On 1 February 2023, the Constitutional Court handed down a judgment that has a significant
bearing on contracts involving wholesale suppliers of petroleum products, and the retailers to
whom they supply them. It could also affect other parties dealing with fuel wholesalers and
retailers.
The case (Rissik Street One Stop CC t/a Rissik Street Engen and Another v Engen
Petroleum Ltd [2023] ZACC 4) arose from an operating lease between Rissik Street One
Stop CC (the retailer) and Engen. The operating lease contained a clause in terms of which,
if Engen did not intend to renew it, it would give the retailer at least 12 months’ notice, to give
the retailer an opportunity to sell its business before the operating lease expired and so
realise the “entrenched value” of the business. The operating lease contained two further
clauses which were apparently in conflict, one providing that Engen would not unreasonably
withhold consent to any sale the retailer entered into, and the other providing that it had an
absolute discretion whether or not to approve a sale or not.
Engen gave notice of its intention not to renew the operating lease but then refused to
consent to a sale concluded by the retailer, and retailer challenged Engen’s decision on the
basis that it was unreasonable. The retailer referred the dispute to the Controller of
Petroleum Products (the Controller) in terms of section 12B of the Petroleum Products Act,
120 of 1977 (PPA). Section 12B was enacted with a view to levelling the often, uneven
contractual playing field between fuel wholesalers and retailers, by providing that the
Controller may, on request by a licensed retailer alleging an unfair or unreasonable
contractual practice by a licensed wholesaler, or vice versa, require the parties to refer the
matter to arbitration. If the arbitrator is of the opinion that the alleged contractual practices
concerned are unfair or unreasonable, he or she must make such award as he or she deems
necessary to correct the situation. The arbitrator has the power to override the express
words of a contract.
During the time the arbitration was pending, the retailer’s operating lease expired and Engen
demanded that the retailer vacate the site. The retailer refused to do so, arguing that it was
entitled to remain in occupation while it attempted to sell its business, in accordance with the
operating lease. Engen applied to the High Court for an order evicting the retailer as its lease
had expired. The retailer in turn applied for an order that Engen’s eviction application was to
be stayed pending the outcome of the arbitration. The High Court granted the retailer’s
application. The High Court’s order was set aside by the Supreme Court of Appeal (SCA),
and the retailer appealed the SCA’s decision to the Constitutional Court.
The Constitutional Court upheld the retailer’s appeal and ordered that Engen’s application to
evict the retailer, on account of its operating lease having terminated, was to be stayed
pending the decision of the arbitrator as to whether Engen’s refusal to approve the
purchaser introduced by the retailer was “an unfair or unreasonable contractual practice”. In
the interim, Engen was obliged to allow the retailer to continue to conduct its business
according to the terms of the operating lease. The Constitutional Court held that the purpose
for which the 12-months’ notice requirement was inserted in the operating lease in the first
place was to allow the retailer time to sell its business and realise the “entrenched value”
(which the retailer estimated was about R6m - R8m). If the retailer was to be evicted, the
business would no longer be a going concern and its value would be lost.
The judgment confirmed that:
The express terms of an agreement between a fuel wholesaler and retailer may be overridden if an arbitrator appointed in terms of the PPA considers them to be unfair or unreasonable;
If the implementation of the express terms of an agreement between a wholesaler and retailer would render the outcome of a decision by an arbitrator ineffective, the implementation of the terms may be delayed pending the arbitrator’s decision. This would include action to terminate the agreement and the agreement can therefore effectively be extended while an arbitration in terms of section 12B of the Petroleum Products Act is pending.
Section 12B of the PPA only deals with contractual practices between licensed fuel retailers
and wholesalers. It does not deal with contractual relationships between wholesalers and
retailers and third parties (such as franchisors and suppliers of other businesses carried on
by a retailer on the site of a retail fuel outlet). Those agreements will continue to be in effect
and enforceable in accordance with their terms, notwithstanding the commencement or
outcome of any arbitration proceedings in terms of the PPA. However, the franchise and
supply agreements relating to other businesses that may be carried on the site are often
linked to the existence and validity of the agreement between the wholesaler and retailer,
and the wholesaler may sometimes even be a party to those agreements. For that reason, a
“contractual practice” by a wholesaler of petroleum products in relation to a retailer may
impact the interests of the franchisor or other party to such an agreement and that party will
need to consider the impact that the initiation and the outcome of an arbitration in terms of
the PPA may have on their own contracts and contractual relationships.
Ian Jacobsberg
