Authors: Tshavhungwe Tshivhase – Senior Associate and Tebogo Maunye – Candidate Attorney
Section 12B of the Petroleum’s Product Act 120 of 1977 (PPA) is a mechanism for quick and effective resolution of disputes that may arise from unfair and unreasonable contractual practices between retailers and wholesalers in the petroleum industry. Described as a resultant effect of South Africa’s troubled past, section 12B was introduced as an efficient means to redress any imbalances in bargaining powers of parties.
Section 12B(4)(a) of the PPA empowers an arbitrator to determine whether petroleum wholesalers or retailers have engaged in unfair or unreasonable contractual practices and, if so, to “make such award as he or she deems necessary to correct such practice”. The precise ambit of the arbitrator’s powers leaves much to interpretation, including whether damages are available as a remedy under this section. That is precisely the issue that manifested itself in Mfoza Services Station (Pty) Ltd v Engen Petroleum Ltd and Another.
Section 12B(4)(a)
The starting point of analysis is the precise wording of section 12B(4). Section 12B of the PPA states that:
“The controller of Petroleum Products may on request by a licenced retailer alleging an unfair or unreasonable contractual practice by a licenced wholesaler, or vice versa, require, by notice in writing to the parties concerned, that the parties submit the matter to arbitration.
…
…
An arbitrator contemplated in subsection (2) and (3) –
a. shall determine whether the alleged contractual practices concerned are unfair or unreasonable and, if so, shall make such an award as he or she deems necessary to correct such practice; and
b. shall determine whether the allegations giving rise to the arbitration were frivolous or capricious and, if so, shall make such award as he or she deems necessary to compensate any party affected by such allegations.
5. …”
The open-ended nature of section 12B(4)(a) resulted in a lack of clarity as to whether a claim for compensation for damages falls within the scope of that which can be awarded under section 12B(4)(a). The Mfoza judgment has brought finality and clarity to the interpretation of section 12B(4)(a) and the ambit of the arbitrator’s powers to award damages as a remedy in section 12B arbitration proceedings.
The Mfoza v Engen Constitutional Court judgment
In this matter, the court in its final analysis was required to determine whether damages or compensation are competent awards under section 12B(4)(a) of the PPA. The court noted that section 12B(4)(a), while being novel, served an important legislative purpose in the transformation of the petroleum industry as it introduced a standard of reasonableness and fairness between the parties.
The main focus of the Mfoza judgment was on the powers of the arbitrator. The court found that section 12B is limited in scope and application, in that it is confined to contractual practices that are allegedly unfair or unreasonable, and the correction of such practices.
Accordingly, the court noted that the creation of the arbitral mechanism in the PPA is an attempt by the legislature to address the unequal bargaining power between wholesalers and retailers in the petroleum industry. A party need only allege an unfair or unreasonable contractual practice to gain access to the section 12B arbitral system. Therefore, arbitral recourse is not compulsory, and a party may still approach a court, should they feel that there are patrimonial damages to claim.
Consequently, all that an arbitrator is mandated to do is to determine whether a contractual practice is unfair or unreasonable. There exists no requirement, nor power, to go beyond such an ambit, and issues of fault, causation, loss, or damage, all fall outside the scope of the enquiry.
Key takeaways
A section 12B(4)(a) award may go no further than to correct the alleged unfair practice and bring the relationship between the parties in accordance with required standards of fairness and equity. Correcting an unfair or unreasonable contractual practice entails ordering the party found to be acting in such manner to modify their practices, so that the unfairness or unreasonableness does not persist going forward.
Accordingly, arbitrators are empowered to make determinations on contractual practices and whether they are unfair or unreasonable, with an appropriate corrective award granted should it be found that the practices are indeed unfair or unreasonable.
The Constitutional Court expressly stated at paragraph [70]:
“[70] In summary, the purpose of the section is confined to determining whether a practice is unfair or unreasonable and then, if it is, to make an award to correct it. There is simply no room for any suggestion of an award of damages, and the determination that must precede it, in this carefully constructed innovation to the PPA. To suggest otherwise would be to give the arbitrator a power that does not accord with the PPA.”
Distinction is also drawn between section 12B(4)(a) and 12B(4)(b). The latter confers onto the arbitrator the power to make compensatory awards arising out of frivolous or capricious allegations, whereas there is no such reference to compensatory awards in section 12B(4)(a). This lends itself to the interpretation that there was never any intention by the legislature to confer upon the arbitrator the power to make compensatory awards in terms of section 12B(4)(a).
The arbitral system of section 12B is not arbitration by agreement. There are several features of the section 12B system that are fit-for-purpose and fall into the limited scope of the arbitral system. A claim for damages under section 12B(4)(a) would be deprived of the protections afforded by the ordinary legal process, including a right of appeal, and that may infringe a party’s right of access to courts as enshrined in section 34 of the Constitution.
Patrimonial damages are by their very nature not intended to correct any unfair or unreasonable practice but rather to compensate a party for damages that may have resulted from such practices. To interpret the section to allow for compensatory award would be divorced from section 12B(4)(a)’s purpose and context – which is corrective in nature. It is in that vein that compensatory relief does not fall within the arbitrators’ powers. It should be mentioned that section 12B does not oust the jurisdiction of the court, but merely provides an additional option to the retailer and wholesaler.
Conclusion
Fairness and reasonableness are regarded as being the overarching considerations that govern all contracts in the retail fuel industry. Should fairness and reasonableness be disregarded by one of the parties to a contract, an intervention by the arbitrator that is forward-looking and corrective is appropriate to bring the relationship back to a state of equilibrium.
Accordingly, the question of damages and the compensation of loss falls outside of the section 12B process.
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