Commentary to article 39. Invalidity of the subsoil use contract and consequences of its invalidity to the Code of the Republic of Kazakhstan “On Subsoil and Subsoil Use”  

1. The grounds for invalidating a subsurface use contract are:

1) recognition of the auction for granting the right of subsurface use as invalid;

2) the absence in the contract for subsurface use of the mandatory conditions established by this Code;

3) establishing the fact that the competent authority has knowingly provided false information that influenced its decision to conclude a contract for subsurface use with this person;

4) other grounds stipulated by the laws of the Republic of Kazakhstan.

2. A subsurface use contract declared invalid does not entail legal consequences, except for those related to its invalidity, and is invalid from the date of its conclusion.

Invalidation of the contract does not release the subsurface user from fulfilling obligations to eliminate the consequences of subsurface use.

3. Invalidation in court or termination of the agreement on the basis of which the transfer and re-registration of the right of subsurface use was carried out shall entail the invalidity of amendments and additions to the contract for subsurface use made in connection with such transfer of the right of subsurface use, but not the contract itself.

4. The recognition of a subsurface use contract as invalid shall entail the invalidity of all subsequent transactions, the subject of which is the right of subsurface use granted on the basis of such a contract.

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(Nogaibai Z.M., Ilyasova K.M., Zhursunov R.M.)

1. The commented article in paragraphs 1-3, paragraphs 1, indicates the special grounds for invalidating the contract provided for in the Subsoil Code, and in paragraphs 4, paragraph 1 also explicitly indicates the possibility of applying other grounds for invalidating contracts provided for by the laws of the Republic of Kazakhstan. The most important point in the commented article is the noted direct indication of the non-exhaustive nature of the list of grounds for the invalidity of contracts, arising from its clause 4, clause 1.

2. The first reason for the invalidity of the contract, paragraph 1, paragraph 1 of the commented article calls the invalidity of the auction for granting the right of subsurface use. The procedure and conditions for declaring an auction invalid are provided for in Article 102 of the Subsoil Code.

3. The next reason for the invalidity of the contract in accordance with clause 2, clause 1, Article 39 is the absence of mandatory conditions in the contract established by the Code on Subsoil. This norm is interconnected with the norm of clause 2 of Article 36 of the Subsoil Code, which contains a list of mandatory terms of contracts for subsurface use, which, however, is not exhaustive. It should be emphasized that the commented norm directly indicates only the absence in the contract of the mandatory conditions established by the Code on the Subsoil, as the basis for the invalidity of the contract. Normally, the concept of "absence" in the contract of mandatory conditions is used, but not "deviation" from them. Within the meaning of the norm, however, we believe that changes or deviations from the mandatory conditions may (taking into account the circumstances) qualify as "absence" of mandatory conditions.

4. Another reason for the invalidity of the contract in accordance with paragraph 3, paragraph 1 of the commented article is the provision of deliberately false information to the competent authority at the conclusion of the contract. In this case, we are not talking about establishing the fact that the person with whom the subsurface use contract was concluded at the end of the auction provided the competent authority with knowingly false information that influenced its decision to allow such a person to participate in the auction, since this case is specified separately in clause 2, clause 2, Article 102 and, accordingly, falls under under the effect of subclause 1 of clause 1 of art.39.

Probably, one of the possible examples when the norm of clause 3, clause 1 of the commented article can be applied is the provision of deliberately false information about the payment of a subscription bonus (see clause 3, Article 100 of the Subsoil Code) or, for example, the provision of deliberately false information by strategic partners of a national company (see clause 3, Article 104 of the Subsoil Code).

5. In accordance with clause 4, clause 1 of the commented article, other grounds provided for by the laws of the Republic of Kazakhstan may serve as grounds for invalidating a subsurface use contract. Such grounds, for example, are provided for in the Civil Code of the Republic of Kazakhstan. At the same time, it does not follow from the literal content of the commented norm that other grounds for invalidating the contract can be provided only in the Civil Code of the Republic of Kazakhstan.

6. In itself, the existence of grounds for declaring a contract invalid, as a rule, also requires going to court (see, for example, paragraphs 1, paragraph 1, Article 39, paragraph 5, Article 102 of the Subsoil Code, etc.).

The establishment of grounds for invalidating a contract differs from the actual procedure for invalidating a contract.

7. The Subsoil Code does not contain any indication of a judicial or non-judicial procedure for invalidating contracts. In this regard, guided by paragraph 4 of Article 1 of the Subsoil Code, the general provisions of Article 157 and other articles of the Civil Code of the Republic of Kazakhstan should be applied.

Kazakh legislation distinguishes between the concepts of invalid disputed and void transactions. In this regard, considering that the commented article refers to the invalidity of contracts, but does not directly indicate their nullity, and also taking into account the provisions of art.157 of the Civil Code of the Republic of Kazakhstan, it should be concluded that contracts for subsurface use are invalid on the grounds listed in paragraphs 1 – 3 of paragraph 1 of art.39 The Code of the Subsoil, may be recognized in court.

Among other grounds for the invalidity of transactions under the Civil Code of the Republic of Kazakhstan, which are applicable according to subclause 4, clause 1, Article 39 of the Subsoil Code to contracts for subsurface use, there are both grounds for dispute and grounds for nullity of transactions.

8. In the case of recognition of an auction as invalid (paragraphs 1, paragraph 1, Article 39, Article 102 of the Subsoil Code), the legislator stipulates in paragraph 5, Article 102 of the Subsoil Code that judicial recognition of the auction as invalid entails the invalidity of the contract concluded following the auction.

Obviously, for the sake of procedural economy, claims for invalidation of the auction should probably also declare the contract invalid if the contract has already been concluded at the time of filing the claim.

9. Paragraphs 2 and 4 of the commented article contain basic provisions on the consequences of declaring the contract invalid. Thus, a contract declared invalid does not entail legal consequences, except for those related to its invalidity, and is invalid from the date of its conclusion (the commentary to art. 38 has already noted the inconsistency of Articles 38 and 39).

In other words, all legal consequences that arise after the conclusion of the contract are recognized as non-existent.

When applying the commented norms, it is necessary to take into account the general consequences of the invalidity of transactions provided for in Articles 157-1 of the Civil Code of the Republic of Kazakhstan (which do not contradict clauses 2 and 4 of Article 39 of the Subsoil Code).

Invalidation of the contract does not release the former subsurface user from fulfilling obligations to eliminate the consequences of subsurface use. This rule is an exception to the above-mentioned general rule on the absence of legal consequences of an invalid contract. Since the protection of the environment and subsurface is an absolute priority for the state, the obligations to eliminate the consequences of subsurface use in the subsurface area under an invalid contract must be fulfilled in any case.

At the same time, taking into account the direct reference in the Subsoil Code to "not releasing the subsurface user from fulfilling liquidation obligations," we believe that the subsurface user, as a general rule, in the cases provided for in paragraphs 1-3 of paragraph 1 of the commented article, cannot submit to the competent authority a claim for reimbursement of his expenses incurred for liquidation for invalidated the contract.

10. The recognition of a subsurface use contract as invalid shall entail the invalidity of all subsequent transactions, the subject of which is the right of subsurface use granted on the basis of such a contract.

Paragraph 4 of the commented article deals with transactions on the transfer of the right of subsurface use (shares in it) to other persons (see art.40 of the Subsoil Code). The invalidity of such transactions by virtue of a direct indication in the commented provision of the Subsoil Code will follow regardless of compliance with the special requirements of the Subsoil Code governing the transfer of the right of subsurface use (shares in it).

11. The commented article, unlike paragraph 2 of Article 34 of the Subsoil Code, does not specify who exactly has the right to file a claim to the court for invalidation of the contract: only the parties to the contract or also other persons. Obviously, in most cases, in practice, we will be talking about the competent authority. At the same time, by virtue of paragraph 4 of Article 1 of the Subsoil Code and paragraph 3 of Article 157 of the Civil Code of the Republic of Kazakhstan, paragraph 1 of Article 157-1 of the Civil Code of the Republic of Kazakhstan, the requirement to declare the transaction (contract for subsurface use) invalid may be submitted by the parties to the contract, interested parties, the appropriate government agency or prosecutor.

12. Given the absence of any special provisions on the limitation period in the Subsoil Code when submitting claims for invalidation of contracts, we believe that the relevant provisions of the Civil Code of the Republic of Kazakhstan on the limitation period apply to claims for invalidity of a subsoil use contract by virtue of paragraph 4 of Article 1 of the Subsoil Code.

In contrast to the above, clause 6 of Article 34 of the Subsoil Code provides for a special limitation period of three months for licenses for subsurface use.

13. In order to protect the rights of investors, paragraph 3 of the commented article separately stipulates that invalidation in court or termination of the contract on the basis of which the transfer and re-registration of the right of subsurface use was carried out entails the invalidity of amendments and additions to the contract for subsurface use made in connection with such transfer of the right of subsurface use, but not the contract itself.

The "amendments and additions to the contract made in connection with the transfer of the right of subsurface use" in the commented norm refers to the cases provided for in paragraph 3 of Article 40 of the Subsoil Code.

The grounds for invalidating the contract on the basis of which the transfer and re-registration of the right of subsurface use was carried out may be both general, i.e. provided for by the Civil Code of the Republic of Kazakhstan, and special, provided for in the Subsoil Code (see, for example, paragraph 4 of Article 44 of the Subsoil Code on the nullity of transactions on the transfer of the right of subsurface use, made without the permission of the competent authority, as well as after the expiration of the permit).

It should be noted, however, that violation of the permissive procedure for the transfer of the right of subsurface use (shares in it), as well as objects related to it, serves as a separate basis for the early termination of the contract for subsurface use by the competent authority unilaterally on the basis of subclause 3, paragraph 1, Article 106 of the Subsoil Code.

The Code does not establish any rules for other amendments and additions to the contract that are not related to the registration of the transfer of the right of subsurface use or a share in it, similar in content to the norm of paragraph 3 of Article 39 of the Subsoil Code. However, since amendments and additions to contracts are made by the parties concluding an addendum to it (paragraph 1 of Article 37 of the Subsoil Code), we are talking about a separate transaction (contract), accordingly, its invalidity for any reason should not affect the validity of the main contract, which included such amendments. amendments and additions to the invalid agreement.

14. The commented article, by virtue of paragraph 3 of Article 277 of the Subsoil Code, has no "retroactive effect", i.e. it does not apply to relations under previously concluded contracts. In this regard, the grounds for invalidating previously concluded contracts should be determined by the provisions of such contracts themselves (if they contain provisions on the grounds for their invalidity) in accordance with paragraph 1 of Article 278 of the Subsoil Code, as well as the applicable legal provisions.

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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