Expropriation – a minefield?

July 1st, 2013
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Agri SA v Minister of Minerals and Energy (CC) (unreported case CCT 51/12, 18-4-2013) (Mogoeng CJ)

By Ben Winks

The Constitutional Court (CC) recently delivered judgment in one of South Africa’s first tests of transformative legislation aimed at fundamental economic reform.

The Agri SA case offered an opportunity to clarify the meaning of one of the most controversial provisions in the Bill of Rights, the so-called ‘property clause’. Instead, it has arguably rendered the legal content and consequences of the clause more uncertain than ever.

Background

When the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) entered into force on 1 May 2004, it reformed the mineral rights regime in South Africa. The Act provides that the state, as custodian of these resources for the benefit of all South Africans, may grant, refuse and administer mineral rights and charge royalties for their exploitation.

The MPRDA introduced detailed transitional arrangements, including affording the holders of unused old order rights (rights to minerals in respect of which no prospecting or mining had yet commenced) a grace period of one year to apply for new order rights.

Before 1 May 2004, a company called Sebenza held coal rights in respect of certain farms, but it was wound-up before conducting any prospecting or mining. These rights were thus ‘unused old order rights’ under the transitional provisions of the MPRDA and, as Sebenza was not able to apply for new order rights in time, they expired on 1 May 2005.

Sebenza’s liquidators deemed the coal rights expropriated and claimed compensation from the Department of Mineral Resources, which rejected the claim. Agri SA took cession of the claim and brought it to the North Gauteng High Court as a test case.

The High Court defined ‘expropriation’ as deprivation of property and acquisition of substantially the same property by the state. It found that the MPRDA not only destroyed pre-existing mineral rights but vested the substance of these rights in the state, thus effecting not only the deprivation, but also the expropriation, of unused old order rights, for which just and equitable compensation was payable.

The Minister of Mineral Resources appealed to the Supreme Court of Appeal (SCA), which agreed broadly with the High Court’s definition of ‘expropriation’, but disagreed that the MPRDA had such an effect. It held that the essential ‘right to mine’, from which all mineral rights are derived, had always been vested in the state and allocated by it to private parties in differing degrees over the years.  The SCA thus held that the MPRDA did not effect a blanket expropriation of mineral rights.

Agri SA approached the CC, which granted leave to appeal but subsequently dismissed the appeal.  Dissenting views were, however, expressed in a minority judgment and a separate judgment by Cameron J.

Majority judgment

The majority agreed with the High Court and the SCA on the definition of ‘expropriation’. However, it disagreed with the SCA on the application of that definition to the MPRDA.

Whereas the SCA effectively found that Sebenza’s mineral rights had not constituted property, the majority of the CC held that, before the MPRDA, the right to exploit minerals was inextricably linked to ownership of those minerals and the SCA’s distinction between mineral rights and the ‘right to mine’ was unclear and misleading.

Originally, mineral rights included ownership of minerals and the right to exploit them. Even when the state assumed regulatory authority over mineral extraction, it could only permit mineral owners to extract them. When the state sought to compel mineral exploitation by third parties, it recognised mineral owners’ proprietary interests by requiring the payment of royalties or by expropriating their mineral rights against payment of compensation.  Moreover, the SCA had ignored the right not to mine as an essential component of mineral ownership.

Accordingly, the majority of the CC held that mineral rights were property with economic value.

The court found that the MPRDA deprived pre-existing mineral right holders of elements of that right, but such deprivation was not arbitrary in light of the objects of the MPRDA and the transitional arrangements.

The key question was whether such deprivation amounted to expropriation.

To establish expropriation, the majority held that the state must have acquired the ‘substance or core content’ of the property in question.

It approached ‘acquisition’ through a holistic and historical interpretation of s 25 of the Constitution, which it stated ‘sits at the heart of an inevitable tension between the interests of the wealthy and the previously disadvantaged’ and must be read ‘with due regard to the gross inequality in relation to wealth and land distribution’. In this light, private property rights should not be over-emphasised at the expense of the state’s social responsibilities.

The majority held that ‘an overly liberal interpretation of acquisition’ could blur the line between deprivation and expropriation, and undermine the constitutional imperative to transform the economy. Acquisition must be determined contextually in each case, considering the source, nature and content of the affected rights, as well as measures taken to interfere with them or preserve their essence.

Accordingly, the majority found that, although the MPRDA effected compulsory deprivation of mineral rights and vested the state with custodianship over them, along with the power to grant to others what could previously only be granted by mineral right holders, the state did not thereby ‘acquire’ those rights, as it had not become the owner of mineral resources for its own benefit, but was their custodian.

Minority judgment

The minority agreed that the appeal should fail, but for different reasons. It was of the view that state acquisition was not an essential element of expropriation, but the state had, in any event, clearly acquired the powers previously held by mineral owners.

The minority argued that the conventional formalistic approach to expropriation was inappropriate for large-scale transformational legislation such as the MPRDA.

Applying an unprecedented approach, the minority held that the MPRDA must be interpreted in a manner that best accords with the spirit, purport and objects of s 25 of the Constitution.

By preserving old order rights for a limited time and affording their holders the exclusive competence to convert them into new order rights, the MPRDA had provided those holders with ‘compensation in kind’ for the loss of their mineral rights, which ‘should be read as giving alternative legislative content to the just and equitable compensation provision for expropriation in section 25(3)’.

This approach would allow courts to ‘cut to the chase’ to determine whether ‘compensation in kind’ is just and equitable, ‘without having to wrestle their way through the formalistic requirements for expropriation’.

It also allows for the possibility of proving that the ‘legislative balancing’ might not have been just and equitable and that further compensation might be payable.

Judgment of Cameron J

Cameron J concurred with the majority, except to the extent that he agreed with the minority that state acquisition, although a ‘general hallmark’ of expropriation, was not required in all cases.

Analysis

In my view, the majority judgment was correct in rejecting the SCA’s approach and in holding that the MPRDA effected a deprivation of property.

With respect, however, in my view there are three difficulties with the majority’s reasoning.

Criticism of the judgment

The first difficulty is the sweeping assumption that state acquisition is an essential element of expropriation. Although this appeared to be common cause between the parties, and was not rigorously interrogated by the lower courts, the CC was, for the first time, faced with defining this important concept in the Bill of Rights. It is thus unfortunate that the minority’s warning against adopting such a sweeping position was not heeded.

The second difficulty is the finding that the state did not acquire the mineral rights previously held by private parties. As the minority illustrated, the powers previously enjoyed by mineral owners are now substantially vested in the state. This is clearly ‘acquisition’ by the state.

The majority’s reasoning that the state cannot be considered to have acquired property that it seeks not for its ‘own’ benefit, but for the benefit of the public is, with respect, unpersuasive.  It is unclear what benefit the state could seek to serve apart from the public benefit.  Expropriation presupposes the pursuit of a public purpose or public interest; otherwise it is unlawful and unconstitutional. In the absence of some definition and distinction of the ‘private’ interests of the state (which, arguably, cannot exist), it is unclear how expropriation could ever be established under the majority’s approach.

The third difficulty is analysing acquisition as a matter of intent rather than effect.

The proper approach appears to be that acquisition is a question of ‘whether’, not of ‘why’, and that the state either has or has not acquired certain property, irrespective of what it plans to do with it.

The majority improperly imports the justification for acquisition into the analysis of whether an acquisition has occurred.

This features in the minority judgment too. The minority held that state acquisition, while not required to establish expropriation, in any event occurred, but it did not clearly commit to finding that the MPRDA effected an expropriation.

It eschews this inquiry entirely, deeming it unduly formalistic, and proposes an alternative, whereby the MPRDA is measured against the spirit and scheme of s 25 of the Constitution, and is found to be consistent with its prescripts of justice and equity.

It is unclear why the minority considered it necessary to conceive such an innovative angle to the application of the Bill of Rights when it could have achieved the same result through a more conventional analysis and, indeed, through s 36 of the Constitution.

Like the majority, it embarks on an exercise in justification, which is preceded by an acknowledgment of a limitation of rights. However, the word ‘limitation’, in this sense, is not used.

If the MPRDA effected an expropriation, as the minority seems to suggest, then a limitation of rights is revealed.

Section 25(2) of the Constitution states:

‘Property may be expropriated only in terms of 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’ (my emphasis).

Even if one accepts the proposition that the MPRDA provided just and equitable ‘compensation in kind’, it still falls foul of the standard set by s 25(2), as it was not ‘agreed to by those affected or decided or approved by a court’.

It is not suggested that the guarantees in s 25(2) are immune from justified limitation, nor that is it impermissible to depart from the prescript that compensation be ‘agreed to by those affected or decided or approved by a court’.

On the contrary, s 25(8) of the Constitution clarifies that no provision in s 25 ‘may impede the state from taking legislative and other measures to achieve land, water and related reform, in order to redress the results of past racial discrimination, provided that any departure from the provisions of this section is in accordance with the provisions of section 36(1)’.

Far from unprecedented, this approach finds support 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 2002 (4) SA 768 (CC) at para 110 and, more directly, in Nhlabathi and Others v Fick (LCC) (unreported case no LCC 42/02, 8-4-2003) (Bam P and Gildenhuys J) at paras 32 to 34.

The minority alludes to a similar approach in European human rights jurisprudence, but does not locate it in a limitations analysis.  In any event, it applies the language and logic of justification to its inquiry, although using a less rigorous rubric than s 36(1).

Its approach is imprecise in tracing the contours of the right to property in a transformative context, and leaves it unclear whether or not the MPRDA limits property rights. Thus, the minority, more so than the majority, may have clouded, rather than clarified, the future interpretation and application of s 25.

In the separate judgment of Came-­ron J, he concurred with the majority that the MPRDA did not result in acquisition of that property by the state; however, he disagreed that state acquisition is an essential element of expropriation. It is not clear, therefore, whether and why Cameron J deems that the MPRDA did or did not effect an expropriation.

Implications for economic transformation and expropriation in general

It is arguable that a more cogent and consistent route was available to the CC, namely to find that the MPRDA –

  • did effect an expropriation of pre-existing mineral rights;
  • did not provide the precise specification of compensation promised in s 25(2);
  • but constituted a reasonable and justifiable limitation of that right, given the importance of its purpose, the pursuit of which was proportional in light of, among others, the transitional measures taken to minimise disruption.

In this way, the court could have provided a much-needed constitutional template for transformative economic reforms.

Instead, the majority effectively denies that s 25 of the Constitution applies to transformative legislation, while the minority proposes that it applies in imprecise spirit rather than in clear letter. The judgment is thus, with respect, unhelpful in charting a coherent jurisprudential course through the difficult project of ensuring equitable distribution and sustainable development of the nation’s natural wealth.

An important instrument in the state’s pursuit of reform is its power to expropriate, currently regulated by the Expropriation Act 63 of 1975. To replace this Act, a draft Expropriation Bill was published in March 2013. Apart from some concerning aspects, the draft Bill represents a workable basis for developing a comprehensive and constitutionally sound procedural framework for expropriation.

However, the judgment in the Agri SA case has rendered the draft Bill inadequate, as it is silent on the substantive content of expropriation, and does not define the concept.

The draft Bill recites the constitutional prescript that property may only be expropriated for a public purpose or in the public interest, but does not meaningfully define these terms.

This is critical, as a strict reading of the majority judgment in the Agri SA case creates the conundrum that, if indeed expropriation is undertaken ‘for a public purpose or in the public interest’, it is not expropriation at all, as the state has not ‘acquired’ the property.

Thus, currently, the draft Bill does not delineate the circumstances of its own application. The reason for its substantive silence is obvious: To date, the debate assumed a conventional understanding of expropriation and focused instead on how it should be exercised and how much compensation it should justify.

An authoritative judgment may have helped to frame future discussion.  It is ironic, therefore, that the judgment delivered in the Agri SA case did not answer the questions raised, but rather undermined the existing understanding of expropriation, replacing it with far more questions than answers.

  • See 2011 (July) DR 47 and 2011 (Nov) DR 40.

Ben Winks LLB (UJ) Advanced LLM (cum laude) (Leiden University, Netherlands) is a candidate attorney at Webber Wentzel in Johannesburg and is a visiting researcher at the University of Johannesburg.

This article was first published in De Rebus in 2013 (July) DR 44.

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