Standard of Expropriation and Compensation under South African law

By Muhammad Mustaqeem de Gama (Director: Legal International Trade and Investment at the Department of Trade and Industry of South Africa) and Rafia de Gama (Lecturer: University of South Africa)

1. Introduction

The Cabinet decision of 20 July 2010[1] specified that an inter-ministerial work group should commence work on an investment protection act for South Africa. Such an act would incorporate, codify and interpret core international law concepts that have been subject to conjecture and dispute in international investment arbitrations and clarify the level of protection that investors may expect in South Africa.

The draft Promotion and Protection of Investment Bill[2] (hereinafter “the Bill”) clarifies the international investment law concepts of national treatment, expropriation, compensation and transfer of funds in line with South African constitutional principles. The Bill also seeks to achieve several balances, including the rights and obligations of investors, to provide adequate protection to foreign investors, to ensure that South Africa’s constitutional obligations are upheld, and that government retains the policy space to regulate in the public interest. This contribution will concentrate on expropriation and compensation under South African law.
2. Standard of expropriation

It is trite that the general rule applied under customary international law is that expropriation can only occur for “public purposes, under due process of law, on a non-discriminatory basis.[3] This formulation is fully aligned to Article 25 of the Constitution of the Republic of South Africa.[4] The South African Constitution more than meets this standard. The draft Bill provides that all investors will have a right to compensation in the event of expropriation. Bilateral Investment Treaties (BITs) typically call for “prompt, adequate and effective” compensation while the draft Bill provides for just and equitable compensation that is effected in a timely manner. Considering this formulation, compensation is considered prompt if paid without delay; adequate, if it has a reasonable relationship with the market value of the investment and effective, if paid in convertible or freely convertible currency.

3. Market value

Unlike the so-called “Hull formula” that uses fair market value as an end point, the constitutional formulation recognises market value as one of the factors that may be taken into account to arrive at “fair and equitable” compensation that may be payable to an investor. There is considerable variance in respect of what constitutes “market value”. Reference may be found in BITs to “fair market value”, “genuine value”, “just compensation”, “real value”. For instance, the RSA-Netherlands BIT (1995) calls for “just compensation representing “genuine value”. This arguably constitutes a standard of compensation that takes into account legitimate objectives of public interest. Article 25 of the Constitution thus situates market value amongst other criteria in order to achieve an overall balance. It does not disregard fair market since it remains a relevant and important benchmark for quantification of damages in the context of expropriation.

4. Indirect and creeping expropriation

The issue of “indirect” and “creeping” expropriation by state action is also addressed in the draft Bill. The draft Bill clarifies that mere incidental adverse impact on the economic value of the investment does not constitute expropriation.[5] It further specifies that a measure aimed at protecting or enhancing legitimate public welfare objectives, such as public health or safety, environmental protection or state security also does not amount to expropriation.[6] The issuance of compulsory licenses in line with international commitment is similarly excluded as acts of expropriation. Article 8(2)(d) of the draft Bill provides that any measure  which results in the deprivation of property but where the state does not acquire ownership of such property cannot be considered to be expropriatory. This particular provision seeks to embed the pronouncement of the South African Constitutional Court in the matter of AgriSA v Minister of Minerals and Energy. [7] Central to this case was the introduction of the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) which abolished the common law position in terms of which the owner of land also owned the minerals below such land.

The claimant argued that the conversion from old order rights to new order rights constituted a deprivation that was subject to compensation under the South African constitution. The Supreme Court of Appeals (SCA) in its judgment held that no expropriation or deprivation occurred due to the fact that mineral rights are devoid of any practical value in the absence of the right to mine, and that a mineral right in relation to which the right to mine has not been secured does not constitute property of which its holder could be deprived or expropriated.[8] This logic seems not to have been accepted by the Constitutional Court and it confirmed the dictum of Ackerman J in First National Bank of SA Ltd t/a Wesbank v Commissioner, South African Revenue Service and Another; First National Bank of SA Ltd t/a Wesbank v Minister of Finance[9] that the lack of value or indeterminate value does not destroy the existence of the right of ownership of minerals.[10] Having embraced this logic Mogoeng CJ proceeded to assess whether the allegation that deprivation of property, envisaged by Article 25 of the Constitution, took place and rose to the level of expropriation. He accepted that a “compulsory deprivation” took place but concluded that in this instance the state did no acquire ownership even though it had assumed custodianship of the rights so affected.[11]

5. Conclusion

Interestingly, the majority decision did not decide definitively that expropriation in terms of the MPRDA is incapable of ever being established. Viewed through an international investment law prism it should be noted that international tribunals have often refused to require compensation when the governmental action did not remove essentially all or most of the property’s economic value.  A mere economic impact test as articulated in the Metalclad decision is not capable of independent existence in light of the character of the government measure particular to this case, especially if account is taken of the purpose and context of such a measure. Both the purpose and context of the measure was to be informed by the transformational mandate as set out in the MPRDA in order to ensure that the injustices of the past in the economic sectors of South Africa were addressed in a balanced way. The decision in AgriSA, contrary to most criticisms, is legally sound and defensible in light of international jurisprudence.