The General Issues of Contractual Stability in the Civil Law and Stability Terms in Subsoil Use Contracts (Svetlana Shtopol, Partner International Law Firm Integrites, Kazakhstan)
The General Issues of Contractual Stability in the Civil Law and Stability Terms in Subsoil Use Contracts
International Law Firm Integrites, Kazakhstan
The dispositivity (principle of optionality) in the civil law lays special emphasis on a contract as an agreement of the parties to a civil transaction, which sets forth their rights and obligations. Article 2 of the Civil Code of the Republic of Kazakhstan specifies that parties are free to establish their rights and obligations on the basis of a contract and in the determination of contract terms and conditions, which do not contradict the law. Taking into consideration the importance of a contract as an institute of the civil law, the issue of contractual stability becomes of great importance alongside the issues of contract execution, performance and termination.
Stability is one of the main criteria for all parties to a contract, as it allows certain terms and conditions of relationships to be fixed, which reflect the interests of the parties and enables them to calculate the economic efficiency of a deal, rely on the results planned and avoid the risk of changes of conduct by any counterparty, including the case of unfair practice, and, in general, to exclude a number of potential negative changes and disputes. Stability allows the parties to a civil transaction to be more confident when entering into a deal and to keep the balance of mutual rights and obligations and as a result to keep the balance of own interests.
Stability of relationships between the parties to a civil transaction may be affected by the change of the legislative norms, which regulate such relationships. As a result of amendments to legislative acts the parties may find themselves in a different legal environment, in which they may be granted new rights or become subject to additional obligations; besides which new statutory requirements or restrictions may be established, which directly affect the performance of a contract.
Although contractual stability is one of the guarantees of the interests of the parties to a civil transaction, quite often parties to a contract have issues and disputes related to amendments to or contract termination. In the event of any failure to resolve such disputes, the parties are forced to appeal to the Courts with a claim to introduce amendments or to terminate the contract. The termination or amendment of a contract, as well as the recognition of a contract as not having been concluded, creates problems for the parties, disturbing the normal course of their business and investment activities.
There are two main aspects related to contractual stability:
1)Change of the ruling legislation following the execution of a contract.
2)Modification of the terms and conditions of a contract by the parties thereto.
Below is an analysis of the norms of the legislation of the Republic of Kazakhstan, which regulate contractual stability.
Change of the ruling legislation following the execution of a contract
The general rule on the time aspects of the operation of legislative acts is set forth in the Law of Kazakhstan «On Regulatory Legal Acts», under which a regulatory legal act does not apply to relationships which occurred prior to its enactment. The only exemption from this rule is the case when the retroactive force of a law or its part is provided for by the law itself or an act on the enactment of such a law.
In accordance with Article 4 of the Civil Code of Kazakhstan, the acts of civil legislation do not have retroactive force and only apply to relationships which occurred after their enactment. Acts of civil legislation apply to relationships which occurred prior to their enactment only in cases when it is explicitly provided for in such an act.
Article 383 of the Civil Code of Kazakhstan sets forth that in the event, if after the execution of a contract, the legislation introduces mandatory obligations for the parties, which differ from those which were in force at the time of the execution of the contract, then the terms and conditions of the contract remain in force, unless the legislation provides for its retroactive application to the relationships, arising out of the contracts executed earlier.
Thus, the civil legislation sets forth the general rule of the stability of contract terms and conditions, specified at the moment of contract execution. Changes in the legislation should not affect the relationships of the parties to a deal, which complies with general logic and is a basis for civil transactions. This is one of the most important provisions of the civil legislation, aimed at the protection of the interests of the parties to civil transactions.
However, we note that the parties are not fully protected from changes and amendments to regulatory legal acts:
Firstly, as stated in the above mentioned Articles 4 and 383 of the Civil Code of Kazakhstan, legislative acts provide for their retroactive application to relationships which occurred prior to their enactment. In this event, changes to a law may affect the relationships of the parties to a contract, depriving them of stability guarantees in respect of the terms and conditions agreed upon.
Secondly, the issue of application of Articles 4 and 383 of the Civil Code of Kazakhstan to certain relationships of the parties arising during the performance of a contract is a disputable one. Article 4 refers only to the rules on the time aspects of the operation of the civil legislation. Article 383 uses the general term ‘legislation’, however, given that the Civil Code regulates only civil law relations, Article 4 and 383 do not apply, for example, to taxes, customs, currency and other relationships, which arise during the performance of contracts and are closely connected to the type of performance and achievement of the contracts’ goals.
So, for example, Clause 2 of Article 3 of the Tax Code of Kazakhstan, the legal acts of Kazakhstan which amend and supplement the Tax Code may, except for certain cases, be adopted not later than the 1st of November of the current year and enacted not earlier than the 1st of January of the year following the year of their adoption. The tax legislation does not provide for taxation stability for the parties to a contract; the interests of taxpayers are protected only by the opportunity to be acquainted with the proposed amendments two months prior to the enactment of such amendments. It does not protect the interests of the parties to a long term contract from the disturbance of the economic balance of their interests and financial forecasts during the performance of contracts.
Clause 2 of Article 3 of the Code of Kazakhstan «On Customs in Kazakhstan» sets forth that the customs sphere is regulated by the customs tariff rules, prohibitions and restrictions, and the customs and tax legislation of Kazakhstan in effect on the day of the registration of the customs declaration, unless otherwise provided for by the Customs Code. Thus, for the participants of foreign economic transactions the customs legislation does not provide for the stability of its provisions either. Prohibitions and restrictions established by the State for import and/or export of certain goods may have significant effects on foreign economic activities.
Thirdly, we note the provisions of Clause 2 of Article 4 of the Civil Code of Kazakhstan which sets forth that in respect of relationships which occurred prior to the enactment of the civil legislation act, such an act applies to the rights and obligations which arise after its enactment. We consider that the stated provision is not clearly formulated and allows for different understandings and interpretations. So, the relationships based upon the contract may occur earlier, but certain rights and obligations may arise later in the course of the performance of the contract. In such a situation the issue of the applicable legislation and, subsequently, the issue of stability becomes a disputable and ambiguous one.
Modification of the terms and conditions of a contract by the parties thereto
The issues related to ensuring the stability of a certain contract are regulated by a number of rules of civil legislation, which determine the procedures for the amendment and termination of civil law contracts.
According to the rule set forth in Article 386 of the Civil Code of Kazakhstan, a contract becomes binding for the parties upon its execution. This is an imperative and unconditional norm: the parties may not unilaterally exclude the binding character of a contract. Further, in accordance with Article 401, the amendment and termination of a contract is possible upon the mutual agreement of the parties, unless otherwise provided for by the Code, other legislative acts and the contract. Prohibition of the unilateral refusal to perform the contractual obligations and unilateral amendment of contract terms and conditions is also set forth in Article 273 of the Civil Code of Kazakhstan.
Another instrument for ensuring contractual stability is the provision of the law which sets forth the following limited list of grounds for the amendment or termination of a contract upon the initiative of one party:
1) Upon material violation of the contract by a party;
2) In other cases as provided for by the Civil Code of Kazakhstan, other legislative acts or the contract.
So, the amendment or termination of a contract on the above grounds is possible only in a judicial procedure.
In practice it is quite difficult to determine the materiality of any contract violation. According to Article 401 of the Civil Code of Kazakhstan, the violation of a contract is recognized as material, if the violation entails such a loss for the other party, as a result of which that party loses a considerable amount of the benefit it was entitled to receive when entering into the contract. The materiality of the contract violation is determined by the Courts based upon the evidence presented by the party/ parties initiating the contractual termination.
Article 404 of the Civil Code of Kazakhstan provides for the unilateral termination of a contract in the following cases:
1) Impossibility of the performance of the contractual obligations;
2) Recognition of the other party as a bankrupt in accordance with the statutorily set procedure;
3) Amendment or cancellation of an act of a State body which was the basis for the execution of a contract;
4) When a contract is entered into without specifying the term, unless otherwise is provided for by legislative acts or the agreement of the parties.
In the case of unilateral refusal from the performance of the contract, the refusing party must notify the other party within one month, unless otherwise provided for by legislative acts or the mutual agreement of the parties.
These are the main provisions of the civil law on contractual stability. In this article we would like to draw special attention to the stability issues related to subsoil use contracts and on the theoretical and practical aspects of the application of the relevant provisions and norms of the civil law to the relations arising out of contracts for subsoil use operations. Taking into consideration the fact that the Kazakhstani economy is based on mineral resources, the issues of subsoil use, relationships between subsoil users and the State as the parties to subsoil use contracts, the guarantee of stability for local and foreign investors remains important and has huge practical implications.
The stability of subsoil use contracts
First of all, it is necessary to identify whether a subsoil use contract may be considered as a civil law contract. The issues of the correlation of public and private interests in subsoil use have always been important and interested lawyers, both theoreticians and practicing ones, and this issue is the subject of a large volume of research by Kazakhstani legal experts.
In the opinion of the author of this article, in accordance with Kazakhstani laws, a subsoil use contract is of a civil law nature. This is confirmed indirectly by a number of norms of the civil law and subsoil use laws, under which subsoil use relationships are regulated by the civil law, and, only in the event of the absence of such a regulation, by special laws.
A subsoil use contract is defined as a contract between a competent body and a subsoil user and its aim is to determine the rights and obligations of the parties when conducting subsoil use operations. In accordance with Article 111 of the Civil Code of Kazakhstan, a competent body in this case enters into relationships, regulated by the civil law on equal terms with the other participants of such relationships.
We understand that when conducting subsoil use operations, a subsoil user enters into a complexity of relationships, which are not of a civil law nature and which are regulated respectively by special laws, including tax laws, customs laws, environmental laws, safety laws and others. In such cases a subsoil user enters into relationships with the State represented by its authorized bodies, and such relationships are not civil law relationships and are beyond the contract as a civil law agreement. However, the issues of the amendment and termination of a subsoil use contract in case of the absence of a regulation of subsoil use laws remain subject to the civil law.
Given the above, in respect of the stability of subsoil use contracts we consider that the provisions of the civil law on stability may be applied only to those subsoil use relationships which are recognized as civil law relationships.
The general norms on the time aspects of the operation of normative legislative acts and special norms set forth in the subsoil use laws should apply to stability issues in general in respect of all the terms and conditions of subsoil use contracts and subsoil use operations. Article 30 of the law of Kazakhstan «On Subsoil and Subsoil Use» sets forth the guarantees for the protection of the rights of subsoil users. Changes and amendments to laws, which worsen the results of the business activities of subsoil users under contracts, are not applicable to contracts executed prior to the enactment of such changes and amendments. Such guarantees are not applicable to the changes and amendments to the laws of the Republic of Kazakhstan on ensuring national security, defence, environmental safety, healthcare, taxation and customs regulation.
It should be noted that the application of stability provisions in practice was and remains problematic. This is a consequence of insufficient legal knowledge and a lack of the diligence of State bodies and officers, which may be considered as a practical problem of the violation of guarantees granted to subsoil users, and also the lack of a clear formulation of the stability provisions of the law which require further improvement.
An example is the issue of formalization of rights to land plots. When concluding a subsoil use contract, the land law provided for certain procedures for the granting of rights to land plots and the amounts of payments related to granting rights to such land plots, including payments as a result of the withdrawal of land plots from the use of other entities and any transfers from one category to another (for example, agricultural losses). But at the time of formalizing the land use rights, the land law was changed and amended, as a result of which a subsoil user incurs considerably higher costs when obtaining land use rights. According to the provisions of Article 30 of the Law of Kazakhstan «On Subsoil and Subsoil Use» such amendments do not apply to the subsoil user. However, the Land Code of Kazakhstan which directly regulates land relationships, do not have similar provisions in this respect. Given that the Land Code of Kazakhstan has a priority compared to the Law of Kazakhstan «On Subsoil and Subsoil Use» as per the hierarchy of normative legislative acts, the application of stability norms becomes disputable and ambiguous.
In our opinion, to ensure the application of stability and guarantee provisions, the special laws should be amended to include the same provisions. For example, the way taxation stability worked earlier, when the stability was provided for directly by the tax laws.
Alongside with guarantees against change of laws, the other important aspect of subsoil use contractual stability is the issue of contract amendments and terminations.
According to Article 71 of the Law of Kazakhstan «On Subsoil and Subsoil Use»; as a general rule changes and/or amendments of a contract are possible upon the mutual agreement of the parties. However, it is provided, that in the event the actions of a subsoil user during subsoil use operations in respect of subsoil areas, fields of strategic importance, lead to a change in the economic interests of the Republic of Kazakhstan, which potentially endangers national security, the competent body may require changes and/or amendments to the contract, including previously concluded contracts, to restore the economic interests of the Republic of Kazakhstan.
As it was noted earlier, the impermissibility of unilateral changes to a contract is the guarantee of contractual stability and the interests of the parties. In this case, a subsoil user is completely unprotected against the risks of forced changes to the terms and conditions of a subsoil use contract by the competent body. As a result the law does not provide for any court procedures for the change of contract terms and conditions in the event a subsoil user disagrees with such changes. Refusal from conducting negotiations, non-achievement of agreements and non-execution of an amendment to a contract on the changes required by the competent body may lead to the unilateral termination of the contract.
The Law of Kazakhstan «On Subsoil and Subsoil Use» also provides for other grounds for the unilateral termination of the contract by the competent body. As a result no procedures or terms for contract termination are specified. Also not specified are the form of the contract termination, and whether the contract is terminated according to judicial or non-judicial procedures. The absence of the norm on any necessity for the competent body to apply to the Courts for contract termination may be considered as the establishment of a non-judicial procedure. But it should also be considered that in the absence of any regulation in this respect within the subsoil law, the civil law norms should be applied, which provide for a judicial procedure for the unilateral change and termination of contracts. The practice on the termination of subsoil use contracts reveals that the non-judicial procedure is applied when the competent body issues an act on termination, which is subsequently appealed by a subsoil user. Often the arguments of subsoil users against the recognition of the contract termination as being invalid are based upon the violation of the procedure for contract termination.
In view of the above, we should note that the norms and provisions on stability of contracts are not fully and duly set forth in the laws of Kazakhstan. In a number of cases the norms and ideas of the laws do not work in practice and cannot be applied as a result of imperfect laws and the non-availability of an integrated approach to the regulation of this issue.
The provisions on the stability of subsoil use contracts are also imperfect. Currently, the guarantees of stability are minimal both in part of the change of laws and in part of the unilateral changes to and any termination of a contract by the State.
This issue is of importance not only from a theoretical point of view, but also has huge practical implications for the legislative process and the application of the laws.
If at the early stages of the development of subsoil use legislation, a contract, including a subsoil use contract, was given to a greater extent supremacy against the changes which occurred after its execution, then currently there is a clear tendency for the tightening of the position of subsoil users, investors and the strengthening of the powers and authorities of the State and a diminution of the subsoil use contract.
A peculiarity of the regulation of stability of subsoil use contracts in Kazakhstan was the application of the guarantee of stability not only to the civil law private relationships between the State and the investor, but also to the administrative relationships arising in the course of conducting subsoil use operations, for example, by fixing in subsoil use contracts the tax and customs payments of subsoil users. Such a mechanism, of course, was confusing from a scientific and theoretical point of view as to the classification of a subsoil use contract, as it contained both private and public law elements. However, from the point of view of regulating this sphere of the economy as a priority, one such mechanism of the stabilization of subsoil use contracts was a positive approach, guaranteeing stability to subsoil users and attracting considerable investments.
To summarize the above, we note that the norms of Kazakhstani laws do not adequately resolve the issues related to the ensuring of contractual stability in general and the stability of subsoil use contracts in particular. There are omissions, contradictions and room for ambiguous interpretations and applications of the norms of the laws.
The issue of ensuring contractual stability as an essential prerequisite for the stable development of civil transactions and the economy requires due attention. Probably, contractual stability should be recognized as one of the basic principles of the civil law which are set forth in Article 2 of the Civil Code of Kazakhstan.