15 Feb 2017

CONSTITUTIONAL COURT JUDGMENT CHANGES THE FACE OF THE PETROLEUM INDUSTRY

Practice Area(s): Litigation |

At the end of last week, the Constitutional Court, in the judgment of Business Zone 1010 CC t/a Emmarentia Convenience Centre v Engen Petroleum Ltd, Controller of Petroleum Products and the Minister of Minerals and Energy, changed the face of the petroleum industry.

The Court dealt with and interpreted the provisions of section 12B of the Petroleum Products Act which says that retailers and wholesalers of petroleum products who allege that between them there has been an unfair or unreasonable contractual practice are entitled to apply to the Controller of Petroleum Products for their dispute to be referred to arbitration. In this case, the Controller refused the retailer’s request for arbitration on the basis that Engen, the wholesaler, had terminated the contract and consequently, the Controller reasoned that there was no valid contract on which to arbitrate. The Constitutional Court disagreed (with the decision from the Supreme Court of Appeal) and directed that the dispute indeed be referred to arbitration.

It is noteworthy that section 12B of the Petroleum Products Act expressly provides that the arbitrator of the dispute must determine whether the alleged contractual practice is “unfair or unreasonable”.  The Court interpreted this to mean that the equitable standard of fairness (as found in the field of labour relations and residential leases) must apply equally to petroleum contracts regardless whether they are subject to statutory arbitration or ordinary court litigation.

This judgment clearly is a game changer of the petroleum world. In summary, the Court held that all contractual agreements between retailer and wholesaler must be interpreted against the standards of fairness and reasonableness. In other words, the express wording of a contract may not be enforceable if it offends these equitable standards. What this will mean in the short term is uncertainty in contractual relationships between retailer and wholesaler and it will take time for a body of judicial precedent to be established that will give insight into how our law will interpret what is meant by the fairness and reasonableness.  The Court did stress that this interpretation and the imposition of equitable standards into the contractual relationship will give effect to what it described as the demand for constitutional transformation of the petroleum industry.  A new world beckons the petroleum industry.