19 October 2020

Arbitration Under The Petroleum Products Act – The Limits Of The Arbitrator's Discretion

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The limitation on t.he powers of the courts and arbitrators has led to a great deal of dissatisfaction in the fuel industry
South Africa Litigation, Mediation & Arbitration
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The limitation on the powers of the courts and arbitrators has led to a great deal of dissatisfaction in the fuel industry, with many dealers complaining of oppressive conduct by the wholesalers whom they see as taking advantage of their relatively much greater economic power.

Most retail fuel dealerships in South Africa are operated under an arrangement between a large fuel wholesaler and the retailer that may very loosely be termed a "franchise agreement", in as much as the retailer is permitted by the wholesaler to use its branding and business system and thereby benefit from its national marketing. In return, the retailer is required to apply the business system and branding to its business, and to maintain standards of quality and service, and offer products and services, prescribed by the wholesaler.

The agreement is often not called a franchise agreement in practice and may not always strictly comply with all the elements of a franchise agreement as defined in section 1 of the Consumer Protection Act ("CPA"). Usually this is because the retailer does not pay a consideration for the right to carry on business under the wholesaler's brand and business system, one of the essential elements of the CPA definition. Instead, the wholesaler derives its income from the sale of fuel products to the retailer. The agreement will in those circumstances include terms dealing with the supply of fuel products to the dealer and will be called a "retail dealer agreement" or a similar title. Often, the wholesaler owns the land from which the service station operates, or hires it from the owner, and leases it to the dealer. The agreement will then bear a name indicating that it is a lease agreement and will contain the essential terms of a lease as well as the terms dealing with the supply of fuel. In both cases, the agreement will include the typical elements of a franchise agreement that deal with the use of the wholesaler's brand and business system and require the retailer to carry on business according to methods and standards laid down by the wholesaler. Also, as is typical of the franchise relationship, the agreement may require the wholesaler to provide training and ongoing support and advice to the retailer in the business.

Almost inevitably, these agreements, whether they are called and comply with the requirements of leases, dealer agreements or franchise agreements, contain provisions for resolution of disputes that may arise between the wholesaler and retailer arising from the agreement. Typically, these clauses provide for disputes to be referred to arbitration and stipulate how the arbitrator is to be appointed. Where the agreement does not provide for arbitration, the dispute will be decided by a court. When deciding the dispute, the arbitrator or court will interpret and apply the terms of the agreement, unless a term appears clearly to be contrary to public policy. In the latter case, the arbitrator or court may refuse to enforce the offending term but, as a rule, will not substitute it with another term that may seem to it to be more equitable. In the words of numerous judgements of the courts, they "will not make a contract for the parties".

This limitation on the powers of the courts and arbitrators has led to a great deal of dissatisfaction in the fuel industry, with many dealers complaining of oppressive conduct by the wholesalers whom they see as taking advantage of their relatively much greater economic power. Some of the issues that have arisen include:

  • Agreements being drafted by wholesalers, in terms that protect the retailer only to the extent that they do not conflict with the wholesaler's interests;
  • Disputes as to whether the wholesaler is providing the level of support the retailer is entitled to expect; and
  • Dissatisfaction on the part of dealers on the restrictions they encounter we place on their right to renew their agreements or sell their businesses.

Section 12B(1) of the Petroleum Products Act has sought to cater for this. In terms of the section, a retailer who believes that a wholesaler is committing an "unfair or unreasonable contractual practice (or vice versa) may request the Controller of Petroleum Products to direct that the matter be referred to arbitration. In terms of section 12B(4), the arbitrator is required to "determine whether the alleged contractual practices concerned are unfair or unreasonable and if so, shall make such award as he or she deems necessary to correct such practice". The section has caused some disquiet in the industry, as it has raised concerns that it gives arbitrators carte blanche to override the terms of individual agreements on a piecemeal basis if they are of the view that the terms are "unfair or unreasonable" and substitute terms that they consider fair and unreasonable, or compensate parties who suffer financial loss as a result of an unfair or unreasonable practice.

This concern was addressed by the Gauteng Local Division of the High Court in a judgement handed down on 5 October 2020, in the matter between Engen Petroleum Limited and one of its retailers, Mfoza Service Station (Pty) Ltd. Engen had ought to review an award by Adv. Vincent Maleka SC, in which he had awarded damages to Mfoza for an allegedly wrongful cancellation of the agreement (which in this case, was an "operating lease") by Engen. Judge Opperman ruled that section 12B(4) conferred jurisdiction on the arbitrator to make an award to "correct" unfair or unreasonable conduct arising out of the contract. The only manner in which this could be done would be by requiring the offending party to take a specific corrective action in the future. An award of monetary compensation to redress past conduct would not amount to "correcting" the offending practice.

It is suggested that the principle that section 12B(4) precludes compensation for past conduct applies similarly to the imputing into an existing agreement of terms that were not included when the agreement was originally concluded, for example a right of renewal. The party concerned may however be ordered to "correct" its past unfair or unreasonable conduct by including the requisite terms in future agreements of that type.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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