Reduced Profits is not Expropriation

The South African Constitutional Court has held that property owner doesn’t have a legal right to value property using a particular method, or to get a specific value when selling the property. In South African Diamond Producers Organisation v Minister of Minerals and Energy the court found that a change to the way a market is regulated isn’t unlawful deprivation of property by the state, and isn’t unconstitutional.

The court was asked to consider the changes to the market practice commonly used by diamond producers when selling diamonds, which is regulated in terms of the Diamonds Act (No 56 of 1986). Previously, diamond producers could use so-called “tender houses”, where non-licenced foreign experts, representing foreign buyers, would assist licenced purchasers with their purchase of parcels of unpolished diamonds.

The Diamond Act was amended to prohibit unlicensed experts from assisting licenced purchasers, effectively outlawing the common business practice used in tender houses. Two constitutional questions were raised against the legal amendments. First, does the prohibition of the market practice result in an unlawful deprivation of property? Secondly, does the prohibition of the market practice infringe on a person’s right to choose a trade?

The court held that the amendments to the Diamonds Act were constitutional; confirming government’s right to regulate markets and change regulations, even when changes decrease the market value that could be realised when selling goods.

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On the first constitutional question – unlawful deprivation of property – the South African Diamond Producers Organisation (SADPO) argued that outlawing of the tender house practice deprived diamond producers of the right to receive full market value for their property when selling diamonds because they could now only market to local licence holders. They argued that a key part of the markets price-forming mechanism was being prohibited, leading to a 30% reduction in the market value that diamond producers could realise. This, they argued, was an interference with the right to alienate property at the highest possible price.

The test the Constitutional Court applies a three stage test to determine if there has been an unconstitutional deprivation of property by the state, (i) is the thing being considered “property”; (ii) is there a “deprivation” of that property; and (iii) is the deprivation arbitrary. If all three questions are answered affirmatively, then the deprivation of the property by the state is unlawful.

The Constitutional Court has held in previous cases that property doesn’t need to be physically taken in order for there to be deprivation. To be classified as a deprivation of property there must, however, be some form of substantial interference going beyond normal restrictions that an open and democratic society would place on property.

The court recognised that a diamond producer has a clear constitutional property right in the physical diamonds themselves, but it was not convinced that these property rights were deprived by merely changing the regulations governing the methods that may be used to sell the property.

The producers still had a right to sell their property, albeit now using different methods. Even if a 30% loss in market value could be proved, this isn’t depravation of the producer’s property rights because they could still sell their diamonds and receive full market value. The only effect was in the methods that could be used to sell the diamonds and the market conditions that determine the highest price – the right to sell was not impacted by the legal amendments.

The court held that markets are inherently regulated, and that an owner of property doesn’t have a legal right to value his goods using a particular method, or to obtain a specific value for his goods – there is no protectable interest to conduct a sale using a particular practice.

On the first constitutional question, the court accordingly held that there was no deprivation of property by the state through the amendments to the Diamonds Act that outlawed the business practice used in tender houses.

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On the second constitutional question – the infringement of the right to trade – SADPO alleged that that outlawing the tender house practice infringed its members right to conduct their business as they deemed fit, breaching their freedom of trade, and their right to conduct an occupation or profession.

The court held that this constitutional right had two distinct elements.

The first element was if the right to choose a trade, occupation or profession was limited. The court held that the amendments didn’t place any hard legal barrier to choosing a trade. It also considered if the amendments placed an effective limit on the trade by effectively barring the entry to the trade by making the practice of the trade so undesirable or unprofitable. The court held that there was no effective limit either – the producer was still able to get assistance through either a licenced person outside of a diamond exchange and export centre (DEEC), or by an unlicensed person at a DEEC.

The second element was if the regulation of the trade was rational and related to a legitimate governmental purpose. The test for rationality is important; it is not a test of whether the regulation reasonable or effective, or whether the objectives can be achieved in better ways. The court ultimately held that the amendments to the Diamonds Act were rationally connected to the promotion of local beneficiations and the monitoring of the movement of unpolished diamonds.

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The court rejected all suggestions that the outlawing the tender houses were unconstitutional, holding that the reduction of a producers profits resulting from a change in the regulation of a market is not unlawful deprivation of property because no property was in fact deprived, and doesn’t infringe the right to conduct a trade if the regulation has a rational purpose.


This work by Clinton Pavlovic is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
The unedited featured photograph by Wu Yi  was published under a Creative Commons Zero Licence.

It’s Time to Reappraise Our Concept of Property

For South Africans to make substantial and lasting progress in making the ideals of the Constitution a reality, it’s necessary to recognise past injustice, reappraise the conception of ownership and property, and accept the consequences of constitutional change. These were the words of the Constitutional Court of South Africa in a judgement delivered by Froneman J in case of Daniels v Scribante and Another (2017 ZACC 13).

In this case Mrs Daniels occupied a dwelling on the landowner’s property in terms of the Extension of Security of Tenure Act No 62 of 1997 (ESTA). The landowner accepted that the state of the dwelling was degrading and not fit for a human, but the landowner nonetheless wanted to stop Mrs Daniels from the leveling the floors, paving an outside area, and installing running water, a wash basin, a second window and a ceiling. All the improvements were going to be done by Mrs Daniels at her own cost.

The court had to decide if the landowner could stop Mrs Daniels from making improvements to the dwelling to make it habitable.

The Court’s Main Judgement

The court rejected the landowner’s argument that even though Mrs Daniels had the right to live in the dwelling on their property, she did not have the right to improve the property to make it fit for human habitation. In the courts main judgement Madlanga J said that the landowner placed an overly narrow interpretation the wording of the law, ignoring the laws purpose. He said that the law is about more than just a roof over your head, and that the right to occupy a dwelling can’t be separated from other fundamental human rights, like the right to human dignity. Mrs Daniels right to occupy the dwelling (her security of tenure) includes habitability. Habitability includes the right to make improvements. If there was no right to make the improvements, then the dwellings habitability is removed, destroying an occupier’s security of tenure.

The court also rejected the landowner’s second argument that if Mrs Daniels was allowed to improve the property, then the landowner might be forced to repay these costs if she was ever evicted, in effect meaning that the landowner was being forced to fund the improvements. The landowner argued that this would be a positive obligation, but that the Bill of Rights doesn’t impose a positive duty on a landowner to ensure that an occupier lives in conditions fit for human habitation.

Importantly, the court dismissed this second argument saying that the Bill of Rights can’t be interpreted as never being able to impose positive duties on private persons. ESTA already imposes a positive duty – a duty to accommodate another person on your land. What’s needed is a weighing of all the relevant factors, and the positive nature of the obligation is only one factor considered.

Mrs Daniels’ right to human dignity and security of tenure must be weighed against the potential that a landowner may have to compensate her if she was ever evicted. The court noted that under our common law a landowner already may have to compensate tenants or occupiers on their departure under certain circumstances.

Madlanga J ordered that Mrs Daniels has the right to improve the dwelling after consulting with the landowner regarding the times that her contractors will need access to the farm.

The Court’s Rejection of Property Absolutism

The landowner’s defense was based on the concept of property absolutism, which places the property rights of an owner above all else. In a separate concurring judgement Froneman J said that it is time for South Africans to reappraise the concept of property, and to reject property absolutism.

Froneman J said that this concept arose in Europe at a time when they underwent a real socio-political struggle against feudal oppression. In the European struggle property absolutism played an important role to ensure individual freedom, but just because the concept played an important role in developing western capitalism, it doesn’t mean that the concept should continue to exist under the South African constitutional dispensation.

The concept of property absolutism didn’t play a role in determining the current land distribution in South Africa. On the contrary, land distribution was determined by a series of laws that were calculated to deprive black people of land and to create a population of wage slaves – people who couldn’t be self-sufficient and who would have to depend on employment at white owned farms and mines for survival.

Froneman J dismissed the argument that absolute protection of property rights is necessary because of modern market benefits, pointing out that this argument is an attempt to slow down or frustrate constitutional change. He said that these extra-judicial arguments, based on economic efficiency, hide their theoretical assumptions and then leap to a conclusion that the economy will suffer from any change that upsets the existing protection and distribution of property. He warned against being blind to the limits of market based exchanges.

Froneman J rejected the argument that the protection of existing property is currently needed in South Africa in order to ensure personal and economic freedom.

This judgement doesn’t in itself alter the legal dispensation, but going forward it should be used to re-evaluate the strict concept of property, and the commonly held assumption that the rights of landowners will always trump the rights of other people in our democratic society.

Indeed, it is time to accept the consequences of constitutional change.


This work by Clinton Pavlovic is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

The unedited featured photograph by Katie Barrett was published under a Creative Commons Zero Licence.