Top court clarifies fuel retailer and Engen lease

Ian Jacobsberg

Fluxmans

On February 1 2023, the Constitutional Court handed down a judgment that has a 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 the retailer challenged Engen’s decision on the basis that it was unreasonable.

The retailer referred the dispute to the Controller of Petroleum Products (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 12months 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 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:

● 1. 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; and

● 2. 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.