ZACC 03
Hearing Date: 17 May 2022
Judgement Date: 01 February 2023
Post Judgment Media Summary
The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.
On 1 February 2023 at 10h00, the Constitutional Court handed down judgment in an application for leave to appeal against the judgment and order of the Supreme Court of Appeal. The Supreme Court of Appeal dismissed an appeal against the judgment and order of the High Court of South Africa, Gauteng Local Division, Johannesburg (High Court). The application concerned whether the High Court was correct in setting- aside an award made by the arbitrator in terms of section 12B(4)(a) of the Petroleum Products Act 120 of 1977 (PPA). The award concluded that there was no bar to an award for monetary compensation being made which arose out of an unfair or unreasonable contractual practice.
Mfoza Service Station (Pty) Limited (Mfoza), conducts the business of a service station and entered into a lease agreement with Engen Petroleum Limited (Engen), a petroleum wholesaler which owns the premises from which Mfoza operated its petroleum retail business. The relationship between the parties was governed by the terms of the lease agreement entered into between them which has since come to an end. Following a dispute between the parties and allegations by Mfoza that Engen had breached the lease agreement, resulting in it suffering damages, the Controller of Petroleum Products (Controller) directed that the parties submit their dispute to arbitration. The Controller concluded that the requirements for a referral to arbitration had been met and referred the matter to arbitration. All of the claims of Mfoza in the arbitration were pleaded as breach of contract claims, and the only relief sought was the payment of damages which related to alleged past loss of profit, loss of goodwill and loss of property value suffered as a result of the conduct of Engen. Arbitration proceedings commenced, during which Engen raised three preliminary objections – only one of which is relevant in these proceedings. It objected to the monetary compensation sought by Mfoza on the basis that such relief amounted to a claim for damages. It said damages could not be awarded under the arbitral jurisdiction conferred upon the Arbitrator, in terms of section 12B(4)(a) of the PPA. This section states that an arbitrator “shall 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”.
In his award, the Arbitrator concluded that as a matter of principle, there was no bar to an award for monetary compensation being made which arose out of an unfair or unreasonable contractual practice. He found that he had the power under the broad rubric of monetary compensation, to award damages as well as other forms of compensation. He dismissed the preliminary objection raised by Engen.
Aggrieved, Engen asked the High Court to review and set aside the award on the basis that the Arbitrator committed a material error of law which constituted a gross irregularity, in that he exceeded his powers as contemplated by section 33 of the Arbitration Act 42 of 1965 (Arbitration Act). The High Court’s stance was that the Arbitrator incorrectly interpreted the provisions of section 12B(4)(a) of the PPA to confer a right upon Mfoza to claim patrimonial damages. It said that the Supreme Court of Appeal and the Constitutional Court have held that the jurisdiction conferred in terms of section 12B(4)(a) is corrective. It relied on the view taken by the Supreme Court of Appeal in Business Zone SCA that an award of damages is not competent under the corrective remedial jurisdiction, but only under a compensatory remedial jurisdiction. As such, the relief sought by Mfoza did not fall within the corrective remedial jurisdiction of the Arbitrator, said the High Court. The High Court explained that the aim of section 12B(4)(a) was to address the unequal bargaining power between parties, being a wholesaler and a licenced retailer. It authorised corrective remedial action prospectively, and as such past wrongs could not be addressed in the form of a damages award.
The High Court found that the Arbitrator exceeded his powers as contemplated in section 33(1)(b) of the Arbitration Act and set aside the award. It found that damages were not available as a remedy under section 12B(4)(a) of the PPA and that the arbitrator was confined to determining his jurisdiction on the case pleaded and not on a case that was not before him. The latter was a reference to the forms of compensation other than damages that the Arbitrator made reference to and which the High Court said was not before him. The High Court further directed Mfoza to amend its statement of case to remove the claim for patrimonial damages.
Mfoza’s applications for leave to appeal the High Court order and judgment were dismissed by the High Court and Supreme Court of appeal, respectively.
On the merits, Mfoza that the restrictive interpretation of section 12B(4)(a) by the Supreme Court of Appeal in Business Zone SCA is incorrect. Mfoza also submitted that the use of the word “correct” should not be understood or interpreted narrowly to qualify or cut down the provision. The payment of compensation is amongst the awards that may be necessary to correct a party’s wrongful (or, in the context of section 12B, unfair or unreasonable) practice. It said in some instances compensation may, depending on the circumstances, be the only remedy available to correct the unfair or unreasonable contractual practice. Mfoza submitted that the High Court had no power to substitute the award. To support this contention, Mfoza stated that, unlike section 172(1)(b) of the Constitution and section 8 of the Promotion of Administrative Justice Act, section 33(1) of the Arbitration Act does not give the Court wide discretionary powers to make any just and equitable remedy. The section provides for only one remedy: setting aside.
Engen submitted that Mfoza’s application for leave to appeal does not engage the jurisdiction of this Court. It submitted that Mfoza does not seek to assert any constitutional right or constitutional issue. In addition, it denied that there are good prospects of success or that the interest of justice favours granting leave to appeal. It submitted that a monetary award does not alter, let alone transform, the structure of the parties’ relationship when they exercise their rights or carry out their duties – it does not correct the practice that has been submitted to the arbitrator. Engen submitted that this interpretation is supported by the text of section 12B, its underlying purpose, and the statutory context. Furthermore, it is also the interpretation which best gives effect to the spirit, purport and object of the Bill of Rights. Engen said that Mfoza’s complaint that the High Court exceeded its powers by substituting the award with its own order is misplaced. It said that the review application concerned a discrete legal question regarding the scope of an arbitrator’s powers. Having found that the Arbitrator was wrong to dismiss the in limine objection, was the end of the matter, and the order of substitution arose out of the setting aside order and did not exceed the power of the High Court sourced in section 33(1)(b) of the Arbitration Act.
The minority judgment, penned by Mhlantla J (Madlanga J and Mlambo AJ concurring), found that this matter engaged this Court’s jurisdiction. However, the minority judgment parted ways with the majority judgment on the interpretation of the arbitrator’s remedial powers under section 12B(4)(a) of the PPA. The minority held that the arbitrator’s powers are wide therefore section 12B(4)(a) of the PPA includes monetary compensation. The minority’s interpretation of the arbitrator’s powers is that section 12B(4)(a) gives the arbitrator the power to make an award that she/he deems necessary to correct an unfair or unreasonable contractual practice, consequently that denotes broad and discretionary powers. The minority held that in so far as “compensation” is concerned, parallels cannot be drawn between the framing of section 12B(4)(a) and section 12B(4)(b) as contemplated in the majority judgment as both sections serve distinct purposes and functions.
The minority concludes that the functions and objects of “compensations” under section 12B(4)(a) and section 12B(4)(b) are distinct. Under section 12B(4)(a), compensation is remedial in nature and by contrast compensation under section 12B(4)(b) is meant to be punitive or retributive. The minority reasons that if the arbitrator’s powers are constrained to remedial action that operates prospectively, it would render the greater scheme and objective of the PPA of transforming contractual practices in the petroleum industry, nugatory. Therefore, the minority would have granted leave to appeal and granted the appeal.
The majority judgment, penned by Kollapen J (Majiedt J, Mathopo J, Tshiqi J and Unterhalter AJ concurring) found that the matter engaged the Constitutional Court’s constitutional jurisdiction and raised an arguable point of law of general public importance which ought to be considered by this Court. It found that determining the power of an arbitrator constitutes the exercise of public power pursuant to empowering legislation – being the PPA – and the interpretation of the section raises a constitutional matter. The need to pronounce on the scope of the arbitrator’s power in terms of section 12B(4)(a) transcends the interests of the parties and implicates the interests of a significant part of the general public – this is then also an arguable point of law of general public importance.The majority judgment further found that leave to appeal should be granted as it is in the interests of justice to provide certainty as to the powers of an arbitrator in terms of section 12B of the PPA.
On the merits, the majority judgment concluded that section 12B(4)(a) does not empower an arbitrator to make an award of damages or compensation as part of a corrective award arising out of an unfair or unreasonable contractual practice. It held that an arbitrator’s award may not go further than correcting the practice. The majority found that “to correct a practice” is about restoring the relationship by identifying the contractual practice that imperils the relationship and then making an award that will end the practice in question. While this Court had overturned the Supreme Court of Appeal’s decision in Business Zone SCA, it had only done so in parts. Further, where arbitrators are given the power to make a compensatory award in terms of section 12B(4)(b) and not under section 12B(4)(a), the choice of language and scope of power indicates the lawmakers’ clear intent to provide different powers in different circumstances. This structure of section 12B(4) also invokes the maxim inclusio unius est exlusio alterius (the specific inclusion of one implies the exclusion of the other). By including and excluding different kinds of remedial powers, the Legislature intended to provide different regimes of arbitral intervention. Moreover, the majority judgment held that the very nature of the arbitral system created by section 12B may not be suited to making a compensatory award. A number of features of the section are fit-for-purpose and fall into the limited scope of the arbitral system such as obliging parties to submit to arbitration upon a referral by the Controller and that the arbitrator’s award is final and binding upon the parties. Mfoza’s interpretation of section 12B(4)(a) could lead to disparate outcomes and consequences, which conflict with the constitutional values of fairness and equality.
Section 12B(4)(a) requires an arbitrator to establish whether the alleged contractual practices are unfair or unreasonable and, if so, to correct such practice by the making of an award. It follows that all that an arbitrator is required to do is to make a determination whether a contractual practice is unfair or unreasonable. There is no power nor requirement for the arbitrator to go beyond that and matters of fault, causation, loss, or damage fall outside of the enquiry. Once an arbitrator has made a determination that a contractual practice is unfair or unreasonable then the arbitrator has wide powers ¬ but they are confined to correcting the practice. One must therefore distinguish the limited nature of the determination that an arbitrator is required to make and the wide powers of redress following such a determination. The purpose of making the award is that it must be necessary to correct such practice. The arbitration model is a creation of statute and the power of the arbitrator is derived from the PPA. It is a power that must be exercised within its lawful parameters and for the purpose it has been given.
As to whether or not the High Court was entitled to make an order substituting the arbitrator’s award, the majority judgment found that the High Court’s order did not constitute an order of substitution and did not in any manner violate the provisions of section 33(1)(b) of the Arbitration Act.
Accordingly, the appeal was dismissed and the applicant was ordered to pay the costs of the appeal, including that of two counsel.
The Full judgment here