The Constitutional Court has ruled that Transnet was entitled to terminate a long-term pricing agreement, put in place in the apartheid era, and relating to the transportation of crude oil to Sasol and Total.

Judge Mbuyiseli Madlanga handed down the judgment on Tuesday.

The Constitutional Court considered whether an agreement between the parties that had existed for about 50 years could be terminated and if Transnet acted lawfully in terminating it.

The agreement had its roots in 1967, during the apartheid era. At the time, coastal refineries did not have the capacity to meet inland demand, and South Africa was also facing sanctions. To avoid running out of fuel, the government decided to establish an inland refinery in Sasolburg.

To secure the participation of French oil company Total, the government agreed that the inland refinery – to be called Natref – would not be disadvantaged by transportation costs (to get fuel from Durban), as Total was also planning to invest in a coastal refinery. The government then arranged for the cost structure for transporting the crude oil to Natref would be such as though the refinery was at the coast.

'GUARANTEED NEUTRALITY'
A tariff was set for transporting the crude oil at 40 cents per 100 pounds. "The government and Total were satisfied that this tariff guaranteed neutrality," the judgment read. The neutrality principle, as it was known, was then in place for the Natref refinery.

Natref was a wholly owned government entity, its shareholders were Total and Sasol. Based on the agreement, tariffs to transport crude oil to the refinery had to adhere to the neutrality principle.

Eventually, Transnet became party to the agreement, representing government. In 1991, 24 years since the initial agreement was struck, a variation was introduced. According to the variation agreement – which still adhered to the neutrality principle – Transnet could increase tariffs to transport the crude oil. Still, the increase could not be more than the weighted average of petroleum products.

But in 2008 and 2011, Transnet did not stick to the neutrality principle and increased tariffs above the weighted average fuel cost. Both Total and Sasol then lodged legal proceedings against Transnet for breaching the variation agreement.

The companies had claimed contractual damages for being overcharged by Transnet. The refund claimed by both companies was under R2 billion. This is almost half of Transnet's profit after tax.

Shortly after Sasol lodged its legal application, Transnet in September 2017 issued a written notice to both companies indicating it would terminate the variation agreement in the next three years.

Following Transnet's termination notice, Total and Sasol sought that the court declare the variation agreement binding. Their legal actions were later consolidated. The South Gauteng High Court in Johannesburg ultimately did not rule in favour of Transnet, which was subsequently not granted leave to appeal by the high court or the Supreme Court of Appeal.

The matter eventually ended up with the Constitutional Court.

Transnet had argued that Total and Sasol had a transportation benefit from a "finite public resource", which other oil companies like BP, Shell and Caltex did not benefit from. Transnet put forward that the High Court's ruling was unfair as Total and Sasol's competitors are not treated equally. Transnet also suggested that Total and Sasol were profiting from the arrangement. According to Transnet, the high court's ruling allows for an agreement that is contrary to public policy.

TERMINATION NOTICE
The Constitutional Court also considered the interpretation of clause 5 of the variation agreement – which makes provision for a three-year notice period to be given to terminate it. This is subject to another agreement for the transportation of crude oil being prepared.

Transnet interpreted this to mean a full agreement would be in the process of being prepared at the time the variation agreement is concluded.

The high court's interpretation was that if a party wanted to terminate the agreement, they had to show a new, "full" agreement is being prepared:

"So long as a full agreement of conveyance for crude oil is being prepared and such agreement will embody how the tariff is set out, either party is entitled to give the other party three years' notice of its intention to disregard the terms of the variation agreement."

- High Court ruling

According to the Constitutional Court, there is no need for a finalised draft or full agreement for a termination to be valid. "It is enough it is being prepared," the judgment read.

However, the high court contradicted itself when it said that the termination was invalid because a full agreement did not accompany Transnet's three-year notice. Sasol sided with the high court's interpretation of clause 5.

The Constitutional Court noted that if this is the case, then it wouldn't matter if the other parties have made an input in preparing the new agreement. "As soon as the unilaterally prepared document is in existence and has been given to Total and Sasol, the entitlement to terminate is triggered," the judgment read.

Total meanwhile argued that in terms of the variation agreement – if the circumstances that give rise to the neutrality principle continue to exist, mainly that Natref is located inland and continues to source crude oil from the coast, then the agreement cannot be terminated. "In essence then, Total contends for a situation where Transnet is locked into this contractual relationship in perpetuity or, at the very least, beyond the foreseeable future," the judgment read.

The Constitutional Court noted that Sasol and Total's interpretations are both untenable.

"The interpretations advocated by Total and Sasol are impractical, insensible and unbusinesslike. They simply do not make the cut."

- Constitutional Court

Judge Madlanga said that Transnet's notice of termination was issued validly. As the notice was issued in September 2017, the variation agreement ended in September 2020. But this does not mean Transnet does not have an obligation to transport crude oil to Natref, it just means the transportation is no longer regulated by contract. "There is nothing in the papers to suggest that Transnet wishes to terminate the use of the pipeline by Total and Sasol," the judgment read.

The Constitutional Court noted that there are legal remedies available to Total and Sasol if Total or the National Energy Regulator of South Africa (Nersa) fail to observe legal obligations. This specifically relates to Sasol and Total claiming contractual damages in the form of refunds for being overcharged by Transnet.

Transnet had argued that Total and Sasol couldn't claim a refund unless a variation agreement is first cancelled. Total and Sasol had argued that they were correct in claiming contractual damages from Transnet since their claims arise from the breach of its tariff-setting obligations.

Transnet is currently studying the judgment and will then decide on the next steps, a spokesperson confirmed.

Sasol and Total are yet to respond to Fin24's request for comment.