The Strategic Fuel Fund (SFF), which monitors and manages SA’s strategic energy feedstocks, has lost an appeal bid in a R7.6m dispute with an international monitoring company over claims of accuracy of crude oil readings.
The Supreme Court of Appeal (SCA) ruled the SFF had earlier entered into an arbitration agreement with monitoring company Krohne that stipulated payment to Krohne of R7.6m.
In its judgment, the SCA clarified the limits of arbitration and what a court is allowed to do. It sent the matter back to the high court due to the court “erring” in how it dealt with arbitration agreements.
The SFF contracted Krohne in 2012 to install a metering system at oil storage installations in Saldanha. The installation comprises storage tanks with a capacity of 45-million barrels of oil. Accurate measurement is crucial so that the SFF knows how much is discharged into these tanks and later exported.
When Krohne completed its services, the SFF disputed the accuracy of the system’s readings and retained R7.6m of Krohne’s final fee. Krohne and the SFF took their dispute before an arbitrator. They reached a settlement agreement in terms of which SFF would pay R7.6m if an independent expert agreed with its claims about accuracy.
In 2019, the expert found Krohne’s system had operated correctly. Krohne demanded the balance be paid. The SFF denied this, arguing the expert ruled only on “the manner in which [the system] was designed and installed”, not on its operation’s accuracy. Therefore, there was no basis for the SFF to pay.
Krohne took the matter to the high court, arguing the expert had ruled on accuracy. In 2023, acting high court judge Brad Wanless dismissed the case without dealing with Krohne’s claim, due to finding the arbitration agreement invalid.
Krohne appealed to the SCA.
Last week, the SCA overturned the dismissal by Wanless.
Writing for a unanimous court, SCA judge Selewa Mothle stressed that arbitration served as an alternative dispute mechanism, avoiding the length and expenses of an already clogged court roll. Arbitration can start only by consent of both parties. Unlike a judgment, Mothle said, “an arbitration is ... a product of an agreement”.
Mothle said arbitration awards could not be interfered with by a court except on very strict grounds, which was not the case here.
This now serves as precedent for all courts that face disputes over arbitration. This also must be considered by corporations in arbitrations, before approaching a court.
Wanless, Mothle said, had focused on “a collateral issue”: whether the award was valid. Mothle ruled there was no doubt it was valid, because the SFF and Krohne had agreed to it. The high court had not dealt with Krohne’s main claim.
Due to the high court deciding a “collateral” issue, Mothle said, the merits of Krohne’s claim had not been dealt with. He therefore ordered the matter back to the high court to deal with the merits before a different judge.
The SFF was ordered to pay costs.
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