It is believed JCDecaux has been pressing to remove the payphones from the tender, arguing the City of Sydney holds no jurisdiction over them.
Sources said the face-off between JCDecaux and the City of Sydney has reached a stalemate and the only body that can decide are the courts.
Meanwhile, oOh!media, a rival bidder in the process, is arguing the City of Sydney is devaluing the tender if the payphones are not included because it would remove the number of available panels and it would allow a close rival to have prime real estate within the CBD. Sources said oOh!media is considering its legal position and believes the tender terms have favoured JCDecaux.
A legal battle over the process would be a messy outcome and could lead to the tender needing to be sent out a third time. The current process is already the second time bidders have been forced to submit expressions of interest.
Rival bidders have long been concerned about the JCDecaux payphone deal with Telstra, even before oOh!media bought Adshel for $570 million and JCDecaux acquired APN Outdoor in the middle of last year.
JCDecaux is believed to be arguing the upgraded digital panels with the payphones fall under the federal Telecommunications Act criteria for low-impact facilities (LIF), which are exempt from state and local council regulation. The act allows telcos to install payphones without council approval.
City of Sydney is understood to be arguing the new panels do not meet the criteria for LIF and therefore fall under its jurisdiction. JCDecaux has held the City of Sydney contract since 1997 and is contracted until next year.
City of Sydney, JCDecaux and oOh!media declined to comment.
In September, the City of Melbourne indicated it was considering legal action against Telstra over its upgraded payphone network. The council indicated it was concerned about much larger digital advertising panels in 120 locations and believed each billboard could earn $8000 in revenue a week.