Central Energy Fund SOC Ltd and Another v Venus Rays Trade (Pty) Ltd and Others

The Central Energy Fund SOC Ltd (CEF) and Strategic Fuel Fund Association NPC (SFF) sought review and setting aside of decisions made in 2015-2016 concerning rotation of South Africa's strategic oil stock comprising 10 million barrels of crude oil. The SFF, wholly owned subsidiary of CEF, was responsible for managing the strategic stock. The rotation was done through sale and purchase agreements coupled with storage arrangements. The SFF sold 3 million barrels to Venus Rays Trade (Venus), which immediately on-sold to Glencore. The SFF also sold 4 million barrels to Taleveras Petroleum Trading DMCC (Taleveras), financed by Contango Trading SA (Contango) and Natixis SA (Natixis). Taleveras immediately on-sold to Contango under a Master Repurchase Agreement. The SFF also sold 3 million barrels to Vesquin Trading/Vitol. The transactions were approved by the Minister of Energy. The SFF's CEO, Mr Sipho Gamede, was found to have received bribes totalling R22.6 million from persons associated with Taleveras between November 2015 and April 2016. The review application was launched in March 2018, more than two years after the agreements were concluded, following review notice in September 2017. The Gobodo forensic report was provided in 2020.

• Whether the decisions and transactions relating to the rotation of the strategic oil stock were unlawful and should be reviewed and set aside under the principle of legality and PAJA
• Whether the delay in instituting and prosecuting the review proceedings should be condoned
• What constitutes just and equitable relief under section 172(1)(b) of the Constitution and section 8(1) of PAJA in circumstances where administrative decisions and resultant contracts are set aside
• Whether innocent third parties who are not complicit in administrative irregularities should be compensated for out-of-pocket expenses incurred in reliance on agreements declared invalid
• Whether compensation for hedging costs constitutes permissible restitution or impermissible damages
• Whether a counter-application is required to claim compensation as part of just and equitable relief in review proceedings
• Whether the principle of subsidiarity precludes compensation orders in review proceedings
• The appropriate costs order in the circumstances

The appeal against paragraphs 7(b) to 14 and paragraphs 15(b) to 17 of the high court order was dismissed with costs. The costs in relation to the third respondent (Taleveras) were limited to one counsel, and as regards the fourth to eighth respondents (Contango, Natixis and Vitol), included the costs of three counsel. The high court's orders reviewing and setting aside the impugned decisions and agreements, and granting compensation to Contango/Natixis and Vitol for their out-of-pocket expenses (including purchase price, storage fees, hedging costs, insurance premiums, letters of credit, inspection fees, and option fees, plus interest), were upheld.

The binding legal principles established are: (1) Courts have wide discretion under section 172(1)(b) of the Constitution and section 8(1) of PAJA to craft appropriate remedies that vindicate rights violated while being fair to all affected parties. (2) When unlawful administrative decisions and resultant contracts are set aside, innocent third parties who are not complicit in maladministration, impropriety or corruption are entitled to compensation for out-of-pocket expenses incurred in reliance on those agreements, in accordance with the 'no-profit-no-loss' principle and corrective principle. (3) Such compensation constitutes restitution to restore the status quo ante, not damages for loss of contract; innocent parties should not profit from unlawful contracts but should not suffer losses either. (4) The 'no-profit-no-loss' principle requires that: (a) parties complicit in maladministration/corruption may be required to suffer losses; (b) innocent parties are not entitled to benefit from unlawful contracts but are not required to suffer losses. (5) Hedging costs incurred as standard practice in oil transactions to protect against price fluctuation risks are legitimate out-of-pocket expenses compensable as part of restitution. (6) No counter-application is required to claim compensation for out-of-pocket expenses in review proceedings where the applicant seeks just and equitable relief and invites respondents to address appropriate remedies. (7) The principle of subsidiarity does not preclude compensation orders properly available under legality and PAJA frameworks. (8) The public interest is served by compensating innocent financiers for losses caused by state unlawfulness, as this promotes secure credit provision, transparency and accountability, and deters future unlawful conduct by removing incentives for inefficient and dishonest administration. (9) Delay by state entities in instituting review proceedings that exacerbates losses to innocent third parties is a relevant factor in determining just and equitable relief. (10) Innocent third parties contracting with organs of state in good faith are entitled to assume compliance with internal arrangements and formalities.

The court made several non-binding observations: (1) The rot that allowed the impugned transactions was pervasive throughout the SFF, from the CEO who accepted bribes, to executives and managers who failed to raise red flags, to the board that failed in its oversight duties, to the CEF and Minister who failed to exercise proper authority. (2) Not compensating innocent parties for losses would 'send out a message to officialdom that no matter how poorly they administer a State entity's affairs, the court will see to it that the entity suffers no loss' - thereby removing deterrent effects. (3) The appellants demonstrated a 'startling failure to accept any responsibility for the unlawfulness of the transactions' and inappropriately portrayed themselves as victims rather than perpetrators. (4) If innocent third-party financiers are required to incur significant losses when the State acts unlawfully despite taking protective steps, this would have a 'chilling effect on financing' and international banks would be reluctant to finance major transactions crucial to the economy. (5) The court noted the 'staggering conspiracy of silence' where the SFF Executive Committee knew of the transactions by 19 January 2016 but no one informed the Board until 5 February 2016. (6) The court observed that seeking punitive costs orders against a party without hearing them is impermissible. (7) The court emphasized that Vitol's engagements with SFF, including providing input on draft documents, were proper commercial conduct and not sinister, as it was 'natural that [parties] should promote [their] company's interests.'

This case is significant for clarifying the principles governing just and equitable relief under section 172(1)(b) of the Constitution and section 8(1) of PAJA in administrative law review proceedings, particularly in public procurement contexts. It establishes important principles regarding: (1) compensation for innocent third parties when unlawful state contracts are set aside; (2) the scope of the 'no-profit-no-loss' principle and corrective principle; (3) the distinction between restitution (permissible) and damages for loss of contract (not permissible); (4) the treatment of hedging costs as legitimate out-of-pocket expenses in oil transactions; (5) the public interest in protecting innocent financiers to promote transparency and accountability; (6) the procedural requirements (or lack thereof) for claiming compensation in review proceedings; (7) the application of the Gijima principle requiring declaration of invalidity even where delay is unreasonable if illegality is clear and indisputable; and (8) judicial approaches to deterring state misconduct while protecting innocent parties. The case reinforces that where state organs act unlawfully, they cannot escape liability for losses suffered by innocent third parties who relied in good faith on those unlawful acts, particularly where the state entity's own delay exacerbated the losses. This promotes the rule of law and accountability in public administration.