The supreme court of appeal this week threw out MTN South Africa’s appeal against a judgment ordering it to pay R11.4-million in damages, plus interest, to a dealer whose business was shut down in 2011 for breach of contract.

MTN had accused the dealer, Belet Industries, of dishonesty after an internal auditor arrived at one of the two stores operated by the company. The GM of the store instructed shop assistants to place 15 obsolete items considered unnecessary to the audit in black bags and keep them outside the shop until the audit was complete.

To MTN, this looked like an attempt to hide something from the auditor.

Based on the supreme court judgment, this seems to have been a rather expensive audit for MTN. The auditor may have been looking for something that wasn’t there to be found.

MTN claimed the 15 “hidden” items were grey goods that the shop was not authorised to stock in terms of the contract with the network provider, and that by placing them outside, the store was obstructing the audit process. MTN felt it could no longer trust the dealer and cancelled its agreement with Belet in September 2011. The breach was so severe, claimed MTN, that it could not be remedied, not even by the payment of money.

Different view

Belet had an entirely different view of what transpired.

The 15 items were either obsolete or defective and did not form part of the MTN audit. Nor were they hidden. They were simply placed outside the store so as not to be counted as stock.

“MTN dispossessed Belet of its business by placing guards outside both stores and refusing Belet access to the stores, taking back all stock, terminating the electronic access to the systems needed to trade and refusing to supply further stock,” reads the judgment.

MTN then notified the landlords of the two stores that it had terminated the dealer agreement, and substituted itself as the lessee until new dealers could be appointed.

In December 2011, Belet sued for damages in the high court in Johannesburg on the basis that MTN had breached or repudiated the dealer agreement. The high court awarded R11.4-million plus interest, which was based on the expected profit had Belet been allowed to continue operating for another 10 years.

MTN defended the action, claiming that in addition to the dishonesty of hiding unauthorised stock from the auditor, Belet had failed to record stock on a new management operating system that dealers were obliged to use.

The supreme court found several inconsistencies in MTN’s arguments, among them changing reasons for the cancellation of the dealer agreement.

When it came to the issue of damages, MTN argued that the second store at Jubilee Mall in Gauteng was not part of the agreement with Belet, which had both stores shut down as a result of the cancellation of the agreement. Belet argued that it should be compensated for the closure of both stores.

“On the undisputed facts the (high court) was correct in finding that MTN, having relied on the Jubilee Mall store being subject to the agreement, could not now, when sued, contend that it was not. MTN conducted two audits of this store. It would, but for the provisions of the agreement, have had no right to do so. It set performance targets for this store.”

MTN’s appeal against the earlier high court ruling was dismissed with costs.