By Deon M Pool

The pursuit of power. How to get it, keep it, and use it, have been central questions of politics, business, military strategy, and human relationships for millennia. Nowhere is such pursuit more evident than in the formulation of contracts. South African courts have always taken the view that if you have signed an agreement, it is accepted that you know what it says, and you have agreed to abide by it.

Against the backdrop of a discriminatory patriarchal system – where some people had more power than others – the Constitution came into being, which requires that the interaction between each person is measured against the concepts of fairness, openness, and equality, as one would expect to have in an open democratic society.

The advent of democracy intended to remove the historical barriers, which excluded most for the benefit of the few to ‘free the potential’ of every person who had a desire to ‘improve the quality’ of their lives (see preamble of the Constitution). In consequence of these fundamental principles, the National Credit Act 34 of 2005, Consumer Protection Act 68 of 2008 (CPA) and the Labour Relations Act 66 of 1995 are the most well-known, intended to introduce and establish the principle of fairness in unequal bargaining situations.

The unequal bargaining power in the petroleum industry remains pervasive and presents a form of the inequality that exists in contractual relationships. These issues gave rise to the promulgation of the Petroleum Products Amendment Act 58 of 2003, which introduced the provisions of s 12B.

Section 12B regulates the contractual relationship between the petrol company and the fuel station owner/operator and is intended to address the unequal bargaining power found in the franchise agreement, which regulates the relationship between the two. In simple terms the agreement states that everything on the site of the fuel station belongs to the fuel company, even the goodwill attached to the business.

The fuel company determines the duration of the agreement, if and to whom it can be sold and retains the rights that would generally be equal in other agreements.

The principles that underlie these agreements are generally informed by the duties imposed by our laws to regulate the petroleum industry. The fuel companies are required to act within a legislative and regulatory framework that is as technically challenging as it is restrictive.

A consequence of the regulations is the highly competitive nature of retailing sites and market share. All the associated interests require protection and promotion, which is pursued with ruthless intent. The franchise agreements are fundamentally premised at ensuring that the fuel company maintains the duties imposed by the regulations while promoting its market share and protecting its brand value.

Unfortunately, the agreements also provide the petrol companies with rights that are open to abuse and manipulation to the detriment of the individual fuel station operator given the one-sided nature of the agreement, which imposes only duties on the fuel station operator, while reserving the rights for the fuel company.

It is in instances, which result in the unequal bargaining position between the parties that s 12B is specifically aimed to address. The most profound result of the inequality that is promoted by the terms of the franchise agreement, is that it results in the taking over of a business as a going concern, which is a drastic step and may inflict hardship on the fuel station operator and employees.

South African courts have pronounced themselves on the fairness that ought to be in contracts. However, the court has stated that they will not interfere with the right to contract and the sanctity of contracts. In simpler terms, the court will not make contracts between people.

The Supreme Court of Appeal (SCA) in Juglal NO and Another v Shoprite Checkers (Pty) Ltd t/a OK Franchise Division [2004] 2 All SA 268 (SCA) has, however, stated that where a party does implement the terms of an agreement in a manner that is unconscionable, illegal, or immoral, the court will not come to their aid, which is likened to provisions of the CPA.

The provisions of s 12B refers to contractual practice and is intended to interrogate the conduct of the parties and not just the terms of the agreement itself. Where a party’s conduct aligns with the terms of the agreement, but the conduct is to manipulate the architecture of the agreement to their advantage, in an unconscionable or immoral manner, the offended party has the right to complain to the Controller of Petroleum Products and call for the compliant to be referred to arbitration.

The arbitration is intended to resolve the dispute quickly, fairly and in a cost-effective manner. The referral process is designed to ensure that the fuel companies do not use their deep pockets to divest the operator of their business and litigate them into the ground so that they eventually give up (it needs to be noted that the provisions of s 12B are also available to the fuel supplier).

In the case of Business Zone 1010 CC t/a Emmarentia Convenience Centre v Engen Petroleum Ltd and Others 2017 (6) BCLR 773 (CC), the issue of the inequality of these agreements came to the attention of the Constitutional Court (CC) and the judgment that followed sets out the manner of the complaint, the discretion of the controller and the powers of the arbitrator.

The CC indicated quite clearly that where a complaint has been referred to the controller, any pending court action is stopped until the process under s 12B has run its course. Although contentious, the CC took the view that the arbitrator can even go so far as to the re-instate a cancelled agreement. The decision of the arbitrator is final and thus it cannot be appealed.

In the instances where a court is asked to stay eviction proceedings pending a s 12B referral, the court is not required to decide if the complaint has merit. Similarly, where a party is not satisfied with the decision of the controller, the Act provides for an internal appeal process to the Minister of Energy Affairs, who is empowered to reconsider the decision of the controller.

Since the Business Zone decision, there have been a few instances where the High Court has been faced with an application to stay eviction proceedings by a fuel company because of an s 12B referral. Presently, the Gauteng, Limpopo and Northwest Divisions of the High Court have stayed eviction proceedings pending the s 12B process, while the KwaZulu-Natal (KZN) Division of the High Court have maintained a different approach.

The most important of the KZN decisions is that of Bright Idea Projects 66 (Pty) Ltd v Former Way Trade and Invest (Pty) Ltd 2018 (6) SA 86 (KZP), which appears to advise on the general approach in KZN in respect of s 12B referrals.

The decisions in North West and Limpopo Divisions are pending appeal to the SCA, which may result in a decision that resolves the disparity between the divisions, given there is a need for certainty throughout the country on this very issue.

It is important to note that, generally, an operator does not have a contractual expectation to have the agreement renewed. A fuel company does not have to renew the agreement on each instance of the intervening five-year period, but the decision not to renew must be one taken in a transparent and fair manner, premised on legitimate considerations.

The idea that a fuel station operator pours 20 years of their life into a site and is then expected to vacate without any compensation, remains extremely contentious. The Gauteng Division of the High Court in Pretoria has found that ‘goodwill’ is affected by the term of tenure on the site, as well as a particular locality and it can never be argued that on the termination of the lease that goodwill terminates and remains attached to the site.

Overall, s 12B refers to the concept of an ‘unfair or unreasonable contractual practice’ as the result of the nature of the franchise agreements, which regulate the commercial relationships between the fuel companies and the fuel station operators. The process is industry specific. The section imposes an equitable standard on contractual relationships, which is nothing new in South African law.

The inherent value of s 12B enabling a party to resolve a dispute through arbitration rather than court proceedings has been recognised and because of the Business Zone decision, it is firmly entrenched in South African law.

Deon Pool BIur (UFS) LLB (Unisa) is an advocate in Johannesburg.

This article was first published in De Rebus in 2021 (May) DR 11.