Expropriation without compensation and the international law standard of treatment
Analysis by Professor Hennie Strydom, South African Research Chair in International Law, University of Johannesburg, for Sakeliga as part of Sakeliga’s submission to the Constitutional Review Committee on the question of amending the Constitution for expropriation without compensation
1. Introduction
The views and comments expressed in this part are based on the premise that the prevailing international law position on the expropriation of property owned by foreign nationals is that the expropriating state is under an obligation to pay compensation. This has been confirmed in various arbitral awards and commentaries on the principles of international investment law (see for instance Salacuse The Law of Investment Treaties (2010); ditto The Three Laws of International Investment (2013). What is also not in dispute is that states may differ as to the method and standard of compensation and different formulations are used in treaties, arbitral awards and national laws.
For instance in the De Sabla case it was found that the claimant was entitled to the “full value” of the property (1934, 28 American Journal of International Law 602, 611 – 602) and in the Norwegian Claims case the Permanent Court of Arbitration held that the claimants were entitled to “just compensation … under the municipal law of the United States, as well as under international law” (The Hague Reports, 1932, vol 2, at 69). In several bilateral investment treaties the phrase “prompt, adequate and effective compensation is used (see example below).
As far as the protection of national and foreign investments are concerned, South Africa has confirmed the relevance of international law standards (see The Protection of Investment Act below) and has committed itself in bilateral treaties to the payment of compensation in the case of expropriation (see treaty with Finland below as an example).
Since these commitments may now be under threat in view of the current plans to provide in law for expropriation without compensation (i.e. confiscation), three counter-movements of the 20th century on expropriation and compensation may be helpful, firstly for investors (national and foreign) to consider the nature and scope of the investment risks they may face in future, and secondly, for government to realize the importance of bringing legal certainty to an area of governance that has become increasingly chaotic and divisive with potentially serious economic and political consequences.
The first, and most notorious, were the large-scale confiscations of property without compensation practiced by the Soviet government after the October Revolution of 1917 under the delusion of the Dictatorship of the Proletariat. In the 1920’s with an economy in ruins and desperately seeking international recognition and economic assistance a so-called New Economic Policy was launched which included concessions by the Soviet government to entertain foreign claims arising out of the confiscation policy following the 1917 revolution (see Salacuse The Law of Investment Treaties (2010) at 62, 63).
What followed was an intricate web of horse trading between Western countries and the Soviet Union in settling claims and counter-claims for damages caused by either the reckless and ruthless experimenting with communism or the opportunistic intervention by some Western powers in the socio-political crisis following the October revolution.
A second development originated in the Latin American countries through efforts to implement the so-called Calvo doctrine which purported to subject all property-related claims to domestic law only and to exclude the use of diplomatic protection by foreign nationals whose property rights were affected by action taken by the territorial state.
This ‘national treatment’ rule had the effect that foreign nationals who entered into contracts under the Calvo clause with the territorial state could not claim treatment under an international law standard and had to accept treatment equal to the treatment nationals of the territorial state could lawfully claim, no matter how low that level of treatment was. In several arbitral awards handed down between the 1920’s and the 1950’s the rule was applied that a Calvo-clause contract precluded a foreign national from presenting a claim to his/her government for interpretation or fulfilment of the contract concluded with the territorial state (Salacuse op cit 65 -67).
In 2002, the International Law Commission, in its Third Report on Diplomatic Protection made it clear that the Calvo clause only applied to contracts between a foreign national and the territorial state containing the clause and not to breaches of international law, especially breaches that constitute a denial of justice (own emphasis). Since compensation is a recognized remedy that must follow an expropriation, the denial of compensation may constitute a denial of justice and even an arbitrary taking of property.
The third, and perhaps most relevant development for current purposes is the post-colonial challenge to customary international law principles on the protection of investments. This took the form of UN General Assembly resolutions in the 1960’s and 1970’s when developing states sought to use their numerical strength in the Assembly to shape international law of state responsibility to foreign investors in accordance with their own interests.
The underlying political agenda was informed by the concept of permanent sovereignty over natural resources by means of which developing states sought recognition of their right to nationalize and re-establish sovereignty over natural resources in their territories without the necessity or adequacy of compensation. Developed states, on the other hand were prepared to accept such a right provided that developing countries remain in compliance with established rules of international law on the payment of compensation.
From the 1960’s to the mid 1970’s 62 developing countries engaged in 875 nationalizations or takeovers of foreign enterprizes which led to a dramatic increase in disputes about the existence and nature of compensation for expropriated property under international law. Soon, the economic and political consequences of the expropriation frenzy had a sobering influence on the aspirations of developing countries under what became known as the New International Economic Order (NIEO). In 1962, the General Assembly adopted resolution 1803 on the issue of permanent sovereignty over natural resources.
In para 3 the resolution states in clear terms that foreign capital investments and the earnings on that “shall be governed by the terms thereof, by the national legislation in force and by international law” (own emphasis). In para 4, the resolution states that in the case of nationalization, expropriation or requisitioning “the owner shall be paid appropriate compensation, in accordance with the rules in force in the State… and in accordance with international law” (own emphasis). Of further significance is para 8, which determines that “[f]oreign investment agreements freely entered into by or between sovereign states shall be observed in good faith” (own emphasis).
Even in the more radical General Assembly resolution 3171 of 1973, developing states did not get rid of the compensation principle, but merely made the amount of compensation and the mode of payment, matters to be determined under national law.
The payment of compensation in the case of expropriation became further entrenched in General Assembly resolution 3281 of 1974, known as the Charter of Economic Rights and Duties of States adopted by a vote of 120 in favour, 6 against and 10 abstentions. In article 2(2)(c) the Charter included the payment of “appropriate compensation” in the case of nationalization, expropriation or transfer of ownership of foreign property, albeit prefaced with the precatory ‘should’.
The Charter never developed into a binding instrument because its terms, like leaving the payment of compensation entirely to the subjective discretion of the expropriating state coupled with its failure to include other terms and conditions firmly established under customary international law created insurmountable obstacles in finding common ground between developing and developed states. Whatever sentiments have remained, in reality the political and economic counter-movements of the 20th century on these issues have lost steam and are unhelpful in the 21st century given the far greater and increasing economic inter-dependence of states.
The current political debates in South Africa on expropriation and the payment of compensation seem to oscillate between Soviet-style confiscation and one or other still to be determined sanitized version of confiscation. The term ‘confiscation’ is deliberately used here in view of the fact that expropriation of property without compensation is an act of confiscation, pure and simple. It takes the form of a forfeiture or a penalty, which by nature, cannot attract compensation. Expropriation, on the other hand, is a concept that is always linked to a remedy in the form of the payment of what the property is worth at a certain point in time. Hence, the denial of compensation for expropriated property amounts to a denial of a remedy which constitutes a violation of the South African constitution as well as of international law.
In the latter instance, it is worth taking note of the following: “The right to a remedy when rights are violated is itself a right expressly guaranteed by global and regional human rights instruments. Most texts guarantee both the procedural right of effective access to a fair hearing and the substantive right to a remedy” (Shelton Remedies in International Human Rights Law 2nd ed (2005) at 114. This explains why the European Court of Human Rights has held that the payment of compensation is a necessary condition for the taking of property by a contracting state (James v United Kingdom 98 Eur. Ct. H.R. Series A, 1986).
Since a range of other legal considerations are applicable it is in the interest of legal certainty, which is a corollary of the rule of law, entrenched in section 1 of the South Africa constitution, that any government decision on the legal dispensation that will in future govern expropriation without compensation (sic) is capable of rationally explaining and justifying where government stands with regard to the developments and principles above. Moreover, of specific relevance will be to get clarity on whether the protective principles in the examples below will still apply in the new expropriation dispensation, and if so, to what extent.
2. The Protection of Investment Act 22 of 2015
This Act, which applies to South African as well as foreign nationals, was passed by Parliament and assented to by the President but its promulgation in the Government Gazette is yet to take place, which event will bring it into operation in accordance with section 16 of the Act. The Act also provides that existing investments that were made under bilateral investment treaties will continue to be protected for the period and terms stipulated in the treaties. Moreover, an investment made after the termination of a bilateral investment treaty but before promulgation of the Act, will be governed by general South African law (section 15).
The nature and scope of the protection of investments envisaged by the Act appear from the following:
In the preamble to the Act, which is a tool of legislative interpretation in South African law, Parliament has endorsed the following principles, rights, obligations and objectives:
- The obligation to protect and promote the rights enshrined in the Constitution;
- The importance that investment plays in job creation and economic development;
- That the state is committed to maintaining an open and transparent environment for investment;
- The responsibility of government to provide a sound legislative framework for the protection of all investments, including foreign investments, pursuant to constitutional obligations;
- Securing the balance of rights and obligations of investors to increase investment in the Republic;
- Rights related to access to just administrative action, access to justice, access to information and all other rights set out in the Bill of Rights;
- The obligation to take measures to protect or advance persons, or categories of persons, historically disadvantaged due to discrimination;
- The protection of investments in accordance with the law, administrative justice and access to information;
- The government’s right to regulate investments in the public interest in accordance with the law; and
- To ensure, in accordance with international law, that human rights, fundamental freedoms and protection of peoples’ resources are adequately protected.
In its substantive part, the Act contains a wide definition of investment and of the assets that will enjoy protection under the Act (section 2). Included are shares, debentures, securities, loans, movable or immovable property, performance under a contract having a financial value, copyrights, intellectual property rights, goodwill, patents, trademarks, profits, dividends, royalties, income yielded by an investment, and rights or concessions to cultivate, extract, or exploit natural resources.
According to section 3, the interpretation and application of the Act will be subject to:
a) The Constitution;
b) The Bill of Rights, according to the interpretation provided for in section 39 of the Constitution, meaning that a court, tribunal or forum must (i) promote the values that underlie and open and democratic society based on human dignity, equality and freedom; (ii) must consider international law and (iii) may consider foreign law;
c) Customary international law, which is law in the Republic unless it is inconsistent with the Constitution or an Act of Parliament (see section 232 of the Constitution);
d) The constitutional duty to prefer any reasonable interpretation of any legislation that is consistent with international law over any other alternative interpretation that is inconsistent with international law (see section 233 of the Constitution); and
e) Any relevant convention or international agreement to which the Republic is or becomes a party.
Section 3 of the Act further invokes the purposes of the Act in section 4 as interpretation aids. These purposes are to:
a) protect investment in accordance with and subject to the Constitution in a manner which balances the public interest and the rights and obligations of investors;
b) affirm the Republic’s sovereign right to regulate investments in the public interest; and
c) confirm the Bill of Rights in the Constitution and the laws that apply to all investors and their investments in the Republic.
Other protective measures provided for in the Act are as follows (sections 6, 9 and 10 of the Act):
a) Ensuring that administrative, legislative and judicial processes do not operate in an arbitrary way or denies justice to investors;
b) The availability of administrative review of decisions consistent with section 33 of the Constitution;
c) Right of access to information;
d) The provision of physical security of property owned by foreign investors in accordance with the minimum standards of customary international law and subject to available resources and capacity; and
e) The right to property in terms of section 25 of the Constitution.
The Protection of Investment Act adopts the ‘national treatment’ standard for the protection of foreign investments. Section 8 reads in this regard as follows:
“Foreign investors and their investments must not be treated less favourably than South African investors in like circumstances”.
What is the position if the future national investment protection standard falls below the international minimum standard of protection? Will foreign investors then be entitled to invoke diplomatic protection or is it the position of the South African government that in such instances a Calvo-type doctrine will apply?
‘Like circumstances’ means the requirements for an overall examination of the merits of the case by taking into account all the terms of a foreign investment. This will include the effect of the investment on the Republic; the sector in which the investments are; the aim of the measure relating to the investment; the effect on third persons and the local community; the effect on employment; and the direct and indirect effect on the environment.
3. Guarantees against expropriation of property without compensation in terms of Bilateral Investment Treaties
By way of example the 1998 Bilateral Investment Treaty between South Africa and Finland is used. This treaty is still in force and according to the Dept of International Relations and Cooperation the South African government has notified the Finnish government of its attention to terminate the treaty in 2019.
If the Protection of Investment Act (above) is then in force, the investments of Finnish nationals will then, presumably, fall under the Act. The termination of the treaty seems to be part of a policy decision by the Dept of Trade and Industry to phase out bilateral investment treaties and to replace their guarantees with the guarantees under the 2015 Act. Since the guarantees contained in the treaty are based on general state practice they have become part of the general principles of investment law and as such have relevance beyond the life of any individual treaty.
3.1 General
In this part the term ‘property’ instead of ‘land’ is used. The reasons are two-fold. Firstly, because the treaty itself uses a brought definition of “investment” in article 1 which includes a range of assets and property classes; and secondly, it is not clear at this point in time whether land and other kinds of immovable property will be the only asset class that will be subject to expropriation without compensation. The BLF and the EFF have made it clear that all property will be subject to this form of expropriation while other voices have called for the clear circumscription of the kinds of property that may be expropriated without compensation. Currently the position remains fluid which calls for government clarification in the interest of legal certainty.
Apart from the bilateral treaty itself, guarantees may derive from general international law on treaties and on the treatment of foreign nationals under international law. As regards the former, the Vienna Convention on the Law of Treaties is of immediate relevance. As a written agreement between states governed by international law it qualifies as a treaty arrangement under article 2(1)(a) of the Vienna Convention with the concomitant rights and duties provided for under the Convention. Of specific relevance are articles 26 and 27.
Article 26 imposes an obligation on the parties to a treaty to give effect to the treaty in good faith while article 27 interdicts a party to a treaty to invoke the provisions of its domestic law as justification for its failure to perform a treaty. Although South Africa is not a party to the Vienna Convention, it has unequivocally accepted that the country considers itself bound by the provisions of the Convention and has made a statement to this effect on the webpage of the Department of International Relations and Cooperation.
By giving public notice to the international community of states about its acceptance of the provisions in the Vienna Convention, it has laid the foundation for parties to agreements with South Africa to have a legitimate expectation that South Africa will perform in good faith the terms and conditions of such agreements.
While, in terms of article 62 of the Vienna Convention on the Law of Treaties, a party to a treaty may invoke a fundamental change of circumstances as a ground for lawfully terminating or withdrawing from a treaty, South Africa cannot avail itself of this provision if the fundamental change is the result of a breach by South Africa of an obligation under the treaty. Moreover, in the context of article 62, South Africa will have to prove that the government was an innocent bystander vis-à-vis the fundamental change of circumstances and that such circumstances were not known at the time of the conclusion of the treaty.
Against this general background certain provisions of the bilateral Finland – South Africa agreement needs to be highlighted. Under article 2(2) investors and their investments are entitled to “fair and equitable treatment” and “shall enjoy full protection and security in the territory of the host party”. The provision further states that the “host Party shall in no way … by unreasonable and discriminatory measures, impair the management, maintenance, use, enjoyment or disposal of investments by investors of the other Contracting party”.
Article 3 contains the well-known ‘national treatment’ principle. Its effect is that the host party is under an obligation to subject investors of the other party to “treatment no less favourable than that which it accords to investments of its own investors or to investments of investors of any third state”. However, if the national treatment standard is lowered (i.e. by legalizing expropriation without compensation) this lowered standard may then equally apply to foreign investors.
In such cases, the South African government will be under an obligation to inform the Finnish government in advance about the potential impact of a lowered national standard, or of other factors, on the treatment of Finnish investors under the bilateral agreement. This obligation to inform is a corollary of the good faith obligation in treaty law mentioned above. Another potential remedy in this regard is section 32 of the Constitution which entitles ‘any person’ to a right of access to information held by the state or a private person “that is required for the exercise or protection of any rights”. Read with section 6(3) of the Protection of Investment Act (if an investor can still rely on it) it means that investors, both national and foreign, will be entitled to have access to government-held information in respect of their investments in a timely fashion.
Acutely relevant in the above context is article 5 of the bilateral agreement. This provision states unequivocally that in the case of expropriation or nationalization, or another measure having the same effect, and provided that it is done in the public interest, on a non-discriminatory basis and under due process of law, prompt, adequate and effective compensation shall be paid (own emphasis).
The amount of compensation shall be the “fair market value of the investment expropriated at the time immediately before the expropriation or impending expropriation became public knowledge in such a way as to affect the value of the investment”. This raises a crucial question about the appropriate time of determining the ‘market value’ of the property that may become subject to expropriation.
Depending on the type of property, current debates may already have a depressing influence on the inherent value of property and in view of the fluidity of the situation a carefully considered property valuation strategy may arise as of right, especially if current debates on the need for the identification and circumscription of property that will be subject to expropriation are taken into account.
3.2 The requirements of ‘fair and equitable treatment’ and ‘full protection and security’
Both these requirements, which often overlap, reflect standard formulations in bilateral investment treaties and need further clarification in view of the general observations above on the essentials of the bilateral investment treaty between Finland and South Africa which may also occur in other bilateral investment treaties entered into by South Africa.
It is now an accepted principle that the ‘fair and equitable treatment’ of foreign nationals in the territorial state contains entitlements that must be given effect to in accordance with the international human rights obligations of the territorial state.
This understanding already became part of the International Law Commission’s 1957 report on state responsibility for injuries done to foreign nationals on their territories (UN Doc A/CN.4/106 (1957) 113). At the time the principle of equal treatment was already enshrined in articles 1 and 2 of the 1948 Universal Declaration of Human Rights and which were strengthened by the catalogue of rights in the International Covenant on Civil and Political Rights (1966) and the International Covenant on Economic, Social and Cultural Rights (1966), both of which have been ratified by South Africa.
These developments, coupled with UN General Assembly resolution 40/144 (1985) on the human rights of individuals who are not nationals of the country in which they find themselves, has caused the enjoyment by foreign nationals of rights in accordance with domestic law to become subject to the international law obligations of the territorial state.
There is no doubt that the developing standards of treatment derived from international human rights law are increasingly likely to determine the content of the ‘fair and equitable treatment’ principle referred to above. Further support for this statement is to be found in the judgment of the International Court of Justice in the Diallo case where the following was said: “Owing to the substantive development of international law over recent decades in respect of the rights it accords to individuals, the scope ratione materiae of diplomatic protection, originally limited to alleged violations of the minimum standard of treatment of aliens, has subsequently widened to include, inter alia, internationally guaranteed human rights” (Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo)(Preliminary Objections) ICJ Reports, 2007, 582 para 39).
The ’full protection and security’ principle puts an obligation on a state to take measures to protect foreign investors and their investments against any negative effects in the host state (Dolzer & Schreuer Principles of International Investment Law 2nd ed (2012) 57. This standard now includes both legal and physical forms of security (Forster “Recovering ‘protection and security’: the treaty standard’s obscure origins, forgotten meaning, and key current significance” in 45(4) Vanderbilt Journal of Transnational Law (2012) 1095 at 1107) and it involves a due diligence standard which applies to questions of state responsibility and liability.
An analysis of arbitral jurisprudence shows that the main elements of the ‘fair and equitable standard’ of treatment are focused on the following duties of the territorial state (Kläger “Fair and equitable treatment” in International Investment Law (2011) 116 – 119; Schefer International Investment Law: Text, Cases and Materials (2013) 188 – 189, ch 5):
- Promises and undertakings made by the territorial state, and upon which the investor has relied, must be honoured since they create legitimate expectations on the part of the investor;
- Treatment of a foreign investor must be non-discriminatory and non-arbitrary;
- Judicial and administrative procedures must follow due process and allow for access to a remedy;
- The legal framework and procedures of the territorial state must be transparent and clear as to what is expected of the investor;
- State measures affecting the investment must be reasonable and rationally linked to their objective and not disproportionately burdensome to the investor; and
- Where compensation is due, it must be paid promptly, adequately and effectively.
With regard to the compensation issue it must be pointed out that the payment of compensation is one of the conditions of an expropriation which must be in conformity with a state’s international obligations (Marboe “Restitution, damages and compensation” in Bungenberg, Griebel, Hobe & Reinisch (eds) International Investment Law (2015) 1033). This legal position was also confirmed by the SADC Tribunal in the Campbell case which dealt with the expropriation of land belonging to mainly white farmers by the Zimbabwean government without the payment of compensation.
In this matter the Tribunal held that in international law, the expropriating state has the duty to compensate and that the exclusion of compensation in the Zimbabwean constitution by means of a 2005 amendment, was contrary to the clear legal position in international law (Mike Campbell and Others v Republic of Zimbabwe, SADC (T) Case no 2/2207, 48 (3) ILM (2009) 534 at 547.
4. Conclusion
Investment risk associated with a lack of legal assurances and effective protection of investments in certain host countries, is the main reason for the enhanced treatification of international investment law since the second half of the previous century. This has taken the form of bilateral as well as multilateral investment arrangements between states providing protection for individual investors.
The consequence of this shift is that treaties have become the fundamental source of international law in the field of foreign investments. These treaties have brought discipline to host country treatment of foreign investors by obligating them to grant investors full protection and security, fair and equitable treatment and protection against arbitrary treatment and expropriation without adequate compensation (Salacuse op cit 2010, 79).
Thus, if the enactment of the 2015 Protection of Investment Act is indeed intended as a step towards the phasing out of bilateral investment treaties in favour of a legislative mechanism, the protective regime of the Act must be scrutinized to assess its comparability with what investors can rely on in terms of an investment treaty or general international law principles. Such an assessment ought to be an integral part of the current constitutional review and public comment process on the issue of expropriation without compensation. With that in mind the following aspects need government’s attention and clarification:
- Nowhere in the Act is there any explicit reference to the payment of compensation. If this was a deliberate omission to provide government with an option to expropriate without compensation, it may constitute a violation of the international minimum standard. Since South Africa has not explicitly denounced this standard, it may face claims based on a legitimate expectation that compensation must be provided for (see also section 6 of the Act);
- In the preamble to the Act, government has committed itself to respect international law and to ensure that human rights, fundamental freedoms and protection of peoples’ resources are adequately protected. This commitment is strengthened by section 4(c) which states that the purpose of the Act is to “confirm the Bill of Rights in the Constitution and the laws that apply to all investors and their investments in the Republic”. Apart from providing a basis for potential claims under the Bill of Rights, there is also the question whether the reference to “laws that apply to all investors…” includes international investment law on the payment of compensation? Furthermore, by committing itself to provide “adequate protection”, government needs to explain, should it decide to expropriate without expropriation, why the taking of property without compensation is not a violation of the “adequate protection” standard.
- Finally, the above issues, among others, illustrate that a reconsideration of the Act is inevitable should expropriation without compensation become a reality. Regardless of how government is going to revise investors’ legal rights the potential for investor – state conflicts over the interpretation and implementation of the applicable legal regime is significant, especially given the potentially ruinous consequences for an investor of an expropriation without compensation.
The resolution of such disputes by means of litigation or other national or international means of dispute resolution usually ends in settlements or awards that have their own political, economic, cost, service delivery and governance implications, which may, at some point or another, eclipse the benefits of the expropriation.
ENDS
