State warned to watch its step on expropriation of foreign-owned property

Expropriation of foreign-owned property without compensation constitutes a violation of SA’s international law and a number of treaties to which the country is a party, legal experts warned.

The co-chairperson of the Joint Constitutional Review Committee, Vincent Smith, said on Sunday this concern was something his committee would have to consider "seriously" when making its final recommendations to Parliament.

According to Peter Leon, Hannah Ambrose, and Ernst Müller of international law firm Herbert Smith Freehills, it is an accepted principle of international law that a country cannot simply implement domestic legislation while avoiding its international law obligations.

In February, in a move that spooked investors, Parliament voted in favour of an EFF motion for land expropriation without compensation. The constitutional review committee was instructed to review section 25 of the Constitution and other property clauses and report back to Parliament in August.

The EFF appears to be pushing for a blanket approach to land expropriation while the ANC seems more in favour of a case-by-case approach as articulated in the Constitution.

In a joint opinion piece, Leon, Ambrose, and Müller said the proposed amendment of section 25 of the Constitution may affect the pricing of investment risk, which may lead prospective as well as existing investors to turn their attention to more hospitable investment destinations.

"Existing foreign investors, in particular, will need to consider what rights and recourse might be available to them under international law to mitigate the risk of expropriation without compensation," they said.

Legal Protection

They said there might be additional legal protection when the property owner was a foreign investor, as the government’s conduct was then regulated not simply by the Constitution but by international law.

"Under customary international law, each sovereign state expects other states to treat its nationals and their property in accordance with … basic standards, collectively known as the ‘international minimum standard of treatment’. This entails [that] expropriation may only be for a legitimate public purpose, in accordance with nondiscriminatory due process, and accompanied by compensation.

"Opinion is divided, however, as to the amount, manner and timing of this compensation. The standard often expected and certainly preferred by foreign investors is ‘prompt, adequate and effective’ compensation," Leon, Ambrose, and Müller said.

Despite these potentially different expectations of compensation under customary international law, upon the expropriation of a foreign investor’s property, there was clear consensus that it required at least some compensation, they said.

"If, however, the Constitution is interpreted, or amended, to permit the expropriation of property owned by foreign nationals without any compensation, SA could become vulnerable to numerous investor-state arbitration claims, capable of costing the country much more than the market value of the expropriated investments. As well as the immediate cost, such claims may have considerable impact on the country’s attractiveness as an investment destination, as the experience in Zimbabwe and further afield in Venezuela has vividly shown."

According to Gary Moore, a lawyer at the Free Market Foundation, bilateral investment treaties govern state treatment of investments in the one country by nationals of the other, and typically require compensation for expropriations.

"Many countries have [bilateral investment treaties] that were entered into in the 1990s. SA entered into some 49 …[which] require compensation for expropriation. Different South African [treaties] refer to the measure of compensation in different terms, usually interpreted as requiring payment of market value," said Moore.

Customary international law recognised states’ right to expropriate alien property subject to compensation. The Permanent Court of International Justice observed that, apart from any treaty, the amount should be the property value, he added.

However, said Moore, the Constitution stated that international agreements were law in the Republic only if enacted by national legislation. And, according to the Constitution, customary international law was law in SA "unless it is inconsistent with the Constitution or an act of Parliament". Thus the internal application of international law within SA was subject to the Republic’s legislation.

The Department of Rural Development and Land Reform said it was premature to comment as the law had not been passed. It referred questions to Parliament. However, a department official who declined to be named said: "The question is still premature since it’s coming before the parliamentary process isn’t yet finalised. Expropriation of land without compensation is going to be determined by Parliament.… Once Parliament has made a decision, the department will be given a directive."

"It is obviously something that we will have to confront … whatever recommendation we make we will have to make sure it doesn’t fall foul of the Constitution or jeopardise whatever agreements we have as a country," said Smith.


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