Prior to 2018, water use entitlements were commonly traded between individuals. On 19 January 20018, however, the Director General of the Department of Water and Sanitation (“DWS”) released a circular stating that section 25 of the National Waster Act, 36 of 1998, as amended (“NWA”), did not allow for the trading of water use entitlements to third parties, which resulted in all future transfer applications being denied by the DWS. The motivation for this decision was to address the unequal distribution of water entitlements on the basis that “[a]ccess to water has historically been the privilege of predominantly white people with access to land and to economic power”.
As a result, three separate matters were launched against the DWS in the Pretoria High Court, challenging the Director General’s decision to refuse the transfer of certain water entitlements and permits. All three matters were founded on materially the same issue, namely whether a water use entitlement obtained in terms of the NWA could be transferred to a third party and, if so, whether a fee may be charged for the transfer (i.e. traded). All three matters were therefore heard together, addressing these issues which fell under section 25(1) & (2) of the NWA, which states that –
“25. Transfer of water use authorisations
(1) A water management institution may. at the request of a person authorised to use water for irrigation under this Act, allow that person on a temporary basis and on such conditions as the water management institution may determine, to use some or all of that water for a different purpose, or to allow the use of some or all of that water on another property in the same vicinity for the same or a similar purpose.
(2) A person holding an entitlement to use water from a water resource in respect of any land may surrender that entitlement or part of that entitlement –
(a) in order to facilitate a particular licence application under section 41 for the use of water from the same resource in respect of other land; and
(b) on condition that the surrender only becomes effective if and when such application is granted.”
Using the first of the three cases as an example, Doornkraal Business Trust (“Doornkraal”), the owner of farms in the Somerset East district of the Eastern Cape, had concluded an agreement with Britzkraal Properties (Pty) Ltd (“Britzkraal”) in terms of which Doornkraal purchased 30 hectares of Britzkraal’s water use entitlement for a price of R1,950,000.00, which Doornkraal required for the intended expansion of its farming operation. The parties declared in their agreement that they were aware that the approval of the regulatory authority was necessary and made that approval a suspensive condition. Pursuant to the agreement, and in terms of section 25(2) of the NWA, Britzkraal surrendered its water use entitlement and Doornkraal applied for a licence in respect of that water use entitlement in terms of section 41 of the NWA.
However, The Director General refused Doornkraal’s application, stating that –
“Section 25(2) of the NWA does not make provision for the transfer of a water use entitlement from one person to another. A person who holds an entitlement may only surrender part or all of his/her entitlement to facilitate a water use licence application to use of water from the same resource in respect of other land that belongs to that person. The National Water Act therefore does not make provision for the trading or transferring of water use entitlements between two separate legal entities”
It was therefore the contention of the DWS that section 25 did not allow for the transfer of water use entitlements to third parties, nor the trade of entitlements by way of such transfer or surrender.
High Court
Before a full bench of the Pretoria High Court, the Court recognised that section 25 could be interpreted broadly to allow the transfer of water use entitlements from one person to another, unrelated, third party, or narrowly to limited transfers to the transfer of water use entitlements from one property owned or controlled by a holder of a water use entitlement to another property owned or controlled by the same person.
However, the High Court abstained from ruling on this point, regarding it as ancillary to the main issue of whether such entitlements can be traded. The full bench held that such “water trading” is no longer permissible due to an incompatibility with the purpose outlined in section 2 of the NWA, and ultimately ordered that –
“A proper construction of section 25 of the Act, the words ‘another property in the vicinity’ and ‘other land’ could mean either as owned by the holder of the water use entitlement, or by another person or third party. I further find that water trade or sale of water use entitlements is unlawful as it offends s 2 of the Act, and is inconsistent with the spirit, purport and objects of the Bill of Rights in the Constitution”
The applicants in the High Court successfully approached the Supreme Court of Appeal, who overturned the decision of the court a quo on both issues of interpretation and trading.
Supreme Court of Appeal
During its consideration of the three matters, the SCA held that the High Court erred in not ruling on the issue of interpretation, stating that it had been misguided in its approach. The SCA highlighted that the issue of whether a water use entitlement can be transferred to an unrelated third party, or whether it is restricted to the transfer of entitlements from one property owned or controlled by a holder of a water use entitlement to another property owned or controlled by the same person, is a pre-requisite before deciding on whether such entitlements can be traded.
Applying the concrete rules of interpretation, the SCA found the narrow interpretation of the DWS to be incompatible with the plain and contextual reading of section 25 of the NWA, and section 25(1) in particular. The Court held that a water management institution is empowered to allow the entitlement-holder, on a temporary basis, “to allow the use of some or all of that water on another property in the same vicinity for the same or a similar purpose”. This contemplates a transfer from the entitlement-holder to a third party. If the intention had been only to allow the entitlement-holder to temporarily use their own water on a second property owned or controlled by them, the section would not have spoken of the water management institution allowing the entitlement-holder to allow that use.
The SCA further held that section 25(2) creates the mechanism for a permanent transfer of water use entitlements, whereby one party, the entitlement-holder, conditionally surrenders their entitlement, while the other party, the prospective entitlement-holder, applies for the licence. Accordingly, if the licence application is not approved by the responsible authority, the surrender ceases to have effect.
On the issue of trading in water use entitlements, the SCA found that the High Court had postured the wrong question, namely whether the NWA allowed for such trading. However, as reasoned by the SCA, the issue is not whether the NWA specifically permits the sale or transfer in water use entitlements, but rather whether the NWA specifically prohibits it. This is a fundamental tenant of freedom of contract, grounded in well-established principles of public policy. The High Court, therefore, erred in finding that all agreements in which water use entitlements are traded are contrary to public policy and section 2 of the NWA, and refusing such applications on this basis.
The SCA further held that the High Court had failed to consider the role of the DWS, and its ability to ensure compliance with the NWA during the transfer or trade of water use entitlements. When the entitlement-holder surrenders the entitlement to facilitate a transfer application, the entitlement goes to the transferee, only if the transfer is approved by the responsible authority (DWS), or remains with the entitlement-holder if the transfer is not approved. At no stage in the process is the water use entitlement available for allocation to anyone else, nor does water become available for unregulated re-distribution. As a result, the transaction, whether successful or not, deprives no-one of access to water.
In light of the above, the SCA upheld the appeal, ruling that water use entitlements can be transferred to third parties under section 25 of the NWA, and that an agreement between the entitlement-holder and a prospective entitlement-holder, in respect of the surrender of such entitlement to facilitate an application for a licence by the prospective entitlement-holder, in return for payment of compensation, is not prohibited.
The DWS took the decision on appeal to the Constitutional Court on the basis that, by allowing the wealthy “to sell water”, a scarce natural resource held in trust by the Minister, the Supreme Court of Appeal’s judgment infringes on the constitutional right to water and equality.
Constitutional Court
In its reasoning, the CC agreed with the SCA’s conclusion that the NWA does not expressly prohibit the trading of water use entitlements between private individuals. Moreover, section 29 of the NWA states that “[i]f a licensee has agreed to pay compensation to another in terms of any arrangement to use water, the responsible authority may make the obligation to pay compensation a condition of the licence”.
The CC reasoned that section 29(2) therefore acknowledges that it is lawful in terms of the NWA to enter into a private transaction relating to the use of water with another person and that, when this is done, it is in order for such an arrangement to include the payment of compensation. Additionally, section 29(2) permits a licensee’s obligation to pay compensation to be made a condition of the licence. This is consonant with an interpretation that a surrender under section 25(2) may be subject to a condition that, upon the success of a licence application by a third party (the new licensee), the latter will be liable to pay a fee to the erstwhile licensee.
Based on the above, and on consideration of several other minor points raised by the DWS, the Constitutional Court dismissed the appeal and upheld the order of the SCA. However, the Court saw fit to add an epilogue to its judgement, stating that –
“The conclusion that I have reached is not dismissive of the state’s concerns that water, a scarce national resource, is largely in the hands of advantaged white farmers. On the contrary, I understand why the state may now be seeking to redress the injustice brought about by this disproportionate enjoyment of water use entitlements. Indeed, one of the factors to be considered to ensure the achievement of the purpose of the [NWA] is ‘redressing the results of past racial and gender discrimination’ … Unfortunately, the existing legislative instrument does not admit of the redress; at least not in the manner contended for by the applicants in this matter”.
The above statement suggests that, while the current legal framework supports the transfer and trade of water use entitlements, future efforts may be made to amend the existing legislation to address the inequities of the past which the DWS seeks to protect.
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