Commentary on Article 383 of the Civil Code of the Republic of Kazakhstan: Contract and Legislation
1. Paragraph 1 of this Article explains the concept of a mandatory (imperative) legal provision, which was also discussed in the preceding Article. However, whereas the preceding Article dealt only with the terms of a contract, the present Article addresses the contract as a whole.
This paragraph establishes that a contract must comply with the mandatory provisions in force at the time the contract is concluded. This principle naturally raises the question of whether mandatory provisions adopted after the conclusion of a contract, but during its term, are binding on the parties if they conflict with the terms of that contract.
For example, suppose a contract was concluded for the performance of certain activities, such as oil production or the provision of tourism services, which could legally be carried out on a contractual basis at the time. Subsequently, a licensing requirement was introduced for that type of activity. In such circumstances, is a licence required to perform obligations arising from a contract concluded before the adoption of the law introducing mandatory licensing?
2. The answer to this question is provided in paragraph 2 of the Article under consideration. The provisions of this paragraph are based on the general principle that newly adopted legislation applies only to legal relationships arising after the legislation enters into force.
This principle is generally established in the resolution or other instrument bringing the relevant legislation into force. An example is the Resolution of the Supreme Council of the Republic of Kazakhstan dated 27 December 1994, On the Entry into Force of the Civil Code of the Republic of Kazakhstan (General Part).
In addition to the general rule that the Civil Code applies to civil-law relationships arising after its entry into force on 1 March 1995 (paragraph 1), the Resolution establishes specific rules governing certain types of legal relationships.
In particular, paragraph 6 provides that the new grounds for invalidity of transactions established by the Civil Code, as well as the consequences of invalidity, apply to transactions concluded after 1 March 1995.
3. The rules established by new legislation may be applied to the terms of contracts concluded previously only where the legislation expressly provides that its provisions extend to relationships arising from contracts concluded before its entry into force.
For example, paragraph 2 of the Resolution of the Supreme Council of the Republic of Kazakhstan dated 27 December 1994, On the Procedure for Bringing into Force the Law of the Republic of Kazakhstan “On Foreign Investments”, provides that Article 6 of the Law also applies to legal relationships that arose before the Law entered into force.
4. The general rule established in paragraph 2 of the Article under consideration is applied with due regard to the specific characteristics of legal relationships regulated by other legislative acts.
For example, the Decree on Oil provides that licences issued and contracts concluded before the Decree entered into force, as well as all related acts adopted by state authorities of the Republic of Kazakhstan, remain valid (paragraph 5 of Article 2 of the Decree).
A similar provision is contained in paragraph 2 of Article 73 of the Decree on Subsoil.
5. The Law on Foreign Investments establishes a broader principle intended to ensure contractual stability in the event of changes in legislation. This principle is set out in Article 6 of the Law.
Article 6 is one of the best-known and most controversial provisions of the Law on Foreign Investments.
It provides that where changes in legislation and/or the entry into force or amendment of international treaties worsen the position of a foreign investor, the legislation in force at the time the investment was made continues to apply to that investment for a period of ten years.
In the case of investments made under long-term contracts exceeding ten years and concluded with authorised state bodies, the legislation in force at the time of the investment continues to apply until the expiry of the contract, unless the contract provides otherwise.
Where changes in legislation and/or the entry into force or amendment of international treaties improve the position of a foreign investor, certain terms of contracts between the foreign investor and the authorised state body representing the Republic may be amended by mutual agreement of the parties to achieve a balance between their economic interests.
The provisions of this Article concerning contracts relate primarily to oil contracts and other contracts associated with subsoil use.
For foreign contractors, this provision is particularly important in relation to taxation. Unfortunately, however, changes were introduced in the regulation of taxation that were inconsistent with the Decree on Oil.
Paragraph 2 of Article 94-3 of the Decree on Taxes, as amended by the Laws dated 31 December 1996 and 8 December 1997, provided as follows:
“If amendments to legislation introduced after the date of signing a contract make it impossible to continue complying with the original terms of the contract or result in a substantial change in its overall economic conditions, the subsoil user, representatives of the competent authority, and the Ministry of Finance of the Republic of Kazakhstan may introduce amendments or additions to the contract as necessary to restore the economic interests of the parties to the position they held at the time the contract was signed.
Such amendments or additions to the terms of the contract shall be made within sixty days from the date on which written notification is provided to the Ministry of Finance of the Republic of Kazakhstan and the subsoil user.”
Thus, the guarantees established by Article 6 of the Law on Foreign Investments were affected by the provisions of the Tax Code.
In the event of amendments to tax legislation, the new rules were to apply to previously concluded subsoil-use contracts as well. However, the parties were granted the right to amend certain contractual terms in order to preserve the economic viability of the project.
In practice, the question arose as to whether this provision applied to contracts concluded before the Tax Code entered into force, that is, before 1 July 1995.
The general principles of legal theory clearly indicate that this provision has no retroactive effect and that Article 6 of the Law on Foreign Investments should apply in full to contracts concluded earlier.
Nevertheless, this issue caused concern among foreign investors and was therefore resolved through legislation.
By a Decree of the President of the Republic of Kazakhstan having the force of law, dated 21 December 1995, amendments were introduced to the Tax Code, and paragraph 4 of Article 179 was restated as follows:
“4. The tax conditions established in subsoil-use contracts concluded before 1 January 1996 between the Government of the Republic of Kazakhstan or the competent authority and domestic or foreign subsoil users, as well as in subsoil-use contracts concluded after that date for the implementation of previously concluded contracts with those subsoil users, and in subsoil-use contracts concluded from 1 January 1996 that have undergone mandatory tax examination, shall be preserved and remain in force throughout the entire period specified for their validity.”
6. This is the situation regarding investments in the subsoil-use sector. But what rules apply to investments in other sectors unrelated to subsoil use?
There is no doubt that Article 6 of the Law on Foreign Investments applies to investments made before 1 July 1995.
This follows from the general principle that, unless expressly provided otherwise in the new legislation, a new law cannot be applied retroactively to relationships that were governed by another law before the new law entered into force.
The situation is more complicated with respect to legal relationships arising after 1 July 1995.
The question is whether Article 6 applies to tax legislation where the investment was made after 1 July 1995.
For example, suppose a foreign investor established a joint venture in January 1997 under the conditions established by the new Tax Code then in force. Several years later, for instance, in 1999, amendments were introduced to the Tax Code that significantly worsened the investor’s position. Would Article 6 of the Law on Foreign Investments apply to that investor?
An interpretation of the relevant provisions and, more importantly, of the underlying principles of the Tax Code suggests that Article 6 of the Law on Foreign Investments should not apply to matters of taxation.
This conclusion follows from the following provisions:
- Matters relating to taxation may not be included in non-tax legislation (paragraph 2 of Article 1 of the Decree on Taxes).
- Tax benefits may not be granted by other legal acts, including benefits of an individual nature (paragraph 3 of Article 2 of the Decree on Taxes).
However, this conclusion is contradicted by subsequent amendments to the legislation.
Under the Law of the Republic of Kazakhstan dated 16 July 1997, On Amendments and Additions to the Law of the Republic of Kazakhstan “On Foreign Investments”, paragraph 4 was added to Article 6 of the Law on Foreign Investments.
Under this paragraph, the guarantees established in paragraph 1 do not extend to legislative amendments that change the procedures and conditions, including taxation and other measures of state regulation, governing the import, production and/or sale of excisable goods, as well as the import of goods intended for sale without processing.
As can be understood from this amendment, paragraph 1 of Article 6 does not apply to the specific categories of taxes referred to in paragraph 4. Consequently, other categories of taxes remain covered by paragraph 1.
Accordingly, subject to the exception established in paragraph 4, Article 6 also applies to changes in tax legislation.
It should be noted that these arguments have now acquired primarily theoretical significance.
On 15 April 1998, further amendments were introduced to the Decree on Taxes. It may be assumed that these changes followed substantial lobbying by foreign subsoil users. As a result, paragraph 2 of Article 94-3 of the Decree on Taxes was repealed.
Consequently, the provisions of Article 6 of the Law on Foreign Investments concerning the stability of legislation apply to all investments, including investments in the subsoil-use sector, except for the cases expressly excluded under paragraph 4.
This commentary was prepared within the framework of the scientific and practical research programme of the Private Law Research Centre of Kazakh State Law University.
Head of the Working Group responsible for drafting the Civil Code of the Republic of Kazakhstan, Corresponding Member of the National Academy of Sciences of the Republic of Kazakhstan, Professor M.K. Suleimenov
Deputy Head of the Working Group, Professor Yu.G. Basin
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