South African Courts and the Expropriation Conundrum: Caveat Foreign Investor, by Azwimphelele Langalanga

Summary

A milestone decision was passed down by South Africa’s premier court seated in Braamfontein, Johannesburg. This was in the case of Agri South Africa v. Minister for Minerals and Energy.[1] It is a case testing the legality of the Mineral and Petroleum Resources Development Act (MPRDA) 28 of 2002 (as amended), particularly its black empowerment provisions. Simply put this piece of legislation had the effect of vesting all mineral ownership to the state. Before it came into being, mineral resources underground were owned by the land owners who in most instances happened to be farmers.[2] These farmers had inter alia the right to exploit the minerals and to lease such mining rights to anyone on their terms. The claimants challenged it on the basis that it expropriated their property. The court ruled that there is a difference between expropriation and deprivation. And basically provided that the concept of indirect expropriation did not apply in South African law.

The MPRDA

The Minerals and Petroleum Resources Development Act (MPRDA)[3] is a piece of legislation promulgated in 2002 with a view to include ‘historically disadvantaged persons’ into the mainstream economy, particularly the mining and petroleum sector. This statute includes most of the principles of black economic empowerment and affirmative action.[4] It is accompanied by a code of good practice encapsulated in the mining charter.[5] These pieces of legislation encumber mining companies to inter alia cede some of their ownership to black owned entities. What is relevant in the case which went up to the highest court of the land was that the MPRDA had the effect of transferring mineral ownership from private entities and persons into the state. What was hitherto real rights was changed into limited rights. Before this regulation owners of land could cede their mineral rights, bequeath them in wills, sell them etc. Now all these rights have been taken away. The case in point involved such a situation and the affected farmers took the matter to court alleging that their property had been expropriated. The argument around expropriation is the one which has proved to be decisive in this matter and could shape the direction of property ownership in this country for a long time to come.

Expropriation: South African Context

Expropriation occurs when a State decides to take property from private owners without their consent. This is usually followed by compensation to offset the loss which the investors would have incurred. The State must engage in this with a view to meeting some public interest obligation. South Africa with its history of colonialism and apartheid characterized by economic imbalances has expropriation at the core of its regulatory regime. The Constitution in its property clause provides for expropriation for a public purpose, with compensation which is just and equitable.[6] One of the salient provisions is that the history of the acquisition must be taken into account. Most importantly it provides that no one can be deprived of their property except when it is sanctioned by a law of general application. What is unique within this property clause is that it is a hybrid between the Calvo and Hull doctrinal approaches to expropriation, both couched within the same provision. David Sneiderman refers to this unusual provision as reflecting “…a unique compromise designed to assuage the anxiety of the Afrikaner minority.”[7] Expropriation is also a principle of international law and particularly the law on foreign direct investment. The difference being that international investment law rarely distinguishes between expropriation and deprivation of property as the South African constitutional court has done.

Expropriation: International Investment Law

South Africa emerged from international isolation in 1994. It then entered into a lot of bilateral investment agreements which obliged it to protect foreign investment. These agreements outlaw expropriation except under the condition that it is lawful, for a public purpose and is carried out for a public purpose. The South African government has completed a review of its bilateral investment treaty framework. It has come to the conclusion that it will not be renewing the agreements as they terminate, arguing that they limit its policy space particularly its broad based black economic empowerment programs.[8] Instead the South African government is in the process of formulating a Foreign Direct Investment (FDI) bill, whose contents have not yet been made public. The government seems to be more in favour of the ousting of investor state dispute settlement and replacing it with domestic adjudication.[9] It argues that its judicial systems meet international best practices. However, this current decision of the Constitutional Court which clearly reflects either some disconnection with (or a flagrant disregard for) international law and international investment law in particular, potentially damages the government’s grounds for entrusting domestic courts with investment disputes.

This was borne by an apprehension that domestic courts of developing countries were not competent enough to deal with investment issues. South Africa has actually been sued in one of the international tribunals in the ICSID case of Piero Foresti, Laura de Carli and Others v the Republic of South Africa (ICSID Case No. ARB (AF)/07/01).[10] This case also challenged the MPRDA under almost similar facts and issues as the Agri South Africa case under discussion.  Unfortunately, the South African government reached an out of court settlement with claimants hence no substantive pronouncement on the legality of the South African black economic empowerment program was reached.

The Constitutional Court Decision and its Implications

The constitutional court decision in Agri SA reflects reluctance or an unawareness of the principle of indirect expropriation. A principle which is not yet settled in international investment law due to the tension between the need for policy space and protection of investors’ rights. This is the principle of indirect expropriation. A principle which provides that any act of the state which leads to the diminution of value of a property is expropriation. The Constitutional Court’s thinking is underlined by the fear to apply a more liberal interpretation of expropriation as it will ostensibly lead to regulatory capture. A narrower interpretation will not interfere with the government’s transformation agenda. In distinguishing between expropriation and deprivation the Court provided that: “Deprivation relates to sacrifices that holders of private property rights may have to make without compensation, whereas expropriation entails state acquisition of that property in the public interest and must always be accompanied by compensation.”[11] Maybe what is even more worrisome is the declaration by the court that: “There can be no expropriation in circumstances where deprivation does not result in property being acquired by the state.”[12] In international investment law, principles such as regulatory takings, indirect expropriation, creeping expropriation, virtual, constructive expropriation, de facto, consequential, measures tantamount to expropriation do not hinge on the state benefiting directly or indirectly from the deprivation or expropriation. Recent trends in international investment law cases support this contention.[13] It must be conceded though that the international investment law scene is replete with inconsistent decisions. As a consequence there are some decisions which are in line with the constitutional court decision.[14]

An argument can be made that when the MPRDA changed old order mineral rights from real rights into limited rights it had an effect of reducing the value of private properties within which those minerals lay. For instance a farmer who owned land with diamonds worth a trillion dollars underneath found himself owning the land excluding the mineral wealth. In international investment law the South African government does not need to have benefited directly or indirectly from the implementation of the MPRDA.[15] If investors have suffered a loss through diminution of the value of their investments a finding of expropriation would be made. In this case real rights are more valuable that limited rights.

Foreign Investors

The question is whether or not foreign investors must be worried by the ruling. The answer is twofold. Firstly, investors need not to be worried for now. This is because disputes resulting from current international investment agreements will not have to be subjected to domestic courts. The terminated agreements have survival clauses ranging between ten to fifteen years meaning that they will be in force for the next decade and a half.[16] However, foreign investors should be very worried should the South African government proceed and remove investor dispute settlement from its future bilateral investment agreements. The judgment of the Constitutional Court reflects the breadth with which the highest court in South Africa will go in accommodating transformative policies. While black economic empowerment in its various manifestations could be argued to be resulting in indirect expropriation it is lamentable that the Court has made a finding to the effect that there is no such principle in South African law. As it stands one can only cry for the local investors who have been left with no remedy.

Conclusion

The Constitutional Court decision in Agri South Africa v. Minister of Minerals and Energy will have a long term effect in damaging investor confidence in this country. It is a decision which outlaws one of the most progressive tenets of international investment law. The decision in a way preempts the Foreign Direct Investment Act which the government is in the course of processing. This is a piece of legislation in the making within which the South African government intends to codify its regulation related to foreign investment. It was borne out of a review of the country’s bilateral investment treaty framework. If the FDI Act of which foreign investors have been anxiously waiting for is contrary to what the court has ruled in this case it can be challenged as unconstitutional. Capital exporting countries and foreign investors in general should study this decision closely and be wary of South African courts’ attitude towards the idea of expropriation and particularly indirect expropriation. The local investors in this case are left with no remedy despite the glaring misinterpretation of legal principles by the Constitutional Court. The SADC tribunal, a regional court could have been their next port of call, but it was unceremoniously disbanded by the regional body.



[1] [2013] ZACC 9

[2] See Peter Leon, “MPRDA Amendment may further damage investor confidence”, Politicsweb, 16 January 2013 (accessed at http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page72308?oid=350853&sn=Marketingweb+detail&pid=90389). See also the South African Institute of Race Relations Submission to the Department of Minerals and Energy, 8 February 2013 (available at www.sairr.org.za/…/SAIRR%20submission%20on%20MPRDA%20Bill%). See also Peter Leon, “International Best Practice for Mineral Regulation in Developing Countries”, Address to the Commonwealth Law Conference, 16 April 2013 (available at http://www.webberwentzel.com/wwb/action/media/downloadFile?media_fileid=7878). 

[3] 28 of 2002.

[4] These include empowerment in areas of: ownership, procurement, employment equity, beneficiation, human resource development, mine community development, housing and living conditions.

[5] Fully referred to as the: Broad Based Socio Economic Empowerment Charter for the South African Mining and Minerals Industry. This is established in terms of Section 100(2) of the Minerals and Petroleum Resources Development Act 28 of 2002 (as amended).

[6] See Section 25 of the South African Constitution. Relevant parts provide thus:

“(1)     No one may be deprived of property except in terms of a law of general application, and no law may permit arbitrary deprivation of property.

(2)     Property may be expropriated in terms of a law of general application-

(a)     For a public purpose or in the public interest; and

(b)     Subject to compensation, the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court.”

[7] See David Sneiderman, “Investment Rules and the New Constitutionalism”, Law and Social Enquiry, Vol. 25, No. 3 (Summer 2000), pp. 757-787.

[8] See South African Trade and Industry Minister Rob Davies, “New Approach Needed on Investment Treaties”, Presentation at UNCTAD, Geneva, 24 September 2012 (available at http://www.southcentre.org/index.php?option=com_content&task=blogcategory&id=144&Itemid=287&limitstart=30&lang=es ). See also Xavier Carrim, “South Africa’s Review and New Policy on BITs”, Presentation at UNCTAD, Geneva, 24 September 2012 (available at http://www.southcentre.org/index.php?option=com_content&task=blogcategory&id=144&Itemid=287&limitstart=30&lang=es).

[9] Ibid.

[10] Decision of 4 August 2010. The action was brought in terms of the Bilateral Investment Promotion and Protection Agreement between the Government of the Republic of South Africa and the Government of the Republic of Italy of 7 June 1997 and the Agreement between the Republic of South Africa and the Belgo-Luxembourg Economic Union on the Reciprocal Promotion and Protection of Investments signed in Pretoria on 14 August 1998.

[11] Supra Note 1, at page 22, para. 48.

[12] Supra, page 28, para. 59. Own emphasis added.

[13] See for instance Waste Management v. United Mexican States (ICSID Case No. ARB(AF)/97/1); Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador (ICSID Case No. ARB/06/11), Awarded on 5 October 2012 at page 7. The latter referred to these types of expropriation as “…measures short of physical taking…that permanently destroy the economic value of the investment or deprive the owner of its ability to manage, use or control its property in a meaningful way.”

[14] See Metalclad v. United Mexican States (ICSID Case. No. ARB(AF)/97/1); S.D. Myers Inc. v. Government of Canada, 2001 FCT 317; Pope & Talbot Inc. v. Government of Canada, 41 ILM 1347 (2002).

[15] See August Reinisch, “Expropriation”, in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds.), The Oxford Handbook of International Law (2008), p. 427.

[16] South Africa has not renewed its expired bilateral investment treaties with Belgium and Luxembourg and has indicated that it will not be renewing similar Mandela-era agreements as they lapse.

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