THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable

Case No: 728/2015

In the matter between:

TRANSNET SOC LIMITED                                                                      APPELLANT

and

TOTAL SOUTH AFRICA (PTY) LTD                                      FIRST   RESPONDENT

SASOL OIL (PTY) LIMITED                                                SECOND RESPONDENT

Neutral
Citation:
Transnet
v
Total
(728/2015)
[2016] ZASCA
(14 September 2016)
Coram:
Lewis, Theron and Zondi JJA and Schoeman and Makgoka AJJA
Heard:
2 September 2016
Delivered:   14 September 2016
Summary:  A contract pertaining to tariffs payable for the transportation of crude oil
remains enforceable despite a change in legislative regime that governs the
conveyance of petroleum products in South Africa: nothing in the contract
incompatible with the relevant legislation.

___________________________________________________________________

ORDER

On appeal from: Gauteng Local Division of the High Court, Johannesburg (Coppin J
sitting as court of first instance)
The appeal is dismissed with the costs of two counsel.
___________________________________________________________________
JUDGMENT

Lewis JA (Theron and Zondi JJA and Schoeman and Makgoka AJJA
concurring)
[1] The question for decision in this appeal is whether a contract between the
former Government of South Africa, and the first respondent, Total South Africa (Pty)
Ltd (Total), continues to bind the appellant, Transnet Soc Ltd (Transnet), a wholly-
owned government company, despite the change in legislative regime that governs
the transport and conveyance of fuel in South Africa. Coppin J in the Gauteng Local
Division of the High Court (to which I shall refer for convenience as ‘the high court’)
was asked and agreed to determine a number of issues arising from pleadings in an
action between the parties separately from others in terms of rule 33(4) of the
Uniform Rules of Court.

[2] Before setting out the issues that the high court was asked to determine, it is
useful to discuss briefly the background to the conclusion of the contract and to the
litigation between the parties. For the purpose of determining whether the contract
survived the change in regime regulating conveyance of fuels and the charges for it,
the parties assumed certain facts alleged in the particulars of claim to be correct.
And the evidence confirming these facts by a witness for Total, Mr R Duchateau,
was not contested by Transnet.

[3] After World War II there was an increase in demand for petroleum products.
Total and other petroleum suppliers obtained these from refineries on the coast,
mostly in Durban but also in Cape Town. The coastal refineries did not have
sufficient capacity to meet the increased need for petroleum products. In 1966 the
Government decided to establish an inland refinery to cater for increasing demand. It
acted in terms of the Railways and Harbours Control and Management
(Consolidation) Act 70 of 1957, which created an ‘Administration’ for the control and
management of railways, ports, harbours and petroleum pipelines. The
Administration was empowered to determine rates for the conveyance of petroleum
pipelines managed by it.

[4] The 1957 Act was repealed by the South African Transport Services Act 65 of
1981. The Administration was renamed the South African Transport Services
(SATS). SATS was established as a commercial enterprise of the Government.
Transnet succeeded SATS in terms of the Legal Succession to the South African
Transport Services Act 9 of 1989, s 3(2) of which provided that Transnet, as a
wholly-owned Government company, acquired most of the property of SATS
including petroleum pipelines.

[5] In 1966 the Administration approached Total and requested it to participate in
the proposed inland refinery. Total was reluctant to do so because it proposed to
invest with Mobil in a coastal refinery, which made more commercial sense for it.
Coastal refineries have access to both international and domestic markets, whereas
an inland refinery would have access only to inland markets. Moreover, when using
an inland refinery, crude oil would have to be brought to it from the coast, thus
incurring pipeline costs that would not arise if the oil were processed at the coast.

[6] Accordingly, as a precondition to participating in the establishment of an
inland refinery, Total required an undertaking from the Administration that it would
not be placed in a position worse than at a coastal refinery. In a letter from the
Department of Commerce and Industries to Total, the general manager assured
Total that, in determining the tariff for the conveyance of crude petroleum by pipeline
from Durban to Sasolburg, where the inland refinery was to be established, in

principle, Total would be treated as if at the coast in determining the tariff for
transporting crude oil.

[7] In response, and after a meeting with the Administration in January 1967,
Total recorded that the Government had undertaken to ensure that an ‘inland
refinery will not at any time be placed at a disadvantage as regards transportation
costs in relation to a refinery sited at the coast’. The principle so agreed was referred
to as ‘the neutrality principle’ (it being neutral whether a refinery was at the coast or
inland) and was honoured for many years, first by the Administration and then by
SATS.

[8] A refinery at Sasolburg was accordingly established and was run by the
National Petroleum Refiners of South Africa (Pty) Ltd (Natref). Total held 36.36% of
the shares in Natref and Sasol held the balance. Sasol was cited as the second
defendant by Total, but has played no role in these proceedings.

[9] When Transnet succeeded SATS it first refused to recognize the neutrality
principle. But in 1991, after meetings between Total, Sasol and Transnet, a variation
agreement was concluded between the parties. Transnet undertook that the
percentage increase in the crude oil tariff that would be levied to Sasol and Total (the
Natref shareholders) would not exceed the weighted average percentage increase of
any adjustments of petrol, diesel and avtur (the so-called white fuels) tariffs.  The
variation agreement, which also embodied the neutrality principle, was largely
complied with until March 2005.

[10] However, Transnet refused to recognize the neutrality principle once the
regulatory regime governing the supply of petroleum products was changed.  The
National Energy Regulator Act 40 of 2004 (NERSA Act) came into force in
September 2005 and the Petroleum Pipelines Act 60 of 2003  (PPA) came into force
in November 2005. The NERSA Act establishes a single regulator to regulate the
electricity, piped-gas and petroleum pipeline industries. The regulator is a juristic
person that, amongst other things, undertakes the functions of the Petroleum
Pipelines Regulatory Authority referred to in the PPA. The regulator is referred to in

the PPA as the ‘Authority’ and in the NERSA Act, in terms of which it is established,
as the ‘Energy Regulator’. I shall refer to it as the NERSA.

[11] The objects of the PPA include the promotion of an efficient, effective,
sustainable and orderly development, operation and use of petroleum pipelines,
loading and storage facilities. The Authority is given the power to issue licences for
the construction and conversion of pipelines, loading and storage facilities, and for
the operation of these (s 4(a)). It is also, importantly, given the power to set or
approve tariffs and charges in the manner prescribed by regulation. At present,
Transnet is the only licensee.

[12] The first tariff determination by the NERSA that is in issue was made for the
2010/2011 years, effective from 1 April 2010. Transnet maintains that the neutrality
principle cannot prevail over that decision, and that the variation agreement has
effectively been terminated by the regulatory regime introduced by the NERSA Act
and the PPA. Accordingly, Total instituted action claiming a declaration that the
variation agreement remains binding, and directing Transnet to implement its terms
by ensuring that the percentage increase in the crude oil tariff does not exceed the
weighted average percentage of petrol, diesel and avtur tariffs. It also claimed
payment of the shortfall that it allegedly suffered as a result of Transnet’s failure to
apply the neutrality principle.

[13] At the start of the trial, as I have said, the high court ordered that only certain
issues be determined. These were the defences raised to the first claim by Total
(paragraphs 14 to 19 of Transnet’s plea) and the responses to them in its replication
by Total. Coppin J found that these defences had to fail. The appeal to this court is
with his leave.

[14] The essence of Transnet’s defences is that the variation agreement, and with
it the neutrality principle, was ‘abolished’ by the PPA; the Authority established by
the NERSA Act was the only body that could set tariffs that licensees are obliged to
charge; the NERSA was not directed by the PPA to give effect to the neutrality
principle; the PPA did not authorize discrimination between customers; the PPA
prohibits any agreement contrary to its provisions, and thus the variation agreement

became void; and that Total had made representations to the NERSA about applying
the neutrality principle, which had been rejected. If Total had any remedy, it was to
review the NERSA’s decision.

[15] On appeal, Transnet argues that the neutrality principle is not consonant with
the provisions of the PPA and that the basis of determining the tariff before its
enactment cannot exist together with that determined by the NERSA in terms of s 28
of the PPA. It should be made clear that the former basis for determining the tariff
paid by petroleum products suppliers was aligned with that payable for rail
transportation. The new method of tariff determination now established by the
NERSA is, in terms of the PPA, completely different, and must comply with the
provisions of the PPA. Total does not argue otherwise.

[16] Section 28 of the PPA provides:
‘(1) The Authority must set as a condition of a licence the tariffs to be charged by a licensee
in the operation of a petroleum pipeline and approve the tariffs for storage and loading
facilities.
(2) A tariff charged in terms of subsection (1)—
(a) must be—
(i)
based on a systematic methodology applicable on a consistent and
comparable basis;
(ii)
fair;
(iii)
non-discriminatory;
(iv)
simple and transparent;
(v)
predictable and stable;
(vi)
such as to promote access to affordable petroleum products;
(b) becomes effective from the date set out in the licence;
(c) must be reviewed by the Authority within the period set out in the licence; and
(d) may be adjusted by the Authority on review.
(3) The tariffs set or approved by the Authority must enable the licensee to—
(a) recover the investment;
(b) operate and maintain the system; and
(c) make a profit commensurate with the risk.
(4) The Authority must monitor the application of tariffs and take appropriate action when
necessary to ensure that they are applied in a non-discriminatory manner and licensees
must provide the information required by the Authority in this regard.

. . .
(6) A licensee may not charge a tariff for the licensed activity in question other than that set
or approved by the Authority.’

[17] The nub of Transnet’s argument on appeal is that the neutrality principle
cannot co-exist with s 28(6). Only the NERSA may set a tariff and the provisions of s
28 do not permit of any deviation. Total, on the other hand, argues that the neutrality
principle is entirely consistent with s 28(6): the NERSA must set a tariff and the
neutrality principle then requires that a lesser amount be charged in respect of crude
petroleum conveyance. Total does not in any way contend that the old method of
setting the tariff be applied.

[18] Indeed, Total’s argument is that if the neutrality principle is not invoked, there
will be a contravention of s 28(2)(a)(iii) which requires that the tariff must be non-
discriminatory. If the tariff for crude petroleum is not reduced then suppliers at the
inland refinery will be discriminated against. Discrimination is also precluded by s 21
of the PPA which provides:
‘Licensees may not discriminate between customers or classes of customers regarding
access, tariffs, conditions or service except for objectively justifiable and identifiable grounds
approved by the Authority.’

[19] While Transnet contends that this provision is meant to ensure that new
licensees who wish to compete with Transnet should not be disadvantaged, in my
view there is no warrant for giving the provision such a limited meaning. The PPA as
a whole is intended, inter alia, to achieve competition in the construction and
operation of petroleum pipelines and associated facilities; to achieve environmentally
responsible transport, loading and transport of petroleum products; to facilitate
investment in the industry and to promote companies owned or controlled by
historically disadvantaged South Africans (s 2). There is no reason why it would be
intended to discriminate against long-established suppliers.

[20] That view is reinforced by s 20 of the PPA which sets out the conditions on
which a licence may be granted by the NERSA, in particular s 20(f), which states:

‘a petroleum pipeline may be licensed for either crude oil or petroleum products, or both, as
long as sufficient pipeline capacity is available for crude oil to enable the uninterrupted
operation of the crude oil refinery located at Sasolburg, to operate at its normal operating
capacity at the commencement of this Act and for so long as that refinery operates as a
going concern;’.

[21] Differentiation based on sound reason does not amount to discrimination (see
the dicta in Prinsloo v Van der Linde 1997 (3) SA 1012 (CC) paras 23 to 25.) In this
matter if the neutrality principle were not applied, there would be no differentiation
despite different circumstances. Total and Sasol, as the shareholders in Natref which
runs the refinery at Sasolburg, would be treated unfairly if they were not able to
recover the cost of piping crude oil: that would mean that they were discriminated
against vis-a-vis coastal refineries. If the Natref refinery were situated at the coast its
shareholders would not have incurred the costs of transporting crude oil. That was
what the neutrality principle was designed to avoid and the position is no different
now that the tariff is set not by Transnet but by the NERSA.

[22] This construction appears to be shared by the NERSA. In its decision in
respect of Transnet’s application for a licence for the 2010/2011 years, it expressly
stated that ‘the maximum tariff’ (my emphasis) set out in a table would be applied
from 1 April 2010. And in its reasons for the decision, the NERSA stated: ‘The tariffs
set in this decision are maximum tariffs thus permitting the licensee to discount’.
Subsequent decisions of the NERSA have again referred to maximum tariffs.

[23] Nothing could be clearer. Transnet is entitled to discount, and the neutrality
principle embodied in the variation agreement obliges it to allow a discount for the
conveyance of crude oil to the Natref refinery. The evidence for Transnet, given by
Mr L Moodley, was that at present coastal customers are treated in the same way as
the Natref refinery. That is unfair discrimination which puts the Natref shareholder at
a disadvantage. That is clearly what the NERSA decision aims to avoid, and why it
allows for a maximum tariff and a discounting of it.

[24] In the circumstances it is clear that Transnet is bound by the variation
agreement of 1991. That is in keeping with the general principle that new legislation

is presumed not to interfere with vested rights: see Fedlife Assurance Ltd v
Wolfaardt [2001] ZASCA 91; 2002 (2) All SA 295 (SCA) para 16. Transnet’s
defences to the action raised in its plea must fail, as the high court found.

[25] The appeal is dismissed with the costs of two counsel.

_______________________
C H Lewis
Judge of Appeal

APPEARANCES

For the Appellant:
L B Broster SC
Instructed by:
Woodhead Bigby Inc, Durban
Lovius Block, Bloemfontein

For the First Respondent:

A Bham SC (with him J Babamia)
Instructed by:
Norton
Rose
Fulbright
South
Africa,
Johannesburg
Webbers Attorneys, Bloemfontein

SUPREME COURT OF APPEAL OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT
OF APPEAL

FROM

The Registrar, Supreme Court of Appeal

DATE

14 September 2016

STATUS

Immediate

Transnet v Total (728/2015) [2016] ZASCA 116 (14 September 2016)

Please note that the media summary is intended for the benefit of the media
and does not form part of the judgment of the Supreme Court of Appeal.

In 1967 the former Administration of the Railways and Harbours, a
predecessor first to the South African Transport Services (SATS) and then to
Transnet, decided that because of the increased demand for petroleum
products in South Africa, it should establish an inland refinery at Sasolburg. At
the time all refineries were at the coast, principally in Durban. The
Administration approached Total, a supplier of petroleum products, to
participate in the inland refinery. It was initially reluctant to do so as the cost of
transporting crude oil from the coast inland via pipeline would be additional to
the cost of refined fuels such as petrol, diesel and avtur. After meetings with
the Administration and Sasol, a state-controlled supplier, Total sought an
undertaking that if it participated in the inland refinery, it would not be worse
off than it would be had it transported refined fuels from the coast.

The Administration made the undertaking, embodied in what came to be
referred to as the ‘neutrality principle’, and Total became a shareholder in
Natref, the company that ran the inland refinery. It held some 33% of the
shareholding and Sasol held the balance. The principle was applied
consistently until Transnet became the owner of the pipeline in 1991.
Transnet refused initially to apply the neutrality principle, until it and Total
varied the original agreement, after which it continued to apply the principle,
charging a lesser amount for transporting crude oil than for refined products.
The tariffs had always been set by the Administration, then by SATS, and
subsequently by Transnet, based on the cost of conveying petroleum
products by rail.

In March 2005 Transnet refused to recognize the neutrality principle. Shortly
after that, the National Energy Regulator Act 40 of 2004 (NERSA Act) came
into force in September 2005 and the Petroleum Pipelines Act 60 of 2003
(PPA) came into force in November 2005. The NERSA Act establishes a
single regulator, the NERSA, to regulate the electricity, piped-gas and
petroleum pipeline industries.

It is now the NERSA that determines the tariff, not Transnet. While Total
accepted that the tariff was set under a new regulatory regime, it contended
that the neutrality principle continued to apply – that it was entitled to a
discount when it conveyed crude oil from the coast. Total instituted action
against Transnet, claiming various forms of relief. The parties agreed, and the
Gauteng Local Division ordered, that the question whether the neutrality
principle continued to apply despite the change in the legislative regime,
would be determined separately.

The court a quo found that the neutrality principle was not inconsistent with
the new legislation. The SCA today dismissed an appeal against the judgment
of that court and confirmed that the principle continued to apply: the legislation
prohibited
discrimination
amongst
customers
and
Total
would
be
disadvantaged unless it applied. The NERSA had set a maximum tariff and
specifically stated in its first tariff determination that a discount could be given.

Thus Transnet was bound to comply with the undertaking given in 1967, as
varied in 1991.

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