Commentary to article 34. Invalidity of the license and consequences of its invalidity to the Code of the Republic of Kazakhstan “On Subsoil and Subsoil Use”  

1. A license may be declared invalid in court in the following cases::

1) upon establishing the fact that the state body that issued the license has knowingly provided false information that influenced its decision to issue the license;

2) violations of the procedure for issuing a license established by this Code, which led to an unjustified decision by a state body to issue a license as a result of a malicious agreement established by a court between an official of a state body and the applicant;

3) issuing a license to a person who has been declared legally incompetent and was such on the day of issue;

4) if the issuance of a license is not provided for or prohibited by this Code.

2. The interested person and the prosecutor have the right to apply to the court with a claim for invalidation of the license, and on the grounds provided for in subparagraphs 1) and 3) of paragraph 1 of this Article, the state body that issued the license also has the right.

An interested party is a person whose right to obtain a license and legitimate interests have been violated or may be violated as a result of issuing a license.

3. The license shall be deemed invalid from the date of entry into force of the court decision.

4. If a license is declared invalid on the grounds provided for in subitems 1) and 2) of paragraph 1 of this Article, the person who received the license is obliged to compensate the state for the damage caused in the amount of income received by such person from the illegal use of a subsurface area and expenses of the state related to the recognition of the license as invalid.

5. A person has no right to demand the recognition of an invalid license, which was issued in violation of the requirements of this Code, other laws of the Republic of Kazakhstan, the charter of a legal entity, if such a requirement is caused by selfish motives or the intention to evade responsibility.

6. The limitation period for disputes related to the invalidity of the license is three months from the date when the plaintiff learned or should have learned about the circumstances that are the basis for declaring the license invalid.

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(Yereshev D.E.)

1. The rules governing the invalidity of a subsurface use license appeared in the Decree on Subsurface Resources of 1996, despite the fact that the licensing procedure for granting subsurface use rights began to operate during the period of the 1992 Code on Subsurface Resources and Processing of Mineral Raw Materials, as well as the Decree on Petroleum of 1995, in these legislative acts, the issues of license invalidity and the consequences of invalidating the license were not affected. Indirectly, these issues were regulated through the institution of license revocation. Thus, the Regulation on the Procedure for Licensing Subsurface Use in the Republic of Kazakhstan, approved by the Cabinet of Ministers of the Republic of Kazakhstan on April 13, 1994, established the grounds for termination of the license. Among other reasons for the termination of the license, there are two:

license issuance and contract signing based on false information provided by the licensee;

establishing the fact of collusion between officials involved in the granting of a license or the conclusion of a contract.

These two grounds for termination of the license were subsequently provided for in the Decree on Mineral Resources of 1996 as grounds for invalidating the license. Thus, Article 41 of the Decree on Mineral Resources of 1996 provided for 2 grounds for invalidating the license:

1) when it is established in court that the licensing authority has knowingly provided incorrect information that influenced its decision to grant a license to this person.;

2) when a court establishes the fact of collusion between officials involved in conducting a competition for investment programs or in granting a license through negotiations with the winning applicant for a license in order to provide him with illegal advantages over other applicants, liberalize conditions and reduce the amount of payments to the budget.

Article 41 did not regulate the consequences of invalidation of the license, except for the indication that the license is recognized as invalid from the moment of issue. Therefore, regarding the consequences of invalidating the license, it was necessary to follow the provisions of art. 157 of the Civil Code of the Republic of Kazakhstan, which established the consequences of the invalidity of the transaction.

The recognition of the license as invalid presupposed a judicial procedure for establishing the facts that are the basis for the invalidity of the license.

2. The need to resolve the issues of invalidity of the license for subsurface use is related to its dual nature, as well as to

the specifics of legal relations in the field of subsoil use. On the one hand, the license is an act of a state body, on the other hand, civil law relations arise on the basis of the license in relation to a subsurface area. This feature of the subsurface use license has always generated controversy about the dual nature of its regulation. At the same time, Article 29 of the Subsoil Code explicitly states that the license for subsurface use does not apply to permits regulated in accordance with the legislation of the Republic of Kazakhstan on permits and notifications. At the same time, the provisions of the Civil Code of the Republic of Kazakhstan on the invalidity of transactions do not take into account the specifics of relations in the field of subsoil use. This specificity is due not only to the participation of the state in relations on subsurface use both as a subject of civil rights and as a bearer of authority, but also to the fact that the subsoil, being state property, acts as a special object of regulation.

Based on the provisions of the Civil Code of the Republic of Kazakhstan, a license for subsurface use, declared invalid, does not entail legal consequences other than the consequences associated with its invalidity. According to the general rules of the Civil Code of the Republic of Kazakhstan, the consequences of invalidity of a transaction can occur in the form of restitution, compensation for losses, and a ban on further transactions. If the license is declared invalid, not all of the consequences specified in the Civil Code of the Republic of Kazakhstan may be applied or applied with certain restrictions.

For this reason, the Subsoil Code establishes a special procedure for invalidating a license.

3. The Article establishes a list of grounds for invalidating the license and the consequences of invalidating the license. The article also defines the procedure for invalidating a license, the list of persons entitled to make such claims, as well as the statute of limitations on them.

It should be noted that the consequences of invalidating a license are provided only in cases where the invalidity of the license is caused by the provision of deliberately false information by the applicant or in the case of collusion between a government agency and the applicant. In other cases, the Subsoil Code does not contain provisions on the consequences of invalidating a license. We believe that the relevant provisions of the Civil Code of the Republic of Kazakhstan should be applied in these cases. At the same time, it should be borne in mind that due to the specifics of subsurface use relations, which are regulated in addition to the norms of private law, as well as the norms of public law, the application of the norms of the Civil Code of the Republic of Kazakhstan in such cases may face difficulties. For example, the application of bilateral restitution

It raises questions in connection with the non-application of the norms of the Civil Code of the Republic of Kazakhstan in relation to tax relations. The fact is that payments in favor of the state in the process of using mineral resources are regulated by the norms of tax legislation (subscription bonus, mineral extraction tax, etc.), which in turn does not provide for the possibility of tax refunds in case the license is declared invalid.

4. Paragraph 1 of the commented article defines a list of grounds for invalidating the license, which is exhaustive. Invalidation of a license can only be carried out in court.

A license may be declared invalid if it is established that the state body that issued the license has knowingly provided false information that influenced its decision to issue the license. That is, the very fact of providing false information is not a reason for invalidating the license, it is also necessary to establish the presence of unlawful intent by the applicant.

The license may also be declared invalid if procedural violations were committed during the issuance of the license. Since the license is issued by a government agency, it is assumed that procedural violations may be committed by the government agency authorized to issue the license. Since the license is a title document issued unilaterally by a government agency, the applicant does not have the authority to issue the license after submitting the application. Therefore, procedural errors committed by a government agency in the process of issuing a license for subsurface use cannot be grounds for invalidating the license. Such errors may result in invalidation of the license only if there was collusion between the applicant and a government official. This approach raises questions related to the consequences of possible procedural violations during the issuance of a license that do not show signs of collusion, but have affected the rights of other applicants, for example, a situation where the principle of the first application was violated by mistake.

Difficulties in law enforcement practice may be caused by the question of whether the existence of such a conspiracy can be established in the framework of a civil lawsuit. Or the fact of collusion should be established in the framework of criminal proceedings, since these actions are covered by the disposition of the relevant articles of the Criminal Code of the Republic of Kazakhstan, providing for liability for corruption crimes. Since the collusion between the official and the applicant contains signs of a criminal offense, by virtue of

Due to the jurisdiction, it cannot be considered in civil proceedings. We believe that the fact of collusion should be established in the framework of criminal proceedings and only after that a civil claim can be filed.

The license may also be declared invalid if the person was legally incompetent on the day the license was issued. It should be noted here that the provisions of the Subsoil Code regarding the invalidation of a license due to the incapacity of a person differ from similar provisions of the Civil Code of the Republic of Kazakhstan regarding the invalidity of transactions involving incapacitated persons. According to the Subsoil Code, only the fact that a court recognizes a citizen as legally incompetent as of the date of license issuance is relevant, whereas according to the Civil Code of the Republic of Kazakhstan, the actual condition of a person subsequently recognized as legally incompetent can also be taken into account.

A license may be declared invalid if its issuance is not provided for or prohibited by the Subsoil Code. In the first case, we are talking about a situation where, for example, a license has been issued for combined exploration and production, which is not provided for in Article 30 of the Subsoil Code. The second case covers situations where a license is issued in violation of the prohibition established by the Subsoil Code. In particular, the Subsoil Code prohibits the issuance of licenses in territories that are completely located within the lands specified in paragraph 1 of art. 25, licenses for exploration and production of mineral resources can also be issued exclusively within the territories included in the state subsoil fund management program.

Clause 2 defines the persons entitled to file claims for invalidation of the license. The prosecutor and the interested person have the right to file lawsuits in all cases listed in paragraph 1 of the commented article, whereas the state body that issued the license cannot act as a plaintiff in cases where the license was issued in violation of the procedure for its issuance. This is due to the fact that in this case, the very government agency responsible for the unlawful issuance of the license cannot initiate its invalidation. Regarding the definition of the circle of interested parties, it should be noted that Part 2, which contains the definition of such, is quite broad and any person who not only applied for a license, but who intends to apply for a subsurface area for which the disputed license has been issued, can be considered such. This follows from the definition of the person concerned given in part 2, paragraph 2 of the article in question. Not only persons whose legitimate interests have been violated are recognized as an interested party, but also persons whose interests have been violated.

which may be violated. And potentially any person can be such.

It should be noted that, unlike the provisions of the Civil Code of the Republic of Kazakhstan, in which, as a general rule, the transaction becomes invalid from the moment it is completed, according to paragraph 3 of the commented article, the license is declared invalid from the moment the court decision comes into force. This implies that from the moment the license is issued until the court's decision is rendered, the license is recognized as legitimate, even though it was subsequently declared invalid. Accordingly, all the consequences associated with the invalidity of the license should be applied not from the date of issue of the license, but from the moment of its recognition as such. Of course, the Civil Code of the Republic of Kazakhstan contains a reservation that legislative acts may establish other legal consequences of the invalidity of transactions, and as already mentioned, the purpose of the commented article is to establish the specifics of the recognition of the license as invalid, but the introduction of a temporary gap between the time the license was issued and before it was declared invalid by a court decision is controversial.

The moment from which the license is declared invalid, provided for in paragraph 3 of the article in question, leads to an ambiguous understanding of the consequences of the invalidity of the license specified in paragraph 4 of the commented article. According to this paragraph, "if a license is declared invalid on the grounds provided for in paragraphs 1 and 2 of paragraph 1 of this article, the person who received the license is obliged to compensate the state for the damage caused in the amount of income received by such a person from the illegal use of a subsurface area and the costs of the state related to the recognition of the license as invalid." Since the license is recognized as invalid from the moment the court decision comes into force, from what moment should the period of illegal use of the subsurface area be calculated? From the literal interpretation of paragraph 3 of the commented article, this period should be calculated from the date of entry into force of the court decision. Does this mean that the period between the issuance of a license and its invalidation cannot be counted towards the period of illegal use of a subsurface area? If we proceed from a purely formal interpretation of this rule, then yes, this period is not recognized as illegal use. However, in this case, recovery of damage does not make sense, since the right of subsurface use ceases from the moment the license is declared invalid and no further damage can occur (unless there is a question of damage related to illegal mining, which is not regulated by the article in question). In this regard, paragraph 4 of Article 34 of the Subsoil Code still follows

It should be understood that the loss for the period of license issuance before its invalidation is subject to recovery.

Paragraph 4 provides for unilateral restitution in the event of invalidation of the license for the cases provided for in subparagraphs 1) and 2) of paragraph 1 of Article 34 of the Subsoil Code. The consequences of invalidating the license in other cases are not specified in this paragraph. Does this mean that in the remaining cases, the provisions of the Civil Code of the Republic of Kazakhstan governing the consequences of the invalidity of the transaction should be applied? Despite the fact that, according to its formal side, a license for subsurface use is an administrative act, however, civil law relations arise on its basis. The above - mentioned art . 29 of the Subsoil Code indicates that a subsoil use license does not apply to permits regulated in accordance with the legislation of the Republic of Kazakhstan on permits and notifications. This suggests that the relevant provisions of the Civil Code of the Republic of Kazakhstan should be applied to the consequences of the invalidity of a subsurface use license, unless otherwise provided by the Subsoil Code.

Paragraph 5 of the article in question restricts the rights of an interested person to demand that a license be declared invalid if it was issued in violation of the requirements of the Subsoil Code, other laws of the Republic of Kazakhstan, or the charter of a legal entity, and such a demand is motivated by selfish motives or the intention to evade responsibility.

It should be noted that the content of this provision is not entirely consistent with paragraph 1 of the same article, which establishes an exhaustive list of grounds for invalidating the license. At first glance, it may seem that clause 5 allows for the possibility of recognizing a license on other grounds, but this is not the case. This provision should be considered taking into account the fact that it does not define the grounds for invalidating a license. The practical significance of this paragraph is questionable, since it is not applicable to any of the cases specified in paragraph 1.

The limitation period for disputes related to the invalidity of the license is three months from the date when the plaintiff learned or should have learned about the circumstances that are the basis for declaring the license invalid. The shortened limitation period in comparison with the limitation period for disputes on invalidation of a transaction established by the Civil Code of the Republic of Kazakhstan is aimed at minimizing the state of uncertainty about the future legal fate of a subsurface use facility.

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  Kazakh Association of Organizations of the Oil and Gas and Energy Complex KAZENERGY

Nur Sultan 2022

The Kazenergy Association expresses its sincere gratitude for the support in preparing the commentary to the following companies: North Caspian Operating Company NV, NC KazMunayGas JSC, Mangistaumunaygas JSC, Karachaganak Petroleum Operating BV, White & Case Kazakhstan LLP, Haller Lomax LLP)", "Erlicon CG" LLP, "Signum Law Firm" LLP. © Kazenergy Association, 2022 © team of authors, 2022 © authors, 2022

Dear readers!

We offer you a scientific and practical commentary prepared by a group of Russian specialists with extensive practical experience in legislation on subsoil and subsoil use and who participated in the preparation of the Code on Subsoil and Subsoil Use.

Subsurface use is a very complex and specific area of public relations, the regulation of which has its own historical background and takes into account the technological specifics of the process of subsurface development, as well as environmental, commercial, legal and other features of exploration and development of deposits.

Kazakhstan's legislation on subsoil and subsurface use has passed through several stages in its development, and has always been based on a balance of interests between the state and subsurface users, transparency, striving for the maximum possible degree of protection of the rights and legitimate interests of investors, ensuring sustainable social, economic and environmental development of the country.

The Code "On Subsoil and Subsoil Use", adopted at the end of 2017, was developed taking into account many years of accumulated experience and law enforcement practice, as well as the results of extensive discussions with experts working in the industry.

It reflects specific, important measures on the part of the state to increase the investment attractiveness of exploration and further reduce administrative barriers.

Nevertheless, practice and legislation do not stand still, constantly evolving, taking into account new challenges facing both the subsurface use industry and the economy as a whole.

In this regard, this commentary is intended to serve as an aid for a wide range of interested persons – specialists working in the industry, in

understanding the meaning of the norms, their historical context, the interrelationship and mutual influence of the various provisions of the Code.

We also hope that studying the commentary will serve as an incentive for new generations of young domestic specialists to work scientifically and practically in this important industry, for the benefit of the development of our country, current and future generations of Kazakhstanis.

Sincerely, U. Karabalin, Deputy Chairman of the Kazenergy Association, Hero of Labor of Kazakhstan