/ 14 April 2022

Fuel fund loses appeal on refunding buyers of South Africa’s oil reserves

South African Oil Tanks As Companies Scour Market For Storage Solutions
The appellate court said the Strategic Fuel Fund tried to play the victim when it was the author of the tainted sale of the country’s entire crude oil reserves. (Waldo Swiegers/Bloomberg via Getty Images)

The supreme court of appeal (SCA) has dismissed with costs — and scathing commentary — a challenge to the high court order compelling the state to pay out of pocket expenses to oil traders as part of a restitution settlement after the sale of South Africa’s strategic crude reserves was overturned.

The Central Energy Fund (CEF) and the Strategic Fuel Fund (SFF) argued that a 2020 high court order went too far in awarding Contango Oil & Gas Company and energy and commodities trader Vitol compensation for hedging losses, insurance, letters of credit and inspection costs associated with their purchase of the country’s oil stocks.

In the case of Vitol, these so-called out of pocket expenses came to about $19-million, plus interest, payable over and above $86-million for the restitution of the purchase price and storage fees.

Contango’s compensation sum included its option fee with Total SA, according to the remedial order handed down by Judge Owen Rogers in the Western Cape high court.

The two companies were among several traders to whom the Strategic Fuel Fund sold 10 million barrels of crude oil for a total of $281-million, a price deemed well below the market value at the time.

The appeal against the remedial order, the SCA said, saw the Central Energy Fund and the Strategic Fuel Fund play the victim rather than accept responsibility.

“It was the SFF, not Contango and Vitol, which violated the principle of legality in taking the impugned decisions and concluding the transactions that followed; and it was the appellants who violated the principle of legality by grossly delaying the institution of review proceedings.” 

The Central Energy Fund and the Strategic Fuel Fund launched a review application in the high court more than two years after the sale of the oil stocks to declare the transactions unlawful and invalid.

The high court found that the deals, driven by the chief executive of the Central Energy Fund, Sipho Gamede, were marred by serious illegalities and a wholesale disregard for corporate governance and transparency. 

Gamede had repeatedly misled then energy minister Tina Joemat-Pettersson to secure her approval and lied about the transactions being vetted by the Strategic Fuel Fund when it had not been briefed about these.

He issued requests for proposals before he had the minister’s consent for selling the reserves, and had insisted on private negotiations rather than competitive bidding.

“Mr Gamede’s conduct was riddled with irregularities and he had no problem with taking bribes,” the court said, noting that R2.6-million flowed into the accounts of his dormant legal practice, later followed by R20-million to his own accounts.

But the judgment also faulted the Strategic Fuel Fund, holding that although Gamede was driving the improper disposal process, he could not have pulled it off without the acquiescence of the fund’s senior managers and directors.

“The board did not proactively intervene to ensure that the SFF and the country’s interests were safeguarded,” Rogers said. 

The court ruled that whereas Taleveras Petroleum Trading took inducements, Glencore, Contango and Vital were innocent third parties entitled to compensation for expenses incurred in their reliance on the transactions.

The SCA said the appeal was based on the misconception that this amounted to compensation akin to damages for the loss of the contracts in question. 

“But properly understood, requiring the SFF to repay those expenses is a consequence of restitution: it serves to restore Contango and Vitol to the status quo ante.” 

The Central Energy Fund and the Strategic Fuel Fund had argued that the high court failed to properly consider the public interest in preventing bribery and “protecting the public purse from funding corrupt transactions”. It ignored the “no profit” principle, the argument went, because Contango and Vitol had failed to do basic due diligence and were not innocent parties.

But the SCA said this was not sustained on the evidence. 

Moreover, the applicants waited until 2017 to inform Contango and Vital that they had doubts about the validity of the contracts, which meant that until such time the companies continued to rely on these in good faith and incur further expenses.

“The public interest in preventing bribery is not advanced by requiring innocent third parties, such as Contango and Vitol, to make losses. 

“The public interest is adversely affected if creditors cannot safely finance transactions with organs of state, and are constantly at risk of incurring losses if it turns out that the state acted unlawfully.”

Instead, the court said, the appellants seemed to believe that innocent third-party financiers should suffer significant losses when the state erred. This would have a chilling effect on financing, making it prohibitively expensive, it added. 

“The appellants have demonstrated a startling failure to accept any responsibility for the unlawfulness of the transactions,” Judge Ashton Schippers said. 

“They go so far as to portray themselves as the victims of the unlawfulness, rather than its perpetrators. They say that the wrongs in this case were not committed against Contango and Vitol, but against them.”

It was, as the court a quo rightly found, Schippers concluded, the Strategic Fuel Fund and not the traders, who had violated the principle of legality by concluding the transactions, and by delaying the review proceedings to annul the contracts.