high credit risk to Telstra”. It was this memo that recommended that security be obtained from First Netcom and that there be a requirement for pre-payment of estimated charges to be incurred in future. In contrast to the first of the letters of 20 May seeking security for 75% of the claimed unpaid charges to 31 March 1997 of $13,863,962, the memo suggests that security be sought for the total amount owing as at 20 May 1997.
All of this memo together with the two letters of 20 May and the subsequent correspondence indicate that Telstra fears that it will not be paid either the past amount or future charges. It was in the light of the refusal and failure of First Netcom to offer or provide either of these requests that led to the notice to discontinue services to First Netcom of 6 June and the proposed letter to First Netcom’s customers. As Telstra’s letter of 6 June and Malleson’s letter to Freehills of 18 June indicate, the threat to discontinue also relies upon First Netcom’s failure to pay several other amounts as requested.
Submissions of parties
Telstra argued for the Court’s acceptance that the unpaid amounts are not seriously disputed. It said that it is no part of the agreement between the parties that disputed bills or parts of bills can justify the non-payment of other undisputed bills or parts of bills. Moreover, it claimed that First Netcom is using the dispute procedure as part of a deliberate plan to conserve its available money. Telstra cited blanket disputation of whole lists of unpaid bills, rejection of entire bills because of an error in one item, refusal to honour the due date for the payment of a single bill, belated raising of disputes long after the original accounts were raised, and refusal to pay even the items actually collected from customers which are acknowledged to be justified. Telstra thus contended that no seriously triable issue was raised as to any or any significant part of the amount claimed. As to the cross claim, Telstra contended that much of it was bogus and in any event that damages would provide an adequate remedy for any causes of action proved.
First Netcom contended that discontinuance and the proposed letter would themselves prove all or some of the causes of action relied on in the cross claim. It said that Telstra submitted the dispute to the Court for resolution and it should not be allowed to have the dispute effectively determined by an extra-curial summary procedure without waiting for the judicial determination that Telstra itself is seeking. First Netcom contended that the genuineness of the dispute has been clearly proved and that it is not irrelevant that Telstra is in current dispute with eighteen out of twenty service providers. Thus Telstra should be found to be threatening discontinuance as a means of pressurising First Netcom to pay or even to drive First Netcom out of the retail market for telecommunications services altogether. This is said to be driven by the last phase of deregulation of the industry on 1 July 1997 which opened the market to full competition.
The legal position
In order to obtain the interlocutory relief it seeks, First Netcom must show that there is an arguable or triable issue that Telstra is not owed the money it seeks or any reasonable proportion of it, or that it does not have a legal or equitable right to discontinue services as threatened. To the extent that First Netcom’s arguments rely upon the cross claim, it must also show that there is an arguable issue that Telstra is in breach of at least some of the obligations upon which the cross claims for damages are sought. It must also raise a serious question for trial that the damages sued for are of the order of the amount quoted or at least that the damages might exceed the amount to which Telstra might be held to be entitled. If these issues or any of them are raised, then the case must be one in which it is appropriate for the Court to exercise its discretion to grant the equitable relief sought. The usual expression is that the balance of convenience must favour the orders being made. It is customary to consider this matter in the context of maintaining the status quo pending the hearing of the action.
Conclusions
It was not in truth disputed in argument that by clauses 6.1, 6.2 and 6.3 of Telstra’s General Conditions Applicable to Telecommunications Services (the General Conditions), Telstra is both entitled to sue for the unpaid costs of services provided to First Netcom and to seek security for these payments. It is also entitled to seek and require pre-payment of future charges likely to be incurred.
Moreover, clause 7.3 of the General Conditions permits discontinuance for non-payment of accounts or security for payment:
(a)Telstra may discontinue provision of a Tariffed Service:
(i) if the customer becomes bankrupt or insolvent.
(ii) if, whether or not the Tariffed Service has already been suspended or restricted under clause 7.2, payment of an account or provision of security, for the service or for any other telecommunications service provided to the customer, is overdue.
(iii) if the customer breaches any term or condition of the Tariff.
No part of the defence and cross claim is inconsistent with Telstra’s right under this clause 7.3 to discontinue the services concerned. Indeed it appears to be implied from paragraph 4 of the defence amongst other places that First Netcom has agreed to be bound by the General Conditions. Prima facie it therefore cannot be disputed that Telstra is contractually entitled to discontinue the services concerned for non-payment of accounts. In other words, the discontinuance is or would prima facie be the exercise of a contractual right.
It is difficult to see from the evidence how the $37 million damages suggested for the cross claim could be in that order especially as First Netcom seems to have been trading at a loss throughout the whole of the period in which they have been in dispute with Telstra.
However, a major question raised by the interlocutory application is whether discontinuance would be a bona fide and proper use of the contractual right, whether it would in the circumstances represent a prejudgment of the issues to be raised in the litigation which Telstra itself commenced, and whether it would be an action in breach of other legal obligations and statutory enactments. In other words, First Netcom’s application for interlocutory relief raises the question whether Telstra’s use of the discontinuance weapon is a legitimate exercise of its rights and powers in the light of its summary effect on First Netcom’s business and profitability. For there seems little doubt and little dispute that discontinuance of its local call service would cause irreparable injury to First Netcom in that it may be fatal to its reputation as a worthy and genuine operator, and thus its retention of its customers’ other business in the trunk and international markets and its capacity to secure additional customers. The evidence did not satisfy me that there was a reasonably available alternative source of supply of local calls on commercial terms to Telstra.
So far as concerns the proposed letter, a real question arises as to whether the proposal to address First Netcom’s customers direct is a legitimate act on the part of Telstra at all, let alone that it is a necessary step in pursuance of its contractual rights to terminate its services to First Netcom. Although Telstra has asked First Netcom to supply a list of names and addresses of its customers, Telstra admitted in evidence that it did not need this list and would be able to send out the letter to the customers without any assistance from First Netcom at all. Accordingly an argument arises as to whether this would be a use by the retail and promotions arms of Telstra of confidential information received for another purpose by another section of its business, whether this and the proposed discontinuance would be a breach of Part IV of the Trade Practices Act, and in any event whether it is misleading in its content. A seriously triable question arises as to whether it is legally appropriate to mix Telstra’s selling of its own claimed qualitative excellence in services with its taking action against a retail competitor under the terms of a contract to supply basic communications facilities over which it has monopolistic control.
Without setting out a full analysis of the figures presented, there seems little doubt, from my reading of the figures and the evidence of First Netcom in relation to them, that prima facie Telstra will be found entitled to some moneys in its principal claim. There is too little evidence at this stage to assess the legitimacy or likely success of all the disputes raised by First Netcom in this connection, not least because the basic material in the form of Telstra’s raw data to justify the charges made was not produced and does not appear to have been examined or analysed by either side. By the same token, sufficient doubts have been raised about some of the charges as to suggest that prima facie Telstra will not recover its entire claim. Leaving aside the cross claim altogether therefore, Telstra’s contractual rights must themselves be assessed against the uncertainty of the amount of the debt it will be able to prove, and whether there are not other legal and equitable blockages to their use of the discontinuance option.
Telstra’s conclusions about First Netcom’s creditworthiness struck me as more argumentative than probative. The essential argument is that First Netcom’s financial situation is such that it should not be permitted further credit facilities. Despite Telstra’s denials, it seems to me that this is in substance if not in form an assertion of insolvency, or at least a present inability or unwillingness due to financial stringencies to pay its debts. This issue requires full litigation, not summary conclusions on an interlocutory basis.
First Netcom has decided that its problems with local calls are such that it will not be offering them to new customers although it intends to continue to supply existing customers. Hence it can be expected that its current monthly requirement of calls of upwards of $600,000 will not be exceeded. If Telstra’s current assessment of debt of in excess of $13 million is correct, it can only rise to around $20 million if not one item is paid in the next twelve months by which time the litigation should be completed.
In fact that set of speculations is unlikely to be realised so adversely to Telstra. With commonsense and application, the case should be completed in less than twelve months. In fact the case cries out for early mediation or arbitration. Furthermore, First Netcom has been willing to pay some sums and submitted in this case that if future charges alone were addressed, it would favourably consider a sensible payment regime. If First Netcom continues to be unable to bill its customers efficiently and accurately, some may well cease to avail themselves of its services. If First Netcom continues to lose money on its local calls service, it seems unlikely to be willing to continue to supply them for long.
10.As I see the evidence, neither party comes to this litigation free of cloud or at least the absence of evidence on essential matters to be proved. I can well understand Telstra’s concerns in the matter but at such an early stage of the case, it is quite inappropriate to foretell or compel the result of highly contentious and substantively disputed claims by permitting the status quo to be disturbed, in this case by the summary removal of a significant part of the business of a commercial enterprise. Telstra will lose further funds if First Netcom continues not to pay and Telstra at present declines arbitration of the disputes. But First Netcom may be forced out of business altogether if an injunction is not granted. This situation bespeaks only one possible result of these interlocutory proceedings.
11.The Courts are normally reluctant to interfere in commercial marketplace competition between two fierce competitors more than is absolutely essential to ensure that the law and fair conduct are being followed. In this case, there are two other concerns. One is that neither party has been entirely frank about its motives and the facts. The second is the possibility that either way an injunction -- or the refusal of an injunction -- will impact on the proposed public float of shares in Telstra foreshadowed by the Telstra (Dilution of Public Ownership) Act 1996 on which, oddly enough, no submissions were made and I have therefore ignored. This case thus presents as one where an injunction should go to preserve the current situation until the disputes can be determined.
Undertaking as to damages
First Netcom has offered the usual undertaking as to damages, meaning that it undertakes to pay any party adversely affected by the interlocutory injunction such compensation (if any) as the Court thinks just, in such manner as the Court directs.
Telstra has sought security for the undertaking in an unstated amount which First Netcom has declined, principally on the ground that Telstra is unlikely to suffer loss or damage from the injunction. This dispute has hardly been argued and there has been no evidence on the subject except incidentally. Further, security for the undertaking is similar to the security for future charges sought in the correspondence and discussed earlier. In my view, if this matter is to be argued at all, it should be by substantive motion and evidence. I will therefore adjourn the issue of security until:
(a) a substantive motion and affidavit(s) have been filed
(b)Telstra has had an opportunity to explore First Netcom’s offer to consider a payment regime for future services,
(c)the possibilities for mediation or arbitration have been considered, and
(d)the Court can determine sensible case management for this litigation including its possible compulsory reference out to arbitration.
Costs
The costs of this application will be reserved until the issue of security and the further management of the case have been determined.
| For the applicant | Mr Henric Nicholas QC and Ms Lucy McCallum instructed by Mallesons Stephen Jaques, Solicitors |
| For the respondent | Mr Roger Gyles QC and Mr Stephen Finch, instructed by Freehill Hollingdale & Page, Solicitors |
| Dates of hearing | 19, 20 and 26 June 1997 |
| Date of judgment | 16 July 1997 |
0
0
0