The Investment Bill: Is it constitutional? – Politicsweb, 28 August 2014

The Investment Bill - an unconstitutional infringement on the right to property?

The investment bill purports to protect and promote investments, but, amongst other dubious things, it allows the state to deprive owners of their property without paying them compensation. Is this permissible in our law?

Our Constitution draws a distinction between deprivation and expropriation of property rights. Expropriation occurs when the state dramatically interferes with an owner's property rights. The state may only expropriate property for a public purpose or in the public interest.  It is also required to pay the owner compensation that is fair and equitable. For example, if private land stands in the way of building a new road, the state may expropriate this property as long as it compensates the owner. In essence, expropriation is a form of deprivation of property accompanied by compensation.

The investment bill

Any mention of deprivation of property not amounting to expropriation should set off alarm bells, since this means that no compensation is owed by the state. Section 8(2)(d) of the Investment Bill states:

‘(2) The following acts...do not amount to acts of expropriation:

(d) any measure which results in the deprivation of property but where the State does not acquire ownership of such property provided that -

(i) there is no permanent destruction of the economic value of the investment; or

(ii) the investor's ability to manage, use or control his or her investment in a meaningful way is not unduly impeded.' 

(our emphasis)

The main clause means that the state does not have to compensate an owner that has been deprived of property if the state does not become the owner of the property. A typical case would be where the state facilitates the stripping of ownership from one person in order to benefit a third party.

The sub clauses create two limitations to the main clause. However, they fail to provide property owners with much protection.

In (i), the phrase ‘no permanent destruction of the economic value of the investment' is troubling, since it is the economic value to the investor that should concern us, not the value of the object itself.

In (ii), the phrase ‘in a meaningful way' creates uncertainty.  The state could limit an owner's use of his property and claim that the limitation is justifiable on the grounds that the owner still has meaningful use of the property.  Furthermore, the word ‘unduly' is problematic as it suggests that even if an owner's ability to exercise his rights over his property is infringed, this may not trigger a need for recompense.

Furthermore, the bill does not require the state to meet both hurdles, since the clauses are separated by an ‘or' not an ‘and'.

What constitutes ‘property' for the purposes of this bill?

The act targets all commercial investments, including those made before the act comes into operation. The terms ‘investment' and ‘property' appear to be used interchangeably. All kinds of property will be affected, from immovables (flats and houses) and movables (cars and laptops) to intellectual property (authors and artists rights). Shares held on the stock exchange, rights conferred by law (liquor licences) and even contractual rights (construction or management contracts) all fall under the scope of the bill.

The practical effects of the bill

Imagine that you buy a residential house as an investment that produces rental income. If the home is in a neighbourhood where there is no community centre, the state could choose to transfer ownership of your property to the community. The economic value of the property would remain the same, despite you no longer having any right to it.

You would no longer be able to use, manage or control the property, but the state could argue that these impediments to your rights are not undue because the community has benefitted from the newly acquired property. Since there is no acquisition of the home by the state, no compensation would be payable and you would have to forfeit your house in return for nothing.

The Agri SA case

The general concern is that this legislation will be upheld in the courts as it is allegedly based on the Agri SA Constitutional Court judgement. The legislature would have us believe that the highest court in the land has already pronounced on the matter.

In the case, Chief Justice Mogoeng held that ‘[t]here can be no expropriation in circumstances where deprivation does not result in property being acquired by the state'. The court relied on the concept of ‘custodianship' which envisages the state as ‘a facilitator or a conduit through which broader and equitable access to mineral and petroleum resources can be realised'. Thus, as a ‘custodian' the state never actually acquires the property in question but merely passes it on to the beneficiary. By Mogoeng's logic, since there is no acquisition, the requirement of compensation can be bypassed.

However, the widespread perception that the bill simply reflects the aforementioned constitutional precedent in statute may, on a closer reading of the case, be unfounded. In fact, it is quite possible that the legislature jumped the gun in this instance as it appears to have gone far beyond what the court intended.

The Agri SA case, lest one forget, deals with very specific property rights, namely old order mineral rights that had ceased to exist as the company in question had failed to exercise its exclusive right to apply for a prospecting or mining right within the given window period. Such rights, in turn, fall under the ambit of very specific legislation (the Mineral and Petroleum Resources Development Act of 2002 (MPRDA)). That act introduced the new and elusive concept of custodianship by stating the following: "Mineral and petroleum resources are the common heritage of all the people of South Africa and the State is the custodian thereof for the benefit of all South Africans."

Mineral rights are tied up with an aspect of the past which has been the cause of great hardship and now plays a central role in South Africa's quest for redress and restitution. Chief Justice Mogoeng, who penned the majority judgement, explains this, declaring that ‘the architecture of the apartheid system placed about 87 percent of the land and the mineral resources that lie in its belly in the hands of 13 percent of the population' and that ‘[t]o address this gross inequality, legislative measures [read the MPRDA] were taken to facilitate equitable access to opportunities in the mining industry'. It is also significant that the Chief Justice only discusses the concept of ‘custodianship' in this very limited realm of rights.

On the issue of acquisition (highly relevant to the concept of custodianship), Mogoeng goes on to state that ‘[a] one size fits all determination of what acquisition entails is not only elusive but also inappropriate particularly when an alleged expropriation of incorporeal rights, like mineral rights, is considered' and that a ‘case by case determination' is ‘the more appropriate way of dealing with these matters'.

The Chief Justice adds that ‘the source, nature and content of the affected incorporeal rights as well as measures taken to interfere with them or to preserve their essence would be of special significance in giving a contextual meaning to acquisition' and highlights ‘a recognition of the need to protect individual property rights'. Evidently, the Chief Justice's words would suggest the court was mindful that it was dealing with a special case. However, the Investment Bill goes far beyond the narrow circumstances of the case and extends Mogoeng's rule to all kinds of property.

It remains to be seen whether the apparent broadening of Mogoeng's rule was indeed warranted. In light of the constitutional provisions relating to property rights as well as our body of jurisprudence on these rights (and ironically the very case on which basis the Department of Trade and Industry drafted this legislation), the Investment Bill might well be unconstitutional.

Moreover, one ought to take note of dissenting Justice Froneman's concern regarding Mogoeng's interpretation of ‘acquisition':

‘It [the State] may not have acquired the right to exploit the minerals, but it has acquired the power to allocate and dispose of the exploitation rights. What private owners of minerals previously had in this regard, the state now has.'

Froneman  goes on to caution that ‘[i]f private ownership of minerals can be abolished without just and equitable compensation...what prevents the abolition of private ownership of any, or all, property in the same way? This [custodianship] construction in effect immunises...any legislative transfer of property from existing property holders to others if it is done by the state as custodian of the country's resources, from being recognised as expropriation...In that way one of the crucial aspects of our historical compromise, the equitable balancing between the protection of existing property rights and the public interest under section 25, is bypassed. I find that unfortunate.'

Justice Cameron, sharing the caution expressed by Froneman, adds that ‘it is inadvisable to extrapolate an inflexible general rule of state acquisition as a requirement for all cases'.

Where to from here?

If the bill is enacted and becomes part of our law our courts may deem it unconstitutional for two reasons.

First, the law extends the number of situations where the principle of custodianship can be used by the state. The investment bill targets property beyond the purview of mineral rights. Therefore the law could be struck down on the basis that it unjustifiably limits an owner's right to property.

Second, the courts could apply the doctrine of constructive expropriation. The doctrine applies in cases where the state deprives an owner of his property without becoming the owner itself. Much like the doctrine of constructive dismissal in labour law, constructive expropriation favours substance over form. The property owner is either awarded compensation or their property is restored to them. However, South African courts have been hesitant about incorporating the doctrine into our law.

Nonetheless, Froneman's following remark in AgriSA would seem to support such a doctrine: ‘It [the State] may not have acquired the right to exploit the minerals, but it has acquired the power to allocate and dispose of the exploitation rights. What private owners of minerals previously had in this regard, the state now has.'

Since the bill has not yet been enacted it is still possible for it to be amended. We suggest that the bill would be greatly improved by changing the wording to the following:

‘S8(2) The following acts...do not amount to acts of expropriation:

(d) any measure which results in the deprivation of property but where the State does not acquire ownership of such property provided that -

(i) there is no destruction of the economic value of the investment to the investor; and

(ii) the investor's ability to manage, use or control his or her investment is not impeded.' 

At this point, it must be noted that the scope of this article is limited to Section 8(2)(d) of the bill. Even the above amendment is unlikely to be able to save the bill due to its many other problematic sections and underlying objectives which we have not dealt with in this piece. However, we think that such an amendment would limit some of the damage the bill is likely to cause the South African economy.

Conclusion

We have argued that Section 8(2)(d) of the bill poses a serious threat to the rights of property owners. We hope that this section of the bill is amended before it is challenged in the courts. In its current form, it creates legal uncertainty that is sure to discourage both foreign and local investment. If the state cares about economic growth and job creation it should reconsider passing the investment bill.

Mark Oppenheimer is a practicing advocate and member of the Johannesburg Bar. He has represented newspapers that are threatened by defamation suits, individuals that were wrongfully arrested by the police and employees that have been unfairly dismissed.

Cecelia Kok obtained a BA LLB (cum laude) from WITS University and now coordinates the Friedrich Naumann Foundation for Freedom's work with local and international think tanks in South Africa. She has a specific interest in rule of law issues and property rights.

This article was written in the authors' private capacities. It first appeared as an occasional paper of the Institute of Race Relations. Such occasional papers do not necessarily accord fully with the policy positions of the IRR.