Strategic Fuel Fund costs spiral as service fight bounces the courts

The Strategic Fuel Fund Association (SFF) has lost its bid to withhold a multimillion-rand outstanding payment to Krohne, an international manufacturer of custody-metering systems whose services at the Saldanha Terminal were faulted by the SFF.

This comes as Supreme Court of Appeal (SCA) Judge Selewe Mothle on Friday overturned the decision of the South Gauteng High Court in Johannesburg, which had dismissed Kronhe’s application for payment of the full service amount.

The high court had dismissed Krohne’s application and ruled that SFF pay the company a sum made up of combined amounts of $60 689 (R1.1 million); R150 799; €67 859 (R1.32m); and 10 264 (R237 636); plus interest on the amounts at the rate of 10% per annum from October 27, 2019 to the date of final payment.

Instead, the SCA instead ordered the SFF to pay for Krohne’s costs of the appeal, including the costs consequent upon the employment of two counsel, and ordered that the matter be remitted back to the high court to be determined on the merits.

The dispute stems from the accuracy of the KOG-metering system Krohne installed at the Saldanha Terminal to accurately measure the precise volume of crude oil discharged into the tanks and subsequently exported out of the country.

SFF acquires, maintains, monitors and manages South Africa’s strategic energy feedstocks and carriers to ensure security in the supply of energy. Its oil storage installation at the Saldanha Terminal comprises six in-ground concrete storage tanks, with a combined capacity of 45 million barrels of oil.

A crucial aspect of the SFF’s function is to be able to measure accurately the precise volume of crude oil discharged into the tanks and subsequently exported.

Krohne contended that it had completed its task as contracted and was entitled to payment of the 10% balance of the contract price, which was being retained as a performance retention fee payable upon completion and certification of the appellant’s performance of the services.

However, the SFF raised the query that the installed system did not operate within the specification agreed to in the contract.

An arbitrator was appointed and in a settlement agreement, both companies agreed to refer the question of the accuracy of the KOG-metering system to a third-party expert – SGS Gulf (SGS) – who in their final report said the metering systems operated within the specification agreed to.

Part of the settlement agreement had been that if SGS established that the system operates within the specification agreed to by the parties in their contract, the SFF would pay the capital sum of R7.6m together with more interest calculated at the rate of 9.5% per annum from April 1, 2014 to the date of payment.

Krohne’s demand for the total capital balance outstanding with interest amounting to R12.7m was parried by the SFF on the basis that the certificates issued by SGS “do not serve as evidence of a certification by SGS of the operation of the system, but merely of the manner in which it was designed and installed by Krohne, which is not the subject of the dispute referred to in the settlement agreement”.

The SCA found that the SGS report was the trigger event for payment of the balance and in wondering if the parties would still have had a dispute after the payment had been made, observed that they had elected not to place their dispute before a court which could have helped in the appointment of a referee.

Alternatively, the court said their appointing an expert whose decision would have been mutually binding could have settled the matter.

The SCA noted that the high court had erred in several points of law and fact in dismissing the application by not considering the merits of the matter, and dealt with a collateral issue raised in argument and also in concluding that the SGS report was not final and binding between the parties.

It said when a dispute was declared, the parties agreed to resolve the dispute through arbitration and entered into a settlement agreement to refer the essence of the dispute to an independent expert.

The appeal judges said Wanless further erred in not finding that the interim award was patently in conflict with the arbitration act which in this case held that first in definitions of the act, “award includes an interim award”.

The settlement agreement signed by the Krohne and the SFF to refer the dispute to an independent expert was endorsed as an award by the arbitrator.

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