EXPROPRIATION UNDER INTERNATIONAL LAW The Mineral and Petroleum Resources Development Act’s Transitional Provisions

by

CLIVE BRETT JONAS (JNSCLI002)

Submitted to The University Of Cape Town

in fulfilment of the requirements for the degree LLB

Faculty of Law, University of Cape Town

Date of submission: 25 September 2009

Supervisor: Professor Hanri Mostert

Department of Private Law, University of Cape Town

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DECLARATION

1. I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend that it is one’s own.

2. I have used the footnoting convention for citation and referencing. Each contribution to, and quotation in, this opinion from the work(s) of other people has been attributed, and has been cited and referenced.

3. This opinion is my own work.

4. I have not allowed, and will not allow, anyone to copy my work with the intention of passing it off as his or her own work.

Signature ______________________________

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Expropriation under International Law The Mineral and Petroleum Resources Development Act’s Transitional Provisions

by

CLIVE BRETT JONAS (JNSCLI002)

Word Count:10 697

This paper was written under the auspices of the LandLawWatch project. The views and opinions expressed here are the author's own and should not be attributed to the LandLawWatch project or the University of Cape Town.

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ABSTRACT

This paper examines the transitional provisions of the MPRDA and their impact on the proprietary positions of investors – specifically foreign investors – whose interests are protected by Bilateral Investment Treaties (BIT) concluded between their various foreign states and South Africa. The paper identifies three distinct characterisations of South Africa’s BITs, depending on how these documents deal with the taking (expropriation) of interests of foreign investors. It then uses the BIT with the United Kingdom, and the BIT with Italy to analyse the varying implications of the differently characterised BITs on proprietary positions of foreign investors in the mining sector, by looking at how the MPRDA’s system of automatic award of old order rights on 1 May 2004, and subsequent conversion thereof to new order rights during the transitional period affected the actual position of such foreign investors in the SA mining sector.

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Table of Contents 1. Introduction .............................................................................................................................................................. 5 2. Transitional Provisions ........................................................................................................................................... 8

2.1 Background ......................................................................................................................................................... 8 2.2 Common Law ...................................................................................................................................................... 9 2.3 The 1991 Act ..................................................................................................................................................... 10 2.4 The 2002 MPRDA ............................................................................................................................................. 11

2.4.1 Old Order Rights ........................................................................................................................................ 11 2.4.2 New Order Rights ...................................................................................................................................... 12

3. Bilateral Investment Treaties (BITs) ..................................................................................................................... 16

3.1 Expropriation clauses in BITs ............................................................................................................................ 16 3.2 Interpretation of Expropriation in International Law ........................................................................................... 18

4. MPRDA and Expropriation of Foreign Investors ................................................................................................. 20

4.1 Inception of the Act ............................................................................................................................................ 21 4.2 End of the Transitional Period ........................................................................................................................... 23

4.2.1 Loss ........................................................................................................................................................... 23 4.2.2 Substitution ................................................................................................................................................ 23

5. Conclusion ............................................................................................................................................................. 27 BIBLIOGRAPHY ......................................................................................................................................................... 31

Primary Sources ...................................................................................................................................................... 31 Statutes .............................................................................................................................................................. 31 Cases ................................................................................................................................................................. 31

Secondary Sources ................................................................................................................................................. 31 Websites ............................................................................................................................................................. 31

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1. Introduction

The Mineral and Petroleum Resources Development Act (MPRDA),1 which came into force on May 1, 2004 has introduced significant changes in the South African mining sector as compared to the previous disposition that existed under the Minerals Act of 1991.2 This is especially true regarding the MPRDA’s (Act’s) underlying policy objectives of ‘socio-economic’ transformation in the mining industry, particularly in respect to ‘previously disadvantaged person,’3 and its broad based equity goals.4 The Act nevertheless attempted to balance these concerns with recognition of the commercial interests of right holders under the 1991 Act, by the inclusion of provisions designed to ensure ‘security of tenure.’5 The attempt to create an equilibrium between these two objectives is manifested in the transitional provisions of the Act found in Schedule II.

In general, these provisions provided for a ‘substitution of rights’ system, which occurred at two different points in time.7 First, upon the coming into force of the Act, holders of common law mineral/prospecting rights, with or without mining authorisation (‘lost rights’), became statutory holders of old order rights, by operation of law.8 Second, the Act provided different cut-off dates for old order right holders to apply for ‘conversion’ to new order rights, subject to the social, labour, and environmental requirements of the Act.9

The issue of whether the Act resulted in the expropriation of common law mineral and/or prospecting rights, either at the inception of the Act or upon expiry of the transitional period(s) is ripe for analysis. Litigation has already begun on various aspects of the transitional provisions.10 Moreover, as the closing date for conversion of old order mining rights has only recently expired, on 1 May 2009, and as these were most commercially valuable old order rights, more litigation will likely follow. In this respect a difference should be made between mining interests held by foreign investors,11 on the one hand, and local South African investors on the other hand. In the case of the latter, any claims arising out of the Act would have to be challenged in a South African domestic court. In the case of the former, however, South Afric

1 Act 28 of 2002. 2 The MPRDA repealed the 1991 Act. 3 MPRDA s 2. 4 In this respect, the Act, s 100(2), provided for a Mining Charter to be developed by government, to govern the BEE requirements of the Act. 5 MPRDA, Schedule II item 2(a). Dale et al South African Mineral and Petroleum Law (2005) SchII-26. 6 Dale (note 5) SchII-208. 7 M Coleman and K Williams ‘South Africa’s Bilateral Investment Treaties, Black Economic Empowerment and Mining: a Fragmented Meeting’ (2008) 1 Business Law Int’l 56 at 81. 8 Ibid 68. 9 Ibid 69. 10 From a domestic law perspective, the Act’s treatment of holders of common law coal and clay rights upon inception of the transitional period, was challenged in the March 2009 North and South Gauteng District case Agri South Africa v the Minister of Minerals and Energy. (Case no 10235/2008 6 March 2009, unreported). From an international law perspective, as discussed by Coleman and Williams, litigation was initiated under international arbitration in the case of Piero Foresti v Republic of South Africa. This case concerned the conversion to old order mining rights, at the inception of the transitional provisions on 1 May 2004. See Coleman and Williams (note 7). However, after the filing of memorials, there has been a stay in proceedings at the instigation of the claimants. Dunbar Investment Treaty News available at http://www.investmenttreatynews.org 11 In most cases, the ‘investor’ would be a juristic person, who held the mineral right. UK-South Africa BIT Art 1(d)(ii).

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obligations to outside investors under its Bilateral Investment Treaties (BITs) with various foreign governments,12 would enable claims to be brought before international arbitration tribunals governed by international law.13

A common feature of BITs is that they contain no expropriation clauses, which oblige host states not to expropriate foreign investments, ‘except for a public purpose and against payment of adequate and effective compensation.’14 For foreign investors, a potential advantage of international arbitration is that the issue of expropriation is not judged according to South African standards,15 as compensation is a requirement regardless of whether the expropriation was lawful or not.16 Thus, from a commercial perspective, investors with mining interests in South Africa, whose rights were affected by the Act, have potential claims against the government of South Africa under the BIT regime.

The essay that follows will focus on the tension between the Act’s transitional provisions and the government of South Africa’s responsibilities to foreign investors in terms of its BITs.17 This essay will also limit its analysis to one of the categories of right holders listed in Schedule II: holders of common law mineral rights and authorisations under the 1991 regime, who became old order mining right holders on the Act’s inception.18 In such a case, ‘a mining company [or private individual] owned the mineral right and was actively mining with it in accordance with the 1991 Act.’19 This would cover any foreign investor who owned an interest in a mining company with active mining operations in place before 1 May 2004. As South Africa has a multitude of BITs, this essay will analyse South Africa’s BIT with the United Kingdom (UK)20 and Italy,21 respectively. Both countries provide a useful case study, as both have significant mining interests in South Africa22 and both BITs are characteristic of the two most commonly found models that South Africa has with other

12 In Piero Foresti v Republic, the claim was brought by Italian and Luxembourg investors, under BIT’s with Italy and the Benelux states respectively. Coleman and Williams (note 7) 57. 13 Coleman and Williams (note 7) 59. In South Africa’s case such disputes and proceedings will generally be decided by the International Centre for the Settlement of Investment Disputes (ICSID), an ancillary body of the World Bank. Canadian-South Africa BIT Art 8(4). UK-South Africa BIT Art 8(2)(a). 14 V Lowe ‘Regulation or Expropriation?’ in M Freeman Current Legal Problems (2003) 449. 15 Under South Africa law, expropriation could have occurred in terms of the Constitution, yet be found to be ‘justifiable’ under s 36, and thus not actionable. 16 M Reisman and R Sloane ‘Indirect Expropriation and its Valuation in the BIT Generation’ in British Yearbook of International Law (2004) 134. In Piero Foresti v Republic of South Africa, Coleman and Williams anticipate that the South African government will place reliance on the justifiable objectives that the Act seeks to achieve. (Note 7) 58 and 81. Arguably, such argument, is not relevant to the question of expropriation, but might be on the quantum of compensation to be paid. 17 Coleman and Williams (note 7) 57. 18 MPRDA, SchII Table 2. P J Badenhorst and H Mostert ‘Revisiting the Transitional Arrangements of the Mineral and Petroleum Resources and Development Act and the Constitutional Property Clause: An Analysis in Two Parts’ (2003) 14 Stell LR 377 at 381. 19 Coleman and Williams (note 7) 69. 20 Entered into force on 27 May 1998. 21 Entered into force on 16 March 1999. 22 In the case of the UK, examples of listed companies with interests in South African mining companies include African Resources Plc, which holds shares in Gold Field Limited. Examples of UK companies with interests in ongoing mining operations include Mwana Plc, which has a 61% stake in Southern Era diamond mine in Klipspringer. Mbendi Information Services available at http://www.mbendi.com. In the case of Italy, the Piero Foresti case concerned Italian investors who hold interests in granite mines in South Africa, individually and through an Luxemburg holding company. Coleman and Williams (note 7) 75.

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countries with significant mining interests.23 A third model BIT, which includes a ‘denial of benefit clause’ will also be briefly discussed below, though countries with such BITs do not seem to have any measurable mining investments in South Africa.

Specifically, this essay is concerned with the question whether the Act’s transitional provisions, either upon inception or at the close of the transitional period, constituted an expropriation of mineral rights in breach of South Africa’s BIT commitments.24 Or whether these provisions amounted to the lawful exercise of the regulatory powers of the South African government and, thus, are not actionable under international treaty law.25 In order to answer this question, it is necessary to compare, at each stage of the conversion process, what exactly was exchanged for what in terms of the rights held by investors. Section one will begin by discussing the transitional provisions provided for under the Act. In this respect, it will investigate the position of right holders under the 1991 Act, who held both common law rights and mining authorisations.26 Then this section will proceed to focus on the two critical dates, mentioned above, in more detail. First, the point at which ‘lost rights’ were exchanged for old order mining rights upon Act’s inception. Second, the situation at the end of the five year transitional period, where old order right holders would have either ‘converted’ to new

order mining rights or failed to ‘convert’ and lost their rights.27

Section two will then focus on South Africa’s BIT regime, and its obligations to foreign investors. This discussion will also analyse the meaning attached to expropriation in international law, as any alleged breach by South Africa of its BIT obligations would fall to be determined under this definition. Here attention will be paid to the various definitions found under international law and the extent to which this body of law recognises economic loss as constituting expropriation. Section three will then evaluate, in terms of the BITs under discussion and under international law, whether expropriation occurred at each stage of the conversion process found in Schedule II. In this section, special attention will be paid to the interplay between mining rights held under the 1991 regime, on the one hand, and the new rights regime engendered by the Act. In comparing the nature of ‘lost rights’ to both old order and new order rights, regard will be had to both a content and fuctionalist-based approach. Each approach frames the issue of expropriation from a different methodological basis. The former comparing the content of each set of rights,28 and the latter going to the issue of control over the economic worth of the asset.29 By applying these two approaches, at each stage of the transitional period, different outcomes are possible to the question of the expropriation of investor property rights. Moreover, in the analysis that follows, account must be taken of the fact that the cases of expropriation under international law have been

23 In this respect, Canada, another country with large mining interests in South Africa, has a BIT almost identical to its UK counterpart. For example, a Canadian company, Placer Dome, has a 50% stake in the Western Areas gold mine. Mbendi Information Services (note 22). 24 Coleman and Williams (note 7) 76. 25 Lowe (note 14) 450. 26 H Mostert Perspective on Mineral Law (manuscript in publication-copy on file with author) 145. 27 MPRDA SchII item 7(7)(8). 28 Badenhorst and Mostert (note 18) 396. 29 Reisman and Sloane (note 16) 130.

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concerned with the expropriation of property rights, where the holder received nothing in return.30 In the case of South Africa, there has generally been a ‘substitution of rights,’ so that the traditional understanding of expropriation found in the case law does not exactly fit with the situation encountered under the Act.31

2. Transitional Provisions

2.1 Background

The structure of South African mining law has traditionally followed a dual organisational framework, based on common

law mineral rights, on the one hand, and the statutory right to search for and extract minerals (mining rights), on the other.32 The latter ‘right to mine,’ has, in turn, been administered by the state through different statutory regimes.33 The 1991 Minerals Act, the regime in place before the MPRDA, followed this two-tiered approach, requiring both common law permission and statutory authorisation to engage in mining operations.34 The 1991 Act had, in fact, ‘re-vested the common law mineral rights’ of its holders, which, under the Minerals Rights Act of 1967, had vested in the state.35 Even so, under the 1991 Act, the actual exercise of the common law right was still constrained by formal authorisation being granted by the state.36 The coming into force of the MPRDA on 1 May 2004 repealed the Minerals Act of 1991 and concomitantly the private (common) law minerals, mining, and prospecting rights that existed under this regime.37 The MPRDA neverthleless did not effect an immediate break from the past, as it also provided for transitional provisions, found in Schedule II.38 A stated objective of the transitional provisions was to provide security of tenure for ongoing mining operations in place before the Act took effect.39 Under these transitional arrangements, holders of mineral rights and/or authorisations under the 1991 regime, were now deemed to hold old order rights, which could be converted, during the transitional period to new order rights.40 The transitional provisions identified several categories of old order

right holders, each with their own prescribed time periods for conversion into new order rights.41 The transitional provisions further differentiated between holders of common law mineral and prospecting rights with active mining/prospecting operations in place before inception of the Act,42 and holders of common law rights only, where no active operations were ongoing (unused old order rights).43 In the case of both old order rights and unused old order

30 Coleman and Williams (note 7) 81. 31 Ibid 69. 32 Mostert (note 26) 152. 33 Ibid. 34 Ibid 146. 35 Ibid 77. 36 Ibid. 37 S110 read with Schedule 1 and S4(2) of the MPRDA. Badenhorst et al Silberberg and Schoeman’s The Law of Property (2006) 670. 38 Dale et al (note 5) SchII-26. See also Agri South Africa v the Minister of Minerals and Energy (note 10). 39 MPRDA, Schedule II s2(a). 40 Coleman and Williams (note 7) 68. 41 Mostert (note 26) 125. 42 MPRDA Schedule II item 1. Coleman and Williams (note 7) 68. 43 Item 1. Mostert (note 26) 125.

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rights, upon conversion to new order rights or the failure to convert within the prescribed time period, the old order right ‘ceased to exist’ and was either replaced by a new order right44 or totally lost.45

2.2 Common Law

A central tenet of the common law is that the owner of the land is also ‘the owner of everything above and below the land.’46 The traditional approach followed in South African property law viewed the concept of ownership as comprising a composite whole, where mineral rights could be ‘subtracted from the full dominium’ (ownership) of the landowner.’47 A second theory explains ownership in terms of a ‘bundle of rights,’ encompassing different ‘incidents of ownership,’ that can be separated and held by third parties.48 Both theories acknowledged that mineral rights were a type of limited real right, constituting an ownership interest that could be held in the property of the landowner.49 This notion of ‘severance’ has been followed in South African law, the belief that mineral rights could be ‘severed-off’ and ‘held independently from landownership rights.’50 Following this position, the dominant approach in South African case law has been to view mineral rights as a type of servitude,51 though this approach had produced some judicial and academic uncertainty.52 Courts have generally spoken about mineral rights as ‘personal quasi-servitudes,’53 based on the fact that they ‘are constituted in favour of a particular person’ and not in favour of the land to which they pertain.54 Unlike personal servitudes, however, which are of limited duration, mineral rights were in theory perpetual and in this respect closer in character to praedial servitudes.55 Moreover, unlike personal servitudes, mineral rights were ‘freely transferable’ and could themselves be subject to a personal servitude.56 The difficulty of classifying mineral rights according to any established category of servitudes, has led some to propose characterising mineral rights as a class of real rights sui

generis.57

The common law mineral right, as it existed separately from ownership of the land, comprised a registrable real right and was enforceable against successors in title to the land.58 Where separated from ownership of the land, the mineral right could either have been held by the landowner under a separate mineral right title or the mineral right could have been

44 Schedule II item 7(7). 45 Item 7(8). Badenhorst et al/Joubert LAWSA 18 para 63. 46 Badenhorst et al/Joubert (note 45) para 7. 47 Ibid para 8. 48 Mostert (note 26) 12-3. 49 Badenhorst et al/Joubert (note 45) para 12. 50 Ibid. 51 Mostert (note 26) 14. 52 Badenhorst et al/Joubert (note 45) para 12. 53 This is the view endorsed by the Appellate Division in a series of cases, the most recent being Trojan Exploration Co (Pty) Ltd v Rustenberg Platinum Mines Ltd as cited in Badenhorst et al/Joubert (note 45) para 12 fn 6. 54 C G van der Merwe ‘Property’ in F du Bois Wille’s (2007) 592. 55 Ibid. 56 Badenhorst et al/Joubert (note 45) para 12. 57 Ibid. 58 Ibid.

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held by a third person.59 The mineral right did not vest title to the minerals in its holder until such time as they had been ‘severed’ from the land.60 Before ‘severance,’ ownership still vested in the owner of the land.61 Thus, the central entitlement attaching to a mineral right, was that, it allowed its holder to enter the land, and to search for and remove any minerals discovered.62 Upon ‘severance,’ the mineral resource became movable property, with ownership vesting in the holder of the mineral right.63 Such rights were of perpetual duration, divisible, and ‘could be alienated separately from the land to which they related.’64 Other entitlements to the right included, that they were ‘freely transferable, [tradable] and inheritable,’65 and it was also possible to have a limited real right, such as a usurfruct or mortgage bond, granted over the mineral right itself.66 Hence, a mineral right could form a security interest granted in favour of a third party.67 Moreover, as limited real rights, mineral rights could not be cancelled or suspended by the state.68

2.3 The 1991 Act

Under the Minerals Act, mineral right holders could only engage in mining operations if they possessed statutory authoriation to do so.69 The granting of authorisation, pursuant to the 1991 Act, was guided by the three objectives: ‘optimal utilization, health and safety and rehabilitation.’70 Such authorisation has been variously described as a ‘licencing scheme’71 or as the ‘right to mine’ component of the 1991 regime.72 Either way, holders of underlying common law rights were unable to utilise their rights without mining authorisation.73 Hence, at this stage, state involvement was much more pronounced, as the state effectively controlled the use of the underlying right.74 Moreover, in contrast to the common law right, grants of authorisations could not be ‘alienated, transferred, ceded or mortgaged.’75 Thus, on the transfer of the underlying mineral right authorisation had to be obtained again by the transferee.76 Moreover, the minister was empowered, in some circumstances, to suspend or terminate the grant of authority.77 While the ability to initiate mining operations necessitated authorisation, the holder of a mineral right could still ‘prevent others from exploiting the mineral resource.’78 This aspect of the common law right, the ability not to utilise

59 Mostert (note 26) 15-6. 60 Badenhorst et al/Joubert (note 45) para 8. 61 Ibid. 62 Mostert (note 26) 17. 63 Badenhorst et al/Joubert (note 45) para 8. 64 Mostert (note 26) 21. 65 Ibid. 66 Badenhorst and Mostert (note 18) 385. 67 Mostert (note 26) 119 fn 819. 68 Coleman and Williams (note 7) 71. 69 Mostert (note 26) 77. 70 Ibid para 159. 71 Coleman and Williams (note 7) 72. 72 Mostert (note 26) 157. 73 Ibid 79. 74 Ibid 54. 75 Ibid 82. 76 Ibid 82-3. 77 Coleman and Williams (note 7) 70. 78 Mostert (note 26) 91.

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of their rivals.80

it, meant that the mineral right holder had a choice of when to initiate mining operations.79 Consequently, mining companies were able to build up large reserves, knowing that once they acquired the mineral right, they could sit on it, to the detriment

2.4 The 2002 MPRDA

2.4.1 Old Order Rights

When the Act came into force, mining companies that held mineral rights and who had ongoing mining operations in place under the 1991 Act, became holders of old order mining rights.81 These rights enabled mining operations to continue unabated for a five year transitional period, without the need to meet the environmental and socio-economic requirements of the Act.82 However, it is not readily apparent from the transitional provisions of the Act what exactly these old order rights entailed as compared to what was held under the 1991 Act.83 Did the old order right encapsulate the underlying mineral right’s content?84 Or was only the authorisation aspect of the 1991 Act carried forward, thus allowing mining operations to continue during the transitional period on the ‘same terms and conditions’ as existed under the previous system?85

The Act does not provide a consistent nor comprehensive definition of old order rights.86 The definition section of Schedule II provided that an old order mining right encompassed the ‘mining lease, consent to mine, permission to mine, claim licence, or mining authorisation’ held under the 1991 Act87 Taking the definition section as his point of departure, Dale argues that an old order mining right, ‘differed in content from the previously existing right,’ as it encompassed only the licencing aspects and not the underlying common law right itself.88 An important implication for Dale’s approach is that upon coming into force, the Act ‘destroyed common law mineral rights,’ retaining only ‘the right to mine’ in the concept of an old order right.89

An alternative approach holds that the content of the old order mining right remained as it had before the Act, consisting of both the common law mineral right, or at least aspects of it, and the mining authorisation granted under the 1991 Act.90 Advocates of this approach point to the wording of Item 7(1), where an old order right is referred to as any right ‘in

79 Coleman and Williams (note 7) 66. 80 Ibid. 81 Ibid 68. 82 Ibid 73 fn 51. 83 Ibid 69. 84 Dale et al (note 5) SchII-12. 85 Ibid SchII-51 and SchII-212(1). 86 Ibid SchII-208. 87 MPRDA Schedule II item 1 (iii). 88 Dale et al (note 5) SchII-211. 89 Ibid SchII-212. 90 Ibid SchII-212(1).

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ight itself.95

ir pre-existing counterparts.’101

force immediately before the Act took effect’ and ‘which continues in force.’91 Focusing on the phrase ‘continues in force,’ it is argued that this old order right was not a new statutory notion devoid of common law content, rather, it should be viewed ‘with reference to the total underlying substratum’ of the 1991 rights regime, as the Act intended.92 Another statutory indication is found in Table 2 of Schedule II, where the Act described different categories of old order mining

rights, including where the common law mineral right was held in conjunction with mining authorisation.93 It has been suggested that in reading the categories described in Table 2 preference should be given to the first right listed, which would thus entail some recognition of mineral rights.94 Dale, however, takes an opposite point of view, arguing that what was brought forward into the concept of an old order right was merely any ancillary rights connected to the authorisation to mine, and not the mineral r

In opposition to Dale’s argument, several academics have adopted a differing methodological approach to the description of old order rights found in Schedule II. They argue that these rights should be construed as a ‘bundle of rights’96 or ‘right clusters’97 encompassing both the mineral right and mining authorisation.98 It seems to follow from this line of argument that though the Act extinguished rights held under the 1991 Act, what it took away was concomitantly replaced by rights of comparable worth.99 This so-called ‘swap argument,’ maintains that the old order

rights conferred by the MPRDA are equivalent to the rights that existed under the previous mineral regime, implying that the common law right is somehow incorporated into the notion of old order rights.100 Hence, those who support this argument contend that, at the very least, old order rights were ‘functionally equivalent to the

2.4.2 New Order Rights

The second critical date prescribed in the Act occurred on May 1 2009, which was the closing date for old order mining

rights to be ‘converted’ to new order mining rights.102 On this date, holders of old order mining rights would have either completed the conversion process and been awarded new order rights, or they would have failed to meet the requirements for conversion and lost their rights completely.103 This would presumably have occurred as a result of an old order right holder not having participated in the conversion process, since the Act makes no provision for the refusal

A Schedule II, Table 2, Category 1. Badenhorst and Mostert (note 18) 381.

7) 692. rt (note 26) 125.

an and Williams (note 7) 81.

II item 7(1).

91 Ibid. 92 Ibid SchII-212. 93 MPRD94 Ibid. 95 Dale et al (note 5) SchII-13. 96 Badenhorst et al (note 297 Moste98 Ibid. 99 Colem100 Ibid. 101 Mostert (note 26) 136. 102 MPRDA Schedule 103 Item 7(7) and (8).

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f tenure for existing operations’112 by limiting the discretionary power of the minister in granting new order rights.113

of a conversion application.104 In terms of the former, holders of old order rights had a preferential right to apply for conversion, to the exclusion of all other interested parties.105 Item 7(3) of Schedule II, moreover, prescribed that the minister must confer the mining right, where (i) the requirements of the Act are satisfied (ii) mining operations were ongoing and would continue, and (iii) an approved environmental management plan had been submitted.106 In terms of the specific requirements of the Act, holders of old order rights, on lodging a conversion application, were required to provide the minister, with among other things, a detailed mining work programme,107 a prescribed social and labour plan,108 and an undertaking and strategy to promote entry into the mining industry for historically disadvantaged persons and to advance socio- economic welfare.109 Moreover, if the initial conversion to a new order right was successful, the holder obtained a preferential right to apply for its renewal upon expiry of the initial use period. 110 At this point, as well, the minister is enjoined to renew the mining right if the mandatory requirements are fulfilled.111 As is apparent, though conversion was not automatic, the Act appeared to ‘ensure security o

The Act describes a new order mining right, as a limited real right ‘in respect of the minerals and the land to which such right relates.’114 This right enables the holder to enter the land subject to the right together with any machinery and equipment, to engage in mining, and to take away and dispose of the minerals extracted.115 Once ‘severed’ from the land, ownership of the minerals, as corporeal movables, belongs to the right holder.116 However, similar to the common law position, ownership of the minerals does not extend to unsevered minerals, as the right holder only acquires ownership upon severance.117 On the other hand, contrary to the common law position, where the owner of the land retained ownership of the unsevered mineral, who could be distinct from the person holding the actual mineral right, the position in the Act regarding ownership of the unsevered mineral is uncertain.118 One approach is that although the Act acknowledges that the State ‘exercises sovereignty over mineral resources’119 and concomitantly that the ‘State is the custodian thereof,’120 it nevertheless does not mean that the state is actually the owner of these mineral resources.121

104 Mostert (note 26) 134. 105 Badenhorst and Mostert (note 18) 395. 106 MPRDA Item 7(3)(a)-(d). 107 Item 7(2)(e) 108 Item 7(2)(f). 109 Item 7(2)(k) read with S2 (d)(f). On conversion, it was only necessary to make an ‘undertaking,’ to achieve these objectives, whereas for new applications, it is a necessary requirement. 110 Section 25(1). Mostert (note 26) 110. 111 Section 24(4). 112 Schedule II, Item 2(a). Dale et al (note 5) SchII-26. 113 Dale et al (note 5) SchII-26. 114 MPRDA s 5(1). 115 MPRDA s 5 (3). Badenhorst and Mostert (note 19) 394. 116 LAWSA (note 45) para 8. 117 Ibid para 101. 118 Ibid. 119 MPRDA s 2(a) 120 Section 3(1). 121 Van der Merwe (note 54) 619.

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of any rights over the ‘severed’ mineral is now dependant on the granting of a new order right in terms of the Act.125

old order rights remain in force into the new order regime, and do not need retrospective consent by the minister.138

On this view, ownership of the unsevered minerals remains with the landowner, albeit with the restriction that they cannot be exploited.122 On the other hand, there is the opinion that ownership of unsevered minerals does in fact vest in the state, despite the fact that the state is not capable in private law terms of having the requisite legal personality to actually hold ownership.123 Nevertheless, it is argued that the terms ‘custodianship’ and ‘sovereignty’ are correlative terms, and that any private law basis for ownership has been repealed by the Act.124 Though as pointed out, regardless of whether ownership vests in the state or private hands, the exercise

The Act provides that this statutorily created limited real right extends to the mineral resource itself, and is not limited to the land, as had been the position under the common law.126 The right must be registered in the Deeds Registry and is ‘enforceable against successors in title of the land.’127 The right is granted for a maximum period of thirty years,128 subject to renewal for a further thirty years, upon meeting the requirements of the Act.129 The mining right (or interest) can only be transferred with the consent of the minister.130 Transfer is defined broadly to include the ‘cession, letting and subletting, alienation, or disposal of the mining right.’131 This requirement also extends to the ‘transfer of a controlling interest in a company or closed corporation, except in the case of listed companies.’132 Such consent may not be withheld where the transferee is able to meet the requirements stipulated in the Act.133 Mortgaging the right, on the other hand, appears to be possible without ministerial consent, at least in cases where the right is used as security for financing in regard to the mining operation itself and where the lender is a bank or financial institution.134 Though, the Act provides that upon default of such a loan, the minister must consent before a sale in execution is pursued.135 On the other hand, the Act is not explicit as to whether ministerial consent is required in any other circumstance for a mining right to be pledged as a security asset,136 that is, where a limited real right can be granted over the right itself.137 However, the Act provides that mortgage bonds in respect to

122 Badenhorst et al/Joubert (note 45) para 101. 123 Ibid. 124 Section 3(1) read with s 4(2). Badenhorst et al/Joubert (note 45) para 101. 125 Badenhorst et al/Joubert (note 45) para 101. 126 Mostert (note 26) 112. 127 Van der Merwe (note 54) 621. It seems thus such rights must specifically be registered in the Mining Titles Office. 128 MPRDA s 23(6). 129 Section 24(4). Van der Merwe (note 54) 620. 130 Section 11(1). Bradenhorst and Mostert (note 18) 395. 131 Section 11(1). Mostert (note 26) 117. 132 Bradenhorst and Mostert (note 18) 396. 133 Section 11(2). Badenhorst and Mostert (note 18) 396. 134 Section 11(3). Badenhorst and Mostert (note 18) 396 135 Section 11(3). Mostert (note 26) 119. 136 Mostert (note 26) 119 fn 819. 137 Bradenhorst and Mostert (note 18) 385. 138 Item 7(6). Mostert (note 26) 128.

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The provisions in section 11 are examples of the commercially useful facets of the Act.139 The Act does not prohibit the alienation of mining rights, though it does impose restraints, particularly the requirement of obtaining the consent of the minister.140 Moreover, the Act vests in the minister the power to suspend or terminate the right, upon breach of the Act’s requirements.141 Such a situation would presumably arise where the right holder failed to comply with its social and labour commitments or its equity obligations, after having been warned.142 In addition, the right can lapse, upon the death of its holder, where there are no successors in title or the successors do not obtain ministerial consent to receive transfer of the asset. 143 The right also lapses upon the liquidation or sequestration of its holder.144 The lapsing of a new order right presumably means that the right is no longer preferential and is now capable of being acquired by the public at large on a ‘first-come, first-serve basis.’145 Finally, the right holder under the Act, is compelled to pay royalties to the state,146 based on the quantity and type of mineral extracted.147

The Act has replaced the conceptual framework traditionally found in South African mineral law, by moving away from the common law notion of mineral rights rooted in property law to a statutory based mining right subject to administrative law.148 What is less certain is how to best characterise a new order mining right. One point of view holds that this right constitutes a type of statutory mining licence, evidenced by its emphasis on ministerial control.149 Van der Walt suggested that the Act replaced ‘the existing private [law] rights with a state controlled system of use rights.’150 Mostert, on the other hand, argued that the ‘dual relationship’ model found under the 1991 Act, that is, the distinction between the underlying common law right and the statutory right to mine,151 has been conflated under the Act ‘into a single process.’152 As such, the ‘state controls both the exercise of the right as well as its content and acquisition.’153 As a result to Mostert, an ‘inverted process of control’ has emerged, beginning with state control of the mining right and ending with ‘the reinforcement of private interests.’154 The end result is that the common law principles of ownership take over upon severance of the mineral resource.155 Moreover, on this approach, it is contended that new order rights have a similar proprietary nature to common law rights, in that they are identified as limited real rights, are capable of

139 Mostert (note 26) 118. 140 Bradenhorst and Mostert (note 18) 397. 141 Section 47. Coleman and Williams (note 7) 71. 142 Section 51. Coleman and Williams (note 7) 71. 143 Mostert (note 26) 108. 144 Ibid. 145 Coleman and Williams (note 7) 66. 146 Section 25(2)(g). 147 Coleman and Williams (note 5) 71. 148 Ibid 66. 149 Ibid 70. 150 Badenhorst et al (note 27) 670. 151 Mostert (note 26) 157. 152 Ibid 146. 153 Ibid. 154 Ibid 145 155 Ibid.

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registration, and are subject to indefinite renewal.156 Thus the ‘advantage of [common law] real rights as secure proprietary rights’157 is maintained in the concept of new order rights.

3. Bilateral Investment Treaties (BITs)

BITs are ‘treaties between states that provide nationals of each contracting state, when investing in the other state, certain protections’ and remedies in case of breach by one of the contracting states.158 Investments in most asset classes are generally protected, including corporeal and incorporeal and immovable and movable property, investments in juristic persons, and ‘business concessions to extract or exploit natural resources.’159 Such treaties also provide for disputes between host nations and foreign investors to either be brought before an international arbitration tribunal, where the case is to be decided according to international law,160 or to be pursued in the domestic courts of the host state.161 In terms of the arbitration route, individual investors are able to bring their claim directly against one of the contracting states, without requiring either participation or approval from their home state, thereby enabling investors to ‘litigate on equal footing with the host state.’162 This is not normally the case in international law, as the International Court of Justice has limited jurisdiction to hear disputes between states only.

3.1 Expropriation clauses in BITs

As far as providing protection to foreign investors, BITs generally contain three core clauses: ‘guarantees against expropriation, fair and equitable treatment, and full security and protection.’163 In terms of expropriation, almost all BITs provide that expropriation can only occur for a public purpose and against adequate compensation.164 Such language is consistent with customary international law, which defines lawful expropriation as measures taken for a public purpose and on a non-discriminatory basis.165 In addition, under the so-called ‘compensatory rule’ in international law, expropriations are only lawful where there has been ‘payment of adequate and effective compensation.’166 Consequently, expropriation is not absolutely proscribed under BITs, provided that it accompanied by compensation.167

Another general feature of BITs is that they contain so-called ‘tantamount clauses,’ which are worded to prohibit either expropriation or measures having an equivalent effect.168 Such clauses have been interpreted to prohibit direct

156 Ibid 160. 157 Van der Merwe (note 54) 427. 158 Coleman and Williams (note 7) 59. 159 South Africa-UK BIT art 1(a)(i) and (v). Dale et al (note 5) SchII-212(3). 160 Coleman and Williams (note 7) 59. 161 Lowe (note 14) 449. 162 Ibid. 163 Ibid 451. 164 Ibid 449. 165 Dale et al (note 5) MPRDA-130. 166 Sedco Inc v Nat’l Ir Oil Co (1986) Iran-US Claims Tribunal, cited in Reisman and Sloane (note 16) 134. 167 Reisman and Sloane (note 16) 134. 168 Ibid 122.

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expropriation, that is, the overt ‘taking of title,’ and so-called indirect expropriation.169 This too is in line with customary international law, where the concept of indirect expropriation, ‘that is a taking without the actual transfer of title,’ has consistently been regarded as equivalent to direct expropriation.170

With regard to expropriation, South Africa’s BITs differ in the level of protection that they provide foreign investors. As a general norm, South Africa’s BIT’s are based on the ‘northern hemisphere model.’171 This means that they generally contain language prohibiting expropriation or equivalent measures, which as stated above, have been held in the case law to reflect cases of both direct and indirect expropriation.172 A good example of this model is found in South Africa’s BIT with the UK: ‘Investments shall not be nationalised, expropriated, or subject to any measures having an effect equivalent to expropriation,’ unless for a ‘public purpose’ and upon ‘payment of compensation.’173

Other BITs, however, are structured to offer broader protections to investors. For example, the Italian BIT contains language which goes beyond that found in most ‘northern hemisphere’ BITs.174 The relevant provision states that: ‘Investments shall not be subject to any measure which might limit rights of ownership, possession, control or enjoyment of investments, permanently or temporarily.’175 Such language appears to cover state conduct beyond that which would ordinarily constitute expropriation in international law, and could include conduct that causes economic loss, without the dispossession of ownership rights.176

On the other hand, some of South Africa’s most recent BITs, for example with Israel, the Czech Republic, and Iran, include a ‘denial of benefits clause,’ stipulating that South Africa can deny benefits to foreign investors for the purposes of attaining equality.177 Coleman and Williams are of the opinion that such a clause will not protect South Africa from international expropriation claims.178 What is required, they argue, is rather a ‘non-precluded measures provision,’ which would provide that any measure taken to address equality will not result in a breach by South Africa of its BIT obligations.179 As these most recent BITs suggest, South Africa appears to have recognised that a ‘northern hemisphere’ type approach is inappropriate to the socio-economic realities that the country faces and in conflict with South Africa’s broad based empowerment objectives.180 On the other hand, South Africa is still bound by the treaties it signed with many first world countries. As such, any claim arising out of the MPRDA’s transitional provisions would fall to be decided on the basis of these treaties.181 Both BITs provide that ‘any [such] investment made while the BIT is in

169 Ibid. 170 D J Harris Cases and Materials on International Law (2004) 584. 171 Coleman and Williams (note 7) 59. 172 Reisman and Sloane (note 16) 122. 173 Article 5(1); Canadian-South African BIT Article 8(1). 174 Coleman and Williams (note 7) 79. 175 Article 5(1). Such language is also followed in article 6 of the South Africa-Netherlands BIT. 176 Dale et al (note 5) MPRDA-131. 177 Coleman and Williams (note 7) 60. 178 Ibid. 179 Ibid. 180 Ibid 59-60. 181 Ibid 77.

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force, will continue to be governed by the BIT, for a period of twenty years after its termination.’182 This means that any claim arising out of the exchange of rights at the beginning or end of the transitional period would be interpreted in light of the current BIT regime.

Ultimately, one cannot loose sight of the unique situation engendered by the Act. Normally, expropriation encompasses ‘a taking or deprivation’ where the state gives nothing back in return.183 Pursuant to the Act, however, there is a rights exchange, both at the inception of the Act, and possibly at the end of the transitional period.184 As such, any analysis of South Africa’s alleged breach of its BIT commitments and concomitantly any interpretation of international law must take account of the ‘substitution argument,’ which has previously not been encountered under international law.185

3.2 Interpretation of Expropriation in International Law

The issue in regard to whether the Act expropriated mineral rights in breach of South Africa’s BIT obligations does not turn on the question of whether such a taking was justified or not.186 Such an expropriation, if proved, would arguably be regarded as lawful, since the Acts broader social and equity objectives would arguably meet the public purpose criteria.187 In this respect, in the Iran-United States Claims Tribunals, it was held that ‘a lawful taking’ or one ‘motivated by worthy economic or social objectives’ is not a defense to a claim for compensation.188 Hence, where individual investors bring claims directly against a the government of South Africa, they will have to prove as a threshold question that expropriation occurred. A tribunal, in turn, deciding the case will apply customary international law as the legal framework for interpreting and giving content to the language found in any particular BIT.

There is no single meaning attached to expropriation under international law, as this system does not follow the doctrine of precedent.189 Thus this term has been interpreted differently by the various tribunals, constituted over the past thirty years to hear investor related disputes. 190 The main sources of international law on expropriation, are to be found in the decisions of the Iran-US Claims Tribunal, and ICSID tribunals set up in terms of BITs or multilateral investment treaties, including NAFTA.191 As stated above, international law recognises that expropriation can occur either directly or indirectly, as evidenced by the seminal decisions in Certain German Interests in Polish Upper Silesia192 and the Norwegian Shipowners Claims case,193 where both judgments held that expropriation takes place where the state

182 South Africa-UK BIT art 14. 183 Coleman and Williams (note 7) 81. 184 Ibid. 185 Ibid. 186 Ibid 58. 187 Dale et al (note 5) SchII-212(8). 188 G Aldrich ‘What Constitutes a Compensable Taking of Property?’ (1994) 88 American Journal of International Law 585 at 590. 189 Harris (note 170) 537. 190 S Subedi ‘The Challenge of Reconciling the Competing Principles within the Law of Foreign Investment’ (2006) 40 Int’l Law 121 at 121. 191 Reisman and Sloane (note 16) 119. 192 (1926) PCIJ No 7. 193 (1922) I RIAA 307.

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interferes with property rights, ‘even though the state disclaims any such intention.’194 In this regard, Reisman and Sloane identify different categories of indirect expropriation, which have been recognised by international courts and tribunals.195 Their analysis identifies a continuum of meaning attached to the notion of indirect expropriation, from the ‘deprivation of ownership rights’196 to the denial of the ‘reasonable economic benefits of the property.’197 A generally accepted definition of indirect expropriation, occupying the middle-ground, was proposed in the Starrett case,198 and recently followed in Santa Elena,199 where the tribunal held that it amounted to the ‘deprivation of the effective use, control, and benefits of property rights.’200 Both Starrett’s and Santa Elena confirmed that expropriation can occur other than by the actual ‘transfer of title.’201 Both judgments also suggested that indirect expropriation included, at the very least, ‘interference with the fundamental rights of ownership.’202 Moreover, as has been consistently emphasized in the case law, a state’s intent matters less than the outcome of the action on the owner, and the type of the measures taken matters less than the practical effect of their impact.203

However, to what extent economic loss constitutes indirect expropriation is unclear under international law. Lowe points out that recent cases have given enhanced protection to investors, by recognising more instances of economic expropriation.204 For example, in a recent NAFTA tribunal judgment, it was held that expropriation can also occur upon the deprivation ‘of a significant part of the use or reasonable economic benefits of the property.’205 Likewise, the European Court of Human Rights has in two judgments206 recognised that measures that ‘destroy an enterprise’s economic viability’ would amount to expropriation, where ‘they significantly reduced an investor’s property rights’207 or ‘significantly reduced the possibility of the exercise of the right.’208 What appears significant in the case law is the extent of the economic loss in determining whether it amounts to expropriation. There generally has to be, at the very least, a substantial impairment of the ‘economic use or benefit of the property.’209 In fact, in Myers Inc v Canada, the tribunal suggested that most prospective cases regarding economic interference by a state would fall under the concept of lawful state regulation.210

194 Reisman and Sloane (note 16) 119. 195 Ibid 122. 196 Tippets v TAMS ATTA (1985) 6 Iran-U.S.C.T.R 219 at 225, cited in Harris (note 170) 584. 197 Metalclad Corp v Mexico (2000) 40 ILM 36 at para 103, cited in Lowe (note 14) 452. 198 Starrett Housing Corp v Iran (1983) 4 Iran-USCTR 122. 199 Compania Del Desarrollo de Santa Elena SA v Republic of Costa Rica (2000) 39 ILM 1317. 200 Lowe (note 14) 453. 201 Harris (note 170) 584. 202 Lowe (note 14) 453. 203 Tippetts cited in Reisman and Sloane (note 16) 120. 204 Lowe (note 14) 457. 205 Metalclad (note 197) para 103. 206 Sporrong v Kingdom of Sweden (1982) 52 EHRR; Agrotexim v Greece (1996) 21 EHRR. 207 Reisman and Sloane (note 16) 120. 208 Sporrong cited in Reisman and Sloane (note 16) 120. 209 Feldman v Mexico ICSID (2002) 42 ILM 625, as cited in Reisman and Sloane (note 16) 129. 210 (2000) 121 ILR 73 NAFTA Tribunal, as cited in Harris (note 170) 585.

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A state’s regulatory power has generally been recognised in international law as ancillary to the ‘permanent sovereignty of each state over its economy.’211 As such, disputes regarding the exercise of a state’s regulatory powers do not generally fall within the jurisdiction of international law nor within the protections provided investors in investment treaties.212 However, how to draw the distinction between lawful regulatory action and unlawful intervention with the rights of foreign investors, is not entirely clear from the case law. 213 In Feldman, for example, the NAFTA tribunal suggested that regulatory action generally involved government measures in the larger public interest, including, according to the tribunal, environmental protection, new tax structures, and the removal of government subsidies.214 To complicate matters, there appears to be a trend in recent case law toward recognising so-called ‘creeping expropriations,’215 that is where the cumulative effects of taxation and regulation over a period of time ‘make the continued economic operation of a project uneconomical so that it has to be abandoned.’216 Overall, therefore, there exists a measure of uncertainty in the meaning attached to expropriation in international law, and concomitantly, the amount of protection to be afforded to foreign investors under multilateral treaties.217

As the next section will demonstrate, those who approach the issue of expropriation under the MPRDA from a content-based perspective follow the traditional definition of expropriation under international law. On this approach, the analysis focuses on limitations to the content of ownership rights resulting from the impugned state action. On the other hand, those who advocate a functionalist methodology to expropriation under the MPRDA argue for a use-based or economic approach to the question of whether the Act expropriated mineral rights. It should be kept in mind that as generally conceived in international law, economic expropriation requires a lesser threshold for a finding of expropriation and is generally advanced where a content-based argument cannot be made out. In the case of the MPRDA, however, with its exchange of rights system, the economic expropriation argument is flipped, and used to argue against expropriation, notwithstanding that from a content-based approach expropriation might have occurred. This argument thus presents a new twist to the meaning of expropriation under international law and remains untested in this jurisprudence.

4. MPRDA and Expropriation of Foreign Investors

As this study is confined to foreign investors who had ongoing mining operations in place when the MPRDA came into force, three scenarios are relevant to the issue of whether Schedule II resulted in the expropriation of property rights: First, expropriation may have occurred at the MPRDA’s inception, on 1 May 2004, where the common law rights and mining authorisations held under the 1991 Minerals Act were exchanged for old order mining rights.218 Second, the

211 Lowe (note 14) 450. 212 Ibid 451. 213 Ibid 447. 214 Feldman v Mexico ICSID (2002) 42 ILM 625, as cited in Reisman and Sloane (note 16) 129. 215 For example, in Waste Mgmt Inc v United Mexican States ICSID (2001), the tribunal explicitly recognised the concept of ‘creeping expropriation.’ 216 Reisman and Sloane (note 16) 124. 217 Lowe (note 14) 453. 218 Coleman and Williams (note 7) 81.

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conversion to new order mining rights, at the end of the transition period, may have resulted in expropriation. A third possibility is that the old order right holder lost their right on 1 May 2009, by failing to convert to a new order right.219 These scenarios are explained below to demonstrate that the Act does not bring about expropriation in all cases.

4.1 Inception of the Act

At the inception of the Act, holders of common law mineral rights and mining authorisations had those rights substituted for old order mining rights.220 In the first place, it is uncertain as to what was substituted for what under the transitional arrangements. As already stated, traditionally South African mineral law differentiated between mineral rights and rights to mine.221 One argument is that old order rights subsumed only the mining authorisation component of the 1991 Act, ‘without carrying forward any substantive common law content.’222 This line of reasoning rejects the ‘substitution of rights’ argument, since, it is contended, what was lost (real right) cannot adequately be compared to what replaced it (old

order right without common law content).223

Applying this perspective to the BITs under consideration, both the Italian and UK BITs speak about ‘limiting the right of ownership,’224 and ‘expropriation or equivalent measures’225 respectively. In this respect, the language in both BITs is consistent with the standard definition of indirect expropriation under international law.226 Any argument that involves the MPRDA would likely turn on the definition of indirect expropriation, as the Act does not formally make reference to the ‘taking of title or ownership,’ and only speaks about an ‘substitution of rights.’ 227 Accepting that common law rights were extinguished, and replaced by rights with a diminished content,228 arguably a ‘deprivation of the fundamental rights of ownership’ has occurred,229 amounting to a breach of the BITs under consideration.

This claim is countered by two overlapping lines of argument. First, it is possible to argue that the content of the old

order right was similar to its common law counterpart.230 Looking at the language used in Schedule II, as stated above, it is arguable that the same rights in place before the Act, continued to exist on commencement of the Act.231 This view is supported by an approach which conceptualises old order rights as constituting a ‘bundle of rights,’ which, in turn, included aspects of both the common law right and statutory authorisation.232 On this analysis, there was no deprivation

219 Mostert (note 26) 134. 220 Coleman and Williams (note 7) 69. 221 Mostert (note 26) 158. 222 Dale et al (note 5) MPRDA-122. 223 Coleman and Williams (note 7) 81. 224 South Africa-Italy BIT art 5(1). 225 South Africa-UK BIT art 14. 226 Reisman and Sloane (note 16) 122. 227 Coleman and Williams (note 7) 81. 228 Dale et al (note 5) SchII-212. 229 Santa Elena (note 199) para 77. 230 Dale et al (note 5) SchII-212(1). 231 Ibid. 232 Badenhorst and Mostert (note 18) 392.

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of ownership rights during the transitional phase, since the content of the old order right and what it was exchanged for (rights held under the 1991 Act) corresponded to a large degree.233

There is a second argument that also denies that expropriation occurred at the inception of the Act. This view holds that, even if the content of the two sets of rights differ, old order rights were ‘functionally equivalent’ to rights held under the 1991 Act.234 As such, nothing practically changed, as mining operations continued as they had before the Act, without the need to comply with the Act’s requirements.235 The functionalist approach flips the argument made by those who contend that the Act ‘deprived its owner of the economic use and enjoyment of the rights to property,’236 and uses it against them, by asserting that the economic benefits of the property right remained intact throughout the transitional period.

In the case of the UK BIT, then, an argument would have to be made that, viewed from the functionalist perspective the acquisition of an old order right did not amount to the expropriation or its equivalent of pre-existing property rights. On this argument, there had been no interference with the ‘economic viability of the enterprise,’ and thus no expropriation of property.237 The functionalist argument is, however, not as strong in terms of the Italian BIT. An argument can be made that on conversion to old order mining rights, even though there was no (factual) interference with ownership rights of the property, its ‘enjoyment’238 had been constrained by the harm caused to the economic value of the investment.239 In general, as stated, international law seems to require a greater threshold for economic loss than merely a decrease in the value of the economic venture.240 What is usually required is that such measures result in a significant loss of the investment.241 However, on the wording of the Italian BIT, in light of the wider protection afforded investors, ‘enjoyment’ of the property might include not only the economic benefits flowing from continued mining operations, but also the loss of the pecuniary value attached to the mineral right itself.242 Here the right was arguably worth significantly less as a tradable asset than its common law counterpart.243

233 Dale et al (note 5) SchII-212. 234 Mostert (note 26) 136. 235 Ibid 162. 236 Coleman and Williams (note 7) 81. 237 Reisman and Sloane (note 16) 123. 238 Italian BIT art 5(1). 239 Reisman and Sloane (note 16) 130. 240 Ibid 123. 241 Ibid 121. 242 Coleman and Williams (note 7) 79. 243 Ibid 81.

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e.250

4.2 End of the Transitional Period

4.2.1 Loss

The second significant date occurred on 1 May 2009, where old order rights were either replaced with new order rights on conversion or ‘ceased to exist.’244 In the latter scenario, no exchange of rights took place, as the unused old order

right was completely lost. and not replaced by any other entitlement to the mineral right.245 The functionalist approach is not applicable here, since there is no factual continuation in mining activity. Arguably on this scenario, foreign investors who held old order mining rights, and did not complete the conversion process, have been expropriated under both the UK and Italian BITs.246 They have lost their old order rights and concomitantly any ownership rights which were brought forward, they no longer have ‘title to’ or ‘possession’ of the asset,247 they have been ‘deprived of the control and economic benefits of the property.’248 and they no longer have ‘access to the use or enjoyment of the property.’249 Such a scenario is most likely in cases of smaller mining operations, where the cost of implementing the Act’s social, labour, environmental, and equity requirements would have proved too prohibitiv

4.2.2 Substitution

The more difficult question is whether expropriation occurred on conversion from old to new order rights. At this point the comparison seems to be between what was held under 1991 Act and what is now held as a new order right. This distinction is relevant in so far as the Act’s statutory language provides for the conversion of old to new order rights and does not explicitly refer to the substitution of ‘lost’ with new order rights.251 However, if one accepts the argument that the old order right is equivalent to the common law right, then the comparison here would also include conversion from old to new order.252 However, if it is found that old order rights differed from ‘lost rights,’ then it is not entirely clear whether the expropriation analysis would compare the ‘lost rights’ to the new order rights or would rather compare what was held during the transitional period (old order rights) to what was granted under the new regime (new order rights).

Assuming that there is no substantial difference between the ‘lost rights’ and old order rights,253 two methodological approaches can be taken to the question of expropriation: a content and functional based approach. From a content-

244 Item 7(7)(8). 245 Badenhorst and Mostert (note 18) 399. 246 Coleman and Williams (note 7) 82. 247 Tippetts (note 196) 225 248 Metalclad (note 197) para 103. 249 Santa Elena (note 199) para 77. 250 Coleman and Williams (note 7) 82. In the South African domestic context, the Court in Agri South Africa (note 10) found that expropriation had occurred in the case of holder’s of common law clay rights who had not activated those rights in terms of the 1991 Act. Under the MPRDA, such unused old order right holders had a two year period after the Act’s inception to commence mining operations or have their rights extinguished. 251 MPRDA SchII item 7(7). 252 Dale et al (note 5) SchII-212(1). 253 For if expropriation is deemed to have occurred upon entry into the transitional stage, then arguably any further analysis based on new order rights would technically be unnecessary.

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based perspective, new order rights have a conceptually different foundation from mineral rights held under the common law, in that they are not sourced in the private law concept of ownership, but rather derive their force from statute.254 On this argument, some of the ancillary entitlements of the common law right, including perpetual duration and free transferability, especially to heirs, are not attached to the new order right.255 That ministerial consent is required for the exercise of any benefit attached to the right, from a content perspective, would constitute a restriction on some of the rights of ownership encapsulated in the common law right.256 A good example is the limitation on the ability to mortgage or offer the right as security, which would arguably diminish a (commercially) important aspect of the right.257 In addition, even though such rights are renewable, they are nevertheless subject to ministerial discretion. In this respect, the minister has the power, in certain circumstances, to revoke the right,258 which is a fundamental difference with the position under the common law. In the case of the 1991 Act, the state did not possess the power to revoke the underlying common law right, as only mining permits could be unilaterally terminated by the state.259

A possible counter-argument is that the content of the two sets of rights is not entirely dissimilar. The Act explicitly describes new order rights as limited real rights, capable of registration, and enforceable against third parties.260 Moreover, the central entitlement attaching to the new order right (the ability of its holder to go on the land, carry out mining operations, and remove the extracted resource) is comparable to the content of the common law right.261 Any content-based argument, then, would have to proceed on the premise that there has been a deprivation of the ‘secondary entitlements’ attached to the common law right.262 Content-based arguments focus on the point that new

order rights are not freely transferable and do not contain that same level of security, in terms of duration, as was the case with the continuous nature of the common law right.263 However, this argument takes no heed of the distinction between the underlying common law right itself, which was freely transferable and the authorisation component of the 1991 regime, which was not.264 A deprivation of content argument, then, would only be relevant in regard to the mineral right as it existed independently from the authorisation necessary to actually trigger the right.265 As regards the authorisation component of the 1991 regime, it is arguable that the transferability provisions of the Act are actually more lenient than under the previous regime.266 In terms of the 1991 Act, where mining operations were ongoing, upon the alienation or transfer of the common law right, the new owner was required to reapply for a statutory grant of

254 Mostert (note 26) 144. 255 Badenhorst and Mostert (note 18 ) 397. 256 Ibid. 257 Coleman and Williams (note 7) 69. 258 MPRDA s 47. 259 Coleman and Williams (note 7) 71. 260 Van der Merwe (note 54) 621. 261 Badenhorst and Mostert (note 18) 394. 262 Ibid 397. 263 Ibid. 264 Mostert (note 26) 82 265 Ibid 82-3. 266 Ibid 133.

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authorisation to actually continue mining operations.267 Under the current Act, reapplication is unnecessary, as the Minister’s consent to the transferability of the new order right means that mining operations can continue unabated, provided that the transferee in question meets the statutory requirements for a mining right under the Act.268 Moreover, the Minister cannot refuse consent where the transferee is able to satisfy these requirements.269 Likewise, though the common law right was of perpetual duration, mining authorisation had to be renewed and could be revoked by the Minister under the old regime.270

Thus any argument that new order rights encompass a diminished content from what was previously held under the 1991 regime would have to separate clearly the common law right from the authorisation component of the previous regime.271 An argument would, on this approach, follow that the limitations in the content of a new order right amounts to indirect expropriation.272 Conversion, would arguably result in a ‘interference with the rights of ownership’ by diminishing the proprietary and temporal aspects of the right.273 On this reading, new order rights would arguably breach the Italian and UK BIT, as they seem to diminish the ownership rights of foreign investors.274 However, this argument would only succeed provided that a court accepted that such restraints on the right amounted to indirect expropriation, at least in the case of the British BIT, which contains a higher threshold for expropriation than its Italian counterpart.

Thus it is uncertain whether a tribunal would accept that enough of the content of a common law right, as compared to a new order right, has been diminished to constitute expropriation in the case of the UK BIT. This is especially true in the sense that the entitlements that existed under the common law, in regards to encumbering and transferring the right, are still applicable to new order rights provided that ministerial approval is obtained.275 Whether this additional requirement of state approval would amount to an actionable expropriation or a form of lawful regulation is unclear. What seems more apparent is the argument that the characteristic of perpetual duration manifest in the common law right that has been lost under the new regime.276 Though renewals are provided for as long as the requirements of the Act are met, the perpetual nature of the common law right carried with it the implication that such a right constituted an (commercially valuable) asset in the estate of its holder and could be passed on to heirs without state approval or the necessity of actually utilising the right.277 Whether a tribunal would hold that the deprivation of this attribute alone is sufficient to constitute (indirect) expropriation, is also an open question. On the other hand, the wording of the Italian BIT, referring as it does to ‘temporary’ limitations on the ‘right of ownership,’ might, nevertheless, be triggered by the added ministerial

267 Ibid. 268 MPRDA s 11(1) and (2). 269 Mostert (note 26) 117. 270 Mostert (note 26) 81. 271 Dale et al (note 5) SchII-212(1). 272 Badenhorst and Mostert (note 18) 397. 273 Santa Elena (note 199) para 77. 274 Coleman and Williams (note 7) 58. 275 MPRDA s 11(1) and (2). Badenhorst and Mostert (note 18) 397. 276 Badenhorst and Mostert (note 18) 397. 277 Mostert (note 26) 91.

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provisions under the Act, even if a tribunal accepted the argument that such restrictions do not amount to an (indirect) expropriation.278

An argument based on a functional approach, on the other hand, would assert that comparing the content of the two rights regimes should not be determinative of whether expropriation has occurred. This argument, in turn, militates against viewing the underlying common law right held under the 1991 Act in isolation.279 From this perspective, the common law right must be understood in terms of its connection with the statutory authorisation scheme that permitted its exercise.280 In this respect, there is no essential difference between rights held under the 1991 regime and the rights granted to new order right holders upon conversion under the Act, as both regimes required state approval to commence mining operations.281 Thus both right regimes are ‘functionally equivalent,’ in that there has been no recognisable change in the way that the rights are actually utilised.282 From the perspective of mining investors, operations would have continued unabated, provided that they had converted to new order rights. As the functionalist approach would depend on a court adopting an economic or use-based perspective of expropriation, an argument would follow that investors have not lost ‘the use and enjoyment of the property,’283 especially in relation to its economic return. Arguments that the grant of new order rights are worth less than their common law counterparts, are unlikely to succeed if viewed from the perspective of economic output derived from the new order right, which has not substantially changed from the 1991 regime. 284 On the other hand, from the perspective of the new order right’s alienability, there is a possible argument that these rights are less valuable than their common law counterparts.285 Not only would Ministerial consent be necessary to sell the right, but its limited duration and capital intensive requirements, as compared to common law mineral rights, would presumably result in a decreased return on the investment made. The counter-argument is that alienability is actually more lenient when compared to the situation under the 1991 Act, since under the old regime the transferee had to reapply for mining authorisation.286 Moreover, it is generally accepted in international law that to constitute economic expropriation the loss in value to an investment must be substantial and not merely constitute an extra-cost in doing business.287

As stated, some judgments have viewed (indirect) expropriation from a content based perspective, focusing on the ‘deprivation’ or ‘interference’ with property rights.288 However, other judgments have also taken into account measures the resulted in economic expropriation, without the loss of ownership.289 As stated above, this economic argument

278 South Africa-Italy BIT art 5(1). Coleman and Williams (note 7) 79. 279 Mostert (note 26) 156-7. 280 Mostert (note 26) 145-6. 281 Ibid 162. 282 Ibid 136. 283 South Afruca-Italy BIT art 5(1); Metaclad (note 197) para 103. 284 Coleman and Williams (note 7) 69. 285 Ibid. 286 Mostert (note 26) 133. 287 Reisman and Sloane (note 16) 124. 288 Tippetts (note 196) 225. 289 Dale et al (note 5) MPRDA-131.

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t.

tracks the functional approach, since it focuses on the investments economic feasibility as a result of state action.290 The functionalist approach, thus, represents a paradigm shift, as it shifts the focus to the usability of the right instead of the underlying content of the righ

On this approach, there is an argument that the MPRDA did not breach the expropriation provisions found in the ‘northern hemisphere’ BITs. Investors have not been deprived of the ‘reasonable economic benefits of the property’ under the Act. 291 Nor is it clear that the ‘substitution of rights’ resulted in a significant diminishment of the value of the investment.292 As stated, there is uncertainty in the case law regarding at what point regulatory action that causes significant economic loss becomes expropriation.293 This is consistent with the approach taken by the ICSID tribunal in Azinian, where the judgment accepted that not all regulatory action or new legal frameworks, which resulted in diminished economic returns for investors should be viewed as expropriation, as they may still be within the lawful regulatory powers of the host state.294 On this approach, then, arguably the Act’s labour, social and environmental requirements would merely amount to lawful regulatory activity within the sole purview of the South African state. Thus the wording of the UK BIT, which reflects general international law, suggests that on the functionalist approach, expropriation has not occurred, since the general economic benefit from the asset has not been significantly prejudiced.

The Italian BIT, however, is not limited to a provision against expropriation or its equivalent and also includes the less intensive prohibition against the ‘enjoyment or control of investments,’ even temporarily.295 On the facts, the cost of implementing environmental assessment programs, undertaking social regeneration measures as well as the equity stakes that are required under the BEE guidelines amended to the Act, would arguably constitute a measure that limits the ‘enjoyment of the investment.’ As pointed out above, the Italian BIT requires something less than expropriation traditionally interpreted from either a content or functionalist based perspective, and is, in this regard, more investor friendly.296

5. Conclusion

Whether the MPRDA’s conversion process from rights held under the 1991 regime to transitional old order rights and potentially to new order rights amounts to expropriation presents a novel legal question that has yet to be encountered in international law. Litigation under international arbitration has so far focused on the taking of property rights without anything being given in return, and not on the conversion from one rights regime to another.297 International law, moreover, has approached the issue of expropriation from different perspectives. Some tribunals have focused on a

290 Reisman and Sloane (note 16) 122. 291 Santa Elena (note 199) para 77. 292 Reisman and Sloane (note 16) 121. 293 Coleman and Williams (note 7) 82. In this regard, the authors’ rely on the NAFTA judgment of SD Myers v Canada (2000). 294 Azinian v United Mexican States ICSID (2000), as cited in Reisman and Sloane (note 16) 129. 295 South Africa-Italy BIT art 5(1). 296 Coleman and Williams (note 7) 79. 297 Coleman and Williams (note 7) 81.

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content-based approach and concomitantly whether there has been a ‘deprivation of the rights of ownership.’298 Other tribunals have focused on whether there has been a diminishment in the usability or economic value of the proprietary asset in question.299 Both approaches, in turn, clearly impact the meaning to be attached to the interpretation of expropriation provisions contained in the BITs under consideration.

This paper has approached the issue of whether the MPRDA has expropriated foreign investors in breach of South Africa’s BITs on the basis of two critical dates. As demonstrated, at the point where the transitional provisions of the Act became operative and rights held under the 1991 regime were exchanged for old order rights, any argument that expropriation occurred appears to be tenuous. In the first place, there is uncertainty based on the Act’s statutory language as to what exactly was converted for what.300 On a content-based approach, it is, therefore, unclear whether the content of an old order right can be distinguished from its common law predecessor.301 Likewise, on a functionalist approach, old order rights continued to operate in the same way as rights held before the Act came into force.302 In fact, there was no disruption in the usability or economic benefits attached to the holder of old order rights during the entire transitional period. Taking this perspective to the BITs under consideration, a persuasive argument can be made that either the content of the two right regimes were comparable and thus there was no deprivation of ownership rights. Or from a functional approach, that conversion to old order rights had no appreciable effect on ongoing mining operations and thus no limitation of the ‘use and enjoyment’ of the property in question. Thus, there would arguably have been no breach of South Africa’s BIT agreement with the UK and Italy or any country with similar expropriation provisions, regardless of the international law perspective that a tribunal would adopt.

The real focus of debate, however, turns on the second critical date of May 1, 2009 when holders of old order mining

rights either lost their rights or had them converted into new order rights. In the case of the former, expropriation likely occurred, as substitution did not take place and there would be an overt taking of property rights.303 The more crucial question is whether upon conversion to new order rights, foreign investors were, nevertheless, expropriated. In the first place, foreign investors challenging the MPRDA would argue that the focus in any inquiry should be on the loss of their common law rights and concomitantly the diminished content of new order rights in comparison.304 This argument would be based on the loss of the ‘secondary entitlements’ of transferability and perpetual duration associated with the common law right of ownership.305 This argument would likely be countered by the government of South Africa on two alternative basis: first, that the content of the two rights are not so dissimilar as to constitute expropriation and second, that the comparison should be on the functionality of the two right regimes. Both counter-arguments, moreover, require

298 Tippetts (note 196) 225. 299 Metalclad (note 197) para 103. 300 Dale et al (note 5) SchII-212(1). 301 Ibid. 302 Mostert (note 26) 136. 303 Ibid 135. 304 Badenhorst and Mostert (note 16) 397. 305 Ibid.

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that any comparison between rights held under the 1991 regime and under the current Act take account of the common law and mining authorization components of the 1991 Act as a composite whole.306 From this perspective, any argument that the ‘secondary entitlements’ of the common law right have been limited would have to take account of the role that state authorisation played in the activation of the common law right under the previous regime, regardless of whether the common law right by itself was freely transferable or of perpetual duration.307

If a tribunal were to accept the argument that the focus of any inquiry should be on the common law right as it existed as a free standing right, then arguably, from a content based perspective, (indirect) expropriation has occurred. The fact that there are limitations on the transferability of new order rights, that they are no longer secured assets in the estate of their holder, and that the State can unilaterally revoke these rights would arguably amount to a ‘limitation on the right of ownership’ in breach of both the UK and Italian BITs.

However, there is also a convincing argument that from a content-based approach, there has been no expropriation, at least in terms of the UK BIT. First, the primary entitlement attached to the common law right, the ability to search for and extract minerals, has not been altered by the conversion process.308 Moreover, there is no absolute bar on transferability309 and presumably renewal is indefinite as long as the holder of a new order right ascribes to the Act’s requirements.310 On this argument, any state authorisation attached to the right should be viewed not as a ‘fundamental limitation of the rights of ownership,’ but as lawful regulatory action.311 Moreover, were a tribunal to take a functionalist approach to the question of expropriation, there would also be no breach of the UK BIT, as there would be no appreciable change in the usability and economic value of new order as compared to those rights held under the 1991 regime.

On the other hand, the Italian BIT would pose some problems for the government of South Africa. As discussed above, the wording of this BIT seems to require something less than expropriation as conventionally interpreted,312 even on the functionalist approach. The prohibition against ‘any measure’ that ‘temporarily’ limits ‘control or enjoyment’ of the investment in question is worded in such a way that any of the above mentioned Ministerial controls over its transferability, usability or even the additional economic costs attached to ongoing mining operations would likely trigger a breach.313

306 Mostert (note 26) 79. 307 Ibid 133. 308 Badenhorst and Mostert (note 16) 394. 309 MPRDA s 11(1). 310 Section 25(1). 311 Feldman (note 209). 312 Coleman and Williams (note 7) 79. 313 South Africa-Italy BIT art 5(1).

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Ultimately, all the different arguments and counter-arguments discussed above are untested and would have to be weighed by a tribunal to determine whether the MPRDA expropriated foreign investors in lights of South Africa’s BIT obligations.

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BIBLIOGRAPHY

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The Mineral and Petroleum Resources Development Act 28 of 2002. South Africa-United Kingdom Bilateral Investment Treaty (in force 27 May 1998). South Africa-Canada BIT (in force 27 November 1995) South Africa-Italy BIT (in force 16 March 1999).

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Agri South Africa v the Minister of Minerals and Energy North and South Gauteng High Court, Pretoria Case no 10235/2008 6 March 2009, unreported. Compania Del Desarrollo de Santa Elena SA v Republic of Costa Rica (2000) 39 ILM 1317. Metalclad Corp v Mexico (2000) 40 ILM 36 Starrett Housing Corp v Iran (1983) 4 Iran-USCTR 122. Tippets v TAMS ATTA (1985) 6 Iran-U.S.C.T.R 219

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Dunbar, D “Suspension Extended in Piero Foresti” Investment Treaty News Available at http://www.investmenttreatynews.org/cms/news/archive.htm (accessed 23.11.2009). Mbendi Information Services. Available at http://www.mbendi.com/org/crgc.htm (accessed 15.10.2009)